NOTE 1. GENERAL ORGANIZATION AND BUSINESS

Fresh Harvest Products, Inc., a New Jersey corporation (the “Company”), is engaged in the software and mobile application development and video production businesses.

The Company previously operated as a natural and organic food products company before management decided to transition the Company’s line of business to capitalize on its relationships within the rapidly growing Software-as-a-Service (SaaS), enterprise software and mobile application markets.

During October 2012, the Company began integrating a digital plan and strategy which will shift the Company’s focus on expanding the online network and community, as well as an expansion of online services, with a focus on developing various SaaS models in the health, wellness, fitness, lifestyles of health and sustainability (LOHAS) and healthcare industries.

The Company expects to develop, license and acquire software applications that will generate revenue through subscription fees, in-app upgrades, purchases and advertising. The Company is currently working on several software applications including a calorie calculator and food comparison software solution so that consumers can be informed and compare what foods they are eating and be able to accurately calculate their daily calories per item, as well as compare foods with each other to learn and understand what the healthier options are. The company is actively seeking strategic partners and acquisition targets in order to grow and expand. 

On October 11, 2012, Fresh Harvest Products, Inc. (referred to herein as the “Company”, “we”, “us” and “our”), the Company, AC LaRocco, Inc., the Company’s wholly-owned subsidiary (the “Subsidiary”), ACL Foods, LLC (“Foods”), and Rose & Shore, Inc. (“R&S”), entered into an agreement (the “Agreement”) pursuant to which the parties agreed to enter into a transaction whereby (i) Foods & R&S released the Company and the Subsidiary from their respective debt obligations to Foods & R&S, including the Secured Promissory Note, the Security Agreement, the Tri-party Agreement, the Assignment and License Agreement (between the Subsidiary and R&S), the Accounts Collection “Lock Box Agreement (between the Subsidiary and R&S), and the personal guaranty of the Subsidiaries obligations to R&S executed by Michael Friedman, the Company’s President & CEO; and (ii) Foods assumed obligations and fees due R&S and a certain food broker for a retail client of the Subsidiary’s, in consideration for the assignment to Foods of the rights, title and interest in certain intellectual property rights of the Subsidiary and R&S.  Each of the parties had been or were a manufacturer (or related to manufacturer) of the Subsidiary, up to the date of these Agreements, and both parties were creditors of the Subsidiary.

Assignment of Property Agreement

On October 11, 2012, the Company, the Subsidiary, R&S and Foods entered into an Assignment of Intellectual Property Agreement pursuant to which the Company and the Subsidiary transferred to Foods at the Closing all of the Company’s and the Subsidiary’s right, title and interest in and to certain AC LaRocco brand properties, including without limitation all trademarks, trade names, copyrights, intellectual property rights and other related rights thereto (the “Transferred Property”).

NOTE 2. LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the continuation of operations, realization of assets and liquidation of liabilities in the ordinary course of business.

For the quarters ended January 31, 2013 and 2012, the Company reported a net loss of $197,438 and $391,607, respectively. 

As of January 31, 2013, the Company maintained total assets of $0, total liabilities including long-term debt of $2,297,455 along with an accumulated deficit of $9,515,623.

The Company believes that additional capital will be required to fund operations through the quarter ended July 31, 2013 and beyond, as it attempts to generate increasing revenue, and develop new products. The Company intends to attempt to raise capital through additional equity offerings and debt obligations. There can be no assurance that the Company will be successful in obtaining financing at the level needed or on terms acceptable to the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying quarterly financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company’s insolvent financial condition also may create a risk that the Company may be forced to file for protection under applicable bankruptcy laws or state insolvency statutes. The Company also may face the risk that a receiver may be appointed. The Company may face additional risks resulting from our current financial condition. For these and other reasons, our management recognizes the adverse difficulties and continuing severe challenges we face. Apart from the limited funds that the Company has received there can be no assurance that the Company will receive any financing or funding from any source or if any financing should be obtained, that existing shareholders will not incur substantial, immediate, and permanent dilution of their existing investment.

The Company’s operations are subject to certain additional risks and uncertainties including, among others, dependence on outside suppliers and manufacturers, competition, dependence on its exclusive license and relationship with the licensor, uncertainties regarding patents and proprietary rights, dependence on key personnel, and other business risks. In addition, there is no assurance, assuming the Company is successful in raising additional capital that the Company will be successful in achieving profitability or positive cash flow.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company as of and for the quarters ended January 31, 2013 and 2012.

