Giggles N' Hugs, Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Giggles N' Hugs, Inc.	Financial_Report.xls
EX-31.1 - EX. 31.1 - Giggles N' Hugs, Inc.	ex31.htm
EX-32.1 - EX. 32.1 - Giggles N' Hugs, Inc.	ex32.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-53948

GIGGLES N HUGS, INC.

(Exact name of registrant as specified in its charter)

Nevada		20-1681362
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10250 Santa Monica, #155, Los Angeles, CA		90067
(Address of principal executive offices)		(Zip Code)

(310) 553-4847

(Registrant’s telephone number, including area code)

Copies of Communications to:

Stoecklein Law Group

401 West A Street

Suite 1150

San Diego, CA 92101

(619) 704-1310

Fax (619) 704-0556

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Ruble 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes x No ¨

The number of shares of Common Stock, $0.001 par value, outstanding on May 7, 2012 was 22,862,145 shares.

GIGGLES N HUGS, INC.

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

Index to Report on Form 10-Q

		Page No.
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4T.	Controls and Procedures	18

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	18

Item1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults Upon Senior Securities	19

Item 4.	Mine Safety Disclosure	19

Item 5.	Other Information	19

Item 6.	Exhibits	19

	Signature	20

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

GIGGLES N HUGS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)


	March 31, 2012			December 31, 2011
Assets

Current assets:
Cash and equivalents	$	396,393		$	608,309
Inventory		14,638			14,297
Prepaid expenses		383			-
Total current assets		411,414			622,606

Fixed assets:
Total fixed assets, net		887,115			880,999

Other assets:
Security deposit		30,000			30,000

Total assets	$	1,328,529		$	1,533,605

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable	$	90,735		$	116,031
Incentive from lessor		524,463			534,465
Accrued expenses		33,826			15,888
Deferred revenue		22,519			16,942
Total current liabilities		671,543			683,326

Total liabilities		671,543			683,326

Stockholders' equity:
Common stock, $0.001 par value, 1,125,000,000 shares authorized,
22,862,145 and 22,862,145 shares issued and outstanding
as of March 31, 2012 and December 31, 2011, respectively		22,862			22,862
Common stock payable (50,000 shares as of March 31, 2012)		209,500			-
Additional paid-in capital		2,001,168			2,001,168
Accumulated deficit		(1,576,544	)		(1,173,751	)
Total stockholders' equity		656,986			850,279

Total liabilities and stockholders' equity	$	1,328,529		$	1,533,605

See Accompanying Notes to Consolidated Financial Statements.

GIGGLES N HUGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)




	For the three months ended
	March 31,
	2012			2011

Revenue
Food and beverage sales	$	164,849		$	155,089
Private party rentals		106,814			59,291
Other sales		68,198			56,197
Allowances, returns and discounts		(11,051	)		(29,268	)
Net sales		328,810			241,309

Costs and operating expenses
Cost of sales including food and beverage		67,554			65,147
Labor		132,137			136,825
Occupancy cost		55,330			65,839
Depreciation		25,866			25,300
Total operating expenses		280,887			293,111

Other expenses
Executive Compensation		309,687			-
Consulting expenses		10,000			208,239
Professional expenses		65,672			59,059
General and administrative expenses		65,357			69,319

Total costs and operating expenses		731,603			629,728

Net loss	$	(402,793	)	$	(388,419	)

Net loss per share - basic	$	(0.02	)	$	(0.01	)

Weighted average number of common shares outstanding - basic		22,862,145			18,486,576

See Accompanying Notes to Consolidated Financial Statements.

