NOTE REGARDING FORWARD-LOOKING STATEMENTS
Unless stated otherwise or the context otherwise requires, the words “we,” “us,” “our,” the “Company” or “Fresh Harvest” in this “Annual Report on Form 10-K collectively refers to Fresh Harvest Products, Inc., a New Jersey corporation (the “Parent Company”), and its subsidiaries. The information in this Annual Report on Form 10-K contains “forward-looking statements” relating to the Company, within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
This report contains information that may be deemed forward-looking, that is based largely on the Company’s current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated.
Among such risks, trends and other uncertainties, which in some instances are beyond its control, may be the Company’s ability to generate cash flows and maintain liquidity sufficient to service its debt, and comply with or obtain amendments or waivers of the financial covenants contained in its credit facilities, if necessary. Other risks and uncertainties include the impact of continuing adverse economic conditions, potential changes in the organic food industry, energy costs, interest rates and the availability of credit, labor costs, legislative and regulatory rulings and other results of operations or financial conditions, increased capital and other costs, competition and other risks detailed from time to time in the Company’s publicly filed documents.
The words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. The Company does not undertake to publicly update or revise its forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Fresh Harvest Products, Inc. (the “Parent Company”) is a corporation formed in the State of New Jersey. We are a developer of proprietary brands and a marketer of organic and natural food products. Our goal is to make our “Wings of Nature™” and “AC LaRocco” brands, national brands of organic and natural foods that will attract consumers because of high quality and affordable pricing. We believe that our management team is intimately knowledgeable about the functions of a marketer in the food industry.
We believe that the consumers that we have targeted are actively looking for quality organic food offerings, and the stores in which they shop are responding to their demands by allocating shelf space for this rapidly expanding segment of the food market. In August 2009, we formed Wings of Nature, LLC in the State of New York and it is a wholly-owned subsidiary of the Parent Company. In April 2010, the Parent Company formed a wholly-owned subsidiary, A.C. LaRocco, Inc. (“New A.C. LaRocco”) in the State of Delaware for the purpose of implementing its new pizza business.
We sell our products to consumers at, what we believe are, reasonable prices through local, regional and national supermarkets, retailers, distributors, brokers, and wholesalers.
Our strategy is to focus on finding and developing and selling the best organic and natural food products in the world. Part of this strategy is to have the “Wings of Nature™” or “AC LaRocco” names branded on our products, as well acquiring other natural and organic food brands.
Currently, our revenues are generated mainly from distributors and retailers. Some of our distributors and retailers include: the largest natural and organic food distributor in the U.S., and the largest natural and organic retailer in the U.S.
The Parent Company was formed in New Jersey as a blank check company on April 21, 2005 with no operations, assets or purpose other than the purpose of seeking a privately held operating company as an acquisition or merger candidate.
On December 16, 2005, the Parent Company entered into an Agreement and Plan of Acquisition and Merger (the “Merger Agreement”) with Fresh Harvest Products, Inc., a New York corporation (“New York FHP”), Michael Friedman, Marcia Roberts and Illuminate, Inc. The Merger Agreement contemplates the merger of the Parent Company and New York FHP (the “Merger”). Although the Parent Company has operated as if the Merger was consummated in December 2005, it has come to the Company’s attention that certain required filings were not made in the State of New Jersey and the State of New York to properly consummate the Merger. As a result, as of the date of this Annual Report on Form 10-K, the Parent Company and New York FHP had not completed the Merger. In order to complete the Merger, the Parent Company and New York FHP plan to take the following steps:
Pay all taxes owed by New York FHP to the State of New York. As of October 31, 2011, New York FHP owed New York State payroll related taxes in the amount of approximately $30,145 plus applicable interest and penalties.
File an application on behalf of the Parent Company for authority to do business in the State of New York with the Secretary of State of the State of New York, which application requires the consent of the New York State Tax Commission, and pay any applicable late filing penalties.
File a final franchise tax return with the State of New York with respect to New York FHP.
File a Certificate of Merger with the Secretary of State of the State of New Jersey.
File a Certificate of Merger with the Secretary of State of the State of New York.
The Parent Company intends to take the steps required to complete the Merger, however, the Parent Company cannot forecast when it will pay the amounts owed to the State of New York, make the indicated filings or otherwise complete the Merger. In addition, there is a risk that the State of New York and the State of New Jersey may require the Parent Company and New York FHP to take additional actions that the Company is not presently contemplating. If the Parent Company and New York FHP are unable to complete the above described steps and to consummate the Merger, then there is a risk that the Parent Company’s acquisition of New York FHP could be challenged which could seriously harm the Parent Company’s business, financial condition, results of operations and cash flows. If the Parent Company and New
York FHP are unable to consummate the Merger, the value of the Parent Company’s shares held by the Parent Company’s shareholders could significantly decline.
