Kisses From Italy Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our Common Stock is quoted on the OTCQB over-the-counter market under the symbol “KITL.” Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. On May14, 2020 the closing price on the OTC Markets for our Common Stock was $0.122 Holders As of the date of this Report, we had 107 holders of record for our Common Shares. Dividend Policy We have not paid any dividends since our incorporation and do not anticipate the payment of dividends in the foreseeable future. At present, our policy is to retain earnings, if any, to develop and market our products. The payment of dividends in the future will depend upon, among other factors, our earnings, capital requirements, and operating financial conditions. The Securities Enforcement and Penny Stock Reform Act of 1990 The Securities and Exchange Commission (the “Commission” or “SEC”) has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stock. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the Commission, which: · contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; · contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of the Securities Act of 1934, as amended; · contains a brief, clear, narrative description of a dealer market, including "bid" and "ask" prices for penny stocks and the significance of the spread between the bid and ask price; · contains a toll-free telephone number for inquiries on disciplinary actions; · defines significant terms in the disclosure document or in the conduct of trading penny stocks; and · contains such other information and is in such form (including language, type, size, and format) as the Securities and Exchange Commission shall require by rule or regulation. 8 The broker-dealer also must provide, prior to effecting any transaction in a penny stock, to the customer: · the bid and offer quotations for the penny stock; · the compensation of the broker-dealer and its salesperson in the transaction; · the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and · monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling their securities. Stock Transfer Agent We have retained ClearTrust Stock Transfer, Inc., 16540 Pointe Village Drive, Suite 205, Lutz, FL 33558, phone (813) 235-4490 as the transfer agent for our Common Stock. ITEM 6. SELECTED FINANCIAL DATA. Not applicable. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our audited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements in the following discussion and elsewhere in this Report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any obligation to update forward-looking statements. Overview We are a Florida corporation incorporated on March 7, 2013, 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. We opened three additional locations by April 2016, all in Southern Florida, through a working relationship with Wyndham Hotels. In September 2017, Hurricane Irma caused significant damage to the area. As a result, we closed all of our stores for renovation following the storm. We reopened two of these locations but elected not to reopen our 4 th location. See “Business - Restaurant Development” below. If we are able to raise additional capital, of which there is no assurance, our intention is to own and operate up to 10 of our restaurants and utilize them as a showcase in the marketing of our proposed franchise operations. 9 In May 2017, we completed our 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. 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 mid to the end of 2021, however, due to the COVID -19 pandemic there can be no assurances. We have never been subject to any bankruptcy proceeding. Our principal offices are located at 80 SW 8 th St. Suite 2000, Miami, Florida, 33130, telephone (305) 423-7129 and our website is www.kissesfromitaly.com. Going Concern Our financial statements accompanying this Report have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have a minimal operating history and minimal revenues or earnings from operations. We have no significant assets or financial resources. We will, in all likelihood, sustain operating expenses without corresponding revenues for the immediate future. See “Part II, Item 8, Financial Statements, and Supplementary Data.” Results of Operations Comparison of Results of Operations for the years ended December 31, 2019, and 2018 Revenue and Cost of Sales During the year ended December 31, 2019, we generated $461,298 in revenues, compared to revenues of $444,421 in revenue during the same period in 2018, an increase of $16,877, or approximately 3.8%. As a result of the COVID-19 pandemic, all of our restaurants are currently closed, and when we do open the stores we expect volume to be negatively impacted. As a result, we expect our revenue in 2020 to be significantly lower than in 2019. The magnitude of the impact, the duration of the pandemic and the timing on our restaurant re-opening is currently indeterminable. Cost of goods sold during the year ended December 31, 2019 was 214,357 compared to $209,568 during the year ended December 31, 2018. Cost of sales as a percentage of sales was consistent at 46.5% and 47.2%, for the years ended December 31, 2019 and 2018, respectively. We are more efficient in terms of cost of sales at higher revenue levels. We expect our cost of sales as a percentage of sales to be reduced, if higher revenue levels increase. Operating expenses Operating expense increased during the year ended December 31, 2019, to $3,011,531 from $591,589 during the same period in 2018. Operating results for 2019 include a non-cash charge of $2,309,897 for stock issuances compared to zero in the 2018 period. During 2019 compared to 2018, payroll expense increased $60,553 primarily due to the addition of a group manager for the restaurants; general and administrative expense increased by $80,247 due to expense increases in numerous expense line items including outside services, utilities and maintenance and repairs; and rent expense increased $22,048. These increases were partially offset by a decrease in consulting and professional fees of $46,175. Other income and expense Other income and expenses were $339,362 in net expense for the year ended December 31, 2019, compared to a net expense of $114,286 during 2018. The increase in net expense of $225,076 is attributable to an increase in interest expense due to the expensing of the beneficial conversion feature of the convertible notes and Series C Preferred Stock, and the recording of interest on higher levels of debt. Except for one $10,000 note holder, all of our interest-bearing debt instruments amounting to $656,196 were converted to equity on September 30, 2019. Net Loss We incurred a net loss attributable to Kisses from Italy, Inc. during the year ended December 31, 2019 of $3,082,860 or $0.03 per share, compared to a net loss of attributable to Kisses from Italy Inc. of $445,448 for the year ended December 31, 2018, or an increase in net loss of $2,637,412. The increase in net loss attributable to Kisses from Italy, Inc. is primarily attributable to stock-based compensation expense of $2,309,897 in 2019 compared to zero in 2018, and due to an increase in interest expense of $225,076 in 2019 above 2018 levels. 