GIGGLES N HUGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


	For the three months ended
	March 31,
	2012			2011

Cash flows from operating activities
Net loss	$	(402,793	)	$	(388,419	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation		25,866			25,300
Shares issued for executive compensation		209,500			-
Changes in operating assets and liabilities:
Increase in prepaid expenses		(383	)		-
Increase in inventory		(341	)		-
Decrease in accounts payable		(25,296	)		(107,788	)
Decrease in lease incentive liability		(10,002	)		(9,874	)
Increase in accrued expenses		17,938			1,000
Increase in deferred revenue		5,577			18,964
Net cash used in operating activities		(179,934	)		(460,817	)

Cash flows from investing activities
Acquisition of fixed assets		(31,982	)		(26,089	)
Net cash used in investing activities		(31,982	)		(26,089	)

Cash flows from financing activities
Proceeds from note payable		-			(3,000	)
Members' distribution		-			(6,603	)
Proceeds from reverse merger		-			769
Proceeds from shares issued		-			1,005,000
Net cash provided by financing activities		-			996,166

NET INCREASE (DECREASE) IN CASH		(211,916	)		509,260

CASH AT BEGINNING OF PERIOD		608,309			15,584

CASH AT END OF PERIOD	$	396,393		$	524,844

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	-		$	-
Income taxes paid	$	-		$	-

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Incentive from lessor	$	-		$	590,000
Liabilities assumed with the merger	$	-		$	79,725

See Accompanying Notes to Consolidated Financial Statements.

GIGGLES N’ HUGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – HISTORY AND ORGRANIZATION

Giggles N’ Hugs, Inc. (“GIGL Inc”) was originally organized 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 its $0.001 par value common stock.

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 (the "SEA"). Under the SEA, GIGL Inc issued 18,289,716 shares of its common stock to in exchange for a 100% interest in GNH, Inc. Additionally under the SEA, the former officer, director and shareholders of GIGL Inc agreed to cancel a total of 47,607,500 shares of its common stock.

For accounting purposes, the acquisition of GNH by GIGL Inc has been recorded as a reverse merger of a public company, with the exception that no goodwill is generated, and followed up with a recapitalization of GNH based on the factors demonstrating that GNH represents the accounting acquirer. As part of closing of the merger between GNH and GIGL Inc, GNH obtained 100% of the restaurant operations of Giggles N Hugs in Westfield mall in Century City, California. The restaurant operations of Giggles N Hugs in Westfield mall in Century City, California was originally formed April 30, 2010 and opened for operation December 3, 2010. Consequently, the historical financial information in the accompanying consolidated financial statements is that of GNH and the restaurant operations of Giggles N Hugs located in Century City, California. As a result of the Merger, GIGL Inc now owns all of the assets, liabilities and operations of a kid friendly restaurant named Giggles N Hugs in Westfield mall in Century City, California. Additionally, GIGL Inc obtained ownership to all intellectual property rights for Giggles N Hugs facilities in the future.

On December 30, 2011, the transactions were completed and resulted in a change in control of the Company. Pursuant to the terms of the Agreement, the Company accepted the resignation of its prior officer and director, Tracie Hadama and appointed Mr. Joey Parsi as President, Chief Executive Officer, Treasurer, and Secretary of the Company.

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 have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2011 and notes thereto included in the Company's Form 10-K annual report. The Company follows the same accounting policies in the preparation of interim reports.

Results of operations for the interim periods are not indicative of annual results.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

For the three months ended March 31, 2012 and 2011, the consolidated financial statements include the accounts of Giggles N’ Hugs, Inc., GNH, Inc. and restaurant operations of Giggles N Hugs in Westfield mall in Century City, California. All significant intercompany balances and transactions have been eliminated. Giggles N’ Hugs, Inc., GNH, Inc. and restaurant operations of Giggles N Hugs in Westfield mall in Century City, California will be collectively referred herein to as the “Company”.

GIGGLES N’ HUGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.

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 department. Depreciation periods are as follows:

Leasehold improvements		10 years
Restaurant fixtures and equipment		10 years
Computer software and equipment		3 to 5 years

Leases

The Company currently leases its restaurant location. The Company evaluates the lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes.

Minimum base rent for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. The initial rent term includes the build-out, or rent holiday period, for the Company’s leases, where no rent payments are typically due under the terms of the lease. Deferred rent expense, which is based on a percentage of revenue, is also recorded to the extent it exceeds minimum base rent per the lease agreement.

The Company disburses cash for leasehold improvements and furniture, fixtures and equipment to build out and equip its leased premises. The Company also expends cash for structural additions that it makes to leased premises of which $590,000 were reimbursed to Century City 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.

