Founders’ past mars future for Fresh Healthy Vending
A California-based franchise wanting to put healthier food in high-end vending machines has a troubled past, uncertain finances and a handful of unhappy former franchisees that are clouding the company’s efforts to grow.
Nicholas Yates and Mark Trotter founded Fresh Healthy Vending in 2010, which immediately gained notice for offering an alternative to junk-food-filled machines so spurned by today’s consumers. By 2012 and 2013, however, they were cited by Washington state and California for failing to disclose their involvement in the company and their history.
That history includes censures for fraud and deceptive practices, which led to two multi-million-dollar judgments levied against them in Australia and Texas, respectively, and then two bankruptcy filings that followed.
At least five former franchisees, meanwhile, say they’ve lost much of the money they put into the brand, as much as $275,000 in one case, and some have resorted to litigation.
“I’m heartbroken every day,” said one former franchisee based in Kentucky, who asked to remain anonymous, adding he was speaking from the parking lot of his second job. He lost $60,000 of his $80,000 investment, he said. “That was all my retirement money and I feel like I was sold a bill of goods.”
Yates, who is chairman, said Fresh Healthy Vending just came off its most successful quarter, including securing a record 135 new locations in August. There are about 5,500 machines sold now. He acknowledged difficulties during the company’s five-year existence, but maintained the company’s finances are improving. He stood behind his company’s relations with franchisees and said all franchisees in the Fresh Healthy Vending system know about his and Trotter’s previous legal judgments.
“You learn after a while that you can’t defend yourself every day from something that you did when you’re 24—I’m 39 years of age now, it was 15 years ago, and that’s the nature of the beast,” he said. “Should I hide under my desk or continue on my quest to redeem myself? The answer is the latter.”
$10.5 million in judgments
Yates is a native Australian whose previous company, phone card vendor Global Prepaid Communication, was cited by the Federal Court of Australia for engaging in “misleading and deceptive conduct” in selling pre-paid telephone cards.
This information first appeared in Fresh Healthy Vending’s 2014 franchise disclosure documents, but was notably absent from its previous disclosures.
The 2006 Australian judgment ordered a range of injunctions to prevent Yates and others from engaging in unlawful conduct in the future, and required that 23 small businesses receive compensation of more than $3.5 million.
In its finding, the Australian Competition & Consumer Commission said card and machine purchasers contacted the commission after investing between $15,400 and $260,000 and “finding that they could make little or no money from the businesses; that the vending machines and phone cards were faulty; and that the franchisor did not provide suitable locations for the machines.”
Mark Trotter, who is co-founder and former shareholder of Fresh Healthy Vending Holdings, lost a case against the state of Texas, for sending unsolicited spam messages “containing false, misleading or deceptive information.” The state cited violations of its Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, the Texas Electronic Mail Solicitation Act and the Deceptive Trade Practices-Consumer Protection Act.
As a result, Trotter and other defendants were fined $7.5 million, not including $1 million in civil penalties.
Both men filed for bankruptcy protection, Trotter in U.S. District Court of the Southern District of California in 2006. Yates filed a debtor’s petition with the Insolvency and Trustee Service Australia to declare himself bankrupt in 2007.
A long-time family friend, Yates defended his associate’s business practices and said what Trotter did was “borderline genius.” Yates attributed Trotter’s problems to the government making an example of him in the early days of email-based marketing.
“Did he do anything wrong?” Yates asked. “You can form your own opinion. I formed my own opinion: I don’t think he did do anything wrong.”
Without admitting or denying California’s allegations that Fresh Healthy Vending failed to include all relevant information in its FDD, the company retroactively agreed to revoke its California franchise registrations for 2010 and 2011, which required offering rescission to 13 of its California franchisees. Four accepted rescission and two filed lawsuits against the company, which were later settled.
Washington took similar action against Fresh Healthy Vending, stating the company “willfully omitted material facts required to be stated in an application, notice or report filed with the Securities Division.”
Yates said he and Trotter weren’t formally working for the company at the time of its founding, which Yates added was intentional given their litigation histories. “We structured the earn-outs” that Fresh Healthy Vending “was supposed to pay us, so we didn’t have to take management roles and be involved,” Yates said. “Mark Trotter had previous litigation regarding his email marketing company and I had some previous litigation regarding a pre-paid phone card machine business that I owned in Australia as well, so that’s why we set up the structure.”
