UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C.  20549





Form
10-K/A


Amendment
No. 1





Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For
the fiscal year ended December 31, 2008





Commission
file number 001-33595





SMART
BALANCE, INC.


(Name of
issuer in its charter)





Delaware
              (State
      or other jurisdiction of
              incorporation
      or organization)
            20-2949397
              (I.R.S.
      Employer
              Identification
      No.)





115
      West Century Road – Suite 260
                Paramus,
      New Jersey
                (Address
      of principal executive offices)
              07652
                (Zip
      Code)





(201)
      568-9300
                (Issuer’s
      telephone number, including area code)
                Securities
      registered under Section 12(b) of the
Act:




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




Common
Stock, $.0001 par value per share





(Title
Of Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes
  ̈   No  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes
  ̈   No  x





Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 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 xNo   ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    ̈





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


Large
      accelerated filer   ̈
            Accelerated
      filer  xNon-accelerated
      filer ̈
            Smaller
      reporting company   ̈




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


Yes 
 ̈   No  x





The
aggregate market value of the outstanding common stock, other than shares held
by persons who may be deemed affiliates of the registrant, computed by reference
to the closing sales price for the Registrant’s Common Stock on June 30, 2008
($7.21), as reported on the Nasdaq Global Market was approximately $194
million.





As of
February 25, 2009, there were 62,630,683 shares of common stock, par value
$.0001 per share, of the registrant outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s proxy statement in connection with its 2009 Annual Meeting
of Stockholders are incorporated by reference in Part III.










EXPLANATORY
NOTE





The
Registrant is filing this Amendment No. 1 to the Registrant’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2008 (“Form 10-K”) to
(i) include the audited financial statements of GFA Holdings, Inc. and
subsidiary (“GFA”), the Registrant’s predecessor, for the period from January 1,
2007 to May 20, 2007 and for the year ended December 31, 2006; (ii) amend Item 6
in order to include the selected financial data for GFA; (iii) amend Item 7 in
order to provide information regarding the results of operations of GFA and to
eliminate the Registrant’s discussion of combined results on an operating basis
for the Registrant and GFA; (iv) amend Item 9A in order to include a revised
report on the Registrant’s Internal Control Over Financial Reporting; and (v)
amend Note 2, “Merger with GFA”, contained in the notes to Smart Balance, Inc.
and subsidiary’s audited financial statements.




Because
the Registrant has amended the Form 10-K as described above, a currently-dated
consent from Ehrhardt Keefe Steiner & Hottman PC has been provided, which is
required to be filed by the SEC pursuant to Item 601(b)(23) of Regulation
S-K.  In addition, because the Registrant has amended the Form 10-K to
provide the audited financial statements of GFA, a consent from McGladrey &
Pullen, LLP has been provided.




Pursuant
to the rules of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) Rule 12b-15, the Registrant has also amended the Form 10-K to provide
currently-dated certifications from the Registrant’s chief executive officer and
chief financial officer, as required by Exchange Act Rule 13a-14(a) or Rule
15d-14(a), as adopted under Section 302 of the Sarbanes-Oxley Act of 2002,
and Section 1350 of Title 18 of the United States Code, as adopted under
Section 906 of the Sarbanes-Oxley Act of 2002.




Except
for the items mentioned above, this Amendment No. 1 does not amend the
Registrant’s previously filed Form 10-K and only includes the items mentioned
above.


i


TABLE
OF CONTENTS





PageCAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS
                1PART
      II
                2Item
      6.Selected
      Historical Financial Information
                2Item
      7.Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                5Item
      9A.Controls
      and Procedures
                17PART
      IV
                19Item
      15.Exhibits;
      Financial Statement Schedules
                19INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS
                F-1




ii


CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




We
believe that some of the information in this annual report constitutes
forward-looking statements. You can identify these statements by forward-looking
words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,”
“estimate,” “intends,” and “continue” or similar words. You should read
statements that contain these words carefully because they:




·
            discuss
      future expectations;




·
            contain
      projections of future results of operations or financial condition;
      or




·
            state
      other “forward-looking”
information.




