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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 26, 2016

or

o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                to               

Commission File Number: 001-14556

INVENTURE FOODS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:  (623) 932-6200

Indicate by check whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x          No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x                No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o          No x

As of April 29, 2016, the total number of shares outstanding of the registrant’s Common Stock was 19,613,169 shares.

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INVENTURE FOODS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

Three Months Ended March 26, 2016

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

Our disclosure and analysis in this Quarterly Report on Form 10-Q, including all documents incorporated by reference, includes “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995.  From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements.  We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “believe,” “expect,” “intend,” “estimate,” “project,” “may,” “should,” “will,” “likely,” “will likely result,” “will continue,” “future,” “plan,” “target,” “forecast,” “goal,” “observe,” “seek,” “strategy” and other words and terms of similar meaning.  The forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events and financial performance.

Forward-looking statements are neither historical facts nor assurances of future performance.  Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to certain risks and uncertainties, including, without limitation, general economic conditions, increases in the cost or availability of ingredients, packaging, energy and employees, price competition and industry consolidation, ability to execute strategic initiatives, product recalls or safety concerns, disruptions of supply chain or information technology systems, customer acceptance of new products and changes in consumer preferences, food industry and regulatory factors, interest rate risks, dependence upon major customers, dependence upon existing and future license agreements, the possibility that we will need additional financing due to future operating losses or in order to implement the Company’s business strategy, acquisition and divestiture-related risks, volatility of the market price of the Company’s common stock, par value $0.01 per share (“Common Stock”), and those other risks and uncertainties discussed herein, that could cause actual results to differ materially from historical results or those anticipated.  In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Quarterly Report on Form 10-Q will in fact transpire or prove to be accurate.  Readers are cautioned to consider the specific risk factors described herein and in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 and any subsequent Form 10-Q, and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof.

The Company undertakes no obligation to update or publicly revise any forward-looking statement whether as a result of new information, future developments or otherwise.  All subsequent written or oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph.  You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q and Form 8-K reports and our other filings with the Securities and Exchange Commission (the “SEC”).  Also note that we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.  We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995.  You should understand it is not possible to predict or identify all such factors.

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PART I — FINANCIAL INFORMATION

Item 1.                   Financial Statements.

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)

(unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited).

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share data)

(unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited).

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited).

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited).

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.             Organization and Summary of Significant Accounting Policies

Inventure Foods, Inc., a Delaware corporation (referred to herein as the “Company,” “Inventure Foods,” “we,” “our” or “us”), is a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands with more than $282 million in annual net revenues for fiscal 2015.

We specialize in two primary product categories: healthy/natural food products and  indulgent specialty snack products.  We sell our products nationally through a number of channels including: grocery stores, natural food stores, mass merchandisers, drug and convenience stores, club stores, value, vending, food service and international.  Our goal is to have a diversified portfolio of brands, products, customers and distribution channels.

In our healthy/natural food category, products include Rader Farms® frozen berries, Boulder Canyon® brand kettle cooked potato chips, Willamette Valley Fruit CompanyTM brand frozen berries, Fresh FrozenTM brand frozen vegetables, Jamba® branded blend-and-serve smoothie kits under license from Jamba Juice Company (“Jamba Juice”), Seattle’s Best Coffee® Frozen Coffee Blends branded blend-and-serve frozen coffee beverage under license from Seattle’s Best Coffee, LLC, Sin In A TinTM  chocolate pate and other frozen desserts and private label frozen fruit and healthy/natural snacks.

In our indulgent specialty snack food category, products include T.G.I. Friday’s® brand snacks under license from T.G.I. Friday’s Inc. (“T.G.I. Friday’s”), Nathan’s Famous® brand snack products under license from Nathan’s Famous Corporation, Vidalia® brand snack products under license from Vidalia Brands, Inc., Poore Brothers® kettle cooked potato chips, Bob’s Texas Style® kettle cooked chips, and Tato Skins® brand potato snacks.  We also manufacture private label snacks for certain grocery retail chains and co-pack products for other snack and cereal manufacturers.

We operate in two segments: frozen products and snack products. The frozen products segment includes frozen fruits, vegetables, beverages and desserts for sale primarily to groceries, club stores and mass merchandisers. All products sold under our frozen products segment are considered part of the healthy/natural food category. The snack products segment includes potato chips, kettle chips, potato crisps, potato skins, pellet snacks, sheeted dough products, popcorn and extruded products for sale primarily to snack food distributors and retailers. The products sold under our snack products segment includes products considered part of the indulgent specialty snack food category, as well as products considered part of the healthy/natural food category.

We operate manufacturing facilities in eight locations.  Our frozen berry products are processed in our Lynden, Washington, Salem, Oregon and Jefferson, Georgia facilities.  Our frozen berry business grows, processes and markets premium berry blends, raspberries, blueberries and rhubarb and purchases blackberries, cherries, cranberries, strawberries and other fruits from a select network of fruit growers for resale.  The fruit is processed, frozen and packaged for sale and distribution to wholesale customers.  Our frozen vegetable products are processed in our Jefferson, Georgia, Thomasville, Georgia and Salem, Oregon facilities.  Our frozen beverage products are packaged at our Lynden, Washington and Jefferson, Georgia facilities.  We also use third-party processors for certain frozen products and package certain frozen fruits and vegetables for other manufacturers.  The products of our frozen desserts business are produced in Pensacola, Florida and Salem, Oregon.  Our snack products are manufactured at our Phoenix, Arizona and Bluffton, Indiana plants, as well as select third-party plants for certain products.

On April 23, 2015, we announced a voluntary product recall of certain varieties of the Company’s Fresh FrozenTM line of frozen vegetables, as well as select varieties of our Jamba® “At Home” line of smoothie kits because our Jefferson, Georgia facility tested positive for Listeria monocytogenes.  For discussion of this product recall, refer to “Note 2 - Product Recall.”

Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year.  Accordingly, the first quarter of fiscal 2016 commenced December 27, 2015 and ended March 26, 2016.

Basis of Presentation

The condensed consolidated financial statements for the quarter ended March 26, 2016 are unaudited and include the accounts of Inventure Foods and all of our wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. The condensed consolidated financial statements, including the December 26, 2015 consolidated balance sheet data which was derived from audited financial statements, have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the condensed consolidated

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

financial statements include all adjustments, consisting only of normal recurring adjustments, necessary in order to make the condensed consolidated financial statements not misleading. A description of our accounting policies and other financial information is included in the audited financial statements filed with our Annual Report on Form 10-K for the fiscal year ended December 26, 2015. The results of operations for the quarter ended March 26, 2016 are not necessarily indicative of the results expected for the full year. Changes to the classification of certain prior year amounts on the cash flow statement were made to reflect current year classification between deferred income taxes and change in other assets and liabilities.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.  We classify our investments based upon an established fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).  The three levels of the fair value hierarchy are described as follows:

Level 1      Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities,

Level 2      Quoted prices in markets that are not considered to be active or financial instruments without quoted market prices, but for which all significant inputs are observable, either directly or indirectly,

Level 3      Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

At March 26, 2016 and December 26, 2015, the carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximate fair values since they are short term in nature.  The carrying value of the long-term debt approximates fair value based on the borrowing rates currently available to us for long-term borrowings with similar terms.  The following table summarizes the valuation of our assets and liabilities measured at fair value on a recurring basis (in thousands) at the respective dates set forth below:

Considerable judgment is required in interpreting market data to develop the estimate of fair value of our assets and liabilities.  Accordingly, the estimate may not be indicative of the amounts that we could realize in a current market exchange.  The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.

The Company’s non-qualified deferred compensation plan assets consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets.

The fair value measurement of the earn-out contingent consideration obligation relates to the acquisitions of Sin In A Tin in September 2014 and Willamette Valley Fruit Company in May 2013, and is included in accrued liabilities and other long-term liabilities in the consolidated balance sheets.  The fair value measurement is based upon significant inputs not observable in the market.  Changes in the value of the obligation are recorded as income or expense in our consolidated

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

statements of operations.  To determine the fair value, we valued the contingent consideration liability based on the expected probability weighted earn-out payments corresponding to the performance thresholds agreed to under the applicable purchase agreements.  The expected earn-out payments were then present valued by applying a discount rate that captures a market participants view of the risk associated with the expected earn-out payments.

A summary of the activity of the fair value of the measurements using unobservable inputs (Level 3 Liabilities) for the quarter ended March 26, 2016, is as follows (in thousands):

Income Taxes

Income tax benefit was $0.6 million for the quarter ended March 26, 2016, compared to $8.2 million for the quarter ended March 28, 2015.  Our effective tax rate was 38.2% and 36.0% for the quarters ended March 26, 2016 and March 28, 2015, respectively.

Loss Per Common Share

Basic loss per common share is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period.  Diluted loss per share is calculated by including all dilutive common shares such as stock options and restricted stock.  Unvested restricted stock grants that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, requires loss per share to be presented pursuant to the two-class method.  However, the application of this method would have no effect on basic and diluted loss per common share and is therefore not presented.

For the quarters ended March 26, 2016 and March 28, 2015, diluted loss per share is the same as basic loss per share as the inclusion of potentially issuable Common Stock would be antidilutive.  Exercises of outstanding stock options are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be anti-dilutive.

Loss per common share was computed as follows for the quarters ended March 26, 2016 and March 28, 2015 (in thousands, except per share data):

Stock-Based Compensation

Compensation expense for restricted stock and stock option awards is adjusted for estimated attainment thresholds and forfeitures and is recognized on a straight-line basis over the requisite period of the award, which is currently one to five

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

years for restricted stock and one to five years for stock options.  We estimate future forfeiture rates based on our historical experience.

Compensation costs related to all stock-based payment arrangements, including employee stock options, are recognized in the financial statements based on the fair value method of accounting.  Excess tax benefits related to stock-based payment arrangements are classified as cash inflows from financing activities and cash outflows from operating activities.  See “Note 9 - Stockholders’ Equity” for additional information.

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASU”) to the FASB’s Accounting Standards Codification.

We consider the applicability and impact of all ASUs.  ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued new accounting guidance related to revenue recognition.  This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance.  The new revenue recognition standard provides a unified model to determine when and how revenue is recognized.  The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services.  This guidance will be effective at the beginning of our 2018 fiscal year and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  We are evaluating the impact, if any, of adopting this new accounting standard on our financial statements.

In June 2014, the FASB issued new guidance related to stock compensation.  This new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition.  As such, the performance target should not be reflected in estimating the grant date fair value of the award.  This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered.  The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings.  Early adoption is permitted.  The adoption of the standard at the beginning of fiscal 2016 did not have an impact on our financial statements.

In April 2015, the FASB issued an ASU to simplify the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015.  Entities should apply the new guidance on a retrospective basis. We adopted the updated standard in the first quarter of fiscal 2016.  The adoption of this guidance reduced other assets and long-term debt, less current portion by $6.1 million and $5.4 million as of March 26, 2016 and December 26, 2015, respectively.

In July 2015, the FASB issued an ASU to simplify the measurement of inventory.  The ASU requires inventory to be subsequently measured using the lower of cost and net realizable value, thereby eliminating the market value approach. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.”  The ASU is effective for reporting periods beginning after December 15, 2016 and is applied prospectively. Early adoption is permitted. We are currently evaluating the impact that this guidance will have on our financial statements and disclosure.

In September 2015, the FASB issued an ASU simplifying the accounting for measurement-period adjustments for business combinations.  The ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are identified, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date.  The ASU is effective for reporting periods beginning after December 15, 2015 and is applied prospectively.  The adoption of this ASU had no impact on our financial statements.

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

In November 2015, the FASB issued an ASU that simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities to be offset and presented as a single noncurrent amount on the balance sheet. The ASU is effective for reporting periods beginning after December 15, 2016 and is applied retrospectively. We do not expect this guidance to have a material impact on our financial statements.

In February 2016, the FASB issued new guidance related to accounting for leases. The new standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are currently evaluating the impact that this guidance will have on our financial statements and disclosure.

In March 2016, the FASB issued an ASU intended to simplify various aspects of the accounting for share-based payments. Excess tax benefits for share-based payments will be recorded as a reduction of income taxes and reflected in operating cash flows upon the adoption of this ASU. Excess tax benefits are currently recorded in equity and as financing activity under the current rules. This guidance is effective for reporting periods beginning after December 15, 2016. We are currently evaluating the impact that this guidance will have on our financial statements and disclosure.

2.             Product Recall

On April 23, 2015, we announced a voluntary product recall of certain varieties of the Company’s Fresh FrozenTM line of frozen vegetables, as well as select varieties of our Jamba® “At Home” line of smoothie kits because our Jefferson, Georgia facility tested positive for Listeria monocytogenes.  The impacts recorded in our consolidated statement of operations attributable to the recall for the quarter ended March 28, 2015 are summarized as follows (in thousands):

(1)   Additional cost of revenues primarily reflects the write-down of approximately $4.9 million of inventory on hand and a provision of approximately $10.4 million for additional costs estimated to be incurred related to the recall, including product expected to be returned from customers and consumers.

(2)   Additional selling, general & administrative costs consists of approximately $0.2 million to record additional accounts receivable reserves.

(3)   Amount reflects a $9.3 million impairment charge recorded to write-off the carrying value of the Fresh Frozen customer relationships intangible asset.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

3.             Inventories

Inventories consisted of the following as of March 26, 2016 and December 26, 2015 (in thousands):

4.             Goodwill, Trademarks and Other Intangibles

Goodwill, trademarks and other intangibles, net, consisted of the following as of March 26, 2016 and December 26, 2015 (in thousands):

Our amortization expense related to these intangibles was $82,000 and $0.3 million for the quarters ended March 26, 2016 and March 28, 2015, respectively.  The trademarks are deemed to have an indefinite useful life because they are expected to generate cash flows indefinitely.

Goodwill and trademarks are reviewed for impairment annually in the fourth fiscal quarter, or more frequently if impairment indicators arise.   As a result of the product recall (See “Note 2 - Product Recall”), the Company reviewed the Fresh Frozen Foods goodwill and intangible assets for impairment as of March 28, 2015.  Our analysis included a review of the forecasted future cash flows of the Fresh Frozen business, including the estimated cash outflows directly related to the product recall.  Based on our review, we concluded that the intangible asset related to the acquired customer relationships of Fresh Frozen Foods was fully impaired.  Accordingly, the Company recorded an intangible asset impairment charge of $9.3 million, which represents the unamortized balance as of March 28, 2015.  We believe the carrying values of our remaining goodwill and intangible assets are appropriate as of March 26, 2016.

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

5.             Accrued Liabilities

Accrued liabilities consisted of the following as of March 26, 2016 and December 26, 2015 (in thousands):

6.             Term Debt and Line of Credit

ABL Credit Facility

On November 18, 2015, the Company entered into a new five-year revolving credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the other lenders party thereto (with all related loan documents, and as amended from time to time, the “ABL Credit Facility”). The ABL Credit Facility provides for a five-year, $50.0 million senior secured revolving credit facility.  The ABL Credit Facility also provides that, under certain conditions, we may increase the aggregate principal amount of loans outstanding thereunder by up to $10.0 million.  Borrowings under the ABL Credit Facility bear interest, at the Company’s option, at a base rate or the London interbank offered rate (“LIBOR”) plus, in each case, an applicable margin.  The ABL Credit Facility will mature, and the commitments thereunder will terminate, on November 17, 2020.

Events of default under the ABL Credit Facility include customary events such as a cross-default provision with respect to other material debt. As of March 26, 2016, the Company is in compliance with all covenants of the ABL Credit Facility.

As of March 26, 2016, there was $26.8 million outstanding under the ABL Credit Facility and the net availability thereunder was $23.2 million.

Term debt consisted of the following as of March 26, 2016 and December 26, 2015 (in thousands):

Term Loan Credit Facility

Also on November 18, 2015 and concurrent with the execution of the ABL Credit Facility, Inventure Foods and certain of its subsidiaries entered into a new five-year term loan credit agreement  with BSP Agency, LLC, a Delaware limited liability company (“BSP”), as administrative agent, and the other lenders party thereto (with all related loan documents, and as amended from time to time, the “Term Loan Credit Facility”).  The Term Loan Credit Facility provides for a $85.0 million senior secured term loan that matures on November 17, 2020.  The Term Loan Credit Facility also provides that, under certain conditions, we may increase the aggregate principal amount of term loans outstanding thereunder by up to $25.0 million.  Borrowings under the Term Loan Credit Facility bear interest, at the Company’s option, at a base rate or LIBOR plus, in each case, an applicable margin.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The Term Loan Credit Facility contains customary negative covenants and also requires the Company, together with its subsidiaries, to comply with a Fixed Charge Coverage Ratio (as defined in the Term Loan Credit Facility) and a Total Leverage Ratio (as defined in the Term Loan Credit Facility). The first Fixed Charge Coverage Ratio and Total Leverage Ratio measurement period was the end of the first quarter of fiscal 2016.  On March 9, 2016, the Company entered into that certain First Amendment to Credit Agreement, dated March 9, 2016, with BSP, as administrative agent, and the other lenders party thereto (the “Amendment”).  The Amendment amends the Term Loan Credit Facility to defer the Company’s obligation to comply with the Total Leverage Ratio until the end of the third quarter of fiscal 2016.

Events of default under the Term Loan Credit Agreement include customary events such as a cross-default provision with respect to other material debt.  As of March 26, 2016 the Company is in compliance with all covenants of the Term Loan Credit Agreement.

Equipment Loans

In August 2015, we entered into an equipment term loan with Banc of America Leasing & Capital LLC.  The loan will finance up to $4.0 million of new kettles and related equipment for our Goodyear, Arizona facility.  The equipment term loan accrues interest at a rate of 3.07% and is expected to be repaid over 60 recurring monthly payments commencing May 2016.

In August 2014, we entered into two separate equipment term loans with Banc of America Leasing & Capital LLC; one for $2.6 million to finance equipment to be used at the Company’s Rader Farms facility, and the other for $1.9 million to finance equipment to be used at Willamette Valley Fruit Company.  Both of these equipment term loans accrue interest at a rate of 2.35% and will be repaid over 60 recurring monthly payments commencing September 15, 2014.

7.             Commitments and Contingencies

Contractual

Our future contractual obligations consist principally of long-term debt, operating leases, minimum commitments regarding third-party warehouse operations services, forward purchase agreements and remaining minimum royalty payments due licensors pursuant to brand licensing agreements.

In order to mitigate the risks of volatility in commodity markets to which we are exposed, we have entered into forward purchase agreements with certain suppliers based on market prices, forward price projections and expected usage levels.  Our purchase commitments for certain ingredients, packaging materials and energy are generally less than 12 months.

Legal Proceedings

We are periodically a party to various lawsuits arising in the ordinary course of business.  Management believes, based on discussions with legal counsel, that the resolution of any such lawsuits, individually and in the aggregate, will not have a material adverse effect on our financial position or results of operations.

On or about February 17, 2016, the Company received a letter from one of its commercial customers requesting indemnity with respect to a lawsuit threatened against the customer in Florida alleging that certain kettle chip products sold by the customer and manufactured by the Company were improperly labeled as “natural.”  The Company is currently investigating the indemnity claim and the allegations made in connection with the threatened lawsuit.

On April 4, 2016, a complaint captioned Westmoreland County Employee Retirement Fund v. Inventure Foods Inc. et al., Case No. CV2016-002718, was filed in the Superior Court in Maricopa County, Arizona against us, our Chief

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Executive Officer and Chief Financial Officer, Capital Foods, LLC, and the underwriters of our secondary securities offering that closed September 14, 2014 (the “September 2014 Offering”).  The complaint, brought as a purported class action on behalf of purchasers of our Common Stock in the September 2014 Offering, alleges violations of the Securities Act and focuses in particular on our facility in Jefferson, Georgia.  The plaintiff seeks certification as a class action, unspecified compensatory damages, rescission or a rescissory measure of damages, attorneys’ fees and costs, and other relief deemed appropriate by the court.  We believe the claims asserted in the complaint are without merit, and we intend to vigorously defend against them.

8.             Business Segments

Our operations consist of two reportable segments: frozen products and  snack products.  The frozen products segment produces frozen fruits, vegetables, beverages and desserts for sale primarily to groceries, club stores and mass merchandisers.  The snack products segment produces potato chips, kettle chips, potato crisps, potato skins, pellet snacks, sheeted dough products, popcorn and extruded products for sale primarily to snack food distributors and retailers.  Our reportable segments offer different products and services.  The majority of our revenues are attributable to external customers in the United States.  We also sell to external customers internationally; however, the revenues attributable to such customers are immaterial.  All of our assets are located in the United States.

All products sold under our frozen products segment are considered part of the healthy/natural food category.  The products sold under our snack products segment include products considered part of the indulgent specialty snack food category, as well as products considered part of the healthy/natural food category.  For the quarters ended March 26, 2016 and March 28, 2015, net revenues of our healthy/natural food category totaled $60.0 million and $66.1 million, respectively.  For the quarters ended March 26, 2016 and March 28, 2015, net revenues of our indulgent specialty snack food category totaled $9.9 million and $11.5 million, respectively.

We do not allocate assets, selling, general and administrative expenses, income taxes or other income and expense to our reportable segments.  The following table present information about our reportable segments for the quarters ended March 26, 2016 and March 28, 2015 (in thousands):

The following table reconciles reportable segment gross profit to our consolidated income (loss) before income taxes for the quarters ended March 26, 2016 and March 28, 2015 (in thousands):

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The table below presents information about revenues for each group of similar products within our reportable segments for the quarter ended March 26, 2016 and March 28, 2015 (in thousands):

(1) Indulgent Specialty Snacks includes T.G.I. Friday’s® brand snacks under license from T.G.I. Friday’s, Nathan’s Famous® brand snack products under license from Nathan’s Famous Corporation, Vidalia® brand snack products under license from Vidalia Brands, Inc., Poore Brothers® kettle cooked potato chips, Bob’s Texas Style® kettle cooked chips, and Tato Skins® brand potato snacks.

(2) Healthy/Natural Snacks includes Boulder Canyon® Authentic Foods brand kettle cooked potato chips and private label healthy/natural snacks.

9.             Stockholders’ Equity

Our 2015 Equity Incentive Plan (the “2015 Plan”) was approved at our 2015 annual meeting of stockholders. Under the 2015 Plan, we are authorized to issue up to 1,400,560 shares of our Common Stock, which number may be increased by up to 250,000 shares subject to any option or award outstanding under the 2005 Equity Incentive Plan that are canceled or forfeited for any reason.  If any shares of our Common Stock subject to awards granted under the 2015 Plan are canceled, those shares will be available for future awards under such plan.  The 2015 Plan expires in May 2025.  Awards granted under the 2015 Plan may include: nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance shares, performance units, and other stock-based awards and cash-based awards.  The 2015 Plan has a term of ten years.  As of March 26, 2016, there were 1,267,385 shares of Common Stock available for awards under the 2015 Plan.

Restricted Common Stock

We have issued shares of restricted Common Stock in the form of restricted stock awards and restricted stock units as incentives to certain employees, officers and members of our board of directors (the “Board”).  Restricted stock awards and restricted stock units granted to members of the Board are granted with a one-year service period.  Restricted stock awards and restricted stock units granted to the Company’s officers vest over three years and typically contain performance restrictions that are required to be achieved over a three-year measurement period in order for the shares to be released.  The number of performance-based restricted stock ultimately released varies based on whether we achieve certain financial results.  Restricted stock units granted to non-officer employees generally vest over three or five years.  We record compensation expense each period based on the market price of our Common Stock at the time of grant and, for performance-based restricted stock awards and units, our estimate of the most probable number of shares that will ultimately be released.  The related stock-based compensation expense is included in selling, general and administrative expenses. 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Additionally, the compensation expense is adjusted for our estimate of forfeitures.  Recipients of restricted Common Stock are entitled to receive any dividends declared on our Common Stock and have voting rights, regardless of whether such shares have vested.

During the three months ended March 26, 2016 and March 28, 2015, the total stock-based compensation expense from restricted Common Stock recognized in the financial statements was $0.3 million and $0.2 million, respectively.  There were no stock-based compensation costs capitalized.

The following table summarizes activities related to restricted stock awards for the three months ended March 26, 2016:

As of March 26, 2016, the total unrecognized costs related to non-vested restricted stock awards was $0.1 million, which is expected to be recognized over a weighted average period of 1.2 years.  This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future.

The following table summarizes activities related to restricted stock units for the three months ended March 26, 2016:

As of March 26, 2016, the total unrecognized costs related to non-vested restricted stock units was $1.6 million, which is expected to be recognized over a weighted average period of 1.8 years.  This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future.

Stock Options

Stock-based compensation expense from stock options recognized in the financial statements totaled less than $0.1 and $0.1 million for the three months ended March 26, 2016 and March 28, 2015, respectively.  There were no stock-based compensation costs capitalized.

The following table summarizes stock option activity during the three months ended March 26, 2016:

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

As of March 26, 2016, the total unrecognized costs related to non-vested stock options granted were $0.3 million.  We expect to recognize such costs in the financial statements over a weighted average period of 1.8 years.  This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future.

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $5.67 as of March 26, 2016, which would have been received by the option holders had all option holders exercised options and sold the underlying shares on that date.  The intrinsic value related to vested stock options outstanding was $0.9 million as of March 26, 2016 based on the exercise price and our closing stock price of $5.67 as of March 26, 2016.

The following table summarizes information about stock options outstanding and exercisable at March 26, 2016:

Prior to May 2008, all stock option grants had a five-year term.  The fair value of these stock option grants is amortized to expense over the service period, generally five years for employees and one year for members of the Board.  In May 2008, our Board approved a 10-year term for all future stock option grants, with service periods of five years for employees and one year for members of the Board.  We issue new shares upon the exercise of stock options, as opposed to reissuing treasury shares.

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INVENTURE FOODS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the other sections of this Quarterly Report on Form 10-Q, and our December 26, 2015 consolidated financial statements and the accompanying notes thereto which are included in our Annual Report on Form 10-K filed with the SEC on March 10, 2016.  The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.  Accordingly, the Company’s actual future results may differ materially from historical results or those currently anticipated.

Quarterly Overview

We are a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands.  Our products are marketed under a strong portfolio of brands, including Rader Farms®, Boulder Canyon®, Fresh FrozenTM , Willamette Valley Fruit CompanyTM, T.G.I. Friday’s®, Jamba®, Vidalia®, Poore Brothers®, Nathan’s Famous ®, Bob’s Texas Style®, Tato Skins®, Seattle’s Best Coffee® and Sin In A TinTM.  T.G.I. Friday’s®, Jamba®, Nathan’s Famous® and Vidalia® are licensed brand names.  We complement our branded product retail sales with private label retail sales and co-packing arrangements.

Our operations consist of two reportable segments: frozen products and  snack products. The frozen products segment includes frozen fruits, vegetables, beverages and desserts for sale primarily to groceries, club stores and mass merchandisers. The snack products segment includes potato chips, kettle chips, potato crisps, potato skins, pellet snacks, sheeted dough products, popcorn and extruded products for sale primarily to snack food distributors and retailers.

For the quarters ended March 26, 2016 and March 28, 2015, net revenues of our healthy/natural food category totaled $60.0 million and $66.1 million, respectively.  For the quarters ended March 26, 2016 and March 28, 2015, net revenues of our indulgent specialty snack food category totaled $9.9 million and $11.5 million, respectively.

This MD&A is intended to assist in the understanding of our condensed consolidated financial statements, the changes in certain key items in those condensed consolidated financial statements from period to period and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our condensed consolidated financial statements.

Results of Operations

The following table sets forth for the periods presented certain financial data as a percentage of net sales for the three months ended March 26, 2016 and March 28, 2015:

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Net Revenues.  Consolidated net revenues were $69.9 million in the quarter ended March 26, 2016, a decrease of $7.8 million, or 10.0%, compared to $77.6 million during the quarter ended March 28, 2015.  Our net revenues by operating segment were as follows (in thousands):

Our frozen products segment net revenues were $45.0 million during the quarter ended March 26, 2016, a decrease of $6.4 million, or 12.4%, compared to $51.3 million during the quarter ended March 28, 2015.  This decrease was primarily attributable to a 20.8% decrease in net revenue from frozen vegetables to $12.7 million in the first quarter of fiscal 2016, compared to $16.0 million in the first quarter of fiscal 2015 as sales continue to lag behind the prior year period as a result of our 2015 voluntary product recall. In addition, net revenues from frozen berries decreased 9.2% in the first quarter of fiscal 2016, compared to the first quarter of fiscal 2015, primarily due to reduced distribution and a price decrease of our most significant frozen berry product.

Our snack products segment net revenues were $24.9 million for the quarter ended March 26, 2016, an decrease of $1.4 million, or 5.2 %, compared to $26.3 million for the quarter ended March 28, 2015.  This decrease was primarily attributable to decreased sales of licensed indulgent products, which decrease was partially offset by increased net revenues of Boulder Canyon products.

Gross Profit.  Gross profit was $8.8 million for the quarter ended March 26, 2016, compared to $(3.7) million for the quarter ended March 28, 2015.  Excluding the $15.3 million of product recall expenses recorded in cost of revenues in the first quarter of fiscal 2015, gross profit* decreased $2.7 million for the quarter ended March 26, 2016 compared to the prior year period and as a percentage of net revenues decreased 230 basis points to 12.6% compared to 14.9% for the prior year period*.

Our gross profit and gross profit as a percentage of net sales by operating segment were as follows (in thousands):