Kisses From Italy Inc. 10-K

ITEM 1. BUSINESS Overview and History Kisses From Italy, Inc. (hereinafter referred to as “us,” “our,” “we,” the “Company” or “Kisses”) is a Florida corporation incorporated on March 7, 2013, which is focused on developing a fast-casual food dining chain restaurant business. We commenced operations by opening our initial corporately owned location in Fort Lauderdale, Florida, in May 2015. Thereafter, by April 2016 we opened three additional locations, all in Southern Florida, through a working relationship with Wyndham Hotels, where we have built two of our other locations. Other than our lease agreements for these locations we have no other agreement in place with Wyndham Hotels. While we have had discussions with their management about enhancing and expanding our working relationship with them, we have no agreement in place to create such a relationship with Wyndham or any other national chain of hotels or timeshare operators and there are no assurances that any such arrangement will become effective in the near future, or at all. In September 2017, Hurricane Irma made landfall in Southern Florida, causing significant damage to the area. As a result, we closed all of our stores for renovation following the storm. Our Fort Lauderdale location was reopened in early November 2017. We reopened two of the hotel locations in Pompano Beach in January 2018 but elected not to reopen our 4 th location, as this location suffered significant damage in the storm. See “Restaurant Development” below. We intend to own and operate up to 6 of our restaurants and utilize them as a showcase in the marketing of our proposed franchise operations. In May 2017, we completed our National Franchise License and now can sell franchises in all of the states in the US except for New York, Virginia, and Maryland which we intend to add at later dates if sufficient demand exists. In June 2017, we completed the sales of two franchise locations in Florida. We anticipate commencement of the building and development of these locations by the end of 2018. We strive to provide the highest level of service, high-quality ingredients, and products. Enveloped in our mission is our philosophy to support and partner with local producers and suppliers within the regions in order to provide a truly authentic experience to our customers. Our vision is to leverage the success of our flagship store and our initial hotel locations in the South Florida market and to expand into other regions on a local, state, national, and global level. The main focus is doing so through our continued corporate-owned store expansion, along with the development and sales of additional locations through the advancement of our franchise and territorial rights program. In May 2018 we filed our initial registration statement on Form S-1 with the US Securities and Exchange Commission. On August 23, 2018, our registration statement was deemed effective by the Commission. We registered an aggregate of 22,201,250 shares of our Common Stock in the registration statement. Subsequently, a licensed broker-dealer filed an application to list our Common Stock for trading. On September 23. 2019 the Company’s application to trade its common stock on the OTCQB under the symbol “KITL”. In May of 2019, we began the initial steps of developing our first European restaurant location, which is located at Strada Provinciale 70 #100, Ceglie del Campo, 70129, Bari, Italia. Our European location began its operation on October 24, 2019. Our European location will also act as our distribution center for European products destined for our current locations and future corporate-owned and franchised locations. Our principal offices are located at 80 SW 8 th St. Suite 2000, Miami, Florida, 33130, telephone (305) 423-7024 and our website is www.kissesfromitaly.com. 1 Current Business Plan Each of our restaurants has been and will continue to be designed to deliver great-tasting food in less than five minutes for in-restaurant dining or take-out orders. In addition, the restaurant’s menu and operating systems have been specifically designed for consistent quality, which we believe is necessary for high-growth franchising. Hours of operation are expected to be from 7:00 am to 11:00 pm, subject to change if additional hours are required based upon the respective location of our restaurants. Covid-19 pandemic On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Most U.S. states and many countries have issued policies intended to stop or slow the further spread of the disease. COVID-19 and the U.S.’s response to the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business or our operations. Our Menu Our menu includes grilled paninis including an Italian style Panini, sausage, beef, sliced pork, or chicken topped with quality natural “sott'olio” (grilled and marinated vegetable) products at prices ranging from $5.95 to $7.95. We also offer deli paninis including fresh cheese Panini, prosciutto, salami, capocollo, bresaola, and turkey panini’s ranging in price from $5.95 to $7.95. All our panini’s include lettuce, tomato, and one choice of cheese and three choices of marinated vegetables, or three choices of grilled vegetables. We also will offer desserts including a Nutella sandwich, a variety of fresh Danish, cannoli, Italian biscotti, sfogliatelle or a corneti, ranging in price from $1.50 to $2.50. Our breakfast menu is served all day We will also have a full coffee and tea favorites, including espresso, cappuccino, and