U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 27, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number: 1-14556
THE INVENTURE GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
| 86-0786101 |
(State or Other Jurisdiction of Incorporation or |
| (I.R.S. Employer |
Organization) |
| Identification No.) |
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
Indicate by check whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
| Accelerated filer o |
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Non-accelerated filer o |
| Smaller reporting company x |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 17,878,621 as of May 7, 2010.
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
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| March 27, |
| December 26, |
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| 2010 |
| 2009 |
| ||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 1,180,189 |
| $ | 1,102,689 |
|
Accounts receivable, net of allowance for doubtful accounts of $89,248 in 2010 and $101,076 in 2009 |
| 11,843,225 |
| 10,884,986 |
| ||
Inventories, net |
| 14,315,035 |
| 17,445,163 |
| ||
Deferred income tax asset |
| 660,729 |
| 651,761 |
| ||
Other current assets |
| 1,356,563 |
| 1,045,797 |
| ||
Total current assets |
| 29,355,741 |
| 31,130,396 |
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Property and equipment, net |
| 23,944,600 |
| 23,734,921 |
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Goodwill |
| 11,616,225 |
| 11,616,225 |
| ||
Trademarks and other intangibles, net |
| 2,746,660 |
| 2,757,161 |
| ||
Other assets |
| 661,955 |
| 596,157 |
| ||
Total assets |
| $ | 68,325,181 |
| $ | 69,834,860 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 8,216,850 |
| $ | 6,751,612 |
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Accrued liabilities |
| 4,693,343 |
| 5,314,180 |
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Current portion of long-term debt |
| 1,193,105 |
| 1,204,475 |
| ||
Total current liabilities |
| 14,103,298 |
| 13,270,267 |
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Long-term debt, less current portion |
| 9,735,290 |
| 10,037,902 |
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Line of credit |
| 6,254,008 |
| 9,870,590 |
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Interest rate swaps |
| 518,440 |
| 452,292 |
| ||
Deferred income tax liability |
| 3,151,120 |
| 3,077,343 |
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Other liabilities |
| 371,294 |
| 219,903 |
| ||
Total liabilities |
| 34,133,450 |
| 36,928,297 |
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Commitments and contingencies (Note 6) |
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Shareholders’ equity: |
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Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding at March 27, 2010 and December 26, 2009 |
| — |
| — |
| ||
Common stock, $.01 par value; 50,000,000 shares authorized; 18,243,650 shares issued and outstanding at March 27, 2010 and December 26, 2009 |
| 182,436 |
| 182,436 |
| ||
Additional paid-in capital |
| 26,103,472 |
| 26,025,632 |
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Accumulated other comprehensive loss |
| (227,498 | ) | (188,429 | ) | ||
Retained earnings |
| 8,604,516 |
| 7,358,119 |
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| 34,662,926 |
| 33,377,758 |
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Less: treasury stock, at cost: 367,957 shares at March 27, 2010 and December 26, 2009 |
| (471,195 | ) | (471,195 | ) | ||
Total shareholders’ equity |
| 34,191,731 |
| 32,906,563 |
| ||
Total liabilities and shareholders’ equity |
| $ | 68,325,181 |
| $ | 69,834,860 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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| Quarter Ended |
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|
| March 27, |
| March 28, |
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Net revenues |
| $ | 31,396,190 |
| $ | 29,718,835 |
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Cost of revenues |
| 24,602,947 |
| 23,624,489 |
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Gross profit |
| 6,793,243 |
| 6,094,346 |
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Selling, general and administrative expenses |
| 4,507,335 |
| 4,475,701 |
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Operating income |
| 2,285,908 |
| 1,618,645 |
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Interest expense, net |
| 216,383 |
| 178,054 |
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Income before income tax provision |
| 2,069,525 |
| 1,440,591 |
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Income tax provision |
| 823,128 |
| 553,416 |
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Net income |
| $ | 1,246,397 |
| $ | 887,175 |
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Earnings per common share: |
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Basic |
| $ | 0.07 |
| $ | 0.05 |
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Diluted |
| $ | 0.07 |
| $ | 0.05 |
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Weighted average number of common shares: |
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Basic |
| 17,875,693 |
| 18,164,223 |
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Diluted |
| 18,149,228 |
| 18,164,223 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| Quarter Ended |
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|
| March 27, |
| March 28, |
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Cash flows from operating activities: |
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Net income |
| $ | 1,246,397 |
| $ | 887,175 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
| 915,848 |
| 805,703 |
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Amortization |
| 15,611 |
| 15,610 |
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Provision for bad debts |
| (11,828 | ) | (27,390 | ) | ||
Deferred income taxes |
| 210,012 |
| 242,026 |
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Share-based compensation expense |
| 77,840 |
| 55,900 |
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Loss on disposition of equipment |
| 24,798 |
| — |
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Change in operating assets and liabilities: |
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Accounts receivable |
| (946,411 | ) | (1,437,289 | ) | ||
Inventories |
| 3,130,128 |
| 977,950 |
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Other assets and liabilities |
| (350,967 | ) | (51,583 | ) | ||
