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Snack Maker Faces Crunch

But last month, the company filed for Chapter 11 bankruptcy protection, contending it needs to protect itself from Chaucer Foods Ltd., a supplier that later became a financier – and then a hostile threat to take over the company. “We’ve been put in a position that the best opportunity to save the company and move forward on the opportunity was to restructure,” Chief Executive James Lacey told the Business Journal. Crunchies, which is still operating during the proceedings, was founded in 2006 to produce freeze-dried fruit snacks. The products appeal to health-conscious parents, featuring dried apples, bananas and berries said to be more nutritious. According to court filings, the company nearly tripled sales in 2012. And according to one newspaper report Crunchies declined to confirm, revenue topped $11.6 million that year. The company’s sales got a boost last year in a deal with Warner Bros. Consumer Products in Burbank, with Crunchies producing snacks for children shaped like cartoon characters from Looney Tunes. Roberto Barragan, president of the non-profit Valley Economic Development Center, has seen fast-growing companies such as Crunchies get in trouble with non-traditional financiers many times before. And it’s something that has become more common in recent years as banks have withdrawn from small-business lending in the aftermath of the recession, he said. “If you are fast-growing, you don’t have a balance sheet, and if you’re new, you don’t have a track record of repayments the banks can point to,” he said. “You are talking about a company not getting access to traditional sources of capital, so they get into arrears with their suppliers.” True intentions Indeed, like other fast-growing companies, Crunchies needed capital to fuel the expansion. It raised money from individual investors and has structured debt agreements with family trusts. Chaucer supplied the company with strawberries, and Crunchies gradually accumulated debt for unpaid invoices. Last year, Chaucer filed a lawsuit claiming the company owed $1.5 million. Crunchies agreed to settle by making monthly payments, and paid back about $500,000 before “the extremely aggressive payment schedule” proved unworkable, according to bankruptcy filings. Chaucer offered to convert its debt into equity and invest an additional $1 million. It even flew in a team of accountants from KPMG LLP to perform due diligence on Crunchies’ books. “Then in August 2014, Chaucer revealed its true intention for a hostile takeover,” the court filings state. “(Chaucer) had plans to move into the United States market, and appeared interested in taking over the debtor as a launching platform.” Chaucer proposed an out-of-court assignment for the benefit of creditors, a legal alternative to bankruptcy that allows a company to shed obligations to unsecured creditors. In the proposal, Chaucer would end up with 23 percent of the equity. Chung Family Trust and Donald Delaski Revocable Trust, two large family trusts which own secured debt, would also have sizeable equity stakes. Lacey, the chief executive, would retain a small stake, but the small investors would be out of the picture and the unsecured debtors would get nothing, Crunchies said. David L. Neale of Levene, Neale, Bender, Yoo and Brill LLP in Los Angeles, is representing the company and said at that point filing for Chapter 11 bankruptcy was the best option. “We’re doing everything we can, because we like to believe there is value in this company. There is going concern value for the company that far exceeds its liquidation value,” he said. In court filings, Crunchies reported the company is valued at $15 million minimum, but that figure would drop to about $3.5 million should it be forced to cease operations and sell off its hard assets. The main catalyst for the bankruptcy filing, Lacey said, was the lawsuit filed by Chaucer Foods last October. But during the workout of that debt, Lacey maintains that his company still viewed Chaucer as a business partner that needed to file its lawsuit only to protect its own business. “We had no idea they wanted to take over the company,” he said. Lacey added that Crunchies fell behind on payments because it was rapidly expanding and depending on a line of credit that fell through. According to bankruptcy filings, Crunchies owes a little more than $4.4 million to its 20 largest unsecured creditors. Chaucer and its attorney did not respond for comment, but the supplier filed a response in court to Crunchies’ bankruptcy filing that said “the debtor’s inability to generate positive cash flow has nothing to do with Chaucer.” Cost cuts Since filing for bankruptcy, Crunchies has cut ties with Chaucer, forcing it to use other suppliers for its strawberries. Lacey said it was not an issue to find other suppliers, since it works with so many who were willing to step in. Neale said Crunchies is working on stabilizing the business and maintaining its clients, while paying off its secured creditors. The company expects to prepare a reorganization plan during the next few months, which could include negotiating to pay off unsecured creditors. At this point, there is no repayment plan in place and the company is not talking to Chaucer or other unsecured creditors. Despite the bankruptcy process, it stuck to its commitment with Costco Wholesale Corp. to supply the grocer with Crunchies snacks this month. So far, Lacey said his company is on the path to regaining financial stability by cutting operating costs by $2 million in the last month. “Even through the disruption in the past six months due to Chaucer and Chung’s estate, we have managed to continue to grow and we should be close to doubling last year’s sales, and then we’ll be profitable again in 2015,” he said. “We went through some major surgery on the company to get it very lean and mean through this.”

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