Basis of Consolidation

The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary. All significant intercompany accounts, balances and transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. Because of the use of estimates inherent in the financial reporting process, actual results may differ significantly from those estimates.

Cash and Cash Equivalents

The Company maintains cash balances in a non-interest bearing account that currently does not exceed federally insured limits. For the purpose of the consolidated statements, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of January 31, 2013 and October 31, 2012.

Net Loss Per Share Calculation

Basic net loss per common share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued.

Revenue Recognition and Sales Incentives

Sales will be recognized when an online or mobile transaction is processed, which occurs when a user of one of software products purchases the products online or in an app. Sales are reported net of sales incentives, which could include discounts and promotions.

Income Taxes

The provision for income taxes is the total of the current taxes payable and the net of the change in the deferred income taxes. Provision is made for the deferred income taxes where differences exist between the period in which transactions affect current taxable income and the period in which they enter into the determination of net income in the financial statements.

Fair Value of Financial Instruments

The Company’s financial instruments, including accounts payable are reflected in the accompanying consolidated financial statements at carrying value, which approximates fair value because of the short-term maturity of these instruments.

Share-based compensation

The Company accounts for common stock issued to employees, directors, and consultants in accordance with the provisions of the Accounting Standards Codification (ASC) 718 Stock Based Compensation. The compensation cost relating to share-based payment transactions will be recognized in the consolidated financial statements. The cost associated with common stock issued to employees, directors and consultants will be recognized, at fair value, on the date issued. Awards granted to non-employee consultants will be subsequently re-measured to current fair value until performance is completed or a performance commitment exists.

For the three month periods ended January 31, 2013 and 2012, the Company recognized $0 and $0 in stock based compensation expense, which is included within the operating expenses on the consolidated statements of operations. The stock was valued at the closing price on the date issued less a 20% discount.

Recently Issued Accounting Pronouncements

As of and for the fiscal quarter ended January 31, 2013, the Company does not expect any of the recently issued accounting pronouncements to have a material impact on its financial condition or results of operations.

Subsequent Events

In accordance with ASC 855, Subsequent Events, the Company evaluated subsequent events through the date of this report; the date the consolidated financial statements were available for issue.

NOTE 4. NOTES PAYABLE - RELATED PARTIES

As of January 31, 2013 and October 31, 2012 the Company had $32,312 in outstanding notes payable to related parties. As of January 31, 2013 and October 31, 2012, the Company had $808 and $0, respectively, in outstanding interest to related parties.  The outstanding notes payable have one-year terms and 10% interest rates. The principal amount of the notes and accrued and unpaid interest is convertible into common shares of the Company upon the due date at $0.0001 per share, subject to adjustments.

The Company currently has a total of twenty-two convertible promissory notes that are in default and the Company may be subject to legal proceedings or lawsuits from any number of those convertible noteholders. 

NOTE 6. DERIVATIVE LIABILITY

The following tables summarize the components of the Company’s derivative liabilities and linked common shares as of January 31, 2013 and October 31, 2012 and the amounts that were reflected in income related to derivatives for the quarter and year then ended:

The following tables summarizes the effects on the Company’s gain (loss) associated with changes in the fair values of the derivative financial instruments by type of financing for the three months ended January 31, 2013 and 2012:

The financings giving rise to derivative financial instruments and the income effects:

The Company’s Convertible Notes gave rise to derivative financial instruments. The Notes embodied certain terms and conditions that were not clearly and closely related to the host debt agreement in terms of economic risks and characteristics. These terms and features consist of the embedded conversion option.

Current accounting principles that are provided in ASC 815 - Derivatives and Hedging require derivative financial instruments to be classified in liabilities and carried at fair value with changes recorded in income. In addition, the standards do not permit an issuer to account separately for individual derivative terms and features embedded in hybrid financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be bundled together and fair valued as a single, compound embedded derivative. The Company has selected the Monte Carlo Simulations valuation technique to fair value the compound embedded derivative because it believes that this technique is reflective of all significant assumption types, and ranges of assumption inputs, that market participants would likely consider in transactions involving compound embedded derivatives. Such assumptions include, among other inputs, interest risk assumptions, credit risk assumptions and redemption behaviors in addition to traditional inputs for option models such as market trading volatility and risk-free rates. The Monte Carlo Simulations technique is a level three valuation technique because it requires the development of significant internal assumptions in addition to observable market indicators.

