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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 26, 2015

or

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

For the transition period from                      to                      

Commission File Number: 001-14556

INVENTURE FOODS, INC.

(Exact name of registrant as specified in its charter)

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

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

As of November 2, 2015, the total number of shares outstanding of the registrant’s common stock was 19,609,388 shares.

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INVENTURE FOODS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

Forward-looking statements are neither historical facts nor assurances of future performance.  Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to certain risks and uncertainties, including, without limitation, general economic conditions, increases in cost or availability of ingredients, packaging, energy and employees, price competition and industry consolidation, ability to execute strategic initiatives, product recalls or safety concerns, disruptions of supply chain or information technology systems, customer acceptance of new products and changes in consumer preferences, food industry and regulatory factors, interest rate risks, dependence upon major customers, dependence upon existing and future license agreements, the possibility that we will need additional financing due to current and future operating losses or in order to implement the Company’s business strategy, acquisition and divestiture-related risks, volatility of the market price of the Company’s common stock, and those other risks and uncertainties discussed herein, that could cause actual results to differ materially from historical results or those anticipated.  In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Quarterly Report on Form 10-Q will in fact transpire or prove to be accurate.  Readers are cautioned to consider the specific risk factors described herein and in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014 and any subsequent Form 10-Q, and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof.

The Company undertakes no obligation to update or publicly revise any forward-looking statement whether as a result of new information, future developments or otherwise.  All subsequent written or oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph.  You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q and Form 8-K reports and our other filings with the SEC.  Also note that we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business under “Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended December 27, 2014 and in our Form 10-Q for the quarterly period ended March 28, 2015.  We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995.  You should understand it is not possible to predict or identify all such factors.

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PART I.            FINANCIAL INFORMATION

Item 1.                   Financial Statements

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)

(unaudited)

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

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share data)

(unaudited)

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

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

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

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.                                      Organization and Summary of Significant Accounting Policies

Inventure Foods, Inc., a Delaware corporation (referred to herein as the “Company,” “Inventure Foods,” “we,” “our” or “us”), is a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands with more than $285 million in annual net revenues for fiscal year 2014.

We specialize in two primary product categories: (1) healthy/natural food products and (2) indulgent specialty snack products. We sell our products nationally through a number of channels including: grocery, natural, mass merchandisers, drug, club, value, vending, food service, convenience stores, 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 and other snack and food items, Willamette Valley Fruit Company brand frozen berries, Fresh Frozen brand frozen vegetables, fruits, biscuits and other frozen snacks, Jamba® branded blend-and-serve smoothie kits under license from Jamba Juice Company, Seattle’s Best Coffee® Frozen Coffee Blends branded blend-and-serve frozen coffee beverage under license from Seattle’s Best Coffee, LLC, Sin In A Tin® chocolate pate and other frozen desserts and private label frozen fruit and healthy/natural snacks.  In our indulgent specialty snack food category, products include T.G.I. Friday’s® brand snacks under license from T.G.I. Friday’s Inc. (“T.G.I. Friday’s”), Nathan’s Famous® brand snack products under license from Nathan’s Famous Corporation, Vidalia® brand snack products under license from Vidalia Brands, Inc., Poore Brothers® kettle cooked potato chips, Bob’s Texas Style® kettle cooked chips, and Tato Skins® brand potato snacks. We also manufacture private label snacks for certain grocery retail chains and co-pack products for other snack and cereal manufacturers.

We operate in two segments: (1) frozen products and (2) snack products. The frozen products segment includes frozen fruits, vegetables, beverages, blends and frozen desserts for sale primarily to groceries, club stores and mass merchandisers. All products sold under our frozen products segment are considered part of the healthy/natural food category. The snack products segment includes potato chips, kettle chips, potato crisps, potato skins, pellet snacks, sheeted dough products, cereal, popcorn and extruded products for sale primarily to snack food distributors and retailers. The products sold under our snack products segment includes products considered part of the indulgent specialty snack food category, as well as products considered part of the healthy/natural food category.

We operate manufacturing facilities in eight locations.  Our frozen berry products are processed in Lynden, Washington, Jefferson, Georgia, and two facilities in Salem, Oregon.  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 Jefferson and Thomasville, Georgia and Salem, Oregon.  Our frozen beverage products are packaged at our Lynden, Washington and Jefferson, Georgia facilities.  We also use third-party processors for certain frozen products and to package certain frozen fruits for other manufacturers.  The products of our frozen desserts business are produced in Pensacola, Florida.  Our snack products are manufactured at our Goodyear, Arizona and Bluffton, Indiana facilities, as well as select third-party co-packers for certain products.

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

Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year.  Accordingly, the third quarter of 2015 commenced June 28, 2015 and ended September 26, 2015.

Basis of Presentation

The consolidated financial statements for the quarter ended September 26, 2015 are unaudited and include the accounts of Inventure Foods and all of our wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. The consolidated financial statements, including the December 27, 2014 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 (“U.S. GAAP”).  In the opinion of management, the condensed consolidated financial

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

statements include all adjustments, consisting only of normal recurring adjustments, necessary in order to make the 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 27, 2014. The results of operations for the quarter ended September 26, 2015 are not necessarily indicative of the results expected for the full year.

Fair Value of Financial Instruments

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

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

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

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

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

At September 26, 2015 and December 27, 2014, the carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximate fair values since they are short term in nature.  The carrying value of the long-term debt approximates fair value based on the borrowing rates currently available to us for long-term borrowings with similar terms.  The following table summarizes the valuation of our assets and liabilities measured at fair value on a recurring basis (in thousands) at the respective dates set forth below:

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

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

A summary of the activity of the fair value of the measurements using unobservable inputs (Level 3 Liabilities) for the nine months ended September 26, 2015, is as follows (in thousands):

Earnings Per Common Share

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share is calculated by including all dilutive common shares such as stock options and restricted stock.  Unvested restricted stock grants that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, requires earnings 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 earnings per common share and is therefore not presented.

For the quarter and nine months ended 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.  For the quarter and nine months ended September 27, 2014, respectively, options to purchase 46,652 and 19,524 shares of our common stock were excluded from the computation of diluted earnings per share.  These exclusions were made because the options’ exercise prices were greater than the average market price of our common stock for those periods.  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.

Earnings (loss) per common share was computed as follows for the quarters and nine months ended September 26, 2015 and September 27, 2014 (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 for restricted stock and one to five years for stock options.  We estimate future forfeiture rates based on our historical experience.

Compensation costs related to all stock-based payment arrangements, including employee stock options, are recognized in the financial statements based on the fair value method of accounting.  Excess tax benefits related to stock-based payment arrangements are classified as cash inflows from financing activities and cash outflows from operating activities.  See “Note 10. Stockholders’ Equity” for additional information.

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Recent Accounting Pronouncements

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

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

In May 2014, the FASB issued new accounting guidance related to revenue recognition.  This new standard will replace all current U.S. 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 was scheduled to be effective at the beginning of our 2017 fiscal year and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  However, on July 9, 2015, the FASB approved a proposal to defer the effective date of the new revenue standard by one year, but will permit entities to adopt one year earlier if they choose (i.e., the original effective date).  The deferral results in the new revenue standard being effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017.  We continue to evaluate 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.  We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.

In April 2015, the FASB issued an ASU to simplify the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted.  Entities should apply the new guidance on a retrospective basis. The Company plans to adopt the updated standard in the first quarter of 2016. The Company is currently evaluating the impact that implementing this ASU will have on its financial statements and disclosures.  The Company does not expect the adoption of this guidance to have a significant impact on its financial statements.

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

In September 2015, the FASB issued an ASU simplifying the accounting for measurement-period adjustments for business combinations.  The ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are identified, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date.  The ASU is effective for reporting periods beginning after December 15, 2015 and is applied prospectively. Early adoption is permitted. The ASU may affect our financial statements to the extent we have business combinations in the future.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2.                                      Product Recall

On April 23, 2015, we announced a voluntary product recall of certain varieties of the Company’s Fresh FrozenTM line of frozen vegetables, as well as select varieties of our Jamba® “At Home” line of smoothie kits because the 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):

(1)         Additional cost of revenues represents the provision for the write-down of inventory on hand and for additional costs estimated to be incurred related to the recall, including product expected to be returned from customers and consumers, partially offset by recall-related insurance recoveries.  Through September 26, 2015, the Company has incurred an estimated $18.8 million of product recall charges, $3.5 million of which was recorded during the quarter ended September 26, 2015.  Approximately $1.5 million of the estimated product recall charges remain unsettled as of September 26, 2015.  Additionally, during the quarter and nine months ended September 26, 2015, the Company incurred approximately $1.1 million and $2.2 million, respectively, of incremental production costs as a result of utilizing co-packers.  These charges were partially offset by recall-related insurance recoveries of $4.2 million recorded during the quarter and nine months ended September 26, 2015.

(2)         Additional selling, general and administrative costs consists of approximately $0.6 million and $2.1 million for the quarter and nine months ended September 26, 2015, respectively, of professional fees associated with the recall.

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

We expect there will be additional costs related to this recall recorded in subsequent quarterly periods. Additionally, while it is too soon to reliably estimate the impact of this recall on the Company’s future sales of the Fresh FrozenTM brand and the Jamba® “At Home” line of smoothie kits, net revenues of the frozen vegetable products affected by the recall declined in the second and third fiscal quarters of 2015 compared to prior periods and are expected to be negatively impacted in subsequent quarterly periods.

3.                                      Acquisitions

Sin In A Tin

On September 29, 2014, we acquired the assets and intellectual property of a small boutique frozen desserts business, Sin In A Tin, for approximately $160,000 in cash. An additional amount of up to $0.5 million is payable to the seller in the form of an earn-out based on future net revenues from the Sin In A Tin products.  At the time of acquisition, the contingent consideration was recorded at $0.2 million based on the fair value assessment. Additionally, we recorded $0.1 million of identifiable intangible assets and $0.1 million of net tangible assets that were assumed as a part of this acquisition based on their estimated fair values, and $0.2 million of residual goodwill.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

4.                                      Inventories

Inventories consisted of the following as of September 26, 2015 and December 27, 2014 (in thousands):

5.                                      Goodwill, Trademarks and Other Intangibles

Goodwill, trademarks and other intangibles, net, consisted of the following as of September 26, 2015 and December 27, 2014 (in thousands):

Our amortization expense related to these intangibles was $83,000 and $301,000 for the quarters ended September 26, 2015 and September 27, 2014, respectively.  For the nine months ended September 26, 2015 and September 27, 2014, amortization expense totaled $466,000 and $903,000, 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.  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 during the nine months ended September 26, 2015, which represented the unamortized balance of the related intangible asset.  We believe the carrying values of our remaining goodwill and intangible assets are appropriate as of September 26, 2015.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

6.                                      Accrued Liabilities

Accrued liabilities consisted of the following as of September 26, 2015 and December 27, 2014 (in thousands):

7.                                      Long-Term Debt

Long-term debt consisted of the following as of September 26, 2015 and December 27, 2014 (in thousands):

On November 8, 2013, we entered into a $60.0 million senior secured term loan and a $30.0 million senior secured revolving line of credit with a syndicate of lenders led by U.S. Bank National Association (“U.S. Bank”), pursuant to a Credit Agreement, a Security Agreement and certain other customary ancillary agreements (the “Senior Credit Facility”).  To facilitate the Senior Credit Facility, the Company and its wholly owned subsidiaries entered into a Letter Amendment Agreement, dated as of November 8, 2013, with U.S. Bank (the “Letter Amendment”).  The Letter Amendment reconciled the terms of the Senior Credit Facility with the terms of the Loan and Security Agreement and that certain Loan Agreement (term loan), dated as of November 30, 2006, by and between the Company’s wholly owned subsidiary, La Cometa Properties, Inc., and U.S. Bank.

The borrowing capacity available to us under the Senior Credit Facility consists of notes representing:

·                  A revolving line of credit up to $30.0 million, maturing on November 8, 2018.  At September 26, 2015, $23.4 million was outstanding and $6.6 million was available under the line of credit.  All borrowings under the revolving line of credit bear interest at either (i) the prime rate of interest announced by U.S. Bank from time to time or (ii) LIBOR, plus the LIBOR Rate Margin (as defined in the Senior Credit Facility note) as adjusted.

·                  An equipment term loan B due September 2020 with interest at 3.12%.  On August 14, 2013, we entered into an equipment term loan B to finance equipment located at Willamette Valley Fruit Company.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The Senior Credit Facility maintained the terms and borrowing capacity of the prior agreement with respect to the following:

·                  Bluffton, Indiana mortgage loan due December 2016; interest rate at 30 day LIBOR plus 165 basis points, fixed through a swap agreement to 6.85%; secured by land and a building in Bluffton, Indiana.

·                  Lynden, Washington real estate term loan due July 2017; interest at LIBOR plus 165 basis points; fixed through a swap agreement to 4.28%; secured by a leasehold interest in the real property in Lynden, Washington.

As is customary in such financings, U.S. Bank, on behalf of a syndicate of lenders, may terminate the syndicate’s commitments, accelerate the repayment of amounts outstanding and exercise other remedies upon the occurrence of an event of default (as defined in the Senior Credit Facility), subject, in certain instances, to the expiration of an applicable cure period.  The Senior Credit Facility requires us to maintain compliance with certain financial covenants, including a minimum fixed charge coverage ratio, a leverage ratio and current ratio.

On June 10, 2015, we entered into Amendment No. 3 to the Credit Agreement dated November 8, 2013 (the “Third Amendment”) with a syndicate of lenders led by U.S. Bank. The Third Amendment provided for two incremental term loans under the Credit Agreement in an aggregate principal amount of up $12.0 million (the “First Bridge Loan”).  The first incremental term loan of $6.0 million was received by the Company on June 10, 2015 and the second incremental term loan of $6.0 million was received by the Company on July 1, 2015.

On July 27, 2015, we entered in to Amendment No. 4 to the Credit Agreement dated November 8, 2013 (the “Fourth Amendment”) with a syndicate of lenders led by U.S. Bank. The Fourth Amendment provides for two incremental term loans under the Credit Agreement in the aggregate principal amount of up to $15.0 million (the “Second Bridge Loan” and collectively with the First Bridge Loan, the “Bridge Loans”), with the first incremental term loan of $10.0 million being received July 27, 2015 and the second incremental term loan in the amount of $5.0 million being received August 18, 2015.  The Fourth Amendment amends certain aspects of the Third Amendment.  The Bridge Loans mature on November 30, 2015. The First Bridge Loan bears interest at a rate per annum equal to the sum of (i) the quotient of (a) the Eurodollar Base Rate (as defined in the Credit Agreement) applicable to the relevant Interest Period (as defined in the Credit Agreement) divided by (b) one minus the Reserve Requirement (expressed as a decimal) (as defined in the Credit Agreement) applicable to such Interest Period, plus (ii) 6.00% per annum. The Second Bridge Loan bears interest at a rate per annum equal to the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to the relevant Interest Period divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) 8.00% per annum.  The proceeds from the Bridge Loans will be used for working capital needs, primarily related to the Company’s precautionary recall of certain products related to its Jefferson, Georgia facility (see “Note 2. Product Recall”), and other general corporate purposes.  Any amounts repaid or prepaid in respect of the Bridge Loans may not be reborrowed.  During the quarter ended September 26, 2015, we repaid $5.0 million of the Bridge Loans.  At September 26, 2015, we were in compliance with all of the financial covenants.

In August 2015, we entered into an equipment term loan with Banc of America Leasing & Capital LLC.  The loan will finance up to $4.0 million of new kettles and related equipment for our Goodyear, Arizona facility.  The equipment term loan accrues interest at a rate of 3.22% and is expected to be repaid over 60 recurring monthly payments commencing January 2016.  As of September 26, 2015, approximately $1.4 million of borrowings have been made under this facility.

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 the Company’s subsidiary, 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 that commenced on September 15, 2014.

Interest Rate Swaps

To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements.  Our interest rate swaps qualify for and are designated as cash flow hedges.  Changes in the fair value of a swap that is highly effective and that is designated and qualifies as a cash flow hedge to the extent that the hedge is effective, are recorded in other comprehensive income.

We entered into an interest rate swap in 2006 to convert the interest rate of the mortgage to purchase the Bluffton, Indiana facility from the contractual rate of 30 day LIBOR plus 165 basis points to a fixed rate of 6.85%.  The swap has a fixed pay-rate of 6.85% and a notional value of approximately $1.8 million at each of September 26, 2015 and December 27, 2014, and expires in December 2016.  We evaluate the effectiveness of the hedge on a quarterly basis and, at

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

September 26, 2015, the hedge is highly effective.  The interest rate swap had a fair value of approximately $102,000 and $155,000 at September 26, 2015 and December 27, 2014, respectively, which were recorded as a liability on the accompanying consolidated balance sheets.  The swap value was determined in accordance with the fair value measurement guidance discussed earlier using Level 2 observable inputs and approximates the loss that would have been realized if the contract had been settled at the end of the fiscal period.

We entered into another interest rate swap in January 2008 to effectively convert the interest rate on the real estate term loan to a fixed rate of 4.28%.  The interest rate swap is structured with decreasing notional values to match the expected pay down of the debt.  The notional value of the swap was $2.4 million and $2.6 million at September 26, 2015 and December 27, 2014, respectively.  The interest rate swap is accounted for as a cash flow hedge derivative and expires in July 2017.  The interest rate swap had fair value of approximately $146,000 and $194,000 at September 26, 2015 and December 27, 2014, respectively, which were recorded as a liability on the accompanying consolidated balance sheets.  This value was determined in accordance with the fair value measurement guidance discussed earlier using Level 2 observable inputs and approximates the loss that would have been realized if the contract had been settled at the end of the fiscal period.

8.                                      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.

Under our license agreement with the Jamba Juice Company (“Jamba Juice”), we are obligated and have agreed to indemnify and defend Jamba Juice in the two matters identified below, and Jamba Juice has tendered defense of these matters to us.

On June 28, 2013, a class action complaint against Jamba Juice and the Company, captioned Lilly v. Jamba Juice Company et al (the “Lilly Matter”), was filed in the Federal Court for the Northern District of California.  The plaintiff purports to represent a class of individuals who purchased make-at-home smoothie kits from Jamba Juice, and alleges that such smoothie kits contain unnaturally processed, synthetic and/or non-natural ingredients and that use of the words “all natural” on the labels of these smoothie kits is unfair and fraudulent and violates various false advertising and unfair competition laws.  The plaintiff also alleges that the smoothie kits contain two additional allegedly non-natural ingredients.  The Company asserted its belief that the “all natural” statement on the smoothie kits was not misleading and was in full compliance with U.S. Food and Drug Administration guidelines.  On September 17, 2013, we filed a motion to dismiss, seeking to dismiss plaintiffs’ claims as to gelatin and the Orange Dream Machine smoothie kit.  Our motion was denied in November 2013.  On February 3, 2014, the plaintiffs filed a motion to certify a class of all persons in California who bought certain Jamba Juice smoothie kits.  On September 18, 2014, the court issued an order granting class certification solely for purposes of determining liability and denying certification for purposes of damages.  The court requested further briefing on the question of whether it has jurisdiction to certify a class for purposes of granting injunctive relief.  Following mediation, the basic terms of a proposed class settlement were reached.  The parties signed a definitive agreement that was filed with the court for approval on December 1, 2014.  Subsequently, the court approved the settlement, the terms of which required the Company to (i) remove the “all natural” designation on the labels of the challenged products and (ii) pay $5,000 to each of the two individual plaintiffs and $425,000 to plaintiffs’ counsel for fees and costs.  The Company would pay no damages to class members, although there is no release by class members of any individual damage claims they might have related to the Lilly Matter.  The Company has complied with the requirements of the settlement and the case has been dismissed.

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(unaudited)

On February 26, 2015, the Company received a demand letter from counsel in California purporting to represent plaintiff, Maria Ghermezian and other California consumers.  The letter alleges that the Company’s use of the words “all natural” to describe certain kettle cooked potato chips is misleading and deceptive to consumers and violates the California Consumer Legal Remedies Act.  The demand letter seeks changes to the Company’s advertising of the products, a recall of the products, and restitution.  Numerous “all natural” lawsuits have been brought against various food manufacturers and distributors in California over the past several years, including the Company.  In July 2015, the matter was resolved to the satisfaction of the parties.

9.                                      Business Segments

Our operations consist of two reportable segments: (1) frozen products and (2) snack products.  The frozen products segment produces frozen fruits, vegetables, beverages, blends, desserts, biscuits and other frozen snacks for sale primarily to groceries, club stores, mass merchandisers and industrial customers.  The snack products segment produces potato chips, kettle chips, potato crisps, potato skins, pellet snacks, sheeted dough products, cereal, 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.

We do not allocate assets, selling, general and administrative expenses, income taxes or other income and expense to our reportable segments.  The following tables present information about our reportable segments for the quarters and nine months ended September 26, 2015 and September 27, 2014 (in thousands):

The following table reconciles reportable segment gross profit to our consolidated income (loss) before income taxes for the quarters and nine months ended September 26, 2015 and September 27, 2014 (in thousands):

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(unaudited)

10.                               Shareholders’ Equity

The Company’s 2015 Equity Incentive Plan (the “2015 Plan”) was approved at its 2015 Annual Meeting of Stockholders.  The 2015 Plan replaces the Company’s 2005 Equity Incentive Plan (as amended, the “2005 Plan”), which would otherwise terminate automatically on the tenth anniversary of its initial adoption in May 2005.  Under the 2015 Plan, we are authorized to issue up to 1,400,560 shares plus up to 250,000 additional shares subject to any option or other award outstanding under the 2005 Plan that expires or is forfeited for any reason after the date of the 2015 Annual Meeting of Stockholders.  If any shares of the Company’s common stock subject to awards granted under the 2015 Plan are canceled, those shares will be available for future awards under the 2015 Plan.  Awards granted under the 2015 Plan may include: stock options, stock appreciation rights, restricted stock and stock units, performance shares and units, other stock-based awards and cash-based awards.  The 2015 Plan has a term of ten years.

Restricted Common Stock

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

Total stock-based compensation expense from restricted common stock recognized in the financial statements was $0.3 million during the three months ended September 26, 2015 and September 27, 2014.  Stock-based compensation expense from restricted common stock was $0.8 million during the nine months ended September 26, 2015 and September 27, 2014.  There were no stock-based compensation costs capitalized.

The following table summarizes activities related to restricted stock awards for the nine months ended September 26, 2015:

As of September 26, 2015, the total unrecognized costs related to non-vested restricted stock awards was $0.2 million, which is expected to be recognized over a weighted average period of 0.5 years.  This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future.

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(unaudited)

The following table summarizes activities related to restricted stock units for the nine months ended September 26, 2015:

As of September 26, 2015, the total unrecognized costs related to non-vested restricted stock units was $2.4 million, which is expected to be recognized over a weighted average period of 2.3 years.  This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future.

Stock Options

Stock-based compensation expense from stock options recognized in the financial statements totaled $0.1 million for the three months ended September 26, 2015 and September 27, 2014, which reduced income from operations accordingly.  During the nine months ended September 26, 2015 and September 27, 2014, stock-based compensation expense from stock options totaled $0.3 million and $0.4 million, respectively.  There were no stock-based compensation costs capitalized.

The following table summarizes stock option activity during the nine months ended September 26, 2015:

As of September 26, 2015, the total unrecognized costs related to non-vested stock options granted were $0.5 million.  We expect to recognize such costs in the financial statements over a weighted average period of 2.1 years.  This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future.

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $9.00 as of September 26, 2015, which would have been received by the option holders had all option holders exercised options and sold the underlying shares on that date.  The intrinsic value related to vested stock options outstanding was $2.1 million as of September 26, 2015 based on the exercise price and our closing stock price of $9.00 as of September 26, 2015.

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(unaudited)

The following table summarizes information about stock options outstanding and exercisable at September 26, 2015: