Inventure Foods (SNAK) 10-Q 2017 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended July 1, 2017

or

☐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 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 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 ☒               No ☐

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 ☒               No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐               No ☒

As of August 7, 2017, the total number of shares outstanding of the registrant’s Common Stock was 19,785,934 shares.

INVENTURE FOODS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

Part I — FINANCIAL INFORMATION
Item 1. Financial Statements.
	Condensed Consolidated Balance Sheets  – July 1, 2017 (Unaudited) and December 31, 2016	1
	Condensed Consolidated Statements of Operations (Unaudited) – quarters and six months ended July 1, 2017 and June 25, 2016	2
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended July 1, 2017 and June 25, 2016	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		30
Item 4. Controls and Procedures		30
Part II — OTHER INFORMATION
Item 1. Legal Proceedings		32
Item 1A. Risk Factors		32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 6. Exhibits		33
Signatures		34

INVENTURE FOODS, INC. AND SUBSIDIARIES

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this Quarterly Report on Form 10-Q (“Form 10-Q”), including all documents incorporated by reference, contains “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-Q 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, our ability to continue as a going concern, 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 and/or to refinance our existing indebtedness due to future operating losses, inability to meet the financial covenants under our term loan and revolving credit facilities, or in order to implement our business strategy, acquisition and divestiture-related risks, volatility of the market price of our common stock, par value $.01 per share (“Common Stock”), and those other risks and uncertainties discussed herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2017 (“2016 Form 10-K”) and any subsequent Form 10-Q 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-Q 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 our 2016 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-Qs and Current Reports on Form 8-K 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 in the “Risk Factors” section of our 2016 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.

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements.

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

	July 1,		December 31,
	2017		2016
ASSETS
Current assets:
Cash and cash equivalents	$	3,007	$	776
Accounts receivable, net of allowance for doubtful accounts of $160 and $160 at July 1, 2017 and December 31, 2016, respectively		16,929		16,334
Inventories		44,325		72,188
Other current assets		2,607		3,216
Total current assets		66,868		92,514
Property and equipment, net of accumulated depreciation of $53,960 and $53,116 at July 1, 2017 and December 31, 2016, respectively		52,069		65,484
Goodwill		14,985		14,985
Trademarks and other intangibles, net		4,749		7,243
Other assets		1,326		1,254
Total assets	$	139,997	$	181,480
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	25,959	$	29,462
Accrued liabilities		8,367		9,533
Line of credit		19,949		32,761
Current portion of term debt		71,051		82,380
Total current liabilities		125,326		154,136
Deferred income tax liability		3,353		1,376
Other liabilities		2,065		2,279
Total liabilities		130,744		157,791
Commitments and contingencies (see Note 7)
Stockholders’ equity:
Common stock, $.01 par value; 50,000 shares authorized; 20,154 and 20,040 shares issued and outstanding at July 1, 2017 and December 31, 2016, respectively		202		200
Additional paid-in capital		36,339		35,721
Accumulated deficit		(26,817)		(11,761)
		9,724		24,160
Less: treasury stock, at cost: 368 shares at July 1, 2017 and December 31, 2016		(471)		(471)
Total stockholders’ equity		9,253		23,689
Total liabilities and stockholders’ equity	$	139,997	$	181,480

See accompanying notes to condensed consolidated financial statements (unaudited).

1

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Quarter Ended				Six Months Ended
	July 1,		June 25,		July 1,		June 25,
	2017		2016		2017		2016
Net revenues	$	51,356	$	57,797	$	100,974	$	114,977
Cost of revenues		41,244		48,094		82,348		95,994
Gross profit		10,112		9,703		18,626		18,983
Operating expenses:
Selling, general and administrative expenses		8,668		7,609		15,924		14,763
Operating income		1,444		2,094		2,702		4,220
Non-operating expense:
Interest expense		2,425		1,967		4,787		3,968
Income (loss) from continuing operations before income tax expense		(981)		127		(2,085)		252
Income tax expense		11		66		113		114
Net income (loss) from continuing operations		(992)		61		(2,198)		138
Net income (loss) from discontinued operations		75		(339)		(12,858)		(1,434)
Net loss	$	(917)	$	(278)	$	(15,056)	$	(1,296)
Income (loss) per common share:
Basic income (loss) from continuing operations	$	(0.05)	$	0.01	$	(0.11)	$	0.01
Basic loss from discontinued operations		—		(0.02)		(0.66)		(0.08)
Basic loss	$	(0.05)	$	(0.01)	$	(0.77)	$	(0.07)
Diluted income (loss) from continuing operations	$	(0.05)	$	0.01	$	(0.11)	$	0.01
Diluted loss from discontinued operations		—		(0.02)		(0.66)		(0.08)
Diluted loss	$	(0.05)	$	(0.01)	$	(0.77)	$	(0.07)
Weighted average number of common shares:
Basic		19,741		19,628		19,708		19,616
Diluted		19,741		19,902		19,708		19,881

See accompanying notes to condensed consolidated financial statements (unaudited).

2

INVENTURE FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended
	July 1,		June 25,
	2017		2016
Cash flows from operating activities:
Net loss	$	(15,056)	$	(1,296)
Net loss from discontinued operations		(12,858)		(1,434)
Net income (loss) from continuing operations		(2,198)		138
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities:
Depreciation		2,956		2,943
Amortization		164		165
Deferred financing fee amortization		939		687
Provision for bad debts		—		32
Deferred income taxes		1,977		—
Stock-based compensation expense		819		740
Gain on disposition of equipment		—		(58)
Changes in assets and liabilities:
Accounts receivable		(2,954)		(3,048)
Inventories		11,543		6,577
Other assets and liabilities		434		2,285
Accounts payable and accrued liabilities		2,698		852
Net cash provided by operating activities - continuing operations		16,378		11,313
Net cash provided by (used in) operating activities - discontinued operations		(6,725)		489
Net cash provided by operating activities		9,653		11,802
Cash flows from investing activities:
Purchase of property and equipment		(925)		(7,759)
Payment of contingent consideration for Willamette Valley Fruit Company		(230)		(340)
Payment of contingent consideration for Sin In A Tin		(7)		(3)
Net cash used in investing activities - continuing operations		(1,162)		(8,102)
Net cash provided by (used in) investing activities - discontinued operations		19,149		(900)
Net cash provided by (used in) investing activities		17,987		(9,002)
Cash flows from financing activities:
Net borrowings on Wells Fargo line of credit		(12,812)		(3,261)
Payments made on capital lease obligations		(9)		(10)
Borrowings on term loans		31		1,097
Repayments made on long term debt		(12,176)		(653)
Payment of loan financing fees		(244)		(1,050)
Proceeds from issuance of common stock under equity award plans		—		187
Payment of payroll taxes on stock-based compensation through shares withheld		(199)		(226)
Net cash used in financing activities - continuing operations		(25,409)		(3,916)
Net cash used in financing activities - discontinued operations		—		—
Net cash used in financing activities		(25,409)		(3,916)
Net increase (decrease) in cash and cash equivalents		2,231		(1,116)
Cash and cash equivalents at beginning of year period		776		2,319
Cash and cash equivalents at end of year period	$	3,007	$	1,203
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	4,247	$	4,060
Cash paid (refunded) during the period for income taxes	$	59	$	(3,377)

See accompanying notes to condensed consolidated financial statements (unaudited).

3

INVENTURE FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.Organization and Summary of Significant Accounting Policies

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 $269 million in annual net revenues for fiscal 2016.

We specialize in two primary product categories: healthy/natural food products and 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, industrial 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 and frozen berry and vegetable blends, Boulder Canyon® brand kettle cooked potato chips, other snack and food items and frozen side dishes, Willamette Valley Fruit CompanyTM brand frozen berries, fruits, biscuits and other frozen snacks, Jamba® brand blend-and-serve smoothie kits under license from Jamba Juice Company (“Jamba Juice”), 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® brand kettle cooked potato chips, Bob’s Texas Style® brand kettle cooked chips, and Tato Skins® brand potato snacks.  We also manufacture private label snacks for certain grocery retail chains and co-pack products for other snack manufacturers.

We operate in two segments: frozen products and snack products. The frozen products segment includes frozen fruits, fruit and vegetable blends, beverages, side dishes and desserts for sale primarily to grocery stores, 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 seven locations. Our frozen berry products are processed in our Lynden, Washington, Bellingham, Washington and two Salem, Oregon 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 beverage products, including fruit and vegetable blends and frozen side dishes, are packaged at our Bellingham, Washington facility.  We also use third-party processors for certain frozen products and package certain frozen fruits and vegetables for other manufacturers.  Our frozen desserts products are produced in our Pensacola, Florida and Salem, Oregon facilities.  Our snack products are manufactured at our Phoenix, Arizona and Bluffton, Indiana facilities, as well as select third-party facilities for certain products.

Our fiscal year ends on the last Saturday occurring in the month of December of each calendar year.  Accordingly, the second quarter of fiscal 2017 commenced April 2, 2017 and ended July 1, 2017.

Strategic and Financial Review Process

In July 2016, we announced that our Board of Directors (“Board”) had commenced a strategic and financial review of the Company with the objective to increase shareholder value.  We engaged Rothschild Inc. to serve as our financial advisor and assist us in this process.  We remain actively involved in this process and are continuing to pursue various strategic alternatives.  As disclosed in our prior reports, no assurance can be given as to the outcome or timing of this process or that it will result in the consummation of any specific transaction.

4

Going Concern Uncertainty

We have incurred losses from operations in each of the quarterly periods since our voluntary product recall in April 2015 of certain varieties of the Company’s Fresh FrozenTM brand of frozen vegetables, as well as select varieties of our Jamba® “At Home” line of smoothie kits.  This fact, together with the projected near term outlook for our business and our inability to complete a strategic transaction (other than the Fresh Frozen Asset Sale) by year end or demonstrate that such a transaction is imminent, raise substantial doubt about our ability to continue as a going concern.  We reported this going concern conclusion in our 2016 Form 10-K, together with the following specific conditions considered by management in reaching such conclusion:

· Our five-year, $85.0 million term loan credit agreement with BSP Agency, LLC (“BSP”), as administrative agent, and the other lenders party thereto (the “BSP Lenders”) (with all related loan documents, and as amended from time to time, the “Term Loan Credit Facility”) requires us to, among other things, comply with Total Leverage Ratio and Fixed Charge Coverage Ratio (each as defined in the Term Loan Credit Facility) covenants by the end of the second quarter of fiscal 2017 and a minimum EBITDA target covenant (the “EBITDA Covenant”) by the month ended April 30, 2017, which target we did not meet (the “EBITDA Covenant Default”) and, as discussed below, we received temporary waivers of such default.  The Total Leverage Ratio, measured at the end of our second fiscal quarter in 2017 must be 4.25:1, and the Fixed Charge Coverage Ratio, measured at the end of our second fiscal quarter in 2017 for the four quarterly periods then ended, must be 1.1:1.  We previously reported that absent the completion of a strategic transaction yielding sufficient cash proceeds (in addition to the proceeds received from the sale of certain  assets, properties and rights of our wholly owned subsidiary, Fresh Frozen Foods, Inc. (now known as Inventure – GA, Inc.) (“Fresh Frozen Foods”) in March 2017) to pay down debt, waivers or amendments by our lenders, or a refinancing of our debt, we would not be able to comply with these covenants when required to do so.  Failure to meet these covenants would result in a default under such credit facility and, to the extent the applicable lenders so elect, an acceleration of the Company’s existing indebtedness, causing such debt of approximately $97.2 million at July 1, 2017 (including $4.5 million of other equipment financing indebtedness that includes cross-default provisions) to be immediately due and payable.  The Company does not have sufficient liquidity to repay all of its outstanding debt in full if such debt were accelerated.

