10-K: Kisses From Italy Inc. Reports Full Year 2023 Results, Cites Strategic Shift

Kisses From Italy Inc. reports a net loss of $4.87 million for 2023, impacted by restaurant closures and increased operating expenses, while shifting focus to acquisition transactions.

Summary

• Kisses From Italy Inc. reported a net loss of $4.87 million for the year ended December 31, 2023, compared to a net loss of $847,385 in 2022.
• Total revenues decreased to $225,953 in 2023 from $391,447 in 2022, primarily due to the closure of the Wyndham Palm-Aire location.
• Operating expenses significantly increased to $3.67 million in 2023 from $676,580 in 2022, largely due to a $2.79 million increase in non-cash stock-based compensation.
• The company's cost of goods sold decreased to $118,005 in 2023 from $213,106 in 2022, reflecting lower sales volume.
• Other expenses, including interest and changes in derivative liability, rose to $1.31 million in 2023 from $362,466 in 2022.
• The company had $24,842 in cash and cash equivalents as of December 31, 2023.
• The company is shifting its focus from restaurant expansion to acquisition transactions and estimates needing $1 million to execute its new business development plans.
• The company's auditors have raised substantial doubt about its ability to continue as a going concern due to accumulated losses and negative cash flows.

Sentiment

Score: 2

Explanation: The document paints a very negative picture with significant losses, declining revenue, high expenses, and a going concern warning. The shift in strategy to acquisitions suggests a lack of confidence in the existing business model. The sentiment is very poor from an investment perspective.

Positives

• The company's relationship with MediaCom SAS for distribution and importing of European products remains intact.
• Kisses From Italy branded products are in 90 stores across Ontario and Quebec, Canada.

Negatives

• The company closed its European location in Bari, Italy, permanently on December 31, 2023.
• The Chino, California franchise location closed on December 31, 2023, due to poor performance.
• The Montreal, Canada franchise location assets were sold to a non-franchisee third party.
• The company did not generate any franchising fees during the time the Chino and Montreal locations were open.
• The company's Wyndham Palm-Aire location closed on September 30, 2023.
• The company has a negative working capital of $789,627 as of December 31, 2023.

Risks

• The company is vulnerable to changes in economic conditions and consumer preferences.
• Increases in food costs could negatively impact profitability.
• The company may be unsuccessful in opening new restaurants or establishing new markets.
• The company may not be able to obtain additional financing on favorable terms.
• New restaurants may not be profitable or may close.
• The company's success depends in part on the operations of its franchisees.
• Incidents involving food-borne illness could adversely affect the company's brand.
• Natural disasters, unusual weather conditions, and pandemics could disrupt the business.
• The company's financial results may fluctuate from period to period.
• The company faces intense competition in the fast-food segment.
• The company's internal controls may be inadequate.
• The company's independent auditors have issued an audit opinion that includes a statement describing the company's going concern status.
• The company's management and principal shareholders have the ability to significantly influence or control matters requiring a shareholder vote.
• FINRA sales practice requirements may limit a stockholder's ability to buy and sell the company's stock.
• The market price of the company's common stock may fluctuate significantly in the future.
• The company's shares are deemed a low-priced penny stock, making trading cumbersome for brokers and dealers.
• The company's future results may vary significantly, which may adversely affect the price of its common stock.
• The company's internal controls may be inadequate, which could cause its financial reporting to be unreliable.
• The costs of being a public company could result in the company being unable to continue as a going concern.
• The company is an emerging growth company and a smaller reporting company, which may make its stock less attractive to investors.
• Shareholders may be diluted significantly through the company's efforts to obtain financing.
• There is a limited trading market for the company's shares of common stock on the OTCQB.
• The company does not intend to pay dividends on its common stock.
• Shares of the company's common stock issuable upon conversion of the outstanding convertible notes may represent overhang that may also adversely affect the market price of its common stock.
• The company could face significant penalties for its failure to comply with the terms of its outstanding convertible notes.
• Certain of the company's outstanding convertible promissory notes include favored nation rights.

Future Outlook

The company is shifting its focus to acquisition transactions and estimates needing approximately $1,000,000 to fully effectuate its business development plans. The company does not believe its former restaurant expansion plan is viable in the current economy.

Management Comments

• Management is actively evaluating current market conditions and exploring the possibility of relocating our operations to other areas within South Florida.
• The company is solely focusing on acquisition transactions.

Industry Context

The restaurant industry is highly competitive and fragmented, with competition based on taste, speed of service, value, name recognition, location, and customer service. The industry is also affected by changes in consumer tastes, economic conditions, and demographic trends. The report notes that the foodservice industry is projected to reach $997 billion in sales in 2023, with a workforce of 15.5 million jobs. However, rising costs and intense competition are significant challenges.

Comparison to Industry Standards

• The document references the 2023 National Restaurant Association State of the Restaurant Industry report, which forecasts $997 billion in sales for the foodservice industry in 2023. Kisses From Italy's revenue of $225,953 is significantly below this industry benchmark.
• The report indicates that 92% of operators say the cost of food is a significant issue. Kisses From Italy's cost of goods sold decreased, but this was due to lower sales, not improved efficiency.
• The industry report notes that 47% of operators expect competition to be more intense. Kisses From Italy faces competition from larger chains like Jimmy Johns, Subway, and Starbucks, which have significantly greater financial resources.
• The industry report highlights that 84% of consumers say going out to a restaurant with family and friends is a better use of their leisure time than cooking and cleaning up. Kisses From Italy's restaurant closures and poor financial performance suggest it is not effectively capturing this consumer demand.
• The industry report mentions that 70% of operators believe business conditions have settled into or are on the path to their new version of normal. Kisses From Italy's strategic shift away from restaurant expansion suggests it has not found a stable path to profitability in the current environment.
• The industry report notes that 87% of operators say they'll likely hire additional employees during the next 6-12 months if qualified applicants are available. Kisses From Italy currently has only 3 full-time employees and is not actively expanding its workforce.
• The industry report indicates that 93% of operators say their restaurants' total food costs are higher than they were in 2019. Kisses From Italy's cost of goods sold decreased, but this was due to lower sales, not improved efficiency.

Management Changes

Related Party Transactions

• The company issued shares of common stock to officers and directors as bonus compensation.
• The company has promissory notes payable to a significant shareholder.

Stakeholder Impact

• Shareholders face significant risk due to the company's financial instability and going concern status.
• Employees may face uncertainty due to the company's strategic shift and financial challenges.
• Customers may experience changes in service due to restaurant closures and potential relocation.
• Suppliers may face uncertainty due to the company's financial instability.

Next Steps

• The company will focus on acquisition transactions.
• The company will seek additional financing through equity or debt.
• The company will evaluate relocating its operations within South Florida.
• The company intends to regain compliance with the OTCQB Standards by July 12, 2024.

Key Dates

Keywords

restaurant, franchise, fast casual, food, Italian, financial results, acquisition, stock, convertible notes, going concern