10-K 1 a15-23234_110k.htm 10-K

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 26, 2015

 

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)

 

Delaware

 

86-0786101

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

5415 East High Street, Suite 350

Phoenix, Arizona 85054

(Address of principal executive offices) (Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 par value

 

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o No  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant was approximately $206.8 million based upon the closing market price on June 26, 2015, the last business day of the registrant’s most recently completed second fiscal quarter.

 

The number of issued and outstanding shares of the registrant’s common stock, $.01 par value, as of March 2, 2016 was 19,610,838.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the registrant’s 2016 annual meeting of stockholders to be held on May 11, 2016 are incorporated herein by reference in Part III of this Form 10-K to the extent stated herein.

 

 

 



Table of Contents

 

INVENTURE FOODS, INC. AND SUBSIDIARIES

 

ANNUAL REPORT ON FORM 10-K

Year Ended December 26, 2015

 

TABLE OF CONTENTS

 

 

PART I

 

 

 

 

Item 1.

Business

2

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

18

Item 2.

Properties

18

Item 3.

Legal Proceedings

18

Item 4.

Mine Safety Disclosures

18

 

 

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19

Item 6.

Selected Financial Data

21

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 8.

Financial Statements and Supplementary Data

35

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

70

Item 9A.

Controls and Procedures

70

Item 9B.

Other Information

71

 

 

 

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

72

Item 11.

Executive Compensation

72

Item 12.

Security Ownership of Beneficial Owners and Management and Related Stockholder Matters

72

Item 13.

Certain Relationships and Related Transactions, and Director Independence

72

Item 14.

Principal Accounting Fees and Services

72

 

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

73

 

 

SIGNATURES

74

EXHIBITS TO FORM 10-K

75

 



Table of Contents

 

Cautionary Statement Regarding Forward-Looking Statements

 

Our disclosure and analysis in this Annual Report on Form 10-K (“Form 10-K) and in our 2015 Annual Report to Stockholders contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995.  From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements.  We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “believe,” “expect,” “intend,” “estimate,” “project,” “may,” “should,” “will,” “likely,” “will likely result,” “will continue,” “future,” “plan,” “target,” “forecast,” “goal,” “observe,” “seek,” “strategy” and other words and terms of similar meaning.  The forward-looking statements in this Form 10-K reflect the Company’s current views with respect to future events and financial performance.

 

Forward-looking statements are neither historical facts nor assurances of future performance.  Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to certain risks and uncertainties, including, without limitation, 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 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, $.01 par value (“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 Form 10-K will in fact transpire or prove to be accurate.  Readers are cautioned to consider the specific risk factors described herein and in “Item 1A. Risk Factors” of this Form 10-K, and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof.

 

The Company undertakes no obligation to update or publicly revise any forward-looking statement whether as a result of new information, future developments or otherwise.  All subsequent written or oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph.  You are advised, however, to consult any further disclosures we make on related subjects in our subsequently filed Form 10-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 “Item 1A. Risk Factors” of this Form 10-K.  We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995.  You should understand it is not possible to predict or identify all such factors.

 

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PART I

 

Item 1.           Business.

 

General

 

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 $282 million in annual net revenues for the most recently completed fiscal year.  We are headquartered in Phoenix, Arizona with plants in Arizona, Florida, Georgia, Indiana, Oregon and Washington.  Our executive offices are located at 5415 East High Street, Suite 350, Phoenix, Arizona 85054, and our telephone number is (623) 932-6200.

 

The Company was formed in 1995 as a holding company to acquire a potato chip manufacturing and distribution business that was founded by Donald and James Poore in 1986.  In December 1996, we completed an initial public offering of our Common Stock.  In November 1998, we acquired the business and certain assets, including the Bob’s Texas Style® potato chip brand, of Tejas Snacks, L.P., a Texas-based potato chip manufacturer.  In October 1999, we acquired Wabash Foods, LLC (“Wabash”), including the Tato Skins®, O’Boisies® and Pizzarias® trademarks and its Bluffton, Indiana manufacturing operation, and assumed all of Wabash’s liabilities.  In June 2000, we acquired Boulder Authentic Foods, Inc., including the Boulder Canyon® brand of potato chips.  In May 2006, we changed our name from Poore Brothers, Inc. to The Inventure Group, Inc.  In May 2007, we acquired a farming operation and berry processing facility in Lynden, Washington from Rader Farms, Inc. (“Rader Farms”).  In May 2010, we changed our name from The Inventure Group, Inc. to Inventure Foods, Inc.  In May 2013, we acquired the berry processing business of Willamette Valley Fruit Company, LLC (“Willamette Valley Fruit Company”), including the Willamette Valley Fruit CompanyTM frozen fruit and vegetable products.  In November 2013, we acquired Fresh Frozen Foods, LLC (“Fresh Frozen Foods”), including the Fresh FrozenTM frozen fruit and vegetable products. In September 2014, we acquired certain assets of a small boutique frozen desserts business, Sin In A TinTM.

 

Segments

 

We operate in two segments: frozen products and snack products. The frozen products segment produces frozen fruits, vegetables, beverages 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 produces potato chips, kettle chips, potato crisps, potato skins, pellet snacks, sheeted dough products 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.

 

The contributions of each of our product segments to net revenues from external customers and gross profit are set forth in Note 12 “Business Segments and Significant Customers”  to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

 

Products

 

For the fiscal years 2015, 2014 and 2013, net revenues totaled $282.6 million, $285.7million and $215.6 million, respectively.

 

In our healthy/natural food category, products include Rader Farms® frozen berries, Boulder Canyon® Authentic Foods brand kettle cooked potato chips, Willamette Valley Fruit CompanyTM frozen fruit and vegetables, Fresh FrozenTM frozen fruit and vegetables, 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, and Sin In A TinTM chocolate pate and other frozen desserts and private label frozen fruit and healthy/natural snacks.  For the year ended December 26, 2015, our healthy/natural food category represented 83.8% of net sales. For fiscal 2015, 2014 and 2013, net revenues of our healthy/natural food category totaled $236.7 million, $236.6 million and $152.2 million, respectively.

 

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In our indulgent specialty snack food category, products include T.G.I. Friday’s® brand snacks under license from 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 snack chip products for several grocery chains and natural stores and co-pack products for other snack manufacturers.  While extremely price competitive, we believe that such arrangements provide a profitable opportunity for us to improve the capacity utilization of our manufacturing facilities. For fiscal 2015, 2014 and 2013, net revenues of our indulgent specialty snack category totaled $45.9 million, $49.1 million and $63.3 million, respectively.

 

During fiscal 2015 and 2014, we launched the following new products under our existing brands:

 

Brand

 

Fiscal 2015

 

Fiscal 2014

Frozen Products Segment:

 

 

 

 

Rader Farms®

 

·        Fresh Start Organic Line

 

·        Fruit Plus Vitamins Mixed Berry

·        Fruit Plus Vitamins Plus Strawberry

·        Fruit Plus Vitamins Plus Blueberry

·        Summers Peak Blueberry

·        Fresh Start Morning Vitality

·        Fresh Start Daily Power

·        Fresh Start Sunrise Refresh

Jamba®

 

·        Razzmatazz

·        Organic Strawberries Wild

·        Orange Fusion

 

·        Strawberry Wild Mexico

·        Blue Fusion

·        Red Fusion

Fresh Frozen™

 

·        N/A

 

·        Steamables

·        Country Blends

·        Triple Berry Blends

Snack Products Segment:

 

 

 

 

Boulder Canyon®

 

·        Coconut Oil Sea Salt Kettle Chips

·        Coconut Oil Pineapple Habanero Kettle Chips

·        Coconut Oil Red Curry Kettle Chips

·        Coconut Oil Sea Salt Popcorn

·        Avocado Oil Sea Salt Popcorn

·        Olive Oil White Cheddar Popcorn

 

·        Authentic Foods Asiago Cheese Protein Chip

·        Chocolate Protein Chip

·        Chocolate Arise Cereal

·        Yogurt Arise Cereal

·        Organic Vegi Sticks

·        Organic Kettle Chips with Sea Salts

·        Thanksgiving Feast Variety Pack

Nathan’s Famous®

 

·        N/A

 

·        Beer Battered Onion Rings

T.G.I.  Friday’s®

 

·        Low Fat Hot Fries

·        Low Fat Cheese Fries

·        Sweet Potato Skins

·        Snack Mix (Sweet & Spicy, Sweet BBQ, Sriracha Ranch, Cheddar Bacon)

 

·        Bacon Ranch Potato Skins

Poore Brothers®

 

·        Sriracha Ranch Potato Chips

 

·        N/A

Bob’s Texas Style®

 

·        Bacon & Jack

·        Olive Oil

 

·        N/A

Vidalia®

 

·        Sweet Potato Crisps

 

·        Sweet Onion Kettle

·        Sweet Onion BBQ Kettle

·        Zesty Ranch Sweet Onion Petal

 

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The contributions of each product segment to net revenues from external customers are set forth in Note 12 “Business Segments and Significant Customers” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

 

Business Strategy

 

Our business strategy is to continue building a diverse portfolio of high quality, competitively priced healthy/natural food brands and indulgent specialty snack food brands through expansion of existing brands, licensing, acquisition and development.  Our goals are to (i) capitalize on healthy/natural and indulgent specialty snack food brand opportunities, (ii) deliver incremental category growth for retailers, (iii) provide product innovation targeted to a defined consumer segment, (iv) build relationships with major retailers in all channels of distribution by providing them higher margins, excellent customer service and continued innovation and (v) maintain a diverse set of brands, products, customers and channels.  The primary elements of our long-term business strategy are as follows:

 

Promote, Develop, Acquire or License Innovative Healthy/Natural and Indulgent Specialty Snack Food Brands.  A significant element of our business strategy is to promote, develop, acquire or license new innovative healthy/natural and indulgent specialty snack food brands that provide a strategic fit with our existing business and that have strong national brand recognition in order to expand, complement and diversify our existing business. Our primary focus is to promote products under brands which we own.

 

Broaden Distribution of Existing Brands.  We plan to increase distribution and the market share of our existing branded products through selected trade activity in various existing or new markets and channels. Marketing efforts may include, among other things, trade advertising and promotional programs with distributors and retailers, in-store advertisements, in-store displays and limited consumer advertising, public relations and coupon programs. We believe growth opportunities exist to increase the distribution of our (i) Boulder Canyon®, Fresh Frozen™ and Radar Farms products in grocery stores, which have all-commodity volumes, or ACVs, in such stores of less than 38% for Boulder Canyon®, less than 20% for Fresh Frozen™ and less than 20% for Radar Farms, (ii) Boulder Canyon® and Fresh FrozenTM products in mass merchandise stores, (iii) Boulder Canyon® and Radar Farms products in club stores, and (iv) Boulder Canyon® products in natural, drug and convenience stores. Our Boulder Canyon® products have an ACV of approximately 83% in natural food stores.

 

Broaden Distribution of Private Label.  We plan to increase distribution of our private label products to existing or new customers.  This will help leverage our infrastructure and capacity and is expected to improve profit margins as there are no related advertising and promotional costs.  Our manufacturing and distribution of private label products enhances our ability to partner with key retailers.

 

Develop New Products for Existing Brands.  We plan to continue our innovation activities to identify and develop (i) new line extensions for our brands, such as new flavors or products, and (ii) new food segments in which to expand the presence of our brands.

 

Leverage Infrastructure and Capacity.     Our Bluffton, Indiana, Goodyear, Arizona, Lynden, Washington, Salem, Oregon, Jefferson, Georgia, and Thomasville, Georgia facilities operated at approximately 25%, 90%, 70%, 70%, 50% and 50% of their respective manufacturing capacities as of December 26, 2015.  We intend to continue to expand our branded product lines, as well as secure new manufacturing opportunities in private label and co-packing arrangements. In addition, we plan to continue capital investment in our plants and improve operating efficiencies.

 

Pursue Selective Licenses and Acquisitions.     We continue to evaluate acquisition opportunities where we can use our competencies in operations, sales, marketing and distribution in order to drive revenue and profit growth.

 

Improve Profit Margins.     We plan to increase our profit margins through increased long-term revenue growth, improved operating efficiencies, higher margin new products and high-growth product categories. For example, we believe the following margin improvement initiatives are important elements of our strategy: rationalization of unprofitable customer accounts, improved product mix and channel flow, expanded sales growth, improved operating efficiencies and leverage and higher margin new product introductions. We believe that improved profit margins are possible with the achievement of the business strategies discussed above.

 

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Manufacturing

 

Our Company-owned manufacturing facility in Bluffton, Indiana produces snack products utilizing a sheeting and frying process with three fryer lines that can produce up to approximately 9,000 pounds per hour and two extruded lines capable of producing up to 4,000 pounds per hour. Previously introduced production capabilities at our Bluffton, Indiana facility allow us to use existing equipment to make additional snacks, including pellet snacks, which are entirely different in appearance and taste from our other product lines. We believe this technology will help expand our product lines and facilitate growth. In fiscal 2013, we installed additional packaging capacity to meet increasing demand on branded, licensed and contract manufacturing opportunities.  In fiscal 2014, we installed additional extrusion capacity to service this growing business segment.  We also produce snack products for customers under private label and co-packing agreements. Our Indiana facility is operating at approximately 20% of sheeted processing capacity and 35% of extruded capacity as of December 26, 2015.

 

Our Company-owned manufacturing facility in Goodyear, Arizona has the capacity to produce up to approximately 4,600 pounds of potato chips per hour, including 2,500 pounds of batch-fried potato chips per hour and 2,100 pounds of continuous-fried potato chips per hour. Poore Brothers®, Bob’s Texas Style®, Boulder Canyon® Authentic Foods, co-packing and private label branded potato chips are produced in a variety of flavors utilizing a batch-frying process. While conventional continuous line cooking methods may produce higher production volume, we believe that our batch-frying process is superior and produces premium potato chip products with enhanced crispness and distinctive flavor. In the fourth quarter of fiscal 2015 we installed two additional batch-frying kettles. Our Arizona facility is operating at approximately 90% of packaging capacity as of December 26, 2015.  In February 2016, we completed the installation of two additional batch-frying kettles and additional packaging equipment in Goodyear and we plan on adding four more batch-frying kettles in Bluffton by the end of the second quarter of fiscal 2016.  These new kettles will reduce our potato chip packaging capacity to 79% in 2016 compared to 90% in 2015, while also significantly reducing our use of co-packers.

 

Our Company-owned Rader Farms farming facility in Lynden, Washington has the capacity to grow up to eight million pounds of raspberries and blueberries per year. 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 and packaged for sale and distribution nationally to wholesale customers under the Rader Farms® brand, as well as through store brands. We also use third-party processors for certain products. Our individually quick frozen, or IQF, processing facilities located at the same location have the capacity to apply the IQF process to 55 million pounds of berries annually.  In fiscal 2013, we invested in new processing equipment to more effectively and efficiently cool the fruit after being harvested, thereby increasing quality. Additionally, we added a packaging line to increase capacity. In 2014, additional IQF processing equipment was added to further increase capacity. Our Washington processing facility is operating at approximately 70% of packaging capacity as of December 26, 2015.

