XML 22 R12.htm IDEA: XBRL DOCUMENT

5. FORMATION OF SUBSIDIARY

12 Months Ended

Oct. 31, 2016

On June 23, 2016, the Company formed a wholly-owned subsidiary named Sonofresco, LLC a Delaware limited liability company.

Pursuant to the terms of an Agreement for Purchase and Sale of Assets dated June 23, 2016 (the “Sono Agreement”), by and among the Company, Coffee Kinetics LLC, a Washington limited liability company (the “Seller”), the members of the Seller and Sono (the “Buyer”), the Company, through its wholly-owned subsidiary Sono, purchased substantially all the assets, including equipment, inventory, customer list and relationships (the “Assets”) of the Seller. The acquisition was accounted for using the purchase method in accordance with ASC 805, “Business Combinations.” The Buyer purchased the Assets for a purchase price consisting of $819,564 in cash and 38,364 shares of the Company's redeemable common stock (the “Sono Shares”) with a value of $200,004 (the "Common Stock Payment Amount") issued on June 29, 2016.

As part of the transaction, all of the employees of the Seller became employees of the Buyer. In addition, on June 29, 2016, the Company entered into a one-year advisory agreement (the “Advisory Agreement”), with one of the Seller’s executives (the “Executive”), on an independent contractor basis, to ensure continuity of the business and to continue to operate the business located in Washington. The Advisory Agreement will automatically renew for an additional one year term upon the expiration of the first year term unless terminated by the Company. After completion of the first year term, the Advisory Agreement is subject to renewal by mutual agreement of the parties. Pursuant to the terms of the Advisory Agreement, the Executive is entitled to cash compensation of $50,000 per annum. If the Advisory Agreement is terminated prior to the end of the first year term, the Executive is entitled to receive an additional $50,000 termination fee. If the term of the Advisory Agreement is extended past the first year term, subject to certain exceptions, the Executive will be entitled to the $50,000 termination fee upon termination of the Advisory Agreement.

The following table summarizes the estimated fair value of the assets and liabilities assumed at the acquisition:
Assets acquired:
Accounts receivable	$	84,142
Inventory		269,565
Equipment		40,000
Customer list		120,000
Goodwill		577,905
Less: liabilities assumed		(72,044	)
Net assets acquired:	$	1,019,568
Purchase of assets funded by:
Cash paid	$	819,564
Redeemable Common Stock		200,004
	$	1,019,568

Pursuant to the terms of Sono Agreement, the value of the Sono shares was based on the three day average of the closing price of the Company's common stock for the three trading days immediately prior to June 23, 2016. In addition, pursuant to the terms of the Sono Agreement, during the twelve month period commencing on June 29, 2016 (the "Closing Date"), if Seller informs Buyer of its desire to sell all, but not less than all of the Sono Shares to the Company, Buyer agrees to repurchase all but not less than all of the Sono Shares at the Common Stock Payment amount.

Pro Forma Results of Operations (unaudited) The following pro forma results of operations for the years ended October 31, 2016 and 2015 have been prepared as though the acquisition of Sono had occurred as of the beginning of the earliest period presented. This pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition of Sono occurred at the beginning of the periods presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future:

	Year ended October 31,
		2016		2015

Pro forma sales		$	80,132,616	$	119,711,018
Pro forma net income (loss)		$	2,290,084	$	(1,433,493	)
Pro forma basic and diluted earnings per share		$	.38	$	(.23	)
Basic and diluted weighted average common shares outstanding			6,082,777		6,212,929

The operations of Sono have been included in the Company’s consolidated statement of operations since the date of the acquisition on June 29, 2016. The total revenue included for the period is $560,736.