Impairment of long-lived assets

The Company assesses potential impairment of our long-lived assets whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable. Factors considered include, but are not limited to, significant underperformance relative to historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. The Company regularly reviews the restaurant if it is cash flow negative for the previous four quarters to determine if impairment testing is warranted. At any given time, the Company may monitor its operations, and impairment charges could be triggered in the future if the restaurant performance does not improve.

GIGGLES N’ HUGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Impairment of long-lived assets (continued)

The Company has identified leasehold improvements as the primary asset because it is the most significant component of our restaurant assets, it is the principal asset from which the Company derives cash flow generating capacity and has the longest remaining useful life. The recoverability is assessed in most cases by comparing the carrying value of the assets to the undiscounted cash flows expected to be generated by these assets. Impairment losses are measured as the amount by which the carrying values of the assets exceed their fair values.

During the three months ended March 31, 2012 and 2011 we did not record an impairment charge against the carrying value of the restaurant located in Century City, California.

Stock-based compensation

The Company records stock based compensation in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.

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 warrants. Loss per common share has been computed using the weighted average number of common shares outstanding during the year.

Revenue recognition

Our revenues consist of sales from our restaurant operations and sales of memberships entitling members unlimited access to our play areas for the duration of their membership. As a general principle, revenue is recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and services have been rendered, (iii) the price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

With respect to memberships, access to our play area extends throughout the term of membership. The vast majority of memberships sold are for one month terms. Revenue is recognized on a straight line basis over the membership period. Century City receives payment from its customers at the start of the subscription period and Century City records deferred revenue for the unearned portion of the subscription period.

Revenues from restaurant sales are recognized when payment is tendered at the point of sale. Revenues are presented net of sales taxes. The obligation is included in other accrued expenses until the taxes are remitted to the appropriate taxing authorities.

We recognize a liability upon the sale of our gift cards and recognize revenue when these gift cards are redeemed in our restaurants.

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.

GIGGLES N’ HUGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent pronouncements

The Company has evaluated the recent accounting pronouncements through May 2012 and believes that none of them will have a material effect on the company’s financial position, results of operations or cash flows.

NOTE 4 – GOING CONCERN

The Company’s financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. As of March 31, 2012, the Company had an accumulated deficit of $1,576,544. The Company has only recently commenced operations and a history of operating losses and use of cash for operating activities. Additionally, the Company is currently in the expansion phase and projects ongoing capital expenditures and other expenses to the construction of a new restaurant location. In light of these facts, the ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund its operations until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

NOTE 5 – INVENTORY

Inventory consisted of the following at:

		March 31,			December 31,
	2012			2011
Restaurant food and supplies		$	14,638		$	14,297
Total		$	14,638		$	14,297

NOTE 6 – FIXED ASSETS

Fixed assets consisted of the following at:

	March 31,			December 31,
	2012			2011
Leasehold improvements	$	988,270		$	958,538
Fixtures and equipment		24,137			21,887
Computer software and equipment		9,909			9,909

Property and equipment, total		1,022,316			990,334
Less: accumulated depreciation		(135,201	)		(106,336	)
Property and equipment, net	$	887,115		$	880,999

Depreciation expense was $25,866 and $25,300 for the three months ended March 31, 2012 and 2011, respectively. Repair and maintenance expenses for the three months ended March 31, 2012 and 2011 were $4,429 and $4,260, respectively.

NOTE 7 – DEFERRED REVENUE

Deferred revenue consisted of the following at:

		March 31,		December 31,
	2012		2011
Membership cards	$	4,923	$	2,225
Gift cards		4,244		3,001
Party deposits	13,352		11,716
Total	$ 22,519		$ 16,942

GIGGLES N’ HUGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 – INCENTIVE FROM LESSOR

The Company received $590,000 from the Company’s landlords as construction contributions pursuant to agreed-upon terms in the lease agreements. Landlord construction contributions usually take the form of up-front cash. Depending on the specifics of the leased space and the lease agreement, amounts paid for structural components are recorded during the construction period as leasehold improvements or the landlord construction contributions are recorded as an incentive from lessor. The incentive from lessor is amortized over the life of the lease which is 10 years.

Amortization of the incentive from lessor was $10,002 and $9,874 for the three months ended March 31, 2012 and 2011, respectively.