10 Liquidity and Capital Resources At December 31, 2019, we had $26,841 in cash. Net cash used in operating activities was $422,871 during the year ended December 31, 2019, compared to $267,172 during the year ended December 31, 2018. This increase in the cash used in the year ended December 31, 2019, compared to the similar period in 2018 was primarily due to an increased operating loss in 2019 of $3,082,860 compared a loss of $445,445 in 2018, offset by non-cash stock-based compensation expense of 2,309,897 in 2019 compared to zero during the same period in 2018. Cash flows used in investing activities were $12,069 for the purchase of equipment of which $10,069 was for our new Bari location in Italy during the year ended December 31, 2019 compared to $-0- in 2018. Cash flows provided by financing activities was $438,904 for the year ended December 31, 2019 compared to cash used in financing activities of $238,094 for the year ended December 31, 2018. The increase is attributable to proceeds from convertible notes we received in 2019 of $388,547 compared to 277,650 in 2018, proceeds from the sale of preferred stock in 2019 of $50,000 compared to $-0- in 2018, and proceeds from loan balances in 2019 of $357 compared to net loan repayments of ($39556) in 2018. The amount of capital we raise will vary from period to period based on the effectiveness of our fund-raising efforts. Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of our financial statements. We have incurred annual losses since inception and expect to incur additional losses in future periods. We have one asset-based line of credit of $15,950. The amount of credit available to be accessed is dependent on the amount of documented credit receipts received by our restaurants. The due dates on these credit advances are typically between 90 and 180 days. The interest rates on this facility is approximately 25%, plus additional processing fees of approximately 5%. As of December 31, 2019, and December 31 2018, loan payable balances were $6,000 and $5,643 respectively. The amount of loans outstanding was significantly reduced due to proceeds from less expensive (in terms of the interest rate) convertible debt that was applied against loan balances. In order to continue the development of the Company, including opening additional company-owned restaurants and continuing to develop and enhance marketing of our franchise concept, we estimate we will need approximately $1 million in additional capital. We believe we can open at least 2 additional locations for approximately $300,000. We intend to use the balance of the funds to either open additional locations or on franchise marketing. We believe that by continuing to open company-owned restaurants we can use these locations to market the franchises. Historically we have raised cash from the proceeds from the private placement of our shares, and through the sale of convertible debentures. We have no agreement with any investment banking or other financing source to provide us with funding. We can provide no assurance that additional funding will be available on a timely basis, on terms acceptable to us, or at all. While we have had discussions with potential investors and investment bankers, we have no agreement with any third party to provide us this additional financing and there can be no assurances that we will obtain this financing, either debt or equity or both, on favorable terms, or at all. Our inability to receive this financing may have a significant negative impact on our continued development and results of our operations. OFF-BALANCE SHEET ARRANGEMENTS We have no off-balance sheet arrangements. Inflation Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the year ended December 31, 2019. 11 Critical Accounting Policies and Estimates Critical accounting estimates – The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Stock-based Compensation – We account for stock-based compensation using the fair value method following the guidance set forth in section 718-10 of the FASB Accounting Standards Codification for disclosure about Stock-Based Compensation. This section requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award- the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Leases – We follow the guidance in ASC 840 “ Leases ,” which requires us to evaluate the lease agreements we enter into to determine whether they represent operating or capital leases at the inception of the lease. On November 15, 2019, the FASB has issued ASU 2019-10, which amends the effective dates for three major accounting standards. The ASU defers the effective dates for the credit losses, derivatives and leases standards (ASC 842) for certain companies. Since we are classified as a “small reporting company” and we have a calendar-year end we are eligible for deferring the adoption of ASC 842 to January 1, 2021. ASC 842 will be effective for us beginning on January 1,2021. While we continue to evaluate the impact of the new standard, we expect the adoption of this guidance will have not have any impact on our financial statements. Recent Accounting Pronouncements Under the Jumpstart Our Business Startups Act, or the JOBS Act, we meet the definition of an “emerging growth company.” We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non- emerging growth companies. On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. As of and for the year ended December 31, 2018, our consolidated financial statements were not materially impacted as a result of the application of Topic 606 compared to Topic 605. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. In March 2019, the FASB issued ASU 2019-01, Codification Improvements , which clarifies certain aspects of the new lease standard. The FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases in July 2018. Also in 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides an optional transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. The amendments have the same effective date and transition requirements as the new lease standard. On November 15, 2019, the FASB has issued ASU 2019-10, which amends the effective dates for three major accounting standards. The ASU defers the effective dates for the credit losses, derivatives and leases standards (ASC 842) for certain companies. Since we are classified as a “small reporting company” and we have a calendar-year end we are eligible for deferring the adoption of ASC 842 to January 1, 2021. 12 ASC 842 will be effective for us beginning on January 1,2020. While we continue to evaluate the impact of the new standard, we expect the adoption of this guidance will have not have any impact on our financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.