Accounts payable and accrued liabilities |
| 726,278 |
| 966,483 |
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Net cash provided by operating activities |
| 5,037,706 |
| 2,434,585 |
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Cash flows from investing activities: |
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Purchase of equipment |
| (1,021,021 | ) | (721,946 | ) | ||
Net cash used in investing activities |
| (1,021,021 | ) | (721,946 | ) | ||
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Cash flows from financing activities: |
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Net borrowings on line of credit |
| (3,616,582 | ) | (881,300 | ) | ||
Payments made on capital lease obligations |
| (8,621 | ) | — |
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Payments made on long-term debt |
| (313,982 | ) | (308,604 | ) | ||
Treasury stock purchases |
| — |
| (471,195 | ) | ||
Net cash used in financing activities |
| (3,939,185 | ) | (1,661,099 | ) | ||
Net increase in cash and cash equivalents |
| 77,500 |
| 51,540 |
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Cash and cash equivalents at beginning of period |
| 1,102,689 |
| 683,567 |
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Cash and cash equivalents at end of period |
| $ | 1,180,189 |
| $ | 735,107 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for interest |
| $ | 210,945 |
| $ | 220,229 |
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Cash paid during the period for income taxes |
| $ | 16,000 |
| $ | — |
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Supplemental disclosures of non-cash investing and financing transactions: |
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Capital lease obligations incurred for the acquisition of property and equipment |
| $ | 129,303 |
| $ | — |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
The Inventure Group, Inc., a Delaware corporation (the “Company”), is a $120+ million leading marketer and manufacturer of healthy/all natural and indulgent specialty snack food brands. The Company is headquartered in Phoenix, Arizona with plants in Arizona, Indiana and Washington. The Company’s executive offices are located at 5415 East High Street, Suite 350, Phoenix, Arizona 85054, and its 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, which had been founded by Donald and James Poore in 1986. In December 1996, the Company completed an initial public offering of its Common Stock. In November 1998, the Company acquired the business and certain assets (including the Bob’s Texas Style® potato chip brand) of Tejas Snacks, L.P. (“Tejas”), a Texas-based potato chip manufacturer. In October 1999, the Company acquired Wabash Foods, LLC (“Wabash”) including the Tato Skins®, O’Boisies®, and Pizzarias® trademarks and the Bluffton, Indiana manufacturing operation and assumed all of Wabash Foods’ liabilities. In June 2000, the Company acquired Boulder Natural Foods, Inc. (“Boulder”) and the Boulder CanyonTM brand of totally natural potato chips. The Company changed its name from Poore Brothers, Inc. to The Inventure Group, Inc. on May 23, 2006. In May 2007, the Company acquired Rader Farms, Inc., including a farming operation and a berry processing facility in Lynden, Washington.
The Company’s goal is to build a rapidly growing specialty brand company that specializes on evolving consumer eating habits in two primary product segments: 1) Healthy/Natural Food Products 2) Indulgent Specialty Snack Food Brands. The Company sells its products nationally through a number of channels including: Grocery, Natural, Mass, Drug, Club, Vending, Food Service, Convenience Stores and International.
In the Healthy/Natural portfolio, products include Rader Farms frozen berries, Boulder Canyon Natural Foods™ brand kettle cooked potato chips, and Jamba™ branded blend-and-serve smoothie kits under licence from Jamba Corporation. In the Indulgent Specialty category, products include TGI Friday’s® brand snacks under license from TGI Friday’s Inc., BURGER KING™ brand snack products under license from Burger King Corporation, Poore Brothers® kettle cooked potato chips, Bob’s Texas Style®kettle cooked chips, Tato Skins® brand potato snacks and O’Boises® potato snacks. The Company also manufactures private label snacks for certain grocery retail chains and distributes snack food products in Arizona that are manufactured by others.
The Inventure Group, Inc.’s frozen berry products are manufactured by Rader Farms, Inc. (“Rader Farms”) a Washington corporation located in Whatcom County, and acquired by the Company in May of 2007. Rader Farms grows, processes and markets premium berry blends, raspberries, blueberries, and rhubarb and purchases marionberries, cherries, cranberries, strawberries and other fruits from a select network of fruit growers for resale. The fruit is processed, frozen and packaged for sale and distribution to wholesale customers. The Company also uses third party processors for certain products.
The Company’s snack products are manufactured at the Arizona and Indiana plants as well as some third party plants for certain products.
The Company’s fiscal year ends on the last Saturday occurring in the month of December of each calendar year. Accordingly, the first quarter of 2010 commenced December 26, 2009 and ended March 27, 2010.
Basis of Presentation
The consolidated financial statements include the accounts of The Inventure Group, Inc. and all of its wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. The financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary in order to make the condensed consolidated financial statements not misleading. A description of the Company’s accounting policies and other financial information is included in the audited financial statements filed with the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2009. The results of operations for the quarter ended March 27, 2010 are not necessarily indicative of the results expected for the full year.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The Company classifies its investments based upon an established fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
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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; |
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Level 3 | Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
At March 27, 2010 and December 26, 2009, 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 the Company for long-term borrowings with similar terms, except for the mortgage loan with fixed interest at 9.03%, which has a fair value of $1.2 million at March 27, 2010 and December 26, 2009.
