Reference is made to the Financial Statements,
the notes thereto, and the Report of Independent Public Accountants thereon commencing at page F-1 of this Report, which Financial Statements,
notes and report are incorporated herein by reference.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
NOTE 1 – ORGANIZATION AND DESCRIPTION
OF BUSINESS
Kisses From Italy Inc. (the “Company”)
was incorporated in Florida on March 7, 2013. Kisses From Italy is a restaurant chain operator,
Franchisor, and product distributor with locations in North America and Europe. 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 Ft. Lauderdale, Florida. Three
additional restaurants, which were located in various Wyndham Hotel properties in the Pompano Beach, Florida area, were then opened within
the following ten months. All locations, which were in leased facilities, were fully operational by April 2016. In December 2017, the
Company vacated one of its restaurants due to the hurricane and did not re-open that location in 2019.
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.
The Company’s accounting year end is December
31.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation and Principles of
Consolidation
The consolidated financial statements of the Company
have been prepared in accordance with GAAP. This basis of accounting involves the application of accrual accounting and consequently,
revenues and gains are recognized when earned, and expenses and losses or recognized when incurred. The consolidated financials include
the accounts of the Company and its wholly-owned subsidiaries; Kisses from Italy 9th LLC, Kisses from Italy-Franchising
LLC; and its 70% owned subsidiary, Kisses-Palm Sea Royal LLC.
All intercompany accounts and transactions are
eliminated in consolidation.
Going Concern
The accompanying consolidated financial statements
have been prepared assuming the Company 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 these financial statements. On a consolidated
basis, the Company has incurred significant operating losses since inception. For the year ended December 31, 2020 we had an operating
loss of $3,709,402. As of December 31, 2020 we had a working capital deficit of $161,294 and an accumulated deficit of $8,916,893.
Because the Company does not expect that existing
operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about the Company’s
ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative
sources of financing. Historically, the Company has raised capital through private placements, as an interim measure to finance working
capital needs and may continue to raise additional capital through the sale of common stock or other securities and obtaining some short-term
loans. The Company will be required to continue to so until its consolidated operations become profitable. Also, the Company has, in the
past, paid for consulting services with its common stock to maximize working capital, and intends to continue this practice where feasible.
Use of Estimates
The preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. The most significant estimates relate to revenue recognition, valuation of accounts receivable and the allowance for doubtful
accounts, inventories, purchase price allocation of acquired businesses, impairment of long-lived assets and goodwill, valuation of financial
instruments, income taxes, and contingencies. The Company bases its estimates on historical experience, known or expected trends and various
other assumptions that are believed to be reasonable given the quality of information available as of the date of these financial statements.
The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from these estimates.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the net value
of face amount less any allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best
estimate of the amount of probable credit losses in our existing accounts receivable. The Company reviews the allowance for doubtful
accounts on a regular basis, and all past due balances are reviewed individually for collectability. Account balances are charged
against the allowance when placed for collection. Recoveries of receivables previously written off are recorded when received. Interest
is not charged on past due accounts.
As of December 31, 2020 and 2019 , our trade receivable
amounted to $5,761 and $-0-, respectively, with an allowance for doubtful accounts of $-0- for both periods.
Foreign Currency Translation
The functional and reporting currency of the company’s
Bari location in Italy is the Euro. Management has adopted ASC 830 “Foreign Currency Matters” for transactions that occur
in foreign currencies. Monetary assets denominated in foreign currencies are translated using the exchange rate prevailing at the balance
sheet date. Average monthly rates are used to translate revenues and expenses.
Transactions denominated in currencies other than
the functional currency, such as the Company’s current retails sales in Canada for Kisses From Italy branded products, are translated
into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign
currency transactions are included in the determination of net income for the respective periods.
Assets and liabilities of the Company’s
operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates.
Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded at the
historical rate when the transaction occurred.
For the approximate two month period ended December
31, 2020 when the Company began the branded retail products operations initiative in Canada, the difference in the exchange rate and the
average monthly rate was not material.
Revenue Recognition
Sales, as presented in the Company’s consolidated
statement of earnings, represents food and beverage product sold and is presented net of discounts, coupons, employee meals and complimentary
meals. Revenue from restaurant sales is recognized when food and beverage products are sold.
