NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Merger
and Recapitalization
The
Company was incorporated in the State of Nevada on September 9, 2004, as Arch Management Services Inc. A change of control of
the Company occurred on June 5, 2006 and the Company changed its name from “Arch Management Services Inc.” to “Tiger
Ethanol International Inc.” on November 24, 2006. On February 11, 2008 the Company changed its name to “Tiger Renewable
Energy Ltd.” Another change of control of the Company occurred on June 4, 2009. On August 10, 2009 the Company changed its
name to “Cono Italiano, Inc.” and its symbol changed to CNOZ.
The
Company was previously party to a joint venture named Xinjiang Yajia Distillate Company Limited (the “Venture”) to
produce ethanol in the People’s Republic of China. The Company’s board of directors determined that it was in the
Company’s best interest to initiate a withdrawal from the ethanol business as of January 31, 2009 and assess alternative
businesses.
On
June 4, 2009 an Affiliate Stock Purchase Agreement (the “Stock Purchase Agreement”) was entered into by and between
Gallant Energy International Inc. (“Gallant”), the owner of 5,000,000 shares of the Company’s common stock (prior
to the Company’s one for sixty reverse stock split) and Lara Mac Inc. (“Lara Mac”), an entity controlled by
Mitchell Brown (now the Chief Executive Officer of the Company and a member of the Company’s Board of Directors). Pursuant
to the Stock Purchase Agreement, Gallant sold all of its 5,000,000 shares of the Company’s common stock to Lara Mac. The
Gallant transaction with Lara Mac resulted in a change in control of the largest voting block of the Company effective as of June
4, 2009.
Under
the terms of the Stock Purchase Agreement, the Board appointed five individuals to fill vacancies on the Board. These new directors
commenced their service on June 19, 2009. The Board also appointed four new officers of the Company.
On
August 10, 2009, the Company conducted a one for sixty reverse stock split. As of that date, all of the existing outstanding common
stock of the Company have been consolidated such that existing stockholders will hold one share of post-split common stock for
every sixty shares owned prior to the reverse split. All fractional shares resulting from the reverse stock split have been rounded
up to the next whole share.
Janex
International Inc. was formed on July 6, 2007, in the State of Delaware. On January 8, 2008 Janex International Inc., changed
its name to Cono Italiano, Inc (Delaware).
Cono
Italiano, LLC (Cono, LLC) was formed on June 27, 2007 as a limited liability company in the State of New Jersey. Cono, LLC had
no operations and its primary assets were the license rights to manufacture, market, and distribute “pizza cono”,
a unique pizza style food product.
-
continued -
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
A
|
-
|
The
Company - continued
|
Merger
and Recapitalization
In
March 2007, the license rights held by the individual founders of Cono, LLC were sold to The Total Luxury Group (TLG), an unrelated
entity. On January 8, 2008 the license rights were transferred to Mitchell Brown for the total consideration of $312,000. The
transfer of Cono, LLC (which includes the license rights) was effected in settlement of an obligation due to Mitchell Brown by
TLG.
On
January 14, 2008, Cono, LLC was sold to Cono, Inc. (Delaware) for the total consideration of $426,000. In exchange for the 100%
interest in Cono, LLC, the sole member of the LLC received 6,000,000 shares of Cono, Inc. (Delaware) valued at $114,000 and was
issued a promissory note for $312,000. Mitchell Brown is also a principal stockholder in Cono, Inc. (Delaware).
The
transaction was accounted for as a recapitalization of Cono, Inc. and Cono, LLC; as both companies were under common control.
As such, the assets and liabilities of Cono, LLC were carried over to Cono, Inc. (Delaware) at the historical carrying values.
At
the time of the sale of Cono, LLC to Cono, Inc. (Delaware), Cono LLC had a tangible net book value of $114,700. Since the assets
and liabilities of Cono, LLC were recorded at their historical carrying amounts after the merger and recapitalization, the excess
of the consideration paid of $426,000 over the carrying value of $114,700 had been recorded as a distribution to the stockholder.