· Our five-year, $50.0 million revolving credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the other lenders party thereto (the “Wells Fargo Lenders”) (with all related loan documents, and as amended from time to time, the “ABL Credit Facility” and, together with the Term Loan Credit Facility, the “Credit Facilities”), requires us to, among other things, comply with a Fixed Charge Coverage Ratio (as defined in the ABL Credit Facility) if our liquidity as of the date of any determination is less than the greater of (i) 12.5% of the Maximum Revolver Amount and (ii) $6.125 million, subject to certain conditions.  As of the date this Form 10-Q was filed with the SEC, we would not be able to comply with the Fixed Charge Coverage Ratio covenant if our liquidity were deemed to have fallen below the applicable threshold.

· The Credit Facilities also require us to furnish our audited financial statements without a “going concern” uncertainty paragraph in the auditor’s opinion.  Our consolidated financial statements for the fiscal year ended December 31, 2016 in our 2016 Form 10-K contained a “going concern” explanatory paragraph.  Under the Credit Facilities, a going concern opinion with respect to our audited financial statements is an event of default (the “Going Concern Covenant Default”).  As of the date our 2016 Form 10-K was filed with the SEC, we obtained a temporary waiver of the Going Concern Covenant Default until May 15, 2017 from the applicable lenders under the Credit Facilities. 

· On May 10, 2017, we entered into a Limited Waiver and Third Amendment to the Credit Agreement with the BSP Lenders (the “Term Loan Third Amendment”).  Under the terms of the Term Loan Third Amendment, the BSP Lenders granted the Company (i) an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017, and (ii) a temporary waiver of the EBITDA Covenant Default until July 17, 2017. The Term Loan Third Amendment also required that the Company comply with the EBITDA Covenant commencing with the fiscal month ending June 30, 2017, measured over the 12-months then ended, and increased the Company’s prepayment fees in

5

the event of a payment or prepayment of principal under the Term Loan Credit Facility (excluding regularly scheduled principal payments).

· On May 15, 2017, we entered into a First Amendment to Credit Agreement and Limited Waiver, effective as of May 12, 2017, with the Wells Fargo Lenders (the “ABL First Amendment”). Under the terms of the ABL First Amendment, the Wells Fargo Lenders granted the Company an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017.  In addition, the terms of the ABL First Amendment provided for, among other things, (i) an increase in the Company’s Applicable Margin for Base Rate and Libor Rate Loans (as such terms are defined in the ABL Credit Facility) effective May 1, 2017 by 100 basis points, (ii) additional financial and collateral reporting obligations and projection requirements, (iii) the immediate right of the Agent (as defined in the ABL Credit Agreement) or the Wells Fargo Lenders to exercise all rights and remedies under the ABL Credit Facility (in lieu of waiting until the earlier of ten business days after the date on which financial statements are required to be delivered for an applicable fiscal month), and (iv) the elimination of the right to issue curative equity.

· On July 17, 2017, we entered into a letter agreement with BSP and the BSP Lenders (the “BSP Letter Agreement”). Under the terms of the BSP Letter Agreement, the BSP Lenders granted the Company (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017, and (ii) a temporary waiver of the financial covenants the Company was required to comply with under the Term Loan Credit Facility (the “Term Loan Financial Covenant Default”) until July 24, 2017.

· On July 17, 2017, we also entered into a Second Amendment to Credit Agreement (the “ABL Second Amendment”) with Wells Fargo and the Wells Fargo Lenders. Under the terms of the ABL Second Amendment, the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017.  In addition, the ABL Second Amendment provided for, among other things, additional reporting obligations, a reduced revolver commitment over a period of time ($49.0 million prior to the effective date of the ABL Second Amendment; $40.0 million from and after the ABL Second Amendment date through August 1, 2017; and $35.0 million from and after August 1, 2017), and adjusted advance rates.

· On July 20, 2017, we entered into a Limited Waiver and Fourth Amendment to Credit Agreement with BSP and the BSP Lenders (the “Term Loan Fourth Amendment”).  Under the terms of the Term Loan Fourth Amendment, the BSP Lenders agreed to (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until August 31, 2017.  In addition, the BSP Lenders agreed to provide $5.0 million of additional financing to the Company in the form of a term loan, payable in equal monthly installments of $12,500 commencing on September 30, 2017, with the balance due and payable on November 17, 2020, which is the maturity date of the Term Loan Credit Facility.  The net proceeds of this new $5.0 million loan may be used for working capital purposes, subject to certain restrictions in the Term Loan Credit Facility, and is subject to the terms and conditions of the Term Loan Credit Facility.

· On July 20, 2017, we also entered into a Third Amendment to Credit Agreement (the “ABL Third Amendment”) with Wells Fargo and the Wells Fargo Lenders.  Under the terms of the ABL Third Amendment, the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017.

As previously disclosed, the Company’s Board and management continue to explore various strategic alternatives.  There can be no assurance that we will be successful in our pursuit of any strategic transaction or that we will be able consummate a strategic transaction in time to address our financial covenant requirements and going concern qualification, or at all, or if we do complete a strategic transition it will be on commercially reasonable terms.  As a result, our liquidity and ability to timely pay our obligations when due could be adversely affected. 

The accompanying condensed consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about our ability to continue as a going concern, other

6

than the reclassification of certain long-term debt and the related debt issuance costs to current liabilities and current assets, respectively.

Our lenders may resist renegotiation or lengthening of payment and other terms through legal action or otherwise if we are unsuccessful in our efforts to complete a strategic transaction.  If we are not able to timely, successfully or efficiently implement the strategies that we are pursuing, we may need to seek voluntarily protection under Chapter 11 of the U.S. Bankruptcy Code.

Basis of Presentation

The condensed consolidated financial statements for the fiscal quarter ended July 1, 2017 are unaudited and include the accounts of Inventure Foods and all of its wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. The condensed consolidated financial statements, including the December 31, 2016 consolidated balance sheet data which was derived from audited financial statements, have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”).  In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary in order to make the condensed consolidated financial statements not misleading. A description of our accounting policies and other financial information is included in the audited financial statements filed with our 2016 Form 10-K. The results of operations for the fiscal quarter ended July 1, 2017 are not necessarily indicative of the results expected for the full year.  

Discontinued Operations

On March 23, 2017, the Company soldcertain  assets, properties and rights of our wholly owned subsidiary, Fresh Frozen Foods, to The Pictsweet Company (“Pictsweet”) pursuant to an Asset Purchase Agreement, dated as of such date, among the Company, Fresh Frozen Foods and Pictsweet (the “Purchase Agreement”).  In accordance with the Purchase Agreement, Pictsweet acquired Fresh Frozen Food’s frozen food processing equipment assets, certain real property and associated facilities located in Jefferson, Georgia and Thomasville, Georgia, and other intellectual property and inventory (the “Fresh Frozen Asset Sale”).  As consideration for the acquisition, Pictsweet paid the Company $23.7 million in cash.  The net proceeds from the Fresh Frozen Asset Sale were $19.5 million, after payment of professional fees and other transaction expenses, and were used to pay down amounts outstanding under the Credit Facilities.  The results of operations for the Fresh Frozen Foods business have been classified as discontinued operations for all periods presented.  As required by the terms of the Purchase Agreement, we have changed the name of our Fresh Frozen Foods subsidiary to Inventure – GA, Inc.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.  We classify our investments based upon an established fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).  The three levels of the fair value hierarchy are described as follows:

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

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

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

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

7

At July 1, 2017 and December 31, 2016, 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 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  at the respective dates set forth below (in thousands):

		July 1, 2017				December 31, 2016
		Non-qualified				Non-qualified
		Deferred		Earn-out		Deferred		Earn-out
		Compensation		Contingent		Compensation		Contingent
		Plan		Consideration		Plan		Consideration
Balance Sheet Classification		Investments		Obligation		Investments		Obligation
Other assets	Level 1	$	704	$	—	$	650	$	—
Accrued liabilities	Level 3		—		(263)		—		(270)
Other liabilities	Level 3		—		(1,291)		—		(1,521)
		$	704	$	(1,554)	$	650	$	(1,791)

Considerable judgment is required in interpreting market data to develop the estimate of fair value of our assets and liabilities.  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 operations.  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. 

A summary of the activity of the fair value of the measurements using unobservable inputs (Level 3 liabilities) for the six months ended July 1, 2017 is as follows (in thousands):

	Level 3
Balance at December 31, 2016	$	1,791
Earn-out compensation paid to Willamette Valley Fruit Company		(230)
Earn-out compensation paid to Sin In A Tin		(7)
Balance at July 1, 2017	$	1,554

Income Taxes

Income tax expense was $11,000  for the fiscal quarter ended July 1, 2017, compared to a tax expense of $0.1 million for the fiscal quarter ended June 25, 2016.  Our effective tax rate was (1.1)% and 52.2% for the fiscal quarters ended July 1, 2017 and June 25, 2016, respectively.

Income tax expense was $0.1 million for the six months ended July 1, 2017, compared to a tax expense of $0.1 million for the six months ended June 25, 2016.  Our effective tax rate was (5.4)% and 45.1% for the six months ended July 1, 2017 and June 25, 2016, respectively.

Income tax expense for the fiscal quarter and six months ended July 1, 2017 was impacted by the full valuation allowance which was initially recorded in the fourth quarter of 2016.  Therefore, income tax expenses was a result of certain state minimum taxes and deferred tax liabilities not subject to the valuation allowance.

8

Loss Per Common Share

Basic loss per common share is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period.  Diluted loss per share is calculated by including all dilutive common shares, such as stock options and restricted stock.  Unvested restricted stock grants that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, require loss per share to be presented pursuant to the two-class method.  However, the application of this method would have no effect on basic and diluted loss per common share and is therefore not presented. 

For the fiscal quarter and six months ended July 1, 2017, diluted loss per share is the same as basic loss per share, as the inclusion of potentially issuable Common Stock would be antidilutive. During the fiscal quarter and six months ended July 1, 2017, 0.6 million 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.  For the fiscal quarter and six months ended June 25, 2016, 0.3 million 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. Exercises of outstanding stock options are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be antidilutive. 