other coffee drinks, soft drinks, bottled water, and juices, as well as various flavors of granite (ices). We also will offer desserts including a Nutella sandwich, a variety of fresh Danish, cannoli, Italian biscotti, sfogliatelle or a corneti, ranging in price from $1.50 to $2.50. We will provide an egg sandwich for breakfast only. We will also have a full coffee and tea favorites, including espresso, cappuccino, and other coffee drinks, soft drinks, bottled water, and juices, as well as various flavors of granite (ices). Our vision is to transport true authentic and rustic taste from the provinces of Italy through a fresh Panini with an espresso, latte, or cold slush espresso to go. We intend to offer products that will cater to all diets including gluten-free diets and emphasize fresh products with no preservatives. All our sott'olio and coffee products are made in Italy. Our management is in constant communication with our product manufacturers and search for high quality and authentic products from different regions from Southern Italy including Sicily, Calabria, Puglia, Napoli, Potenza, and Toscana. Ensuring freshness and quality, our representatives work closely with local farmers and ranchers for all meats and fresh vegetables. All our products are D.O.P. (Protected Designation of Origin) certified and defined in the European Commission Regulations. Quick Service Restaurants Between May 2015 and May 2016, we opened four (4) restaurants in Southern Florida. Each of our restaurants is owned by a wholly-owned limited liability company. Our initial restaurant is located at 3146 NE 9 th Street in Fort Lauderdale, Florida. This location is across the street from an Atlantic Ocean public beach and consists of approximately 1,000 square feet of a retail restaurant with seating for up to 25 guests. See “Part I, Item 2, Property,” below. This restaurant opened for business in May 2015. Subsequently, we opened three additional similar restaurants, all in Southern Florida. Except for the Fort Lauderdale location, all of our restaurant locations arose out of a relationship we established with Wyndham Vacation Ownership, Inc., which operates timeshare apartment complexes. Of our three restaurants, two are located in Wyndham timeshare resort properties where they are the only restaurants on site. Our lease agreements provide for our restaurants to provide room service that can be charged to the customer’s room, as well as an opportunity to provide food and beverage service to various sales, orientations, marketing, and owner events held by Wyndham regularly on these properties. Wyndham remits payments for these services bi-weekly and charges us with a 5% administrative fee for processing costs. Our menu includes grilled paninis including an Italian style Panini, sausage, beef, sliced pork, or chicken topped with quality natural “sott'olio” (grilled and marinated vegetable) products at prices ranging from $5.95 to $7.95. We also offer deli paninis including fresh cheese Panini, prosciutto, salami, capocollo, bresaola, and turkey panini’s ranging in price from $5.95 to $7.95. All our panini’s include lettuce, tomato, and one choice of cheese and three choices of marinated vegetables, or three choices of grilled vegetables. We also will offer desserts including a Nutella sandwich, a variety of fresh Danish, cannoli, Italian biscotti, sfogliatelle or a corneti, ranging in price from $1.50 to $2.50. Our breakfast menu is served all day We will also have a full coffee and tea favorites, including espresso, cappuccino, and other coffee drinks, soft drinks, bottled water, and juices, as well as various flavors of granite (ices). 2 The initial relationship with Wyndham has provided us with an additional revenue stream that we had not considered when we originally began implementing our business plan. We have continued our discussions with Wyndham, as well as other similar companies, and believe that our continued expansion of our restaurant concept will be enhanced as a result of our developing a more extensive relationship with Wyndham or another similar company. There are no assurances this will occur. Our flagship location, at 3146 NE 9 TH in Fort Lauderdale, suffered the greatest impact from the Hurricane of all of our locations. The commercial building where our restaurant was located sustained severe damage. We have remained as the sole tenant on the property since September 2017. Property repair from the Hurricane did not commence until well into the second half of 2018. The building remained in shambles as of this date of this Report. This has greatly reduced the foot traffic to the surrounding area thereby affecting our exposure to any potential walk-by customers. As repairs to the building finally commenced in mid-2018, we were asked by the building landlord to close for the entire month of July 2018. We complied and received a rent abatement for a period of four (4) months. The impact from these on-going repairs continued well in 2019 with no clear of estimated time as to when the repairs will be completed. While no assurances can be provided we are confident that once the repairs are complete the area will return to its once sought out status. Each location is managed by one senior employee/manager and individually assessed based on foot traffic, seasonality, and other demographic factors. We abide by the standards and rules set forth by the State of Florida Department of Health. Michele Di Turi, our CEO and Ross Golub have the Certified