 

In May 2013, we acquired the berry processing business of Willamette Valley Fruit Company. Willamette Valley Fruit Company has two plants in Salem, Oregon. Both plants occupy leased facilities and process and package marionberries, other blackberries, blueberries, strawberries, cranberries, rhubarb, and other fruits and vegetables for industrial customers, as well as contract manufacturing and private label brands. The processing facility has four IQF lines capable of freezing 35,000 pounds per hour of fruit during peak production. As this plant is seasonal with the fruit harvests, it operates at approximately 100% of capacity in the peak production months of June through September and at approximately 20% of capacity the remainder of the year. The packaging plant has the ability to package up to approximately 19 million pounds annually and is operating at 70% of capacity as of December 26, 2015.

 

In November 2013, we acquired Fresh Frozen Foods. Fresh Frozen Foods has two plants located in Jefferson, Georgia and Thomasville, Georgia which process and package IQF vegetables, breads and other items sold under the Fresh FrozenTM brand. The Jefferson plant operates as a packaging facility capable of packaging approximately 95 million pounds of products annually. This plant is operated at approximately 70% of capacity as of December 26, 2015. The Thomasville facility is a processing facility which has one IQF line capable of producing approximately 77 million pounds of IQF carrots, peas, potatoes, onions and other vegetables and fruits annually. This plant is operated at approximately 50% of capacity as of December 26, 2015.

 

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Marketing and Distribution

 

We conduct our marketing efforts through three principal sets of activities: (i) consumer marketing in print, outdoor, digital and social media; (ii) consumer incentives such as coupons; and (iii) trade promotions to support price features, displays and other merchandising of our products by our customers.

 

Our products are sold through a number of channels, including: grocery stores, natural food stores, mass merchandisers, drug and convenience stores, club stores, value, vending, food service, industrial and international. Our products are distributed through Company-owned and third-party warehouses, direct store delivery, distribution centers and other facilities.

 

Suppliers

 

The principal raw materials we utilize are potatoes, potato flakes, potato starch, corn, oils, seasonings, berries and vegetables. We believe that the raw materials we need to produce our products are readily available from numerous suppliers on commercially reasonable terms. Potatoes, potato flakes and corn are widely available year-round, although they are subject to seasonal price fluctuations. We use a variety of oils and seasonings in the production of our snack products and believe that alternative sources for such oils and seasonings, as well as alternative oils and seasonings, are readily abundant and available. We may lock in prices for raw materials, such as oils, as we deem appropriate. We freeze an average of approximately 50% of our total annual berry requirements and approximately 35% of our total annual vegetable requirements in our own processing facilities, and augment that production by purchasing additional frozen berries and vegetables to meet customer demand. We purchase both fresh berries and vegetables from local farmers and already frozen berries and vegetables for our repackaging business, and we purchase yogurt in cube form from a third-party company for use in our at home smoothie kits. We use packaging materials in our snack and frozen businesses.

 

We choose our suppliers based primarily on price, quality, availability and service. Although we believe that our required products and ingredients are readily available, and that our business success is not dependent on any single supplier, the failure of certain suppliers to meet our performance specifications, quality standards or delivery schedules could have a material adverse effect on our business and results of operations. In particular, a sudden scarcity, a substantial price increase, or an unavailability of product ingredients could materially adversely affect our operations. In such circumstances, alternative ingredients may not be available when needed or, if available, on terms acceptable to the Company.

 

Customers

 

Costco accounted for approximately 23%, 26% and 35% of the Company’s 2015, 2014 and 2013 net revenues, respectively.  With the addition of our Willamette Valley Fruit Company and Fresh Frozen Foods businesses in 2013, Costco accounted for approximately 27% of consolidated 2013 pro forma net revenues (see Note 3 “Acquisitions” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K).  The remainder of our revenues were derived from sales to customers, grocery chains, club stores, regional distributors and other manufacturers, none of which individually accounted for more than 10% of our net revenues in fiscal 2015.  A decision by any of our major customers to cease or substantially reduce their purchases could have a material adverse effect on our business.

 

The majority of our revenues are attributable to external customers in the United States.  We do sell to Canadian and international customers as well, however, the revenues attributable to these customers are immaterial.  All of our assets are located in the United States.

 

Competition

 

Our snack products generally compete against other snack foods, including potato chips, tortilla chips, popcorn, cheese snacks and other specialty snack brands. The snack food industry is large and highly competitive and is dominated by large food companies, including Frito-Lay, Inc., a subsidiary of PepsiCo, Inc., The Kellogg Company, ConAgra Foods, Inc., Diamond Foods, Inc., General Mills, Inc. and Snyder’s-Lance, Inc. These companies possess substantially greater financial, production, marketing, distribution and other resources than us, and their brands are more widely recognized than our products.  Numerous other companies that are actual or potential competitors offer products similar to ours, and some of these have greater financial and other resources (including more employees and more extensive facilities) than us. In addition, many competitors offer a wider range of products than we offer. Local or regional markets often have significant smaller competitors, many of whom offer products similar to ours. Expansion of our operations into new markets has and will continue to encounter significant competition from national, regional and local competitors that may be greater than that encountered by us in our existing markets. In addition, such competitors may challenge our position in our existing markets.

 

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While we believe that we have innovative products and methods of operation that will enable us to compete successfully, no assurance can be given that we will be able to do so when faced with such competition.

 

Our frozen berry products generally compete against other packaged berries on the basis of quality and price. Key competitors include Townsend Farms, Inc., Sunopta Inc., Cascadia Farm of Small Planet Foods, Inc., Wyman’s of Maine, Dole Food Company, Inc., Frozen Foods Inc., Stahlbush Island Farms Inc. and other regional IQF and bagging fruit operations.  Obtaining freezer space at supermarkets and club stores is critical to successfully compete with other berry products, as supermarkets and club stores will frequently only carry one brand of frozen berry products, contrasted to snack products where multiple brands are typically carried.

 

Our frozen vegetable products generally compete against other packaged vegetables on the basis of quality and price. Key competitors include the Birds Eye Frozen division of Pinnacle Foods, Inc., General Mills, Inc., The Pictsweet Company and Hanover Foods Corp. Obtaining freezer space at supermarkets and club stores is critical to successfully compete with other vegetable products, as supermarkets and club stores will frequently only carry a few brands of frozen vegetable products.

 

Our smoothie kits generally compete against other packaged smoothie kits on the basis of quality and price. Key competitors include Dole Food Company, Inc. smoothies and a number of smaller competing brands. Obtaining freezer space at grocery, mass merchandiser and club stores is critical to successfully compete with other smoothie products, as grocery, mass merchandiser and club stores will frequently only carry two to three brands of frozen smoothie products, contrasted to snack products where multiple brands are typically carried.

 

The principal competitive factors affecting the markets in which we compete include product quality and taste, brand awareness among consumers, access to shelf or freezer space, price, advertising and promotion, varieties offered, nutritional content, product packaging and package design. We compete in our markets principally on the basis of product quality and taste. Frozen products are produced at our Lynden, Washington, Salem, Oregon and Thomasville, Georgia facilities utilizing IQF technology, for which we do not have exclusive rights.  However, we have patent pending technology to apply nutrients sourced from fruits and vegetables to boost the nutrition level in our fortified fruit products.  Products produced at our Bluffton, Indiana facility involve the use of unique technology including sheeted dough and pellet snacks. We do not have exclusive rights for this technology either. The taste and quality of the products we produce at our Goodyear, Arizona facility are largely attributable to two elements of our manufacturing process: batch-frying and distinctive seasonings to produce a variety of flavors. We do not have exclusive rights to the use of either element. Consequently, competitors may incorporate such elements into their own processes.

 

Government Regulation

 

The manufacture, labeling and distribution of our products are subject to the rules and regulations of a variety of federal, state and other governmental agencies.  There can be no assurance that new laws or regulations will not be passed that could require us to alter the taste or composition of our products or impose other obligations on us.  New or increased government regulation of the food industry, including, but not limited to, laws or regulations related to food safety, chemical composition, production processes, traceability, product quality, packaging, labeling and product recalls, could adversely impact our results of operations by increasing production costs, or restricting our methods of operation and distribution.  Such changes could also affect sales of our products and have a material adverse effect on our financial condition and results of operations.  These regulations may address food industry or society factors, such as obesity, nutritional and environmental concerns and diet trends.  In addition to laws relating to food products, our operations are governed by laws relating to environmental matters, workplace safety and worker health.  We believe that we presently comply in all material respects with such laws and regulations.

 

Employees

 

As of December 26, 2015, we had 1,100 total employees.  There are 972 employees in manufacturing and distribution, composed of 527 full-time, 66 part-time, and 379 temporary positions.  There are 44 employees in sales and marketing, and 84 in administration and finance.  Our employees are not represented by any collective bargaining organization, and we have never experienced a work stoppage.  We believe that our relations with our employees are good.

 

Patents, Trademarks and Licenses

 

We own the following trademarks in the United States: Boulder Canyon®, Canyon Cut®, Rader Farms®, Poore Brothers®, Intensely Different®, Texas Style®, Tato Skins®, O’Boisies®, Pizzarias®, Braids®, Willamette Valley Fruit

 

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Company™, Fresh Frozen™ and Sin In A Tin™. We consider our trademarks to be of significant importance in our business. We are not aware of any circumstances that would have a material adverse effect on our ability to use our trademarks.

 

From time to time, we enter into licenses with owners of distinctive brands to produce branded snack food products. These licenses may require us to make royalty payments on sales and to achieve certain minimum sales levels by certain dates during the contract term.  The termination of any of our license agreements, whether at the expiration of their term or prior thereto, could have a material adverse effect on our financial condition and results of operations.

 

In 2000, we launched our T.G.I. Friday’s® brand snack products under a license agreement with T.G.I. Friday’s, which expires in December 2019.  In July 2009, we entered into a license agreement with Jamba Juice, which expires in 2035, and, in 2010, launched a line of Jamba® branded blend-and-serve smoothie kits.  In January 2011, we entered into a license agreement with Nathan’s Famous Corporation, which expires in 2031, and launched a line of Crunchy Crinkle Fries. In June 2012, we entered into a license agreement with Vidalia Brands, Inc. that expires in 2019 and launched a line of onion flavored snacks. In November 2012, we entered into a license agreement with Seattle’s Best Coffee LLC, with an initial term expiring in November 2017 and an automatic five-year extension upon meeting certain minimum sales targets, and created a line of blend-and-serve frozen coffee drink kits.

 

We produce T.G.I. Friday’s® brand snack products, Tato Skins® brand potato crisps and Boulder Canyon® Authentic Foods Rice and Bean, Hummus Chips, Garden Select Vegetable Crisps and Ancient Grains utilizing a sheeting and frying process that includes technology that we license from a third party. Under the terms of such license agreement, we have a royalty-bearing license to use the technology in the United States, Canada and Mexico until such time as the parties mutually agree to terminate the license agreement. Even though the patents for this technology expired in December 2006, in consideration for the use of this technology, we are required to make royalty payments on sales of products manufactured utilizing the technology until the termination date of such agreement. However, should products substantially similar to Tato Skins®, O’Boisies® and Pizzarias® become available for any reason in the marketplace by any manufacturer other than us which results in a sales decline of 10% or more, any royalty obligation for the respective products shall cease.

 

In 2014, we introduced Rader Farms® Fruit PLUS Vitamins™, the first-ever fortified whole frozen fruit product.  Using proprietary technology and topical nutrients sourced from whole fruits and vegetables, Fruit PLUS Vitamins builds on naturally-occurring vitamins found within whole strawberries, blueberries and blackberries and boosts the nutrition level with five additional vitamins: B1, B6, D, E and K.  We currently have a patent pending for this technology.

 

Seasonality

 

The food products industry is seasonal.  Consumers tend to purchase our snack products at higher levels during the major summer holidays and also at times surrounding major sporting events throughout the year.  Additionally, smoothie sales tend to peak during the warmer summer months. Our industrial berry business at Willamette Valley Fruit Company is generally slower during the first quarter of each fiscal year. Additionally, we may face seasonal price increases for raw materials.

 

Industry Practices

 

Our agreements with customers are generally short-term, primarily due to the nature of our products, industry practices and fluctuations in supply, demand and price for such products. In certain instances where we are selling further processed products to large customers, we may enter into written agreements whereby we will act as the exclusive or preferred supplier to the customer, with pricing terms that are either fixed or variable.

 

Research and Development

 

We incur research and development costs to support growth through the introduction of new products and the improvement in quality of existing products.  We recorded $0.4 million, $0.3million and $0.3 million in fiscal 2015, 2014 and 2013, respectively, for research and development costs.

 

Available Information

 

Our Internet address is www.inventurefoods.com. We make available at this address, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports

 

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filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). In this Form 10-K, we incorporate by reference as identified herein certain information from parts of our proxy statement for the 2016 annual meeting of stockholders, which we will file with the SEC and will be available free of charge on our website. Reports of our executive officers, directors and any other persons required to file securities ownership reports under Section 16(a) of the Exchange Act are also available through our website. Information contained on our website is not part of this Form 10-K.

 

You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet website located at http://www.sec.gov that contains the information we file or furnish electronically with the SEC.

 

Item 1A.        Risk Factors.

 

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could materially adversely affect our business, financial condition, results of operations, cash flows and the trading price of our Common Stock.  You should read and carefully consider these risk factors, and the entirety of this Form 10-K, before you invest in our securities.

 

Risks Related to Our Business

 

We may not be successful in our future acquisition or other strategic transaction endeavors, if any, which could have an adverse effect on our business and results of operations.

 

A material element of our business strategy is the development, acquisition and/or licensing of innovative specialty food brands, for the purpose of expanding, complementing and/or diversifying our business. We may in the future engage in acquisitions or other strategic transactions, such as joint ventures or investments in other entities to facilitate this business strategy. We may be unable to identify suitable targets, opportunistic or otherwise, for acquisitions or other strategic transactions in the future. If we identify a suitable candidate, our ability to successfully implement the strategic transaction would depend on a variety of factors including our ability to obtain financing on acceptable terms and comply with the restrictions contained in our debt agreements. If we need to obtain our lenders’ consent to a strategic transaction, they may refuse to provide such consent or condition their consent on our compliance with additional restrictive covenants that limit our operating flexibility. Strategic transactions involve risks, including those associated with integrating the operations or maintaining the operations as separate (as applicable), financial reporting, disparate technologies and personnel of acquired companies, joint ventures or related companies; managing geographically dispersed operations, joint ventures or other strategic investments; the diversion of management’s attention from other business concerns; the inherent risks in entering markets or lines of business in which we have either limited or no direct experience; unknown risks; and the potential loss of key employees, customers and strategic partners of acquired companies, joint ventures or companies in which we may make strategic investments. We may not successfully integrate any businesses or technologies we may acquire or strategically develop in the future and may not achieve anticipated revenue and cost benefits relating to any such strategic transactions. Strategic transactions may be expensive, time consuming and may strain our resources. Strategic transactions may not be accretive to our earnings and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, one-time write-offs of goodwill and amortization expenses of other intangible assets. In addition, strategic transactions that we may pursue could result in dilutive issuances of equity securities.

 

We may incur losses and costs as a result of any product recalls we are required to make or product liability claims that may be brought against us.

 

We may need to recall some of our products if they become adulterated or if they are mislabeled.  We may also be liable if the consumption of any of our products causes injury.  Such injury could result from tampering by unauthorized third parties; product contamination (such as listeria, e-coli, and salmonella) or spoilage; the presence of foreign objects, substances, chemicals, and other agents; residues introduced during the growing, storage, handling or transportation phases; or improperly formulated products.  A widespread product recall could result in significant and unexpected expenditures and losses due to the costs of a recall, the destruction of product inventory and lost sales due to the unavailability of product for a period of time.  We could also suffer losses from a significant product liability judgment against us.  The product liability and product recall insurance maintained by us may not be adequate to cover any loss or exposure for product liability, and such insurance may not continue to be available on terms acceptable to us.  Any product liability claim not fully covered by

 

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insurance, as well as any adverse publicity resulting from a product liability claim or product recall, could have a material adverse effect on our operating results, and could also result in adverse publicity, damage to our reputation and a loss of consumer confidence in our products.  In addition, our results could be adversely affected if consumers lose confidence in the safety and quality of our products, ingredients or packaging, even in the absence of a recall or a product liability case.

