UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 24, 2016

or

☐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 mark 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 ☒               No ☐

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 ☒               No ☐

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 Exchange Act).

Yes ☐               No ☒

As of October 31, 2016, the total number of shares outstanding of the registrant’s Common Stock was 19,671,834 shares.

INVENTURE FOODS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

INVENTURE FOODS, INC. AND SUBSIDIARIES

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including all documents incorporated by reference, contains “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, uncertainties and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from historical results or those indicated in the forward-looking statements include, among others, the following, including, without limitation, general economic conditions, increases in the cost or availability of ingredients, packaging, energy and employees, price competition and industry consolidation, our 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 our business strategy, our ability to maintain compliance in the future with the covenants contained in our existing credit facilities, acquisition and divestiture-related risks, volatility of the market price of our common stock, par value $0.01 per share (“Common Stock”), and such other factors discussed herein and in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 and any subsequent Quarterly Report on Form 10-Q.  In light of these risks, uncertainties and changes in circumstances, 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. 

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to update or publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.  All subsequent written or oral forward-looking statements attributable to us or persons acting on our 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 Quarterly Reports on Form 10-Q and Current Reports on Form 8-K 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 in the “Risk Factors” section of 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.

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).

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).

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

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

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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

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, industrial 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, other snack and food items, Willamette Valley Fruit CompanyTM brand frozen berries, Fresh FrozenTM brand frozen vegetables, fruits, biscuits and other frozen snacks, Jamba® brand blend-and-serve smoothie kits under license from Jamba Juice Company (“Jamba Juice”), Seattle’s Best Coffee® Frozen Coffee Blends brand blend-and-serve frozen coffee beverages 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® brand kettle cooked potato chips, Bob’s Texas Style® brand 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 grocery stores, 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 nine locations. Our frozen berry products are processed in our Lynden, Washington, Bellingham, Washington, Jefferson, Georgia and two Salem, Oregon 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 Bellingham, 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.  Our frozen desserts products are produced in our Pensacola, Florida and Salem, Oregon facilities.  Our snack products are manufactured at our Phoenix, Arizona and Bluffton, Indiana facilities, as well as select third-party facilities for certain products.

On April 23, 2015, we announced a voluntary product recall of certain varieties of the Company’s Fresh FrozenTM brand 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 a 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 third quarter of fiscal 2016 commenced June 26, 2016 and ended September 24, 2016.

Basis of Presentation

The condensed consolidated financial statements for the quarter ended September 24, 2016 are unaudited and include the accounts of Inventure Foods and all of its 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 Quarterly Reports on 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 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 September 24, 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 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities

Level 2Quoted 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 3Prices 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 September 24, 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  at the respective dates set forth below (in thousands):

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 TinTM 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 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 nine months ended September 24, 2016 is as follows (in thousands):

Income Taxes

Income tax benefit was $1.1 million for the quarter ended September 24, 2016, compared to $0.5 million for the quarter ended September 26, 2015.  Our effective tax rate was 29.8% and 23.6% for the quarters ended September 24, 2016 and September 26, 2015, respectively.

Income tax benefit was $2.0 million for the nine months ended September 24, 2016, compared to $9.9 million for the nine months ended September 26, 2015.  Our effective tax rate was 34.0% and 35.1% for the nine months ended September 24, 2016 and September 26, 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, require 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 and nine months ended September 24, 2016 and September 26, 2015, diluted loss per share is the same as basic loss per share, as the inclusion of potentially issuable Common Stock would be antidilutive. During the quarter and nine months ended September 24, 2016, 354,359 and 294,887 shares of Common Stock underlying stock options and restricted stock units were not included in the computation of diluted earnings (loss) per share because inclusion of such shares would be antidilutive.  For the quarter and nine months ended September 26, 2015, 341,886 and 364,143 shares of Common Stock underlying stock options and restricted stock units were not included in the computation of diluted earnings (loss) per share because inclusion of such shares 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 antidilutive. 

Loss per common share was computed as follows for the quarters and nine months ended September 24, 2016 and September 26, 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 years.  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 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 August 2014, FASB issued an ASU requiring an entity to perform a going concern assessment by evaluating its ability to meet its obligations for a look-forward period of one year from the financial statement issuance date. Disclosures are required if it is probable an entity will be unable to meet its obligations within the look-forward period. Incremental substantial doubt disclosure is required if the probability is not mitigated by management’s plans. The guidance is effective for all entities for the first annual period ending after December 15, 2016 and interim periods thereafter. Early application is permitted. We are currently evaluating the impact this guidance will have on our financial disclosures; however, as the guidance only impacts disclosure, the adoption of this guidance is not expected to have any impact on our financial condition, results of operations and cash flows.

In April 2015, the FASB issued an ASU to simplify the presentation of debt issuance costs. This 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. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and is applied retrospectively. We adopted this ASU in the first quarter of fiscal 2016.  The adoption of this ASU reduced our other assets and long-term debt, less current portion, by $5.5 million and $5.4 million as of September 24, 2016 and December 26, 2015, respectively.

In July 2015, the FASB issued an ASU to simplify the measurement of inventory.  This 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.”  This ASU is effective for reporting periods beginning after December 15, 2016 and is applied prospectively. Early adoption is permitted. We are evaluating the impact, if any, of adopting this guidance on our financial statements and disclosure.

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. This ASU is effective for reporting periods beginning after December 15, 2016 and can be applied either retrospectively or prospectively. We adopted this ASU in the third quarter of fiscal 2016 on a retrospective basis.  Therefore, our December 26, 2016 deferred tax asset of $3.8 million and deferred tax liability of $2.6 million are now presented as a single noncurrent deferred tax asset of $1.2 million.

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. Early adoption is permitted. We are evaluating the impact, if any, of adopting this guidance 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 evaluating the impact, if any, of adopting this guidance 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 brand 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 and nine months ended September 26, 2015 are summarized as follows (in thousands):

3.Inventories

Inventories consisted of the following as of September 24, 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 September 24, 2016 and December 26, 2015 (in thousands):

Our amortization expense related to these intangibles was $83,000 and $83,000 for the quarters ended September 24, 2016 and September 26, 2015, respectively. For the nine months ended September 24, 2016 and September 26, 2015, amortization expense totaled $248,000 and $466,000, 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 in 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 on March 28, 2015.  We believe the carrying values of our remaining goodwill and intangible assets are appropriate as of September 24, 2016.

5.Accrued Liabilities

Accrued liabilities consisted of the following as of September 24, 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 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 September 24, 2016, the Company is in compliance with all covenants of the ABL Credit Facility.

As of September 24, 2016, there was $31.6 million outstanding under the ABL Credit Facility and the net availability thereunder was $17.3 million.

Term debt consisted of the following as of September 24, 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 five-year term loan credit agreement with BSP Agency, LLC (“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.

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 and a Total Leverage Ratio (each 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 “First Amendment”).  The First Amendment amended 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.

On September 27, 2016, the Company entered into that certain Second Amendment to Credit Agreement with BSP, as the administrative agent, and the other lenders party thereto (the “Second Amendment”). The Second Amendment defers compliance with the Company’s Total Leverage Ratio and Fixed Charge Coverage Ratio covenants until the second

quarter of fiscal 2017, requires the Company to comply with a minimum EBITDA covenant commencing with the fiscal month ending April 30, 2017, and increases the Base Rate Margin and the Libor Rate Margin thereunder by 100 basis points.  The Second Amendment also amends the fees payable to the lenders in the event of prepayment and restricts the Company’s ability to raise Curative Equity (as defined in the Second Amendment) until the fourth quarter of fiscal 2017.

Events of default under the Term Loan Credit Facility include customary events such as a cross-default provision with respect to other material debt.  As of September 24, 2016, the Company is in compliance with all covenants of the Term Loan Credit Facility.

Equipment Loans

In August 2015, we entered into an equipment term loan with Banc of America Leasing & Capital LLC for $3.1 million to finance new kettles and related equipment for our Goodyear, Arizona facility.  The equipment term loan accrues interest at a rate of 3.07% and will 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.

Debt Classification

In accordance with FASB Accounting Standard Codification (“ASC”) 470-10-45 on Debt Presentation, all of the Company’s outstanding debt has been reclassified in the accompanying condensed consolidated balance sheet as a current liability as of September 24, 2016.  Absent the Second Amendment, the Company would not have been in compliance with the Total Leverage Ratio as of September 24, 2016.  Unless our results of operations materially improve by the second quarter of fiscal 2017, we engage in a strategic transaction that enables us to pay down our debt, or we secure a waiver or further loan amendment from our lender, there is a risk that we will not be in compliance with our financial covenants at the end of the second quarter of fiscal 2017.  As previously announced, the Company commenced a comprehensive strategic and financial review of the Company’s operations and engaged Rothschild Inc. to serve as its financial advisor to assist the Company in this process, including the pursuit of value-enhancing initiatives as a standalone company, capital structure optimization, a sale of the Company, a sale of certain assets of the Company or other strategic business combination. This comprehensive strategic and financial review remains ongoing as of the date of this Quarterly Report on Form 10-Q.  Accordingly, given the early stages of this review, there can be no assurances that these efforts will result in a completion of a transaction or, if one is completed, that it will be on favorable terms.  A default under the Term Loan Credit Facility would trigger a default under the ABL Credit Facility and certain of our equipment lease financing arrangements, as these facilities each contain cross-default provisions. As such, we reclassified all of our outstanding debt as a current liability.

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.

Indemnification Request

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.”  On March 7, 2016, the Company informed the commercial customer that the Company had no obligation to indemnify the commercial customer with respect to the matter.

Class Action

On April 4, 2016, a complaint captioned Westmoreland County Employee Retirement Fund (“Westmoreland”) v. Inventure Foods Inc. (“Inventure” or “the Company”) et al., Case No. CV2016-002718, was filed in the Superior Court in Maricopa County, Arizona. Additional defendants are the Company’s Chief Executive Officer and Chief Financial Officer, Capital Foods, LLC, and the underwriters of  the secondary securities offering that closed September 14, 2014 (the “September 2014 Offering”).  The class action complaint alleges violations of the Securities Act and focuses on the Company’s frozen food facility in Jefferson, Georgia.  Westmoreland 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.  The Company intends to vigorously defend against the claims.

On May 6, 2016,  the Company removed the purported class action from Superior Court in Maricopa County to the United States District Court for the District of Arizona (“District Court”).  On May 26, 2016, plaintiff filed a motion to remand the purported class action to the Maricopa County Superior Court.  On July 13, 2016, Inventure, along with our Chief Executive Officer and Chief Financial Officer, and Capital Foods, LLC, filed a response in opposition to the motion to remand.  The September 2014 Offering underwriters joined in our opposition brief.  The plaintiff filed its reply in support of the motion to remand on June 23, 2016.  On July 5, 2016, the District Court ordered a stay of proceedings until the Court had an opportunity to rule on the motion to remand. 

On August 11, 2016, the District Court granted Westmoreland’s motion to remand the case to the Maricopa County Superior Court.  On October 11, 2016, all of the defendants, including Inventure and its Chief Executive Officer and Chief Financial Officer, filed a motion for complex case designation with the Maricopa County Superior Court.  Westmoreland responded to this motion on October 26, 2016.  The Maricopa County Superior Court granted the motion.