On
November 12, 2009 Cono Inc. (Delaware) entered into a share exchange agreement whereby Cono Inc. (Delaware) would exchange all
of its common stock for the stock of Tiger Renewable Energy, Inc. (TRE) (a shell company) on a share for share basis. Prior to
entering into the share exchange agreement, the principal stockholder of Cono Inc. (Delaware) became a stockholder of TRE, either
through direct ownership or through an entity in which he controlled, effectively gaining control of TRE, and on August 10, 2009,
TRE changed its name to Cono Italiano, Inc., a Nevada corporation. As an inducement for Cono (Delaware) to enter the share exchange
agreement, TRE’s largest shareholder has agreed to the cancellation of 242,557 shares of Cono (Nevada) stock.
The
exchange of shares between Cono Italiano, Inc., (Delaware) and Cono Italiano, Inc., (Nevada) was accounted for as a recapitalization
of the Companies, as the majority stockholder of Cono Italiano, Inc. will be the majority stockholder of the surviving company.
Pursuant to the accounting for a recapitalization, the historical carrying value of the assets and liabilities of Cono, Inc. (Nevada)
will carry over to the surviving company.
Effective
at the closing of the share exchange transactions, November 12, 2009, Cono (Delaware) became a wholly owned subsidiary of Cono
(Nevada).
On
December 13, 2011 the Board of Directors approved increasing the authorized shares of common stock from 100,000,000 to 150,000,000.
-
continued -
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
A
|
-
|
The
Company - continued
|
Scope
of Business
The
Company is licensed to distribute an innovative food product - a cone-shaped pizza called “Pizza Cono.” The product
will be distributed into fast food market establishments which include typical fast food chains, supermarkets, convenience stores,
entertainment facilities, and sports arenas. The Company’s focus will be the sale and management of licensing and distribution
agreements with customers.
Note
B
|
-
|
Summary
of Significant Accounting Policies
|
All
significant accounting policies can be viewed on the Company’s annual report filed with the Securities and Exchange Commission.
Any
new significant accounting policies are listed below.
Inventory
Inventory
is stated at the lower of cost or market, using the first-in, first-out method. The Company follows standard costing methods for
manufactured products.
Derivative
Instruments
All
derivatives have been recorded on the balance sheet at fair value based on the lattice model calculation. These derivatives, which
have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price
less than the exercise price set forth in such warrants, are separately valued and accounted for on the Company’s balance
sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not
readily available, fair values are determined using market based pricing models incorporating readily observable market data and
requiring judgment and estimates.
Lattice
Valuation Model
The
Company valued the conversion features in its outstanding convertible notes using a lattice valuation model, with the assistance
of a valuation consultant. The lattice model values instruments based on a probability weighted discounted cash flow model. The
Company uses the model to develop a set of potential scenarios. Probabilities of each scenario occurring during the remaining
term of the instruments are determined based on management’s projections and the expert’s calculations. These probabilities
are used to create a cash flow projection overt the term of the instruments and determine the probability that the projected cash
flow will be achieved. A discounted weighted average cash flow for each scenario is then calculated and compared to the discounted
cash flow of the instruments without the compound embedded derivative in order to determine a value for the compound embedded
derivative.
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
C
|
-
|
Recently
Issued Accounting Standards
|
The
Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s
results of operations, financial position or cash flow.
Note
D
|
-
|
Related
Party Transactions
|
Due
from Related Party
On
July 14, 2008, (the date of Edesia’s inception), the Company entered into an operating agreement with Edesia Emprise, LLC
to manufacture product for the Company. The CEO of the Company owned 50% of Edesia until July 21, 2008 when he transferred his
interest to a relative. At the date of the transfer, Edesia had no assets or business operations.
Due
from Related Party consists of monies advanced on behalf of Edesia Emprise, LLC.