Food Manager accreditation and have the proper authority to provide necessary food safety courses. Restaurant Franchising In addition to opening our company-owned restaurants, we are engaged in franchising of our restaurant concept so that we can build market share and brand awareness. We retained legal counsel specializing in franchise operations, who has prepared our Franchise Agreement. In May 2017, we completed its National Franchise License and now have the ability to sell franchises in all of the states in the US except for New York, Virginia, and Maryland which we intend to add at later dates if sufficient demand exists. On June 23 rd , 2017 we completed the sale of our initial two franchises at a price of $15,000 per location, each to be located in Florida. These locations are set to be developed at a later date. We anticipate commencement of the building and development of these locations by July 1, 2020. Each of our franchise restaurants are required to conform to a standard of interior design, featuring a distinctive and comfortable Italian décor. Our prior approval is required for each specific location of a proposed franchise restaurant, which includes a requirement that the same be in a clearly identifiable commercial location built out in accordance with our standards. Franchisees are also required to satisfactorily complete training and purchase certain equipment and supplies from us and other approved suppliers. We also require the purchase of a point-of-sale system and data polling services from a specified supplier and a computer system that meets established system standards. Franchisees are required to purchase approximately 90% to 95% of their supplies and food inventory either directly from us, or from approved suppliers. We attempt to negotiate system-wide volume discounts and/or rebates for our franchisees from approved suppliers and if successful, pass such discounts and/or rebates on to franchisees based on the volume of their purchases from the suppliers providing the discounts. The franchise agreement also requires our franchisee to pay royalties of 9% of gross sales, which are defined to be total actual charges for all products (food and non-food) and services, such as catering and delivery, sold to customers, exclusive of taxes, every week. We retain 6% of this royalty and the remaining 3% goes towards a marketing fund. The marketing fund is broken down in two parts, 2% for local marketing and 1% for national marketing. We anticipate that until national coverage is warranted, local and/or regional marketing campaigns will be implemented. We also require that our franchisee enter into a collateral assignment and assumption of lease through which we are granted a security interest in all of the furniture, removable trade fixtures, inventory, licenses and supplies located in the restaurant as collateral for (1) the payment of any obligation owed to us, (2) any default or breach under the terms of the lease, and (3) any default or breach of any of the terms and provisions of the franchise agreement. In the event of a breach of or default under the lease or payment by a franchisee as a result of a breach or default, we may be entitled to possession of the restaurant and all of our rights, title, and interest in and to the lease. We also enter into a conditional assignment of telephone numbers and listings that assigns us telephone numbers and directory listings upon termination or expiration of a franchise relationship. 3 The initial term of a franchise agreement is ten years, with a renewal provision of between 2-5 years on the terms and conditions of the franchise agreement so long as there has been substantial compliance with the franchise agreement and pay a to-be-determined fee for each renewal. Franchisees are also required to replace any franchise that terminates or expires or any restaurant that closes within the territory if necessary, to maintain the number of our named restaurants required in the development schedule. If a franchisee fails to meet the development schedule, we have the right to terminate the agreement or adjust that territory to eliminate any state in the territory where they have not achieved the minimum number required for that state. We are required to perform the following services: · Solicitation of new franchise owners - Actively and continuously market and promote through advertising and solicit prospective franchise owners in their territory according to an annual plan and budget that they develop and submit for our approval. · Site selection, leasing, and build-out - Consult and advise franchise owners with site selection and lease negotiation of the restaurants. Develop and maintain relationships with landlords for purposes of obtaining sites for restaurants and coordinating efforts with franchise owners to lease such sites. Develop relationships with landlords, contractors, equipment suppliers, and service providers in the territory and assist in the supervision of the build-out for the restaurants in our territory. · Training - Provide all initial training to the franchise owners, as well as supplemental and refresher training at our training restaurant. Schedule and coordinate all training of all franchise owners with our required mode of operations. · Opening assistance - Provide grand opening support, including coordinating marketing with local television, radio, newspapers, and trade publications. Provide franchise owners with supervisory assistance and guidance in connection