NOTE 9 – STOCKHOLDERS’ EQUITY

On July 15, 2010, the Company amended its articles of incorporation to increase the authorized capital from 75,000,000 common shares to 1,125,000,000 common shares. The Company has only one class of stock. All rights and privileges normally associated with stock ownership are vested in that single class of stock.

During the three months ended March 31, 2012, the Company authorized the issuance of 50,000 shares of common stock to Sean Richards related to his appointment as Chief Operating Officer of the Company. The fair value of the shares of common stock was $209,500 which is recorded to common stock payable. As of the date of this filing, the shares have not been issued.

During the three months ended March 31, 2012, there have been no issuances of common stock.

NOTE 10 – WARRANTS AND OPTIONS

As of March 31, 2012, there were no warrants or options outstanding to acquire any additional shares of common stock.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

The Company leases its restaurant location under an operating lease, with the remaining term being 10 years. Restaurant leases typically include land and building shells, require contingent rent above the minimum base rent payments based on a percentage of sales ranging from 7% to 10%, have escalating minimum rent requirements over the term of the lease and require various expenses incidental to the use of the property. The lease also has a renewal option, which Century City may exercise in the future. The Company’s current lease provides early termination rights, permitting the Company and its landlord to mutually to terminate the lease prior to expiration if the Company does not achieve specified sales levels in certain years.

As of March 31, 2012, the aggregate minimum annual lease payments under operating leases, including amounts characterized as deemed landlord financing payments are as follows:

2012	$	137,938
2013	188,975
2014	194,644
2015	200,483
2016	206,498
2017	212,692
Thereafter	482,983
Total	$	1,624,213

Rent expense for the Company’s Century City operating lease was $34,766 and $34,766 for the period during the three months ended March 31, 2012 and March 31, 2011, respectively.

GIGGLES N’ HUGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)

On March 23, 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 is expected to commence on November 1, 2012 and expire on April 30, 2022. Upon commencement, the aggregate minimum annual lease payments under operating leases, including amounts characterized as deemed landlord financing payments are as follows:

2012			$35,400
2013			213,816
2014	222,369
2015	231,263
2016	240,514
2017	264,201
Thereafter	1,656,937
Total		$2,864,500

Rent expense for the Company’s Topanga operating lease was $0 and $0 for the period during the three months ended March 31, 2012 and March 31, 2011, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly 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.

Overview

Giggles is a family-friendly restaurant with play areas for children 10 years and younger. The restaurant also features daily live entertainment and shows. The restaurant design is intended to create a fun, casual, family atmosphere where children can interact with parents and each other and where everyone enjoys freshly prepared, organic, nutritious and reasonably priced meals.

Currently, Giggles owns and operates one restaurant in the Westfield mall in Century City, California, and our second restaurant which is currently in development in the Westfield mall in Topanga, California. In the future, we plan to open a number of our Giggles N Hugs themed restaurants in high end malls throughout the country.

RESULTS OF OPERATIONS

As a result of our recent acquisition of 100% of GNH and change in business and operations, a discussion of the past financial results of Giggles is not pertinent and the financial results of GNH and its Giggles N Hugs Century City Location, the accounting acquirer, is considered the financial results of the Company on a going-forward basis.

REVENUE

	Three Months Ended March 31,						Increase (Decrease)
	2012			2011			$		%
Revenue:
Food and beverage sales	$	164,849		$	155,089		$	9,760	6.3	%
Private party rentals		106,814			59,291			47,523	80.2	%
Other sales		68,198			56,197			12,001	21.4	%
Allowances, returns and discounts		(11,051	)		(29,268	)		18,217	(62.2)	%
Net sales	$	328,810		$	241,309		$	87,501	36.2	%

Our food and beverage sales for the three months ended March 31, 2012 were $164,849 compared to $155,089 in the three months ended March 31, 2012. This resulted in an increase in food and beverage sales of $9,760, or 6.3%, from the same period a year ago. We offer a healthy alternative to typical child friendly restaurants, offering appetizing menu options that incorporate nutritious ingredients some children would normally shy away from. We are continuously evaluating and modifying our menu to accommodate guest requests. During July 2011, we obtained our liquor license and began to offer alcoholic beverages. To date, we have realized modest sales volumes related to the purchases of alcoholic beverages by our customers.