The
Company purchased manufacturing equipment on behalf of Edesia to be used by an unrelated entity for the production of the pizza
cone products. The manufactured pizza cone products will be resold by Cono and its licensees. Production of the pizza cones under
the agreement began in March 2009.
The
advances are non-interest bearing and is due upon demand. Due from related party consists of the following:
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Edesia Emprise, LLC
|
|
$
|
––
|
|
|
$
|
16,937
|
|
Due
to Officer
Certain
disbursements of the Company have been paid by an officer of the Company. The balance at June 30, 2013 and December 31, 2012 was
$769,317 and $767,317 respectively. There are no established repayment terms. Interest expense for the six month periods ended
June 30, 2013 and 2012 was $38,445 and $4,079. Since there is no formal agreement on repaying interest, interest has been imputed
to Additional Paid in Capital. From December 31, 2009 through June 30, 2013 interest due to officer was calculated at the Applicable
Federal Rate (AFR) ranging from 0.95% to 2.64%. Due to the AFR rate being considerably lower than the current market rate, the
Company imputed interest at 9% in the amount of $34,529 through June 30, 2013 which was credited to Additional Paid in Capital.
At June 30, 2013, the officer of the Company has forgiven all accrued interest computed through June 30, 2013, in the amount of
$63,750.
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
E
|
-
|
Accrued
Legal Expense
|
Accrued
legal expense consists of legal services rendered to the Company in the ordinary course of business including SEC filings and
the reverse merger. Accrued legal expense at June 30, 2013 and December 31, 2012 was $220,269 and $199,269, respectively.
Note
F
|
-
|
Convertible
Notes Payable
|
The
Company had convertible debentures outstanding as follows:
|
June 30, 2013
|
|
Outstanding
Balance of
Convertible
Debenture
|
|
|
Unamortized
Discount
|
|
|
Net of Principal
and Unamortized
Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DT Crystal - Debenture
|
|
$
|
47,988
|
|
|
$
|
––
|
|
|
$
|
47,988
|
|
|
TCA Global – Debenture
|
|
|
250,000
|
|
|
|
––
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Convertible Debentures
|
|
$
|
297,988
|
|
|
$
|
––
|
|
|
$
|
297,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Outstanding
Balance of
Convertible
Debenture
|
|
|
Unamortized
Discount
|
|
|
Net of Principal
and Unamortized
Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DT Crystal - Debenture
|
|
$
|
47,988
|
|
|
$
|
––
|
|
|
$
|
47,988
|
|
|
TCA Global – Debenture
|
|
|
250,000
|
|
|
|
2,193
|
|
|
|
247,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Convertible Debentures
|
|
$
|
297,988
|
|
|
$
|
2,193
|
|
|
$
|
295,795
|
|
On
September 30, 2009, the Company entered into a note payable with DT Crystal Limited accruing interest at prime plus 3% annually
which is due upon demand. The note is convertible at option of the holder into restricted stock of Cono (Nevada) based on the
average bid closing price of the Company’s shares for 30 days before conversion, minus a 15% discount. At June 30, 2013
and December 31, 2012 accrued interest payable to DT Crystal was $11,247 and $19,240, respectively. The variable conversion price
of this note agreement resulted in an embedded derivative liability.
On
February 27, 2012, the Company entered into a security agreement with TCA Global Credit Master Fund, LP, a Cayman Islands limited
partnership related to a $250,000 convertible promissory note issued by the Company in favor of TCA to acquire equipment and for
operational expenses. The Security Agreement grants to TCA a continuing, first priority security interest in all of the Company’s
assets, wheresoever located and whether now existing or hereafter arising or acquired.