Loss per common share was computed as follows for the fiscal quarters and six months ended July 1, 2017 and June 25, 2016 (in thousands, except per share data):

	Quarter Ended				Six Months Ended
	July 1,		June 25,		July 1,		June 25,
	2017		2016		2017		2016
Basic Earnings (Loss) Per Share:
Net income (loss) from continuing operations	$	(992)	$	61	$	(2,198)	$	138
Net income (loss) from discontinued operations		75		(339)		(12,858)		(1,434)
Net loss	$	(917)	$	(278)	$	(15,056)	$	(1,296)
Weighted average number of common shares		19,741		19,628		19,708		19,616
Loss per common share	$	(0.05)	$	(0.01)	$	(0.77)	$	(0.07)
Diluted Earnings (Loss) Per Share:
Net income (loss) from continuing operations	$	(992)	$	61	$	(2,198)	$	138
Net income (loss) from discontinued operations		75		(339)		(12,858)		(1,434)
Net loss	$	(917)	$	(278)	$	(15,056)	$	(1,296)
Weighted average number of common shares		19,741		19,628		19,708		19,616
Incremental shares from assumed conversions of stock options and non-vested shares of restricted stock		—		274		—		265
Adjusted weighted average number of common shares		19,741		19,902		19,708		19,881
Loss per common share	$	(0.05)	$	(0.01)	$	(0.77)	$	(0.07)

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.  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 9 - Stockholders’ Equity” for additional information.

9

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of accounting standards updates (“ASU”) to the FASB’s Accounting Standards Codification.

We consider the applicability and impact of all ASUs.  ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued new guidance related to revenue recognition.  This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance.  The new revenue recognition standard provides a unified model to determine when and how revenue is recognized.  The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services.  This guidance will be effective at the beginning of our 2018 fiscal year and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  As of July 1, 2017, we have not evaluated the impact of this new accounting standard on our financial statements.

In July 2015, the FASB issued an ASU to simplify the measurement of inventory.  This ASU requires inventory to be subsequently measured using the lower of cost and net realizable value, thereby eliminating the market value approach. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.”  This ASU is effective for reporting periods beginning after December 15, 2016 and is applied prospectively. Early adoption is permitted. We adopted this guidance in the first quarter of fiscal 2017, and it had no impact on our financial statements and disclosure.

In February 2016, the FASB issued new guidance related to accounting for leases. The new standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted.  As of July 1 2017, we have not evaluated the impact of this new accounting standard on our financial statements.

In March 2016, the FASB issued an ASU intended to simplify various aspects of the accounting for share-based payments. Excess tax benefits for share-based payments will be recorded as a reduction of income taxes and reflected in operating cash flows upon the adoption of this ASU. Excess tax benefits are currently recorded in equity and as financing activity under the current rules. This guidance is effective for reporting periods beginning after December 15, 2016. We adopted this guidance in the first quarter of fiscal 2017, and the adoption did not have a material impact on our financial statements and disclosure.

2.Discontinued Operations

On March 23, 2017, the Company soldcertain assets, properties and rights of our wholly owned subsidiary, Fresh Frozen Foods, to Pictsweet pursuant to the Purchase Agreement.  In accordance with the Purchase Agreement, Pictsweet acquired Fresh Frozen Food’s frozen food processing equipment assets, certain real property and associated facilities located in Jefferson, Georgia and Thomasville, Georgia, and other intellectual property and inventory.  As consideration for the acquisition, Pictsweet paid the Company $23.7 million in cash. The Fresh Frozen business was part of the Company’s frozen products segment.  The net proceeds from the Fresh Frozen Asset Sale were $19.5 million, after payment of professional fees and other transaction expenses, and were used to pay down amounts outstanding under the Credit Facilities.  As of December 31, 2016, total assets and total liabilities related to the Fresh Frozen Foods business were $32.2 million and $2 million, respectively.  The activity included in discontinued operations in the fiscal

10

quarter ended July 1, 2017, related to the changes in estimated accruals that were settled during the period. The results of operations for the Fresh Frozen Foods business have been classified as discontinued operations for all periods presented.

The summary comparative financial results of the Fresh Frozen Foods business, included within discontinued operations, were as follows (in thousands):

	Quarter Ended				Six Months Ended
	July 1, 2017		June 25, 2016		July 1, 2017		June 25, 2016
Net revenues	$	58	$	11,467	$	8,735	$	24,141
Cost of revenues		8		10,902		8,602		24,040
Gross profit		50		565		133		101
Operating expenses:
Selling, general and administrative expenses		39		884		669		1,839
Operating income (loss)		11		(319)		(536)		(1,738)
Loss (gain) on sale of Fresh Frozen Foods		(64)		—		10,082		—
Interest expense, net		—		354		331		708
Income (loss) before income taxes		75		(673)		(10,949)		(2,446)
Income tax expense (benefit)		—		(334)		1,909		(1,012)
Net income (loss) from discontinued operations	$	75	$	(339)	$	(12,858)	$	(1,434)

3.Inventories

Inventories consisted of the following as of July 1, 2017 and December 31, 2016 (in thousands):

	July 1,		December 31,
	2017		2016
Finished goods	$	17,210	$	27,661
Raw materials		27,115		44,527
Inventories	$	44,325	$	72,188

11

4.Goodwill, Trademarks and Other Intangibles

Goodwill, trademarks and other intangibles, net, consisted of the following as of July 1, 2017 and December 31, 2016 (in thousands):

	Estimated	July 1,		December 31,
	Useful Life	2017		2016
Goodwill:
Inventure Foods		$	5,986	$	5,986
Rader Farms			5,630		5,630
Willamette Valley Fruit Company			3,147		3,147
Sin In A Tin			222		222
Goodwill		$	14,985	$	14,985
Trademarks:
Inventure Foods		$	896	$	896
Rader Farms			1,070		1,070
Willamette Valley Fruit Company			740		740
Fresh Frozen Foods			—		2,330
Sin In A Tin			123		123
Other intangibles:
Rader Farms - Customer relationship, gross carrying amount	10 years		100		100
Rader Farms - Customer relationship, accum. amortization			(100)		(96)
Willamette Valley Fruit Company - Customer relationship, gross carrying amount	10 years		3,200		3,200
Willamette Valley Fruit Company - Customer relationship, accum. amortization			(1,280)		(1,120)
Trademarks and other intangibles, net		$	4,749	$	7,243

Our amortization expense related to these intangibles was $82,000 and $83,000 for the fiscal quarters ended July 1, 2017 and June 25, 2016, respectively. For the six months ended July 1, 2017 and June 25, 2016, amortization expense totaled $164,000 and $165,000, respectively.  The trademarks are deemed to have an indefinite useful life because they are expected to generate cash flows indefinitely.

Goodwill and trademarks are reviewed for impairment annually in the fourth fiscal quarter, or more frequently if impairment indicators arise. We believe the carrying values of our goodwill and intangible assets are not impaired as of July 1, 2017.

5.Accrued Liabilities

Accrued liabilities consisted of the following as of July 1, 2017 and December 31, 2016 (in thousands):

	July 1,		December 31,
	2017		2016
Accrued payroll and payroll taxes	$	2,965	$	1,756
Accrued royalties and commissions		917		1,621
Accrued advertising and promotion		1,052		1,465
Accrued berry purchase payments		1,010		1,908
Accrued other		2,423		2,783
Accrued liabilities	$	8,367	$	9,533

6.Term Debt and Line of Credit

ABL Credit Facility

On November 18, 2015, the Company entered into the ABL Credit Facility. 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

12

certain conditions, we may increase the aggregate principal amount of loans outstanding thereunder by up to $10.0 million.  Borrowings under the ABL Credit Facility bear interest, at the Company’s option, at a base rate or the London interbank offered rate (“LIBOR”) plus, in each case, an applicable margin.  The ABL Credit Facility will mature, and the commitments thereunder will terminate, on November 17, 2020.

Events of default under the ABL Credit Facility include customary events such as a cross-default provision with respect to other material debt.  The ABL Credit Facility requires us to, among other things, comply with a Fixed Charge Coverage Ratio (as defined in the ABL Credit Facility) if our liquidity as of the date of any determination is less than the greater of (i) 12.5% of the Maximum Revolver Amount and (ii) $6.125 million, subject to certain conditions.  As of the date this Form 10-Q was filed with the SEC, we would not be able to comply with the Fixed Charge Coverage Ratio covenant if our liquidity were deemed to have fallen below the applicable threshold. 

On May 15, 2017, the Company entered into the ABL First Amendment, pursuant to which the Wells Fargo Lenders granted the Company an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017.  In addition, the terms of the ABL First Amendment provided for, among other things, (i) an increase in the Company’s Applicable Margin for Base Rate and Libor Rate Loans (as such terms are defined in the ABL Credit Facility) effective May 1, 2017 by 100 basis points, (ii) additional financial and collateral reporting obligations and projection requirements, (iii) the immediate right of the Agent (as defined in the ABL Credit Agreement) or the Wells Fargo Lenders to exercise all rights and remedies under the ABL Credit Facility (in lieu of waiting until the earlier of ten business days after the date on which financial statements are required to be delivered for an applicable fiscal month), and (iv) the elimination of the right to issue curative equity.

On July 17, 2017, the Company entered into the ABL Second Amendment with Wells Fargo and the Wells Fargo Lenders, pursuant to which the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017.  In addition, the ABL Second Amendment provided for, among other things, additional reporting obligations, a reduced revolver commitment over a period of time ($49.0 million prior to the effective date of the ABL Second Amendment; $40.0 million from and after the ABL Second Amendment date through August 1, 2017; and $35.0 million from and after August 1, 2017), and adjusted advance rates.

On July 20, 2017, the Company entered into the ABL Third Amendment with Wells Fargo and the Wells Fargo Lenders, pursuant to which the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017. 

Absent the ABL Second Amendment and the ABL Third Amendment, the Going Concern Covenant Default would have been reinstated, and the Company would have been in default under the ABL Credit Facility as of the date this Form 10-Q was filed with the SEC.

As of July 1, 2017, there was $19.9 million outstanding under the ABL Credit Facility and the net availability thereunder was $6.9 million.

Term debt consisted of the following as of July 1, 2017 and December 31, 2016 (in thousands):

	July 1,		December 31,
	2017		2016
Term loan credit facility through November 2020	$	72,727	$	84,150
Equipment term loan, Goodyear, Arizona, due monthly through April 2021		2,459		2,759
Equipment term loan, Rader Farms, due monthly through August 2019		1,160		1,420
Equipment term loan, Willamette Valley Fruit Company, due monthly through August 2019		861		1,054
Capital lease obligations, primarily due May 2022		66		44
Long-term debt		77,273		89,427
Less: deferred financing fees, net		(6,222)		(7,047)
Less: current portion of long-term debt		(71,051)		(82,380)
Long-term debt, less current portion	$	—	$	—

13

Term Loan Credit Facility

Also on November 18, 2015 and concurrent with the execution of the ABL Credit Facility, the Company entered into the Term Loan Credit Facility.  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.  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.

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 and a Total Leverage Ratio. The first Fixed Charge Coverage Ratio and Total Leverage Ratio measurement period was the end of the first quarter of fiscal 2016.  On March 9, 2016, the Company entered into that certain First Amendment to Credit Agreement, with BSP, as administrative agent, and the BSP Lenders (the “Term Loan First Amendment”).  The Term Loan First Amendment amended 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.

On September 27, 2016, the Company entered into that certain Second Amendment to Credit Agreement with BSP, as administrative agent, and the BSP Lenders (the “Term Loan Second Amendment”). The Term Loan Second Amendment deferred compliance with the Company’s Total Leverage Ratio and Fixed Charge Coverage Ratio covenants until the second quarter of fiscal 2017, required the Company to comply with the EBITDA Covenant commencing with the month ended April 30, 2017, and increased the Base Rate Margin and the Libor Rate Margin (each as defined in the Term Loan Credit Facility) thereunder by 100 basis points.  The Term Loan Second Amendment also amended the fees payable to the lenders in the event of prepayment and restricts the Company’s ability to raise Curative Equity (as defined in the Term Loan Second Amendment) until the fourth quarter of fiscal 2017.