The Company continues to have limited capital resources and has experienced net losses and negative cash flows from operations and expects these conditions to continue for the foreseeable future. As of October 31, 2011, the Company had no cash available for operations and had an accumulated deficit of $7,652,829. Management believes that cash on hand as of October 31, 2011 is not sufficient to fund operations through October 31, 2012. The Company will be required to raise additional funds to meet its short and long-term planned goals. There can be no assurance that such funds, if available at all, can be obtained on terms reasonable to the Company.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. However, the Company has limited revenue and without realization of additional capital, it would be highly unlikely for the Company to continue as a going concern.
THE MARKET IN ORGANIC AND NATURAL FOODS
We believe that the market for natural and organic foods is growing fast and has begun to enter into mainstream retailing. Organic food is sold in the majority of supermarkets (Source: Organic Trade Association’s 2010 Organic Industry Survey) and we believe that the market is ready to identify with brands dedicated to quality, reasonably priced, great tasting natural and organic packaged foods and beverages for both children and adults.
OVERVIEW AND TRENDS OF THE NATURAL AND ORGANIC MARKET
Organic Food Industry Statistics
(Source: Organic Trade Association’s 2011 Organic Industry Survey)
According to the Organic Trade Association’s 2011 Organic Industry Survey, the organic industry grew at a rate of nearly eight percent in 2010. Further, some sectors of the organic market enjoyed annual growth of well over 30 percent. In 2010, the organic industry grew to over $28.6 billion.
While, total U.S. food sales grew by less than one percent in 2010, the organic food industry grew by 7.7 percent. In 2010, 40 percent of surveyed organic companies reported positive full-time employment growth.
Healthy Food Industry Growth & Trends
(Source: Tully & Holland 2011 Food Industry Update, August 2011)
The fastest growing segment of the U.S. food industry is healthy foods which has grown at a 7% Compound Annual Growth Rate (“CAGR”) over the past decade compared to just a 3% CAGR for the food industry as a whole over the same time period. There has been strong demand by increasingly self conscious consumers for products that are labeled as organic, all natural, gluten free, whole grain, or low fat. This has been aided by government programs to encourage healthy eating. The decrease in consumer discretionary spending during the recession did manage to slow down the market for healthy foods because healthy eating options are, by consensus, more expensive than their unhealthy counterparts.
Consumers Desire Healthier Food Options and Front-of-Package Nutrition Facts
(Source: Deloitte 2011 Consumer Food and Product Insights Survey Part Two)
Consumers are taking note of the front-of-the package nutrition information to assist them in making healthier purchasing decisions, according to the survey. More than 3 in 4 respondents (76.2 percent) agree or somewhat agree they are looking for healthier food options when they shop more often, and nearly two-thirds of those surveyed (64.8 percent) agree or somewhat agree that food retailers are starting to sell more locally produced fruits and vegetables.
Trends in Frozen Foods
(Source: Food Processing Magazine, 2010, Frozen Foods Article, http://www.foodprocessing.com/articles/2010/frozenfood.html)
As for the future, industry-wide frozen foods sales are expected to increase 25 percent by 2013, up to $64.8 billion. Analysts expect frozen foods to be buoyed by new convenience and health-targeted introductions. This dual aim of combining healthier recipes – in line with the overall consumer trend – with the convenience of frozen foods, is expected to be strongest in breakfast foods, vegetables, appetizers, snacks and sides.
North American Food & Beverage Key Industry Trends
(Source: CCC Investment Banking, Q2 2011)
Organic Food Market Has Continued to Survive the Recession - Forecasts show that the organic market may grow by 104% from 2010 to 2015, with total annual sales exceeding US$788B by 2015.