We
believe that communicating our expectations to our stockholders is important.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors and cautionary
language discussed in this annual report provide examples of risks,
uncertainties and events that may cause actual results to differ materially from
the expectations we describe in our forward-looking statements, including, among
other things, our ability to:




·
            raise
      prices as fast as commodity costs
increase;




·
            introduce
      and expand distribution of new
products;




·
            meet
      marketing and infrastructure needs;




·
            meet
      long-term debt covenants; and




·
            continue
      to grow net sales in a competitive environment with rising costs and an
      increasingly price sensitive
consumer.




You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report.




All
forward-looking statements included herein attributable to us are expressly
qualified in their entirety by the cautionary statements contained or referred
to in this section. Except to the extent required by applicable laws and
regulations, we undertake no obligation to update these forward-looking
statements to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.




1


PART
II




Item
6.              Selected
Historical Financial Information




Smart
Balance, Inc and Subsidiary




The
following is a summary of selected financial data of the Smart Balance, Inc. and
subsidiary (the “Company”) for the period from May 31, 2005 (inception) to
December 31, 2008, which should be read in conjunction with the audited
financial statements of the Company and the notes thereto, including the
description of the merger with GFA Holdings, Inc., the parent company of GFA
Brands, Inc. (collectively, “GFA”) included in Note 2 and our change in
accounting principle discussed in Note 15:




Twelve months
                  ended
                  December 31,
                  2008
                
                
                Twelve months
                  ended
                  December 31,
                  2007(1)
                
                
                Twelve months
                  ended
                  December 31,
                  2006
                
                
                May 31, 2005
                  (inception) to
                  December 31,
                  2005Net
      sales
                
                $
                221,871,912
                
                
                $
                111,038,295
                
                
                $
                -
                
                
                $
                -Cost
      of goods sold
                
                
                126,903,498
                
                
                
                58,715,013
                
                
                
                -
                
                
                
                -Gross
      profit
                
                
                94,968,414
                
                
                
                52,323,282
                
                
                
                -
                
                
                
                -Operating
      expenses:Marketing
                
                
                33,286,061
                
                
                
                15,118,184
                
                
                
                -
                
                
                
                -Selling
                
                
                17,671,462
                
                
                
                12,268,066
                
                
                
                -
                
                
                
                -General
      and administrative
                
                
                38,317,244
                
                
                
                17,931,109
                
                
                
                -
                
                
                
                -Expenses
      settled with Founders’ stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,359,856Performance
      based shares released from escrow
                
                
                -
                
                
                
                18,455,815
                
                
                
                -
                
                
                
                -Formation
      and operating costs
                
                
                -
                
                
                
                -
                
                
                
                1,924,602
                
                
                
                109,554Total
      operating expenses
                
                
                89,274,767
                
                
                
                63,773,174
                
                
                
                1,924,602
                
                
                
                2,469,410Operating
      profit (loss)
                
                
                5,693,647
                
                
                
                (11,449,892
                )
                
                
                (1,924,602
                )
                
                
                (2,469,410
                )Other
      income (expense):Interest
      income
                
                
                291,949
                
                
                
                2,449,614
                
                
                
                4,220,026
                
                
                
                23,742Interest
      expense
                
                
                (9,049,019
                )
                
                
                (9,677,881
                )
                
                
                -
                
                
                
                -(Loss)
      gain on derivative liability
                
                
                (5,132,231
                )
                
                
                (45,556,199
                )
                
                
                (15,266,445
                )
                
                
                1,808,566Other
      income (expense), net
                
                
                (2,335,752
                )
                
                
                (1,019,607
                )
                
                
                -
                
                
                
                -Total
      other income (expense)
                
                
                (16,225,053
                )
                
                
                (53,804,073
                )
                
                
                (11,046,419
                )
                
                
                1,832,308Loss
      before income taxes
                
                
                (10,531,406
                )
                
                
                (65,253,965
                )
                
                
                (12,971,021
                )
                
                
                (637,102
                )Provision
      (benefit) for income taxes
                
                
                (3,563,553
                )
                