-
continued -
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
F
|
-
|
Convertible
Notes Payable
- continued
|
On
February 27, 2012, the Company issued the Convertible Note in favor of TCA. The maturity date of the Convertible Note is February
27, 2013, and the Convertible Note bears interest at a rate of twelve percent (12%) per annum. Interest will accrue monthly but
is due and payable upon maturity date of note. The Convertible Note is convertible into shares of the Company’s common stock
at a price equal to ninety-five percent (95%) of the lowest daily volume weighted average price of the Company’s common
stock during the five (5) trading days immediately prior to the date of conversion. The Convertible Note may be prepaid in whole
or in part at the Company’s option without penalty. As of the date of this report, the convertible note has not been repaid,
but the Company is negotiating a resolution.
The
above Convertible Note contains an embedded derivative liability feature recorded as a debt discount in the amount of $13,157
which was expensed to interest expense over the term of the note. For the year ended December 31, 2012, $10,963 was expensed to
interest expense resulting in a remaining debt discount of $2,193 which was expensed during the three months ended March 31, 2013.
The note value, net of debt discount, was $250,000 at June 30, 2013. Accrued interest at June 30, 2013 and December 31, 2012 was
$40,000 and $25,000, respectively.
As
of the date of this report, the Company has not paid TCA the principal and accrued interest that was due on their convertible
note on February 27, 2013. Due to circumstances surrounding the financing, the Company is in negotiations to fulfill their obligation.
The
Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The Company has reported recurring losses from
operations. As a result, there is an accumulated deficit of $3,424,663 at June 30, 2013.
The
Company’s continued existence is dependent upon its ability to raise capital. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as a going concern.
Common
Stock
During
the year ended December 31, 2006, the Company issued 6,000,000 shares to Mitch Brown in exchange for license rights and equipment.
These shares were valued at $165,000.
On
January 14, 2008, Cono, LLC was sold to Cono, Inc. (Delaware) for the total consideration of $426,000. In exchange for the 100%
interest in Cono, LLC, the sole member of the LLC received 6,000,000 shares of Cono, Inc. (Delaware) valued at $114,000 and was
issued a promissory note for $312,000. Mitchell Brown is also a principal stockholder in Cono, Inc. (Delaware).
-
continued -
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Common
Stock - continued
The
transaction was accounted for as a recapitalization of Cono, Inc. and Cono, LLC; as both companies were under common control.
As such, the assets and liabilities of Cono, LLC were carried over to Cono, Inc. (Delaware) at the historical carrying values.
At
the time of the sale of Cono, LLC to Cono, Inc. (Delaware), Cono LLC had a tangible net book value of $114,700. Since the assets
and liabilities of Cono, LLC were recorded at their historical carrying amounts after the merger and recapitalization, the excess
of the consideration paid of $426,000 over the carrying value of $114,700 had been recorded as a distribution to the stockholder.
During
the year ended December 31, 2008, the Company issued 44,250,000 shares to vendors in exchange for services. These shares were
valued at $478,744 based on the closing price at the dates of grants.
During
the year ended December 31, 2008, the Company issued 3,000,000 shares to prior owners for license rights. These shares were valued
at $57,000 based on the per share value of the Cono LLC equity on January 14, 2008.
On
November 12, 2009 Cono Inc. (Delaware) entered into a share exchange agreement whereby Cono Inc. (Delaware) would exchange all
of its common stock for the stock of Tiger Renewable Energy, Inc. (TRE) (a shell company) on a share for share basis. Prior to
entering into the share exchange agreement, the principal stockholder of Cono Inc. (Delaware) became a stockholder of TRE, either
through direct ownership or through an entity in which he controlled, effectively gaining control of TRE, and on August 10, 2009,
TRE changed its name to Cono Italiano, Inc., a Nevada corporation. As an inducement for Cono (Delaware) to enter the share exchange
agreement, TRE’s largest shareholder has agreed to the cancellation of 242,557 shares of Cono (Nevada) stock.
On
August 10, 2009, the Company conducted a one for sixty reverse stock split.
During
the year ended December 31, 2009, the Company issued 262,000 shares for cash received in the amount of $64,870.
