Kisses From Italy Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our unaudited consolidated 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 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 Kisses From Italy Inc. (together with its subsidiaries), hereinafter referred to as “us,” “our,” “we,” or the “Company”) was incorporated in the State of Florida on March 7, 2013, with a focus on developing a fast, casual food dining chain restaurant business. The Company operates through its wholly-owned subsidiaries, Kisses From Italy 9 th LLC, Kisses From Italy-Franchising LLC, Kisses From Italy, Inc. (Canada) (a company incorporated under the laws of Canada and registered in Quebec on December 23, 2020), and Kisses From Italy Italia SRLS (a limited liability company incorporated in Italy), and its 70% owned subsidiary, Kisses-Palm Sea Royal LLC. We commenced operations by opening our initial corporate-owned restaurant in Fort Lauderdale, Florida in May 2015. By April 2016, we opened three additional restaurants located in various Wyndham Hotel properties in the Pompano Beach, Florida area. In September 2017, Hurricane Irma caused significant damage to the area, which resulted in Wyndham halting operations at its hotel properties for repairs and renovations and the closure of our Wyndham hotel locations. In December 2017, we vacated one of our restaurants in the Wyndham Hotel properties due to damage from the hurricane and have not re-opened such restaurant. During the first half of 2021, we consolidated the remaining two Wyndham stores into one location. While our Fort Lauderdale location was reopened in early November 2017, we were only able to reopen two of the hotel locations in Pompano Beach in late January 2018. We also elected not to reopen our fourth location, as the damages were too excessive. If we can raise additional capital, of which there is no assurance, we intend to own and operate up to 10 restaurants and utilize them as a showcase in the marketing of our proposed franchise operations. In May 2017, we completed our National Franchise License which permits us to sell franchises in all of the states in the United States except for New York, Virginia, and Maryland, which licenses we hope to obtain if sufficient demand exists in the future. We opened our first European location in Ceglie del Campo, Bari, Italy, in October 2019. The Bari location closed in April 2020 due to the Covid-19 pandemic, briefly re-opened and has not re-opened as of the date of this Report. Such location was intended to serve as the distribution center for products for European locations, as well as to be used as a training facility for European franchises. However, this initiative has been severely curtailed due to the onset and lingering impact of Covid -19 in Europe. Our two corporate-owned restaurants, one located in Fort Lauderdale, Florida, and one within the Wyndham location in Pompano Beach, Florida, have fully re-opened without limitation or any social distancing requirement. In September 2019, the Company’s common stock was approved for trading by FINRA and in October 2019 was approved for uplisting by the OTC Markets Group to the OTCQB under the symbol “KITL”. 18 In June of 2020, the Company entered into a multi-unit development agreement (the “Development Agreement”) pursuant to which it granted development rights to Demasar Management, Inc. (“Demasar”) to open and operate up to 100 restaurants in Canada. Under this Development Agreement, the developer is obligated to open a minimum of 20 restaurants by June 17, 2025. On November 20, 2021, we opened a franchise location under the Development Agreement in Montreal, Quebec, Canada. In September of 2020, we entered 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. Currently, Kisses From Italy branded products are in 50 stores across Ontario and Quebec, Canada. In April of 2021, we entered into a Consulting Agreement with Fransmart, LLC, a Delaware limited liability company (“Fransmart”), pursuant to which we engaged Fransmart as our exclusive global franchise developer and representative for a period of ten years. In June of 2021, the Company’s first franchise location opened in Chino, California. In November of 2021, the Company opened its second franchise location in Montreal, Canada. On March 9, 2022, Articles of Amendment to the Company’s Articles of Incorporation to increase the number of its authorized common stock from 200,000,000 shares to 300,000,000 shares became effective. Such action was approved by the Board of Directors on January 25, 2022 and a majority of the Company’s shareholders on January 27, 2022. The purpose of the share increase was to make available additional shares of common stock to meet the current obligations of the Company to issue common stock, including under outstanding convertible securities. Recent Developments On July 26, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with 1800 Diagonal Lending LLC, a Virginia limited liability company ( the “Lender”), pursuant to which the Company issued the Lender a promissory note in the principal amount $70,000.00 (the “Note”). The Note bears interest at a rate of 9% per annum and is due and payable on July 26, 2023. Upon an event of default under the Note, the interest increases to 22%. The Company has the