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| Fair Value at March 27, 2010 |
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| Level 1 |
| Level 2 |
| Level 3 |
| Total |
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Liabilities: |
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Interest rate swaps |
| — |
| $ | 518,440 |
| — |
| $ | 518,440 |
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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 the Company 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.
Adoption of New Accounting Pronouncements
In January 2010, the FASB issued an amendment to require new disclosures for fair value measurements and provide clarification for existing disclosure requirements. More specifically, this update requires (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The Company adopted this standard at the beginning of its 2010 fiscal year and it did not have a material impact on the Consolidated Financial Statement note disclosures.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by including all dilutive common shares such as stock options and restricted stock. The total stock options outstanding of 2,130,500 and restricted shares outstanding of 124,353 were excluded from the weighted average per share calculation for the quarter ended March 27, 2010 because inclusion of such would be anti-dilutive. Stock options outstanding of 2,150,833 and restricted shares outstanding of 35,853 were excluded from the weighted average per share calculation for the quarter ended March 28, 2009 because inclusion of such would be anti-dilutive. Exercises of outstanding stock options or warrants are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be anti-dilutive. Earnings per common share was computed as follows for the quarters ended March 27, 2010 and March 28, 2009:
|
| Quarter Ended |
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|
| March 27, |
| March 28, |
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Basic Earnings Per Common Share: |
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Net income |
| $ | 1,246,397 |
| $ | 887,175 |
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Weighted average number of common shares |
| 17,875,693 |
| 18,164,223 |
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Earnings per common share. |
| $ | 0.07 |
| $ | 0.05 |
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Diluted Earnings Per Common Share: |
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Net income |
| $ | 1,246,397 |
| $ | 887,175 |
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Weighted average number of common shares |
| 17,875,693 |
| 18,164,223 |
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Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock |
| 273,535 |
| — |
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Adjusted weighted average number of common shares |
| 18,149,228 |
| 18,164,223 |
| ||
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Earnings per common share |
| $ | 0.07 |
| $ | 0.05 |
|
Stock Options and Stock-Based Compensation
Stock options and other stock based compensation awards expense are adjusted for estimated forfeitures and are recognized on a straight-line basis over the requisite period of the award, which is currently five to ten years for stock options, and three years for restricted stock. The Company estimates future forfeiture rates based on its historical experience.
Compensation costs related to all share-based payment arrangements, including employee stock options, are recognized in the financial statements based on the fair value method of accounting. Excess tax benefits related to share-based payment arrangements be classified as cash inflows from financing activities and cash outflows from operating activities.
See Footnote 8 “Shareholder’s Equity” for additional information.
Deferred Compensation Plan
Effective January 1, 2007 the Company implemented a deferred compensation plan. The assets are invested in mutual funds and are reflected in other current assets and the related obligation is reflected in accrued liabilities in the Company’s Condensed Consolidated Balance Sheets.
2. Inventories
Inventories consisted of the following:
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| March 27, |
| December 26, |
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|
| 2010 |
| 2009 |
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Finished goods |
| $ | 4,689,400 |
| $ | 5,558,696 |
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Raw materials |
| 9,625,635 |
| 11,886,467 |
| ||
|
| $ | 14,315,035 |
| $ | 17,445,163 |
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3. Goodwill, Trademarks and Other Intangibles
Goodwill, trademarks and other intangibles, net consisted of the following:
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| Estimated |
| March 27, |
| December 26, |
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Goodwill: |
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The Inventure Group, Inc. |
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| $ | 5,986,252 |
| $ | 5,986,252 |
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Rader Farms, Inc. |
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| 5,629,973 |
| 5,629,973 |
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Total Goodwill, net |
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| $ | 11,616,225 |
| $ | 11,616,225 |
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Trademarks: |
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The Inventure Group, Inc. |
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|
| 1,535,659 |
| $ | 1,535,659 |
| |
Rader Farms, Inc. |
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|
| 1,070,000 |
| 1,070,000 |
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Other intangibles: |
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Rader - Covenant-not-to-compete, gross carrying amount |
| 5 years |
| 160,000 |
| 160,000 |
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Rader - Covenant-not-to-compete, accum. amortization |
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|
| (90,677 | ) | (82,676 | ) | ||
Rader - Customer relationship, gross carrying amount |
| 10 years |
| 100,000 |
| 100,000 |
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Rader - Customer relationship, accum. amortization |
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|
| (28,322 | ) | (25,822 | ) | ||
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Total Trademarks and other intangibles, net |
|
|
| $ | 2,746,660 |
| $ | 2,757,161 |
|
Amortization expense related to these intangibles for the quarters ended March 27, 2010 and March 28, 2009 were $10,501 and $10,500, respectively.
Goodwill and trademarks are reviewed for impairment annually in the fourth fiscal quarter, 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 reduces the fair value of a reporting unit below its carrying value. 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. The carrying values were not impaired as of March 27, 2010.