We did not meet the EBITDA Covenant (the “EBITDA Covenant Default”).  On May 10, 2017, the Company entered into the Term Loan Third Amendment, pursuant to which the lenders granted the Company (i) an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017, and (ii) a temporary waiver of the EBITDA Covenant Default, until July 17, 2017.  The Term Loan Third Amendment also required that the Company comply with the EBITDA Covenant commencing with the fiscal month ending June 30, 2017, measured over the 12-months then ended, and increased the Company’s prepayment fees in the event of a payment or prepayment of principal under the Term Loan Credit Facility (excluding regularly scheduled principal payments).

On July 17, 2017, the Company entered into the BSP Letter Agreement, pursuant to which the BSP Lenders granted the Company (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until July 24, 2017.

On July 20, 2017, the Company entered into the Term Loan Fourth Amendment, pursuant to which the BSP Lenders agreed to (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until August 31, 2017.  In addition, the BSP Lenders agreed to provide $5.0 million of additional financing to the Company in the form of a term loan, payable in equal monthly installments of $12,500 commencing on September 30, 2017, with the balance due and payable on November 17, 2020, which is the maturity date of the Term Loan Credit Facility.  The net proceeds of the $5.0 million loan may be used for working capital purposes, subject to certain restrictions in the Term Loan Credit Facility, and is subject to the terms and conditions of the Term Loan Credit Facility.

Absent the BSP Letter Agreement and the Term Loan Fourth Amendment, the Going Concern Covenant Default would have been reinstated, and the Company would have been in default under the Term Loan Credit Facility as of the date this Form 10-Q was filed with the SEC.

Equipment Loans

In August 2015, we entered into an equipment term loan with Banc of America Leasing & Capital LLC for $3.1 million to finance new kettles and related equipment for our Goodyear, Arizona facility.  The equipment term loan accrues interest at a rate of 3.07% and will be repaid over 60 recurring monthly payments commencing May 2016. 

14

In August 2014, we entered into two separate equipment term loans with Banc of America Leasing & Capital LLC. One for $2.6 million to finance equipment to be used at the Company’s Rader Farms facility, and the other for $1.9 million to finance equipment to be used at Willamette Valley Fruit Company. Both of these equipment term loans accrue interest at a rate of 2.35% and will be repaid over 60 recurring monthly payments commencing September 15, 2014.

Debt Classification

In accordance with FASB Accounting Standard Codification (“ASC”) 470-10-45 on Debt Presentation, all of the Company’s outstanding debt has been reclassified in the accompanying condensed consolidated balance sheet as a current liability as of July 1, 2017 and December 31, 2016.  Absent the Term Loan Third Amendment, the Company would not have been in compliance with the Total Leverage Ratio and Fixed Charge Ratio covenants as of July 1, 2017.  Further, absent the BSP Letter Agreement and the Term Loan Fourth Amendment, the Company would not have been in compliance with the financial covenants under the Term Loan Credit Facility as of the date this Form 10-Q was filed with the SEC.  Unless we engage in a strategic transaction that enables us to pay down or refinance our debt, or we secure a waiver from our lenders or a further loan amendment to the Term Loan Credit Facility, we will not be in compliance with our financial covenants as of August 31, 2017 (as required by the Term Loan Fourth Amendment).  As previously announced, the Company commenced a comprehensive strategic and financial review of the Company’s operations and engaged Rothschild Inc. to serve as its financial advisor to assist the Company in this process, including the pursuit of value-enhancing initiatives including, a sale of the Company, a sale of assets of the Company or other strategic business combination, or other capital structure optimization opportunities. This comprehensive strategic and financial review remains ongoing as of the date this Form 10-Q was filed with the SEC.  There can be no assurances that these efforts will result in a completion of a transaction or, if one is completed, that it will be on favorable terms.  A default under either the Term Loan Credit Facility or ABL Credit Facility would trigger a default under the other Credit Facility and certain of our equipment lease financing arrangements, as these facilities each contain cross-default provisions. As such, we classified all of our outstanding debt as a current liability.

7.Commitments and Contingencies

Contractual

Our future contractual obligations consist principally of long-term debt, operating leases, minimum commitments regarding third-party warehouse operations services, forward purchase agreements and remaining minimum royalty payments due to licensors pursuant to brand licensing agreements. 

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.

Legal Proceedings

We are 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 our financial position or results of operations.

Litigation

On April 4, 2016, a purported class action captioned Westmoreland County Employee Retirement Fund (“Westmoreland”) v. Inventure Foods, Inc. et al., Case No. CV2016-002718, was filed in the Superior Court in Maricopa County, Arizona. Additional defendants are the Company’s Chief Executive Officer and Chief Financial Officer, and the underwriters of the secondary securities offering that closed September 14, 2014 (the “September 2014 Offering”).  The class action complaint, which was amended a second time on March 27, 2017, alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act and focuses on the conditions at the Company’s former frozen food facility in Jefferson, Georgia.  Westmoreland seeks certification as a class action, unspecified compensatory damages, rescission or a rescissory measure of damages, attorneys’ fees and costs, and other relief deemed appropriate by the court.  The Company, its Chief Executive Officer, its Chief Financial Officer and the September 2014 Offering underwriters have answered and moved to dismiss the second amended complaint. On August 8, 2017, the court granted in part and denied

15

in part the motion to dismiss, which was converted to a motion for judgment on the pleadings.  The Company intends to vigorously defend against the claims.

On November 10, 2016, the Center for Environment Health (“CEH”), represented by Howard Hirsch of Lexington Law Group, filed a lawsuit against the Company under the California Safe Drinking Water and Toxic Enforcement Act (known as “Proposition 65”) (the “Act”).  CEH contends that the Company’s potato-based chip products contain amounts of acrylamide in excess of what is permitted under the Act.  A retailer of the Company, Bristol Farms, demanded indemnity in relation to the litigation.  The Company has answered the complaint and intends to vigorously defend the lawsuit.

On November 14, 2016, Michelle Blair (represented by Matthew Armstrong of Armstrong Law Firm LLC and Stuart Cochran of Cochran Law PLLC) filed a putative class action against the Company in St. Louis City Circuit Court.  Ms. Blair purports to represent a class of consumers who purchased one of nine Boulder Canyon® brand products listing “evaporated cane juice” as an ingredient.  Ms. Blair contends that the use of “evaporated cane juice” was misleading because evaporated cane juice is sugar.  In the complaint, Ms. Blair advances claims for violation of Missouri’s Merchandising Practices Act, Mo. Rev. Stat. § 407.020, et seq. and 15 C.S.R. 60-8.020, et seq., and unjust enrichment.  On February 3, 2017, the Company removed the action to the Eastern District of Missouri. Plaintiff dismissed the removed action without prejudice and refiled a substantially similar complaint in the Southern District of Illinois. The new complaint is brought by Ms. Blair and a new plaintiff, Shannah Burton, and asserts a nationwide putative class, as well as a putative class of Illinois and Missouri purchasers. Ms. Burton alleges claims under the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 Ill. Comp. Stat. Ann. 505/2, et seq. Both plaintiffs also assert claims for unjust enrichment and breach of express warranty. On April 24, 2017, the Company filed a motion to dismiss the complaint.  The Company intends to vigorously defend the lawsuit.

On March 9, 2017, a verified stockholder derivative complaint was filed under seal in the U.S. District Court for the District of Arizona.  The case has since been unsealed and is captioned  Robert Hutton Derivatively on Behalf of Inventure Foods, Inc. v.  Terry McDaniel et al., Case No. 2:17-cv-00727.  The named defendants include certain of the Company’s current and former officers and directors —Terry McDaniel, Steve Weinberger, Timothy A. Cole, Ashton D. Asensio, Macon Bryce Edmonson, Paul J. Lapadat, Harold S. Edwards, David I. Meyers, and Itzhak Reichman.  The lawsuit also names the Company as a nominal defendant.  The complaint focuses on the conditions at the Company’s former frozen food facility in Jefferson, Georgia and the Company’s 2015 and 2016 proxy statements.  The plaintiff purports to derivatively assert on behalf of the Company claims for alleged violation of Section 14(a) of the Exchange Act, breach of fiduciary duty, waste of corporate assets and unjust enrichment.  According to the complaint, the plaintiff seeks an unspecified award of actual or compensatory damages in favor of the Company; an order directing the Company to take certain actions concerning its corporate governance and internal procedures, including putting forward certain proposals concerning its corporate governance policies and amendments to the Company’s Bylaws and Certificate of Incorporation for a stockholder vote; an award of extraordinary equitable and/or injunctive relief concerning the defendants’ trading activities or their assets; restitution from defendants to Inventure Foods consisting of a disgorgement of all profits, benefits and other compensation obtained by defendants; costs and disbursements of the action, including attorneys, accountant and experts’ fees, costs and expenses; and other and further relief as the court deems just and proper. The defendants have moved to dismiss the complaint or, in the alternative, stay the matter pending resolution of the putative class action brought by Westmoreland (identified above) is resolved.  Oral argument on the motion to dismiss is set for August 30, 2017.  The defendants intend to vigorously defend the lawsuit.

On March 27, 2017, a putative securities class action was filed by Glenn Schoenfeld in the U.S. District Court for the District of Arizona, Case No. 2:17-cv-00910, against the Company, its Chief Executive Officer, and its Chief Financial Officer (the “Schoenfeld Lawsuit”). On April 27, 2017, John Robinson filed a putative securities class action in the U.S. District Court for the District of Arizona, Case No. 2:17-cv-01258, against the Company, its Chief Executive Officer, and its Chief Financial Officer (the “Robinson Lawsuit”).  On June 23, 2017, the court consolidated the Robinson Lawsuit with the Schoenfeld Lawsuit, and the caption was changed to In re Inventure Foods, Inc. Securities Litigation, Case No. 2:17-cv-0910.  On June 27, 2017, the court appointed lead plaintiffs and lead counsel.  Lead plaintiffs’ consolidated amended complaint is due August 26, 2017. The original complaints in the Schoenfeld Lawsuit and Robinson Lawsuit were  purportedly filed on behalf of all persons and entities that acquired the Company’s securities between March 3, 2016 and March 16, 2017, and asserted claims for alleged violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and focused on the Company’s internal controls over accounting and financial reporting, its statements of operations for fiscal year 2015, and public statements in press releases and SEC filings between March 3, 2016 and March 16, 2017.  Mr. Schoenfeld sought certification as a class

16

action, unspecified compensatory damages, attorneys’ fees, costs and expenses incurred in the action, and other relief deemed appropriate by the court.  Mr. Robinson sought certification as a class action, unspecified damages, prejudgment and post-judgment interest, reasonable attorneys’ fees, expert fees and other costs, and such other and further relief as the court may deem just and proper.  The Company intends to vigorously defend the consolidated lawsuit.