                
                (705,897
                )
                
                
                808,140
                
                
                
                -Net
      loss
                
                $
                (6,967,853
                )
                
                $
                (64,548,068
                )
                
                $
                (13,779,161
                )
                
                $
                (637,102
                )Less:
      Unpaid dividends on cumulative preferred stock
                
                $
                -
                
                
                $
                37,159,011
                
                
                $
                -
                
                
                $
                -Net
      loss available for common shares
                
                $
                (6,967,853
                )
                
                $
                (101,707,079
                )
                
                $
                (13,779,161
                )
                
                $
                (637,102
                )Net
      loss per share - basic and diluted
                
                $
                (0.11
                )
                
                $
                (4.12
                )
                
                $
                (0.96
                )
                
                $
                (0.16
                )Weighted
      average shares outstanding - basic and diluted
                
                
                62,523,742
                
                
                
                24,667,344
                
                
                
                14,355,945
                
                
                
                4,025,031







(1)  The
Company acquired GFA on May 21, 2007.





2




December 31,
                  2008
                
                
                December 31,
                  2007(1)
                
                
                December 31,
                  2006
                
                
                December 31,
                  2005Balance
      sheet data:Cash
      and cash equivalents
                
                $
                5,492,330
                
                
                $
                37,648,754
                
                
                $
                569,142
                
                
                $
                1,548,609Investments
      held in trust - restricted
                
                
                —
                
                
                
                —
                
                
                
                101,073,611
                
                
                
                98,354,755Other
      current assets
                
                
                26,674,727
                
                
                
                28,786,993
                
                
                
                1,050,620
                
                
                
                377,060Property
      and equipment, net
                
                
                4,300,642
                
                
                
                1,805,331
                
                
                
                —
                
                
                
                —Goodwill
                
                
                374,885,923
                
                
                
                374,885,923
                
                
                
                —
                
                
                
                —Other
      intangible assets
                
                
                155,223,243
                
                
                
                159,645,634
                
                
                
                —
                
                
                
                —Other
      non-current assets
                
                
                1,958,736
                
                
                
                3,594,387
                
                
                
                3,590,790Total
      assets
                
                $
                568,535,601
                
                
                $
                606,367,022
                
                
                $
                106,284,163
                
                
                $
                100,280,424Current
      liabilities
                
                $
                26,017,702
                
                
                $
                21,390,568
                
                
                $
                8,578,195
                
                
                $
                4,489,516Derivative
      liabilities
                
                
                5,132,231
                
                
                
                —
                
                
                
                32,284,925
                
                
                
                17,018,480Long-term
      debt
                
                
                69,504,174
                
                
                
                119,504,174
                
                
                
                —
                
                
                
                —Other
      liabilities
                
                
                161,711
                
                
                
                —
                
                
                
                —
                
                
                
                —Deferred
      tax liability
                
                
                46,268,286
                
                
                
                53,293,528
                
                
                
                —
                
                
                
                —Total
      liabilities
                
                
                147,084,104
                
                
                
                194,188,270
                
                
                
                40,863,120
                
                
                
                21,507,996Common
      stock subject to possible conversion
                
                
                —
                
                
                
                —
                
                
                
                19,661,116
                
                
                
                19,661,116Deferred
      interest income
                
                
                —
                
                
                
                —
                
                
                
                432,623
                
                
                
                —Series
      A convertible preferred stock
                
                
                —
                
                
                
                175,657,474
                
                
                
                —
                
                
                
                —Series
      A convertible preferred stock - par value
                
                
                —
                
                
                
                1,539
                
                
                
                —
                
                
                
                —Common
      stock – par value
                
                
                6,263
                
                
                
                4,311
                
                
                
                1,595
                
                
                
                1,595Additional
      paid in capital
                
                
                507,377,418
                
                
                
                315,479,759
                
                
                
                59,741,972
                
                
                
                59,746,819Retained
      deficit
                
                
                (85,932,184
                )
                
                
                (78,964,331
                )
                
                
                (14,416,263
                )
                
                
                (637,102
                )Total
      stockholders’ equity
                
                
                421,451,497
                
                
                
                412,178,752
                
                
                
                45,327,304
                
                
                
                59,111,312Total
      liabilities and stockholders’ equity
                
                $
                568,535,601
                
                
                $
                606,367,022
                
                
                $
                106,284,163
                
                
                $
                100,280,424







(1)  The
Company acquired GFA on May 21, 2007.