 

Concerns with the safety and quality of our food products or ingredients could negatively impact our brand image and profitability.

 

Our success depends on our ability to maintain consumer confidence in the safety and quality of our products or ingredients.  Our success also depends on our ability to maintain the brand image of our existing products, build up brand image for new products and brand extensions, and maintain our corporate reputation.  We cannot assure you, however, that our commitment to product safety and quality and our continuing investment in advertising and marketing will have the desired impact on our products’ brand image and on consumer preferences. Product safety or quality issues, actual or perceived, or allegations of product contamination, even when false or unfounded, could tarnish the image of the affected brands and may cause consumers to choose other products.  Allegations of product safety or quality issues or contamination, even if untrue, may require us from time to time to recall a product from all of the markets in which the affected production was distributed.  Such issues or recalls could negatively affect our profitability and brand image.

 

A significant portion of our revenues are derived from one customer.

 

Overall, Costco accounted for approximately 23% of our 2015 net revenues.  A decision by Costco to no longer carry certain frozen berry products could have a material adverse impact on our Frozen business.  A decision by any major customer to cease or substantially reduce its purchases, or a decrease in the popularity of frozen berries during any year, could have a material adverse effect on our operating results, and such decision by Costco would have a material adverse effect on our business, financial condition and results of operations.

 

We depend on a license agreement for the right to sell our T.G.I. Friday’s® brand.

 

For the year ended December 26, 2015, approximately 12% of our net revenues were attributable to the T.G.I. Friday’s® brand products, which are manufactured and sold by us under our license agreement with T.G.I. Friday’s that expires in December 2019.  The license agreement imposes certain requirements and conditions on us (including, without limitation, minimum sales targets).  Our failure to comply with these requirements and conditions could result in the early termination of this license agreement by T.G.I. Friday’s.  If we are unsuccessful in negotiating an extension of this license agreement, or the license agreement is not renewed at the expiration of its term or is terminated prior thereto, our business, financial condition and results of operations would be materially and adversely affected.

 

Our business may be adversely affected by oversupply of snack and frozen products at the wholesale and retail levels and seasonal fluctuations.

 

Profitability in the food product industry is subject to oversupply of certain snack and frozen products at the wholesale and retail levels, which can result in our products going out of date before they are sold.  The snack and frozen products industry is also seasonal.  Consumers tend to purchase our snack products at higher levels during the major summer holidays and also at times surrounding major sporting events throughout the year.  Our industrial berry business at Willamette Valley Fruit Company is generally slower during the first quarter of each fiscal year.  Additionally, we may face seasonal price increases for raw materials.  Such seasonal costs could materially and adversely affect our results of operations in any given quarter.

 

We may incur substantial costs in order to market our products.

 

Successful marketing of our products generally depends upon obtaining adequate retail shelf space for product display, particularly in supermarkets.  Frequently, food manufacturers and distributors, incur costs in order to obtain additional shelf space.  Whether or not we incur such costs in a particular market is dependent upon a number of factors, including demand for our products, relative availability of shelf space and general competitive conditions.  We may incur significant shelf space or other promotional costs as a necessary condition of entering into competition or maintaining market share in particular markets or stores.  If incurred, such costs may have a material adverse effect on our results of operations.

 

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We may not be able to respond successfully to shifting consumer preferences.

 

Consumer preferences evolve over time and are extremely difficult to predict.  Our success depends in part on our ability to timely respond to current market trends and anticipate changing consumer tastes and dietary habits and to develop and license new products that appeal to such preferences, including concerns of consumers regarding health and wellness, obesity, product attributes, and ingredients.  Introduction of new products and product extensions requires significant development and marketing investment.  If our products fail to meet consumer preferences, or we fail to introduce new and improved products on a timely basis, then the return on that investment will be less than anticipated and our strategy to grow sales and profits with investments in marketing and innovation will be less successful.  Similarly, demand for our products could be affected by increased attention to nutritional values, such as the sodium, fat, protein, or calorie content of different products, or concerns regarding the health effects of specific ingredients, such as gluten, soybeans, nuts, and oils.  If consumer demand for our products declines, our sales volumes and our business could be negatively affected.

 

The loss of certain key employees could adversely affect our business.

 

Our success is dependent in large part upon the abilities of our executive officers, including Terry McDaniel, Chief Executive Officer, and Steve Weinberger, Chief Financial Officer.  Implementation of our business strategy will challenge our executive officers, and the inability of such officers to perform their duties or our inability to attract and retain other highly qualified personnel could have a material adverse effect upon our operating results.

 

We may not be able to successfully implement our strategy to expand our business internationally.

 

We plan to expand sales to Canadian customers and are exploring other international market opportunities for our brands.  Such expansion may require significant management attention and financial resources and may not produce desired levels of revenue.  International business is subject to inherent risks, including longer accounts receivable collection cycles, difficulties in managing operations across disparate geographical areas, difficulties enforcing agreements and intellectual property rights, fluctuations in local economic, market and political conditions, compliance requirements with U.S. and foreign export regulations, potential adverse tax consequences and currency exchange rate fluctuations.  Currency exchange rate fluctuations may impact our ability to remain competitive in international markets.

 

We rely on information technology in our operations, and any material failure, inadequacy, interruption or breach of security of that technology could harm our ability to effectively operate our business.

 

We rely on information systems across our operations, including for management, sales, and order processing. Our ability to effectively manage our business and coordinate the sales and delivery of our products depends significantly on the reliability and capacity of these systems.  Like other companies, our information technology systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, and other security issues.  The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, a material network breach in the security of these systems as a result of cyber-attack, or any other failure to maintain a continuous and secure cyber network could result in substantial harm or inconvenience to us or our customers.  This could include the theft of our intellectual property or trade secrets, or the improper use of personal information or other “identity theft.”  Each of these situations or data privacy breaches may cause delays in customer service, reduce efficiency in our operations, require significant capital investments to remediate the problem, or result in negative publicity that could harm our reputation and results.

 

Changes in the legal and regulatory environment in which we operate could limit our business activities, increase our operating costs, reduce demand for our products or result in litigation.

 

The conduct of our businesses, including the production, storage, distribution, sale, display, advertising, marketing, labeling, health and safety practices, transportation and use of many of our products, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as to laws and regulations administered by government entities and agencies outside the United States in markets in which our products are made, manufactured or sold.  These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic or social events.  Such changes may include changes in: food and drug laws; laws related to product labeling, advertising and marketing practices; laws regarding the import or export of our products or ingredients used in our products; laws and programs restricting the sale and advertising of certain of our products; laws and programs aimed at reducing, restricting or eliminating ingredients present in certain of our products; laws and

 

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programs aimed at discouraging the consumption or altering the package or portion size of certain of our products; increased regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the effects on health of ingredients in, or attributes of, certain of our products; state consumer protection laws; taxation requirements, including the imposition or proposed imposition of new or increased taxes or other limitations on the sale of our products; competition laws; anti-corruption laws; employment laws; privacy laws; laws regulating the price we may charge for our products; and environmental laws.  New laws, regulations or governmental policy and their related interpretations, or changes in any of the foregoing, including taxes or other limitations on the sale of our products, ingredients contained in our products or commodities used in the production of our products, may alter the environment in which we do business and, therefore, may impact our operating results or increase our costs or liabilities.

 

We may incur significant future expenses in connection with the implementation of our business strategy.

 

We strive to achieve our long-term vision of being a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands. Our efforts are subject to the substantial risks, expenses and difficulties frequently encountered in the implementation of a business strategy. If we are unsuccessful in developing, acquiring and/or licensing new brands, and increasing distribution and sales volume of our existing products, our operating results could be negatively impacted. Even if we are successful, this business strategy may require us to incur substantial additional expenses, including advertising and promotional costs, “slotting” expenses (i.e., the cost of obtaining shelf or freezer space in certain grocery stores), and integration costs of any future acquisitions. We also may be unsuccessful at integrating any future acquisitions.

 

Risks Related to Our Indebtedness, the Economy and the Credit Markets

 

Our business is subject to the general health of the economy, including consumer spending, and any slowdowns or decreases in the U.S. economy could materially affect our revenue and operating results.

 

An economic slowdown in the U.S., including consumer spending, may cause substantial volatility in the stock market and layoffs and other restrictions on spending by companies in almost every business sector could impact our business in a variety of ways, including:

 

·

a reduction in consumer spending, which would result in a reduction in demand for our products or result in increased pressure from competitors or customers to reduce the prices of our products and/or limit our ability to increase or maintain prices, which could negatively impact our revenues and profitability.;

 

 

·

a negative impact on the ability of our customers to timely pay their obligations to us or our vendors to timely supply services, thus reducing our cash flow; and

 

 

·

an increase in payment risk with others we do business with, including customers, suppliers, distributors, financial institutions, insurance companies and other business partners, which could negatively impact our revenues and profitability.

 

Without similar changes in expenses, which may be difficult to achieve, our margins will contract if revenue falls, and ultimately may result in having a material adverse effect on our financial condition and results of operations.

 

We are required to maintain certain ongoing financial covenants under our credit facilities, and if we fail to meet those covenants or otherwise suffer a default thereunder, our lenders may accelerate the payment of such indebtedness.

 

On November 18, 2015, we entered into (i) a new five-year $50.0 million revolving credit facility (with all related loan documents, and as amended from time to time, the “ABL Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), as the administrative agent, and the other lenders party thereto, and (ii) a new five-year $85.0 million term loan facility (with all related loan documents, and as amended from time to time, the “Term Loan Credit Facility”), with BSP Agency, LLC (“BSP), as administrative agent, and the other lenders party thereto, which facilities replaced our prior credit agreement with U.S. Bank National Association (“U.S. Bank”) dated November 8, 2013.  Our obligations under the ABL Credit Facility and the Term Loan Credit Facility (collectively, the “Credit Facilities”) are secured by substantially all of our assets and are guaranteed by our subsidiaries.  We are required to comply with certain financial and other restrictive covenants pursuant to these two credit facilities so long as borrowings remain outstanding thereunder.  Should we be in default under any of such covenants, Wells Fargo and BSP, as applicable, have the right, upon written notice and after the expiration of any applicable period during which such default may be cured, to demand immediate payment of all of the then unpaid principal and accrued but unpaid interest under the respective Credit Facility.  At December 26, 2015, we were in compliance with all covenants of each Credit Facility.

 

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As we execute our business strategy, we may not be able to remain in compliance with our financial covenants.  Any acceleration of the borrowings under the ABL Credit Facility or the Term Loan Credit Facility prior to the applicable maturity dates could have a material adverse effect upon our business, financial condition and results of operations.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

Our substantial indebtedness could adversely affect our operations and financial condition.

 

Our operations are capital intensive, and we operate with a high amount of debt relative to our size. At December 26, 2015, we had (i) $26.0 million in aggregate principal amount of indebtedness outstanding under our ABL Credit Facility, and (ii) ) $85.0 million in aggregate principal amount of indebtedness outstanding under our Term Loan Credit Facility.  Our level of indebtedness could have important consequences, such as:

 

·                  limiting our ability to invest operating cash flow in our business due to debt service requirements;

 

·                  limiting our ability to obtain additional financing to fund growth, acquisitions, working capital, capital expenditures, debt service requirements or other cash requirements;

 

·                  limiting our operational flexibility due to the covenants contained in our debt agreements;

 

·                  limiting our ability to compete with companies that are less leveraged and that may be better positioned to withstand economic downturns;

 

·                  making us vulnerable to fluctuations in market interest rates, to the extent our debt is subject to floating interest rates or needs to be refinanced;

 

·                  requiring us to sell assets to reduce indebtedness or influence our decisions about whether to do so;

 

·                  increasing our vulnerability to general adverse economic and industry conditions; and

 

·                  limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

 

Covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions.

 

The Credit Facilities require us, under certain limited circumstances, to maintain certain financial ratios and limit our ability to make capital expenditures. These covenants and ratios could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund our operations. Breach of a covenant in the Credit Facilities could cause acceleration of a significant portion of our outstanding indebtedness. Any future debt could also contain financial and other covenants more restrictive than those imposed under the Credit Facilities.

 

A breach of a covenant or other provision in any debt instrument governing our current or future indebtedness could result in a default under that instrument and, due to cross-default and cross-acceleration provisions, could result in a default under our other debt instruments. Upon the occurrence of an event of default under the ABL Credit Facility, Term Loan Credit Facility or any other debt instrument, the lenders could elect to declare all amounts outstanding to be immediately due and payable and, in the case of the ABL Credit Facility, terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure the indebtedness. If the lenders under our current or future indebtedness accelerate the payment of the indebtedness, we cannot assure you that our assets or cash flow would be sufficient to repay in full our outstanding indebtedness.

 

The amount we can borrow under our ABL Credit Facility depends in part on the value of certain pledged collateral. If the value of such collateral declines under appraisals our lenders receive, the amount we can borrow will similarly decline. If the amount we can borrow declines as a result of the foregoing, we may be required to repay certain outstanding borrowings in order to remain in compliance with the covenants under the ABL Credit Facility.  In such event, we cannot assure you our cash flow would be sufficient to repay such indebtedness.

 

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We may not be able to generate sufficient cash to service all of our debt, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or to refinance our obligations under our debt will depend on our financial and operating performance and that of our subsidiaries, which, in turn, will be subject to prevailing economic and competitive conditions and to financial and business factors, many of which may be beyond our control. See the table under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Contractual Obligations” for disclosure regarding the amount of cash required to service our debt.

 

We may not maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure our debt. Such alternative measures may not be successful and may not enable us to meet our scheduled debt service obligations. We may not be able to refinance any of our indebtedness or obtain additional financing, particularly because of our anticipated high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt, as well as prevailing market conditions. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. The instruments governing our indebtedness restrict our ability to dispose of assets and use the proceeds from any such dispositions. We may not be able to consummate those sales, or if we do, at an opportune time, or the proceeds that we realize may not be adequate to meet debt service obligations when due.

 

Global capital and credit market conditions could have an adverse effect on our ability to access the capital and credit markets, including our revolving credit facility.

 

Disruptions in the global credit markets that materially impact liquidity in the debt market, making financing terms for borrowers less attractive or, in some cases, unavailable altogether, have occurred in the past and may occur again in the future. Such a disruption could result in the unavailability of certain types of debt financing, including access to revolving lines of credit. We engage in borrowing and repayment activities under our revolving credit facility on an almost daily basis and have not had any disruption in our ability to access our revolving credit facility as needed. However, future credit market conditions could increase the likelihood that one or more of our lenders may be unable to honor its commitments under our revolving credit facility, which could have an adverse effect on our business, financial condition and results of operations.

 

Additionally, in the future we may need to raise additional funds to, among other things, fund our existing operations, improve or expand our operations, respond to competitive pressures, or make acquisitions. If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively. If we raise additional funds by issuing equity securities, stockholders may experience dilution of their ownership interests, and the newly issued securities may have rights superior to those of the Common Stock. If we raise additional funds by issuing debt, we may be subject to further limitations on our operations arising out of the agreements governing such debt. If we fail to raise capital when needed, our business will be negatively affected.