8.Business Segments

Our operations consist of two reportable segments: frozen products and snack products.  The frozen products segment includes frozen fruits, fruit and vegetable blends, beverages, side dishes and desserts for sale primarily to grocery stores, club stores and mass merchandisers.  The snack products segment produces 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.  Our reportable segments offer different products and services.  The majority of our revenues are attributable to external customers in the United States.  We also sell to external customers internationally. However, the revenues attributable to such customers are immaterial.  All of our assets are located in the United States.

All products sold under our frozen products segment are considered part of the healthy/natural food category.  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. 

For the fiscal quarters ended July 1, 2017 and June 25, 2016, net revenues of our healthy/natural food category totaled $41.2 million and $47.9 million, respectively. For the fiscal quarters ended July 1, 2017 and June 25, 2016, net revenues of our indulgent specialty snack food category totaled $10.1 million and $9.9 million, respectively.

For the six months ended July 1, 2017 and June 25, 2016, net revenues of our healthy/natural food category totaled $81.9 million and $95.2 million, respectively.  For the six months ended July 1, 2017 and June 25, 2016, net revenues of our indulgent specialty snack food category totaled $19.0 million and $19.8 million, respectively.

We do not allocate assets, selling, general and administrative expenses, income taxes or other income and expense to our reportable segments.  The following table presents information about our reportable segments for the fiscal quarters  and six months ended July 1, 2017 and June 25, 2016 (in thousands):

	Frozen		Snack
	Products		Products		Consolidated
Quarter Ended July 1, 2017
Net revenues from external customers	$	20,692	$	30,664	$	51,356
Depreciation and amortization included in segment gross profit		225		576		801
Segment gross profit		3,607		6,505		10,112
Quarter Ended June 25, 2016
Net revenues from external customers	$	30,312	$	27,485	$	57,797
Depreciation and amortization included in segment gross profit		241		534		775
Segment gross profit		4,283		5,420		9,703
Six Months Ended July 1, 2017
Net revenues from external customers	$	44,154	$	56,820	$	100,974
Depreciation and amortization included in segment gross profit		451		1,155		1,606
Segment gross profit		8,348		10,278		18,626
Six Months Ended June 25, 2016
Net revenues from external customers	$	62,608	$	52,369	$	114,977
Depreciation and amortization included in segment gross profit		522		1,041		1,563
Segment gross profit		9,068		9,915		18,983

17

The following table reconciles reportable segment gross profit to our consolidated income (loss) from continuing operations before income taxes for the fiscal quarters and six months ended July 1, 2017 and June 25, 2016 (in thousands):

	Quarter Ended				Six Months Ended
	July 1,		June 25,		July 1,		June 25,
	2017		2016		2017		2016
Segment gross profit	$	10,112	$	9,703	$	18,626	$	18,983
Unallocated amounts:
Operating expenses		(8,668)		(7,609)		(15,924)		(14,763)
Interest expense		(2,425)		(1,967)		(4,787)		(3,968)
Income (loss) from continuing operations before income tax expense	$	(981)	$	127	$	(2,085)	$	252

The table below presents information about revenues for each group of similar products within our reportable segments for the fiscal quarters and six months ended July 1, 2017 and June 25, 2016 (in thousands):

	Quarter Ended July 1, 2017				Quarter Ended June 25, 2016
			% of Net				% of Net
	Net Revenue		Revenues		Net Revenue		Revenues
Frozen Products:
Berries, blends, beverages and desserts	$	20,475	39.9	%	$	30,312	52.4	%
Riced Vegetables		217	0.4	%		—	—	%
Total Frozen		20,692	40.3	%		30,312	52.4	%
Snack Products:
Indulgent specialty snacks (1)		10,106	19.7	%		9,873	17.1	%
Healthy/natural snacks (2)		20,558	40.0	%		17,612	30.5	%
Total snack	$	30,664	59.7	%	$	27,485	47.6	%
Consolidated	$	51,356	100.0	%	$	57,797	100.0	%
	Six Months Ended July 1, 2017				Six Months Ended June 25, 2016
			% of Net				% of Net
	Net Revenue		Revenues		Net Revenue		Revenues
Frozen Products:
Berries, beverages, blends and desserts	$	43,553	43.2	%	$	62,608	54.5	%
Vegetables		601	0.6	%		—	—	%
Total frozen		44,154	43.8	%		62,608	54.5	%
Snack Products:
Indulgent specialty snacks (1)		19,033	18.8	%		19,799	17.2	%
Healthy/natural snacks (2)		37,787	37.4	%		32,570	28.3	%
Total snack	$	56,820	56.2	%	$	52,369	45.5	%
Consolidated	$	100,974	100.0	%	$	114,977	100.0	%

(1) Indulgent specialty snacks includes 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® brand kettle cooked potato chips, Bob’s Texas Style® brand kettle cooked chips, and Tato Skins® brand potato snacks.

(2) Healthy/natural snacks includes Boulder Canyon® brand kettle cooked potato chips, other snack and food items and private label healthy/natural snacks.

18

9.Stockholders’ Equity

The Company’s 2015 Equity Incentive Plan (the “2015 Plan”) was approved at our 2015 annual meeting of stockholders. Under the 2015 Plan, we are authorized to issue up to 1,400,560 shares of our Common Stock, which number may be increased by up to 250,000 shares subject to any option or award outstanding under the Amended and Restated 2005 Equity Incentive Plan that are canceled or forfeited for any reason.  If any shares of our Common Stock subject to awards granted under the 2015 Plan are canceled, those shares will be available for future awards under such plan.   Awards granted under the 2015 Plan may include: nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance shares, performance units, and other stock-based awards and cash-based awards.  The 2015 Plan has a term of ten years and expires in May 2025.  As of July 1, 2017, there were 552,886 shares of Common Stock available for awards under the 2015 Plan.

Restricted Common Stock

We have issued shares of restricted Common Stock in the form of restricted stock awards and restricted stock units as incentives to certain employees, officers and members of our Board.  Restricted stock awards and restricted stock units granted to members of the Board are granted with a one-year service period.  Restricted stock awards and restricted stock units granted to the Company’s officers vest over three years and typically contain performance conditions that are required to be achieved over a three-year measurement period in order for the shares to be released.  The number of performance-based restricted stock awards and units that ultimately vest depend on whether we achieve certain financial results.  Restricted stock units granted to non-officer employees generally vest over three or five years.  We record compensation expense each period based on (i) the market price of our Common Stock at the time of grant, and (ii) for performance-based restricted stock awards and units, our estimate of the most probable number of shares that will ultimately be released.  The related stock-based compensation expense is included in selling, general and administrative expenses.  Additionally, the compensation expense is adjusted for our estimate of forfeitures.  Recipients of restricted stock awards are entitled to receive any dividends declared on our Common Stock and have voting rights, regardless of whether such shares have vested.  Recipients of restricted stock units have no voting rights or rights to receive cash dividends with respect to restricted stock unit awards until shares of Common Stock are issued in settlement of such awards.

During the fiscal quarters ended July 1, 2017 and June 25, 2016, the total stock-based compensation expense from restricted Common Stock recognized in the financial statements was $0.4 million and $0.3 million, respectively. During the six months ended July 1, 2017 and June 25, 2016, the total stock-based compensation expense from restricted common stock recognized in the financial statements was $0.7 million and $0.7 million, respectively. There was no stock-based compensation costs capitalized. 

The following table summarizes activities related to restricted stock awards for the six months ended July 1, 2017:

		Weighted
		Average Grant
	Number	Date Fair Value
Nonvested balance at December 31, 2016	8,333	$	12.78
Granted	—	$	—
Vested and released	(8,333)	$	12.78
Forfeited	—	$	—
Nonvested balance at July 1, 2017	—	$	—

As of July 1, 2017, there was no unrecognized costs related to non-vested restricted stock awards.

19

The following table summarizes activities related to restricted stock units for the six months ended July 1, 2017:

		Weighted
		Average Grant
	Number	Date Fair Value
Nonvested balance at December 31, 2016	541,346	$	8.40
Granted	485,554	$	4.05
Vested and released	(159,910)	$	9.16
Forfeited	(39,208)	$	10.26
Nonvested balance at July 1, 2017	827,782	$	5.62

As of July 1, 2017, the total unrecognized costs related to non-vested restricted stock units was $3.4 million, which is expected to be recognized over a weighted average period of 2.1 years.  This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future. 

Stock Options

Stock-based compensation expense from stock options recognized in the financial statements totaled $0.1 million and $0.1 million for the fiscal quarters and six months ended July 1, 2017 and June 25, 2016, respectively.  There was no stock-based compensation costs capitalized.

The following table summarizes stock option activity during the six months ended July 1, 2017:

				Aggregate		Weighted Average
		Weighted		Intrinsic Value		Remaining
	Options	Average		(in-the-money		Contractual Life
	Outstanding	Exercise Price		options)		(in years)
Outstanding at December 31, 2016	567,602	$	5.23
Granted	—	$	—
Exercised	—	$	—
Forfeited or expired	(13,687)	$	10.37
Outstanding at July 1, 2017	553,915	$	5.10	$	473,948	3.8

As of July 1, 2017, the total unrecognized costs related to non-vested stock options granted were $0.1 million.  We expect to recognize such costs in the financial statements over a weighted average period of 1.2 years.  This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future. 

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the closing price of $4.31 of our Common Stock as of July 1, 2017, which would have been received by the option holders had all option holders exercised options and sold the underlying shares on that date.  The intrinsic value related to vested stock options outstanding was $0.5 million as of July 1, 2017 based on the exercise price and closing price of $4.31 of our Common Stock as of July 1, 2017.

The following table summarizes information about stock options outstanding and exercisable at July 1, 2017:

						Weighted
						Average
						Remaining	Weighted			Weighted
						Contractual	Average			Average
Range of					Options	Life	Exercise		Options	Exercise
Exercise Prices					Outstanding	(in years)	Price		Exercisable	Price
$	1.70	-	$	1.86	138,600	1.3	$	1.75	138,600	$	1.75
$	2.4	-	$	4.16	156,450	3.1	$	3.55	156,450	$	3.55
$	4.28	-	$	7.21	213,400	5.4	$	6.88	191,300	$	6.84
$	7.61	-	$	13.21	45,465	6.3	$	12.36	34,465	$	12.37
					553,915	3.8	$	5.10	520,815	$	4.86

20

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 service period, generally five years for employees and one year for members of the Board.  In May 2008, our Board approved a 10-year term for all future stock option grants, with service periods of five years for employees and one year for members of the Board.  We issue new shares upon the exercise of stock options, as opposed to reissuing treasury shares.

21

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

For a description of the Company’s critical accounting policies and an understanding of the significant factors that influenced the Company’s performance during the fiscal quarter and six months ended July 1, 2017, this 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-Q, including the condensed consolidated financial statements and related notes appearing in Part I, Item 1, as well as  our 2016 Form 10-K.  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 risks described in the “Risk Factors” section of our 2016 Form 10-K.  Accordingly, the Company’s actual future results may differ materially from historical results or those currently anticipated.

Executive Overview

We are 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 Boulder Canyon®, Rader Farms, Willamette Valley Fruit CompanyTM, T.G.I. Friday’s®, Jamba®, Vidalia®, Poore Brothers®, Nathan’s Famous®, Bob’s Texas Style®, Tato Skins® and Sin In A TinTM.  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.

