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 Unaudited Consolidated Financial Statements
For the Three and Nine Months Ended September
30, 2021 and 2020
NOTE 1 – ORGANIZATION AND DESCRIPTION
OF BUSINESS
Kisses From Italy Inc. (the “Company”)
was incorporated in Florida on March 7, 2013. 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. Three additional restaurants, which are located
in various Wyndham Hotel properties in the Pompano Beach, Florida area, were then opened within the following ten months. All locations,
which are in leased facilities, were fully operational by April 2016. In December 2017, the Company vacated one of its restaurants due
to a hurricane and has not re-opened that location. During the three months ended June 30, 2021, the Company consolidated its two Wyndham
stores into one location to become more efficient. The Company opened its inaugural European location in Ceglie del Campo, Bari, Italy,
in October 2019. Such location will serve as the distribution center for products for European locations. The Bari location was closed
in the fourth quarter of 2020 and currently remains closed as of the date of this Report due to Covid-19.
On May 28, 2021 the Company opened its first franchise
in Chino, California. Due to the onset of Covid-19 the Company has temporarily waived any franchise fees so that the franchisee could
well establish the operations at that location.
The Company’s accounting year-end is December
31.
COVID-19
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 is having a
negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Most US states and
many countries have issued policies intended to stop or slow the further spread of the disease.
Covid-19 and the U.S’s response to the pandemic
are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the Covid-19 pandemic may
have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent
of the effects on the economy, the markets we serve, our business, or our operations.
All of the Company’s three corporate-owned
restaurants which are located in Fort Lauderdale, Florida, Bari, Italy, and within the Wyndham location in Pompano Beach, Florida, have
fully re-opened subject to recommended social distancing guidelines. The Company’s hotel locations were closed longer than other
sites due to CDC recommendations.
Except for our Bari location, our US locations
are now open and are operating at near pre-Covid revenue levels. There can be no assurances that we will be allowed to remain open at
full capacity or that we can maintain current sales levels.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Management’s Representation of Interim
Financial Statements
The accompanying unaudited consolidated financial
statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed by such rules and regulations,
and management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial
statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position
and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of
results for a full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial
statements at and as of December 31, 2020, filed as part of the Company’s Annual Report on Form 10-K with the SEC on April 15, 2021.
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 Kisses from Italy Bari, Italy and its 70% owned subsidiary, Kisses-Palm Sea Royal LLC.
All intercompany accounts and transactions are
eliminated in consolidation.
Going Concern
The accompanying unaudited consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates 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.
On a consolidated basis, the Company has incurred significant operating losses since inception.
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 of equity and convertible debt as interim
measures to finance working capital needs and may continue its efforts to raise additional capital through the sale of common stock or
other securities and obtain short-term loans. The Company will be required to continue to do 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 receivables 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 its 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. These receivables are related to the sale of our private label branded products sold in retail and grocery stores in Canada.
As of September 30, 2021, and December 31, 2020,
our trade receivable amounted to $6,137 and $5,761, respectively, with an allowance for doubtful accounts of $-0- for both periods.
Other Receivable
Other receivables are comprised of two components,
a receivable from the government for Employee Retention Credits (“ERC”) and Value Added Tax at the Company’s Bari location
in Italy.
The purpose of the ERC is to encourage employers
to keep employees on the payroll, even if they are not working during the covered period due to the effects of the coronavirus outbreak.
The updated ERC provides a refundable credit of up to $5,000 for each full-time equivalent employee a company retained from March 13,
2020, to Dec. 31, 2020, and up to $14,000 for each retained employee from Jan. 1, 2021, to June 30, 2021. The Company qualifies as an
employer if it was ordered to fully or partially shut down or if the Company’s gross receipts fell below 50% for the same quarter
in 2019 (for 2020) and below 80% (for 2021). As of September 30, 2021 and December 31, 2020 the Company had ERC credits receivable of
$45,939 and $-0- respectively.
Valued Added Tax (“VAT”)
The Valued Added Tax (“VAT”)
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 September 30, 2021 and December 31, 2020 the Company had a VAT net
receivable from its Bari location amounting to $4,839.
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. To date, this difference has been immaterial for the Bari
location.
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.
Since the Company began the branded retail products
operations initiative in Canada in late 2020, the difference in the exchange rate and the average monthly rate did not have a material
impact on the Company’s financial statements.
Revenue Recognition
The Company recognizes revenue under the guidelines
of ASC 606. Sales, as presented in the Company’s consolidated statement of earnings, represent franchise revenue; and food and beverage
product sold which is presented net of discounts, coupons, employee meals and complimentary meals. Revenue is recognized using the five
step approach required under the guidelines of ASC 606.
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 September 30, 2021 and December 31, 2020,
the Company cash equivalents totaled $13,347 and $37,336, respectively.
Property and equipment
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:
Estimated useful lives of property
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Computers, software, and office equipment
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1 – 6 years
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Machinery and equipment
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3 – 5 years
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Leasehold improvements
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Lesser of lease term or estimated
useful life
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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.