Material Agreement
On March 2, 2010, the Parent Company simultaneously entered into the Asset Purchase Agreement (the “Asset Purchase Agreement”) dated March 2, 2010 among the Parent Company, Take and Bake, Inc., doing business as A.C. LaRocco Pizza Company (the “Seller”), Clarence Scott and Karen Leffler and, the Company believes, acquired certain assets and liabilities of the Seller (as further described below) (the “Asset Acquisition”). The Seller was in the business of marketing and distributing all natural and organic, whole grain, heart healthy pizzas, including organic thin pizzas with sprouted grain crust. The purchase price for the assets acquired by the Parent Company pursuant to the Asset Purchase Agreement was 15,000,000 shares of common stock (the “Share Consideration”) and monthly payments of $1,800 for a 60-month period, along with the assumption of a promissory note to the Seller’s principal supplier. In April 2010, the Parent Company formed a wholly owned subsidiary, A.C. LaRocco, Inc., a Delaware corporation (“New A.C. LaRocco”), for the purpose of implementing its new pizza business.
The assets acquired by the Company in the Asset Acquisition, included all of the assets of Seller constituting or used in connection with its business, except for certain excluded assets. The assets excluded from the Asset Acquisition, included, among others: (i) receivables due to the Seller as of March 2, 2010, (ii) cash and cash equivalent items on hand at the close of business on the closing date, (iii) accounts receivable earned from the operations of the business during the period beginning 60 days prior to the closing date and ending on the closing date, (iv) accounts receivable as to litigation commenced prior to the closing date against a debtor, (v) all judgments in favor of Seller in connection with the collection of accounts receivable and (vi) all checkbooks, stubs, books of account , ledgers and journals related to the prior operation of the Seller’s business.
Purchase Price Allocation
The acquisition of the assets of Take and Bake, Inc. on March 2, 2010, including the settlement agreement of May 4, 2011, was accounted for as a business combination as defined under ASC 805, Business Combinations. The purchase price allocation is as follows:
Explanation:
(1)
The valuation of the inventory was based on cost and was being maintained by a third-party warehouse that maintained perpetual inventory records.
(2)
The valuation of the equipment was based on a third-party appraisal as of March 2, 2010.
(3)
The management of the Company determined that based on market conditions that existed as of March 2, 2010, the Company’s principal supplier had a perfected security interest in all assets of Take and Bake, Inc. and that Take and Bake, Inc. operated at a loss for several years prior to March 2, 2010, therefore the trade name, logo and trade secrets were valued at zero.
(4)
The assumption of liabilities includes a term note payable to Rose & Shore, Inc., the Company’s principal supplier.
(5)
The consideration paid included a term note payable to Take and Bake, Inc.
(6)
Since there was no methodology set forth in the Agreement dated March 2, 2010 as to how the 15,000,000 shares of restricted common stock of the Company were to be valued, management of the Company determined the value of the common stock to be the closing price of the Company’s common stock of $.03 without taking into consideration any discounts for the restrictions, the lack of trading volume to sell the shares if they were free trading and that the 15,000,000 shares represented approximately 11% of the outstanding shares as of March 2, 2010.
(7)
Management of the Company determined the Goodwill, defined as Total Consideration Paid less Identifiable Assets, to be $666,512.
On March 2, 2010, the parties to the Asset Purchase Agreement also entered into an Asset Acquisition Memorandum (the “Memorandum” which we refer to together with the Asset Purchase Agreement, as the “Transaction Documents”). The Memorandum provided, among other things, that the Parent Company was required to invest a minimum of $500,000 within six months of the closing date of the Asset Acquisition into New A.C. LaRocco, which payments could be made directly to New A.C. LaRocco or to anyone that the Seller and New A.C. LaRocco deemed necessary.
On March 2, 2011, in lieu of the 15,000,000 shares of common stock described in the Asset Purchase Agreement, the Parent Company issued 150,000 shares of its Series A Convertible Preferred Stock to the Seller, which were converted into 15,000,000 shares of common stock.
On May 4, 2011, the Parent Company, New York FHP, New A.C. LaRocco, the Seller, Clarence Scott and Karen Leffler entered into a Settlement Agreement and Release (the “Settlement Agreement”), which was effective on May 11, 2011.
