Kisses From Italy Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Annual Report. Actual future results may be materially different from what we expect. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by federal securities and any other applicable law. Results of Operations Comparison of Results of Operations for the years ended December 31, 2022, and 2021 11 Revenue and Cost of Sales Total revenues for the year ended December 31, 2022, were $391,447 compared to $400,662 during the year ended December 31, 2021. Revenues for the year ended December 31, 2022 was comprised of $365,970 in food sales and $25,477 in sales of branded products to retail locations in Canada; compared to food sales of $364,662 and franchise sales of $36,116 during the year ended December 31, 2021. The revenues in 2022 were comparable to 2021 due to no change in the retail environment for our products. We are working on new concepts and menu changes but there can be no assurances that these changes will be successful. Cost of goods sold during the year ended December 31, 2022 was $213,106 compared to $203,121 during the year ended December 31, 2021. This slight increase in cost of sales in 2022 over 2021 levels is attributable to higher food costs in 2022, offset by improved operating efficiencies. Operating expenses Operating expenses were $675,579 for the year ended December 31, 2022, compared to $4,337,390 during the year ended December 31, 2021. Non-cash stock-based compensation was $5,170 and $3,765,5911 for the years ended December 31, 2022 and December 31, 2021, respectively. Excluding the stock-based compensation in both periods, operating expenses were $675,579 for the year ended December 31, 2022 compared to $571,999 for the year ended December 31, 2021. This is primarily attributable to increased general and administrative expenses due to inflationary factors as well increased corporate activity. Other income and expense Other expenses comprising interest expense and change in the fair value of the derivative liability was $362,467 for the year ended December 31, 2022 compared to $798,877 during the year December 31, 2021. The decrease in other expenses is attributable to fewer conversions of equity instruments with beneficial conversion issues in which interest expense was recognized in 2021 compared to 2022, a gain of $34,373 from the extinguishment of debt, partially offset by an increase of $73,398 due to the recognition of a derivative liability in 2022 compared to zero in the 2021 period. Net Loss As a result of the forgoing, the net loss attributable to Kisses From Italy Inc. for the year ended December 31, 2022 was $847,385 compared to a net loss attributable to Kisses of Italy, Inc of $4,942,113 for same period ended December 31, 2021. The decrease in the net loss in the 2022 period is primarily attributable to a decrease of $3,760,421 of non-cash stock based compensation, decreased other expense in 2022 partially offset by increased general and administrative expenses . Liquidity and Capital Resources On December 31, 2022, we had $324,493 in cash and cash equivalents. Net cash used in operating activities was $579,140 during the year ended December 31, 2022, compared to net cash used of $451,591 during the year ended December 31, 2021. The increase in net cash used in operating activities of $127,459 is primarily attributable to increased operating losses net of non-cash items compared to the year ended December 31, 2021. Net cash used in investing activities was $40,852 due to the purchase of fixed assets during the year ended December 31, 2022, compared to $1,910 during the period ended December 30, 2021. 12 Net cash provided by financing activities was $805,000 for the year ended December 31, 2022, compared to $555,650 during the year ended December 31, 2021. The difference in the 2022 period compared to 2021 is attributable to proceeds of $550,000 from convertible notes, $250,000 from proceeds in notes payable, compared to $435,650 in proceeds from the sale of common stock and $120,000 in proceeds from the sale of preferred stock. During the next year, we estimate that we will need approximately $1,000,000 to fully effectuate our business development plans, including opening additional company-owned restaurants and continuing to develop and enhance the marketing of our franchise concept. Subject to the continued impact of Covid-19, we currently believe that we can open at least two additional restaurants for approximately $300,000. We believe that continuing to open company-owned restaurants will assist us to market other locations. 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 the 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. Going Concern Our consolidated financial statements were prepared to assume 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 the 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. These factors, among others, 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 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. 13 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 “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 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. 14 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.