On Dec. 18, 2019, the Financial Accounting Standards
Board (FASB) released Accounting Standards Update (ASU) 2019-12, which affects general principles within Topic 740, Income Taxes. The
amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The FASB has stated that the ASU is
being issued as part of its Simplification Initiative, which is meant to reduce complexity in accounting standards by improving certain
areas of generally accepted accounting principles (GAAP) without compromising information provided to users of financial statements. The
Company adopted this guidance on January 1, 2021 which had no impact on the Company’s financial statements.
Stock-based Compensation
The Company accounts for stock-based compensation
using the fair 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 lease 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
an impact on our financial statements.
Canadian Government and Provincial Sales Tax (“G.S.T.”
and “P.S.T.”)
The Company does not collect any Canadian 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 2019 and inventory for retail sales held in Canada. Our US locations do not have liquor
licenses. The balance of inventory on September 30, 2021 and December 31, 2020 was $5,866 and $4,051, 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 – GOING CONCERN AND LIQUIDITY
As of September 30, 2021 the Company had cash
on hand of $13,347 a working capital deficiency of $109,555 and an accumulated deficit of $12,748,823
Management has concluded that these financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business.
It is the Company’s current intention to
raise debt and/or equity financing to fund ongoing operating expenses. The Company believes it will be successful in raising sufficient
capital to operate for the next 12 months, however, there is no assurance that financing, whether debt or equity, will be available to
the Company, satisfactorily completed or on terms favorable to the Company. Any issuance of equity securities, if accomplished, could
cause substantial dilution to existing stockholders and any debt financing may contain covenants limiting certain corporate actions. Any
failure by the Company to successfully raise additional financing would have a material adverse effect on its business, including the
possible inability to continue operations.
NOTE 4 – PROPERTY AND EQUIPMENT
As of September 30, 2021 and December 31, 2020
the Company had $6,320 and $8,480 in property and equipment, all located at its Bari location in Italy. As of March 31, 2021 all property
and equipment and leaseholds at its US locations had been fully depreciated.
NOTE 5 – ACCRUED AND OTHER LIABILITIES
The following table sets forth the components
of the Company’s accrued liabilities on September 30, 2021 and December 31, 2020.
Schedule of accrued and other liabilities
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|
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September 30,
2021
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|
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December 31,
2020
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Sales tax payable
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$
|
1,245
|
|
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$
|
3,804
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|
Accrued interest payable
|
|
|
3,604
|
|
|
|
2,067
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Payroll tax liabilities
|
|
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125,931
|
|
|
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142,648
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|
Total accrued liabilities
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$
|
130,780
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|
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$
|
148,519
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The Company is in arrears on its payroll tax payments
as of September 30 2021. Included in the “payroll tax liabilities” as of September 30, 2021 is approximately $41,630 in interest
and penalties.
NOTE 6 – PROMISSORY NOTES PAYABLE
As of September 30, 2021 and December 31, 2020
we had two unsecured 8% notes payable amounting to $12,171 that mature in June 2023.
NOTE 7 – CONVERTIBLE NOTES
As of September 30, 2021 and December 31, 2020,
the outstanding principal balance of convertible notes was $10,000.
NOTE 8 – STOCKHOLDERS EQUITY
Common Stock
The Company has authorized 200,000,000 shares
of Common Stock. On September 30, 2021 and December 31, 2020, there were 169,683,651 and 154,832,335 shares of common stock issued and
outstanding, respectively, with a $0.001 par value.
During the nine months ended September 30, 2021,
the Company issued the following shares:
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·
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1,500,000 shares of common stock to an investor relations firm valued at $300,000
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·
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10,000,000 shares to its executive officers valued at $1,675,000
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·
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100,000 shares to a service provider valued at $16,750
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·
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1,750,000 shares of common stock were sold to accredited investors yielding the company $175,000 in proceeds
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·
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1,501,306 shares in common stock were issued upon the conversion of Series C Preferred Stock
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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.
There were no shares of Series A Stock outstanding
as of September 30, 2021 and 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 September 30, 2021.
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 divided
by the floor price of $0.10 established by the Board of Directors. 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 September 30, 2021 and December 31, 2020
there were 139,610 shares and 79,610 shares of Series C Preferred outstanding, respectively, which were purchased at a price of $1.00 per
share.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
As of September 30, 2021, the Company had three
operating restaurants. The Company leases these spaces based upon the following schedules:
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·
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Kisses From Italy 9th
LLC based in Fort Lauderdale, Florida leases approximately 990
square feet and has paid $3,273 per month since 2018, pending completion of the required renovations
to the exterior and interior of the property necessitated due to hurricane damage that occurred to the location in 2018. The landlord
has been very slow in making these changes. It was agreed upon that when work was completed, and approved by the City of Fort Lauderdale,
the rent would be increased to the market rate at that time. Beginning on May 1 , 2021, the rent increased to $5,857.50 per month and
was renewed by the Company for an additional five-year term with standard annual escalator costs.
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·
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Kisses From Italy-Palm Aire based
in Pompano Beach, Florida leases approximately 2,300
square feet for $3,933.00 per month. The Company has a one-year automatic renewal provision for this lease on May 1st of each
year under the same terms.
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·
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Kisses From Italy – based
in Bari, Italy, leases approximately 2,200 square feet of space for 1,400 euros per month under the terms of a six-year lease which ends
on May 5, 2024 and has an optional automatic renewal provision for six years.
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