 

Risks Related to the Frozen Products Segment

 

Farming is subject to numerous inherent risks including changes in weather conditions or natural disasters that can have an adverse impact on crop production and materially affect our results of operations.

 

We are subject to the risks that generally relate to the agricultural industry.  Adverse changes in weather conditions and natural disasters, such as windstorms, floods, earthquakes, droughts, extreme temperatures or pestilence, may affect the crop quality and size.  In extreme cases, entire harvests may be lost in some geographic areas.  These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.  Fresh berries and vegetables are also vulnerable to crop disease and to pests, which may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions.  Moreover, there can be no assurance that available technologies to control such infestations will continue to be effective.  These infestations can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.  Our competitors may be affected differently by such weather conditions and natural disasters depending on the location of their supplies or operations.

 

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Unavailability of purchased berries and vegetables, at reasonable prices, could adversely affect operations.

 

Our manufacturing costs are subject to fluctuations in certain commodity prices. Berries and vegetables are not readily available year-round.  Therefore, we use the IQF technique to freeze the berries and vegetables harvested for use during the year to meet processing demands.  In addition to freezing our own home-grown berries, we also purchase a substantial amount of berries from outside suppliers to meet customer demands. We are dependent on our suppliers to provide us with an adequate supply of vegetables and berries on a timely basis. The failure of certain suppliers to meet our performance specifications, quality standards or delivery schedules could have a material adverse effect on our operating results.  To the extent that certain types of berries or vegetables become scarce, substantially increase in price, or become unavailable or unavailable on commercially attractive terms, our operating results could be materially and adversely affected.

 

Risks Related to the Snack Product Segment

 

We may not be able to compete successfully in the highly competitive snack food industry.

 

The market for snack foods, such as those sold by us, is large and intensely competitive.  Competitive factors in the snack food industry include product quality and taste, brand awareness among consumers, access to supermarket shelf space, price, advertising and promotion, variety of snacks offered, nutritional content, product packaging and package design.  We compete in that market principally on the basis of product taste and quality.

 

The snack food industry is dominated by large food companies, including Frito-Lay, Inc., a subsidiary of PepsiCo, Inc., The Kellogg Company, ConAgra Foods, Inc., Diamond Foods, Inc., General Mills, Inc., Snyder’s-Lance, Inc. and others which have substantially greater financial and other resources than us and sell brands that are more widely recognized than our products. Numerous other companies that are actual or potential competitors of ours, many with greater financial and other resources (including more employees and more extensive facilities) than us, offer products similar to ours. In addition, many of our competitors offer a wider range of products than that offered by us.  Local or regional markets often have a significant number of smaller competitors, many of whom offer products similar to ours. With the expansion of our operations into new markets, we have and will continue to encounter significant competition from national, regional and local competitors that may be greater than that encountered by us in our existing markets. In addition, such competitors may challenge our position in our existing markets.

 

A disruption in the performance of our suppliers could have an adverse effect on our operations.

 

Our manufacturing costs are subject to fluctuations in the prices of potatoes, potato flakes, potato starch, corn and oil, as well as other ingredients used in our products.  Potatoes, potato flakes, potato starch and corn are widely available year-round, and we use a variety of oils in the production of our products.  Nonetheless, we are dependent on our suppliers to provide us with products and ingredients in adequate supply and on a timely basis.  The failure of certain suppliers to meet our performance specifications, quality standards or delivery schedules could have a material adverse effect on our operating results.  Changing suppliers can require long lead times. The failure of our suppliers to meet our needs could occur for many reasons, including fires, natural disasters, weather, manufacturing problems, disease, crop failure, strikes, transportation interruption, government regulation, political instability and terrorism.  A failure of supply could also occur due to suppliers’ financial difficulties, including bankruptcy.  Any significant interruption to supply or cost increase could substantially harm our business and financial performance.  To the extent that product ingredients become scarce, substantially increase in price, or become unavailable or unavailable on commercially attractive terms, our operating results could be materially and adversely affected.  From time to time, we may lock in prices for raw materials, such as oils, as we deem appropriate, and such strategies may result in us paying prices for raw materials that are above market at the time of purchase.

 

We do not own the patents for the technology we use to manufacture certain T.G.I. Friday’s®, Boulder Canyon® and Tato Skins® brand products, as well as certain private label branded products.

 

We license technology from a third party in connection with the manufacture of certain T.G.I. Friday’s®, Boulder Canyon® and Tato Skins® brand products, as well as certain private label branded products, and have a royalty-bearing, exclusive right license to use the technology necessary to produce these products in the United States, Canada, and Mexico until such time as the parties mutually agree to terminate the agreement. Even though the patents for this technology expired in December 2006, in consideration for the use of this technology, we are required to make royalty payments to the third

 

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party on sales of products manufactured utilizing the technology until the termination of such license agreement.  Since these patents have expired, we no longer have exclusive rights to this technology and, as a result, may face additional competition that could adversely affect our revenues. Moreover, our competitors, some of which may have significantly greater resources than us, may utilize different technology in the manufacture of products that are similar to those we currently manufacture, or that we may manufacture in the future. The entry of any such products into the marketplace could have a material adverse effect on our sales of certain T.G.I. Friday’s®, Boulder Canyon® and Tato Skins® brand products, certain private label branded products, as well as any such future products.

 

We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.

 

Our ability to compete effectively depends in part upon our ability to protect our rights to trademarks, copyrights and other intellectual property we own or license. Our use of contractual provisions, confidentiality procedures and agreements, and trademark, copyright, unfair competition, trade secret and other laws to protect our intellectual property and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our services or our use of intellectual property infringe their intellectual property rights.  Any litigation or claims brought by or against us could result in substantial costs and diversion of our resources.  A successful claim of trademark, copyright or other intellectual property infringement against us could prevent us from providing services, which could have a material adverse effect on our business, financial condition or results of operations. In addition, a breakdown in our internal policies and procedures may lead to an unintentional disclosure of our proprietary, confidential or material non-public information, which could in turn harm our business, financial condition or results of operations.

 

Risks Related to Our Securities

 

Substantial sales of our Common Stock by our stockholders could depress the market price of our Common Stock regardless of our operating results.

 

Sales of substantial amounts of our Common Stock in the public market, or the perception that these sales could occur, could adversely affect the market price of our Common Stock and impair our ability to raise capital through offerings of our Common Stock.  As of December 26, 2015, we had 19,610,838 shares of our Common Stock outstanding.  In addition, as of December 26, 2015, there were outstanding options to purchase 644,602 shares of our Common Stock and 390,279 shares of Common Stock issuable upon the vesting of restricted stock units. Substantially all of our outstanding Common Stock is eligible for sale, subject to Rule 144 volume limitations for holders affected by such limitations, as are shares of our Common Stock issuable under vested and exercisable options. If our existing stockholders sell a large number of shares of our Common Stock or the public market perceives that existing stockholders might sell our Common Stock, the market price of our Common Stock could decline significantly. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.

 

Our stock price has been, and may continue to be, volatile, and may decline regardless of our financial performance.

 

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The market price of our Common Stock has fluctuated and may continue to fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

·                  actual or anticipated fluctuations in our financial results;

·                  announcements relating to our industry or to our own business or prospects;

·                  the failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

·                  changes in operating performance and stock market valuations of other public companies generally, or those in our industry in particular;

·                  price and volume fluctuations in the overall stock market, including as a result of trends in the global economy;

·                  our ability or inability to raise additional capital and the terms on which we raise it;

·                  future sales of Common Stock or the perception that sales could occur;

·                  failure of suppliers to meet expectations;

·                  the unavailability of berries or vegetables at attractive prices;

·                  any major change in our board of directors or management;

·                  developments relating to litigation, governmental investigation, the legal and regulatory environment, product recalls or changes in competitive conditions; and

·                  other events or factors, including those resulting from war, incidents of terrorism, changes in weather conditions or natural disasters, or responses to these events.

 

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of publicly traded companies.  Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against such a company. If securities class action litigation is instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources and could materially adversely affect our operating results.

 

Anti-takeover provisions contained in our amended certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

 

Our amended certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of delaying, preventing or rendering more difficult an acquisition of us if such acquisition is deemed undesirable by our board of directors.  Among other things, our amended certificate of incorporation and amended and restated bylaws include provisions:

 

·                  authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our Common Stock;

 

·                  limiting the liability of, and providing indemnification to, our directors and officers;

 

·                  limiting the ability of our stockholders to call and bring business before special meetings; and

 

·                  controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings.

 

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

 

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our outstanding Common Stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding Common Stock not held by such 15% or greater stockholder.

 

Any provision of our amended certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Common Stock, and could also affect the price that some investors are willing to pay for our Common Stock.

 

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Table of Contents

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, if they change their recommendations regarding our stock adversely, or if our operating or financial results do not meet expectations, our stock price and trading volume could decline.

 

The trading market for our Common Stock is influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors.  If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline.  If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets.  In addition, if our operating or financial results do not meet analysts’ expectations, our stock price or trading volume could decline. Any of these factors could cause you to lose part or all of you investment in our Common Stock.

 

We do not expect to declare any dividends in the foreseeable future.

 

We do not anticipate declaring any cash dividends to holders of our Common Stock in the foreseeable future. In addition, certain debt agreements of ours limit our ability to declare and pay cash dividends, and any future financing agreements may prohibit us from paying any type of dividends. Consequently, investors may need to rely on sales of their Common Stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our Common Stock.

 

Item 1B.        Unresolved Staff Comments.

 

We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our 2015 fiscal year that remain unresolved.

 

Item 2.           Properties.

 

The following table summarizes information about our significant manufacturing, distribution, farming and administrative facilities in use as of December 26, 2015:

 

Operating Segment

 

Location

 

Primary Activities

 

Own or Lease

 

Total Space

 

Headquarters

 

Phoenix, Arizona

 

Executive Offices

 

Lease

 

13,865 sq ft

 

 

 

 

 

 

 

 

 

 

 

Snack products

 

Goodyear, Arizona

 

Manufacturing

 

Own

 

59,840 sq ft

 

 

 

Tolleson, Arizona

 

Distribution

 

Lease

 

279,279 sq ft

 

 

 

Bluffton, Indiana

 

Manufacturing

 

Own

 

135,781 sq ft

 

 

 

Bluffton, Indiana

 

Distribution

 

Lease

 

100,000 sq ft

 

 

 

 

 

 

 

 

 

 

 

Frozen products

 

Lynden, Washington

 

Farming

 

Lease

 

840 acres

 

 

 

Lynden, Washington

 

Manufacturing

 

Own

 

50,229 sq ft

 

 

 

Salem, Oregon

 

Manufacturing

 

Lease

 

28,524 sq ft

 

 

 

Salem, Oregon

 

Manufacturing

 

Lease

 

65,000 sq ft

 

 

 

Jefferson, Georgia

 

Manufacturing

 

Own

 

59,480 sq ft

 

 

 

Thomasville, Georgia

Pensacola, Florida

 

Manufacturing

Manufacturing

 

Own

Lease

 

101,290 sq ft

1,600 sq ft

 

 

We are responsible for all insurance costs, utilities and real estate taxes in connection with our facilities.  We believe that our facilities are adequately covered by insurance.  We also believe that our properties generally are in good operating condition and are suitable for our current purposes.

 

Item 3.           Legal Proceedings.

 

For a discussion of legal proceedings, see Note 13 “Legal Proceedings” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

 

Item 4.           Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

Item 5.                                 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our Common Stock is traded on the Nasdaq Global Select Market tier of the Nasdaq Stock Market under the symbol “SNAK.”

 

The following table sets forth the range of high and low sale prices of our Common Stock as reported on the Nasdaq Global Market for each quarter of the fiscal year ended December 26, 2015, and each quarter of the fiscal year ended December 27, 2014.

 

 

 

Common Stock

 

 

 

High

 

Low

 

Fiscal 2015:

 

 

 

 

 

First Quarter

 

$

13.08

 

$

9.60

 

Second Quarter

 

$

12.32

 

$

8.51

 

Third Quarter

 

$

11.24

 

$

7.93

 

Fourth Quarter

 

$

9.82

 

$

6.57

 

 

 

 

 

 

 

Fiscal 2014:

 

 

 

 

 

First Quarter

 

$

14.50

 

$

11.14

 

Second Quarter

 

$

14.49

 

$

11.28

 

Third Quarter

 

$

13.94

 

$

10.10

 

Fourth Quarter

 

$

14.11

 

$

10.98

 

 

Stockholders of Record

 

There were approximately 135 stockholders of record as of March 2, 2016.  We believe the number of beneficial owners is substantially greater than the number of record holders because a significant percentage of the Common Stock is held of record in broker “street names.”

 

Dividends

 

We have never declared or paid any dividends on the shares of our Common Stock.  Management intends to retain any future earnings for the operation and expansion of our business and does not anticipate paying any dividends at any time in the foreseeable future.  Additionally, certain of our debt agreements restrict our ability to declare and pay dividends.

 

Sales of Unregistered Securities

 

We did not make any sales of unregistered securities during fiscal 2015.

 

Issuer Purchases of Equity Securities

 

There were no shares repurchased during fiscal 2015.

 

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Stock Price Performance Graph

 

Set forth below is a graph comparing the percentage change in the cumulative total stockholder return on our Common Stock with the cumulative total return of the Russell 2000 Index (Market Index) and the S&P Packaged Foods Index (Peer Index) for the period starting December 27, 2010 and ending December 26, 2015.  The graph assumes that $100 was invested on December 25, 2010 in our Common Stock and in each of the two indices, and that, as to such indices, dividends were reinvested.  We have not, since our inception, paid any cash dividends on our Common Stock.  Historical stock price performance reflected in the below graph is not necessarily indicative of future price performance.

 

 

 

 

December 25,
2010

 

December 31,
2011

 

December 29,
2012

 

December 28,
2013

 

December 27,
2014

 

December 26,
2015

 

Inventure Foods, Inc. Common Stock (SNAK)

 

100.00

 

86.57

 

146.06

 

311.81

 

285.19

 

166.20

 

Russell 2000 Index (Market Index)

 

100.00

 

93.91

 

105.47

 

147.17

 

154.03

 

146.36

 

S&P Packaged Foods (Peer Index)

 

100.00

 

113.22

 

120.10

 

154.36

 

173.52

 

196.45

 

 

See Note 10 “Stockholders Equity” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for a summary of treasury stock repurchases and retirements.

 

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Item 6.           Selected Financial Data.