During
the year ended December 31, 2009 the Company issued 500,000 shares for related party expense in the amount of $70,000 based upon
the amount due to the related party.
During
the year ended December 31, 2009, the Company issued 18,000,000 shares for a note payable conversion. These shares were valued
at $18,000 based upon the note payable conversion agreement and therefore no gain or loss was recorded on conversion.
-
continued -
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
H
|
-
|
Share
Activity - continued
|
Common
Stock
During
the year ended December 31, 2009, the Company issued 7,616,428 shares to vendors in exchange for services. These shares were valued
at $186,393 based on the closing price at the dates of grants.
During
the year ended December 31, 2009 the Company’s stockholders’ equity was recapitalized to give effect to the shares
received by the existing shareholders of the Company from the share exchange agreement with Tiger Renewable Energy Inc.
During
the year ended December 31, 2009, the Company issued 10,000 shares to a vendor in exchange for services rendered to Tiger Renewable
Energy and whose payables were assumed in the share exchange. These shares were valued at $3,500.
During
the year ended December 31, 2010, the Company issued 125,000 shares to Pino Gelato, Inc. at a value of $75,816 as per the licensing
agreement.
During
the year ended December 31, 2010, the Company issued 10,000,000 shares to vendors in exchange for services. These shares were
valued at $93,880 based on the closing price at the dates of grants.
During
the year ended December 31, 2010, the Company issued 2,000,000 shares for a note payable conversion. These shares were valued
at $184,547 based upon the note payable conversion agreement and therefore no gain or loss was recorded on conversion.
During
the year ended December 31, 2011, the Company issued 3,325,000 shares to vendors in exchange for services. These shares were valued
at $156,249 based on the closing price at the dates of grants.
During
the year ended December 31, 2011, the Company issued 4,000,000 shares as per a stock subscription agreement entered into on July
11, 2011. Total value of the stock subscription agreement was $200,000 including 525,640 shares included in common stock subscribed.
On
July 11, 2011 the Company signed a subscription agreement with an individual to purchase 4,525,640 shares of the Company’s
common stock in four (4) installments of $50,000 each, totaling $200,000. As of December 31, 2011 all of the four installments
had been received totaling $200,000. The Company has issued 4,000,000 shares of the 4,525,640 that were to be issued. 525,640
shares of common stock are due to the individual for his investment therefore, common stock subscribed is $526 at December 31,
2011. During the year ended December 31, 2012 the Company issued the individual the 525,640 shares due him under the subscription
agreement and in accordance with this agreement since the individual was entitled to 4.9% of the outstanding shares of the Company
at the date of the final issuance the individual received an additional 374,360 shares of common stock.
-
continued -
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
H
|
-
|
Share
Activity - continued
|
Common
Stock
During
the year ended December 31, 2011, the Company cancelled 3,280,000 shares returned from vendors for services not performed in the
amount of $31,116.
During
the year ended December 31, 2011, the Company issued 3,184,000 to prior owners in the amount of $93,520 based on the closing prices
at the date of the grant.
During
the year ended December 31, 2012, the Company issued 2,000,000 shares for cash received in the amount of $75,000.
During
the year ended December 31, 2012, the Company issued 4,100,000 shares to vendors in exchange for services. These shares were valued
at $141,000 based on the closing price at the dates of grants.
During
the year ended December 31, 2012, the Company issued 998,099 shares to TCA in consideration for the Equity Facility fee. These
shares were valued at $52,500 based on the closing document.
During
the year ended December 31, 2012, the Company issued 900,000 shares to an investor in fulfillment of a stock subscription agreement.
On
January 17, 2013, the Company issued 2,000,000 shares to MSU Canada, (a customer) as a selling incentive. These shares were valued
at $60,000 at the date of the grant based on the closing price of the stock on the grant date.
