Cautionary Statements
This Form 10-Q contains "forward-looking statements," as that term is used in
federal securities laws, about First Foods Group, Inc.'s financial condition,
results of operations and business.
These statements include, among others:
· statements concerning the potential benefits that First Foods Group, Inc.
("First Foods", "we", "our", "us", the "Company", or "management") may
experience from its business activities and certain transactions it
contemplates or has completed; and
· statements of First Foods' expectations, beliefs, future plans and strategies,
anticipated developments and other matters that are not historical facts.
These statements may be made expressly in this Form 10-Q. You can find many of
these statements by looking for words such as "believes," "expects,"
"anticipates," "estimates," "opines," "plans," or similar expressions used in
this Form 10-Q. These forward-looking statements are subject to numerous
assumptions, risks and uncertainties that may cause First Foods' actual
results to be materially different from any future results expressed or
implied by First Foods in those statements. The most important facts that
could prevent First Foods from achieving its stated goals include, but are not
limited to, the following:
(a) volatility or decline of First Foods' stock price;
(b) potential fluctuation of quarterly results;
(c) failure of First Foods to earn significant revenues or profits;
(d) inadequate capital to continue or expand its business, and inability to
raise additional capital or financing to implement its business plans;
(e) rapid adverse changes in markets; due to among other things, war,
terrorism, weather conditions, environmental factors, pandemic, economic
crises, legislation, etc.;
(f) litigation with or legal claims and allegations by outside parties against
First Foods, including but not limited to challenges to First Foods'
intellectual property rights; and
(g) reliance on proprietary merchant advance credit models, which involve the
use of qualitative factors that are inherently judgmental and which could
result in merchant defaults.
In December 2019, a novel strain of coronavirus surfaced. The spread of COVID-19
around the world in 2020 has caused significant volatility in U.S. and
international markets. There is significant uncertainty around the breadth and
duration of business disruptions related to COVID-19, as well as its impact on
the U.S. and international economies. The Company's financial position,
operations, and cash flows as of September 30, 2020 have been adversely
affected, and may be further affected in the future, by the recent and ongoing
outbreak of the coronavirus disease 2019 (COVID-19) which in March 2020, was
declared a pandemic by the World Health Organization. The ultimate disruption
which may be caused by the outbreak is uncertain; however, it may result in a
material adverse impact on the Company's financial position, operations and cash
flows. Possible areas that may be affected include, but are not limited to,
disruption to the Company's labor workforce, unavailability of products and
supplies used in operations, and the decline in value of assets held by the
Company. As of September 30, 2020 and through the filing date of the financial
statements, the Company has continued to collect its receivables from its cash
advances but has experienced an increase in payment delinquencies and has had
two customers renegotiate the terms of their cash advance due to COVID-19.
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There is no assurance that First Foods will be profitable, due to, among other
potential reasons, that First Foods may not be able to successfully develop,
manage or market its products and services, First Foods may not be able to
attract or retain qualified executives and personnel, First Foods may not be
able to obtain customers for its products or services, additional dilution in
outstanding stock ownership may be incurred due to the issuance of more shares,
warrants and stock options, or the exercise of outstanding warrants and stock
options, and other risks inherent in First Foods' business.
Because the forward-looking statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or implied by the
forward-looking statements. First Foods cautions you not to place undue reliance
on the statements, which speak only of management's plans and expectations as of
the date of this Form 10-Q. The cautionary statements contained or referred to
in this section should be considered in connection with any subsequent written
or oral forward-looking statements that First Foods or persons acting on its
behalf may issue. First Foods does not undertake any obligation to review or
confirm analysts' expectations or estimates or to release publicly any revisions
to any forward-looking statements to reflect events or circumstances after the
date of this Form 10-Q, or to reflect the occurrence of unanticipated events.
General
First Foods is currently a "smaller reporting company" under the JOBS Act. A
company loses its "smaller reporting company" status on (i) the day its public
float becomes greater than or equal to $250,000,000 or (ii) had annual revenues
of less than $100,000,000 and either: (A) had no public float or (B) had a
public float of less than $700,000,000. As a "smaller reporting company," First
Foods is exempt from certain obligations of the Exchange Act, including those
found in Section 14A(a) and (b) related to shareholder approval of executive
compensation and golden parachute compensation and Section 404(b) of the
Sarbanes-Oxley Act of 2002 related to the requirement that management assess the
effectiveness of the Company's internal control for financial reporting.