 

The following selected historical consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited Consolidated Financial Statements and related notes to those statements included in this Form 10-K.  Numbers are expressed in thousands except per share data.  The selected historical consolidated financial data as of and for the fiscal years ended December 26, 2015, December 27, 2014, December 28, 2013, December 29, 2012 and December 31, 2011 have been derived from our audited Consolidated Financial Statements.  Fiscal 2011 contained 53 weeks and fiscal 2015, 2014, 2013 and 2012 each contained 52 weeks. The historical results are not necessarily indicative of results to be expected in any future period

 

 

 

December 26,
2015

 

December 27,
2014

 

December 28,
2013

 

December 29,
2012

 

December 31,
2011

 

Year ended:

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

282,558

 

$

285,663

 

$

215,580

 

$

185,179

 

$

162,232

 

Gross profit

 

20,337

 

53,121

 

38,886

 

36,892

 

30,134

 

Operating income (loss)

 

(26,499

)

18,933

 

10,850

 

11,344

 

5,210

 

Net income (loss)

 

(20,783

)

10,561

 

6,618

 

7,449

 

2,817

 

Earnings (Loss) per common share — diluted

 

$

(1.06

)

$

0.53

 

$

0.33

 

$

0.38

 

$

0.15

 

Weighted average common shares — diluted

 

19,588

 

19,990

 

19,789

 

19,574

 

19,199

 

 

 

 

 

 

 

 

 

 

 

 

 

As of:

 

 

 

 

 

 

 

 

 

 

 

Net working capital

 

$

67,666

 

$

55,027

 

$

33,981

 

$

25,151

 

$

22,934

 

Total assets

 

218,446

 

195,310

 

170,091

 

95,894

 

97,975

 

Long-term debt

 

114,664

 

78,020

 

65,088

 

17,014

 

23,779

 

Stockholders’ equity

 

52,488

 

71,966

 

59,153

 

51,099

 

41,610

 

 

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Item 7.                                           Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the other sections of this Form 10-K, including “Item 1. Business” and “Item 8. Financial Statements and Supplementary Data.”  The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in “Item 1A. Risk Factors.”  Accordingly, the Company’s actual future results may differ materially from historical results or those currently anticipated.

 

Overview

 

The Company is a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands.  Our products are marketed under a strong portfolio of brands, including Rader Farms®, Boulder Canyon®, Fresh FrozenTM, Willamette Valley Fruit CompanyTM , T.G.I. Friday’s®, Jamba®, Vidalia®, Poore Brothers®, Nathan’s Famous ®, Bob’s Texas Style®, Tato Skins® and Seattle’s Best Coffee®.  T.G.I. Friday’s®, Jamba®, Nathan’s Famous® and Vidalia® are licensed brand names.  We complement our branded product retail sales with private label retail sales and co-packing arrangements.  The majority of our revenues are attributable to external customers in the United States.  We sell to external customers internationally; however, the revenues attributable to those customers are immaterial.

 

Fiscal 2015 was impacted by the voluntary product recall of our Fresh FrozenTM business, resulting in a 1.1% decrease in net revenues over the prior fiscal year to $282.6 million.  In fiscal 2015, our products in the healthy/natural category represented 83.8% of net sales, a one point increase from the prior year.  For fiscal 2015, 2014 and 2013, net revenues of our healthy/natural food category totaled $236.7 million, $236.6 million and $152.2 million, respectively.  For fiscal 2015, 2014 and 2013, net revenues of our indulgent specialty snack food category totaled $45.9 million, $49.1 million and $63.3 million, respectively.

 

Our frozen berry business experienced pressure primarily due to lost distribution and a lower selling price for our most significant frozen berry item as a result of year-over-year cost declines.  Even so, frozen berry sales grew 4.1% for the year. Our Rader Farms® Fresh Start products, which combine a healthful blend of frozen fruit and vegetables, have demonstrated the early strong potential of this product.  We continue to ramp distribution across sales channels including club stores, mass merchandisers, and several key supermarket retailers. We remain focused on ways to grow our branded frozen berry business.

 

The snack industry has been heavily influenced by a proliferation of new flavors and health focused snacks, with a rapid increase in the number of low-fat, low-carb, all-natural and organic products.  We believe the trend for healthier snacks will continue and will provide new revenue growth opportunities for our Rader Farms®, Boulder Canyon®, Fresh FrozenTM and premium private label products.  We intend to continue brand investments in 2016 to drive further sales and earnings growth in the long term.  During fiscal 2015, we also launched new flavors of Boulder Canyon® Coconut Oil Sea Salt Kettle Chips, Coconut Oil Pineapple Habanero Kettle Chips,  Coconut Oil Red Curry Kettle Chips, Coconut Oil Sea Salt Popcorn, Avocado Oil Sea Salt Popcorn and Olive Oil White Cheddar Popcorn.

 

On May 28, 2013, we completed our acquisition of the berry processing business of Willamette Valley Fruit Company for a cash purchase price of $9.3 million.  An additional amount of up to $3.0 million may be payable to Willamette Valley Fruit Company as contingent consideration in the form of an earn-out if certain performance thresholds are met during the seven-year period following the closing of this transaction (see Note 3 “Acquisitions” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K).

 

On November 8, 2013, we completed our acquisition of Fresh Frozen Foods for a cash purchase price of $38.4 million plus a working capital adjustment of $0.4 million.  An additional amount of up to $3.0 million could have been payable to Fresh Frozen Foods in the form of an earn-out based on the achievement of specified fiscal 2014 performance objectives, which were not met (see Note 3 “Acquisitions” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K).

 

On September 29, 2014, we acquired the assets and intellectual property of a small boutique frozen desserts business, Sin In A TinTM, 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 derived from the Sin In A TinTM products.

 

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All of our assets are located in the United States and include manufacturing facilities in Arizona, Georgia, Florida, Indiana, Oregon and Washington.

 

Results of Operations

 

The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources.  This discussion should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” and the “Cautionary Statement Regarding Forward-Looking Statements” on page 1.

 

Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year.  Accordingly, fiscal 2015 commenced December 28, 2014 and ended December 26, 2015.  The fiscal year end dates result in an additional week of results every five or six years.  There were 52 weeks in each of fiscal 2015, 2014 and 2013.  The following table sets forth for the periods presented certain financial data as a percentage of net sales for the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013:

 

 

 

2015

 

2014

 

2013

 

Net revenues

 

100.0

%

100.0

%

100.0

%

Cost of revenues

 

92.8

 

81.4

 

82.0

 

Gross profit

 

7.2

 

18.6

 

18.0

 

Selling, general and administrative expenses

 

13.3

 

12.0

 

13.0

 

Impairment of Intangible Asset

 

3.3

 

 

 

Operating income

 

(9.4

)

6.6

 

5.0

 

Interest expense, net

 

2.2

 

0.9

 

0.4

 

Income before income taxes

 

(11.6

)

5.7

 

4.6

 

Income tax provision

 

(4.2

)

2.0

 

1.5

 

Net income

 

(7.4

)%

3.7

%

3.1

%

 

Our operations consist of two reportable segments:  frozen products and snack products.  The frozen products segment includes frozen fruits, vegetables, beverages and frozen desserts, for sale primarily to groceries, club stores and mass merchandisers. The snack product segment includes manufactured potato chips, kettle chips, potato crisps, potato skins, pellet snacks, sheeted dough products and extruded products for sale primarily to snack food distributors and retailers.

 

Fiscal 2015 Compared to Fiscal 2014

 

Net Revenues.  In fiscal 2015, net revenues decreased $3.1 million, or 1.1 %, to $282.6 million compared with net revenues of $285.7 million for the previous fiscal year. Our net revenues by operating segment were as follows (in thousands):

 

 

 

Year Ended

 

 

 

 

 

December 26,
2015

 

December 27,
2014

 

%
Change

 

Frozen Products

 

$

167,166

 

$

179,518

 

(6.9

)

Snack Products

 

115,392

 

106,145

 

8.7

 

Consolidated

 

$

282,558

 

$

285,663

 

1.1

%

 

The frozen products segment net revenues were $167.2 million, a decrease of $12.3 million, or 6.9%, compared with net revenues of $179.5 million for the previous fiscal year.  This decrease was primarily attributable to the voluntary product recall of our Fresh Frozen™ business which commenced in April 2015.  Excluding Fresh Frozen sales since the product recall in April 2015*, the frozen products segment net revenues increased 3.6% driven by our frozen fruit business that grew even with a nearly 20% pricing decline and lost distribution of our most significant frozen berry item.

 

The snack products segment net revenues were $115.4 million in fiscal 2015, an increase of $9.3 million, or 8.7 %, compared with net revenues of $106.1 million for the previous fiscal year.  This increase was primarily due to increased sales of Boulder Canyon® and healthy/natural private label products. Our Boulder Canyon®  brand has increased distribution and sales growth has been supported with continued new product innovation.

 

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*See “Non-GAAP Data and Reconciliations” below for information on the calculation of net revenues excluding the Fresh Frozen business since the product recall.

 

Gross Profit.  Gross profit for fiscal 2015 was $20.3 million, or 7.2% of net revenues, compared to $53.1 million, or 18.6% of net revenues, for the prior fiscal year.  Our gross profit and gross profit as a percentage of net sales by operating segment were as follows (in thousands):

 

 

 

Year Ended

 

 

 

December 26,
2015

 

% of Net
Revenues

 

December 27,
2014

 

% of Net
Revenues

 

Frozen Products

 

$

2,729

 

1.6

%

$

32,329

 

18.0

%

Snack Products

 

17,608

 

15.3

%

20,792

 

19.6

%

Consolidated

 

$

20,337

 

7.2

%

$

53,121

 

18.6

%

 

The frozen products segment gross profit was $2.7 million in fiscal 2015, a decrease of $29.6 million, or 91.6%, compared to gross profit of $32.3 million for the prior fiscal year.  This decrease is attributable to our voluntary product recall.  Expenses associated with the voluntary product recall reduced gross profit by $17.1 million and consisted of $21.3 million of recall-related disposal costs of inventory, product returns and fees from consumers and customers, as well as increased co-packing costs partially offset by $4.2 million of insurance recoveries (see Note 2 “Product Recall” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K).  Excluding the costs directly associated with the Fresh Frozen product recall, gross profit for fiscal 2015 was $19.9 million**, compared to $32.3 million in the prior year. Gross profit as a percentage of revenue was 11.9% in fiscal 2015, compared to 18.0% in the prior year.  This 610 basis point decrease in gross margin was driven in part by incremental costs added to the Fresh Frozen business to enhance product testing and improve the manufacturing operations, as well as increased cold storage costs incurred as a result of higher raw material inventory levels.  The gross margin decline was also a result of pricing pressure experienced in our frozen fruit business.

 

The snack products segment gross profit was $17.6 million in fiscal 2015, a decrease of $3.2 million, or 15.3%, compared to gross profit of $20.8 million for the prior fiscal year, and decreased as a percentage of net revenues to 15.3% in fiscal 2015 from 19.6% in the prior fiscal year.  The decrease in gross margin in fiscal 2015 was primarily a result of $4.3 million of increased costs to produce certain kettle chips attributable to various co-packing arrangements we entered into in fiscal 2015 due to capacity constraints at our Goodyear, Arizona facility.

 


**See “Non-GAAP Data and Reconciliations” below for information on the calculation of gross profit exclusive of product recall costs.

 

Selling, General and Administrative Expenses.  Selling, general and administrative (“SG&A”) expenses increased $3.4 million, or 9.9%, during fiscal 2015, compared to the prior fiscal year.  SG&A expense included additional professional fee expenses of $2.2 million due to the Fresh Frozen voluntary product recall.  In fiscal 2014, SG&A expense included the reversal of the Fresh Frozen Foods contingent consideration liability offset by estimated Jamba litigation settlement costs and fees associated with the Company’s secondary offering.  The net impact of these items reduced fiscal 2014 SG&A expenses by $1.9 million.  Excluding the impact of these items, SG&A expenses*** decreased $0.7 million to $35.4 million, compared to $36.1 million in the prior fiscal year and as a percentage of net revenues, remained flat at 12.5%, compared to 12.6% in the prior fiscal year.

 


***See “Non-GAAP Data and Reconciliations” below for information on the calculation of SG&A expenses exclusive of product recall costs.

 

Impairment of Intangible Asset.  In fiscal 2015, as a result of the product recall we concluded that the intangible asset related to the acquired customer relationships of Fresh Frozen Foods was fully impaired.  Accordingly, we recorded an intangible asset impairment charge of $9.3 million in the first quarter of fiscal 2015.

 

Interest Expense.  Net interest expense increased $3.7 million, to $6.3 million, in fiscal 2015 compared to $2.6 million in fiscal 2014.  This increase was primarily due to higher debt balances associated with the Credit Facilities entered into in November 2015 and the write off of deferred financing fees of $0.5 million and settlement of interest rate swaps of $0.1 million associated with the repayment of our prior credit agreement with U.S. Bank dated November 8, 2013 (with all related loan documents, and as amended from time to time, the “Prior Credit Facility”) and higher interest rate charges associated with two previous bridge loans entered into with U.S. Bank under the Prior Credit Facility to help fund the cost of the voluntary product recall.

 

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Income Tax Provision.  The income tax provision was a benefit of $12.0 million for fiscal 2015 compared to an expense of $5.8 million of tax provision in the prior fiscal year.  Our effective income tax expense rate was 36.7% in fiscal 2015, compared to 35.3% in fiscal 2014.  The change in the effective tax rate in fiscal 2015 is primarily due to changes to our state tax rate and updates to the carrying value of certain deferred items.

 

Non-GAAP Data and Reconciliations

 

Under the headings “Net revenues”, we reported net revenues excluding the Fresh Frozen business since our voluntary product recall commenced in April 2015.  Net revenues exclusive of the Fresh Frozen business since the product recall is a non-GAAP (defined below) measures and exclude the impacts of the Fresh Frozen business since the product recall.  We reported net revenues excluding the Fresh Frozen business since the product recall because we believe they provide useful information regarding the Company’s normal operating results and allow for better comparability with prior period operating results.  Nevertheless, amounts reported as net revenues excluding the Fresh Frozen business since the product recall have certain limitations as analytical tools and should not be used as substitutes for net revenues prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

 

A reconciliation of net revenues excluding the Fresh Frozen business since the product recall to net revenues, the most directly comparable GAAP measure, is as follows (in thousands):

 

 

 

Fiscal Years

 

 

 

December 26,
2015

 

December 27,
2014 (1)

 

Consolidated:

 

 

 

 

 

Net revenues exclusive of the Fresh Frozen business since the product recall

 

$

253,035

 

$

239,024

 

Net revenues of the Fresh Frozen business since the product recall

 

29,523

 

46,639

 

Net revenues

 

$

282,558

 

$

285,663

 

 

 

 

 

 

 

Frozen products segment:

 

 

 

 

 

Net revenues exclusive of the Fresh Frozen business since the product recall

 

$

137,643

 

$

132,879

 

Net revenues of the Fresh Frozen business since the product recall

 

29,523

 

46,639

 

Net revenues

 

$

167,166

 

$

179,518

 

 


(1)         Net revenue amounts for fiscal 2014 have been presented to exclude net revenues of the Fresh Frozen business for the comparable period of fiscal 2014.

 

Under the headings “Gross profit” and “Selling, general and administrative expenses”, we reported gross profit and SG&A expenses exclusive of product recall costs, respectively.  Gross profit and SG&A expenses exclusive of product recall costs are non-GAAP measures and exclude the impacts of the product recall.  We reported gross profit and SG&A expenses exclusive of product recall costs because we believe they provide useful information regarding the Company’s normal operating results and allow for better comparability with prior period operating results.  Nevertheless, amounts reported for gross profit and SG&A expenses exclusive of product recall costs have certain limitations as analytical tools and should not be used as substitutes for gross profit and SG&A expenses prepared in accordance with GAAP.

 

A reconciliation of gross profit exclusive of product recall costs to gross profit, the most directly comparable GAAP measure, is as follows (in thousands):

 

Frozen products segment:

 

December 26, 2015

 

Gross profit, excluding product recall costs

 

$

19,871

 

Estimated costs related to the product recall, including product expected to be returned, the write-down of inventory, and incremental co-packing costs

 

(21,314

)

Insurance recovery of product recall costs

 

4,172

 

Gross profit

 

$

2,729

 

 

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A reconciliation of selling, general and administrative expenses exclusive of product recall costs to SG&A expenses, the most directly comparable GAAP measure, is as follows (in thousands):

 

 

 

December 26, 2015

 

Selling, general and administrative expenses, excluding product recall costs

 

$

35,385

 

Incremental recall-related professional fees

 

2,174

 

Selling, general and administrative expense

 

$

37,559

 

 

Fiscal 2014 Compared to Fiscal 2013

 

Net Revenues.  In fiscal 2014, net revenues increased $70.1 million, or 32.5%, to $285.7 million compared with net revenues of $215.6 million for the previous fiscal year. Our net revenues by operating segment were as follows (in thousands):

 

 

 

Year Ended

 

 

 

 

 

December 27,
2014

 

December 28,
2013

 

%
Change

 

Frozen Products

 

$

179,518

 

$

117,124

 

53.3

%

Snack Products

 

106,145

 

98,456

 

7.8

%

Consolidated

 

$

285,663

 

$

215,580

 

32.5

%

 

The frozen products segment net revenues were $179.5 million in fiscal 2014, an increase of $62.4 million, or 53.3%, compared with net revenues of $117.1 million for the previous fiscal year.  This increase was primarily a result of the additional revenues from Willamette Valley Fruit Company and Fresh Frozen Foods which businesses we acquired in fiscal 2013.

 

The snack products segment net revenues were $106.1 million in fiscal 2014, an increase of $7.7 million, or 7.8%, compared with net revenues of $98.5 million for the previous fiscal year.  This increase was primarily due to increased sales of Boulder Canyon® and healthy/natural private label products, partially offset by a reduction in sales of T.G.I. Friday’s® branded snacks.

 

Gross Profit.  Gross profit for fiscal 2014 was $53.1 million, compared to $38.9 million for the prior fiscal year, with gross margin increasing 60 basis points to 18.6% for fiscal 2014, compared to 18.0% for the prior fiscal year.  Our gross profit and gross profit as a percentage of net sales by operating segment were as follows (in thousands):

 

 

 

Year Ended

 

 

 

December 27,
2014

 

% of Net
Revenues

 

December 28,
2013

 

% of Net
Revenues

 

Frozen Products

 

$

32,329

 

18.0

%

$

22,745

 

19.4

%

Snack Products

 

20,792

 

19.6

%

16,141

 

16.4

%

Consolidated

 

$

53,121

 

18.6

%

$

38,886

 

18.0

%

 

The frozen products segment gross profit was $32.3 million in fiscal 2014, an increase of $9.6 million, or 42.1%, compared to gross profit of $22.7 million for the prior fiscal year.  The increase in gross profit for the year was primarily attributable to the additional business contributed by Fresh Frozen Foods as well as increased production capability resulting from our acquisition of Willamette Valley Fruit Company.  As a percentage of net revenues, gross profit decreased to 18.0% in fiscal 2014 from 19.4% in fiscal 2013. This decrease was primarily due to lower margins from our Fresh Frozen Foods business, which was impacted by increased trade promotional spending.

 

The snack products segment gross profit was $20.8 million in fiscal 2014, an increase of $4.7 million, or 28.8%, compared to gross profit of $16.1 million for the prior fiscal year, and increased as a percentage of net revenues to 19.6% in fiscal 2014 from 16.4% in fiscal 2013.  The increase in gross profit in fiscal 2014 was primarily driven by improved product and channel mix with a stronger emphasis on higher margin branded products.

 

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Selling, General and Administrative Expenses.  SG&A expenses increased $6.2 million, or 21.9%, during fiscal 2014, compared to the prior fiscal year.  SG&A expense reflects a number of adjustments including the reversal of the Fresh Frozen Foods contingent consideration liability, which was partially offset by estimated Jamba litigation settlement costs and fees associated with the Company’s secondary offering.  The net impact of these items reduced SG&A expenses by $1.9 million in fiscal 2014.  In fiscal 2013, SG&A expenses included $1.4 million of acquisition-related transaction costs.  Excluding the impact of these items, SG&A expenses increased $9.5 million to $36.1 million, compared to $26.6 million in the prior fiscal year and as a percentage of net revenues, increased 30 basis points to 12.6% in fiscal 2014, compared to 12.3% in the prior fiscal year.  The increase in SG&A expenses were primarily due to full year costs of our two acquired business in fiscal 2013, increased incentive compensation expenses, higher health insurance costs under our partially self-insured plan, and as a result of reinvesting a portion of earnings back into the business to support future growth.

 

Interest Expense.

 

Net interest expense in fiscal 2014 increased 198.6%, to $2.6 million, compared to $0.9 million in fiscal 2013.  This increase was primarily due to higher debt balances related to the two acquisitions that occurred during 2013.

 

Income Tax Provision.

 

The income tax provision of $5.8 million for fiscal 2014 is $2.4 million higher than the $3.4 million of tax provision for the prior year.  Our effective income tax expense rate was 35.3% in fiscal 2014, compared to 33.7% in fiscal 2013.  This change in the effective tax rate is primarily due to an increase in state tax rates.

 

Liquidity and Capital Resources

 

Liquidity represents our ability to generate sufficient cash flows from operating activities to satisfy obligations, as well as our ability to obtain appropriate financing.  Therefore, liquidity cannot be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving our objectives.  Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures and debt repayment.  Sufficient liquidity is expected to be available to enable us to meet these demands.  Net working capital was $67.7  million (a current ratio of 2.5:1) and $55.0 million (a current ratio of 2.5:1) at December 26, 2015 and December 27, 2014, respectively. In addition to cash flow, our principal current source of liquidity is the ABL Credit Facility described below.

 

Cash and Cash Flow

 

The following table sets forth for the periods presented certain consolidated cash flow information for the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013 (in thousands):

 

 

 

December 26,
 2015

 

December 27,
 2014

 

December 28,
 2013

 

Net cash (used in) provided by operating activities

 

$

(11,353

)

$

(1,282

)

$

5,346

 

Net cash used in investing activities

 

(11,240

)

(13,243

)

(57,023

)

Net cash provided by financing activities

 

24,417

 

14,110

 

52,168

 

Net (decrease) increase in cash and cash equivalents

 

1,824

 

(415

)

491

 

Cash and cash equivalents at beginning of year

 

495

 

910

 

419

 

Cash and cash equivalents at end of year

 

$

2,319

 

$

495

 

$

910

 

 

Our primary uses of cash during fiscal 2015 were expenses associated with the product recall and to fund capital expenditures.

 

Our primary uses of cash during fiscal 2014 were to fund capital expenditures and operations, including building inventory to accommodate the continued growth in demand for our products.

 

Operating Cash Flows

 

Cash flows from operating activities reflect our net earnings, adjusted for non-cash items such as, depreciation, amortization, stock-based compensation expense, write-offs and write-downs of assets, as well as changes in accounts receivable, inventories, accounts payable and accrued liabilities, and other assets and liabilities.

 

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Net cash used in operating activities totaled $11.4 million in fiscal 2015 compared to net cash used in operating activities of $1.3 million for fiscal 2014.  The $10.1 million year-over-year change was primarily a result of the cash outlays attributable to the product recall, as well as the impact of reduced sales of frozen vegetables during the temporary shutdown of our Jefferson, Georgia facility.

 

Net cash used in operating activities totaled $1.3 million for fiscal 2014 compared to net cash provided by operating activities of $5.3 million for fiscal 2013.  The $6.6 million year-over-year change was primarily a result of increased cash used to grow inventory in the current year as a result of continued growth in demand primarily for our frozen berry business.   During fiscal 2014, we experienced an increase in berry costs, while at the same time adding capacity at our IQF facilities in order to expand our ability to freeze more fresh fruit, allowing us to reduce our dependence on higher priced purchased frozen berries.  Inventories of lower cost fresh berries we grow or purchase from local farms and freeze through our IQF tunnels peak during the summer harvest and are generally sold over the next several months.   We purchase frozen berries to supplement our needs until the next harvest or as needed for fruit we do not freeze ourselves. The emphasis on freezing more berries instead of purchasing them results in a higher upfront investment in inventory.  The impact from higher cash outlays for inventory was partially offset by the overall increase in sales and the related higher collections of accounts receivables.

 

Investing Cash Flows

 

Net cash used in investing activities was $11.2  million in fiscal 2015, compared to $13.2 million in fiscal 2014 and $57.0 million in fiscal 2013. Our fiscal 2015 investing activities primarily were driven by capital expenditures for manufacturing and packaging equipment at our Goodyear, Arizona facility, building and equipment enhancements in our Jefferson, Georgia facility, as well capitalized software costs associated with an ERP system upgrade.   Our fiscal 2014 investing activities primarily were driven by capital expenditures made to increase our production capacity.   Our fiscal 2013 investing activities included the acquisition of Willamette Valley Fruit Company and Fresh Frozen Foods for $8.5 million and $38.8 million, respectively, as well as $9.8 million in capital expenditures.  The $9.8 million in capital expenditures related to the purchase of manufacturing equipment, primarily for new packaging equipment and new extrusion equipment at our Bluffton, Indiana facility, along with other expenditures relating to preproduction costs of berry plants, software, building improvements and office equipment.   In fiscal 2016, we plan to spend approximately $9.0 million in capital expenditures, primarily at our manufacturing facilities.  Capital expenditures are funded primarily by net cash flow from operating activities, cash on hand, and available credit from our ABL Credit Facility.

 

Financing Cash Flows

 

Net cash provided by financing activities totaled $24.4 million and $14.1 million for fiscal 2015 and 2014, respectively.  The $10.3 million increase in year-over-year net cash provided by financing activities primarily reflects $31.2 million of additional borrowings under the Term Loan Credit Facility and ABL Credit Facility to fund costs associated with the product recall; offset by $6.4 million of payments made for debt financing fees.

 

Net cash used by financing activities in fiscal 2013 totaled $52.2 million which was primarily attributable to the higher level of new financing experienced in 2013 relating to our two acquisitions

 

Debt and Capital Resources

 

ABL Credit Facility and Term Loan Credit Facility

 

The summary of our indebtedness and restrictive and financial covenants set forth below is qualified by reference to our ABL Credit Facility and Term Loan Credit Facility, both of which are exhibits to our public filings with the SEC.

 

ABL Credit Facility

 

On November 18, 2015, we entered into the new five-year ABL Credit Facility with Wells Fargo, as administrative agent, and the other lenders party thereto replacing our Prior Credit Facility.  All commitments under the Prior Credit Facility were terminated and all outstanding borrowings thereunder were repaid effective November 18, 2015.  The remaining obligations of the Company and its subsidiaries under the Prior Credit Facility generally are limited to certain remaining contingent indemnification obligations.

 

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The Prior Credit Facility consisted of a revolving line of credit, which was scheduled to mature on November 8, 2018, an equipment term loan scheduled to mature on September 2020, a mortgage loan on certain property of the Company located in Bluffton, Indiana due December 2016, and a real estate term loan on certain property of the Company located in Lynden, Washington due July 2017.  All borrowings under the revolving line of credit accrued interest at either the U.S. Bank prime rate of interest or London Interbank Operating Rate (“LIBOR”), plus the LIBOR Rate Margin (as such terms were defined in the Prior Credit Facility) as adjusted.  The equipment term loan accrued interest at 3.12%.

 

The ABL Credit Facility provides for a five-year, $50.0 million senior secured revolving credit facility.  The ABL Credit Facility also provides that, under certain conditions, we may increase the aggregate principal amount of loans outstanding thereunder by up to $10.0 million.  On November 18, 2015, we borrowed $21.9 million under the ABL Credit Facility.  We used the initial borrowing under that facility, together with the proceeds from the Term Loan Credit Facility (described below) to repay all outstanding borrowings under the Prior Credit Facility (consisting of $101.1 million), to pay accrued interest with respect to such loans, and to fund the payment of certain fees and costs relating to the Credit Facilities.  The ABL Credit Facility will mature, and the commitments thereunder will terminate, on November 17, 2020.

 

The Company and all of its subsidiaries are borrowers under the ABL Credit Facility.  Subject to certain exceptions, the obligations under the ABL Credit Facility are secured by a lien on substantially all of the assets of the Company including: (i) a perfected first priority pledge of all the equity interests of the Company, and (ii) a perfected first priority security interest in substantially all other tangible and intangible assets of the Company and its subsidiaries (including, but not limited, to accounts receivable, inventory, equipment, general intangibles, investment property, real property, intellectual property and the proceeds of the foregoing).  The obligations under the ABL Credit Facility are also guaranteed by each of the Company’s subsidiaries.

 

Availability of borrowings under the ABL Credit Facility is subject to, among other things, a borrowing base calculation based upon a valuation of our eligible accounts and eligible inventory (including eligible finished goods, raw materials, and by-products inventory), each multiplied by an applicable advance rate or limit, and certain reserves and caps customary for financings of this type.  If at any time the aggregate amounts outstanding under the ABL Credit Facility exceed the borrowing base then in effect, a prepayment of an amount sufficient to eliminate such excess is required to be made.  Availability of borrowings under the ABL Credit Facility is also subject to a bringdown of the representations and warranties in such Facility and the absence of any default thereunder (including any such default under our financial and other covenants in our Term Loan Credit Facility described below).  Voluntary prepayments of revolving loans under the ABL Credit Facility are permitted at any time, in whole or in part, without premium or penalty.

 

Borrowings under the ABL Credit Facility bear interest, at the Company’s option, at a base rate or LIBOR plus, in each case, an applicable margin.  LIBOR is reset at the beginning of each selected interest period based on the LIBOR rate then in effect; provided that, if LIBOR is below zero, then such rate will be equal to zero plus the applicable margin.  The base rate is a fluctuating interest rate equal to the highest of (i) the federal funds effective rate from time to time plus 0.50%, (ii) LIBOR (after taking account of any applicable floor) applicable for an interest period of one month plus 1.00%, and (iii) the prime lending rate announced from time to time by Wells Fargo.  The applicable margin is subject to adjustment based on the Company’s Average Excess Availability (as defined in the ABL Credit Facility).  Additionally, to maintain availability of funds under the ABL Credit Facility, we pay a monthly commitment fee of 0.25-0.375%, depending on the average ABL Credit Facility balance, on the unused portion of the ABL Credit Facility.

 

Ongoing extensions of credit under the ABL Credit Facility are subject to customary conditions, including sufficient availability under the borrowing base.  The ABL Credit Facility also contains covenants that require the Company to, among other things, periodically furnish financial and other information to the various lenders.  The ABL Credit Facility contains customary negative covenant and also requires the Company, together with its subsidiaries, to comply with a Fixed Charge Coverage Ratio (as defined in the ABL Credit Facility). The first Fixed Charge Coverage Ratio measurement period is the end of the first quarter of fiscal 2016.

 

Events of default under the ABL Credit Facility include customary events such as a cross-default provision with respect to other material debt. As of December 26, 2015, the Company is in compliance with all covenants of the ABL Credit Facility.

 

We use the ABL Credit Facility, in part, to fund our seasonal working capital needs, which are affected by, among other things, the growing cycles of the fruits and vegetables we process, for capital expenditures and for other general corporate purposes. The vast majority of our fruit and vegetable inventories are produced during the harvesting and packing

 

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Table of Contents

 

months of June through September and depleted through the remaining eight months. Accordingly, our need to draw funds under the ABL Credit Facility fluctuates significantly during the year.

 

As of December 26, 2015, there was $26.0 million outstanding under the ABL Credit Facility and the net availability thereunder was $23.1 million.

 

Term Loan Credit Facility

 

Also on November 18, 2015 and concurrent with the execution of the ABL Credit Facility, we entered into the new five-year Term Loan Credit Facility with BSP, as administrative agent, and the other lenders party thereto.  The Term Loan Credit Facility provides for a $85.0 million senior secured term loan that matures on November 17, 2020.  The Term Loan Credit Facility also provides that, under certain conditions, we may increase the aggregate principal amount of term loans outstanding thereunder by up to $25.0 million.  As noted above, we used the proceeds of the Term Loan Credit Facility, together with certain proceeds of the ABL Credit Facility, to refinance the indebtedness under the Prior Credit Facility and to fund payment of certain fees and costs related to the Credit Facilities.  Unlike amounts repaid under the ABL Credit Facility, any amounts we repay under the Term Loan Credit Facility may not be reborrowed.  The Term Loan Credit Facility also matures on November 17, 2020.

 

The Company and all of its subsidiaries are borrowers under the Term Loan Credit Facility.  Subject to certain exceptions, the obligations under the Term Loan Credit Facility are secured by substantially all of the assets of the Company including: (i) a perfected first priority pledge of all the equity interests of the Company, and (ii) a perfected first priority security interest in substantially all other tangible and intangible assets of the Company (including, but not limited, to accounts receivable, inventory, equipment, general intangibles, investment property, real property, intellectual property and the proceeds of the foregoing).

 

Borrowings under the Term Loan Credit Facility bear interest, at the Company’s option, at a base rate or LIBOR plus, in each case, an applicable margin.  LIBOR is reset at the beginning of each selected interest period based on the LIBOR rate then in effect; provided that, if LIBOR is below zero, then such rate will be equal to zero plus the applicable margin.  The base rate is a fluctuating interest rate equal to the highest of (i) the federal funds effective rate from time to time plus 0.50%, (ii) LIBOR (after taking account of any applicable floor) applicable for an interest period of one month plus 1.00%, and (iii) the prime lending rate announced by Wells Fargo.  The applicable margin is subject to adjustment based on the Company’s Total Leverage Ratio (as defined in the Term Loan Credit Facility).

 

The Term Loan Credit Facility requires amortization in the form of quarterly scheduled principal payments of $212,500 per fiscal quarter from March 2016 to September 2020, with the remaining balance due on the maturity date of November 17, 2020.  In addition to the scheduled quarterly principal payments, the Company is required to make mandatory principal payments out of Excess Cash Flow (as defined in the Term Loan Credit Facility).

 

As of December 26, 2015, the amount outstanding under the Term Loan Credit Facility was $85.0 million and the interest rate payable was 8.0%.  Voluntary prepayments of amounts outstanding under the term loan are permitted in whole or in part, in minimum amounts as set forth in the Term Loan Credit Facility, with prior notice but without premium or penalty, on or after November 18, 2016.

 

The Term Loan Credit Facility also contains affirmative and negative covenants that require the Company to, among other things, periodically furnish financial and other information to the various lenders.  The Term Loan Credit Facility contains customary negative covenants and also requires the Company, together with its subsidiaries, to comply with a Fixed Charge Coverage Ratio (as defined in the Term Loan Facility) and a Total Leverage Ratio (as defined in the Term Loan

 

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Table of Contents

 

Credit Facility). The first Fixed Charge Coverage Ratio and Total Leverage Ratio measurement period is the end of the first quarter of fiscal 2016.  On March 9, 2016, the Company entered into the First Amendment to Credit Agreement (the “Amendment”) with the lenders party thereto and BSP, as the administrative agent.  The Amendment amends the Term Loan Credit Facility to defer the Company’s obligation to comply with the Total Leverage Ratio until the end of the third quarter of fiscal 2016.

 

Events of default under the Term Loan Credit Agreement include customary events such as a cross-default provision with respect to other material debt.  As of December 26, 2015, the Company is in compliance with all covenants of the Term Loan Credit Agreement.

 

See Note 8 to our Consolidated Financial Statements “Long-Term Debt and Line of Credit” in Part II, Item 8 of this Annual Report on Form 10-K.

 

Outlook

 

We believe that our cash provided by operating activities together with borrowings available under our ABL Credit Facility will be sufficient to fund our working capital needs and future capital expenditures for the next 12 months.   We anticipate fiscal 2016 capital expenditures of approximately $9.0 million, funded through working capital and various purchase or financing arrangements.  Our plans are not expected to materially affect our financial ratios or liquidity.  In connection with the implementation of our business strategy, discussed in detail in “Item 1. Business,” we may incur operating losses in the future and may require future debt or equity financings (particularly in connection with future strategic acquisitions, new brand introductions or capital expenditures).  Expenditures relating to acquisition-related integration costs, market and territory expansion and new product development and introduction may adversely affect promotional and operating expenses and consequently may adversely affect operating and net income.  These types of expenditures are expensed for accounting purposes as incurred, while revenue generated from the result of such expansion or new products may benefit future periods.  We believe that we will generate positive cash flow from operations during the next twelve months, which, along with our existing working capital and borrowing facilities, will enable us to meet our operating cash requirements for the next twelve months.  This belief is based on current operating plans and certain assumptions, including those relating to our future revenue levels and expenditures, industry and general economic conditions and other conditions.  For instance, if current general economic conditions worsen, we believe that our sales forecasts may prove to be less reliable than they have in the past as consumers may change their buying habits with respect to snack food products.  Unexpected price increases for commodities used in our snack products, or adverse weather conditions affecting our Rader Farms crop yield could also impact our financial condition.  If any of these factors change, we may require future debt or equity financings to meet our business requirements.  Any required financings may not be available or, if available, may not be on terms attractive to us.

 

Off-Balance Sheet Arrangements

 

Under SEC regulations, in certain circumstances, we are required to make certain disclosures regarding the following off-balance sheet arrangements, if material:

 

·                  Any obligation under certain guarantee contracts;

 

·                  Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

 

·                  Any obligation under certain derivative instruments; and

 

·                  Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

 

We do not have any off-balance sheet arrangements that are required to be disclosed pursuant to these regulations, other than those described in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.  We do not have, nor do we engage in, transactions with any special purpose entities.  As of December 26, 2015 we no longer have any outstanding interest rate swaps and are not engaged in any derivative activities and had no forward exchange contracts.  In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual

 

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obligations.  These transactions are recognized in our financial statements in accordance with GAAP, and are more fully discussed below.

 

Contractual Obligations

 

At December 26, 2015, our contractual obligations for continuing operations were as follows (in thousands):

 

 

 

Payments due by period

 

 

 

Less than 1 year

 

1-3 years

 

3-5 years

 

More than 5 years

 

Total

 

Long-term debt(a)

 

$

1,812

 

$

4,339

 

$

84,229

 

$

111

 

$

90,491

 

Capital lease obligations(b)

 

18

 

32

 

5

 

 

55

 

Operating lease obligations(c)

 

2,340

 

3,491

 

2,536

 

4,921

 

13,288

 

Purchase obligations(d)

 

46,413

 

 

 

 

46,413

 

Total

 

$

50,583

 

$

7,862

 

$

86,770

 

$

5,032

 

$

150,247

 

 


(a)         Reflects amounts outstanding under our Term Loan Credit Facility and equipment term loans with Banc of America Leasing & Capital LLC as of December 26, 2015.  During fiscal 2015 we entered into the $85.0 million Term Loan Credit Facility with BSP, the terms of which are noted in Note 8 “Term Debt and Line of Credit” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.  In addition to the amounts in the table above, the Company has a revolving line of credit of up to $50.0 million under the ABL Credit Facility.  Although the ABL Credit Facility matures on November 17, 2020, we are not able to reliably estimate the timing of future drawdowns or repayments under the ABL Credit Facility.  At December 26, 2015, $26.0 million was outstanding under the ABL Credit Facility.

 

(b)         Amounts represent the expected cash payments of our capital leases, including the expected cash payments of interest expense of approximately $7 thousand on our capital leases.  See further discussion of our capital lease obligations as of December 26, 2015 in Note 9 “Commitments and Contingencies” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

 

(c)          Reflects amounts outstanding under our operating lease obligations as of December 26, 2015.

 

(d)         In order to mitigate the risks of volatility in commodity markets to which we are exposed, we have entered into 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.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are disclosed in Note 1 “Operations and Summary of Significant Accounting Policies” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.  The SEC has previously indicated that a “critical accounting policy” is one which is both important to the portrayal of our financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  We believe that the following accounting policies fit this definition:

 

Allowance for Doubtful Accounts.  We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  If our financial condition were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  We record specific allowances for receivable balances that are considered at higher risk due to known facts regarding the customer.

 

Inventories.  Our inventories are stated at the lower of cost (first-in, first-out) or market.  We identify slow moving or obsolete inventories and estimate appropriate loss provisions related thereto.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 

Goodwill and Trademarks.  Goodwill and trademarks are reviewed for impairment annually, or more frequently if impairment indicators arise.  Goodwill is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduce 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.

 

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We believe that each of our remaining trademarks has the continued ability to generate cash flows indefinitely, and therefore each of our trademarks has been determined to have an indefinite life.  Our determination that these trademarks have indefinite lives includes an evaluation of historical cash flows and projected cash flows for each of these trademarks.  We continue to make investments to market and promote each of these brands, and management continues to believe that the market opportunities and brand extension opportunities will generate cash flows for an indefinite period of time.  In addition, there are no legal, regulatory, contractual, economic or other factors to limit the useful life of these trademarks, and we intend to renew each of these trademarks, which can be accomplished at little cost.

 

Revenue Recognition.  In accordance with GAAP, 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 is recognized when the product is received by the retailer.  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.  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.

 

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.  The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.

 

Marketing Costs.  These costs include various sponsorships, coupon administration and consumer advertising programs that we enter into throughout the year, and are expensed as incurred.  We participate in a coupon programs, such as Sunday Free Standing Inserts (FSIs), digital marketing, coupon programs and social media, including Facebook, Twitter and Google advertising.  We use a national public relationship firm to promote all of our brands throughout the year targeting newspapers, magazines, web sites, bloggers, television and radio stations.  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.  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.

 

Income Taxes.  We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage.  Our effective tax rate is based on the level of income of our separate legal entities.  Significant judgment is required in evaluating tax positions that affect the annual tax rate.  Unrecognized tax benefits for uncertain tax positions are established when, despite the fact that the tax return positions are supportable, we believe these positions may be challenged and the results are uncertain.  We adjust these liabilities in light of changing facts and circumstances.

 

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.

 

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 of full-time employees of the Company on the first day of the

 

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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 $100,000 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 are included in accrued liabilities, and 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.

 

The above listing is not intended to be a comprehensive list of all of our accounting policies.  In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in their application.  See our audited Consolidated Financial Statements and notes thereto included in this Form 10-K, which contain accounting policies and other disclosures required by GAAP.

 

Item 7A.                Quantitative and Qualitative Disclosures About Market Risk

 

Commodity Pricing Risk

 

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.

 

Interest Rate Risk

 

To the extent that we borrow under the Term Loan Credit Facility and ABL Credit Facility, we are exposed to market risk related to changes in interest rates.  Using debt levels and interest rates as of December 26, 2015, the weighted average interest rate on borrowings was 6.5%.  At December 26, 2015, we had $111.0 million in variable rate debt.  A 10% increase in the variable interest rate would impact annual interest expense by $0.7 million based on debt balances as of December 26, 2015.

 

To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements.  Our interest rate swaps are measured at fair value and 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 (loss).  In the fourth quarter of fiscal 2015 we settled our existing interest rate swaps in connection with our repayment of the Prior Credit Facility.  As of December 26, 2015 the Company no longer utilized interest rate swaps.

 

The “Interest Rate Swaps” information contained in Note 8 “Term Debt and Line of Credit” to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K is incorporated by reference herein.

 

Foreign Currency Exchange Rate Risk

 

We contract for and settle all purchases in U.S. dollars.  We only purchase a modest amount of goods directly from international vendors.  Therefore, we consider the effect of foreign currency rate changes to be indirect and we do not hedge using any derivative instruments.  Historically, we have not been impacted by changes in exchange rates.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Item 8.           Financial Statements and Supplementary Data.

 

Report of Independent Registered Public Accounting Firm

36

Consolidated Balance Sheets as of December 26, 2015 and December 27, 2014

37

Consolidated Statements of Operations for the fiscal years ended December 26, 2015, December 27, 2014, and December 28, 2013

38

Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 26, 2015, December 27, 2014, and December 28, 2013

39

Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 26, 2015, December 27, 2014, and December 28, 2013

40

Consolidated Statements of Cash Flows for the fiscal years ended December 26, 2015, December 27, 2014, and December 28, 2013

41

Notes to Consolidated Financial Statements

42

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Inventure Foods, Inc.

Phoenix, Arizona

 

We have audited the accompanying consolidated balance sheets of Inventure Foods, Inc. and subsidiaries (the “Company”) as of December 26, 2015 and December 27, 2014 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 26, 2015. We also have audited the Company’s internal control over financial reporting as of December 26, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Inventure Foods, Inc. and subsidiaries as of December 26, 2015 and December 27, 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 26, 2015, in conformity with generally accepted accounting principles in the United States of America. Also in our opinion, Inventure Foods, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 26, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

/s/ Moss Adams LLP

 

Scottsdale, Arizona

March 10, 2016

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)

 

 

 

December 26,
2015

 

December 27,
2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,319

 

$

495

 

Accounts receivable, net

 

19,928

 

22,420

 

Inventories

 

81,807

 

65,216

 

Deferred income tax asset

 

3,788

 

1,228

 

Other current assets

 

6,262

 

1,220

 

Total current assets

 

114,104

 

90,579

 

 

 

 

 

 

 

Property and equipment, net

 

59,963

 

55,200

 

Goodwill

 

23,286

 

23,286

 

Trademarks and other intangibles, net

 

14,718

 

24,543

 

Other assets

 

6,375

 

1,702

 

Total assets

 

$

218,446

 

$

195,310

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

35,983

 

$

15,533

 

Accrued liabilities

 

8,629

 

12,978

 

Current portion of long-term debt

 

1,826

 

7,041

 

Total current liabilities

 

46,438

 

35,552

 

 

 

 

 

 

 

Long-term debt, less current portion

 

88,713

 

59,218

 

Line of credit

 

25,951

 

18,802

 

Deferred income tax liability

 

2,560

 

6,869

 

Interest rate swaps

 

 

349

 

Other liabilities

 

2,296

 

2,554

 

Total liabilities

 

165,958

 

123,344

 

 

 

 

 

 

 

Commitments and contingencies (see Notes 9 and 13)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value; 50,000 shares authorized; 19,979 and 19,961 shares issued and outstanding at December 26, 2015 and December 27, 2014, respectively

 

200

 

200

 

Additional paid-in capital

 

34,271

 

33,100

 

Accumulated other comprehensive loss

 

 

(134

)

Retained earnings

 

18,488

 

39,271

 

 

 

52,959

 

72,437

 

Less: treasury stock, at cost: 368 shares at December 26, 2015 and December 27, 2014

 

(471

)

(471

)

Total stockholders’ equity

 

52,488

 

71,966

 

Total liabilities and stockholders’ equity

 

$

218,446

 

$

195,310

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

 

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share data)

 

 

 

December 26,
2015

 

December 27,
2014

 

December 28,
2013

 

Net revenues

 

$

282,558

 

$

285,663

 

$

215,580

 

Cost of revenues

 

262,221

 

232,542

 

176,694

 

Gross profit

 

20,337

 

53,121

 

38,886

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

37,559

 

34,188

 

28,036

 

Impairment of intangible asset

 

9,277

 

 

 

Operating income (loss)

 

(26,499

)

18,933

 

10,850

 

Non-operating (income) expense:

 

 

 

 

 

 

 

Interest expense, net

 

6,330

 

2,604

 

872

 

Income (loss) before income tax expense

 

(32,829

)

16,329

 

9,978

 

Income tax expense (benefit)

 

(12,046

)

5,768

 

3,360

 

Net income (loss)

 

$

(20,783

)

$

10,561

 

$

6,618

 

 

 

 

 

 

 

 

 

Earnings (Loss) per common share:

 

 

 

 

 

 

 

Basic

 

$

(1.06

)

$

0.54

 

$

0.34

 

Diluted

 

$

(1.06

)

$

0.53

 

$

0.33

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

Basic

 

19,588

 

19,500

 

19,360

 

Diluted

 

19,588

 

19,990

 

19,789

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

 

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

December 26,
2015

 

December 27,
2014

 

December 28,
2013

 

Net income (loss)

 

$

(20,783

)

$

10,561

 

$

6,618

 

Change in fair value of interest rate swaps, net of tax

 

62

 

110

 

134

 

Settlement of interest rate swaps, net of tax

 

72

 

 

 

Comprehensive income (loss)

 

$

(20,649

)

$

10,671

 

$

6,752

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

 

 

Common Stock

 

Additional
Paid-in

 

Retained

 

Accumulated
Other
Comprehensive

 

Treasury

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Stock, at Cost

 

Total

 

Balance, December 29, 2012

 

19,571

 

$

196

 

$

29,660

 

$

22,092

 

$

(378

)

$

(471

)

$

51,099

 

Net income

 

 

 

 

6,618

 

 

 

6,618

 

Change in fair value of interest rate swaps, net of tax

 

 

 

 

 

134

 

 

134

 

Stock-based compensation expense

 

 

 

968

 

 

 

 

968

 

Tax benefit from equity awards

 

 

 

653

 

 

 

 

653

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

274

 

2

 

(321

)

 

 

 

(319

)

Balance, December 28, 2013

 

19,845

 

$

198

 

$

30,960

 

$

28,710

 

$

(244

)

$

(471

)

$

59,153

 

Net income

 

 

 

 

10,561

 

 

 

10,561

 

Change in fair value of interest rate swaps, net of tax

 

 

 

 

 

110

 

 

110

 

Stock-based compensation expense

 

 

 

1,697

 

 

 

 

1,697

 

Tax benefit from equity awards

 

 

 

332

 

 

 

 

332

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

116

 

2

 

111

 

 

 

 

113

 

Balance, December 27, 2014

 

19,961

 

$

200

 

$

33,100

 

$

39,271

 

$

(134

)

$

(471

)

$

71,966

 

Net (loss)

 

 

 

 

(20,783

)

 

 

(20,783

)

Change in fair value of interest rate swaps, net of tax

 

 

 

 

 

62

 

 

62

 

Settlement of interest rate swaps, net of tax

 

 

 

 

 

72

 

 

72

 

Stock-based compensation expense

 

 

 

1,489

 

 

 

 

1,489

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

18

 

 

(318

)

 

 

 

(318

)

Balance, December 26, 2015

 

19,979

 

$

200

 

$

34,271

 

$

18,488

 

$

 

$

(471

)

$

52,488

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

December 26,
2015

 

December 27,
2014

 

December 28,
2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(20,783

)

$

10,561

 

$

6,618

 

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

 

 

 

 

 

 

 

Depreciation

 

6,958

 

6,683

 

5,445

 

Amortization

 

548

 

1,204

 

288

 

Impairment of intangible asset

 

9,277

 

 

 

Provision for bad debts

 

229

 

17

 

(3

)

Deferred income taxes

 

(11,326

)

2,540

 

627

 

Excess income tax benefit from stock-based compensation

 

 

(332

)

(653

)

Stock-based compensation expense

 

385

 

557

 

619

 

Restricted stock compensation expense

 

1,104

 

1,140

 

349

 

Debt Extinguishment costs

 

607

 

 

 

Loss on disposition of equipment

 

60

 

118

 

16

 

Contingent consideration revaluation

 

261

 

(2,998

)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

2,265

 

1,183

 

(2,634

)

Inventories

 

(16,592

)

(22,103

)

(7,554

)

Other assets and liabilities

 

4

 

135

 

626

 

Accounts payable and accrued liabilities

 

15,650

 

13

 

1,602

 

Net cash (used in) provided by operating activities

 

(11,353

)

(1,282

)

5,346

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

(11,042

)

(11,835

)

(9,775

)

Proceeds from the sale of property and equipment

 

36

 

 

 

Purchase of Willamette Valley Fruit Company

 

 

(1,250

)

(8,472

)

Purchase of Fresh Frozen Foods

 

 

 

(38,776

)

Purchase of Sin In A Tin

 

 

(158

)

 

Payment of contingent consideration for Willamette Valley Fruit Company

 

(230

)

 

 

Payment of contingent consideration for Sin In A Tin

 

(4

)

 

 

Net cash used in investing activities

 

(11,240

)

(13,243

)

(57,023

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Net borrowings on U.S Bank line of credit

 

(18,802

)

15,579

 

(6,894

)

Net borrowings on Wells Fargo line of credit

 

25,951

 

 

 

Proceeds from issuance of common stock under equity award plans

 

31

 

320

 

206

 

Payments made on capital lease obligations

 

(1,450

)

(334

)

(486

)

Borrowings on term loans

 

114,055

 

4,515

 

70,047

 

Repayments made on long term debt

 

(88,363

)

(5,896

)

(10,161

)

Payment of loan financing fees

 

(6,432

)

(198

)

(671

)

Settlement of Interest Rate Swaps

 

(224

)

 

 

Excess income tax benefit from stock-based compensation

 

 

332

 

653

 

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

 

(349

)

(208

)

(526

)

Net cash provided by financing activities

 

24,417

 

14,110

 

52,168

 

Net increase (decrease) in cash and cash equivalents

 

1,824

 

(415

)

491

 

Cash and cash equivalents at beginning of year

 

495

 

910

 

419

 

Cash and cash equivalents at end of year

 

$

2,319

 

$

495

 

$

910

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

4,794

 

$

1,950

 

$

734

 

Cash paid (refunded) during the period for income taxes

 

$

(681

)

$

3,144

 

$

1,307

 

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing transactions:

 

 

 

 

 

 

 

Capital lease obligations incurred for the acquisition of property and equipment

 

$

36

 

$

 

$

16

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.     Operations and Summary of Significant Accounting Policies

 

Description of Business

 

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 $282 million in annual net revenues for fiscal 2015.

 

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 stores, natural food stores, mass merchandisers, drug and convenience stores, club stores, value, vending, food service 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, Willamette Valley Fruit CompanyTM brand frozen berries, Fresh FrozenTM brand frozen vegetables, 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 TinTM chocolate pate and other frozen desserts and private label frozen fruit and healthy/natural snacks.

 

In our indulgent specialty snack food category, products include T.G.I. Friday’s® brand snacks under license from T.G.I. Friday’s Inc. (“T.G.I. Friday’s”), Nathan’s Famous® brand snack products under license from Nathan’s Famous Corporation, Vidalia® brand snack products under license from Vidalia Brands, Inc., Poore Brothers® 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: frozen products and snack products.  The frozen products segment includes frozen fruits, vegetables, beverages and 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, popcorn and extruded products for sale primarily to snack food distributors and retailers.  The products sold under our snack products segment include products considered part of the indulgent specialty snack food category, as well as products considered part of the healthy/natural food category.

 

We operate manufacturing facilities in eight locations.  Our frozen berry products are processed in our Lynden, Washington, Salem, Oregon and Jefferson, Georgia facilities.  Our frozen berry business grows, processes and markets premium berry blends, raspberries, blueberries and rhubarb and purchases blackberries, cherries, cranberries, strawberries and other fruits from a select network of fruit growers for resale.  The fruit is processed, frozen and packaged for sale and distribution to wholesale customers.  Our frozen vegetable products are processed in our Jefferson, Georgia, Thomasville, Georgia and Salem, Oregon facilities.  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 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 Phoenix, Arizona and Bluffton, 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.

 

Acquisitions

 

We account for acquisitions using the acquisition method of accounting.  The results of operations of our acquired businesses have been included in our consolidated results from their respective dates of acquisition.

 

On September 29, 2014, we acquired the assets and intellectual property of a small boutique frozen desserts business, Sin In A TinTM, 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 attributable to Sin In A TinTM products (see Note 3 “Acquisitions”).

 

On November 8, 2013, we completed our acquisition of Fresh Frozen Foods, LLC (“Fresh Frozen Foods”) for a cash purchase price of $38.4 million plus a working capital adjustment of $0.4 million.  An additional amount of up to $3.0

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

million could have been payable to Fresh Frozen Foods as contingent consideration in the form of an earn-out based on the achievement of specified fiscal 2014 performance objectives, which were not met (see Note 3 “Acquisitions”).

 

On May 28, 2013, we completed our acquisition of the berry processing business of Willamette Valley Fruit Company, LLC (“Willamette Valley Fruit Company”) for a cash purchase price of $9.3 million.  An additional amount of up to $3.0 million may be payable to Willamette Valley Fruit Company as contingent consideration in the form of an earn-out if certain performance thresholds are met during the seven-year period following the closing of the transaction (see Note 3 “Acquisitions”).

 

Principles of Consolidation

 

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

 

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 2015 commenced December 28, 2014 and ended December 26, 2015, resulting in a 52-week fiscal year.  Fiscal 2014 commenced December 29, 2013 and ended December 27, 2014, resulting in a 52-week fiscal year.  Fiscal 2013 commenced December 30, 2012 ended December 28, 2013, resulting in a 52-week fiscal year.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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 revenue 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 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.

 

 

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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

At December 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:

 

 

 

 

 

December 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

 

$

 

$

564

 

$

 

$

 

$

697

 

$

 

Interest rate swaps

 

Level 2

 

 

 

 

(349

)

 

 

Accrued liabilities

 

Level 3

 

 

 

(376

)

 

 

(246

)

Other liabilities

 

Level 3

 

 

 

(1,499

)

 

 

(1,602

)

 

 

 

 

$

 

$

564

 

$

(1,875

)

$

(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 TinTM in September 2014 and Willamette Valley Fruit Company in May 2013, and is included in accrued liabilities and other long-term liabilities in the consolidated balance sheets.  The fair value measurement is based upon significant inputs not observable in the market.  Changes in the value of the obligation are recorded as income or expense in our consolidated statements of 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 participants view of the risk associated with the expected earn-out payments. In fiscal 2015, we increased our estimate of the total earn-out expected to be achieved, which resulted in an increase in operating expenses of $0.2 million during the year ended December 26, 2015.  In fiscal 2014, we reduced the value of the contingent consideration related to the Fresh Frozen Foods acquisition to zero due to the forecasted reduction in estimated achievement of targets, and we reduced the value of the contingent consideration related to the Willamette Valley Fruit Company acquisition by $0.3 million based on a reduction in our estimate of the total earn-out expected to be achieved.

 

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

 

 

 

Level 3

 

Balance at December 27, 2014

 

$

1,848

 

Earn-out compensation paid to Willamette Valley Fruit Company

 

(230

)

Earn-out compensation paid to Sin In A Tin

 

(4

)

Willamette Valley Fruit Company earn-out revaluation

 

235

 

Sin In A Tin earn-out revaluation

 

26

 

Balance at December 26, 2015

 

$

1,875

 

 

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. In fiscal 2015, the Company settled all existing interest rate swaps as part of our debt refinancing.  As of December 26, 2015 the Company did not have any interest rate swaps.

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Treasury Stock

 

We record repurchases of our common stock, $.01 par value (“Common Stock”), as treasury stock at cost.  We also record the subsequent retirement of these treasury shares at cost.  The excess of the cost of the shares retired over their par value is allocated between additional paid-in capital and retained earnings.  The amount recorded as a reduction of paid-in capital is based on such excess.

 

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 generally 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 to ten 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 was 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.  In 2015, as a result of the product recall (see Note 2 “Product Recall”) 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Management believes that each of our trademarks has the continued ability to generate cash flows indefinitely.  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.  Management intends to renew each of these trademarks, which can be accomplished at little cost.

 

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.

 

See Note 4 “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 each such employee’s 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 employees’ dependents, if elected by each such employee.  We have contracted with an insurance carrier for stop loss coverage that commences when $100,000 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 are $0.2 million and $0.3 million at December 26, 2015 and December 27, 2014, 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 actual expense we will ultimately incur could differ from such estimates.

 

Revenue Recognition

 

In accordance with GAAP, 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.

 

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 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.

 

Selling and Administrative Expenses

 

Selling and administrative expenses include salaries and wages, bonuses and incentives, stock-based compensation expenses, employee related expenses, facility-related expenses, marketing and advertising expenses, depreciation of property and equipment, professional fees, amortization of intangible assets, provisions for losses on accounts receivable and other operating expenses.

 

We recorded $1.1million, $1.4 million and $0.9 million in fiscal 2015, 2014 and 2013, respectively, for advertising costs, which are included in selling, general and administrative expenses on the Consolidated Statements of Operations contained herein.  These costs include various sponsorships, coupon administration and consumer advertising programs that we enter into throughout the year and are expensed as incurred.  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 $1.5 million, $1.7 million and $2.2 million for the years ended December 26 2015, December 27, 2014 and December 28, 2013, respectively.   The cost of product used in the

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

demonstrations, which is insignificant, and the fee we pay to the independent third-party providers who conduct the in-store demonstrations, are recorded as an 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.  The 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 Company uses a two-step approach to recognize and measure uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolutions of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement.  The Company believes that its income tax filing positions and deductions would be sustained upon examination; thus, the Company has not recorded any uncertain tax positions as of December 26, 2015.

 

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 unrecognized tax benefits for the fiscal years ended December 26, 2015 and December 27, 2014.

 

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  The material jurisdictions that are subject to examination by tax authorities include the U.S. federal, Arizona, California, Georgia, Indiana and Oregon.  Our U.S. federal income tax returns for fiscal 2012 through 2014 remain open to examination by the Internal Revenue Service.  Our state tax returns for fiscal 2011 through 2014 remain open to examination by the state jurisdictions.

 

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.

 

Earnings (Loss) 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 (loss) per share is calculated by including all

 

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INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

dilutive common shares such as stock options and restricted stock.  For the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013 551,886,  117,534 and 291,571 shares of Common Stock underlying stock options and restricted stock units were not included in the computation of diluted earnings (loss) per share because inclusion of such shares would be antidilutive or because the exercise prices were greater than the average market price of Common Stock for the period.  Exercises of outstanding stock options or warrants are assumed to occur for purposes of calculating diluted earnings (loss) per share for periods in which their effect would not be anti-dilutive.

 

Earnings (loss) per common share was computed as follows for the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013 (in thousands, except per share data):

 

 

 

December 26,
 2015

 

December 27, 
2014

 

December 28, 
2013

 

Basic Earnings (Loss) Per Share:

 

 

 

 

 

 

 

Net income (Loss)

 

$

(20,783

)

$

10,561

 

$

6,618

 

Weighted average number of common shares

 

19,588

 

19,500

 

19,360

 

Earnings (Loss) per common share

 

$

(1.06

)

$

0.54

 

$

0.34