On January 1, 2018, the Company 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 the Company’s historic accounting under ASC 605. As of and for the years ended December 31, 2020 and 2019, respectively,
the consolidated financial statements were not materially impacted as a result of the application of Topic 606 compared to Topic 605.
Non-controlling interest
Non-controlling interest represents third-party
ownership in the net assets of one of our consolidated subsidiaries. For financial reporting purposes, the assets and liabilities of our
majority-owned subsidiary consolidated with those of the Company’s wholly-owned subsidiaries, with any third-party investor’s
interest shown as non-controlling interest.
Cash and Cash Equivalents
The Company considers all highly liquid temporary
cash investments with an original maturity of three months or less to be cash equivalents. On December 31, 2020 and December 31, 2019,
the Company cash equivalents totaled $37,336 and $26,841 respectively.
Property and equipment
Property and equipment are stated at cost or fair
value. During 2018 the Company closed one of its locations and removed all property and detachable leaseholds. The Company believes that
this equipment and leaseholds which are in excellent condition can be used at existing and new locations and that the undepreciated book
value is equivalent to its fair market value, thus no impairment was recorded. Depreciation is computed by the straight-line method and
is charged to operations over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. The
carrying amount and accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal and any resulting
gain or loss is included in results of operations. The estimated useful lives of property and equipment are as follows:
Computers, software, and office equipment
|
1 – 6 years
|
Machinery and equipment
|
3 – 5 years
|
Leasehold improvements
|
Lesser of lease term or estimated useful life
|
Income taxes
The Company accounts for income taxes under FASB
ASC 740, “Accounting for Income Taxes”. Under FASB ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FASB ASC 740-10-05, “Accounting
for Uncertainty in Income Taxes” prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by taxing authorities.
The amount recognized is measured as the largest
amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company assesses the validity
of its conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might
cause it to change its judgment regarding the likelihood of a tax position’s sustainability under audit.
Stock-based Compensation
The Company accounts 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
The Company currently follows the guidance in
ASC 840 “Leases,” which requires us to evaluate the lease agreements the Company enters into to determine whether they
represent operating or capital leases at the inception of the lease.
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 for certain companies. Since the Company is classified as a small reporting company and has a calendar-year end companies
the Company eligible for deferring the adoption of ASC 842 to December 15, 2021.
ASC 842 will be effective for the Company 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.
Valued Added Tax (“VAT”)
The VAT is a broadly-based consumption tax which
is assessed to the value that is added to goods and services. The Value Added Tax (“VAT”), applies to nearly all goods and
services that are bought and sold within the European Union. In Italy where the Company operates, the VAT tax ranges between 4 and 10%
for food products and alcohol. As of December 31, 2020, the Company had a VAT net receivable from is new Bari location which opened in
2019, amounting to $4,839 compared to 4,442 for the period ended December 31, 2019.
Canadian Government and Provincial Sales Tax (“G.S.T.”
and “P.S.T.”)
The Company does not collect any Canadina G.S.T.
(Government Sales Tax) and P.S.T. (Provincial Sales Tax) as the company acts as product distributor and not as a final sales retailer.
Inventory
The inventory is comprised of alcoholic beverages
at our new Bari location in Italy which opened in 2020, and inventory for retail sales held in Canada. Our US locations do not have liquor
licenses. The balance of inventory on December 31, 2020 and 2019 was $4,051 and $1,987 respectively.
Net Loss per Share
Net loss per common share is computed by dividing
net loss by the weighted average common shares outstanding during the period as defined by Financial Accounting Standards, ASC Topic 260,
"Earnings per Share." Basic earnings per common share (“EPS”) calculations are determined by dividing net income
by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are
determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding.
Recent Accounting Pronouncements
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 for certain companies. Since the Company is classified as a small reporting company and has a calendar-year end companies
the Company 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.
