NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
A - The Company
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 UNAUDITED 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 UNAUDITED 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. During the period ended September 30, 2013 the company recognized
an impairment charge of $15,850 for obsolete inventory.
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 conversion price based on market prices for our stock, 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 UNAUDITED 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:
|
|
September
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 September 30, 2013 and December 31, 2012 was $771,717
and $767,317 respectively. There are no established repayment terms. Interest expense for the nine month periods ended September
30, 2013 and 2012 was $55,782 and $5,694. Since there is no formal agreement on repaying interest, interest has been imputed to
Additional Paid in Capital. From December 31, 2009 through September 30, 2013, interest was calculated at the Applicable Federal
Rate (AFR) raning from 0.95% to 2.69%. Due to the AFR rate being considerably lower than the current market rate, the Company
imputed interst at 9% in the amount of $51,866 through September 30, 2013 which was credited to Addiational Paid in Capital. At
September 30, 2013, the officer of the Company has forgiven all accrued interest computed through September 30, 2013, in the amount
of $63,750.
CONO ITALIANO,
INC.
(A DEVELOPMENT STAGE COMPANY)
(A NEVADA CORPORATION)
Keyport, New
Jersey
NOTES
TO UNAUDITED 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 September 30, 2013 and December 31, 2012 was $230,769 and $199,269, respectively.
Note F -
Convertible
Notes Payable
The Company had
convertible debentures outstanding as follows:
September
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 September 30, 2013 and December 31,
2012 accrued interest payable to DT Crystal was $11,997 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 UNAUDITED 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 September 30, 2013. Accrued interest at September 30, 2013 and December 31, 2012 was $47,500
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.
Note G -
Going
Concern
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 $3,550,115 at September 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.
Note H -
Share
Activity
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)
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.
CONO ITALIANO,
INC.
(A DEVELOPMENT STAGE COMPANY)
(A NEVADA CORPORATION)
Keyport, New
Jersey
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note H -
Share
Activity - continued
Common Stock
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 of 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 Conon 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.
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.
CONO ITALIANO,
INC.
(A DEVELOPMENT STAGE COMPANY)
(A NEVADA CORPORATION)
Keyport, New
Jersey
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note H -
Share
Activity - continued
Common Stock
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 based upon the amount due to the vendor.
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 UNAUDITED 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.
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 September 30, 2013 accrued compensation was $393,750. The compensation of the officers has
been set as follows:
Officer
|
|
Annual
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 UNAUDITED 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 September 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
September 30, 2013, 769,078 additional shares had been issued. A total of $84,591 is included in Deferred Equity Financing Costs
at December 31, 2012 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,
this results 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 $20,811 and $35,592 as of September 30, 2013 and
December 31, 2012, respectively. The inputs used in the calculation included the following: volatility rates of 163% and 139%
at September 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.
- continued
-
CONO ITALIANO, INC.
(A DEVELOPMENT STAGE COMPANY)
(A NEVADA CORPORATION)
Keyport, New
Jersey
NOTES
TO UNAUDITED 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
|
|
|
(Gain) Loss on
Derivative for
the Period
Ended
September 30, 2013
|
|
|
Settled
to
Additional
Paid in
Capital
|
|
|
Derivative
Balances At
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DT Crystal
- Debenture
|
|
$
|
2,842
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
(1,378
|
)
|
|
$
|
––
|
|
|
$
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCA Global – Debenture
|
|
|
32,750
|
|
|
|
––
|
|
|
|
––
|
|
|
|
(13,403
|
)
|
|
|
|
|
|
|
19,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,592
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
(14,781
|
)
|
|
$
|
––
|
|
|
$
|
20,811
|
|
Note L -
Commitments
and Contigencies
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 September 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note L -
Commitments
and Contigencies - 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 nine months
ended September 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
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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note M -
Fair
Value – 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 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 September 30, 2013 and December 31, 2012. No other items were valued at fair value on a recurring
or non-recurring basis as of September 30, 2013 or December 31, 2012.
September
30, 2013
|
|
|
|
|
Fair
Value Measurements Using
|
|
|
|
Carrying
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liabilities
|
|
$
|
20,811
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
20,811
|
|
|
$
|
20,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
$
|
20,811
|
|
|
$
|
20,811
|
|
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
On February 4, 2014
the Company approved increasing common stock from 150,000,000 to 500,000,000 authorized shares. The Company also approved the
authorization of up to 20,000,000 “blank check” preferred stock of the Company with $0.001 par value.
Subsequent to September
30, 2013, the Company issued 38,000,000 shares of common stock bringing the total outstanding common stock to 148,002,165. The
38,000,000 shares issued consisted of 31,000,000 and 7,000,000 shares issued respectively to Mitch Brown and Alex Kaminski officers
of the Company for their services rendered.