On
February 11, 2013, the Company issued 769,078 shares to TCA in exchange for equity financing in the amount of $16,735 as calculated
after the nine month evaluation date. The shares were valued when contractually owed and accrued for at December 31, 2012. The
related liability was relieved with the issuance.
Note
I
|
-
|
Employment
Contracts
|
On
December 30, 2009 the Company entered into employment agreements with each of the officers serving the Company. The employment
agreements contained the following provisions: (i) two-year terms with automatic renewal provisions unless notice is given by
either party 30 days prior to renewal; (ii) commitment of a substantial portion of their professional time to the Company, consisting
of 75% of their time for Mitchell Brown and 60% of their time for each of Alex Kaminski and Steve Savage; and (iii) and additional
customary employment agreement terms and conditions. The officers have agreed that they will not receive any compensation for
their services to the Company prior to January 1, 2012. At June 30, 2013 accrued compensation was $337,500. The compensation of
the officers has been set as follows:
|
|
|
Annual
|
|
|
Officer
|
|
Salary
|
|
|
Mitchell Brown, Chief Executive Officer
|
|
$
|
125,000
|
|
|
Alex Kaminski, Chief Financial Officer and Treasurer
|
|
$
|
50,000
|
|
|
Steve Savage, Secretary
|
|
$
|
50,000
|
|
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
J
|
-
|
Security
Agreement
|
On
February 27, 2012, the Company entered into an Equity Agreement with TCA. Pursuant to the terms of the Equity Agreement, for a
period of twenty-four (24) months commencing on the date of effectiveness of a Registration Statement, TCA shall commit to purchase
up to $1,500,000 of the Company’s common stock, par value $0.001 per share. The purchase price of the Shares under the Equity
Agreement is equal to ninety-five percent (95%) of the lowest daily volume weighted average price of the Company’s common
stock during the five (5) consecutive trading days after the Company delivers to TCA an Advance notice in writing requiring TCA
to advance funds to the Company, subject to the terms of the Equity Agreement. At June 30, 2013, no shares had been purchased.
As
further consideration for TCA entering into and structuring the Equity Facility, the Company paid to TCA a fee by issuing to TCA
that number of shares of the Company’s common stock that equal a dollar amount of fifty-two thousand and five hundred dollars
($52,500) (the “Facility Fee Shares”). It is the intention of the Company and TCA that the value of the Facility Fee
Shares shall equal $52,500. In the event the value of the Facility Fee Shares issued to TCA does not equal $52,500 after a nine
month evaluation date, the Equity Agreement provides for an adjustment provision allowing for necessary action (either the issuance
of additional shares to TCA or the return of shares previously issued to TCA to the Company’s treasury) to adjust the number
of Facility Fee Shares issued. As of December 31, 2012, 998,099 shares of common stock have been issued as consideration for the
Equity Facility fee. The nine month analysis concluded that the Company owes TCA 1,317,508 common shares in the amount equal to
$32,091. As of June 30, 2013, 769,078 additional shares had been issued. A total of $84,591 is included in Deferred Equity Financing
Costs at June 30, 2013 which will be netted against proceeds when shares are purchased pursuant to the Equity Agreement. This
was expensed during the quarter ended June 30, 2013 since no funds have been derived from this agreement.
Note
K
|
-
|
Derivative
Liability
|
The
Company evaluated their convertible note agreements pursuant to ASC 815 and ASC 820 and due to there being no minimum or fixed
conversion price resulting in an indeterminate number of shares to be issued in the future, the Company determined an embedded
derivative existed and ASC 815 applied for their convertible notes with a cumulative balance of $24,876 and $35,592 as of June
30, 2013 and December 31, 2012, respectively. The inputs used in the calculation included the following; volatility rates of 163%
and 139% at June 30, 2013 and December 31, 2012, respectively, estimated default rate at 5% increasing by 1% per month to a maximum
of 10%, capital raising events would occur with no resets for notes, holder of note would redeem based on availability of alternative
financing 1% of time increasing 1% monthly to 20% and the holder would automatically convert the note at maturity if the registration
was effective and the company was not in default.
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
K
|
-
|
Derivative
Liability – continued
|
|
|
Derivative
Liability at
December 31,
2012
|
|
|
Reclass from
equity to
derivative
liability
|
|
|
Discount
on debt
with initial
valuation
|
|
|
|
|
|
Settled to
Additional
Paid in
Capital
|
|
|
Derivative
Balances
At
June 30,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DT Crystal - Debenture
|
|
$
|
2,842
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
(2,086
|
)
|
|
$
|
––
|
|
|
$
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCA Global – Debenture
|
|
|
32,750
|
|
|
|
––
|
|
|
|
––
|
|
|
|
(8,630
|
)
|
|
|
|
|
|
|
24,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,592
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
(10,716
|
)
|
|
$
|
––
|
|
|
$
|
24,876
|
|
Note
L
|
-
|
Commitments
and Contingencies
|
On
November 6, 2009, Cono Italiano (Delaware) entered into a Commitment Letter, pursuant to which, one of the Company’s shareholders,
Lara Mac Inc., has agreed to provide financing to Cono Italiano, Inc., with such funds as the Company’s Board of Directors
shall deem to be sufficient to maintain the Company’s ordinary course of business operations (the “Commitment Amount”).
We may draw on the Commitment Amount in monthly tranches in accordance with our operating requirements as set forth in our business
plan. The available Commitment Amount will be reduced by the aggregate cash proceeds received by the Company which are derived
from the issuance of any equity securities and Company gross revenues. Draws on the Commitment Amount will be made on terms of
unsecured notes, with interest set on each note as of the date of the draw at prime rate plus two percent per annum. The notes
will mature and become repayable thirty calendar days after demand.
The
Company will give Lara Mac Inc., customary representations and warranties regarding the good standing of our Company and status
of progress in respect of our Company business plan prior to each draw on the Commitment Amount, and we will provide certifications
and covenants regarding use of proceeds of each draw, which will be in customary forms reasonably requested by Lara Mac Inc.,
as determined by reference to similar lenders making similar loans to similar companies. Lara Mac Inc. will not be required to
make any loans under the Commitment Amount to us if we are unable to make the representations, warranties, certifications or covenants,
or if we are in breach of any previously given representations, warranties, certifications or covenants. If we breach any of the
notes, the default rate will be 15% per annum and Lara Mac Inc. may seek recourse against our company for repayment of all of
the notes. As of June 30, 2013, the agreement was still in effect and no funds have been borrowed.
-
continued –
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
L
|
-
|
Commitments
and Contingencies – continued
|
On
September 7, 2011 the Company entered into a manufacturing agreement with Interstate Caterers for the purposes of manufacturing,
producing and distributing “pizza cono”. As consideration for Interstate entering into the agreement, the Company
agreed to issue 3,500,000 shares of its restricted common stock upon the execution of the agreement. As of December 31, 2012 the
stock had been issued. As consideration for Interstate’s services under the agreement, Interstate will receive seventy percent
(70%) of the difference between the sales price for the product less direct manufacturing costs for such product, regardless of
whether the Company or Interstate initiated the sales of such product. In addition, the Company will lease to Interstate certain
equipment to be used in the manufacture of the Cono products for $1.00 per year.
For
the six months ended June 30, 2013 and the year ended December 31, 2012 the Company and Interstate have modified the consideration
portion of what Interstate will receive. Interstate has agreed to forgo the 70% difference since sales of the product are in the
initial phase in order to help the Company promote the product.
The
term of the agreement is for a period of ten years commencing on September 7, 2011, the execution date of the agreement, and automatically
renews for one additional ten-year period unless either the Company or Interstate provides the other notice of its intention to
not renew at least thirty days prior to the end of the Initial Term. The agreement may be earlier terminated at any time by the
mutual consent of the Company and Interstate. The Company may unilaterally terminate the agreement based on, among other things,
Interstate’s non-performance in accordance with the Company’s specifications. In addition, Interstate indemnifies
the Company against third party claims based on alleged product defects.