Furthermore, Section 103 of the JOBS Act provides that as a "smaller reporting
company", First Foods is not required to comply with the requirement to provide
an auditor's attestation of ICFR under Section 404(b) of the Sarbanes-Oxley Act
for as long as First Foods qualifies as a "smaller reporting company." However,
a "smaller reporting company" is not exempt from the requirement to perform
management's assessment of internal control over financial reporting.
First Foods is primarily focused on developing its specialty chocolate product
line through its core business subsidiary, Holy Cacao, and secondarily
participating in MCAs through its 1st Foods Funding Division. First Foods
continues to pursue new foodservice brands and menu concepts.
Holy Cacao is dedicated to producing, packaging, distributing and selling
specialty chocolate products, including specialty chocolate products infused
with a hemp-based ingredient in accordance with the Company's understanding of
the Agricultural Act of 2014 (the "2014 Farm Bill") and/or the Agriculture
Improvement Act of 2018 (the "2018 Farm Bill," and together with the 2014 Farm
Bill, collectively, the "Farm Bill"), which renders the production of hemp in
compliance with the provisions of the Farm Bill federally lawful. The Company
has not been, is not, and has no current plans to be involved in producing,
packaging, distributing or selling any product that is infused with a
marijuana-based ingredient, although it intends to revisit the matter as
regulations change in jurisdictions in which it operates. The Company is also
dedicated to licensing its intellectual property ("IP"), including its name,
brand, and packaging, to third parties. The Company may license its IP to third
parties that may produce, package, and distribute hemp-based products pursuant
with the Company's understanding of the Farm Bill. The Company may license its
IP to third parties that may produce, package, and distribute marijuana-based
products, but only as such licensing is legal. On February 27, 2019, the United
States Patent and Trademark Office (the "USPTO") approved Holy Cacao's trademark
brand, "The Edibles' Cult." On November 26, 2019, the USPTO approved Holy
Cacao's trademark brand, "Purely Irresistible." The Company has submitted
multiple applications to the USPTO for additional brand names, including
"Mystere" and "Southeast Edibles" among others. On February 5, 2019, the Company
signed a Consulting Agreement with a consultant to assist in the manufacturing,
packaging and distribution of the Company's chocolate product line. On March 26,
2019, the Company acquired access to a fully equipped 6,000 square foot
chocolate manufacturing facility that allows it to use its full complement of
personnel to produce its specialty chocolate product line and sell it to
manufacturing and wholesaling companies. On March 1, 2020, the Company's Board
of Directors made a strategic decision to broaden the appeal of its hemp-based
chocolate products to a wider base of customers, who are particularly discerning
about the cleanliness of the Company's manufacturing facility and quality of its
hemp-based chocolate products, by successfully obtaining worldwide Kosher
certification from the Union of Orthodox Jewish Congregations of America,
Kashruth Division (the "OU"), which is the largest and most recognized
certification of its kind in the world. On March 9, 2020, the Company retained
Tartikov Beth Din ("BD") to allow BD to supervise the hemp-based chocolate
products produced by the Company in accordance with OU certification standards.
On July 7, 2020, Michael Kaplan was appointed to the Board of Directors and, as
of August 1, 2020, accepted the role of Chief Marketing Officer with authority
to oversee the Company's sales and marketing operations, and responsibility for
developing oversight processes and procedures. On August 4, 2020, the Company
retained Moises Davidovits as its full-time chocolatier. Mr. Davidovits is a
third-generation chocolatier who is responsible for the manufacturing, packaging
and distribution of the Company's chocolate product line, as well as the
formulation of all of the Company's proprietary chocolate recipes. On October
19, 2020, the Company entered into a chocolate sales agreement with B&A
Brokerage for the greater metropolitan New York area.
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On October 25, 2017, the Company entered into a contract with TIER Merchant
Advances LLC ("TIER") to participate in the purchase of future receivables from
qualified TIER merchants for the purpose of generating near-term and long-term
revenue for the Company. On November 8, 2018 the Company also began providing
cash advances directly to merchants.
The Company is quoted on the OTCQB under "FIFG."