Our operations consist of two reportable segments: frozen products and snack products. The frozen products segment includes frozen fruits, beverages fruit and vegetable blends, beverages, side dishes and desserts for sale primarily to grocery stores, club stores and mass merchandisers. 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.

For the fiscal quarters ended July 1, 2017 and June 25, 2016, net revenues of our healthy/natural food category totaled $41.2 million and $47.9 million, respectively.  For the fiscal quarters ended July 1, 2017 and June 25, 2016, net revenues of our indulgent specialty snack food category totaled $10.1 million and $9.9 million, respectively.

This MD&A is intended to assist in the understanding of our condensed consolidated financial statements, the changes in certain key items in those condensed consolidated financial statements from period to period and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our condensed consolidated financial statements.

Recent Developments

On March 23, 2017, we announced the sale ofcertain assets, properties and rights of our wholly owned subsidiary, Fresh Frozen Foods, to Pictsweet, pursuant to the Purchase Agreement.  In accordance with the Purchase Agreement, Pictsweet acquired Fresh Frozen Food’s frozen food processing equipment assets, certain real property and associated facilities located in Jefferson, Georgia and Thomasville, Georgia, and other intellectual property and inventory.  The Fresh Frozen Foods facilities processed and packaged IQF vegetables and fruits sold primarily under the Fresh Frozen™ brand. As consideration for the acquisition, Pictsweet paid the Company $23.7 million in cash.  The Company’s net proceeds from the Fresh Frozen Asset Sale were $19.5 million, after payment of professional fees and other transaction expenses.  These proceeds were used to pay down amounts outstanding under the Credit Facilities.

Strategic and Financial Review Process

In July 2016, we announced that our Board had commenced a strategic and financial review of the Company, with the objective to increase shareholder value.  We engaged Rothschild Inc. to serve as our financial advisor and assist us in this process.  As reported in our 2016 Form 10-K, we remain actively involved in this process and are continuing to pursue various strategic alternatives.  No assurance can be given as to the outcome or timing of this process or that it will result in the consummation of any specific transaction.

Going Concern Uncertainty

We have incurred losses from operations in each of the quarterly periods since our voluntary product recall in April 2015 of certain varieties of the Company’s Fresh FrozenTM brand of frozen vegetables, as well as select varieties of

22

our Jamba® “At Home” line of smoothie kits.  This fact, together with the projected near term outlook for our business and our inability to complete a strategic transaction (other than the Fresh Frozen Asset Sale) by year end or demonstrate that such a transaction is imminent, raise substantial doubt about our ability to continue as a going concern.  We reported this going concern conclusion in our 2016 Form 10-K, together with the following specific conditions considered by management in reaching such conclusion:

· Our five-year, $85.0 million Term Loan Credit Facility with BSP and the BSP Lenders requires us to, among other things, comply with Total Leverage Ratio and Fixed Charge Coverage Ratio (each as defined in the Term Loan Credit Facility) covenants by the end of the second quarter of fiscal 2017 and the EBITDA Covenant by the month ended April 30, 2017, which target we did not meet and, as discussed below, we received temporary waivers of such default.  The Total Leverage Ratio, measured at the end of our second fiscal quarter in 2017 must be 4.25:1, and the Fixed Charge Coverage Ratio, measured at the end of our second fiscal quarter in 2017 for the four quarterly periods then ended, must be 1.1:1.  We previously reported that absent the completion of a strategic transaction yielding sufficient cash proceeds (in addition to the proceeds received from the sale of certain assets, properties and rights of our wholly owned subsidiary, Fresh Frozen Foods, in March 2017) to pay down debt, waivers or amendments by our lenders, or a refinancing of our debt, we would not be able to comply with these covenants when required to do so.  Failure to meet these covenants would result in a default under such credit facility and, to the extent the applicable lenders so elect, an acceleration of the Company’s existing indebtedness, causing such debt of approximately $97.2 million at July 1, 2017 (including $4.5 million of other equipment financing indebtedness that includes cross-default provisions) to be immediately due and payable.  The Company does not have sufficient liquidity to repay all of its outstanding debt in full if such debt were accelerated.

· Our five-year, $50.0 million ABL Credit Facility with Wells Fargo and the Wells Fargo Lenders (requires us to, among other things, comply with a Fixed Charge Coverage Ratio (as defined in the ABL Credit Facility)) if our liquidity as of the date of any determination is less than the greater of (i) 12.5% of the Maximum Revolver Amount and (ii) $6.125 million, subject to certain conditions.  As of the date this Form 10-Q was filed with the SEC, we would not be able to comply with the Fixed Charge Coverage Ratio covenant if our liquidity were deemed to have fallen below the applicable threshold.

· The Credit Facilities also require us to furnish our audited financial statements without a “going concern” uncertainty paragraph in the auditor’s opinion.  Our consolidated financial statements for the fiscal year ended December 31, 2016 in our 2016 Form 10-K contained a “going concern” explanatory paragraph.  Under the Credit Facilities, a going concern opinion with respect to our audited financial statements is an event of default.  As of the date our 2016 Form 10-K was filed with the SEC, we obtained a temporary waiver of the Going Concern Covenant Default until May 15, 2017 from the applicable lenders under the Credit Facilities. 

· On May 10, 2017, we entered into the Term Loan Third Amendment.  Under the terms of the Term Loan Third Amendment, the BSP Lenders granted the Company (i) an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017, and (ii) a temporary waiver of the EBITDA Covenant Default until July 17, 2017. The Term Loan Third Amendment also required that the Company comply with the EBITDA Covenant commencing with the fiscal month ending June 30, 2017, measured over the 12-months then ended, and increased the Company’s prepayment fees in the event of a payment or prepayment of principal under the Term Loan Credit Facility (excluding regularly scheduled principal payments).

· On May 15, 2017, we entered into the ABL First Amendment, pursuant to which the Wells Fargo Lenders granted the Company an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017.  In addition, the terms of the ABL First Amendment provided for, among other things, (i) an increase in the Company’s Applicable Margin for Base Rate and Libor Rate Loans (as such terms are defined in the ABL Credit Facility) effective May 1, 2017 by 100 basis points, (ii) additional financial and collateral reporting obligations and projection requirements, (iii) the immediate right of the Agent (as defined in the ABL Credit Agreement) or the Wells Fargo Lenders to exercise all rights and remedies under the ABL Credit Facility (in lieu of waiting until the earlier of ten business days after the date on which financial statements are required

23

to be delivered for an applicable fiscal month), and (iv) the elimination of the right to issue curative equity.

· On July 17, 2017, we entered into the BSP Letter Agreement, pursuant to which the BSP Lenders granted the Company (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until July 24, 2017.

· On July 17, 2017, we also entered into the ABL Second Amendment with Wells Fargo and the Wells Fargo Lenders, pursuant to which the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017.  In addition, the ABL Second Amendment provided for, among other things, additional reporting obligations, a reduced revolver commitment over a period of time ($49.0 million prior to the effective date of the ABL Second Amendment; $40.0 million from and after the ABL Second Amendment date through August 1, 2017; and $35.0 million from and after August 1, 2017), and adjusted advance rates.

· On July 20, 2017, we entered into the Term Loan Fourth Amendment, pursuant to which the BSP Lenders agreed to (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until August 31, 2017.  In addition, the BSP Lenders agreed to provide $5.0 million of additional financing to the Company in the form of a term loan, payable in equal monthly installments of $12,500 commencing on September 30, 2017, with the balance due and payable on November 17, 2020, which is the maturity date of the Term Loan Credit Facility.  The net proceeds of the $5.0 million loan may be used for working capital purposes, subject to certain restrictions in the Term Loan Credit Facility, and is subject to the terms and conditions of the Term Loan Credit Facility.

· On July 20, 2017, we also entered into the ABL Third Amendment, pursuant to which the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017.

As previously disclosed, as noted above and as more fully described under “Liquidity and Capital Resources” below, the Company’s Board and management continue to explore various strategic alternatives.  There can be no assurance that we will be successful in our pursuit of any strategic transaction or that we will be able consummate a strategic transaction in time to address our financial covenant requirements and going concern qualification, or at all, or if we do complete a strategic transaction it will be on commercially reasonable terms.  As a result, our liquidity and ability to timely pay our obligations when due could be adversely affected.   

The accompanying condensed consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about our ability to continue as a going concern, other than the reclassification of certain long-term debt and the related debt issuance costs to current liabilities and current assets, respectively.  

Our lenders may resist renegotiation or lengthening of payment and other terms through legal action or otherwise if we are unsuccessful in our efforts to complete a strategic transaction.  If we are not able to timely, successfully or efficiently implement the strategies that we are pursuing, we may need to seek voluntarily protection under Chapter 11 of the U.S. Bankruptcy Code.

Results of Operations

In addition to focusing on measurements calculated in accordance with GAAP, we focus on “selling, general and administrative expenses, excluding strategic review professional fees and legal settlement gains,” which is a non-GAAP financial measure.  As such, we include in this Form 10-Q a reconciliation to its most directly comparable GAAP financial measure.  Non-GAAP financial measures have certain limitations as analytical tools and should not be used as substitutes for measurements prepared in accordance with GAAP.   This reconciliation and a description of the limitations of this non-GAAP financial measure are included in “Non-GAAP Data and Reconciliations” below.

24

The following table sets forth for the periods presented certain financial data as a percentage of net sales for the fiscal quarters and six months ended July 1, 2017 and June 25, 2016:

	Quarter Ended				Six Months Ended
	July 1,		June 25,		July 1,		June 25,
	2017		2016		2017		2016
Net revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues	80.3		83.2		81.6		83.5
Gross profit	19.7		16.8		18.4		16.5
Selling, general and administrative expenses	16.9		13.2		15.8		12.8
Operating income	2.8		3.6		2.6		3.7
Interest expense	4.7		3.4		4.7		3.5
Loss before income taxes	(1.9)		0.2		(2.1)		0.2
Income tax expense	—		0.1		0.1		0.1
Net (loss) income from continuing operations	(1.9)	%	0.1	%	(2.2)	%	0.1	%

Net Revenues.  Consolidated net revenues from continuing operations decreased 11.1% to $51.4 million in the fiscal quarter ended July 1, 2017, a decrease of $6.4 million, compared to $57.8 million in the fiscal quarter ended June 25, 2016.  Net revenues for the six months ended July 1, 2017 decreased 12.2% to $101.0 million, compared to $115.0 million during the six months ended June 25, 2016. 

Our net revenues by operating segment were as follows (in thousands): 

	Quarter Ended						Six Months Ended
	July 1,		June 25,		%		July 1,		June 25,		%
	2017		2016		Change		2017		2016		Change
Frozen products	$	20,692	$	30,312	(31.7)		$	44,154	$	62,608	(29.5)
Snack products		30,664		27,485	11.6			56,820		52,369	8.5
Consolidated	$	51,356	$	57,797	(11.1)	%	$	100,974	$	114,977	(12.2)	%

Our frozen products segment net revenues were $20.7 million during the fiscal quarter ended July 1, 2017, a decrease of $9.6 million, or 31.7%, compared to $30.3 million during the fiscal quarter ended June 25, 2016. During the six months ended July 1, 2017, our frozen products segment net revenues were $44.2 million, a decrease of $18.5 million, or 29.5%, compared to $62.6 million for the six months ended June 25, 2016.  The decrease in net revenues for the fiscal quarter and six months ended July 1, 2017 were primarily a result of reduced private label sales distribution and a frozen berry market price decrease as well as a reduction in Jamba at-home smoothie sales.

Our snack products segment net revenues were $30.7 million during the fiscal quarter ended July 1, 2017, an increase of $3.2 million, or 11.6%, compared to $27.5 million during the fiscal quarter ended June 25, 2016. During the six months ended July 1, 2017, our snack products segment net revenues were $56.8 million, an increase of $4.5 million, or 8.5%, compared to $52.4 million for the six months ended June 25, 2016.  The decrease in net revenues for the fiscal quarter and six months ended July 1, 2017 were primarily a result of strong increases in both Boulder Canyon and better-for-you private label sales, partially offset by reduced license brand sales.

Gross Profit.  Gross profit from continuing operations was $10.1 million for the fiscal quarter ended July 1, 2017, compared to $9.7 million for the fiscal quarter ended June 25, 2016.  Gross profit from continuing operations was $18.6 million for the six months ended July 1, 2017, compared to $19.0 million for the six months ended June 25, 2016.

25

Our gross profit and gross profit as a percentage of net sales by operating segment were as follows (in thousands):

	Quarter Ended								Six Months Ended
	July 1,		% of Net		June 25,		% of Net		July 1,		% of Net		June 25,		% of Net
	2017		Revenues		2016		Revenues		2017		Revenues		2016		Revenues
Frozen products	$	3,607	17.4	%	$	4,283	14.1	%	$	8,348	18.9	%	$	9,068	14.5	%
Snack products		6,505	21.2	%		5,420	19.7	%		10,278	18.1	%		9,915	18.9	%
Consolidated	$	10,112	19.7	%	$	9,703	16.8	%	$	18,626	18.4	%	$	18,983	16.5	%

Our frozen products segment gross profit was $3.6 million for the fiscal quarter ended July 1, 2017, compared to $4.3 million for the fiscal quarter ended June 25, 2016 and as a percentage of net revenues increased 330 basis points to 17.4%, compared to 14.1% for the prior-year period. For six months ended July 1, 2017, gross profit for our frozen segment was $8.3 million, compared to $9.1million for the six months ended June 25, 2016 and as a percentage of net revenues increased 440 basis points to 18.9%, compared to 14.5% for the prior-year period.  The significant improvement in the frozen products segment gross margin for the fiscal quarter and six months ended July 1, 2017 was driven by fewer purchases of higher priced frozen berries and reduced 2016 harvest fruit prices. 

Our snack products segment gross profit was $6.5 million for the fiscal quarter ended July 1, 2017, compared to $5.4 million for the fiscal quarter ended June 25, 2016.  As a percentage of net revenues, gross margin increased 150 basis points to 21.2% for the fiscal quarter ended July 1, 2017, compared to 19.7% for the fiscal quarter ended June 25, 2016.  This increase in gross margin was primarily due to lower trade promotion spending compared to the second quarter of fiscal 2016.

For the six months ended July 1, 2017, gross profit from continuing operations increased $0.4 million to $10.3 million, compared to $9.9 million for the six months ended June 25, 2016. As a percentage of net revenues, gross margin decreased 80 basis points to 18.1% for the six months ended July 25, 2017 from 18.9% for the six months ended June 25, 2016, primarily due to higher trade promotion spending primarily in the first quarter of fiscal 2017 and reductions in inventory standard costs that occurred in the first quarter of fiscal 2017.

Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses was $8.7 million for the fiscal quarter ended July 1, 2017, compared to $7.6 million the fiscal quarter ended June 25, 2016.  Excluding the $1.0 million for professional fees related to the Company’s ongoing strategic review, Adjusted SG&A expenses (as discussed below in “Non-GAAP Data and Reconciliations”) remained flat for the fiscal quarter ended July 1, 2017 compared to the prior-year period and, as a percentage of net revenues, increased 170 basis points to 14.9% compared to 13.2% for the prior-year period.  The increase is primarily due to increased expenses associated with other legal, medical and accrued bonus costs.

For the six months ended July 1, 2017, SG&A expenses was $15.9 million, compared to $14.8 million during the six months ended June 25, 2016.  Excluding the $1.1 million for professional fees related to the Company’s ongoing strategic review and the $1.2 million legal settlement gain recorded in SG&A in the first six months of fiscal 2017, Adjusted SG&A expenses (as discussed below in “Non-GAAP Data and Reconciliations”) increased $1.3 million for the six months ended June 25, 2016, compared to the prior-year period and as a percentage of net revenues increased 320 basis points to 16.0% compared to 12.8% for the prior-year period.  This increase is primarily due to increased expenses associated with other legal, medical and accrued bonus costs.

Interest Expense.  Interest expense was $2.4 million for the fiscal quarter ended July 1, 2017, compared to $2.0 million for the fiscal quarter ended June 25, 2016.  For the six months ended July 1, 2017, interest expense was $4.8 million, compared to $4.0 million during the six months ended June 25, 2016. These increases in interest expense were primarily due to increased interest rates on our Term Loan Credit Facility implemented with the Second Amendment.

Income Tax Benefit. Our effective tax rate was (1.1)% and 52.2% for the fiscal quarters ended July 1, 2017 and June 25, 2016, respectively.  For the six months ended July 1, 2017 our effective tax rate was (5.4)% compared to 45.1% for the six months ended June 25, 2016.  Income tax expense for the fiscal quarter and six months ended July 1, 2017 was impacted by the full valuation allowance which was initially recorded in the fourth quarter of fiscal 2016.

26

Therefore, income tax expenses was a result of certain state minimum taxes and deferred tax liabilities not subject to the valuation allowance.

Discontinued Operations. Discontinued operations represents the Fresh Frozen Foods business that was sold on March 23, 2017.  Discontinued operations generated net income of $75,000 for the fiscal quarter ended July 1, 2017, compared to a net loss of $0.3 million for the prior-year period.  The activity in the fiscal quarter ended July 1, 2017 related to the changes in estimated accruals that were settled during the period.  Discontinued operations generated a net loss of $12.9 million and $1.4 million for the six months ended July 1, 2017 and June 25, 2016, respectively.  The six months ended July 1, 2017 includes a loss on the Fresh Frozen Asset Sale of $10.1 million. See “Note 2 -  Discontinued Operations" in the condensed consolidated financial statements for more information.

Non-GAAP Data and Reconciliations

“Adjusted Selling, general and administrative expenses” or “Adjusted SG&A expenses” is defined as SG&A expenses less professional fees associated with the Company’s strategic review and gains from a legal settlement with the previous owners of Fresh Frozen Foods over purchase price hold back funds held in escrow.We present Adjusted SG&A expenses because we believe it provides useful information regarding the Company’s normal operating results and allows for better comparability with current period operating results.    

A reconciliation of Adjusted SG&A expenses to SG&A expenses is as follows (in thousands):

	Quarter Ended				Six Months Ended
	July 1, 2017		June 25, 2016		July 1, 2017		June 25, 2016
Adjusted Selling, general and administrative expenses	$	7,651	$	7,609	$	16,108	$	14,763
Strategic review professional fees		1,017		—		1,052
Gain from legal settlement		—		—		(1,236)	��	—
Selling, general and administrative expense	$	8,668	$	7,609	$	15,924	$	14,763

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.

Operating Cash Flows

Cash flows from operating activities reflect our net loss, 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.

Net cash provided operating activities was $9.7 million for the six months ended July 1, 2017, compared to net cash provided by operating activities of $11.8 million for the six months ended June 25, 2016. The year-over-year decrease was primarily a result of an increase of the net loss in fiscal 2017 compared to fiscal 2016 along with additional interest expense in the first six months of fiscal 2017 compared to the prior-year period.

Investing Cash Flows

Net cash provided by investing activities was $18.0 million for the fiscal quarter ended July 1, 2017, compared to cash used of $9.0 million for the fiscal quarter ended June 25, 2016.  The first six months of fiscal 2017 included $19.5 million in proceeds from the Fresh Frozen Asset Sale.  Capital expenditures of $1.2 million in the first six months of fiscal 2017 primarily relate to building improvements and manufacturing equipment, of which $0.3 million is included in discontinued operations.  Capital expenditures of $8.7 million in the first six months of fiscal 2016 primarily relate to manufacturing equipment and enterprise resource planning system integration, of which $0.9 million is included in discontinued operations.  During fiscal 2017, we plan to make approximately $3.0 million in capital expenditures, primarily at our manufacturing facilities.  Capital expenditures are funded by net cash flow from operating activities,

27

cash on hand, available credit from our ABL Credit Facility and equipment term loans.  Payments of contingent consideration related to the acquisition of Willamette Valley Fruit Company totaled $0.2 million during the six months ended July 1, 2017, compared to $0.3 million during the prior-year period. 

Financing Cash Flows

Net cash used in financing activities for the fiscal quarter ended July 1, 2017 was $25.4 million, compared to $3.9 million in the six months ended June 25, 2016.  This year-over-year decrease in cash provided by financing activities was largely due to a pay down of the Term Loan Credit Facility of $11.4 million and the ABL Credit Facility of $12.8 million, primarily from the proceeds of the Fresh Frozen Asset Sale.

Debt and Capital Resources

At July 1, 2017, there was $3.0 million in cash and $19.9 million borrowed on our ABL Credit Facility. At that date, $6.9 million of additional borrowings were available under the ABL Credit Facility. As is customary in such financings, Wells Fargo 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 ABL Credit Facility), subject, in certain instances, to the expiration of an applicable cure period. Certain events may trigger an acceleration of repayment of the amounts outstanding under the ABL Credit Facility as set forth in such credit facility. The ABL Credit Facility requires us to maintain compliance with certain financial covenants, including a Fixed Charge Coverage Ratio in the event liquidity as of the date of any determination is less than the greater of (i) 12.5% of the Maximum Revolver Amount and (ii) $6.125 million, subject to certain conditions.  As of July 1, 2017, we would not be able to comply with the Fixed Charge Coverage Ratio covenant if our liquidity were deemed to have fallen below the applicable threshold.

Our Term Loan Credit Facility requires us to comply with a Fixed Charge Coverage Ratio and Total Leverage Ratio (each as defined in the Term Loan Credit Facility) and the EBITDA Covenant.  We must comply with the Fixed Charge Coverage Ratio and Total Leverage Ratio beginning in the second quarter of fiscal 2017.  We were required to comply with the EBITDA Covenant commencing with the month ended April 30, 2017, which target we did not meet, and as discussed below, we received temporary waivers of such default.  Unless we engage in a strategic transaction that enables us to pay down our debt, or we secure a waiver or further loan amendment from our lender, we will not be in compliance with our financial covenants when required to meet such covenants.  Such a breach would constitute an Event of Default under (and as defined in) the Term Loan Credit Facility if it remained uncured or a modification or waiver is not agreed to (or, if applicable, extended) by the lenders under such credit facility.

The Credit Facilities also require us to furnish our audited financial statements without a “going concern” uncertainty paragraph in the auditor’s opinion.  Our consolidated financial statements for the fiscal year ended December 31, 2016 in our 2016 Form 10-K contained a “going concern” explanatory paragraph.  Under the Credit Facilities, a going concern opinion with respect to our audited financial statements is an event of default.  As of the date our 2016 Form 10-K was filed with the SEC, we obtained a temporary waiver of the Going Concern Covenant Default until May 15, 2017 from the applicable lenders under the Credit Facilities and, as discussed below, we received further temporary waivers of such default.

On May 10, 2017, we entered into the Term Loan Third Amendment, pursuant to which the BSP Lenders granted the Company (i) an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 until July 17, 2017, and (ii) a temporary waiver of the Minimum EBITDA Covenant Default until July 17, 2017.  The Term Loan Third Amendment also required that the Company comply with the EBITDA Covenant commencing with the fiscal month ending June 30, 2017, measured over the 12-months then ended, and increased the Company’s fees in the event of a payment or prepayment of principal under the Term Credit Facility (excluding regularly scheduled principal payments).

On May 15, 2017, we entered into the ABL First Amendment, pursuant to which the Wells Fargo Lenders granted the Company an extension of the temporary waiver of the Going Concern Covenant Default from May 15, 2017 to July 17, 2017.  In addition, the terms of the ABL First Amendment provided for, among other things, (i) an increase in the Company’s Applicable Margin for Base Rate and Libor Rate Loans (as such terms are defined in the ABL Credit Facility) effective May 1, 2017 by 100 basis points, (ii) additional financial and collateral reporting obligations and projection requirements, (iii) the immediate right of the Agent (as defined in the ABL Credit Agreement) or the Wells Fargo Lenders to exercise all rights and remedies under the ABL Credit Facility (in lieu of waiting until the earlier of ten

28

business days after the date on which financial statements are required to be delivered for an applicable fiscal month), and (iv) the elimination of the right to issue curative equity.

On July 17, 2017, we entered into the BSP Letter Agreement, pursuant to which the BSP Lenders granted the Company (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until July 24, 2017.

On July 17, 2017, we also entered into the ABL Second Amendment, pursuant to which the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 17, 2017 to July 24, 2017.  In addition, the ABL Second Amendment provided for, among other things, additional reporting obligations, a reduced revolver commitment over a period of time ($49.0 million prior to the effective date of the ABL Second Amendment; $40.0 million from and after the ABL Second Amendment date through August 1, 2017; and $35.0 million from and after August 1, 2017), and adjusted advance rates.

On July 20, 2017, we entered into the Term Loan Fourth Amendment, pursuant to which the BSP Lenders agreed to (i) a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017, and (ii) a temporary waiver of the Term Loan Financial Covenant Default until August 31, 2017.  In addition, the BSP Lenders agreed to provide $5.0 million of additional financing to the Company in the form of a term loan, payable in equal monthly installments of $12,500 commencing on September 30, 2017, with the balance due and payable on November 17, 2020, which is the maturity date of the Term Loan Credit Facility.  The net proceeds of the $5.0 million loan may be used for working capital purposes, subject to certain restrictions in the Term Loan Credit Facility, and is subject to the terms and conditions of the Term Loan Credit Facility.

On July 20, 2017, we also entered into the ABL Third Amendment, pursuant to which the Wells Fargo Lenders granted the Company a further extension of the temporary waiver of the Going Concern Covenant Default from July 24, 2017 to August 31, 2017.

A default under either the Term Loan Credit Facility or the ABL Credit Facility would trigger a default under the other Credit Facility and certain of our equipment lease financing arrangements, as these facilities each contain cross-default provisions.  In the event of non-compliance and if we are unable to secure necessary waivers or modifications to the applicable Credit Facility, the lenders under such Credit Facilities would have the right to accelerate the indebtedness thereunder.  In such an event, we would not have the liquidity sufficient to repay such indebtedness or meet our operating expenses, capital expenditures and other cash needs.

See “Note 6 - Term Debt and Line of Credit” of our condensed consolidated financial statements in Item 1 of this Form 10-Q for detail regarding our financing arrangements.

Outlook

All of the Company’s outstanding debt has been reclassified in the accompanying condensed consolidated balance sheet as a current liability as of July 1, 2017.  As previously reported, on July 27, 2016, the Company announced that it had commenced a strategic and financial review with the objective of increasing shareholder value.  The Company and its advisors have been actively involved in this process since the date of such announcement and, as of the filing of this Form 10-Q, are continuing to pursue various strategic alternatives.  On March 23, 2017, the Company completed the Fresh Frozen Asset Sale, which yielded net proceeds to the Company of $19.5 million.  Although such proceeds were used to pay down amounts outstanding under the Credit Facilities, additional capital is required to ensure compliance with the Total Leverage Ratio and Fixed Charge Coverage Ratio covenants under our Term Loan Credit Facility by August 31, 2017. 

Absent the Term Loan Fourth Amendment, the Company would have been in breach of the requirement to deliver audited financial statements without a going concern opinion at July 24, 2017, and the EBITDA Covenant at July 1, 2017 under the Term Loan Credit Facility.  Further absent the ABL Third Amendment, the Company would have been in breach of the requirement to deliver audited financial statements without a going concern opinion at July 24, 2017.  The waivers set forth in the Term Loan Fourth Amendment, together with the waivers set forth in the ABL Third Amendment, provide the Company with additional time to pursue various strategic alternatives.  However, unless we engage in a strategic transaction that enables us to pay down our debt, or we secure additional waivers or further loan

29

amendments from our lenders, we will not be in compliance with our financial covenants when required to meet such covenants.  No assurance can be given as to the outcome or timing of our pursuit of a strategic transaction or that we will be able to successfully complete a transaction at all or, if completed, on terms reasonable to us.  A default under either the Term Loan Credit Facility or the ABL Credit Facility will trigger a default under the other Credit Facility and certain of our equipment lease financing arrangements, as these facilities each contain cross-default provisions.  It could also result in the termination of all commitments to extend further credit under our ABL Credit Facility. 

Our lenders may resist renegotiation or lengthening of payment and other terms through legal action or otherwise if we are unsuccessful in our efforts to complete a strategic transaction.  If we are not able to timely, successfully or efficiently implement the strategies that we are pursuing, we may need to seek voluntarily seek protection under Chapter 11 of the U.S. Bankruptcy Code.

We anticipate fiscal 2017 capital expenditures of approximately $3.0 million, funded through working capital and various purchase or financing arrangements.

Contractual Obligations

There have been no material changes in our reported contractual obligations, as described under “Contractual Obligations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of  the 2016 Form 10-K.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates since the filing of the 2016 Form 10-K.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in our reported market risks, as described in “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our 2016 Form 10-K.

Item 4.  Controls and Procedures. 

Evaluation of Disclosure Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the reporting period covered by this Form 10-Q.  Based upon that evaluation and as a result of the material weakness in internal control over financial reporting described in “Controls and Procedures” in Part II, Item 9A of the 2016 Form 10-K, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of July 1, 2017 for the purpose of providing reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Remediation Efforts to Address Material Weakness

As previously described in “Controls and Procedures” in Part II, Item 9A of the 2016 Form 10-K, the Company began implementing a remediation plan to address the control deficiency that led to the material weakness mentioned above. The remediation plan includes the following:

· An upgrade of the software used to help monitor trade spend liabilities.  This new software upgrade is already complete and pulls actual sales data into the sales volume input estimates for open sales promotion plans to improve the accuracy of sales volume estimates. 

· The creation of a Task Force to help identify further improvements, including a more diligent review of key critical accounts to validate sales plans are accurate. 

30

The Company’s enhanced review and control procedures were in place and operating during the first six months of fiscal 2017. The Company is in the process of testing the newly implemented internal controls and related procedures. The material weakness cannot be considered remediated until the control has operated for a sufficient period of time and until management has concluded, through testing, that the control is operating effectively. Our goal is to remediate this material weakness by the end of fiscal 2017.

Changes in Internal Control Over Financial Reporting

Except as described above, there were no changes to the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended July 1, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

31

PART II—OTHER INFORMATION

Item 1.Legal Proceedings.

For a discussion of legal proceedings, see “Note 7 - Commitments and Contingencies - Legal Proceedings” to our condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Item 1A. Risk Factors.

During the fiscal quarter ended July 1, 2017, there were no material changes from the risk factors as previously disclosed in our  2016 Form 10-K.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

The following table contains information for shares repurchased during the fiscal quarter ended July 1, 2017.

				Total number of	Approximate dollar
				shares purchased as	value of shares that
				part of publicly	may yet be
	Total number of	Average price paid		announced plans or	purchased under the
Fiscal period	shares purchased(1)	per share		programs	plans or programs
April 2, 2017 - May 6, 2017	—	$	—	—	$	—
May 7, 2017 - June 3, 2017	36,163	$	4.08	—	$	—
June 4, 2017 - July 1, 2017	196	$	4.26	—	$	—
Total	36,359	$	4.09	—	$	—

(1) Shares of restricted stock withheld, at the election of certain holders of restricted stock, by the Company from the vested portion of a restricted stock award with a market value approximating the amount of the withholding taxes due from such restricted stockholders.

32

Item 6.Exhibits.

10.1	Limited Waiver and Third Amendment to Credit Agreement, dated as of May 10, 2017, by and among the Company and certain of its subsidiaries, as the borrowers, each of the lenders from time to time a party thereto, and BSP Agency, LLC, as the administrative agent for each member of the Lender Group (as defined therein) (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2017).
10.2	First Amendment to Credit Agreement and Limited Waiver, dated as of May 12, 2017, by and among the Company and certain of its subsidiaries, as the borrowers, each of the lenders from time to time a party thereto, and Wells Fargo Bank, National Association, as the administrative agent for each member of the Lender Group and the Bank Product Providers (each as defined therein), as the sole arranger, and as the sole book runner (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 17, 2017).
10.3	Letter Agreement, dated as of July 17, 2017, by and among the Company and certain of its subsidiaries, as the borrowers, each of the lenders from time to time a party thereto, and BSP Agency, LLC, as the administrative agent for each member of the Lender Group (as defined therein) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 21, 2017).
10.4	Limited Waiver and Fourth Amendment to Credit Agreement, dated as of July 21, 2017, by and among the Company and certain of its subsidiaries, as the borrowers, each of the lenders from time to time a party thereto, and BSP Agency, LLC, as the administrative agent for each member of the Lender Group (as defined therein) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 21, 2017).
10.5	Second Amendment to Credit Agreement and Limited Waiver, dated as of July 17, 2017, by and among the Company and certain of its subsidiaries, as the borrowers, each of the lenders from time to time a party thereto, and Well Fargo Bank, National Association, as the administrative agent for each member of the Lender Group and Bank Product Provisions (as such terms are defined therein) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 21, 2017).
10.6	Third Amendment to Credit Agreement and Limited Waiver, dated as of July 21, 2017, by and among the Company and certain of its subsidiaries, as the borrowers, each of the lenders from time to time a party thereto, and Well Fargo Bank, National Association, as the administrative agent for each member of the Lender Group and Bank Product Provisions (as such terms are defined therein) (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on July 21, 2017).
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**		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.
101.INS*		XBRL Instance Document.
101.SCH*		XBRL Taxonomy Extension Scheme Document.
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.

*     Filed herewith.

**   Furnished herewith.

33

SIGNATURES

Pursuant to the requirements 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:	August 10, 2017	INVENTURE FOODS, INC.
		By:	/s/ Steve Weinberger
			Steve Weinberger
			Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)

34