On October 17, 2016, Westmoreland filed an amended complaint in Maricopa County Superior Court.  Like the original complaint, the amended complaint focuses on the Company’s frozen food facility in Jefferson, Georgia and alleges claims for purported Securities Act violations against the Company, its Chief Executive Officer, its Chief Financial Officer, and the underwriters of the September 2014 Offering.  Westmoreland also continues to seek 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.  The Company and its Chief Executive Officer and Chief Financial Officer have until November 14, 2016 to respond to the amended complaint.

An initial case management conference has been set for December 12, 2016.

Pre-Lawsuit Notifications and Demands

On July 11, 2016, the Company received a pre-lawsuit notification and demand from Farbod Nikravesh (represented by Barbara Rohr of Faruqi & Faruqi).  No lawsuit has been filed.  Mr. Farbod purports to represent a class of consumers who purchased Boulder Canyon brand products advertised as “All Natural.”  Mr. Farbod alleges the products contain non-natural ingredients, including, but not limited to, maltodextrin, dextrose, and citric acid.  He intends to file a class action for alleged violations of the California Legal Remedies Act (Cal. Civ. Code § 1750, et seq.), the California Unfair Competition Law (Cal. Bus. & Prof. Code § 17200, et seq.), the California False Advertising Act (Cal. Bus. & Prof. Code § 17500, et seq.), and other “common law and other statutory violations.”   The Company removed the challenged language (“All Natural”) from its packaging before receiving the letter.  The parties have tentatively agreed to resolve the matter on a confidential basis with no lawsuit being filed.

Maryanne McGuiness (represented by Tim Howard of Howard & Associates) served the Company with a pre-lawsuit notification and demand on July 11, 2016.  No lawsuit has been filed.  Ms. McGuiness purports to represent a

class of consumers who purchased Boulder Canyon kettle chips advertised as “All Natural” and “Non-GMO.”  Ms. McGuiness alleges the products contain non-natural and non-GMO ingredients, including but not limited to citric acid, disodium phosphate, corn, corn starch, corn meal, corn flour, corn masa, soluble corn fiber, corn syrup solids, maltodextrin, dextrose, fructose, and sucrose.  She intends to file a class action based on alleged violations of the Florida Deceptive and Unfair Trade Practices Act (Fla. Stat. 501.201, et seq.) and the Florida Misleading Advertising Statute (Fla. Stat. § 817.41), as well as for breach of express and implied warranties, unjust enrichment, and other contract and tort violations.  To avoid suit, Ms. McGuiness demands that the Company refrain from false and misleading advertising, identify consumers who purchased product during the limitations period, disgorge revenues from sales of products, and implement a corrective advertising campaign, including a disclaimer.  The Company removed “All Natural” from all packages and advertising of kettle cooked chips before receiving the letter, and intends to vigorously defend any class action filed.

On August 19, 2016, the Center for Environment Health (represented by Howard Hirsch of Lexington Law Group) served the Company with a Notice of Violation of the California Safe Drinking Water and Toxic Enforcement Act (known as “Proposition 65”) (the “Act”).  No lawsuit has been filed.  The notice claims that the Company’s Sweet Potato Fries product contain amounts of acrylamide in excess of what is permitted under the Act.  The Company intends to vigorously defend the allegations if any lawsuit is filed.

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 grocery stores, 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 three months ended September 24, 2016 and September 26, 2015, net revenues of our healthy/natural food category totaled $57.3 million and $59.3 million, respectively.  For the three months ended September 24, 2016 and September 26, 2015, net revenues of our indulgent specialty snack food category totaled $9.2 million and $10.6 million, respectively.

For the nine months ended September 24, 2016 and September 26, 2015, net revenues of our healthy/natural food category totaled $176.6 million and $179.7 million, respectively.  For the nine months ended September 24, 2016 and September 26, 2015, net revenues of our indulgent specialty snack food category totaled $29.0 million and $34.2 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 presents information about our reportable segments for the quarters and nine months ended September 24, 2016 and September 26, 2015 (in thousands):