Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below of the financial
condition and results of operations for the Company and should be read in conjunction with the consolidated financial statements and the
notes to such financial statements (pages F-1 to F-19), “Forward-looking Statements” (page ii) and Risk Factors
set forth in Item 1A.
Overview
The Company’s main
focus is to develop a fast, casual food dining chain restaurant business of corporate-owned restaurants and expanding through a nationwide/international
franchise and territory sales program. The Company commenced operations in May 2015 by opening its first location in Fort Lauderdale,
Florida, which is the only operating restaurant as of the date of this Annual Report. The Company also opened in 2016 three additional
restaurants, located in various Wyndham Hotel properties in the Pompano Beach, Florida area, but these restaurants are no longer operational
(in December 2017, the Company vacated one of its restaurants due to a hurricane; in June 2021, the Company consolidated its two Wyndham
restaurants into one location to become more efficient, and in May 2023, the Company made the decision not to renew a lease in Wyndham
Palm Aire location and to close its operations there.
The Company opened its
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 permanently closed on December 31, 2023. Such a location was intended to serve as the distribution center for future
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. The Company’s relationship with MediaCom SAS for
distribution and importing of European products remains intact and the distribution hub has been moved to Naples, Italy at the MediaCom
SAS offices.
In September 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 90 stores across Ontario and Quebec, Canada.
In April 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 2021 and November
2021, the Company opened its first two franchise locations in Chino, California and Montreal, Canada, respectively. Due to the difficulty
of opening new retail food establishments with proper levels of staffing, and ongoing inflationary pressures and supply chain constraints
due to COVID, the Chino, California location was unable to generate profitable operations and was closed as of December 31, 2023. As the
economic environment in Quebec, Canada continued its decline, the Montreal location assets were sold to a non-franchisee third party.
During the time these locations were open, the Company did not generate any franchising fees.
On November 29, 2021,
the Company entered into a Standby Equity Commitment Agreement (the “Purchase Agreement”), dated November 22, 2021, together
with a registration rights agreement (the “Registration Rights Agreement”) with MacRab, pursuant to which the Company has
the right to sell to the Investor up to $7,500,000 in shares of the Company’s Common Stock, subject to certain limitations listed
below. In connection with the Purchase Agreement, the Company issued to MacRab a five-year warrant (the “MacRab Warrant”)
to purchase 750,000 shares of Common Stock (the “Warrant Shares”) with stand anti-dilution provisions and cashless exercise.
On March 29, 2023, the Company and MacRab entered into the First Amendment to the Purchase Agreement. The Purchase Agreement, as amended
by Amendment #1, reduced the minimum price per share in the Purchase Agreement from $0.10 per share to $0.001, so that the closing price
of the Company’s Common Stock during each of the six trading days immediately preceding the respective “put date” must
not be lower than $0.001 per share. On December 5, 2023, the Company and MacRab entered into the Second Amendment to the Purchase Agreement,
for the purpose of extending the commitment period under the Purchase Agreement. The Purchase Agreement, as amended by Amendment #2, changed
the definition of the “Commitment Period” extending the it to 36 months from the date of the Purchase Agreement and removing
a condition that if the initial registration statement is no longer effective, it will trigger an earlier termination.
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On April 26, 2023, the
Company sold and issued to MacRab 1,502,502 shares of its Common Stock to MacRab under the Purchase Agreement at the purchase price of
$0.0333, and on August 17, 2023, the Company sold and issued to MacRab a second tranche of 890,914 shares of its Common Stock at the purchase
price of $0.02223 per share.
On May 11, 2022, the Company entered into a Securities
Purchase Agreement (the “Fourth Man Purchase Agreement”) with Fourth Man, pursuant to which the Company received $135,000
in gross proceeds and issued to Fourth Man a promissory note in the principal amount of $150,000.00 (the “Fourth Man Note”).
Pursuant to the Fourth Man Purchase Agreement, Fourth Man was granted a right of first refusal on all issuances by the Company, as well
as a most favored nations on all securities to be issued by the Company until the Fourth Man Note is paid in full. In connection with
the execution and delivery of the Fourth Man Purchase Agreement and the issuance of the Fourth Man Note, the Company issued to Fourth
Man 607,000 commitment shares (the “Fourth Man Commitment Shares”) and a warrant to purchase an additional 1,500,000 shares
of common stock of the Company (the “Fourth Man Warrant”) at an exercise price of $0.10 per share. On April 12, 2023, Fourth
Man Note converted the outstanding balance and accrued interest under the Fourth Man Note to 3,456,000 shares of our Common Stock. On
December 26, 2023, all Fourth Man Warrant Shares were issued upon exercise of Fourth Man Warrants, including 6,954,545 Warrant Shares
that were issued on a cashless basis exercise.
