1. Organization and Summary of Significant Accounting Policies

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

On May 28, 2013, we completed our acquisition of the berry processing business of Willamette Valley Fruit Company, (the “WVFC Acquisition”) for a cash purchase price of $9.3 million. An additional amount of up to $3.0 million is payable as contingent consideration in the form of an earn-out if certain performance thresholds are met during the period of up to 7 years following the closing.

We specialize in two primary product categories: 1) Healthy/Natural Food Products 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 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 products, Willamette Valley Fruit CompanyTM, Jamba® branded blend-and-serve smoothie kits under license from Jamba Juice Company, Seattle’s Best Coffee® branded frozen coffee drinks under license from Seattle’s Best Coffee, LLC. and private label frozen fruit and healthy/natural snacks. As part of the WVFC Acquisition we license the Willamette Valley Fruit Company trade name to the former owners of the berry processing business for certain products specified in the licensing agreement. Production and distribution of our Seattle’s Best Coffee® products began during March 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., 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 manufacturers.

We operate manufacturing facilities in five locations. Our frozen berry products are manufactured in Lynden, Washington and two facilities in Salem, Oregon. Our frozen berry business 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. Our frozen beverage products are packaged at our Lynden facility. We also use third party processors for certain frozen products. Our snack products are manufactured at our Arizona and Indiana plants as well as some third party plants 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 2013 commenced March 31, 2013 and ended June 29, 2013.

Basis of Presentation

The consolidated financial statements include the accounts of Inventure Foods, Inc. and all of our wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. The 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. 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 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 29, 2012. The results of operations for the quarter ended June 29, 2013 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 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 June 29, 2013 and December 29, 2012, 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 summarized the valuation of our financial instruments (in thousands):

		June 29, 2013							December 29, 2012
Balance Sheet Classification		Interest Rate Swaps			Non-qualified Deferred Compensation Plan Investments		Earn-out Contingent Consideration Obligation		Interest Rate Swaps			Non-qualified Deferred Compensation Plan Investments
Interest rate swaps	Level 1	$	—		$	—	$	—	$	—		$	—
	Level 2	(605		)	—		—		(766		)	—
	Level 3	—			—		—		—			—
		$	(605	)	$	—	$	—	$	(766	)	$	—

Other assets	Level 1	$	—		$	492	$	—	$	—		$	440
	Level 2	—			—		—		—			—
	Level 3	—			—		—		—			—
		$	—		$	492	$	—	$	—		$	440

Other liabilities	Level 1	$	—		$	—	$	—	$	—		$	—
	Level 2	—			—		—		—			—
	Level 3	—			—		2,400		—			—
		$	—		$	—	$	2,400	$	—		$	—

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 WVFC Acquisition in May 2013, and is included in other long-term liabilities in the condensed consolidated balance sheets. We determined the fair value of the earn-out contingent consideration obligation using a discounted cash flow model. The key assumption used in applying the income approach is a discount rate which approximates our debt credit rating. 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 condensed consolidated statements of income. There were no changes in the fair value of our Level 3 earn-out contingent consideration obligation during the quarter ended June 29, 2013.

Income Taxes

For the quarters ended June 29, 2013 and June 30, 2012 our provisions for income taxes was $669,000 and $998,000 respectively. The effective tax rate for the second quarter of 2013 was 32.2% compared with 38.1% for the second quarter of 2012. The change in the effective tax rate is due to a decrease in our tax-effected equity compensation costs.

For the six months ended June 29, 2013 and June 30, 2012 our provisions for income taxes was $1.3 million and $1.9 million respectively. Our effective tax rate for the six months ended June 29, 2013 and June 30, 2012 was 33.9% and 36.1%, respectively. The change in the effective tax rate is due to a decrease in our tax-effected equity compensation costs.

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 and includes unvested restricted stock grants. Diluted earnings per share is calculated by including all dilutive common shares such as stock options. Under FASB ASC 260-10, 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.

Options to purchase 274,222 and 217,403 shares of our Common Stock were excluded from the computation of diluted earnings per share for both the quarter and six months ended June 29, 2013, respectively. Options to purchase 256,169 and 282,038 shares of our Common Stock were excluded from the computation of diluted earnings per share for the quarter and six months ending June 30, 2012, respectively. 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 quarters and six months ended June 29, 2013 and June 30, 2012 (in thousands, except per share data):

	Quarters Ended				Six Months Ended
	June 29, 2013		June 30, 2012		June 29, 2013		June 30, 2012
Basic Earnings Per Share:
Net income	$	1,407	$	1,623	$	2,463	$	3,345
Weighted average number of common shares	19,307		18,899		19,257		18,590
Earnings per common share	$	0.07	$	0.09	$	0.13	$	0.18

Diluted Earnings Per Share:
Net income	$	1,407	$	1,623	$	2,463	$	3,345
Weighted average number of common shares	19, 307		18,899		19,257		18,590
Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock	395		656		441		870
Adjusted weighted average number of common shares	19,702		19,555		19,698		19,460
Earnings per common share	$	0.07	$	0.08	$	0.13	$	0.17

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 service period of the award, which is currently five to ten 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 share-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 share-based payment arrangements are classified as cash inflows from financing activities and cash outflows from operating activities.

See Note 9 “Shareholder’s Equity” for additional information.

Adoption of New Accounting Pronouncements

We have adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on our financial position or results of operations.