Note
M
|
-
|
Fair
Value of Financial Instruments
|
The
Company has categorized its assets and liabilities recorded at fair value based upon the fair value hierarchy specified by GAAP.
All assets and liabilities are recorded at historical cost which approximates fair value, and therefore, no items were valued
according to these inputs.
The
levels of fair value hierarchy are as follows:
|
●
|
Level
1
inputs
utilize
unadjusted
quoted
prices
in
active
markets
for
identical
assets
or
liabilities
that
the
Company
has
the
ability
to
access;
|
|
●
|
Level
2
inputs
utilize
other-than-quoted
prices
that
are
observable,
either
directly
or
indirectly.
Level
2
inputs
include
quoted
prices
for
similar
assets
and
liabilities
in
active
markets,
and
inputs
such
as
interest
rates
and
yield
curves
that
are
observable
at
commonly
quoted
intervals;
and
|
|
●
|
Level
3
inputs
are
unobservable
and
are
typically
based
on
our
own
assumptions,
including
situations
where
there
is
little,
if
any,
market
activity.
|
-
continued -
CONO
ITALIANO, INC.
(A
DEVELOPMENT STAGE COMPANY)
(A
NEVADA CORPORATION)
Keyport,
New Jersey
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
M
|
-
|
Fair
Value of Financial Instruments - continued
|
In
certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases,
the Company categorizes such financial asset or liability based on the lowest level input that is significant to the fair value
measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the asset or liability.
Both
observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3
category. All assets and liabilities aside from the derivative assets and liabilities are at cost which approximates fair value
and there are not items that were required to be valued on a non-recurring basis.
The
following liability was valued at fair value as of June 30, 2013 and December 31, 2012. No other items were valued at fair value
on a recurring or non-recurring basis as of June 30, 2013 or December 31, 2012.
|
June 30, 2013
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
24,876
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
24,876
|
|
|
$
|
24,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
24,876
|
|
|
$
|
24,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
35,592
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
35,592
|
|
|
$
|
35,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
35,592
|
|
|
$
|
35,592
|
|
Note N
|
-
|
Subsequent
Events
|
Effective July 31, 2013, Cono Italiano,
Inc. (the “Company”) entered into an Investment Agreement (the “Investment Agreement”) with KVM Capital
Partners (“KVM”), whereby the parties also agreed to enter into a registration rights agreement (the “Registration
Rights Agreement”). Pursuant to the terms of the Investment Agreement, for a period of thirty-six (36) months commencing
on the trading day immediately following date of effectiveness of the Registration Statement (as defined below), KVM shall commit
to purchase up to $1,200,000 of the Company’s common stock, par value $0.001 per share (the “Shares”), pursuant
to Puts (as defined below), covering the Registrable Securities (as defined below). The purchase price of the Shares under the
Investment Agreement is equal to a twenty-two and one half (22.5%) percent discount to the average of the three lowest closing
bids as calculated using the average of the three lowest closing bids during the last seven trading days after the Company
delivers to KVM a Put notice in writing requiring KVM to purchase shares of the Company, subject to the terms of the Investment
Agreement.
The “Registrable Securities” include
(i) the Shares and (ii) any shares of capital stock issued or issuable with respect to the Shares, if any, as a result of any stock
split, stock dividend, recapitalization, exchange or similar event or otherwise, which have not been (x) included in the Registration
Statement that has been declared effective by the SEC, or (y) sold under circumstances meeting all of the applicable conditions
of Rule 144 (or any similar provision then in force) under the Securities Act of 1933, as amended.
As further consideration for KVM entering into
and structuring the Investment Agreement, the Company shall pay to KVM a facility fee by issuing to KVM 1,000,000 shares
of the Company’s common stock.