right to prepay the Note in full at any time upon three trading days’ prior written notice, subject to a prepayment penalty if the Note is prepaid on or before January 22, 2023. The prepayment penalty is equal to 20% of the outstanding principal and interest under the Note for prepayment made on or before September 24, 2022, 25% of the outstanding principal and interest under the Note for prepayment made between September 25, 2022 and November 23, 2022 and 29% of the outstanding principal and interest under the Note for prepayment made between September 26, 2022 and January 22, 2023. The Note is convertible at the option of the Lender at any time after January 22, 2023 at a conversion price equal to 65% of the lowest closing bid price of the Company’s common stock on the OTCQB market or other applicable exchange during the ten trading days preceding the conversion date, provided that no such conversion may result in the Lender and its affiliates beneficially owning more than 4.99% of the then outstanding shares of the common stock of the Company. For as long as the Note is outstanding, the Company must have authorized and reserved, free of preemptive rights, nine times the number of shares issuable upon full conversion of the Note (initially 25,846,153 shares), subject to the 4.99% beneficial ownership limitation. Covid-19 Pandemic On March 11, 2020, the World Health Organization declared the Covid-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic has had a negative on the global economy, leading to disruptions and volatility in the global financial markets. The continuing effect of the Covid-19 continues to be uncertain and subject to change. We do not know the full extent of the effects on the economy, the markets we serve, our business, or our operations in the future. The Company’s two corporate-owned restaurants in Fort Lauderdale, Florida and the Wyndham location in Pompano Beach, Florida, have fully re-opened without any Covid-19 restrictions. The Company’s Bari location in Italy remains closed due to such restrictions. Going forward there can be no assurance that our restaurants will be allowed to remain open or if open, at full capacity, or that we can achieve historic sales levels. 19 Results of Operations Three months ended September 30, 2022, and September 30, 2021 Revenue and Cost of Sales Total revenues for the three months ended September 30, 2022 were $101,522 compared to $85,727 during the three months ended September 30, 2021. The increase in revenue is primarily attributable to higher sales at the Company’s Kisses-Palm Sea Royal location based in Pompano Beach, Florida. Cost of goods sold during the three months ended September 30, 2022, was $56,179 compared to $43,644 during the three months ended September 30, 2021. This increase is attributable to higher sales and increased costs due to the high inflationary trends in the food industry. Operating expenses Operating expenses were $214,298 for the three months ended September 30, 2022, compared to $157,166 during the three months ended September 30, 2021. The increase in expenses in the three month period ended September 30, 2022 period is primarily attributable to an increase in general and administrative expense of $49,167 and an increase in consulting and professional fees of $20,508 over 2021 levels. The increases are due to higher expenses due to inflationary trends, as well as increased professional fees associated with raising capital to fund the Company’s operations. Other income and expense Other expense for the three months ended September 30, 2022 was $118,536 compared to $95,545 during the three months ended September 30, 2021. The increase in the 2022 period is due to a change in the fair market value of the derivative liability of $109,411 in the 2022 period compared to $-0- in the 2021 period, offset by a reduction in interest expense in the 2022 period of $86,420. Net Loss As a result of the foregoing during the three months ended September 30, 2022, we incurred a net loss of $287,491 and a net loss of $5,596 attributable to non-controlling interests in the three months ended September 30, 2022, compared to a net loss of $210,628 and a net loss of $5,874 attributable to non-controlling interests for the three months ended September 30, 2021. The increase in the net loss in the 2022 period compared to the 2021 period is attributable higher operating expenses and the recording of a derivative liability in 2022. Nine months ended September 30, 2022, and September 30, 2021 Revenue and Cost of Sales Total revenues for the nine months ended September 30, 2022 were $311,484 compared to $328,479 during the nine months ended September 30, 2021. The decrease in revenue is primarily attributable to lower sales at the Company’s Kisses From Italy 9th LLC’s restaurant based in Fort Lauderdale, Florida. Cost of goods sold during the nine months ended September 30, 2022, was $162,125 compared to $155,953 during the three months ended September 30, 2021. The increase in cost of sales is attributable to higher food costs due to the high inflationary trends in the food industry. Operating expenses Operating expenses were $556,125 for the nine months ended September 30, 2022, compared to $3,646,423 during the nine months ended September 30, 2021. Non-cash stock-based compensation was $5,170 and $3,231,573, respectively, for the nine months ended September 30, 2022 and September 30, 2021. Excluding the stock-based compensation in the nine months ended September 30, 2022 and 2021, operating expenses were $550,955 and $414,850 respectively. The increase in expenses in the nine month period ended September 30, 2022 period is primarily attributable to an increase in consulting and professional fees of $47,734 and an increase in G&A expense of $82,503 over 2021 levels. The increases are due to higher expenses due to inflationary trends, as well as increased professional fees associated with raising capital to fund the Company’s operations. 