On May 24, 2023, the
Company, entered into a Securities Purchase Agreement (the “JSC Purchase Agreement”) with Jefferson Street Capital LLC, a
New Jersey limited liability company (“JSC”), pursuant to which the Company received $100,000.00 in gross proceeds and issued
to JSC a promissory note in the principal amount of $110,000.00 (the “JSC Note”). The JSC Note bears interest at a rate of 10%
per annum and is due and payable no later than February 9, 2024. The JSC Note is convertible at a fixed conversion price of $0.01 (the
“JSC Conversion Price”), subject to standard adjustments. If the Company issues securities for less than the JSC Conversion
Price, the JSC Conversion Price shall be reduced to such an amount.
In connection with the
execution and delivery of the Purchase Agreement and the issuance of the Note, the Company issued to JSC 500,000 commitment
shares (the “JSC Commitment Shares”) and a warrant to purchase an additional 1,000,000 shares of common stock of
the Company at an exercise price of $0.10 per share (the “JSC Warrant”), exercisable on the earlier of 180 days from
the date it was issued or when a registration statement covering the JSC Warrant Shares is declared effective. On June 21, 2023, the Company
entered into an amendment (the “Amendment”) to the JSC Warrant with JSC, pursuant to which the parties provided that any stock
issuances to MacRab LLC officers, directors, vendors, and suppliers of the Company in satisfaction of amounts owed to such parties, would
not result in an adjustment to the exercise price. In consideration for the Amendment, the Company issued 3,000,000 shares of
Common Stock to JSC.
On June 6, 2023, the
Company entered into a Securities Purchase Agreement (the “Firstfire Purchase Agreement”), effective as of June 12, 2023,
with Firstfire, pursuant to which the Company received $100,000 in gross proceeds and issued to Firstfire a promissory note in the principal
amount of $110,000.00 (the “Firstfire Note”). The Firstfire Note bears interest at a rate of 10% per annum and is due
and payable on June 5, 2024. Although the Company has the right to prepay the Firstfire Note without penalty, the annual interest is due
if the Firstfire Note is paid in full by the Company prior to maturity. Upon default of the Firstfire Note, the interest increases to
the lesser of 18% per annum or the maximum amount permitted by law. The Firstfire Note is convertible at the option of Firstfire,
at any time at a fixed conversion price of $0.01 (the “Firstfire Conversion Price”), subject to standard adjustments.
If the Company issues securities for less than the Firstfire Conversion Price, the Firstfire Conversion Price shall be reduced to such
an amount.
In connection with the
execution and delivery of the Firstfire Purchase Agreement and the issuance of the Firstfire Note, the Company issued to Firstfire 500,000 commitment
shares and a warrant (the “Firstfire Warrant”) to purchase of up to 1,000,000 shares of the Company’s common
stock (the “Firstfire Warrant Shares”) at an exercise price of $0.10 per share. The Firstfire Warrant is exercisable
commencing on the date of issuance and ending on the five-year anniversary of the date of issuance.
On July 11, 2023, the
Company entered into a Securities Purchase Agreement (the “CS Capital Purchase Agreement”) with GS Capital Partners, LLC (“CS
Capital Partners”) pursuant to which the Company received $105,000.00 in gross proceeds and issued to CS Capital Partners a promissory
note in the principal amount of $115,000.00 (the “Note”). The Note bears interest at a rate of 10% per annum, at a fixed conversion
price of $0.01 (the “Conversion Price”) and is due and payable no later than July 11, 2024. The Note may be prepaid at an
amount equal to 110% of the principal plus accrued interest within 180 days. In connection with the execution and delivery of the Purchase
Agreement and the issuance of the Note, the Company issued to CS Capital Partners 500,000 commitment shares (the “Commitment Shares”)
and a warrant to purchase an additional 862,500 shares of common stock of the Company (the “Warrant Shares”) at an exercise
price of $0.10 per share (the “Exercise Price”). exercisable at any time on or after the date of the issuance and terminating
on the five-year anniversary of the Issue Date. The Company also issued 1,500,000 returnable shares to CS Capital Partners (the “Returnable
Shares”), which are held in book-entry and returnable to the Company by CS Capital Partners unless there is an uncured default during
the 12-month term of the Note.
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On August 22, 2023, the
Company entered into a Securities Purchase Agreement (the “Coventry Purchase Agreement”) with Coventry Enterprises, LLC, (“Coventry”),
pursuant to which the Company received $105,000 in gross proceeds and issued to Coventry a 10% promissory note in the principal amount
of $115,000 (the “Coventry Note”). In connection with the execution and delivery of the Coventry Purchase Agreement and the
issuance of the Coventry Note, the Company issued to Coventry 500,000 commitment shares (the “Coventry Commitment Shares”)
and a warrant to purchase an additional 862,500 shares of Common Stock (the “Coventry Warrant”) at an exercise price of $0.10
per share (the “Exercise Price”). In addition to the Coventry Commitment Shares, the Company issued 1,500,000 returnable shares
to Coventry, which are held in book-entry and returnable to the Company by Coventry unless there is an uncured default during the 12-month
term of the Coventry Note. The Coventry Note bears interest at a rate of 10% per annum, at a fixed conversion price of $0.01 (the “Conversion
Price”) and is due and payable no later than August 22, 2024. Between December 5, 2023 and December 24, 2023, the Company issued
an aggregate of 3,800,000 shares to Jefferson Street Capital LLC upon conversion of the JSC Note.
