| Organization and Summary of Significant Accounting Policies | 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 Company TM 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 Tin TM 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.
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 Frozen TM 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 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 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 sold certain 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 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
Level 2 Quoted prices in markets that are not considered to be active or financial instruments without quoted market prices, but for which all significant inputs are observable, either directly or indirectly
Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
At 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 Tin TM 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.
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.
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. |