with the opening and initial operations of their restaurants. Provide pre-opening and post-opening assistance for each new restaurant. · Monitoring, audit, and inspection - Be responsible for at least monthly monitoring of the operation of their restaurants, including monitoring and reporting of the sales volume and other data as determined from time to time. Monitor and communicate to our franchisee the marketing efforts of our restaurants. Conduct or assist franchisees with inspecting or auditing restaurants and their owners, with visits no less than monthly and in-depth reports at least quarterly. · Vendors and suppliers - Notify vendors and, if necessary, locate new vendors for the franchises and coordinate distribution and purchasing programs. Assist franchisees in developing programs for suppliers and distributors of approved products. Maintain positive relationships and evaluate additional incentive programs and marketing programs from approved and preferred suppliers, vendors, and other designated parties. · Continuing assistance to franchise owners - Provide continuing operating assistance and assist in facilitating transfers and renewals of franchises. Assist franchise owners during transfers of their franchises or restaurants. We also require our franchisees to maintain certain staffing levels to meet all of the terms of the agreement. For the first development year, we require each location to have 2 corporate employees, increasing to 3 for the fifth development year. If a franchisee fails to perform any of the above services and we need to step in to perform such tasks, we require that they pay us an amount equal to 125% of the expenditures incurred by us in performing the services that they failed to perform. In addition, such failure will constitute a breach of the agreement. A breach of the agreement gives us the right to terminate the agreement after delivering notice to them of the breach and their failure to cure the breach within 30 days after delivery of the notice. The agreement includes provisions where each franchisee must refer all inquiries for franchises in their territory to us. Under the terms of the Area Representative Agreement, we have the sole right to grant franchises in all our unsold territories, terminate a franchise agreement, and approve site selections, leases, and other franchise real estate transactions. 4 Franchise Marketing Our marketing strategy for establishing multi-unit franchises is to contact individuals or entities that have previously developed franchises in other concepts. This strategy allows us to find people with the proper knowledge, experience, and financial resources to develop a successful franchise operation in a timely fashion. We are seeking individuals or groups with the skills and financial strength to operate multi-unit franchise organizations within specific geographic territories. These persons must qualify on the basis of their skill sets and financial ability to develop a territory. We anticipate a franchise territory will consist of areas that are either cities or counties depending on population. We seek to identify people with considerable experience in the management of food service venues who also have sufficient start-up capital to open several of our restaurants. As of the date of this Report, we have entered into discussions with several possible franchise owners. It is anticipated that these franchisees may open multiple units, including restaurants in Florida, California, the United Kingdom, Italy and/or Canada. However, there is no definitive agreement binding these potential franchisees to purchasing any of our franchises and there are no assurances that we will sell any franchises in the future. We will consider the skills and investment capital that each potential multiple franchise owner presents to determine the size and nature of the territory and the minimum number of our restaurants that the franchise owner will be required to maintain in the territory in order keep the exclusive rights to that territory. We will review the demographics of each proposed location to consider the appropriate number of restaurants in each area based upon population and other factors including per capita income and then set the minimum number of restaurants at half the amount. Franchisees will not be restricted from opening additional restaurants beyond the minimum for their territory. We have not yet generated revenue from the sourcing of franchises and there are no assurances we will ever generate revenues from this business concept. Commissary System We plan to develop centralized commissary facilities that will serve all of the restaurants that we own in a given region. We believe that a commissary that serves a region of restaurants will improve efficiency and consistency for the restaurant concept. We also believe that a commissary system will allow our restaurants to be approximately 500 square feet smaller than they would otherwise be. We plan to build commissaries in areas with lower rent. In this manner, we plan to save the difference between the 500 fewer square feet that retail rental space would cost and the commissary’s costs located in a lower rent area. Our commissary will have storage space for paper products as well as walk-in coolers to store food. Food preparation for sauces, salad dressings, and other base ingredients will be done in the commissary “clean room” and then delivered to local restaurants daily. We believe central food preparation of sauces