4. Accrued Liabilities
Accrued liabilities consisted of the following:
|
| March 27, |
| December 26, |
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Accrued payroll and payroll taxes |
| $ | 1,274,830 |
| $ | 1,635,564 |
|
Accrued royalties and commissions |
| 788,525 |
| 809,095 |
| ||
Accrued advertising and promotion |
| 1,087,878 |
| 1,327,021 |
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Accrued other |
| 1,542,110 |
| 1,542,500 |
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|
| $ | 4,693,343 |
| $ | 5,314,180 |
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5. Long-Term Debt
Long-term debt consisted of the following:
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| March 27, |
| December 26, |
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|
| 2010 |
| 2009 |
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Mortgage loan due monthly through July, 2012; interest at 9.03%; collateralized by land and building in Goodyear, AZ |
| $ | 1,498,684 |
| $ | 1,515,079 |
|
Mortgage loan due monthly through December, 2016; interest rate at 30 day LIBOR plus 165 basis points, fixed through a swap agreement to 6.85%; collateralized by land and building in Bluffton, IN |
| 2,203,277 |
| 2,220,877 |
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Equipment term loan due monthly through May, 2014; interest at LIBOR plus 165 basis points; collateralized by equipment at Rader Farms in Lynden, WA |
| 3,642,857 |
| 3,857,143 |
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Real Estate term loan due monthly through July, 2017; interest at LIBOR plus 165 basis points; fixed through a swap agreement to 4.28%; secured by a leasehold interest in the real property in Lynden, WA |
| 3,567,605 |
| 3,612,125 |
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Vehicle term loan and other miscellaneous loans due in various monthly installments through February, 2011; collateralized by vehicles |
| 9,415 |
| 29,868 |
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Office Equipment leases due June 2012 |
| 6,557 |
| 7,285 |
| ||
|
| 10,928,395 |
| 11,242,377 |
| ||
Less current portion of long-term debt |
| (1,193,105 | ) | (1,204,475 | ) | ||
Long-term debt, less current portion |
| $ | 9,735,290 |
| $ | 10,037,902 |
|
To fund the acquisition of Rader Farms, the Company entered into a Loan Agreement (the “Loan Agreement”) with U.S. Bank National Association (“U.S. Bank”). Each of the Company’s subsidiaries is a guarantor of the Loan Agreement, which is secured by a pledge of all of the assets of the consolidated group. The borrowing capacity available to the Company under the Loan Agreement consists of notes representing:
· a $15,000,000 revolving line of credit maturing on June 30, 2011; $6,254,008 was outstanding at March 27, 2010. Based on eligible assets, the amount available under the line of credit was $8,166,152 at March 27, 2010. As defined in the revolving credit facility note, all borrowings under the revolving line of credit will bear interest at either (i) the prime rate of interest announced by U.S. Bank from time to time or (ii) LIBOR plus the LIBOR Rate Margin.
· Equipment term loan due May 2014 noted above.
· Real estate term loan due July 2017 noted above.
U.S. Bank may terminate its commitments and accelerate the repayment of amounts outstanding and exercise other remedies upon the occurrence of an event of default (as defined in the Loan Agreement), subject, in certain instances, to the expiration of an applicable cure period. The agreement requires the Company to maintain compliance with certain financial covenants, including a minimum tangible net worth, a minimum fixed charge coverage ratio and a minimum current ratio. At March 27, 2010, the Company was in compliance with all of the financial covenants.
Interest Rate Swaps
To manage exposure to changing interest rates, the Company selectively enters into interest rate swap agreements. The Company’s interest rate swaps qualify for and are designated as cash flow hedges. Changes in the fair value of a swap that is highly effective and that is designated and qualifies as a cash flow hedge to the extent that the hedge is effective, are recorded in other comprehensive income (loss).
The Company entered into an interest rate swap in 2006 to convert the interest rate of the mortgage to purchase the Bluffton, Indiana plant from the contractual rate of 30 day LIBOR plus 165 basis points to a fixed rate of 6.85%. On September 28, 2008, the Company’s first day of its fiscal fourth quarter, the Company prospectively redesignated the hedging relationship to a cash flow hedge. The swap has a fixed pay-rate of 6.85% and a notional amount of approximately $2.2 million at March 27, 2010 and expires in December, 2016. We evaluate the effectiveness of the hedge on a quarterly basis and at March 27, 2010 the hedge is highly effective. The interest rate swap had fair value of ($269,786) at March 27, 2010, which is recorded as a liability on the accompanying consolidated balance sheet. The swap value was determined in accordance with the fair value measurement guidance discussed earlier using Level 2 observable inputs and approximates the loss that would have been realized if the contract had been settled on March 27, 2010.