The Company's principal executive offices are located at First Foods Group, Inc.
c/o Incorp Services, Inc., 3773 Howard Hughes Parkway, Suite 500S, Las Vegas, NV
89169-6014. Our telephone number is (201) 471-0988.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these unaudited condensed
consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We monitor our
estimates on an on-going basis for changes in facts and circumstances, and
material changes in these estimates could occur in the future. Changes in
estimates are recorded in the period in which they become known. We base our
estimates on historical experience and other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from our
estimates, if past experience or other assumptions do not turn out to be
substantially accurate.
Certain of our accounting policies are particularly important to the portrayal
and understanding of our financial position and results of operations and
require us to apply significant judgment in their application. As a result,
these policies are subject to an inherent degree of uncertainty. In applying
these policies, we use our judgment in making certain assumptions and estimates.
Our critical accounting policies are outlined in Note 1 in the Notes to the
Unaudited Condensed Consolidated Financial Statements.
Results of Operations for the Three Months Ended September 30, 2020 compared to
the Three Months Ended September 30, 2019
We had $31,536 of revenue for the three months ended September 30, 2020 compared
to $79,480 in revenue for the three months ended September 30, 2019. The
decrease in revenue was driven by a decrease of participation in merchant cash
advances due to Covid-19.
Cost of product sales for the three months ended September 30, 2020 was $7,838
compared to $20 for the three months ended September 30, 2019. The increase in
cost of product sales was due to an increase in product sales.
Professional fees for the three months ended September 30, 2020 was $28,827
compared to $11,576 for the three months ended September 30, 2019. The increase
in professional fees was due to an increase in legal fees.
General and administrative expenses for the three months ended September 30,
2020 was $522,033 compared to $429,012 for the three months ended September 30,
2019. The increase in general and administrative expenses was primarily due to
an increase in employee-related cost due to headcount growth.
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Provision for merchant cash advances for the three months ended September 30,
2020 was ($105,798) compared to $37,191 for the three months ended September 30,
2019. The decrease in provision for merchant cash advances was due to lowering
the reserve allowance for our merchant cash advances.
Results of Operations for the Nine Months Ended September 30, 2020 compared to
the Nine Months Ended September 30, 2019
We had $153,221 of revenue for the nine months ended September 30, 2020 compared
to $267,778 in revenue for the nine months ended September 30, 2019. Our
decrease in revenue was the result of a decrease in product sales and
participation in merchant cash advances.
Cost of product sales for the nine months ended September 30, 2020 was $13,289
compared to $21,003 for the nine months ended September 30, 2019. The decrease
in cost of product sales was due to a decrease in product sales.
Professional fees for the nine months ended September 30, 2020 was $59,154
compared to $66,423 for the nine months ended September 30, 2019. This decrease
in professional fees was due to lower legal expenses.
General and administrative expenses for the nine months ended September 30, 2020
was $1,490,095 compared to $1,219,260 for the nine months ended September 30,
2019. The increase in general and administrative expenses was due to increased
costs associated with expanding the business, an increase in employee-related
cost due to headcount growth, consulting and accounting fees, research and
development expenses, depreciation expense and insurance expense. These
increases were offset by decreases to advertising and promotion, charitable
contributions, lower fees and commissions for our cash advances and travel.
Provision for merchant cash advances for the nine months ended September 30,
2020 was $374,087 compared to $59,940 for the nine months ended September 30,
2019.The increase in provision for merchant cash advances was due to an increase
in our reserve allowance for our merchant cash advances related to Covid-19.
Cash Flows
Operating Activities
Net cash used in operating activities for the nine months ended September 30,
2020 and 2019 amounted to $54,399 and $328,343, respectively. This includes a
net loss of approximately $2,300,000, offset by non-cash expenses of
approximately $1,720,000 related to stock-based compensation, depreciation and
amortization expense, reserves for merchant cash advances and non-cash lease
expense, and approximately $520,000 related to the change in net assets and
liabilities which includes the increase in accounts payable and accrued
liabilities, deferred revenue, inventory, prepaid expenses and other current
assets and a decrease in accounts receivable, operating lease liabilities and
deferred merchant cash commissions. This resulted in a working capital
deficiency of $(1,872,007) at September 30, 2020 compared to $(732,653) at
December 31, 2019.
Investing Activities
Net cash used in investing activities amounted to $197,924 for the nine months
ended September 30, 2020 and $0 for the nine months ended September 30, 2019.
This was due to the purchase of equipment in 2020.