3


GFA




GFA’s
historical information was derived from its audited consolidated financial
statements as of and for the period from January 1, 2007 through May 20, 2007,
the years ended December 31, 2006 and December 31, 2005 and for the period
from February 5, 2004 to December 31, 2004. This information was also
derived from combined audited financial statements from GFA’s predecessor
companies, New Industries Corporation and Fitness Foods, Inc. for the
three-month period ended March 31, 2004. The information is only a summary
and should be read in conjunction with the historical consolidated financial
statements and related notes of GFA and its predecessor companies. The
historical results included below and elsewhere in this document are not
indicative of the future performance of GFA.




(in
thousands)





GFA Holdings, Inc.
                
                
                GFA
                  Holdings,
                  Inc.
                
                
                Combined
                  Predecessor
                  CompaniesPeriod
                  from
                  Jan. 1,
                  2007 to
                
                
                Year Ended
                  December 31,
                
                
                Period
                  from
                  Feb. 5,
                  2004 to
                
                
                Period from
                  Jan. 1, 2004
                  toMay 20,
                  2007
                
                
                2006
                
                
                2005
                
                
                2004(1)
                
                
                Dec. 31,
                  2004(1)
                
                
                Mar. 31,
                  2004(1)(unaudited)
                  Pro FormaConsolidated
      Statement of Operations data:Net
      Revenue
                
                $
                72,442
                
                
                $
                158,468
                
                
                $
                114,710
                
                
                $
                83,999
                
                
                $
                66,765
                
                
                $
                17,234Gross
      Profit
                
                
                39,721
                
                
                
                88,707
                
                
                
                67,007
                
                
                
                47,195
                
                
                
                37,557
                
                
                
                9,638Operating
      Income (Loss)
                
                
                (8,952
                )
                
                
                24,054
                
                
                
                15,275
                
                
                
                8,866
                
                
                
                6,482
                
                
                
                2,384Selected
      Balance Sheet data (end of period):Total
      assets
                
                $
                131,111
                
                
                $
                118,877
                
                
                $
                113,308
                
                
                $
                110,927
                
                
                $
                110,927
                
                
                $
                108,899Long-term
      debt, current portion
                
                
                -
                
                
                
                4,725
                
                
                
                5,846
                
                
                
                13,594
                
                
                
                13,594
                
                
                
                -Long-term
      debt, noncurrent portion
                
                
                -
                
                
                
                -
                
                
                
                12,879
                
                
                
                19,331
                
                
                
                19,331
                
                
                
                3,021Deferred
      tax liability, noncurrent
                
                
                7,732
                
                
                
                6,801
                
                
                
                5,041
                
                
                
                1,864
                
                
                
                1,864
                
                
                
                -







(1)
            On
      February 5, 2004 GFA was organized and on March 31, 2004 it acquired
      certain assets of New Industries Corporation, formerly known as GFA
      Brands, Inc. (an Ohio corporation), referred to as “GFA
      Ohio.”  Also on March 31, 2004 GFA issued 100,000 shares of
      common stock to Fitness Foods, Inc. (“FFI”) in exchange for certain of
      FFI’s assets as part of a contribution agreement between FFI and
      GFA.  The audited results for the period from January 1,
      2004 through March 31, 2004 are the combined statements for GFA Ohio
      and FFI before the acquisitions on March 31, 2004.  The
      results from February 5, 2004 through December 31, 2004 are for
      GFA.  The pro forma results for the 12 months ended
      December 31, 2004 are the combined amounts for GFA Ohio and FFI for
      the period from January 1, 2004 through March 31, 2004 and for
      GFA from inception, February 5, 2004 through December 31,
      2004.  Although GFA was formed on February 5, 2004, it had
      no operating activity until it acquired the assets of GFA Ohio and FFI on
      March 31, 2004.




