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 April 12, 2021 the closing price on the OTCQB of our common stock was $0.165. Holders As of April 12, 2021, we had 107 holders of record of our common stock. 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. 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. 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. The Bari location was closed in the fourth quarter of 2021 and currently remains closed as of the date of this Report due to Covid-19. In January of 2020, Kisses From Italy signed its first Franchise Agreement for the state of California. Due to the onset of COVID the opening was delayed and is set to op in the second quarter of 2021. In June of 2020, the Company signed a Multi-Unit Development deal for 100 locations in Canada with Demasar Management, who will be taking the lead for franchise expansion and assisting in the Canadian brand building for the Kisses From Italy brand. In September of 2020, we decided to enter retail food and grocery stores with Kisses From Italy branded products in Canada. The product launch began in November of 2020 and Kisses From Italy Branded products were in nine retail stores by the end of 2020. At the end of Q1 2021 Kisses From Italy branded products are in over 20 stores across Ontario and Quebec in Canada. Results of Operations Comparison of Results of Operations for the years ended December 31, 2020, and 2019 Revenue and Cost of Sales Total revenues for the year ended December 31, 2020 was $514,038 compared to $461,298 during the same period ended December 31, 2019. The 2020 revenues are comprised of 222,453 in food sales and $291,585 in franchise sales. 2019 revenues are comprised of $461,298 in food sales and zero in franchise sales. During the year ended December 31, 2020, our revenues from food sales at our restaurants were $222,453 compared to $461,298 for the year ended December 31, 2019, representing a decrease of $238,845. We believe the decrease in revenue is attributable to the Covid-19 mandated shutdowns at various times during 2020 as well as Covid mandated capacity restrictions of all of our locations. During 2020, we entered into a Development Agreement in which we received a fee of 400,000 CAD, or $291,585. This fee falls under the guidelines of ASC 606 which states that the entire amount of revenue can be recognized because we have no future performance obligations associated with the Agreement, and the fee is non-refundable. As a result, we recorded the entire amount as revenue during the year ended December 31, 2020. Franchise sales for the year ended December 31, 2020 were $291,585 compared to no franchise sales during the year ended December 31, 2019. During the fourth quarter of 2020 we began offering our branded products to retail locations in Canada. For the year ended December 31, 2020 we generated $5,761 in revenues compared to $-0- in the prior period. Currently these retail sales for 2021 are trending 25-30% higher than the fourth quarter of 2020. These revenues were included in food sales on our Statements of Operations for the period ended December 31, 2020. Cost of goods sold during the year ended December 31, 2020, was $114,101 compared to $214,357 during the year ended December 31, 2019. This decrease is attributable to lower sales volumes due to the impact of Covid-19. 10 Operating expenses Operating expense increased to $3,640,846 during the year ended December 31, 2020, compared to $3,011,531 during the year ended December 31, 2019. The increase is primarily attributable to 3,028,201 in stock-based compensation expense in the year ended December 31, 2020, compared to stock-based compensation of 2,309,797 in the year ended December 31, 2019. Excluding the stock-based compensation, operating expenses were $612,645 for the year ended December 31, 2020 compared to $701,734 or the year ended December 31, 2019, representing a decrease of $89,089. This decrease is primarily attributable to a reduction in payroll expenses of $111,699 due to the impact of Covid-19 on sales levels. Due to the impact of Covid-19 the Company has begun a process to reduce its store operating expenses. There can be no assurance the Company will be successful in doing so. Other income and expense Other expense was $497,367 during the year ended December 31, 2020, compared to $339,362 during the year ended December 31, 2019. The increase in other expenses is attributable to increased interest expense due to the issuance of Series C preferred stock with a beneficial conversion features that was charged to interest expense during the year ended December 31, 2020. Net Loss During the year ended December 31, 2020, we incurred a net loss of $3,738,522 and a net loss of $29,120 attributable to non-controlling interests, compared to a net loss of $3,103,952 and a net loss of $21,092 attributable to non-controlling interests for the year ended December 31, 2019. The increase in the net loss during the year ended December 31, 2020 is primarily attributable to an increase in operating expenses of $629,315 and an increase in interest expense of $158,251 offset by an increase of $152,996 in gross profit margin. Liquidity and Capital Resources On December 31, 2020, we had $37,336 in cash. Net cash used in operating activities was $169,984 during the year ended December 31, 2020, compared to $422,871 during the year ended December 31, 2019. This decrease in the cash used in the year ended December 31, 2020, was primarily due to a decreased loss in the year ended December 31, 2020, net of stock based compensation. Cash flows used in investing activities were $1,136 for the purchase of equipment in the year ended December 31, 2020 compared to cash used in operating activities of $12,069 during the same period in 2019 for the purchase of equipment for the Bari, Italy restaurant. Cash flows provided by financing activities was $181,761 for the year ended December 31, 2020 compared to cash provided in financing activities of $438,904 for the year ended December 31, 2019. The decrease is primarily attributable to proceeds from convertible notes we received in the year ended December 31, 2019 of $388,547 compared to no proceeds in the year ended December 31, 2020 offset by proceeds from the sale of preferred stock in the year ended December 31, 2020 of $155,600 compared to no proceeds in the year ended December 31, 2019. 11 GOING CONCERN 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. In addition, the Company continues to experience negative cash flows from operations. Also, if the Company is unable to obtain adequate capital due to the continued spread of Covid-19, the Company may be required to further reduce the scope, delay, or eliminate some or all of its planned operations. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern, These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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 financing will 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, 2020. 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. 12 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 “emerging growth company” and we have a calendar-year end we are eligible for deferring the adoption of ASC 842 to December 15, 2021. ASC 842 will be effective for us beginning on December 15, 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 “emerging growth company” and we have a calendar-year end we are eligible for deferring the adoption of ASC 842 to December 15, 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. 13 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.