The Company entered into another interest rate swap in January 2008 to effectively convert the interest rate on the real estate term loan to a fixed rate of 4.28%. The interest rate swap is structured with decreasing notional amounts to match the expected pay down of the debt. The notional value of the swap at March 27, 2010 was $3.6 million. The interest rate swap is accounted for as a cash flow hedge derivative and expires in July 2017. We evaluate the effectiveness of the hedge on a quarterly basis and at March 27, 2010 the hedge is highly effective. The interest rate swap had fair value of ($248,654) at March 27, 2010, which is recorded as a liability on the accompanying consolidated balance sheet. This value was determined in accordance with the fair value measurement guidance discussed earlier using Level 2 observable inputs and approximates the loss that would have been realized if the contract had been settled on March 27, 2010.
The only component of other comprehensive income/loss for the periods presented is the change in fair value of the interest rate swaps. The effect of such is as follows:
|
| Quarter ended |
| ||||
|
| March 27, 2010 |
| March 28, 2009 |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 1,246,397 |
| $ | 887,175 |
|
|
|
|
|
|
| ||
Change in fair value of interest rate swaps (net of tax) |
| (66,148 | ) | 54,354 |
| ||
|
|
|
|
|
| ||
Comprehensive income |
| $ | 1,180,249 |
| $ | 941,529 |
|
6. Litigation
The Company is periodically a party to various lawsuits arising in the ordinary course of business. Management believes, based on discussions with legal counsel, that the resolution of any such lawsuits, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or results of operations.
The Inventure Group, Inc. was one of eight companies sued by the Environmental Law Foundation in August, 2006 in the Superior Court for the State of California for the County of Los Angeles by the Attorney General of the State of California for alleged violations of California Proposition 65. California Proposition 65 is a state law that, in part, requires companies to warn California residents if a product contains chemicals listed within the statute. The matter was resolved in March 2009, and the Company incurred a settlement liability of $0.2 million.
7. Business Segments
The Company’s operations consist of three reportable segments: manufactured snack products, berry products and distributed products. The manufactured snack products segment produces potato chips, potato crisps and potato skins for sale primarily to snack food distributors and retailers. The berry products segment produces frozen berries for sale primarily to groceries and mass merchandisers. The distributed products segment sells snack food products manufactured by other companies to the Company’s Arizona snack food distributors. The Company’s reportable segments offer different products and services. The majority of the Company’s revenues are attributable to external customers in the United States. The Company does sell to customers in Mexico, Canada, the Caribbean, Latin America, South America, the Middle East, Malta, Germany, India, Hong Kong, Japan, Singapore, Malaysia, Thailand, Taiwan, Philippines, and the United Kingdom as well, however the revenues attributable to those customers are immaterial. In October 2009, the Company expanded overseas distribution of the snacks it produces under its BURGER KING TM licensing agreement. The snacks will be available in 17 new countries in Asia, Europe, and the Middle East, including China, Turkey, and the Scandinavian countries. All of the Company’s assets are located in the United States. The Company does not allocate any assets to the distributed products segment.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (Note 1). The Company does not allocate assets, selling, general and administrative expenses, income taxes or other income and expense to segments.
|
| Manufactured |
| Berry |
| Distributed |
| Consolidated |
| ||||
Quarter ended March 27, 2010 |
|
|
|
|
|
|
|
|
| ||||
Net revenues from external customers |
| $ | 18,498,068 |
| $ | 12,049,133 |
| $ | 848,989 |
| $ | 31,396,190 |
|
Depreciation and amortization included in segment gross profit |
| 301,275 |
| 177,936 |
| — |
| 479,211 |
| ||||
Segment gross profit |
| 3,029,443 |
| 3,755,364 |
| 8,436 |
| 6,793,243 |
| ||||
Goodwill |
| 5,986,252 |
| 5,629,973 |
| — |
| 11,616,225 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Quarter ended March 28, 2009 |
|
|
|
|
|
|
|
|
| ||||
Net revenues from external customers |
| $ | 18,172,714 |
| $ | 10,708,582 |
| $ | 837,539 |
| $ | 29,718,835 |
|
Depreciation and amortization included in segment gross profit |
| 252,663 |
| 153,778 |
| — |
| 406,441 |
| ||||
Segment gross profit |
| 2,804,179 |
| 3,098,403 |
| 191,764 |
| 6,094,346 |
| ||||
Goodwill |
| 5,986,252 |
| 5,629,973 |
| — |
| 11,616,225 |
| ||||
The following table reconciles reportable segment gross profit to the Company’s consolidated income before income tax benefit (provision) for the quarters ended March 27, 2010 and March 28, 2009:
|
| March 27, 2010 |
| March 28, 2009 |
| ||
Segment gross profit |
| $ | 6,793,243 |
| $ | 6,094,346 |
|
Unallocated amounts: |
|
|
|
|
| ||
Operating expenses |
| (4,507,335 | ) | (4,475,701 | ) | ||
Interest expense, net |
| (216,383 | ) | (178,054 | ) | ||
Income before income tax provision |
| $ | 2,069,525 |
| $ | 1,440,591 |
|
8. Stock Options, Stock-Based Compensation and Shareholders’ Equity
The Company’s 1995 Stock Option Plan (the “1995 Plan”), as amended, provided for the issuance of options to purchase 3,500,000 shares of Common Stock. The options granted pursuant to the 1995 Plan expire over a five-year period and generally vest over three years. In addition to options granted under the 1995 Plan, the Company also issued non-qualified options (non-plan options) to purchase Common Stock to certain Directors and Officers which are exercisable and expire either five or ten years from date of grant. All options are issued at an exercise price of fair market value at the date of grant and are non-compensatory. The 1995 Plan expired in May 2005 with 410,518 reserved but unissued shares of Common Stock available for issuance under the 1995 Plan, and was replaced by the Inventure Group, Inc. 2005 Equity Incentive Plan (the “2005 Plan”) as described below.