Financing Activities
Net cash provided by financing activities amounted to $304,545 for the nine
months ended September 30, 2020 and $306,850 for the nine months ended September
30, 2019. This was due to an increase of proceeds from the sale of shares of
common stock and from loans in 2020 vs 2019, partially offset by repayment of
loans.
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Liquidity and Capital Resources
The Company's unaudited condensed consolidated financial statements are prepared
using generally accepted accounting principles in the United States of America
applicable to a going concern which contemplates the realization of assets and
liquidation of liabilities in the normal course of business.
The Company has not yet established an ongoing source of revenues sufficient to
cover its operating costs and allow it to continue as a going concern. The
ability of the Company to continue as a going concern is dependent on the
Company obtaining adequate capital to fund operating losses until it becomes
profitable. If the Company is unable to obtain adequate capital, it could be
forced to cease operations.
In order to continue as a going concern, the Company will need, among other
things, additional capital resources. As of September 30, 2020, the Company had
approximately $370,600 of third party short term debt that is due within the
next twelve months. Management's plan is to obtain such resources for the
Company by obtaining capital from management and significant shareholders
sufficient to meet its operating expenses and seeking equity and/or debt
financing. However, management cannot provide any assurances that the Company
will be successful in accomplishing any of its plans.
The Company does not have sufficient cash flow for the next twelve months from
the issuance of these unaudited condensed consolidated financial statements. The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations. The accompanying unaudited condensed consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
In December 2019, a novel strain of coronavirus surfaced. The spread of COVID-19
around the world in 2020 has caused significant volatility in U.S. and
international markets. There is significant uncertainty around the breadth and
duration of business disruptions related to COVID-19, as well as its impact on
the U.S. and international economies. The Company's financial position,
operations, and cash flows as of September 30, 2020 have been adversely
affected, and may be further affected in the future, by the recent and ongoing
outbreak of the coronavirus disease 2019 (COVID-19) which in March 2020, was
declared a pandemic by the World Health Organization. The ultimate disruption
which may be caused by the outbreak is uncertain; however, it may result in a
material adverse impact on the Company's financial position, operations and cash
flows. Possible areas that may be affected include, but are not limited to,
disruption to the Company's labor workforce, unavailability of products and
supplies used in operations, and the decline in value of assets held by the
Company. As of September 30, 2020 and through the filing date of the financial
statements, the Company has continued to collect its receivables from its cash
advances but has experienced an increase in payment delinquencies and has had
two customers renegotiate the terms of their cash advance due to COVID-19.
Concentration Risks
The Company recognizes the concentration of its merchant cash advances, which
could inherently create a potential risk to future working capital in the event
that the Company is not able to collect all, or a majority, of the outstanding
merchant cash advances. The Company actively mitigates its portfolio
concentration risk by monitoring its merchant cash advance provider's ability to
participate in merchant cash advances from alternative providers and spreading
merchant cash advance participation across various merchants.
As of September 30, 2020, the Company's receivables from merchant cash advances
included $90,793 from two merchants ($56,153 and $34,640), representing 61% of
the Company's merchant cash advances. The Company earned $9,919 of MCA income
from one merchant, representing 51% of the Company's MCA income for the three
months ended September 30, 2020. The Company earned $92,723 of MCA income from
two merchants ($67,100 and $25,623), representing 72% of the Company's MCA
income for the nine months ended September 30, 2020.
As of December 31, 2019, the Company's receivables from merchant cash advances
included $713,124 from two merchants ($179,853 and $533,271), representing 91%
of the Company's merchant cash advances. The Company earned $44,073 of MCA
income from one merchant, representing 56% of the Company's MCA income for the
three months ended September 30, 2019. The Company earned $102,987 of MCA income
from one merchant representing 44% of the Company's MCA income for the nine
months ended September 30, 2019.
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As of September 30, 2020, there was no accounts payable concentration other than
amounts owed to related parties which makes up 72% of the balance. As of
December 31, 2019, there was no accounts payable concentration other than
amounts owed to related parties which makes up 61% of the balance.
For the three months ended September 30, 2020, the Company had purchase
concentrations of 36%, 27%, and 25% from three vendors. For the nine months
ended September 30, 2020, the Company had purchase concentrations of 64% and 12%
from two vendors. For the three and nine months ended September 30, 2019, the
Company had purchase concentrations of 100% from one vendor.
Off-Balance Sheet Arrangements
No off-balance sheet arrangements exist.
Contractual Obligations
None.
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FIRST FOODS GROUP, INC. 