20 Other income and expense Other expenses comprised of interest expense and the change in the fair value of the derivative liability was $421,040 for the nine months ended September 30, 2022 compared to $347,747 during the nine months ended September 30, 2021. The increase in the 2022 period is due to a derivative liability of $109,411 in 2022 compared to $-0- in the 2021 period, partially offset by a decline in interest expense of $36,118. Net Loss As a result of the foregoing during the nine months ended September 30, 2022, we incurred a net loss of $827,805 and a net gain of $10,934 attributable to non-controlling interests in 2022, compared to a net loss of $3,821,644 and a net profit of $10,286 attributable to non-controlling interests for the nine months ended September 30, 2021. The decrease in the net loss during the nine months ended September 30, 2022 is primarily attributable to $3,231,573 in stock based compensation in the nine months ended September 30, 2021, compared to $5,170 in the nine months ended September 30, 2022. Liquidity and Capital Resources The Company had cash and cash equivalents of $435,076 as of September 30, 2022. The Company has historically financed its operations through convertible notes and equity issuances. The COVID-19 pandemic has caused significant disruptions to the global financial markets. The full impact of the COVID-19 outbreak continues to evolve, is highly uncertain and subject to change. The Company continues to estimate the effects of the COVID-19 outbreak on its operations and financial condition. While significant uncertainty remains, the Company believes that the COVID-19 outbreak will continue to have a negative impact on the ability to raise financing and access capital. Net cash used in operating activities was $509,408 during the nine months ended September 30, 2022, compared to net cash used of $317,079 during the nine months ended September 30, 2021. The increased net cash used in operating activities for the 2022 period compared to 2021 is primarily attributable to a decrease in profitability of approximately $232,564 net of non-cash stock based compensation in the 2022 period. Net cash provided by financing activities was $805,000 for the nine months ended September 30, 2022, compared to $295,000 during the nine months ended September 30, 2021. The increase in net cash provided by financing activities is primarily attributable to proceeds of $550,000 from the sale of convertible notes, and $250,000 of proceeds from a note payable in the 2022 period, compared to the sales of common stock and preferred stock in private offering for proceeds of $295,000 in the nine months ended September 30, 2021. There can be no assurances that additional financing, either through equity or debt, will be available on a timely basis, on favorable terms or at all. While we have had discussions with potential investors and investment bankers, we have no agreement with any third party to provide additional financing. Our inability to obtain additional financing may have a significant negative impact on our continued development and results of our operations. Covid-19 has also caused significant disruptions to the global financial markets, which impacts our ability to raise additional capital. If the Company is unable to obtain adequate capital due to the continued spread of Covid-19, the Company may be required to reduce the scope, delay, or eliminate some or all of its planned operations. 21 Going Concern Our consolidated financial statements were prepared assuming that we will continue as a going concern and do not include adjustments for the recoverability and the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve months following the date of these financial statements that may be necessary should we be unable to continue in operation. 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 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. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Critical Accounting Estimates Management’s discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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. Our critical accounting policies are 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. Our significant accounting policies are more fully discussed in Note 2 to our unaudited financial statements contained herein. Recent Accounting Pronouncements There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company's operations, financial position, or cash flows. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is a smaller reporting company and is not required to provide this information.