The 2005 Plan was approved at the Company’s 2005 Annual Meeting of Shareholders and reserved for issuance that number of shares of Common Stock determined by adding (a) 410,518, which is the number of reserved but unissued shares available for issuance under the 1995 Plan, (b) 500,000, which is the number of additional shares approved by the stockholders on May 23, 2006 to be added to the 2005 Plan, (c) 500,000, which is the number of additional shares approved by the stockholders on May 19, 2008 to be added to the 2005 Plan and (d) 500,000, which is the number of additional shares approved by the stockholders on May 19, 2009 to be added to the 2005 Plan. If any shares of Common Stock subject to awards granted under the 1995 Plan or the 2005 Plan are canceled, those shares will be available for future awards under the 2005 Plan. The 2005 Plan expires in May 2015, and awards granted under the 2005 Plan may include: nonqualified stock options, incentive stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and stock-reference awards. Prior to May 2008, all stock option grants had a five year term. The fair value of these stock option grants is amortized to expense over the vesting period, generally three years for employees and one year for the Board of Directors. In May 2008, the Company’s Board of Directors approved a 10 year term for all future stock option grants, with vesting periods of five years and one year for employees and Board of Director members, respectively.
During the three months ending March 27, 2010 and March 28, 2009, the total share-based compensation expense from restricted stock recognized in the financial statements was $17,726 and $-0- respectively, and is included in selling, general and administrative expenses. There were no share-based compensation costs which were capitalized. As of March 27, 2010 and March 28, 2009 the total unrecognized costs related to non-vested restricted stock awards granted was $153,624 and $-0-, respectively.
There were no restricted stock awards granted during the three months ended March 27, 2010 and March 28, 2009. All restricted stock awards vest three years from the date of grant. Share-based compensation expense related to restricted stock awards is recognized on the straight-line method over the requisite service period, which is approximately three years, and the related share-based compensation expense is included in selling, general and administrative expenses.
During the three months ended March 27, 2010 and March 28, 2009, the Company recorded $60,114 and $55,900 of share-based compensation expense, respectively, related to stock options. There were no stock options exercised during the three months ended March 27, 2010 and March 28, 2009.
As of March 27, 2010, the amount of unrecognized compensation expense related to stock options to be recognized over the next two years is approximately $0.3 million. This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future. Generally, the Company issues new shares upon the exercise of stock options as opposed to reissuing treasury shares.
The following table summarizes stock option activity during the quarter ended March 27, 2010:
|
| Plan Options |
| |||
|
| Options |
| Weighted |
| |
Balance, December 26, 2009 |
| 2,130,500 |
| $ | 2.26 |
|
Granted |
| — |
| $ | — |
|
Forfeited |
| — |
| $ | — |
|
Exercised |
| — |
| — |
| |
Balance, March 27, 2010 |
| 2,130,500 |
| $ | 2.26 |
|
The total intrinsic value related to stock options exercisable and outstanding was $1,028,825 as of March 27, 2010 and $19,200 as of March 28, 2009. The intrinsic value related to vested stock options outstanding was $282,997 as of March 27, 2010 and $-0- as of March 28, 2009. The aggregate intrinsic value is based on the exercise price and the Company’s closing stock price of $2.70 as of March 27, 2010 and $1.56 as of March 28, 2009.