and base ingredients will maintain the consistency of our restaurants’ products and possibly reduce labor costs. Restaurant Advertising Our advertising has and will consist primarily of newspaper print ads, direct mailing efforts and also through social media, including Facebook, Twitter, and other social media outlets. We also participated in other forms of advertising. For example, we intend to use an airplane to advertise our Kisses banner to the Fort Lauderdale beach crowd, offering promotional free coffee and T-shirts. Our ads will contain a coupon for a free coffee with the purchase of any meal item. As we open restaurants in new markets we plan to duplicate the advertising effort we employed in Fort Lauderdale and to spend initially approximately 2% to 3% of monthly revenue for local advertising on a per company-owned restaurant basis. Since we plan to build multiple restaurants simultaneously within a specific geographic region, we believe our advertising cost as a percentage of revenue will decrease as we increase the number of restaurants within a region. There are no assurances we will successfully open multiple restaurants moving forward. Employees We currently employ 8 full-time persons, plus our officers. Employees include 4 chefs, 3 baristas and an inventory manager. Our employees work at will and are not represented by a collective bargaining unit. We believe our relationship with our employees is excellent in most cases. We require all our employees and consultants to sign a confidentiality and non-disclosure agreement. Our success relies on our ability to hire additional employees, particularly on the local sales side. We believe there are numerous quality people to choose from throughout our area of targeted expansion. 5 As we grow we anticipate in the near future we will require a franchise director and a Chief Financial Officer/Controller, as well as various administrative support personnel. Competition The fast-food segment of the restaurant industry is highly competitive and fragmented. In addition, fast food restaurants compete against other segments of the restaurant industry, including fast-casual restaurants and casual dining restaurants. The number, size, and strength of our competitors vary by region. Our competitors also compete based on a number of factors, including taste, the speed of service, value, name recognition, restaurant location, and customer service. The restaurant industry is often affected by changes in consumer tastes; national, regional or local economic conditions; currency fluctuations; demographic trends; traffic patterns; the type, number, and location of competing food retailers and products; and disposable purchasing power. Our restaurant concept is expected to compete with international, national, and regional restaurant chains as well as locally-owned restaurants. We will compete not only for customers, but also for management and hourly personnel, suitable real estate sites, and qualified franchisees. We believe that each of the following restaurants may provide competition to our proposed restaurants because they all are franchise operations that sell sandwiches and coffee: · Jimmy John’s · Subway · Chipotle Mexican Grill · Miami Subs Grill · Starbucks Of the above-listed restaurants, all are larger and have significantly greater financial resources than we currently have available. Government Regulations We are subject to various federal, state and local laws affecting our business. Our restaurants must comply with licensing and regulation by a number of governmental authorities, which include health, sanitation, safety, and fire agencies in the state or municipality in which the restaurant is located. In addition, we must comply with various state laws that regulate the franchisor/franchisee relationship. We are also subject to federal and state laws governing employment and pay practices, overtime, tip credits, and working conditions. The bulk of our employees are paid on an hourly basis at rates related to the federal and state minimum wages. We are also subject to federal and state child labor laws which, among other things, prohibit the use of certain “hazardous equipment” by employees 18 years of age or younger. Under the Americans with Disabilities Act, we could be required to expend funds to modify our restaurants to better provide service to, or make reasonable accommodation for the employment of disabled persons. We continue to monitor our facilities for compliance with the Americans with Disabilities Act in order to conform to its requirements. We believe future expenditures for such compliance would not have a material adverse effect on our operations. As a potential franchisor, we will be soliciting prospects for franchises and are subject to federal and state laws pertaining to franchising. These laws require that certain information be provided to franchise prospects at certain times and regulate what can be said and done during the offering process. Some states require the franchise offering circular to be registered and renewed on an annual basis. 6 Trademarks and Patents We have applied for and received a registered trademark of our logo in Italy, No. 0001 528191. We have also obtained the registered trademark of our logo in the United States (the United States Patent and Trademark Office) Serial Number. 87138230 ITEM 1A. RISK FACTORS We are a smaller reporting company and not required to include this disclosure in this Report. ITEM 1B. UNRESOLVED STAFF COMMENTS None.