Our private party rentals for the three months ended March 31, 2012 were $106,814 compared to $59,291 in the three months ended March 31, 2011. This resulted in an increase in private party rentals of $47,523, or 80.2%, from the same period a year ago. Party rentals range from as few as 15 guests up to 200 and contribute significantly to our revenues. Private party rentals accounted for over 32% of net sales during the three months ended March 31, 2012 and over 24% in the three months ended March 31, 2011. We believe that party revenue will continue to be a significant contributor to net sales and we plan to work diligently to advertise the availability of and attract future parties. Management believes that party revenue will tend to be cyclical; the first fiscal quarter of the year is a typically slower period for parties, as there are fewer major holidays compared to the fourth quarter, for example. As a result, management expects revenues from parties to increase during the summer months and winter, while the first and third quarters may experience some weakness.

Sales from other sources include the fee we charge for guests to access our over 2,000 square-foot children’s play area, sales of our one-, three- or six-month membership cards entitling entrance to the play area at a discounted price and sales from Giggles N Hugs-branded merchandise. Other sales for the three months ended March 31, 2012 were $68,198 compared to $56,197 in the three months ended March 31, 2011. This resulted in an increase in sales of $12,001, or 21.4%, from the same period a year ago. Management attributes this to our own internal marketing efforts, as well as the Westfield Century City Mall holding periodic events to boost traffic to the mall, in general.

Allowances, returns and discounts for the three months ended March 31, 2012 were $11,051 compared to $29,268 in the three months ended March 31, 2011. This resulted in a decrease in allowances, returns and discounts of $18,217, or 62.2%, from the same period a year ago. We believe 2011 allowances were higher primarily because we offered a greater number of coupons and discounts to attract customers to our location, which had only opened its doors in December 2010. We hope to reduce our reliance on the use of coupons and discounts to attract customers in future periods.

COSTS AND OPERATING EXPENSES

	Three Months Ended March 31,						Increase (Decrease)
	2012			2011			$			%
Costs and operating expenses:
Cost of sales including food and beverage	$	67,554		$	65,147		$	2,407		3.7	%
Labor		132,137			136,825			(4,688	)	3.4	%
Occupancy cost		55,330			65,839			(10,509	)	(15.9)	%
Depreciation		25,866			25,300			566		2.2	%
Total operating expenses	$	280,887		$	293,111		$	(12,224	)	(4.2)	%

Other Expenses
Executive compensation		309,678			-			309,687			*
Consulting expenses		10,000			208,239			(198,239	)	(95.2)	%
Professional expenses		65,672			59,059			6,613		11.2	%
General and administrative expenses		65,357			69,319			(3,962	)	(5.7)	%
Total other expenses		450,716			336,617			114,099		(89.7)	%

Total costs and operating expenses		731,603			629,728			101,875		16.2	%

Net Loss	$	(402,793	)	$	(388,419	)	$	(14,374	)	3.7	%

Notes to Costs and Operating Expenses table:

* Not divisible by zero

Cost of sales. Costs related to food purchases, supplies and general restaurant operations totaled $67,554 during the three months ended March 31, 2012, which was 3.7% higher than cost of sales of $65,147 in the three months ended March 31, 2011. Food costs fluctuate regularly and are difficult to offset or minimize. Any increase in costs of certain commodities could adversely impact our operations unless we pass any such price increases to our guests.

Labor. Labor expenses for the three months ended March 31, 2012 was $132,137, a decrease of 3.4%, from the three months ended March 31, 2011. We are a customer service company and our primary variable cost is related to providing such services. As a result, labor costs comprised 18.1% of our total expenses during the three months ended March 31, 2012, compared to 21.7% in the comparable period ended March 31, 2011. Labor costs are constantly fluctuating and any changes to minimum wages payable could adversely impact our operations.

Occupancy Cost. Occupancy cost for the three months ended March 31, 2012 was $55,330, a decrease of 15.9%, from the three months ended March 31, 2011. Rent and other related items should not materially vary from period to period. Future increases may also be related to potential increases resulting from new store development. During the quarter ended March 31, 2012, we entered into a lease agreement to open a second location in the Westfield Topanga mall and have incurred various expenses related to the project.

Depreciation. Depreciation for the three months ended March 31, 2012 was $25,866, an increase of 2.2%, from the three months ended March 31, 2011. We depreciate and amortize purchases of our ongoing capital investments and the construction and leasehold improvements related to the development of our Century City store. During the three months ended March 31, 2012, we entered into a lease to develop a new location in Topanga, California, for which we expect to incur further construction costs that will be depreciated and amortized in future periods.

Executive Compensation. During the three months ended March 31, 2012, we paid our one executive officer wages of $22,885 and issued to him bonuses aggregating $211,500, of which $209,500 was paid in the form of 50,000 shares of our common stock in lieu of cash. Additionally, we paid our majority shareholder and executive officer $75,302 during the period ended March 31, 2012. We did not record any executive compensation in the comparable three month period ended March 31, 2011.

Consulting Expenses. In the three months ended March 31, 2012, we incurred consulting expense of $10,000, compared to $208,239 in the comparable period ended March 31, 2011. The consulting expense primarily related to the preparation for the December 2011 reverse merger, and we expect the majority of fees paid to consultants in 2011 were non-recurring. Our management expects consulting fees to continue to decline during the fiscal year 2012. Unfortunately, there can be no assurance we will experience any such decline in consulting expenses.

Professional Expenses. Professional fees for the three months ended March 31, 2012 was $65,672, an increase of 11.2%, from the three months ended March 31, 2011, in which we incurred $59,059 in professional fees. These fees primarily include accounting fees, fees related to the audit of our financial statements, legal fees and fees incurred from other professional service firms. We expect to continue to incur professional fees in relation to maintaining our public reporting status with the Securities and Exchange Commission.

General and Administrative. In the normal course of our operations, we incur various expenses, including, but not limited to, legal fees, accounting fees, advertising and promotion, utilities, office supplies and postage and shipping expenses. During the three months ended March 31, 2012, general and administrative expenses were $65,357, compared to $69,319 in the three months ended March 31, 2011.

Net Loss

Our net loss for the three months ended March 31, 2012 was $402,793, a widening loss of $14,374, or 3.7%, from $388,419 for the three months ended March 31, 2011. We continue to have a net loss and believe the loss will be reduced and profitability will be attained in future quarters as the popularity of our restaurants increase.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2012, we had $396,393 in cash and equivalents and $14,638 in inventory. The following table provides detailed information about our net cash flow for all financial statement periods presented in this Report. To date, we have financed our operations through the issuance of stock and borrowings, in addition to sales-generated revenue.

The following table sets forth a summary of our cash flows for the three months ended March 31, 2012 and 2011:

	Three Months Ended March 31,
	2012			2011
Net cash used in operating activities	$	(179,934	)	$	(387,329	)
Net cash used in investing activities		(31,982	)		(26,089	)
Net cash provided by financing activities		-			922,678
Net increase (decrease) in Cash		(211,916)			509,260
Cash, beginning of year		608,309			15,584
Cash, end of year	$	396,393		$	524,844

Operating activities

Net cash used in operating activities was $179,934 for the three months ended March 31, 2012, as compared to $387,329 used in operating activities for the same period in 2011.

Investing activities

Net cash used in investing activities was $31,982 for the three months ended March 31, 2012, as compared to $26,089 used in investing activities for the same period in 2011.

Financing activities

Net cash provided by financing activities for the three months ended March 31, 2012 was $0, as compared to $922,678 for the same period of 2011.

We expect to use our cash to invest in our core businesses, including new product innovations, advertising and marketing, as well as the construction and build-out of additional restaurant locations. Other than normal operating expenses, cash requirements for fiscal 2012 are expected to consist primarily of capital expenditures for the build out of our Topanga, California stores and additional investments in advertising and marketing efforts.

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.

Operation Plan

Our overall business plan is to expand and grow our restaurants and increase revenues. Our business and strategy will be directed toward the following approaches.