He added the company paid its fine, amended its disclosures and was only required to temporarily stop selling franchises in California after being forced to give its in-state franchisees the opportunity to leave the system.
Fresh Healthy Vending’s finances have also come into focus, with the company’s auditors issuing a “going concern” disclosure at the end of 2013 on the heels of a net loss of $745,867 over a six-month period.
An accounting term, “going concern” refers to a company’s ability to continue operating without the threat of liquidation. Fresh Healthy Vending’s statement suggested that, as of December 2013, its financial future was in serious question.
Yates said the company’s finances have improved slightly in the last two years. In its Form 10-Q, filed with the Securities and Exchange Commission in March 2015, Fresh Healthy Vending reported a net loss of $1.3 million over the nine months ending March 31 of this year. Revenue in the period was $4.9 million. As of March 31, the company had $178,760 in cash on hand, total assets of $3.9 million and liabilities of $8.7 million.
The company delayed its most recent 10-K report, although Yates stressed the company’s finances are improving and said the filing was only late due to an in-house delay.
Franchise Times spoke with two current franchisees, Todd Weishaus of Michigan and Craig Walters of Pennsylvania, who said they were happy with the company’s relations with its franchisees, as well as its potential to upend the unhealthy vending machine status quo across the country.
Weishaus, who owns 62 machines, characterized his interest in Fresh Healthy Vending as a passion made personal by a son with eating restrictions that are often difficult to meet. “As an adult you can make your own choices, but we’re fortunate as adults to still make some choices for our children and by giving them a healthier option,” he said.
Walters, who owns 40 Fresh Healthy Vending machines and one of its micro markets, sees the company as “Whole Foods brought to you,” and the future of vending with wellness becoming increasingly important. Walters said Yates “has supported in every way all aspects of my business development activities.”
Some former franchisees tell a different story, with claimed individual losses ranging from $60,000 to $275,000.
Sandy Anthony, an ex-franchisee from Pinellas Park, Florida, said she invested $120,000 in the brand and lost approximately $70,000. She alleged the company took “at least four or five months” to secure locations on her behalf, and she ultimately pulled several machines out and sold some to a private vendor and others back to Fresh Healthy Vending “for a ridiculously low price.”
“Rather than offering me the support they had promised on the front end, basically they said they did what they promised, they put them in locations and if it didn’t work out, their hands were tied,” Anthony said. “I felt like their follow-through as far as supporting the franchisees was not what you paid for in the upfront costs.” She said the franchisor offered her only $2,000 for the machines she sold back, which she purchased from Fresh Healthy Vending for $10,000 apiece.
Other former franchisees echoed those complaints, saying the franchisor placed machines in “absolutely terrible locations,” among other things.
Theo Arnold, an attorney at Singler PLC, said his client, like others, was sold a franchise “that did not live up to what it was” said to be. “They misrepresented themselves,” he said. “That includes that Fresh Healthy Vending had principals, owners and managers that omitted material disclosures about who they were and their past histories.”
Trying to improve
Asked about the experiences of former franchisees, Yates acknowledged timely securing of locations has been a problem in the company’s past, particularly after he left the company for a year in 2012. “I have admitted that it was a problem for us getting the qualified locations we needed in a timely manner, not for all franchisees, but for some of them, and we have absolutely turned the corner,” he said.
Yates is confident he can overcome the company’s problems, and is even looking to diversify. It is at the end of due diligence with two home-based service providers that will take Fresh Healthy Vending in a new direction, and likely necessitate changes to its corporate structure.
“You’ll see us introduce two new concepts to our umbrella as a public company and with those concepts will come the CEOs of those business that are already in place,” he said. “A couple of additions to our board of directors will allow us the credibility that we need to grow.”
Asked what he’s learned during his five tumultuous years in franchising, Yates said, like many franchise organizations, he’s focused on attracting fewer, more sophisticated franchisees to ease the company’s growing pains.
As for continuing questions about his past, he hopes outsiders can see “an element of redemption in all of this.”
“Putting five-and-a-half thousand health food vending machines across the country as a pioneer of the concept is not a bad thing—I definitely shouldn’t be judged on that,” he said. “This country needed it badly.”