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, 2019 and
2018
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 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.
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, 2019 we had an operating loss of $3,082,860. As of December 31, 2019 we had a working capital deficit of $181,492
and a retained earnings deficit of $5,207,491.
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 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.
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 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, 2019 when Bari began operation, 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, 2019 and 2018, 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. At December 31, 2019 and December 31,
2018, the Company cash equivalents totaled $26,841 and $22,877 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 January 1, 2021.
ASC 842 will be effective for the Company
beginning on January 1, 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, 2019, the Company had a VAT
net receivable from is new Bari location which opened in 2019, amounting to $4,442. The VAT tax amounted to $-0- as of
December 31, 2018 because the Company had no foreign locations subject to VAT tax.
Inventory
The inventory is comprised of alcoholic
beverages at our new Bari location in Italy which opened in 2019. Our US locations do not have liquor licenses. The balance of
inventory at December 31, 2019 and 2018 was $1,987 and $-0- 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 January 1, 2021.
ASC 842 will be effective for us beginning
on January 1,2020. 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 at December 31, 2019, and December 31, 2018:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net Book
Value
|
|
|
Cost
|
|
|
Accumulated Depreciation
|
|
|
Net Book
Value
|
|
Capital assets subject to depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
64,781
|
|
|
$
|
(45,587)
|
|
|
$
|
19,194
|
|
|
$
|
52,868
|
|
|
$
|
(35,200
|
)
|
|
$
|
17,668
|
|
Leasehold improvements
|
|
|
175,916
|
|
|
|
(135,996)
|
|
|
|
39,920
|
|
|
|
175,716
|
|
|
|
(103,036
|
)
|
|
|
72,680
|
|
Total fixed assets
|
|
$
|
240,697
|
|
|
$
|
(181,583)
|
|
|
$
|
59,114
|
|
|
$
|
228,584
|
|
|
$
|
(138,236
|
)
|
|
$
|
90,348
|
|
For the years ended December 31, 2019 and December
31, 2018, the Company recorded depreciation and amortization of $43,303 and $39,573 respectively.
NOTE 4 – ACCRUED AND OTHER LIABILITIES
The following table sets forth the components
of the Company’s accrued liabilities at December 31, 2019 and December 31, 2018.
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
Sales tax payable
|
|
$
|
7,630
|
|
|
$
|
12,605
|
|
Accrued interest payable
|
|
|
2,940
|
|
|
|
21,728
|
|
Accrued rent
|
|
|
–
|
|
|
|
12,114
|
|
Payroll tax liabilities
|
|
|
132,706
|
|
|
|
109,642
|
|
Accrued other
|
|
|
–
|
|
|
|
2,000
|
|
Total accrued liabilities
|
|
$
|
143,276
|
|
|
$
|
158,089
|
|
The Company is in arrears on its payroll tax
payments as of December 31, 2019. Included in the “payroll tax liabilities” as of December 31, 2019, is approximately
$35,209 in interest and penalties.
NOTE 5 – LOANS PAYABLE
We have one
asset-based line of credit of $15,950 as of December 31, 2019. The amount of credit available to be accessed is dependent on the
amount of documented credit receipts received by the Company’s restaurants. The due dates on these credit advances are typically
between 90 and 180 days. The interest rate on the facility is approximately 25%, plus additional processing fees of approximately
5%.
As of December 31, 2019, and December
31 2018, loan payable balances were $6,000 and $5,643 respectively. The amount of loans outstanding was significantly reduced
due to proceeds from less expensive (in terms of the interest rate) convertible debt that was applied against loan balances.
NOTE 6 – CONVERTIBLE NOTES
As of December 31, 2019 and December 31, 2018,
the balance of convertible notes was $10,000 and $277,650 respectively.
In April 2018, the Company commenced a private
offering of up to $700,000 in convertible debenture (the “Debentures”), to non-residents of the US. These notes accrue
interest at the rate of 8% per annum and are convertible into shares of the Company’s Common Stock and are only convertible
until such time as the Company’s Common Stock is approved for trading, of which there is no assurance, at a conversion rate
of $0.0667 per share. Interest is payable annually, on or before February 15 of each year. The Debentures mature three years after
the issuance date.
Since the Company’s shares were previously
sold in a private placement at a price of $0.10 per share, the difference in price is considered a beneficial conversion feature.
Since the holders of the Notes have the right to convert immediately, the beneficial conversion feature of $221,843 has been immediately
expensed and recorded as interest expense.
During the three month period ended September
30, 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. At December 31, 2019 and December 31, 2018, there were 126,550,553 and 81,780,170 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, 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, 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
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 (the “Board”).
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, 2019.
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 (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 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.
There were no shares of Series B Stock outstanding
as of December 31, 2019.
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 price for the price paid 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.
There were 50,000 shares of Series C Preferred,
par value $0.001 which were purchased at a price of $1.00 per share, outstanding as of December 31, 2019.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
As of December 31, 2019 and 2018, the Company
had three 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. For financial statement purposes, 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 December 9, 2020.
|
|
·
|
Kisses From Italy-Palm Aire based in Pompano Beach, Florida leases approximately 2,300 square feet of space at a cost of $3,800 per month. The lease ends on May 1, 2020. 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 $546 per month. The lease ends on August 1, 2020. 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 $223 per month, which has been designated the Company’s principal
place of business.
NOTE 9 – SUBSEQUENT EVENTS
For the period from January 1, 2020 through
the date of this Report, the Company received $93,100 in proceeds from the sale of Series C Preferred Stock to six different accredited
investors. Additionally, an accredited investor providing services to the Company converted $10,000 of unpaid fees into $10,000
of Series C Preferred Stock.