Issuer Purchases of Equity Securities
The Company’s Board of Directors approved a stock re-purchase program that was publically announced on Form 8-K filed with the SEC on September 26, 2008 whereby up to $2 million of common stock could be purchased from time to time at the discretion of management (the “2008 program”). The repurchased shares are generally held as treasury stock and are available for general corporate purposes unless and until such shares are retired by the Board. The 2008 program expired August 23, 2009 and the Company continues to evaluate its share repurchase opportunities. Below is a table showing repurchased shares for each month included in the period covered by this report:
Period |
| Total Number |
| Weighted |
| Total Number of |
| Maximum that |
| ||
|
|
|
|
|
|
|
|
|
| ||
12/28/08 — 1/31/09 |
| — |
| $ | — |
| — |
| $ | 1,272,878 |
|
|
|
|
|
|
|
|
|
|
| ||
2/1/09 — 2/28/09 |
| — |
| $ | — |
| — |
| $ | 1,272,878 |
|
|
|
|
|
|
|
|
|
|
| ||
3/1/09 - 03/28/09 |
| 367,957 |
| $ | 1.28 |
| 367,957 |
| $ | (471,195 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
3/29/09 - 03/27/10 |
| — |
| $ | — |
| — |
| $ | (471,195 | ) |
|
|
|
|
|
|
|
|
|
| ||
Total |
|
|
|
|
|
|
| $ | 801,683 |
| |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, including all documents incorporated by reference, includes “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and The Inventure Group, Inc. (the “Company”) desires to take advantage of the “safe harbor” provisions thereof. Therefore, the Company is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all of such forward-looking statements. In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “estimates,” “projects,” “will likely result,” “will continue,” “future” and similar terms and expressions identify forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q reflect the Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including specifically the possibility that the Company will need additional financing due to future operating losses or in order to implement the Company’s business strategy, the possible diversion of management resources from the day-to-day operations of the Company as a result of strategic acquisitions, potential difficulties resulting from the integration of acquired businesses with the Company’s business, other acquisition-related risks, lack of consumer acceptance of existing and future products, dependence upon key license agreements, dependence upon major customers, significant competition, risks related to the food products industry, volatility of the market price of the Company’s common stock, par value $.01 per share (the “Common Stock”), the possible de-listing of the Common Stock from the Nasdaq Capital Market if the Company fails to satisfy the applicable listing criteria (including a minimum share price) in the future and those other risks and uncertainties discussed herein, that could cause actual results to differ materially from historical results or those anticipated. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Quarterly Report on Form 10-Q will in fact transpire or prove to be accurate. Readers are cautioned to consider the specific risk factors described herein and in “Risk Factors” in the Company’ Annual Report on Form 10-K for the fiscal year ended December 26, 2009 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 publicly revise these forward-looking statements to reflect events or circumstances that may arise after the date hereof. 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 section.
Results of Operations
Quarter ended March 27, 2010 compared to the quarter ended March 28, 2009
Net revenues for the first quarter of fiscal 2009 were $31.4 million, 5.6% higher than last year’s first quarter net revenues of $29.7 million. Snack division net revenues were $19.3 million, up 1.8% over last year’s first quarter net revenues. Rader Farms net revenues were $12.0 million, up 12.5% over last year’s first quarter net revenues. The Rader Farms increase was a result of a strong volume increase achieved while absorbing recent price reductions in the market for berries.
Gross profit for the quarter ended March 27, 2010 increased 11.5% or $0.7 million to $6.8 million, as compared to the quarter ended March 28, 2009, and also increased as a percentage of net revenues (21.6% of net revenue for 2010 and 20.5% of net revenue for 2009). The increase in gross profit was primarily attributable to increased unit sales, improved plant performance and an overall lower cost of berries. These gains were partially offset by lower C-Store business in the snack division, as well as an industry-wide impact of poor storage potatoes.
Selling, general and administrative expenses were $4.5 million in the first quarter of 2010, or 14.4% of net revenues for the quarter, which is relatively flat in dollars versus 2009, but down 0.7% from 15.1% of net revenues last year. The improvement represents the Company’s ability to drive top-line growth while containing costs. Net income was $1.2 million, or $0.07 per basic and diluted share, compared to net income of $0.9 million, or $0.05 per basic and diluted share last year.
Liquidity and Capital Resources
Net working capital was $15.3 million (a current ratio of 2.1:1) at March 27, 2010 and $17.9 million (a current ratio of 2.35:1) at December 26, 2009. For the quarter ended March 27, 2010, the Company generated cash flow of $5.0 million from operating activities, invested $1.0 million in equipment, and utilized $3.9 million to pay down its line of credit and other debt. For the quarter ended March 28, 2009, the Company generated cash flow of $2.4 million from operating activities, invested $0.7 million in equipment and utilized $1.2 million to pay down its line of credit and other debt and purchased $0.5 million of treasury shares.
The Company’s Goodyear, Arizona manufacturing and distribution facility is subject to a $1.6 million mortgage loan from Morgan Guaranty Trust Company of New York, bears interest at 9.03% per annum and is secured by the building and the land on which it is located. The loan matures on July 1, 2012; however monthly principal and interest installments of $16,825 are determined based on a twenty-year amortization period.
The Company’s Bluffton, Indiana manufacturing and distribution facility was purchased for $3.0 million in December, 2006. The facility is subject to a $2.3 million mortgage loan from U.S. Bank National Association, bears interest at the 30 day LIBOR plus 165 basis points and is secured by the building and the land on which it is located. The interest rate associated with this debt instrument was fixed to 6.85% via an interest rate swap agreement with U.S. Bank National Association in December 2006. The loan matures in December, 2016; however monthly principal and interest installments of $18,392 are determined based on a twenty-year amortization period.
To fund the acquisition of Rader Farms the Company entered into a Loan Agreement (the “Loan Agreement”) with U.S. Bank National Association (“U.S. Bank”). Each of our subsidiaries is a guarantor of the Loan Agreement, which is secured by a pledge of all of the assets of our consolidated group. The borrowing capacity available to us under the Loan Agreement consists of notes representing:
· a $15,000,000 revolving line of credit maturing on June 30, 2011; based on asset eligibility, there was $8.2 million of borrowing availability under the line of credit at March 27, 2010.
