News Column

GIGGLES N' HUGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 18, 2014

This Twenty-Six Week 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. Fiscal year 2013 consists of a year ending December 29, 2013. Fiscal year 2012 consists of year ending December 31, 2012. The election for fiscal year was made with the 8-K filing in October 2013. Overview Giggles N' Hugs 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 N' Hugs owns and operates one restaurant in the Westfield Mall in Century City, California and a second restaurant in the Westfield Mall in Topanga, California, and a third restaurant in the Glendale Galleria in Glendale, California. In the future, we hope to plan to open a number of our Giggles N' Hugs themed restaurants in high end malls throughout the country. 3 RESULTS OF OPERATIONS



Results of Operations for the Thirteen Weeks Ended June 29, 2014 and Three Months Ended June 30, 2013:

REVENUE For For Thirteen the Three Months Weeks Ended Ended Increase (Decrease) June 29, 2014 June 30, 2013 $ % Revenue: Food and beverage sales $ 416,768 $ 362,789 $ 53,979 14.9 % Private party rentals 198,133 155,449 42,684 27.5 % Other sales 238,463 176,890 61,573 34.8 % Allowances, returns and discounts (28,753 ) (32,644 ) 3,891 -11.9 % Net sales $ 824,611 $ 662,484 $ 162,127 24.5 %

Our food and beverage sales for the thirteen weeks ended June 29, 2014 were $416,768, including revenue from the Westfield Topanga location and Glendale Galleria location which were opened in 2013, compared to $362,789 in the three months ended June 30, 2013. This resulted in an increase in food and beverage sales of $53,979, or 14.9%, 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. Our private party rentals for the thirteen weeks ended June 29, 2014 were $198,133, including revenue from the Westfield Topanga location and Glendale Galleria location which were opened in 2013, compared to $155,449 in three months ended June 30, 2013. This resulted in an increase in private party rentals of $42,684, or 27.5%, from the same period a year ago. Party rentals range from 15 to 200 guests and contribute significantly to our revenues. Private party rentals accounted for 24% of net sales during the thirteen weeks ended June 29, 2014 and 23% in the three months ended June 30, 2013. 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 and winter months, while the first and third quarters may experience

some weakness.

Sales from other sources include a fee 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 thirteen weeks ended June 29, 2014 were $238,463, including revenue from the Westfield Topanga location and Glendale Galleria location which were opened in 2013, compared to $176,890 in the three months ended June 30, 2013. This resulted in an increase in sales of $61,573, or 34.8%, from the same period one year ago. Management attributes this to our own internal marketing efforts, as well as periodic events held by the Westfield Century City Mall, Westfield Topanga Mall and Glendale Galleria to boost traffic to the mall, in general. Allowances, returns and discounts for the thirteen weeks ended June 29, 2014 were $28,753 compared to $32,644 in the three months ended June 30, 2013 primarily from the Westfield Topanga location and Glendale Galleria location which were opened in 2013. This resulted in decrease in allowances, returns and discounts of $3,891, or 11.9%, from the same one year ago. 4 COSTS AND OPERATING EXPENSES For For Thirteen the Three Months Weeks Ended Ended Increase (Decrease) June 29, 2014 June 30, 2013 $ % Costs and operating expenses: Cost of sales including food and beverage $ 229,570 $ 118,061 $ 111,509 94.5 % Labor 315,747 236,602 79,145 33.5 % Occupancy cost 222,482 135,830 86,652 63.8 % Depreciation 86,966 54,254 32,712 60.3 % Total operating expenses $ 854,765 $ 544,747 $ 310,018 56.9 % Other expenses: Executive compensation 99,615 132,693 (33,078 ) -24.9 % Non-employee stock-based compensation 20,346 89,700 (69,354 ) -77.3 % Professional and consulting expenses 160,622 168,713 (8,091 ) -4.8 % General and administrative expenses 67,656 84,504 (16,848 ) -19.9 % Finance and interest expenses 95,716 13,500 95,716 709.0 % (Gain)/ Loss on stock issuance for payable settlement - (50,000 ) - * Total other expenses 443,955 439,110 (31,655 ) -7.2 % Total costs and operating expenses 1,298,720 983,857 278,363 28.3 % Provision for income taxes 3,200 - 3,200 * Net loss $ (477,309 ) $ (321,373 ) $ (119,436 ) 37.2 %



Notes to Costs and Operating Expenses table:

Cost of sales. Costs related to food purchases, supplies and general restaurant operations totaled $229,570 during the thirteen weeks ended June 29, 2014 including costs from the Westfield Topanga location and Glendale Galleria location which were opened in 2013, representing a 94.5% increase from the $118,061 cost of sales in the three months ended June 30, 2013. 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. Cost of sales is high due to the opening of the Westfield Topanga location and Glendale Galleria in 2013. Labor. Labor expenses for the thirteen weeks ended June 29, 2014 was $315,747, including costs from the Westfield Topanga location and Glendale Galleria location which were opened in 2013, an increase of 33.5%, from the three months ended June 30, 2013, which was $236,602. We are a customer service company and our primary variable cost is related to providing such services. As a result, labor costs comprised 37% of our total operating expenses during the thirteen weeks ended June 29, 2014, compared to 43% in the comparable three months ended June 30, 2013. Labor costs are constantly fluctuating and any changes to minimum wages payable could adversely impact our operations. Cost of sales is high due to the opening of the Westfield Topanga location and Glendale Galleria in 2013. 5 Occupancy Cost. Occupancy cost for the thirteen weeks ended June 29, 2014 was $222,482, including the costs from the Westfield Topanga location and Glendale Galleria location which were opened in 2013, an increase of 63.8%, from the three months June 30, 2013. Facility and other related items should not materially vary from period to period. Depreciation. Depreciation for the thirteen weeks ended June 29, 2014 was $86,966 including the costs from the Westfield Topanga location and Glendale Galleria location which were opened in 2013, an increase of 63.8%, from the three months ended June 30, 2013, which was $135,830. We depreciate and amortize purchases of our ongoing capital investments and the construction and leasehold improvements related to the development of our stores. Executive Compensation. During the thirteen weeks ended June 29, 2014, executive compensation decreased by $33,078, or 24.9%, to $99,615, from $132,693 for the three months ended June 30, 2013. Non-Employee Stock Based Compensation. During the thirteen weeks ended June 29, 2014, we decreased $69,354 in non-cash non-employee stock based compensation charges, a decrease of 77.3% from three months ended June 30, 2013. The Company amortized shares of common stock shares for stock issuances for professional and advisory services.

Professional and Consulting Expenses. For the thirteen weeks ended June 29, 2014, professional and consulting expenses were $160,622, an decrease of 4.8% from the three months ended June 30, 2013, in which we incurred $168,713 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, postage and shipping expenses. During the thirteen weeks ended June 29, 2014, general and administrative expenses were $67,656, compared to $84,504 in the three months ended June 30, 2013. Net Loss Our net loss for the thirteen weeks ended June 29, 2014 was $477,309, an increase of $119,436, or 37.2%, from $321,373 for the three months ended June 30, 2013. 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 increases. 6



Results of Operations for the Twenty Six Weeks Ended June 29, 2014 and Six Months Ended June 30, 2013:

REVENUE For the Twenty-Six Weeks For the Six Ended Months Ended Increase (Decrease) June 29, 2014 June 30, 2013 $ % Revenue: Food and beverage sales $ 854,925$ 555,754$ 299,171 53.8 % Private party rentals 391,493 255,253 136,240 53.4 % Other sales 459,977 257,787 202,190 78.4 % Allowances, returns and discounts (59,734 ) (58,363 ) (1,371 ) 2.3 % Net sales $ 1,646,661$ 1,010,431$ 636,230 63.0 % Our food and beverage sales for the twenty-six weeks ended June 29, 2014 were $854,925 compared to $555,754 in the six months ended June 30, 2013 including revenue from the Westfield Topanga location which opened March 23, 2013. This resulted in an increase in food and beverage sales of $299,171, or 53.8%, from the same period one 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. Our private party rentals for the twenty-six weeks ended June 29, 2014 generated $391,493, including revenue from the Westfield Topanga location, compared to $255,253 in the six months ended June 30, 2013. This resulted in an increase in private party rentals of $136,240, or 53.4%, from the same period one 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 24% of net sales during the twenty-six weeks ended June 29, 2014 and over 25% in the six months ended June 30, 2013. 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 twenty-six weeks ended June 29, 2014 were $459,977, including revenue from the Westfield Topanga location, compared to $257,787 in the six months ended June 30, 2013. This resulted in an increase in sales of $202,190, or 78.4%, from the same period a year ago. Management attributes this to our own internal marketing efforts, as well as the Westfield Century City Mall, Westfield Topanga Mall and Glendale Galleria holding periodic events to boost traffic to the mall, in general. Allowances, returns and discounts for the twenty-six weeks ended June 29, 2014 were $59,734, compared to $58,363 in the six months ended June 30, 2013. This resulted in a decrease in allowances, returns and discounts of $1,371, or 2.3%, from the same period a year ago primarily from the Westfield Topanga location and Glendale Galleria location which were opened in 2013. We continue to hope to reduce our reliance on the use of coupons and discounts to attract customers in future periods. 7 COSTS AND OPERATING EXPENSES For the Twenty-Six Weeks For the Six Ended Months Ended Increase (Decrease) June 29, 2014 June 30, 2013 $ % Costs and operating expenses: Cost of sales including food and beverage $ 443,654$ 226,809$ 216,845 95.6 % Labor 635,265 368,726 266,539 72.3 % Occupancy cost 457,152 205,520 251,632 122.4 % Depreciation 171,152 80,110 91,042 113.6 % Total operating expenses $ 1,707,223$ 881,165$ 826,058 93.7 % Other expenses: Executive compensation 202,115 170,116 31,999 18.8 % Non-employee stock-based compensation 43,034 185,066 (142,032 ) -76.7 % Professional and consulting expenses 399,996 258,323 141,673 54.8 % General and administrative expenses 146,992 134,784 12,208 9.1 % Finance and interest expenses 130,606 27,000 130,606 483.7 % (Gain)/ Loss on stock issuance for payable settlement (2,133 ) (50,000 ) (2,133 ) * Total other expenses 920,610 725,289 172,321 23.8 % Total costs and operating expenses 2,627,833 1,606,454 998,379 62.1 % Provision for income taxes 2,400 - 2,400 * Net loss $ (983,572 )$ (596,023 )$ (364,549 ) 61.2 %



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 $443,654 during the twenty-six weeks ended June 29, 2014, including costs from the Westfield Topanga location and Glendale Galleria location which were opened in 2013, which was 95.6% higher than cost of sales of $226,809 in the six months ended June 30, 2013. 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 twenty-six weeks ended June 29, 2014 was $635,265, including cost from the Westfield Topanga location and Glendale Galleria location, an increase of 72.3%, from the six months ended June 30, 2013. We are a customer service company and our primary variable cost is related to providing such services. As a result, labor costs comprised 37% of our total expenses during the twenty-six weeks ended June 29, 2014, compared to 42% in the comparable period ended June 30, 2013. Labor costs are constantly fluctuating and any changes to minimum wages payable could adversely impact our operations. Occupancy Cost. Occupancy cost for the twenty-six weeks ended June 29, 2014 was $457,152, including the lease costs Westfield Topanga location and Glendale Galleria location, an increase of 122.4%, from the six months ended June 30, 2013. Facility and other related items should not materially vary from period to period. 8

Depreciation. Depreciation for the twenty-six weeks ended June 29, 2014 was $171,152, including the Westfield Topanga location depreciation and Glendale Galleria location which were opened in 2013, an increase of 113.6%, from the six months ended June 30, 2013. We depreciate and amortize purchases of our ongoing capital investments and the construction and leasehold improvements related to the development of our stores.



Executive Compensation. During the twenty-six weeks ended June 29, 2014, executive compensation increased by $31,999 or 18.8%, to $202,115 from $170,116 for the six months ended June 30, 2013.

Non-Employee Stock Based Compensation. During the twenty-six weeks ended June 29, 2014, we decreased non-cash non-employee stock based compensation charges of $142,032. The Company amortized shares of common stock shares for stock issuances for professional and advisory services. Professional Expenses and Consulting Expenses. Professional and consulting fees for the twenty-six weeks ended June 29, 2014 was $399,996, an increase of 54.8%, from the six months ended June 30, 2013, in which we incurred $258,323 in 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 twenty-six weeks ended June 29, 2014, general and administrative expenses were $146,992, compared to $134,784 in the six months ended June 30, 2013. Net Loss

Our net loss for the twenty-six weeks ended June 29, 2014 was $983,572, an increase of $364,549 or 61.2%, from $596,023 for the six months ended June 30, 2013. 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. 9 LIQUIDITY AND CAPITAL RESOURCES As of June 29, 2014, we had negative $9,578 in cash and equivalents, $32,895 in inventory, $14,962 in prepaid stock-based compensation, and $19,681 in prepaid expenses and other. 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 twenty-six weeks ended June 29, 2014 and six months ended June 30, 2013:

For Twenty-Six For Six Months Weeks Ended Ended June 29, 2014June 30, 2013

Net cash provided by (used in) operating activities $ (531,786 )$ 260,848 Net cash used in investing activities (93,831 ) (766,426 ) Net cash provided by financing activities 544,816

435,000 Net decrease in Cash (80,801 ) (70,578 ) Cash, beginning of period 71,223 156,474 Cash, end of period $ (9,578 ) $ 85,896 Operating activities Net cash used by operating activities was ($531,786) for the twenty-six weeks ended June 29, 2014, as compared to $260,848 provided by operating activities for the six months ended June 30, 2013. Investing activities Net cash used in investing activities was ($93,831), for the twenty-six weeks ended June 29, 2014, as compared to ($766,426) used in investing activities for the six months ended June 30, 2013. Financing activities Net cash provided by financing activities for the twenty-six weeks ended June 29, 2014 was $544,816, as compared to $435,000 for the six months ended June 30, 2013. 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 2014 are expected to consist primarily of capital expenditures and additional investments in advertising and marketing efforts.



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.

10



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.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters