1. Organization, Business and Summary of Significant Accounting Policies:

Inventure Foods, Inc., a Delaware corporation (the “Company,” referred to as “we” “our” or “us”), is a $185+ million leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands.

Our goal is to build a rapidly growing specialty brand company that specializes in evolving consumer eating habits in two primary product segments: 1) Healthy/Natural Food Products 2) Indulgent Specialty Snack Food Brands. We sell our products nationally through a number of channels including: Grocery, Natural, Mass Merchandisers, Drug, Club, Vending, Food Service, Convenience Stores and International. Our goal is to have a diversified portfolio of brands, products, customers and distribution channels.

In the healthy/natural portfolio, products include Rader Farms frozen berries, Boulder Canyon Natural Foods® brand kettle cooked potato chips, Jamba® branded blend-and-serve smoothie kits under license from Jamba Juice Company and private label frozen fruit and healthy/natural snacks. In November 2012, we entered into a license agreement with Seattle’s Best Coffee LLC, and launched a line of blend-and-serve frozen coffee drink kits. Production and distribution of these products are scheduled to begin during the first quarter of 2013.

In the Indulgent Specialty category, products include T.G.I. Friday’s® brand snacks under license from T.G.I. Friday’s Inc., BURGER KING™ brand snack products under license from Burger King Corporation, 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. Our license to sell Burger King™ brand snacks products expired December 31, 2012. We also manufacture private label snacks for certain grocery retail chains and distribute snack food products in Arizona that are manufactured by others.

We own and operate manufacturing facilities in three locations. Our snack products are manufactured at the Arizona and Indiana plants as well as some third party plants for certain products. Our frozen berry products are manufactured by our wholly-owned subsidiary Rader Farms, Inc., a Delaware Corporation (“Rader Farms”). Rader Farms grows, processes and markets premium berry blends, raspberries, blueberries, and rhubarb and purchases marionberries, 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. We also use third party processors for certain products.

On November 5, 2012, we sold our Direct-Store-Delivery (DSD) business for $1.2 million in cash, which primarily covered a network of independently operated and owned service routes and limited fixed assets associated with the DSD business. We received an additional $0.3 million for inventory on-hand. We recognized a net gain of $1.1 million in continuing operations as we will continue to indirectly sell our products through this network at a reduced cost and will no longer sell distributed products. 2012 sales of distributed products were $2.6 million. Our DSD business was part of our Snack segment and included a limited number of snack food products purchased and sold through our DSD network in Arizona.

Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year. Accordingly, the fiscal year end dates result in an additional week of results every five or six years. Fiscal year 2012 commenced January 1, 2012 and ended December 29, 2012, resulting in a 52 week fiscal year. Fiscal year 2011 commenced December 26, 2010 ended December 31, 2011, resulting in a 53 week fiscal year.

Principles of Consolidation

The consolidated financial statements include the accounts of Inventure Foods, Inc. and all of its wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We routinely evaluate our estimates, including those related to accruals for customer programs and incentives, product returns, bad debts, income taxes, long-lived assets, inventories, stock based compensation, interest rate swap valuations, accrued broker commissions and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

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 measurements). The three levels of the fair value hierarchy are described as follows:

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

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

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

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

At December 29, 2012 and December 31, 2011, 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.

		December 29, 2012					December 31, 2011
Balance Sheet Classification		Interest Rate Swaps			Non-qualified Deferred Compensation Plan Investments		Interest Rate Swaps			Non-qualified Deferred Compensation Plan Investments
Interest rate swaps	Level 1	$	—		$	—	$	—		$	—
	Level 2	(766,218		)	—		(843,635		)	—
	Level 3	—			—		—			—
		$	(766,218	)	$	—	$	(843,635	)	$	—

Other assets	Level 1	$	—		$	440,130	$	—		$	384,778
	Level 2	—			—		—			—
	Level 3	—			—		—			—
		$	—		$	440,130	$	—		$	384,778

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.

Derivative Financial Instruments

We utilize interest rate swaps in the management of our variable interest rate exposure and do not enter into derivatives for trading purposes. All derivatives are measured at fair value. Our interest rate swaps are classified as cash flow hedges.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable consist primarily of receivables from customers and distributors for products purchased. Receivables are past due when they are unpaid greater than thirty days. We determine any required reserves by considering a number of factors, including the length of time the accounts receivable have been outstanding, and our loss history. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. We identify slow moving or obsolete inventories and estimate appropriate write-down provisions related thereto. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In the ordinary course of business, we manage price and supply risk of commodities by entering into various short-term purchase arrangements with our vendors.

Property and Equipment

Property and equipment are recorded at cost. Cost includes expenditures for major improvements and replacements. Maintenance and repairs are charged to operations when incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the appropriate accounts, and the resulting gain or loss is recognized. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, ranging from two to thirty years. We capitalize certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are included in property, plant and equipment and amortized on a straight-line basis when placed into service over three years.

We evaluate the recoverability of property and equipment not held for sale by comparing the carrying amount of the asset or group of assets against the estimated undiscounted future cash flows expected to result from the use of the asset or group of assets and their eventual disposition, in accordance with relevant authoritative guidance. If the undiscounted future cash flows are less than the carrying value of the asset or group of assets being evaluated, an impairment loss is recorded. The loss is measured as the difference between the fair value and carrying value of the asset or group of assets being evaluated. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less cost to sell. The estimated fair value would be based on the best information available under the circumstances, including prices for similar assets or the results of valuation techniques, including the present value of expected future cash flows using a discount rate commensurate with the risks involved.

Intangible Assets

Goodwill and trademarks are reviewed for impairment annually or more frequently if impairment indicators arise. Goodwill, by reporting unit, is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduces the fair value of a reporting unit below its carrying value. We have concluded from our annual impairment testing performed in December that neither of our two reporting units were at risk of failing the impairment test in the near term, and we believe that there are no known risks for that conclusion to change at either of our reporting units. Intangible assets with indefinite lives are required to be tested for impairment between the annual tests if an event occurs or circumstances change indicating that the asset might be impaired. Amortizable intangible assets are amortized using the straight-line method over their estimated useful lives, which is the estimated period over which economic benefits are expected to be provided.

Management believes that each of our trademarks has the continued ability to generate cash flows indefinitely, and therefore each of our trademarks has been determined to have an indefinite life. Management’s determination that our trademarks have indefinite lives includes an evaluation of historical cash flows and projected cash flows for each of these trademarks. In addition, there are no legal, regulatory, contractual, economic or other factors to limit the useful life of these trademarks, and management intends to renew each of these trademarks, which can be accomplished at little cost.

See Note 2 “Goodwill, Trademarks, and Other Intangible Assets” for additional information.

Self-Insurance Reserves

We are partially self-insured for the purposes of providing health care benefits to employees covered by our insurance plan. The plan covers all full-time employees of the Company on the first day of the month after hiring date for salaried employees, and the first day of the month following the ninetieth day of service for hourly employees. The plan covers the employee’s dependents, if elected by the employee. We have contracted with an insurance carrier for stop loss coverage that commences when $75,000 in claims is paid annually for a covered participant. In addition, we have contracted for aggregate stop loss insurance which provides coverage after the maximum amount paid by us exceeds approximately $1.5 million. Estimated unpaid claims included in accrued liabilities amount to $0.4 million and $0.3 million at December 29, 2012 and December 31, 2011 respectively. These amounts represent management’s best estimate of amounts that have not been paid prior to the year-end dates. It is reasonably possible that the expense we will ultimately incur could differ.

Revenue Recognition

In accordance with accounting principles generally accepted in the United States, we recognize operating revenues upon shipment of products to customers provided title and risk of loss pass to our customers. In those instances where title and risk of loss does not pass until delivery, revenue recognition is deferred until delivery has occurred. In our snack products segment, revenue for products sold through our local distribution network prior to the sale of this business in November 2012, was recognized when the product is received by the retailer.

Provisions and allowances for sales returns, promotional allowances, coupon redemption and discounts are also recorded as a reduction of revenues in our consolidated financial statements. These allowances are estimated based on a percentage of sales returns using historical and current market information. We record certain reductions to revenue for promotional allowances. There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances. An off-invoice allowance is a reduction of the sales price that is directly deducted from the invoice amount. We record the amount of the deduction as a reduction to revenue when the transaction occurs. We record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue. Anytime we offer consideration (cash or credit) as a trade advertising or promotional allowance to a purchaser of products at any point along the distribution chain, the amount is accrued and recorded as a reduction in revenue. Costs associated with obtaining shelf space (i.e., “slotting fees”) are accounted for as a reduction of revenue in the period in which we incur such costs. The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.

Marketing Costs

We recorded $0.9 million and $1.0 million, in fiscal years 2012 and 2011 respectively, for advertising costs which are included in selling, general and administrative expenses on the Consolidated Statements of Operations. These costs include various sponsorships, coupon administration and consumer advertising programs that we enter into throughout the year, and are expensed as incurred. We are a national co-sponsor of American Rivers, a leading conservation organization protecting and restoring America’s rivers. We are allowed to use the American Rivers mark on packaging and printed materials as well as directly promote products to members and river cleanup volunteers. Our marketing programs also include selective event sponsorship designed to increase brand awareness and to provide opportunities to mass sample branded products.

Also included in selling, general and administrative expense are costs and fees relating to the execution of in-store product demonstrations with club stores or grocery retailers, which were $1.9 million and $3.6 million for the years ended December 29, 2012 and December 31, 2011, respectively. The cost of product used in the demonstrations, which is insignificant, and the fee we pay to the independent third party providers who conduct the in-store demonstrations, are recorded as expense when the event occurs. Product demonstrations are conducted by independent third party providers designated by the various retailer or club chains. During the in-store demonstrations, the consumers in the stores receive small samples of our products, and consumers are not required to purchase our product in order to receive the sample.

Shipping and Handling

Shipping and handling costs are included in cost of revenues. We do not bill customers for freight.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The authoritative guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

It is our policy to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We do not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest or penalties recorded during the years ended December 29, 2012 and December 31, 2011.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Our U.S. federal income tax returns for years 2009 through 2011 remain open to examination by the Internal Revenue Service. Our state tax returns for years 2008 through 2011 remain open to examination by the state jurisdictions.

Stock Options and Stock-Based Compensation

Stock options and other stock based compensation awards expense are adjusted for estimated forfeitures and are recognized on a straight-line basis over the requisite period of the award, which is currently one to five years for stock options, and one to three years for restricted stock. 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 8 “Shareholders’ Equity” for additional information.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income 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. For the year ended December 29, 2012, options to purchase 281,017 shares of our Common Stock were excluded from the calculation of diluted earnings per share because their effects were antidilutive. For the year ended December 31, 2011, options to purchase 215,500 shares of our Common Stock were excluded from the calculation of diluted earnings per share because their effects were antidilutive. 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 or warrants are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be anti-dilutive. Earnings per common share was computed as follows for the years ended December 29, 2012 and December 31, 2011:

	December 29, 2012		December 31, 2011
Basic Earnings Per Share:
Net income	$	7,448,634	$	2,816,837
Weighted average number of common shares	18,821,495		18,109,548
Earnings per common share	$	0.40	$	0.16

Diluted Earnings Per Share:
Net income	$	7,448,634	$	2,816,837
Weighted average number of common shares	18,821,495		18,109,548
Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock	752,038		1,089,320
Adjusted weighted average number of common shares	19,573,533		19,198,868
Earnings per common share	$	0.38	$	0.15

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. We recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. Our financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued.

Recent Accounting Pronouncements

In 2011, the Financial Accounting Standards Board (“FASB”) issued two Accounting Standards Updates (“ASUs”), which amend the guidance for the presentation of comprehensive income. The amended guidance eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Upon adoption, other comprehensive income must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in comprehensive income. We adopted these ASUs in 2012 using two separate but consecutive statements.

In July 2012, the FASB issued new impairment testing requirements for indefinite-lived intangible assets. Under the updated standard an entity would first perform a qualitative impairment test for indefinite-lived intangible assets to determine whether a quantitative assessment is necessary. The requirements are effective for annual and interim impairment tests for fiscal years beginning after September 15, 2012. The Company adopted the requirements during fiscal year 2012, but elected to continue to perform a quantitative impairment analysis for our indefinite-lived intangibles.