· an equipment term loan, secured by the equipment acquired, subject to a $5.8 million mortgage loan from U.S. Bank National Association, bears interest at the 30 day LIBOR plus 165 basis points. The loan matures in May, 2014 and monthly principal installments are $71,429 plus interest and
· a real estate term loan, secured by a leasehold interest in the real property we are leasing from the former owners of Rader Farms in connection with the Acquisition, subject to a $4.0 million real estate term loan from U.S. Bank National Association, bears interest at the 30 day LIBOR plus 165 basis points. The interest rate associated with this debt instrument was fixed to 4.28% via an interest rate swap agreement with U.S. Bank National Association in January 2008. The loan matures in July, 2017; however monthly principal and interest installments of $36,357 are determined based on a fifteen-year amortization period.
All borrowings under the revolving line of credit will bear interest at either (i) the prime rate of interest announced by U.S. Bank from time to time or (ii) LIBOR, plus the LIBOR Rate Margin (as defined in the revolving credit facility note). The term loan will bear interest at LIBOR, plus the LIBOR Rate Margin (as defined in the term loan note).
As is customary in such financings, U.S. Bank may terminate its commitments and accelerate the repayment of amounts outstanding and exercise other remedies upon the occurrence of an event of default (as defined in the Loan Agreement), subject, in certain instances, to the expiration of an applicable cure period. The agreement requires the Company to maintain compliance with certain financial covenants, including a minimum tangible net worth, a minimum fixed charge coverage ratio and a debt to equity ratio. At March 27, 2010, the Company was in compliance with all of the financial covenants.
Interest Rate Swaps
See Footnote 5 “Long-Term Debt” in the Company’s “Notes to Unaudited Condensed Consolidated Financial Statements” for detail regarding the Company’s interest rate swaps.
Contractual Obligations
The Company’s future contractual obligations consist principally of long-term debt, operating leases, minimum commitments regarding third party warehouse operations services, remaining minimum royalty payments due licensors pursuant to brand licensing agreements and severance charges to terminated executives. As of March 27, 2010 there have been no material changes to the Company’s contractual obligations since its December 26, 2009 fiscal year end, other than scheduled payments.
The Company has plans to expand its Bluffton, Indiana manufacturing facility to add extruded snack production capabilities later this fiscal year. The addition of the latest state-of-the-art extrusion technology will expand manufacturing capabilities to include sheeted dough, pellet and extruded baked snacks. The $4 million expansion is expected to be complete by the third quarter of 2010.
Management’s Plans
In connection with the implementation of the Company’s business strategy, the Company 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. Management believes that the Company will generate positive cash flow from operations during the next twelve months, which, along with its existing working capital and borrowing facilities, will enable the Company to meet its operating cash requirements for the next twelve months, including planned capital expenditures. The belief is based on current operating plans and certain assumptions, including those relating to the Company’s future revenue levels and expenditures, industry and general economic conditions and other conditions. For instance, if current general economic conditions continue or 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, the Company may require future debt or equity financings to meet its business requirements. There can be no assurance that any required financings will be available or, if available, will be on terms attractive to the Company.
Critical Accounting Policies and Estimates
There have been no significant changes to the Company’s critical accounting policies and estimates since the filing of its Form 10-K for the year ended December 26, 2009.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This information has been omitted pursuant to Item 305(e) of Regulation S-K, promulgated under the Securities Act of 1933, as amended.
Item 4T. Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is 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. Our internal control over financial reporting includes those policies and procedures that:
(i) |
| pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
|
|
|
(ii) |
| 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 our management and directors; and |
|
|
|
(iii) |
| provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of 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 all misstatements or instances of fraud. As such, a control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. 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.
Management assessed the effectiveness of internal control over financial reporting as of March 27, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of March 27, 2010.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
The Company is periodically a party to various lawsuits arising in the ordinary course of business. Management believes, based on discussions with legal counsel, that the resolution of any such lawsuits, individually and in the aggregate, will not have a material adverse effect on the financial statements taken as a whole.
The Company was one of eight companies sued by the Environmental Law Foundation in August, 2006 in the Superior Court for the State of California for the County of Los Angeles by the Attorney General of the State of California for alleged violations of California Proposition 65. California Proposition 65 is a state law that, in part, requires companies to warn California residents if a product contains chemicals listed within the statute. The matter was resolved in March 2009, at which time the Company incurred a settlement liability of $0.2 million.
During the quarter ended March 27, 2010, there were no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
None.
(a) Exhibits:
31.1 — Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
31.2 — Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
32.1 — Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: | May 11, 2010 |
| THE INVENTURE GROUP, INC. | |
|
| |||
|
| |||
| By: | /s/ Terry McDaniel | ||
|
| Terry McDaniel | ||
|
| Chief Executive Officer | ||
|
| (Principal Executive Officer) | ||
EXHIBIT INDEX
31.1 — | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a). |
|
|
31.2 — | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a). |
|
|
32.1 — | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |