Organization and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 26, 2015

Organization and Summary of Significant Accounting Policies:

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 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 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; and

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

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

At September 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:

		September 26, 2015								December 27, 2014
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		Earn-out Contingent Consideration Obligation
Other assets	Level 1	$	—		$	511	$	—		$	—		$	697	$	—
Interest rate swaps	Level 2	(248		)	—		—			(349		)	—		—
Accrued liabilities	Level 3	—			—		(241		)	—			—		(246		)
Other liabilities	Level 3	—			—		(1,372		)	—			—		(1,602		)

		$	(248	)	$	511	$	(1,613	)	$	(349	)	$	697	$	(1,848	)

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.

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):

	Level 3
Balance at December 27, 2014	$	1,848
Earn-out compensation paid for Willamette Valley Fruit Company	(230		)
Earn-out compensation paid for Sin In A Tin	(5		)

Balance at September 26, 2015	$	1,613

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):

	Quarters Ended					Nine Months Ended
	September 26, 2015			September 27, 2014		September 26, 2015			September 27, 2014
Basic Earnings (Loss) Per Share:
Net income (loss)	$	(1,737	)	$	3,084	$	(18,323	)	$	7,153

Weighted average number of common shares	19,594			19,530		19,580			19,478

Earnings (loss) per common share	$	(0.09	)	$	0.16	$	(0.94	)	$	0.37


Diluted Earnings (Loss) Per Share:
Net income (loss)	$	(1,737	)	$	3,084	$	(18,323	)	$	7,153

Weighted average number of common shares	19,594			19,530		19,580			19,478
Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock	—			484		—			488

Adjusted weighted average number of common shares	19,594			20,014		19,580			19,966

Earnings (loss) per common share	$	(0.09	)	$	0.15	$	(0.94	)	$	0.36

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.

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.