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EX-32 - EX-32 - INVENTURE FOODS, INC.snak-20170701xex32.htm
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EX-31.1 - EX-31.1 - INVENTURE FOODS, INC.snak-20170701ex311188cfd.htm

   

 

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 July 1, 2017

 

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)

 

Delaware

86-0786101

(State or other jurisdiction of incorporation or

(I.R.S. Employer

organization)

Identification No.)

 

 

5415 East High Street, Suite #350, Phoenix, Arizona

85054

(Address of principal executive offices)

(Zip Code)

 

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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer ☐

 

 

Accelerated filer ☒

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 August 7, 2017, the total number of shares outstanding of the registrant’s Common Stock was 19,785,934 shares.

 

 

 

 


 

INVENTURE FOODS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

 

Table of Contents

 

Part I — FINANCIAL INFORMATION 

    

 

 

 

 

Item 1. Financial Statements. 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets  – July 1, 2017 (Unaudited) and December 31, 2016

 

1

 

Condensed Consolidated Statements of Operations (Unaudited) – quarters and six months ended July 1, 2017 and June 25, 2016

 

2

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended July 1, 2017 and June 25, 2016

 

3

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

4

 

 

 

 

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

 

22

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

30

 

 

 

 

Item 4. Controls and Procedures 

 

30

 

 

 

 

Part II — OTHER INFORMATION 

 

 

 

 

 

 

Item 1. Legal Proceedings 

 

32

 

 

 

 

Item 1A. Risk Factors 

 

32

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

32

 

 

 

 

Item 6. Exhibits 

 

33

 

 

 

Signatures 

 

34

 

 


 

INVENTURE FOODS, INC. AND SUBSIDIARIES

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Our disclosure and analysis in this Quarterly Report on Form 10-Q (“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 Form 10-Q reflect the Company’s 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, our ability to continue as a going concern, general economic conditions, increases in 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 and/or to refinance our existing indebtedness due to future operating losses, inability to meet the financial covenants under our term loan and revolving credit facilities, or in order to implement our business strategy, acquisition and divestiture-related risks, volatility of the market price of our common stock, par value $.01 per share (“Common Stock”), and those other risks and uncertainties discussed herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2017 (“2016 Form 10-K”) and any subsequent Form 10-Q 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 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 “Item 1A. Risk Factors” of our 2016 Form 10-K, 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 subsequently filed Form 10-Qs and Current Reports on Form 8-K and our other filings with 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 2016 Form 10-K.  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)

 

 

 

 

 

 

 

 

 

 

 

    

July 1,

    

December 31,

 

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,007

 

$

776

 

Accounts receivable, net of allowance for doubtful accounts of $160 and $160 at July 1, 2017 and December 31, 2016, respectively

 

 

16,929

 

 

16,334

 

Inventories

 

 

44,325

 

 

72,188

 

Other current assets

 

 

2,607

 

 

3,216

 

Total current assets

 

 

66,868

 

 

92,514

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $53,960 and $53,116 at July 1, 2017 and December 31, 2016, respectively

 

 

52,069

 

 

65,484

 

Goodwill

 

 

14,985

 

 

14,985

 

Trademarks and other intangibles, net

 

 

4,749

 

 

7,243

 

Other assets

 

 

1,326

 

 

1,254

 

Total assets

 

$

139,997

 

$

181,480

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

25,959

 

$

29,462

 

Accrued liabilities

 

 

8,367

 

 

9,533

 

Line of credit

 

 

19,949

 

 

32,761

 

Current portion of term debt

 

 

71,051

 

 

82,380

 

Total current liabilities

 

 

125,326

 

 

154,136

 

 

 

 

 

 

 

 

 

Deferred income tax liability

 

 

3,353

 

 

1,376

 

Other liabilities

 

 

2,065

 

 

2,279

 

Total liabilities

 

 

130,744

 

 

157,791

 

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $.01 par value; 50,000 shares authorized; 20,154 and 20,040 shares issued and outstanding at July 1, 2017 and December 31, 2016, respectively

 

 

202

 

 

200

 

Additional paid-in capital

 

 

36,339

 

 

35,721

 

Accumulated deficit

 

 

(26,817)

 

 

(11,761)

 

 

 

 

9,724

 

 

24,160

 

Less: treasury stock, at cost: 368 shares at July 1, 2017 and December 31, 2016

 

 

(471)

 

 

(471)

 

Total stockholders’ equity

 

 

9,253

 

 

23,689

 

Total liabilities and stockholders’ equity

 

$

139,997

 

$

181,480

 

 

 

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

1


 

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarter Ended

    

Six Months Ended

 

 

 

July 1,

    

June 25,

 

July 1,

    

June 25,

 

 

 

2017

 

2016

 

2017

 

2016

 

Net revenues

 

$

51,356

 

$

57,797

 

$

100,974

 

$

114,977

 

Cost of revenues

 

 

41,244

 

 

48,094

 

 

82,348

 

 

95,994

 

Gross profit

 

 

10,112

 

 

9,703

 

 

18,626

 

 

18,983

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

8,668

 

 

7,609

 

 

15,924

 

 

14,763

 

Operating income

 

 

1,444

 

 

2,094

 

 

2,702

 

 

4,220

 

Non-operating expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

2,425

 

 

1,967

 

 

4,787

 

 

3,968

 

Income (loss) from continuing operations before income tax expense

 

 

(981)

 

 

127

 

 

(2,085)

 

 

252

 

Income tax expense

 

 

11

 

 

66

 

 

113

 

 

114

 

Net income (loss) from continuing operations

 

 

(992)

 

 

61

 

 

(2,198)

 

 

138

 

Net income (loss) from discontinued operations

 

 

75

 

 

(339)