NOTE 3 – PROPERTY AND EQUIPMENT
The following table sets forth the components
of the Company’s property and equipment on December 31, 2020, and December 31, 2019:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net Book
Value
|
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net Book
Value
|
|
Capital assets subject to depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
66,365
|
|
|
$
|
(57,885
|
)
|
|
$
|
8,480
|
|
|
$
|
64,781
|
|
|
$
|
(45,587
|
)
|
|
$
|
19,194
|
|
Leasehold improvements
|
|
|
175,514.
|
|
|
|
(175,514
|
)
|
|
|
–
|
|
|
|
175,916
|
|
|
|
(135,996
|
)
|
|
|
39,920
|
|
Total fixed assets
|
|
$
|
241,879
|
|
|
$
|
(233,399
|
)
|
|
$
|
8,480
|
|
|
$
|
240,697
|
|
|
$
|
(181,583
|
)
|
|
$
|
59,114
|
|
For the years ended December 31, 2020 and December
31, 2019, the Company recorded depreciation and amortization of $51,970 and $43,303 respectively.
NOTE 4 – ACCRUED AND OTHER LIABILITIES
The following table sets forth the components
of the Company’s accrued liabilities on December 31, 2020 and December 31, 2019.
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Sales tax payable
|
|
$
|
3,804
|
|
|
$
|
7,630
|
|
Accrued interest payable
|
|
|
2,067
|
|
|
|
2,940
|
|
Payroll tax liabilities
|
|
|
142,648
|
|
|
|
132,706
|
|
Total accrued liabilities
|
|
$
|
148,519
|
|
|
$
|
143,276
|
|
The Company is in arrears on its payroll tax payments
as of December 31, 2020. Included in the “payroll tax liabilities” as of December 31, 2020, is approximately $148,519 in interest
and penalties.
NOTE 5 – LOANS AND NOTES PAYABLE
As of December 31, 2020, and December 31 2019,
loan payable balances were $-0- and $6,000 respectively. We currently have no available lines of credit.
As of December 31, 2020 we had two unsecured 8%
notes payable amounting to $12,171 that mature in June 2023. We had no notes outstanding as of December 31, 2019.
NOTE 6 – CONVERTIBLE NOTES
As of December 31, 2020 and December 31, 2019,
the balance of convertible notes was $10,000 and $10,000 respectively.
During the year ended December, 2019, convertible
noteholders holding $656,195 of convertible notes along with accrued interest of $30,074 converted their notes into 10,294,285 shares
of Common Stock.
NOTE 7 – STOCKHOLDERS EQUITY
Capital Stock
The Company has authorized 200,000,000
shares of Common Stock authorized. On December 31, 2020 and December 31, 2019, there were 154,832,335 and 126,550,335 shares of
Common Stock issued and outstanding, with a $0.001 par value.
Common Stock Issued in Private Placements
During the year ended December 31, 2020, the company
accepted one subscription from an accredited investor for $19,900 and issued 200,000 shares of common stock.
During the year ended December 31, 2019, the
Company did not accept any subscription agreements to purchase its Common Stock.
Common Stock Issued in Exchange for Services
During the year ended December 31, 2020, the Company
issued 25,391,800 shares of its Common Stock to its management and consultants for services. These shares were values at $3,028,201.
During the year ended December 31, 2019, the Company
issued 34,476,080 shares of its Common Stock to its management and consultants for services. These shares were values at $2,309,897.
Preferred stock converted to common stock
During the year ended December 31, 2020, the
Company issued 2,690,000 shares of common stock upon the conversion of 125,990 shares of Series C Stock described below. There were no
conversions of preferred stock to common stock in the year ended December 31, 2019.
Preferred Stock
On December 19, 2019, the Company filed a Certificate
of Designation with the state of Florida to set up three categories of preferred stock: Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock (the “Certificate of Designation”). The Certificate of Designation designated 1,500,000 shares
of the Company’s authorized preferred stock as Series A Preferred Stock (“Series A Stock”), 5,000,000 shares as Series
B Preferred Stock (“Series B Stock”) and 1,000,000 shares as Series C Preferred Stock (“Series C Stock”).
A summary of the material provisions of the Certificate
of Designation governing the Series A Stock, the Series B Stock and the Series C Stock is as follows:
Series A Stock
The Series A Stock is not convertible. Each share
of Series A Stock shall entitle the holder to three hundred (300) votes for each share of Series A Stock. Any amendment to the Certificate
of Designation requires the consent of the holders of at least two-thirds of the shares of Series A Stock then outstanding. The holders
of Series A Stock are not entitled to dividends until and unless determined by the Board of Directors of the Company.
Liquidation Preference
No distribution shall be made to holders of shares
of capital stock ranking junior to the Series A Preferred Stock upon liquidation, dissolution or winding-up of the Company. The Series
A Stock ranks pari passu with the Series C Stock.
The were no shares of Series A Stock outstanding
as of December 31, 2020.
Series B Stock
The Series B Stock is convertible at any time
by the holder into the number of shares of common stock of the Company based on two times the price paid by the holder paid for the shares.
The Board has the authorization to establish a minimum price for the price the Series B Stock (so that if the market price of the common
stock of the Company drops below the issuance price, the conversion rate will then be based on the minimum price established by the Board
and not the price paid for the shares). The holders of the Series B Stock shall not be entitled to voting rights except as otherwise provided
for in the law. The holders of Series B Stock are not entitled to dividends until and unless determined by the Board.
Liquidation Preference
The holders of Series B Stock shall not be entitled
to any distributions upon a liquidation of the Company.
Restrictions of Transferability
The shares of the Series B Stock shall not, directly,
or indirectly, be sold, hypothecated, transferred, assigned, or disposed of in any manner without the prior written consent of the Board
and applicable securities laws.
There were no shares of Series B Stock outstanding
as of December 31, 2020.
Series C Stock
The Series C Stock is convertible at any time
by the holder into the number of shares of common stock of the Company on the basis of three times the price paid for the shares. The
Board has established a minimum conversion price of $0.10 per share. The holders of the Series C Stock shall not be entitled to voting
rights except as otherwise provided for in the law. The holders of Series C Stock are not entitled to dividends until and unless determined
by the Board.
Liquidation Preference
Upon any liquidation of the Company, the holders
of Series C Stock shall be entitled to the amount paid for the shares of Series C Stock prior to the holders of shares ranking junior
to the Series C Stock. Upon the holders of the Series C Stock and any series of stock ranking pari passu with the Series C Stock having
received distributions to which they are entitled, the remaining assets of the Company shall be distributed to the other holders pro rata
in proportion to the shares held by each holder.
Restrictions of Transferability
The shares of the Series C Preferred Stock shall
not, directly, or indirectly, be sold, hypothecated, transferred, assigned, or disposed of in any manner without the prior written consent
of the Board and applicable securities laws.
As of December 31, 2020 and 2019 there were 79,610
shares and 50,000 shares of Series C Preferred outstanding, respectively, which were purchased at a price of $1.00 per share.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
As of December 31, 2020 and 2019, the Company
had four operating store locations. The Company leases these spaces based upon the following schedules:
|
·
|
Kisses From Italy 9th LLC based in Fort Lauderdale, Fl. leases approximately 990 square feet of space at a cost of $2,650 per month through the period ended July 31, 2018. Beginning on August 1, 2018 the rent increased to $5,773 per month for eight months and then it will be reduced to $3,274 per month. The increased rent amount of $5,773 includes an additional payment of $2,500 per month for these 8 months, arising out of a $20,000 dispute settlement related to a rent dispute. This amount for the months of September and August 2018 ($5,000) has been recorded as “rent expense” on the Company’s financial statement The lease ends on June 30, 2021.
|
|
·
|
Kisses From Italy-Palm Aire based in Pompano Beach, Florida leases approximately 2,300 square feet of space at a cost of $4,051.83 per month. The lease ends on May 1, 2021. The Company has a one-year automatic renewal provision for this lease.
|
|
·
|
Kisses From Italy -Sea Gardens based in Pompano Beach, Florida leases approximately 600 square feet of space at a cost of $595.40 per month. The lease ends on August 1, 2021. The Company has a one-year automatic renewal provision for this lease but is not obligated to exercise this renewal provision.
|
|
|
|
|
·
|
Italian location - Strada Provinciale 70 #100, Ceglie del Campo, 70129, Bari, Italia -The Lease was signed for a six year term in June 2019, at a rate of approximately $1,570 per month.
|
The Company also rents professional and furnished
space on a month to month basis in Miami, Florida at a cost of $251 per month, which has been designated the Company’s principal
place of business.
NOTE 9 – SUBSEQUENT EVENTS
For the period from January 1, 2021 through the
date of this Report, the Company received $145,000 in proceeds from the sale of 1,450,000 common shares to three different accredited
investors. Additionally, the Company issued 1,500,000 for services to an investor relations firm.