The terms of the Settlement Agreement include, among others:
The Parent Company shall issue an additional 150,000 shares of Series A Convertible Preferred Stock to the Seller (the “Share Payment”), which shares have been issued;
during the 90 day period following the effective date of the Settlement Agreement, Fresh Harvest would pay to the Seller an aggregate of $23,000, which amount has been paid;
neither Mr. Scott nor Ms. Leffler would be restricted from accepting employment with, consulting with or investing in any business in competition with Fresh Harvest or its subsidiaries;
each of the Seller, Mr. Scott and Ms. Leffler acknowledged and agreed that upon receipt of the Share Payment by the Parent Company and compliance by New A.C. LaRocco with the provisions of Section 2(b) of the Settlement Agreement (i.e., payment of $23,000 to the Seller), all amounts owed by Fresh Harvest and/or New A.C. LaRocco to the Seller, Mr. Scott and Ms. Leffler in connection with the Asset Acquisition, pursuant to the Transaction Documents (including the employment agreements between Fresh Harvest and each of Mr. Scott and Ms. Leffler) or otherwise shall be deemed satisfied and paid in full;
each of the Seller, Mr. Scott and Ms. Leffler acknowledged and agreed that on March 2, 2010, the Parent Company acquired all right, title and interest in (collectively, the “Acquired Assets”) all of the property and assets, real, personal or mixed, tangible and intangible, of every kind and description of the Seller, except for: (1) receivables due to the Seller on March 2, 2010, (2) cash and cash equivalent items on hand at the close of business on March 2, 2010, (3) accounts receivable earned from the operation of the Seller’s business during the period beginning sixty (60) days prior to March 2, 2010 and ending on March 2, 2010, (4) accounts receivable as to litigation commenced prior to March 2, 2010 against a debtor for purposes of collection, (5) all judgments in favor of the Seller in connection with the collection of accounts receivable as of March 2, 2010 and (6) all checkbooks, stubs, books of account, ledgers and journals related to the prior operation of the Seller’s business prior to March 2, 2010;
each of the Seller, Mr. Scott and Ms. Leffler further acknowledged and agreed that the only liability assumed by Fresh Harvest from the Seller pursuant to the Transaction Documents was the assumption of that certain Secured Promissory Note dated July 6, 2007 in the original principal amount of $218,357 (and with a principal balance of $127,919 on March 2, 2010) owed by the Seller to a specified creditor;
(vii)
New A.C. LaRocco agreed to transfer to the Seller certain specified assets and any rights and obligations of New A.C. LaRocco and/or Fresh Harvest with respect to the facility located in Spokane, Washington; and,
(viii)
subject to certain conditions, the domain name healthypizzarevolution.com, will be the property of Mr. Scott.
The Settlement Agreement also provides for a mutual release of claims by the parties.
(1)
Assets located in the Spokane, Washington office that were released in the Settlement Agreement dated May 4, 2011.
Balance of the Note Payable owed to Take and Bake, Inc. that was released in the Settlement Agreement dated May 4, 2011.
150,000 shares of convertible preferred stock (15,000,000 shares of common stock) at a per common share price of $.012; per share price of the common stock was determined to be the closing price of the shares on the date of issuance.
Certificate of Designations
On February 23, 2011, the Parent Company filed a Certificate of Designations of Series A Convertible Preferred Stock (the “Certificate of Designations”) with the Secretary of State of the State of New Jersey. The Certificate of Designations, subject to the requirements of New Jersey law, states the designation, number of shares, powers, preferences, rights, qualifications, limitations and restrictions of the Parent Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”). In summary, the Certificate of Designations provides:
Number
5,000,000 shares of the Parent Company’s Preferred Stock are designated as shares of Series A Convertible Preferred Stock.
Dividends
Any dividends (other than dividends on common stock payable solely in common stock or dividends on the Series A Preferred Stock payable solely in Series A Preferred Stock) declared or paid in any fiscal year will be declared or paid among the holders of the Series A Preferred Stock and common stock then outstanding in proportion to the greatest whole number of shares of common stock which would be held by each such holder if all shares of Series A Preferred Stock were converted into shares of common stock pursuant to the terms of the Certificate of Designations. The Parent Company’s Board of Directors is under no obligation to declare dividends on the Series A Preferred Stock.
Conversion
Each share of Series A Preferred Stock is generally convertible (subject to an increase in the number of shares of the Parent Company’s authorized common stock (the “Conversion Amendment”)) into 100 shares of the Parent Company’s common stock (the “Conversion Rate”).
Subject to the prior increase in the number of the Parent Company’s authorized shares of common stock, each share of Series A Preferred Stock will automatically be converted into shares of common stock at the then effective Conversion Rate for such share immediately upon the election of the Parent Company. On September 6, 2011, the authorized number of shares of the Parent Company’s common stock was increased to 2,000,000,000 shares. The Parent Company subsequently elected to cause the conversion of all shares of Series A Preferred Stock outstanding on September 16, 2011 into shares of common stock. As a result, 2,350,003 shares of Series A Convertible Preferred Stock converted into an aggregate of 235,000,300 shares of common stock.