Significant inputs and results arising from the Monte Carlo Simulations process are as follows for the compound embedded derivative that has been bifurcated from the Convertible Notes and classified in liabilities:

The following table reflects the issuances of compound embedded derivatives and changes in fair value inputs and assumptions related to the compound embedded derivatives during the quarter ended January 31, 2013 and the year ended October 31, 2012.

The fair value of the compound embedded derivative is significantly influenced by the Company’s trading market price, the price volatility in trading and the interest components of the Monte Carlo Simulation technique.

NOTE 7. STOCKHOLDERS’ EQUITY

Series A Preferred Stock

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 into 100 shares of the Parent Company’s common stock (the “Conversion Rate”).

Liquidation

In the event of any liquidation, dissolution or winding up of the Parent Company, the assets of the Parent Company legally available for distribution by the Parent Company would be distributed with equal priority and pro rata among the holders of the Series A Preferred Stock and common stock in proportion to the number of shares of common stock held by them, with the shares of Series A Preferred Stock being treated for this purpose as if they had been converted to shares of common stock at the then applicable Conversion Rate.

Voting

On any matter presented to the stockholders of the Parent Company for their action or consideration at any meeting of stockholders of the Parent Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series A Preferred Stock would be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Parent Company’s Certificate of Incorporation, holders of Series A Preferred Stock vote together with the holders of common stock as a single class.

NOTE 8. PROVISION FOR CORPORATE INCOME TAXES

The Company provides for income taxes by the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. This also requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company has approximately $2,600,000 in gross deferred tax assets at January 31, 2013, resulting from net operating loss carry forwards. A valuation allowance has been recorded to fully offset these deferred tax assets because the future realization of the related income tax benefits is uncertain. Accordingly, the net provision for income taxes is zero as of January 31, 2013.

The Company had net operating losses (NOLs) as of January 31, 2013 of approximately $7,700,000 for federal tax purposes, portions of which are currently expiring each year through 2033. The Company may be able to utilize its NOLs to reduce future federal and state income tax liabilities. However, these NOLs are subject to various limitations under Internal Revenue Code (“IRC”) Section 382. IRC Section 382 limits the use of NOLs to the extent there has been an ownership change of more than 50 percentage points. In addition, the NOL carry-forwards are subject to examination by the taxing authority and could be adjusted or disallowed due to such exams. Although the Company has not undergone an IRC Section 382 analysis, it is possible that the utilization of the NOLs could be substantially limited. The Company has no tax provision for the quarterly periods ended January 31, 2013 and 2012 due to losses and full valuation allowances against net deferred tax assets.

As of October 31 2012, the difference between the tax provision at the statutory federal income tax rate and the tax provision attributable to loss before income taxes is as follows (in percentages):

Fin 48 - Accounting for Uncertain Tax Positions

The Parent Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, and local jurisdictions. The Company is no longer subject to U.S. federal income tax examination by tax authorities for the years prior to October 31, 2005. With respect to state and local jurisdictions, with limited exception, the Parent Company and or its subsidiaries are no longer subject to income tax audits prior to October 31, 2005. In the normal course of business, the Company is subject to examination by various taxing authorities. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that may result from these open tax years.

Based on management’s review of the Company’s tax position, the Parent Company and subsidiaries had no significant unrecognized corporate tax liabilities as of January 31, 2013 and 2012 payable to the Internal Revenue Service due to the net operating loss carry-forward, however, the Company had yet to file its 2005 through 2009 Federal, New Jersey nor New York Corporate Income Tax Returns.

NOTE 9. UNPAID PAYROLL TAXES

As of January 31, 2013, the Company owed the Internal Revenue Service and New York State payroll related taxes in the amounts of $135,875 and $30,084, respectively, plus applicable interest and penalties. The total amount due to both taxing authorities including penalties and interest was $165,959 as of January 31, 2013, and $165,959 as of October 31, 2012, subject to further penalties and interest plus accruals on unpaid wages.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Rent

As of January 31, 2013, the Parent Company maintains its office in New York, New York.  There is a month-to-month office lease. The rent is approximately $1,050 per month for our current office location.  For the three month periods ended January 31, 2013 and 2012, rent expense was $3,150 and $5,300, respectively, and is included within general and administrative expenses on the consolidated statements of operations.

As of January 31, 2013 and October 31, 2012, the total amount owed to related party was $27,200 and $24,050, including $8,000 and $4,850, respectively, for accumulated rent.

IRS Tax Lien

The Internal Revenue Service has placed a federal tax lien on all of the assets of the Company.