 

 

(12,858)

 

 

(1,434)

 

Net loss

 

$

(917)

 

$

(278)

 

$

(15,056)

 

$

(1,296)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) from continuing operations

 

$

(0.05)

 

$

0.01

 

$

(0.11)

 

$

0.01

 

Basic loss from discontinued operations

 

 

 —

 

 

(0.02)

 

 

(0.66)

 

 

(0.08)

 

    Basic loss

 

$

(0.05)

 

$

(0.01)

 

$

(0.77)

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) from continuing operations

 

$

(0.05)

 

$

0.01

 

$

(0.11)

 

$

0.01

 

Diluted loss from discontinued operations

 

 

 —

 

 

(0.02)

 

 

(0.66)

 

 

(0.08)

 

    Diluted loss

 

$

(0.05)

 

$

(0.01)

 

$

(0.77)

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,741

 

 

19,628

 

 

19,708

 

 

19,616

 

Diluted

 

 

19,741

 

 

19,902

 

 

19,708

 

 

19,881

 

 

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

 

2


 

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

Six Months Ended

 

 

 

July 1,

    

June 25,

 

 

 

2017

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(15,056)

 

$

(1,296)

 

Net loss from discontinued operations

 

 

(12,858)

 

 

(1,434)

 

Net income (loss) from continuing operations

 

 

(2,198)

 

 

138

 

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

2,956

 

 

2,943

 

Amortization

 

 

164

 

 

165

 

Deferred financing fee amortization

 

 

939

 

 

687

 

Provision for bad debts

 

 

 —

 

 

32

 

Deferred income taxes

 

 

1,977

 

 

 —

 

Stock-based compensation expense

 

 

819

 

 

740

 

Gain on disposition of equipment

 

 

 —

 

 

(58)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,954)

 

 

(3,048)

 

Inventories

 

 

11,543

 

 

6,577

 

Other assets and liabilities

 

 

434

 

 

2,285

 

Accounts payable and accrued liabilities

 

 

2,698

 

 

852

 

Net cash provided by operating activities - continuing operations

 

 

16,378

 

 

11,313

 

Net cash provided by (used in) operating activities - discontinued operations

 

 

(6,725)

 

 

489

 

Net cash provided by operating activities

 

 

9,653

 

 

11,802

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(925)

 

 

(7,759)

 

Payment of contingent consideration for Willamette Valley Fruit Company 

 

 

(230)

 

 

(340)

 

Payment of contingent consideration for Sin In A Tin

 

 

(7)

 

 

(3)

 

Net cash used in investing activities - continuing operations

 

 

(1,162)

 

 

(8,102)

 

Net cash provided by (used in) investing activities - discontinued operations

 

 

19,149

 

 

(900)

 

Net cash provided by (used in) investing activities

 

 

17,987

 

 

(9,002)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net borrowings on Wells Fargo line of credit

 

 

(12,812)

 

 

(3,261)

 

Payments made on capital lease obligations

 

 

(9)

 

 

(10)

 

Borrowings on term loans

 

 

31

 

 

1,097

 

Repayments made on long term debt

 

 

(12,176)

 

 

(653)

 

Payment of loan financing fees

 

 

(244)

 

 

(1,050)

 

Proceeds from issuance of common stock under equity award plans

 

 

 —

 

 

187

 

Payment of payroll taxes on stock-based compensation through shares withheld

 

 

(199)

 

 

(226)

 

Net cash used in financing activities - continuing operations

 

 

(25,409)

 

 

(3,916)

 

Net cash used in financing activities - discontinued operations

 

 

 —

 

 

 —

 

Net cash used in financing activities

 

 

(25,409)

 

 

(3,916)

 

Net increase (decrease) in cash and cash equivalents

 

 

2,231

 

 

(1,116)

 

Cash and cash equivalents at beginning of year period

 

 

776

 

 

2,319

 

Cash and cash equivalents at end of year period

 

$

3,007

 

$

1,203

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

4,247

 

$

4,060

 

Cash paid (refunded) during the period for income taxes

 

$

59

 

$

(3,377)

 

 

 

 

 

 

 

 

 

 

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

3


 

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 $269 million in annual net revenues for fiscal 2016.

 

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 and frozen berry and vegetable blends, Boulder Canyon® brand kettle cooked potato chips, other snack and food items and frozen side dishes, Willamette Valley Fruit CompanyTM brand frozen berries, fruits, biscuits and other frozen snacks, Jamba® brand blend-and-serve smoothie kits under license from Jamba Juice Company (“Jamba Juice”), 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 manufacturers.

 

We operate in two segments: frozen products and snack products. The frozen products segment includes frozen fruits, fruit and vegetable blends, beverages, side dishes 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 include 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 seven locations. Our frozen berry products are processed in our Lynden, Washington, Bellingham, Washington 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 beverage products, including fruit and vegetable blends and frozen side dishes, are packaged at our Bellingham, Washington facility.  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.

 

Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year.  Accordingly, the second quarter of fiscal 2017 commenced April 2, 2017 and ended July 1, 2017.

 

Strategic and Financial Review Process

 

In July 2016, we announced that our Board of Directors (“Board”) had commenced a strategic and financial review of the Company with the objective to increase shareholder value.  We engaged Rothschild Inc. to serve as our financial advisor and assist us in this process.  We remain actively involved in this process and are continuing to pursue various strategic alternatives.  As disclosed in our prior reports, no assurance can be given as to the outcome or timing of this process or that it will result in the consummation of any specific transaction.

4


 

 

Going Concern Uncertainty

 

We have incurred losses from operations in each of the quarterly periods since our voluntary product recall in April 2015 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.  This fact, together with the projected near term outlook for our business and our inability to complete a strategic transaction (other than the Fresh Frozen Asset Sale) by year end or demonstrate that such a transaction is imminent, raise substantial doubt about our ability to continue as a going concern.  We reported this going concern conclusion in our 2016 Form 10-K, together with the following specific conditions considered by management in reaching such conclusion:     

 

·

Our five-year, $85.0 million term loan credit agreement with BSP Agency, LLC (“BSP”), as administrative agent, and the other lenders party thereto (the “BSP Lenders”) (with all related loan documents, and as amended from time to time, the “Term Loan Credit Facility”) requires us to, among other things, comply with Total Leverage Ratio and Fixed Charge Coverage Ratio (each as defined in the Term Loan Credit Facility) covenants by the end of the second quarter of fiscal 2017 and a minimum EBITDA target covenant (the “EBITDA Covenant”) by the month ended April 30, 2017, which target we did not meet (the “EBITDA Covenant Default”) and, as discussed below, we received temporary waivers of such default.  The Total Leverage Ratio, measured at the end of our second fiscal quarter in 2017 must be 4.25:1, and the Fixed Charge Coverage Ratio, measured at the end of our second fiscal quarter in 2017 for the four quarterly periods then ended, must be 1.1:1.  We previously reported that absent the completion of a strategic transaction yielding sufficient cash proceeds (in addition to the proceeds received from the sale of certain  assets, properties and rights of our wholly owned subsidiary, Fresh Frozen Foods, Inc. (now known as Inventure – GA, Inc.) (“Fresh Frozen Foods”) in March 2017) to pay down debt, waivers or amendments by our lenders, or a refinancing of our debt, we would not be able to comply with these covenants when required to do so.  Failure to meet these covenants would result in a default under such credit facility and, to the extent the applicable lenders so elect, an acceleration of the Company’s existing indebtedness, causing such debt of approximately $97.2 million at July 1, 2017 (including $4.5 million of other equipment financing indebtedness that includes cross-default provisions) to be immediately due and payable.  The Company does not have sufficient liquidity to repay all of its outstanding debt in full if such debt were accelerated.

 

·

Our five-year, $50.0 million revolving credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the other lenders party thereto (the “Wells Fargo Lenders”) (with all related loan documents, and as amended from time to time, the “ABL Credit Facility” and, together with the Term Loan Credit Facility, the “Credit Facilities”), requires us to, among other things, comply with a Fixed Charge Coverage Ratio (as defined in the ABL Credit Facility) if our liquidity as of the date of any determination is less than the greater of (i) 12.5% of the Maximum Revolver Amount and (ii) $6.125 million, subject to certain conditions.  As of the date this Form 10-Q was filed with the SEC, we would not be able to comply with the Fixed Charge Coverage Ratio covenant if our liquidity were deemed to have fallen below the applicable threshold.

·

The Credit Facilities also require us to furnish our audited financial statements without a “going concern” uncertainty paragraph in the auditor’s opinion.  Our consolidated financial statements for the fiscal year ended December 31, 2016 in our 2016 Form 10-K contained a “going concern” explanatory paragraph.  Under the Credit Facilities, a going concern opinion with respect to our audited financial statements is an event of default (the “Going Concern Covenant Default”).  As of the date our 2016 Form 10-K was filed with the SEC, we obtained a temporary waiver of the Going Concern Covenant Default until May 15, 2017 from the applicable lenders under the Credit Facilities. 

 

·

On May 10, 2017, we entered into a Limited Waiver and Third Amendment to the Credit Agreement with the BSP Lenders (the “Term Loan Third Amendment”).  Under the terms of the Term Loan Third Amendment, the BSP Lenders granted the Company (i) an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017, and (ii) a temporary waiver of the EBITDA Covenant Default until July 17, 2017. The Term Loan Third Amendment also required that the Company comply with the EBITDA Covenant commencing with the fiscal month ending June 30, 2017, measured over the 12-months then ended, and increased the Company’s prepayment fees in

5


 

the event of a payment or prepayment of principal under the Term Loan Credit Facility (excluding regularly scheduled principal payments).

 

·

On May 15, 2017, we entered into a First Amendment to Credit Agreement and Limited Waiver, effective as of May 12, 2017, with the Wells Fargo Lenders (the “ABL First Amendment”). Under the terms of the ABL First Amendment, the Wells Fargo Lenders granted the Company an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017.  In addition, the terms of the ABL First Amendment provided for, among other things, (i) an increase in the Company’s Applicable Margin for Base Rate and Libor Rate Loans (as such terms are defined in the ABL Credit Facility) effective May 1, 2017 by 100 basis points, (ii) additional financial and collateral reporting obligations and projection requirements, (iii) the immediate right of the Agent (as defined in the ABL Credit Agreement) or the Wells Fargo Lenders to exercise all rights and remedies under the ABL Credit Facility (in lieu of waiting until the earlier of ten business days after the date on which financial statements are required to be delivered for an applicable fiscal month), and (iv) the elimination of the right to issue curative equity.

 

·

On July 17, 2017, we entered into a letter agreement with BSP and the BSP Lenders (the “BSP Letter Agreement”). Under the terms of the BSP Letter Agreement, the BSP Lenders granted the Company (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017, and (ii) a temporary waiver of the financial covenants the Company was required to comply with under the Term Loan Credit Facility (the “Term Loan Financial Covenant Default”) until July 24, 2017.

 

·

On July 17, 2017, we also entered into a Second Amendment to Credit Agreement (the “ABL Second Amendment”) with Wells Fargo and the Wells Fargo Lenders. Under the terms of the ABL Second Amendment, the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017.  In addition, the ABL Second Amendment provided for, among other things, additional reporting obligations, a reduced revolver commitment over a period of time ($49.0 million prior to the effective date of the ABL Second Amendment; $40.0 million from and after the ABL Second Amendment date through August 1, 2017; and $35.0 million from and after August 1, 2017), and adjusted advance rates.

 

·

On July 20, 2017, we entered into a Limited Waiver and Fourth Amendment to Credit Agreement with BSP and the BSP Lenders (the “Term Loan Fourth Amendment”).  Under the terms of the Term Loan Fourth Amendment, the BSP Lenders agreed to (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until August 31, 2017.  In addition, the BSP Lenders agreed to provide $5.0 million of additional financing to the Company in the form of a term loan, payable in equal monthly installments of $12,500 commencing on September 30, 2017, with the balance due and payable on November 17, 2020, which is the maturity date of the Term Loan Credit Facility.  The net proceeds of this new $5.0 million loan may be used for working capital purposes, subject to certain restrictions in the Term Loan Credit Facility, and is subject to the terms and conditions of the Term Loan Credit Facility.

 

·

On July 20, 2017, we also entered into a Third Amendment to Credit Agreement (the “ABL Third Amendment”) with Wells Fargo and the Wells Fargo Lenders.  Under the terms of the ABL Third Amendment, the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017.

 

As previously disclosed, the Company’s Board and management continue to explore various strategic alternatives.  There can be no assurance that we will be successful in our pursuit of any strategic transaction or that we will be able consummate a strategic transaction in time to address our financial covenant requirements and going concern qualification, or at all, or if we do complete a strategic transition it will be on commercially reasonable terms.  As a result, our liquidity and ability to timely pay our obligations when due could be adversely affected. 

 

The accompanying condensed consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about our ability to continue as a going concern, other

6


 

than the reclassification of certain long-term debt and the related debt issuance costs to current liabilities and current assets, respectively.

 

Our lenders may resist renegotiation or lengthening of payment and other terms through legal action or otherwise if we are unsuccessful in our efforts to complete a strategic transaction.  If we are not able to timely, successfully or efficiently implement the strategies that we are pursuing, we may need to seek voluntarily protection under Chapter 11 of the U.S. Bankruptcy Code.

 

Basis of Presentation

 

The condensed consolidated financial statements for the fiscal quarter ended July 1, 2017 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 31, 2016 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 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 2016 Form 10-K. The results of operations for the fiscal quarter ended July 1, 2017 are not necessarily indicative of the results expected for the full year.  

 

Discontinued Operations

 

On March 23, 2017, the Company sold certain  assets, properties and rights of our wholly owned subsidiary, Fresh Frozen Foods, to The Pictsweet Company (“Pictsweet”) pursuant to an Asset Purchase Agreement, dated as of such date, among the Company, Fresh Frozen Foods and Pictsweet (the “Purchase Agreement”).  In accordance with the Purchase Agreement, Pictsweet acquired Fresh Frozen Food’s frozen food processing equipment assets, certain real property and associated facilities located in Jefferson, Georgia and Thomasville, Georgia, and other intellectual property and inventory (the “Fresh Frozen Asset Sale”).  As consideration for the acquisition, Pictsweet paid the Company $23.7 million in cash.  The net proceeds from the Fresh Frozen Asset Sale were $19.5 million, after payment of professional fees and other transaction expenses, and were used to pay down amounts outstanding under the Credit Facilities.  The results of operations for the Fresh Frozen Foods business have been classified as discontinued operations for all periods presented.  As required by the terms of the Purchase Agreement, we have changed the name of our Fresh Frozen Foods subsidiary to Inventure – GA, Inc.

 

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.

 

7


 

At July 1, 2017 and December 31, 2016, 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 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1, 2017

 

December 31, 2016

 

 

    

    

    

Non-qualified

    

 

 

    

Non-qualified

    

 

 

 

 

 

 

Deferred

 

Earn-out

 

Deferred

 

Earn-out

 

 

 

 

 

Compensation

 

Contingent

 

Compensation

 

Contingent

 

 

 

 

 

Plan

 

Consideration

 

Plan

 

Consideration

 

Balance Sheet Classification

 

 

 

Investments

 

Obligation

 

Investments

 

Obligation

 

Other assets

 

Level 1

 

$

704

 

$

 —

 

$

650

 

$

 —

 

Accrued liabilities

 

Level 3

 

 

 —

 

 

(263)

 

 

 —

 

 

(270)

 

Other liabilities

 

Level 3

 

 

 —

 

 

(1,291)

 

 

 —

 

 

(1,521)

 

 

 

 

 

$

704

 

$

(1,554)

 

$

650

 

$

(1,791)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 six months ended July 1, 2017 is as follows (in thousands):

 

 

 

 

 

 

 

 

    

Level 3

 

Balance at December 31, 2016

 

$

1,791

 

Earn-out compensation paid to Willamette Valley Fruit Company

 

 

(230)

 

Earn-out compensation paid to Sin In A Tin

 

 

(7)

 

Balance at July 1, 2017

 

$

1,554

 

 

Income Taxes

 

Income tax expense was $11,000  for the fiscal quarter ended July 1, 2017, compared to a tax expense of $0.1 million for the fiscal quarter ended June 25, 2016.  Our effective tax rate was (1.1)% and 52.2% for the fiscal quarters ended July 1, 2017 and June 25, 2016, respectively.

 

Income tax expense was $0.1 million for the six months ended July 1, 2017, compared to a tax expense of $0.1 million for the six months ended June 25, 2016.  Our effective tax rate was (5.4)% and 45.1% for the six months ended July 1, 2017 and June 25, 2016, respectively.

 

Income tax expense for the fiscal quarter and six months ended July 1, 2017 was impacted by the full valuation allowance which was initially recorded in the fourth quarter of 2016.  Therefore, income tax expenses was a result of certain state minimum taxes and deferred tax liabilities not subject to the valuation allowance.