On September 30, 2023 the Company’s Wyndham
Palm-Aire location closed its store but remained as an operating entity. Management is actively evaluating current market conditions and
exploring the possibility of relocating our operations to other areas within South Florida. This decision stems from our ongoing commitment
to strategic growth and optimizing our operational footprint. The consideration to relocate is driven by several factors, including but
not limited to:
Market Dynamics: Analysis of market trends and opportunities suggests
potential advantages in certain geographic locations within South Florida that align more closely with our strategic objectives.
Operational Efficiency: Evaluating alternative locations may provide
opportunities to enhance operational efficiency, reduce costs, and improve service delivery to our customers.
Infrastructure and Resources: Assessing the availability of suitable
infrastructure, resources, and talent pool in different areas to support our long-term growth plans.
At this time it has not been considered discontinued operations in
accordance with ASC 205-20 because the division has not been disposed of nor is disposal in the plan.
Results of Operations
Comparison of Results
of Operations for the years ended December 31, 2023, and 2022
Revenue and Cost of
Sales
Total revenues for the
year ended December 31, 2023, were $225,953 compared to $391,447 during the year ended December 31, 2022. The revenues in 2023 decreased
due to the closing of the Company’s Wyndham Palm-Aire location on September 30, 2023.
Cost of goods sold during
the year ended December 31, 2023 was $118,005 compared to $213,106 during the year ended December 31, 2022. This decrease in cost of sales
in 2023 over 2022 levels is attributable due to lower sales levels in 2023 compared to 2022.
Operating expenses
Operating expenses were
$3,669,458 for the year ended December 31, 2023 compared to $676,580 for the year ended December 31, 2022. Non-cash stock-based compensation
was $2,793,843, including $2,481,300 stock-based compensation to related parties, and $5,170 for the years ended December 31, 2023 and
December 31, 2022, respectively. Excluding the stock-based compensation in both periods, operating expenses were $878,057 for the year
ended December 31, 2023 compared to $671,410 for the year ended December 31, 2022. This is primarily attributable to an increase in payroll
and consulting fees of approximately $146,000 in the 2023 period compared to 2022.
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Other income and expense
Other expenses comprising
interest expense and change in the fair value of the derivative liability were $1,310,036 for the year ended December 31, 2023 compared
to $362,466 for the year ended December 31, 2022. The increase in other expenses is attributable to a material increase in interest expense
and financing fees of approximately $1,132,000.
Net Loss
As a result of the forgoing, the net loss attributable
to Kisses From Italy Inc. for the year ended December 31, 2023 was $4,871,545 compared to net loss attributable to Kisses of Italy, Inc
of $847,385 for same period ended December 31, 2022. The increase in the net loss in the 2023 period is primarily attributable to an increase
of $2,788,673 of non-cash stock based compensation, increase of other expenses offset by a slight decrease in general and administrative
expenses.
Liquidity and Capital
Resources
On December 31, 2023,
we had $24,842 in cash and cash equivalents.
Net cash used in operating
activities was $835,051 during the year ended December 31, 2023, compared to net cash used of $579,142 during the year ended December
31, 2022. The increase in net cash used in operating activities of $255,911 is primarily attributable to increased operating losses net
of non-cash items compared to the year ended December 31, 2022.
Net cash used in investing
activities was $-0- during the year ended December 31, 2023, compared $40,852 during the year ended December 31, 2022, due to the purchase
of $40,852 in equipment in 2022 compared 2023.
Net cash provided by
financing activities was $535,399 for the year ended December 31, 2023, compared to $805,000 for the year ended December 31, 2022. The
difference in the 2023 period compared to 2022 is attributable $65,073 from proceeds of the sale of common stock under the Company’s
equity line of credit; $450,000 from proceeds in convertible notes, offset with $70,000 repayment of convertible notes and $12,171 repayment
of notes payable in 2023; compared to $550,000 from proceeds in convertible notes and $250,000 from proceeds in notes payable in 2022.
During the next year,
we are solely focusing on acquisition transactions and we estimate that we will need approximately $1,000,000 to fully effectuate our
business development plans. We do not believe our former restaurant expansion plan is viable in the current economy.
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.
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.
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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.
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 became 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.
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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.
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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.