Company-Owned Restaurants. One near term strategy is to explore opening company-owned and/or managed restaurants within the next twelve months. Currently, we are in discussions with The Westfield Group to potentially open new Giggles N Hugs restaurants at The Westfield Valencia Mall and The Westfield Santa Anita Mall. In March 2012, we signed a 10-year commercial lease for 5,900 square feet of space at The Westfield Topanga Shopping Center in the San Fernando Valley.

Franchising. In addition to, or in lieu of our company-owned restaurants, we believe we can efficiently grow our operations by franchising our stores to a well-qualified and financed franchising group for large scale development. Currently, we have no plans to franchise our stores unless we get an experienced franchisor to do multiple locations and that will maintain the quality, atmosphere, and reputation of our brand.

Existing Services. We plan to further market and promote our existing products and designs directly to consumers. In addition, we plan to constantly refine and improve our food products.

New Products and Services. We are currently expanding, and intend to further expand, our product and service offerings. Some of the new products and services we are currently developing include:

•Curb-side take-out. As with many restaurants with no drive-thru, we have established a curb-side, take-out service for our customers. Since the majority of our patrons are parents, convenient take-out is a significant factor. The ease of not having to remove kids from their car-seats when purchasing food is a significant factor for return patronage. This service is now available at our Century City location.

•Drop-off service. We offer “drop-off” service where parents can drop off their kids at our unique restaurant to play while they go shopping in the mall. Parents must agree to remain on the premises of the mall, while we supervise their children. Our play aides supervise and interact with up to four children at a time and the service costs $14.00 per hour.

•Beer/Wine license. Parents have enquired about beer and/or wine to accompany their meals. Since margins from alcoholic beverages are often high, we believe this would increase our revenues without a proportional increase in costs. We recently acquired our beer and wine license for the Century City location. This service is now available at out Century City location.

•Furniture and Equipment Referrals. Parents frequently ask us where to purchase various furniture, fixtures, toys, and equipment inside our play area. We are in discussions with a baby products supplier to potentially receive commissions for each referral. We have been in active discussions with manufacturers but have not come to any definitive agreement.

•Baby food. As part of our branding, we may add Giggles N Hugs baby foods for toddlers too young for solid foods. We already offer mashed bananas, and pureed butternut squash. Currently, we are not planning on the branding initiative at this time.

•Merchandising. We intend to sell books, stuffed animals, toys, cups, t-shirts, and balls all with the Giggles N Hugs logo. We are in active discussions with potential manufacturers and licensing agencies but we are 6 to 12 months away from any products.

•Gift Certificates. We offer gift certificates of different denominations that are an extremely popular gift item for people of all ages.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

This item is not applicable as we are currently considered a smaller reporting company.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Principal Executive Officer and Principal Financial Officer, Joey Parsi, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on his evaluation, he concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are ineffective in providing reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not a party to any material legal proceedings.

Item 1A. Risk Factors

Our significant business risks are described in Item 1A to Form 10-K for the year ended December 31, 2011 to which reference is made herein.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Stock Issuances

During the three months ended March 31, 2012, we authorized the issuance of 50,000 shares of common stock to Sean Richards related to his appointment as Chief Operating Officer of the Company. As of the date of this filing, the shares have not been issued.

We believe that the issuance and sale of the above securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule. The securities were sold directly by us and did not involve a public offering or general solicitation. The recipients of the securities were afforded an opportunity for effective access to files and records of the Company that contained the relevant information needed to make their investment decision, including the financial statements and 34 Act reports. We reasonably believed that the recipients, immediately prior to the sale of the securities, were accredited investors and had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The management of the recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the securities.

Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities from the time of our inception through the period ended March 31, 2012.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosure.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.		Description
31.1		Certification of Principal Executive Officer & Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications of Principal Executive Officer & Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		XBRL Taxonomy Extension Definition Linkbase

101.LAB*		XBRL Taxonomy Extension Label Linkbase

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GIGGLES N’ HUGS, INC.


Date: May 21, 2012	By:	/S/ Joey Parsi
		Joey Parsi
		Chief Executive Officer
		(Principal Executive Officer and duly authorized signatory)

Giggles N' Hugs, Inc. - FORM 10-Q - May 21, 2012

Attached files

Giggles N' Hugs, Inc. Reports