 

8


 

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 fiscal quarter and six months ended July 1, 2017, 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 fiscal quarter and six months ended July 1, 2017, 0.6 million 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 fiscal quarter and six months ended June 25, 2016, 0.3 million 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 fiscal quarters and six months ended July 1, 2017 and June 25, 2016 (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarter Ended

 

Six Months Ended

 

 

 

July 1,

    

June 25,

    

July 1,

    

June 25,

 

 

 

2017

 

2016

 

2017

 

2016

 

Basic Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(992)

 

$

61

 

$

(2,198)

 

$

138

 

Net income (loss) from discontinued operations

 

 

75

 

 

(339)

 

 

(12,858)

 

 

(1,434)

 

Net loss

 

$

(917)

 

$

(278)

 

$

(15,056)

 

$

(1,296)

 

Weighted average number of common shares

 

 

19,741

 

 

19,628

 

 

19,708

 

 

19,616

 

Loss per common share

 

$

(0.05)

 

$

(0.01)

 

$

(0.77)

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(992)

 

$

61

 

$

(2,198)

 

$

138

 

Net income (loss) from discontinued operations

 

 

75

 

 

(339)

 

 

(12,858)

 

 

(1,434)

 

Net loss

 

$

(917)

 

$

(278)

 

$

(15,056)

 

$

(1,296)

 

Weighted average number of common shares

 

 

19,741

 

 

19,628

 

 

19,708

 

 

19,616

 

Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock

 

 

 —

 

 

274

 

 

 —

 

 

265

 

Adjusted weighted average number of common shares

 

 

19,741

 

 

19,902

 

 

19,708

 

 

19,881

 

Loss per common share

 

$

(0.05)

 

$

(0.01)

 

$

(0.77)

 

$

(0.07)

 

 

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.

 

9


 

Recent Accounting Pronouncements

 

Changes to GAAP are established by the Financial Accounting Standards Board (the “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.  As of July 1, 2017, we have not evaluated the impact of this new accounting standard on our financial statements.

 

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 adopted this guidance in the first quarter of fiscal 2017, and it had no impact on our financial statements and disclosure.

 

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.  As of July 1 2017, we have not evaluated the impact of this new accounting standard on our financial statements.

 

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 adopted this guidance in the first quarter of fiscal 2017, and the adoption did not have a material impact on our financial statements and disclosure.

 

2.Discontinued Operations

 

On March 23, 2017, the Company sold certain assets, properties and rights of our wholly owned subsidiary, Fresh Frozen Foods, to Pictsweet pursuant to the Purchase Agreement.  In accordance with the Purchase Agreement, Pictsweet acquired Fresh Frozen Food’s frozen food processing equipment assets, certain real property and associated facilities located in Jefferson, Georgia and Thomasville, Georgia, and other intellectual property and inventory.  As consideration for the acquisition, Pictsweet paid the Company $23.7 million in cash. The Fresh Frozen business was part of the Company’s frozen products segment.  The net proceeds from the Fresh Frozen Asset Sale were $19.5 million, after payment of professional fees and other transaction expenses, and were used to pay down amounts outstanding under the Credit Facilities.  As of December 31, 2016, total assets and total liabilities related to the Fresh Frozen Foods business were $32.2 million and $2 million, respectively.  The activity included in discontinued operations in the fiscal

10


 

quarter ended July 1, 2017, related to the changes in estimated accruals that were settled during the period. The results of operations for the Fresh Frozen Foods business have been classified as discontinued operations for all periods presented.

 

The summary comparative financial results of the Fresh Frozen Foods business, included within discontinued operations, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarter Ended

    

Six Months Ended

 

 

 

July 1, 2017

 

June 25, 2016

 

July 1, 2017

 

June 25, 2016

 

Net revenues

 

$

58

 

$

11,467

 

$

8,735

 

$

24,141

 

Cost of revenues

 

 

 8

 

 

10,902

 

 

8,602

 

 

24,040

 

Gross profit

 

 

50

 

 

565

 

 

133

 

 

101

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

39

 

 

884

 

 

669

 

 

1,839

 

Operating income (loss)

 

 

11

 

 

(319)

 

 

(536)

 

 

(1,738)

 

Loss (gain) on sale of Fresh Frozen Foods

 

 

(64)

 

 

 —

 

 

10,082

 

 

 —

 

Interest expense, net

 

 

 —

 

 

354

 

 

331

 

 

708

 

Income (loss) before income taxes

 

 

75

 

 

(673)

 

 

(10,949)

 

 

(2,446)

 

Income tax expense (benefit)

 

 

 —

 

 

(334)

 

 

1,909

 

 

(1,012)

 

Net income (loss) from discontinued operations

 

$

75

 

$

(339)

 

$

(12,858)

 

$

(1,434)

 

 

3.Inventories

 

Inventories consisted of the following as of July 1, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

July 1,

    

December 31,

 

 

 

2017

 

2016

 

Finished goods

 

$

17,210

 

$

27,661

 

Raw materials

 

 

27,115

 

 

44,527

 

Inventories

 

$

44,325

 

$

72,188

 

 

 

11


 

4.Goodwill, Trademarks and Other Intangibles

 

Goodwill, trademarks and other intangibles, net, consisted of the following as of July 1, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Estimated

    

July 1,

    

December 31,

 

 

 

Useful Life

 

2017

 

2016

 

Goodwill:

 

 

 

 

 

 

 

 

 

Inventure Foods

 

 

 

$

5,986

 

$

5,986

 

Rader Farms

 

 

 

 

5,630

 

 

5,630

 

Willamette Valley Fruit Company

 

 

 

 

3,147

 

 

3,147

 

Sin In A Tin

 

 

 

 

222

 

 

222

 

Goodwill

 

 

 

$

14,985

 

$

14,985

 

 

 

 

 

 

 

 

 

 

 

Trademarks:

 

 

 

 

 

 

 

 

 

Inventure Foods

 

 

 

$

896

 

$

896

 

Rader Farms

 

 

 

 

1,070

 

 

1,070

 

Willamette Valley Fruit Company

 

 

 

 

740

 

 

740

 

Fresh Frozen Foods

 

 

 

 

 —

 

 

2,330

 

Sin In A Tin

 

 

 

 

123

 

 

123

 

 

 

 

 

 

 

 

 

 

 

Other intangibles:

 

 

 

 

 

 

 

 

 

Rader Farms - Customer relationship, gross carrying amount

 

10 years

 

 

100

 

 

100

 

Rader Farms - Customer relationship, accum. amortization

 

 

 

 

(100)

 

 

(96)

 

Willamette Valley Fruit Company - Customer relationship, gross carrying amount

 

10 years

 

 

3,200

 

 

3,200

 

Willamette Valley Fruit Company - Customer relationship, accum. amortization

 

 

 

 

(1,280)

 

 

(1,120)

 

Trademarks and other intangibles, net

 

 

 

$

4,749

 

$

7,243

 

 

Our amortization expense related to these intangibles was $82,000 and $83,000 for the fiscal quarters ended July 1, 2017 and June 25, 2016, respectively. For the six months ended July 1, 2017 and June 25, 2016, amortization expense totaled $164,000 and $165,000, 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. We believe the carrying values of our goodwill and intangible assets are not impaired as of July 1, 2017.

 

5.Accrued Liabilities

 

Accrued liabilities consisted of the following as of July 1, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

July 1,

    

December 31,

 

 

 

2017

 

2016

 

Accrued payroll and payroll taxes

 

$

2,965

 

$

1,756

 

Accrued royalties and commissions

 

 

917

 

 

1,621

 

Accrued advertising and promotion

 

 

1,052

 

 

1,465

 

Accrued berry purchase payments

 

 

1,010

 

 

1,908

 

Accrued other

 

 

2,423

 

 

2,783

 

Accrued liabilities

 

$

8,367

 

$

9,533

 

 

 

6.Term Debt and Line of Credit

 

ABL Credit Facility

 

On November 18, 2015, the Company entered into 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

12


 

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.  The ABL Credit Facility requires us to, among other things, comply with a Fixed Charge Coverage Ratio (as defined in the ABL Credit Facility) if our liquidity as of the date of any determination is less than the greater of (i) 12.5% of the Maximum Revolver Amount and (ii) $6.125 million, subject to certain conditions.  As of the date this Form 10-Q was filed with the SEC, we would not be able to comply with the Fixed Charge Coverage Ratio covenant if our liquidity were deemed to have fallen below the applicable threshold. 

 

On May 15, 2017, the Company entered into the ABL First Amendment, pursuant to which the Wells Fargo Lenders granted the Company an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017.  In addition, the terms of the ABL First Amendment provided for, among other things, (i) an increase in the Company’s Applicable Margin for Base Rate and Libor Rate Loans (as such terms are defined in the ABL Credit Facility) effective May 1, 2017 by 100 basis points, (ii) additional financial and collateral reporting obligations and projection requirements, (iii) the immediate right of the Agent (as defined in the ABL Credit Agreement) or the Wells Fargo Lenders to exercise all rights and remedies under the ABL Credit Facility (in lieu of waiting until the earlier of ten business days after the date on which financial statements are required to be delivered for an applicable fiscal month), and (iv) the elimination of the right to issue curative equity.

 

On July 17, 2017, the Company entered into the ABL Second Amendment with Wells Fargo and the Wells Fargo Lenders, pursuant to which the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017.  In addition, the ABL Second Amendment provided for, among other things, additional reporting obligations, a reduced revolver commitment over a period of time ($49.0 million prior to the effective date of the ABL Second Amendment; $40.0 million from and after the ABL Second Amendment date through August 1, 2017; and $35.0 million from and after August 1, 2017), and adjusted advance rates.

 

On July 20, 2017, the Company entered into the ABL Third Amendment with Wells Fargo and the Wells Fargo Lenders, pursuant to which the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017. 

 

Absent the ABL Second Amendment and the ABL Third Amendment, the Going Concern Covenant Default would have been reinstated, and the Company would have been in default under the ABL Credit Facility as of the date this Form 10-Q was filed with the SEC.

 

As of July 1, 2017, there was $19.9 million outstanding under the ABL Credit Facility and the net availability thereunder was $6.9 million.

 

Term debt consisted of the following as of July 1, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

July 1,

    

December 31,

 

 

 

2017

 

2016

 

Term loan credit facility through November 2020

 

$

72,727

 

$

84,150

 

Equipment term loan, Goodyear, Arizona, due monthly through April 2021

 

 

2,459

 

 

2,759

 

Equipment term loan, Rader Farms, due monthly through August 2019

 

 

1,160

 

 

1,420

 

Equipment term loan, Willamette Valley Fruit Company, due monthly through August 2019

 

 

861

 

 

1,054

 

Capital lease obligations, primarily due May 2022

 

 

66

 

 

44

 

Long-term debt

 

 

77,273

 

 

89,427

 

Less: deferred financing fees, net

 

 

(6,222)

 

 

(7,047)

 

Less: current portion of long-term debt

 

 

(71,051)

 

 

(82,380)

 

Long-term debt, less current portion

 

$

 —

 

$

 —

 

 

13


 

Term Loan Credit Facility

 

Also on November 18, 2015 and concurrent with the execution of the ABL Credit Facility, the Company entered into 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. 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, with BSP, as administrative agent, and the BSP Lenders (the “Term Loan First Amendment”).  The Term Loan 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 administrative agent, and the BSP Lenders (the “Term Loan Second Amendment”). The Term Loan Second Amendment deferred compliance with the Company’s Total Leverage Ratio and Fixed Charge Coverage Ratio covenants until the second quarter of fiscal 2017, required the Company to comply with the EBITDA Covenant commencing with the month ended April 30, 2017, and increased the Base Rate Margin and the Libor Rate Margin (each as defined in the Term Loan Credit Facility) thereunder by 100 basis points.  The Term Loan Second Amendment also amended 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 Term Loan Second Amendment) until the fourth quarter of fiscal 2017.

We did not meet the EBITDA Covenant (the “EBITDA Covenant Default”).  On May 10, 2017, the Company entered into the Term Loan Third Amendment, pursuant to which the lenders granted the Company (i) an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017, and (ii) a temporary waiver of the EBITDA Covenant Default, until July 17, 2017.  The Term Loan Third Amendment also required that the Company comply with the EBITDA Covenant commencing with the fiscal month ending June 30, 2017, measured over the 12-months then ended, and increased the Company’s prepayment fees in the event of a payment or prepayment of principal under the Term Loan Credit Facility (excluding regularly scheduled principal payments).

 

On July 17, 2017, the Company entered into the BSP Letter Agreement, pursuant to which the BSP Lenders granted the Company (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until July 24, 2017.

On July 20, 2017, the Company entered into the Term Loan Fourth Amendment, pursuant to which the BSP Lenders agreed to (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until August 31, 2017.  In addition, the BSP Lenders agreed to provide $5.0 million of additional financing to the Company in the form of a term loan, payable in equal monthly installments of $12,500 commencing on September 30, 2017, with the balance due and payable on November 17, 2020, which is the maturity date of the Term Loan Credit Facility.  The net proceeds of the $5.0 million loan may be used for working capital purposes, subject to certain restrictions in the Term Loan Credit Facility, and is subject to the terms and conditions of the Term Loan Credit Facility.

 

Absent the BSP Letter Agreement and the Term Loan Fourth Amendment, the Going Concern Covenant Default would have been reinstated, and the Company would have been in default under the Term Loan Credit Facility as of the date this Form 10-Q was filed with the SEC.

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. 

 

14


 

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 July 1, 2017 and December 31, 2016.  Absent the Term Loan Third Amendment, the Company would not have been in compliance with the Total Leverage Ratio and Fixed Charge Ratio covenants as of July 1, 2017.  Further, absent the BSP Letter Agreement and the Term Loan Fourth Amendment, the Company would not have been in compliance with the financial covenants under the Term Loan Credit Facility as of the date this Form 10-Q was filed with the SEC.  Unless we engage in a strategic transaction that enables us to pay down or refinance our debt, or we secure a waiver from our lenders or a further loan amendment to the Term Loan Credit Facility, we will not be in compliance with our financial covenants as of August 31, 2017 (as required by the Term Loan Fourth Amendment).  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 including, a sale of the Company, a sale of assets of the Company or other strategic business combination, or other capital structure optimization opportunities. This comprehensive strategic and financial review remains ongoing as of the date this Form 10-Q was filed with the SEC.  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 either the Term Loan Credit Facility or ABL Credit Facility would trigger a default under the other Credit Facility and certain of our equipment lease financing arrangements, as these facilities each contain cross-default provisions. As such, we classified 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 to 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.

 

Litigation

 

On April 4, 2016, a purported class action captioned Westmoreland County Employee Retirement Fund (“Westmoreland”) v. Inventure Foods, Inc. 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, and the underwriters of the secondary securities offering that closed September 14, 2014 (the “September 2014 Offering”).  The class action complaint, which was amended a second time on March 27, 2017, alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act and focuses on the conditions at the Company’s former 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, its Chief Executive Officer, its Chief Financial Officer and the September 2014 Offering underwriters have answered and moved to dismiss the second amended complaint. On August 8, 2017, the court granted in part and denied

15


 

in part the motion to dismiss, which was converted to a motion for judgment on the pleadings.  The Company intends to vigorously defend against the claims.

 

On November 10, 2016, the Center for Environment Health (“CEH”), represented by Howard Hirsch of Lexington Law Group, filed a lawsuit against the Company under the California Safe Drinking Water and Toxic Enforcement Act (known as “Proposition 65”) (the “Act”).  CEH contends that the Company’s potato-based chip products contain amounts of acrylamide in excess of what is permitted under the Act.  A retailer of the Company, Bristol Farms, demanded indemnity in relation to the litigation.  The Company has answered the complaint and intends to vigorously defend the lawsuit.

 

On November 14, 2016, Michelle Blair (represented by Matthew Armstrong of Armstrong Law Firm LLC and Stuart Cochran of Cochran Law PLLC) filed a putative class action against the Company in St. Louis City Circuit Court.  Ms. Blair purports to represent a class of consumers who purchased one of nine Boulder Canyon® brand products listing “evaporated cane juice” as an ingredient.  Ms. Blair contends that the use of “evaporated cane juice” was misleading because evaporated cane juice is sugar.  In the complaint, Ms. Blair advances claims for violation of Missouri’s Merchandising Practices Act, Mo. Rev. Stat. § 407.020, et seq. and 15 C.S.R. 60-8.020, et seq., and unjust enrichment.  On February 3, 2017, the Company removed the action to the Eastern District of Missouri. Plaintiff dismissed the removed action without prejudice and refiled a substantially similar complaint in the Southern District of Illinois. The new complaint is brought by Ms. Blair and a new plaintiff, Shannah Burton, and asserts a nationwide putative class, as well as a putative class of Illinois and Missouri purchasers. Ms. Burton alleges claims under the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 Ill. Comp. Stat. Ann. 505/2, et seq. Both plaintiffs also assert claims for unjust enrichment and breach of express warranty. On April 24, 2017, the Company filed a motion to dismiss the complaint.  The Company intends to vigorously defend the lawsuit.

 

On March 9, 2017, a verified stockholder derivative complaint was filed under seal in the U.S. District Court for the District of Arizona.  The case has since been unsealed and is captioned  Robert Hutton Derivatively on Behalf of Inventure Foods, Inc. v.  Terry McDaniel et al., Case No. 2:17-cv-00727.  The named defendants include certain of the Company’s current and former officers and directors —Terry McDaniel, Steve Weinberger, Timothy A. Cole, Ashton D. Asensio, Macon Bryce Edmonson, Paul J. Lapadat, Harold S. Edwards, David I. Meyers, and Itzhak Reichman.  The lawsuit also names the Company as a nominal defendant.  The complaint focuses on the conditions at the Company’s former frozen food facility in Jefferson, Georgia and the Company’s 2015 and 2016 proxy statements.  The plaintiff purports to derivatively assert on behalf of the Company claims for alleged violation of Section 14(a) of the Exchange Act, breach of fiduciary duty, waste of corporate assets and unjust enrichment.  According to the complaint, the plaintiff seeks an unspecified award of actual or compensatory damages in favor of the Company; an order directing the Company to take certain actions concerning its corporate governance and internal procedures, including putting forward certain proposals concerning its corporate governance policies and amendments to the Company’s Bylaws and Certificate of Incorporation for a stockholder vote; an award of extraordinary equitable and/or injunctive relief concerning the defendants’ trading activities or their assets; restitution from defendants to Inventure Foods consisting of a disgorgement of all profits, benefits and other compensation obtained by defendants; costs and disbursements of the action, including attorneys, accountant and experts’ fees, costs and expenses; and other and further relief as the court deems just and proper. The defendants have moved to dismiss the complaint or, in the alternative, stay the matter pending resolution of the putative class action brought by Westmoreland (identified above) is resolved.  Oral argument on the motion to dismiss is set for August 30, 2017.  The defendants intend to vigorously defend the lawsuit.

 

On March 27, 2017, a putative securities class action was filed by Glenn Schoenfeld in the U.S. District Court for the District of Arizona, Case No. 2:17-cv-00910, against the Company, its Chief Executive Officer, and its Chief Financial Officer (the “Schoenfeld Lawsuit”). On April 27, 2017, John Robinson filed a putative securities class action in the U.S. District Court for the District of Arizona, Case No. 2:17-cv-01258, against the Company, its Chief Executive Officer, and its Chief Financial Officer (the “Robinson Lawsuit”).  On June 23, 2017, the court consolidated the Robinson Lawsuit with the Schoenfeld Lawsuit, and the caption was changed to In re Inventure Foods, Inc. Securities Litigation, Case No. 2:17-cv-0910.  On June 27, 2017, the court appointed lead plaintiffs and lead counsel.  Lead plaintiffs’ consolidated amended complaint is due August 26, 2017. The original complaints in the Schoenfeld Lawsuit and Robinson Lawsuit were  purportedly filed on behalf of all persons and entities that acquired the Company’s securities between March 3, 2016 and March 16, 2017, and asserted claims for alleged violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and focused on the Company’s internal controls over accounting and financial reporting, its statements of operations for fiscal year 2015, and public statements in press releases and SEC filings between March 3, 2016 and March 16, 2017.  Mr. Schoenfeld sought certification as a class

16


 

action, unspecified compensatory damages, attorneys’ fees, costs and expenses incurred in the action, and other relief deemed appropriate by the court.  Mr. Robinson sought certification as a class action, unspecified damages, prejudgment and post-judgment interest, reasonable attorneys’ fees, expert fees and other costs, and such other and further relief as the court may deem just and proper.  The Company intends to vigorously defend the consolidated lawsuit.

 

8.Business Segments

 

Our operations consist of two reportable segments: frozen products and snack products.  The frozen products segment includes frozen fruits, fruit and vegetable blends, beverages, side dishes 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 fiscal quarters ended July 1, 2017 and June 25, 2016, net revenues of our healthy/natural food category totaled $41.2 million and $47.9 million, respectively. For the fiscal quarters ended July 1, 2017 and June 25, 2016, net revenues of our indulgent specialty snack food category totaled $10.1 million and $9.9 million, respectively.

 

For the six months ended July 1, 2017 and June 25, 2016, net revenues of our healthy/natural food category totaled $81.9 million and $95.2 million, respectively.  For the six months ended July 1, 2017 and June 25, 2016, net revenues of our indulgent specialty snack food category totaled $19.0 million and $19.8 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 fiscal quarters  and six months ended July 1, 2017 and June 25, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Frozen

    

Snack

    

 

 

 

 

 

Products

 

Products

 

Consolidated

 

Quarter Ended July 1, 2017

 

 

 

 

 

 

 

 

 

 

Net revenues from external customers

 

$

20,692

 

$

30,664

 

$

51,356

 

Depreciation and amortization included in segment gross profit

 

 

225

 

 

576

 

 

801

 

Segment gross profit

 

 

3,607

 

 

6,505

 

 

10,112

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 25, 2016

 

 

 

 

 

 

 

 

 

 

Net revenues from external customers

 

$

30,312

 

$

27,485

 

$

57,797

 

Depreciation and amortization included in segment gross profit

 

 

241

 

 

534

 

 

775

 

Segment gross profit

 

 

4,283

 

 

5,420

 

 

9,703