4


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




Background




Smart
Balance, Inc. (“Smart Balance” or the “Company”) was incorporated in Delaware on
May 31, 2005 under the name Boulder Specialty Brands, Inc., as a blank check
company formed to serve as a vehicle for the acquisition, through a merger,
capital stock exchange, asset acquisition or other similar business combination
with a then currently unidentified operating business and/or brand in the
consumer food and beverage industry whose net assets constituted at least 80% of
our net assets.





The net
proceeds from our initial public offering in December 2005 were $99.5 million.
Of this amount, approximately $98.4 million (including deferred underwriting
discounts and commissions of approximately $3.6 million) was deposited in trust
pending our initial business combination. On May 21, 2007, we completed a merger
with GFA Brands, Inc. (“GFA”), which owned and marketed the Smart Balance® line
of products, among others.





We are
providing results of operations for both the Company and for GFA.  The
Company’s results of operations are presented for the years ended December 31,
2008, 2007 and 2006.  Results for the year ended December 31, 2007
include the operations of GFA from May 21, 2007.  For GFA, we are
providing results of operations for the period from January 1, 2007 to May 20,
2007 and for the year ended December 31, 2006.





You
should read this section together with consolidated financial statements
including the notes to those financial statements for the periods mentioned
above, which are included elsewhere in this report.




Company
Overview




We are a
consumer food products company that competes primarily in the retail branded
food products industry and focuses on providing value-added, functional food
products to consumers. Functional food is defined as a food or a food ingredient
that has been shown to affect specific functions or systems in the body and may
play an important role in disease prevention. We market buttery spreads,
popcorn, peanut butter, cooking oil, mayonnaise and other products primarily
under the Smart Balance®trademark.
In the natural food channel, we sell similar natural and organic products under
the trademark Earth Balance® trademark.
Our trademarks are of material importance to our business and are protected by
registration or other means in the United States and a number of international
markets.  Our buttery spreads business, marketed under
Smart Balance®,
Earth Balance®,
SmartBeat® and
Nucoa®, is by
far the most developed product segment and accounted for approximately 75% of
2008 sales.




Our
products are sold in all 50 states, with little international sales presence. We
sell our products in mass merchandise, grocery, natural food and club stores
throughout the U.S, with a majority of products sold through supermarket chains
and food wholesalers.  Our largest customer, Wal-Mart Stores, Inc. and
its affiliates, accounted for approximately 20% of consolidated net sales for
the year ended December 31, 2008.




Approximately
73% of our sales utilize a proprietary licensed, patented technology that
enhances good-to-bad cholesterol ratios, uses no hydrogenated or partially
hydrogenated oils and has only trace amounts of trans fats.  In 1996,
Brandeis University licensed to GFA certain technology relating to the use of a
balanced proportion of saturated and polyunsaturated fatty acids from one or
more vegetable oil sources for incorporation in food products to increase HDL
and HDL/LDL cholesterol ratio.  Our agreement with Brandeis provides
us with an exclusive license to a number of patents until April 7, 2015, at
which time the patents will expire. We also have assignment of several patents
with a number of our other products.   In 2008 we entered into a
long-term agreement with Brandeis to develop new technologies, which, if
developed, provides us the option to use in our products.  In
addition, we have proprietary trade secrets, technology, know-how processes and
other intellectual property rights that are not registered.




Our
primary growth strategy is to continue to drive consumer and trade awareness of
our brands, increase distribution of our existing products, and continue to
launch additional line extensions and new products.  We actively
advertise via network and cable TV, radio, coupons, and in-store
promotions.  We have also benefited from favorable trends in the food
industry regarding the required labeling of trans fats levels in food products
and increased consumer awareness of the negative health implications of trans
fats in foods.


5


We
outsource production of finished goods to third-party
manufacturers.  We do not own or operate any manufacturing
facilities.  Outsourcing is designed to allow us to enhance production
flexibility and capacity, leverage working capital, and focus our energy and
resources on marketing and sales, while substantially reducing capital
expenditures and avoiding the complication of managing a production work force.
Our buttery spreads are produced by two manufacturers, one of whom has multiple
locations.  Most of our other products are each supplied by a separate
sole source. In the event of an interruption in supply, we believe we could
arrange for additional suppliers to provide the affected
products.  While we believe our manufacturers have the capacity to
fulfill our current production needs and are willing to increase capacity as we
grow, we will monitor capacity, service and costs and will qualify alternative
sources of supply as needed.




Our
manufacturers supply our products at a price equal to the cost of ingredients
and certain packaging plus a contracted toll charge.  Except in
unusual circumstances, we provide no raw materials to our
manufacturers.  However, we work with our manufacturers to source high
quality ingredients at attractive pricing.  The prices paid for raw
materials used in our products generally reflect factors such as weather,
commodity market fluctuations, currency fluctuations, tariffs, and the effects
of governmental agricultural programs. Although the prices of raw materials can
be expected to fluctuate as a result of these factors, we believe such raw
materials to be in adequate supply and generally available from numerous
sources. We also negotiate certain commodities and packaging costs directly with
the suppliers.  Manufacturers are required by contract to announce
changes in ingredient prices in advance. Toll charges cannot be unilaterally
increased by the manufacturers, however, some manufacturers are able to increase
toll charges after giving us notice of the increase at least six months in
advance. We bear all freight costs associated with shipping finished
products.




We use
third party distributors and a network of public warehouses to deliver product
from our manufacturers to our customers. We rely primarily on one third party
distributor to deliver all of our spreads and other refrigerated products. All
freight costs associated with shipping finished products are borne by
us.




The food
industry is highly competitive and numerous multinational, regional and local
firms currently compete, or are capable of competing, with us.  Our
products compete with branded products as well as generic and private-label
products of food retailers, wholesalers and cooperatives. We compete primarily
on the basis of product quality, brand recognition, brand loyalty, service,
marketing, advertising, patent protections and price.  Some
competitors may have different profit or strategic objectives than we
do.  Substantial advertising and promotional expenditures are required
to maintain or improve a brand’s market position or to introduce a new
product.  Our largest principal competitors are Unilever, Kraft Foods,
and ConAgra Foods, each of whom have substantially greater market presence,
longer operating histories, better distribution, more significant customer bases
and greater financial, marketing, capital and other resources than
us.




6




Smart
Balance, Inc. Results of Operations




Results
of Operations for the Year Ended December 31, 2008 Compared to the Year Ended
December 31, 2007 and for the Year Ended December 31, 2007 Compared to the Year
Ended December 31, 2006




(in millions except per share)
                    
                    Years Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Net
      Sales
                    
                    $
                    221.9
                    
                    
                    $
                    111.0
                    
                    
                    $
                    —Cost
      of Goods Sold
                    
                    
                    126.9
                    
                    
                    
                    58.7
                    
                    
                    
                    —Gross
      Profit
                    
                    
                    95.0
                    
                    
                    
                    52.3
                    
                    
                    
                    —Operating
      Expenses
                    
                    
                    89.3
                    
                    
                    
                    63.8
                    
                    
                    
                    1.9Operating
      Income (Loss)
                    
                    
                    5.7
                    
                    
                    
                    (11.5
                    )
                    
                    
                    (1.9
                    )Other
      Income (Expenses)
                    
                    
                    (16.2
                    )
                    
                    
                    (53.7
                    )
                    
                    
                    (11.1
                    )Loss
      before Income Taxes
                    
                    
                    (10.5
                    )
                    
                    
                    (65.2
                    )
                    
                    
                    (13.0
                    )Provision
      (Benefit) for Income Taxes
                    
                    
                    (3.6
                    )
                    
                    
                    (0.7
                    )
                    
                    
                    0.8Net
      (Loss)
                    
                    $
                    (6.9
                    )
                    
                    $
                    (64.5
                    )
                    
                    $
                    (13.8
                    )Net
      (Loss) available to Common Shares
                    
                    $
                    (6.9
                    )
                    
                    $
                    (101.7
                    )
                    
                    $
                    (13.8
                    )Net
      (Loss) Per Common Available Share
                    
                    $
                    (0.11
                    )
                    
                    $
                    (4.12
                    )
                    
                    $
                    (0.96
                    )





Net
Sales:




Our net
sales for the year ended December 31, 2008 was $221.9 million, which was our
first full year of operations.  For the year ended December 31, 2007
our net sales were $111.0 million, which only includes GFA sales made after the
acquisition.  We had no net sales in 2006 as we were a blank check
company with no operations.




Cost
of Goods Sold:




The cost
of goods sold for the year ended December 31, 2008 was $126.9 million compared
with $58.7 million for the period from May 21, 2007 to December 31, 2007, which
only includes GFA cost of goods sold made after the
acquisition.  Gross profit, as a percentage of net sales, was 42.8% in
2008, compared to 47.1% in 2007.  Significantly higher commodity costs
in 2008 accounted for the decline in gross profit percentage since these costs
could not be quickly recovered through price increases.




Operating
Expenses:




Total
operating expenses, which included selling, marketing and general and
administrative expenses, for the year ended December 31, 2008 was $89.3 million
compared with $63.8 million for the period from May 21, 2007 to December 31,
2007.  The operating expenses for 2007 only include GFA expenses after
the date of acquisition.  Also included in operating expenses were
approximately $14.9 million for 2008 and $6.7 million for 2007 of stock-based
compensation expense, as determined under Statement of Financial Reporting
Standard (SFAS) No. 123R.  In addition, included in 2007 was the costs
associated with the release from escrow of the founders’ shares ($18.5 million)
after our common stock closed at or above $11.50 for twenty out of thirty
trading days.  For the year ended December 31, 2006, we had expenses
related to the formation of the Company of $1.9 million.




Operating
(Loss):




We had
operating income of $5.7 million in 2008 compared with operating losses of $11.5
million and $1.9 million for the years ended December 31, 2007 and 2006,
respectively, as a result of the items mentioned above.




7




Other
Income (Expense):




We had
other expenses of $16.2 million in 2008 compared with $53.8 million in 2007 and
$11.1 million in 2006.  Included in other expenses in 2008 was $5.1 of
derivative losses related to the Company’s interest rate swap and net interest
expense of $8.8 million.  Included in the results for 2007 was a $45.6
million loss from derivative liabilities compared to a loss in the same period
in 2006 of $15.3 million (see “Accounting for Warrants – Derivative Liability”
located elsewhere in this Form 10-K). Net interest expense was $8.8 million in
2008 and   $7.2 million in 2007, compared with interest income of
$4.2 million in 2006. The increases in net interest expense in 2008 and 2007
were due to the secured debt financing incurred in connection with our
acquisition of GFA whereas, in 2006, we had interest income from the investment
of the IPO proceeds held in trust during 2006.




Income
Taxes:




The
provision for income taxes for the year ended December 31, 2008 was a benefit of
$3.6 million or 33.8% of pre-tax loss.  The provision for income taxes
for the year ended December 31, 2007 was a benefit of $0.7 million compared with
a provision of $0.8 million in year ended December 31, 2006. The provision or
benefit is based on taxable income, which excludes the losses for derivatives,
except for losses related to our interest rate swaps in 2008, and the expenses
related to performance based founders’ shares released from escrow, which are
not deductible for tax purposes.




Net
(Loss):




Our net
loss for the year ended December 31, 2008 was $7.0 million compared to a net
loss for the year ended December 31, 2007 of $64.5 million and a loss of $13.8
million in the corresponding period in 2006.




Net
(Loss) Available to Common Shares:




Our net
loss available to common shares in 2008 was $7.0 million or $(0.11) per
share.  Our net loss available to common shares in 2007 was $101.7
million, which included a charge of $37.2 million for the accrual of dividends
on Series A convertible preferred stock, and was $13.8 million in
2006.  Under the terms of the Series A convertible preferred stock,
the holders of such shares were entitled to at least three years of dividends
compounded quarterly, which were payable in additional shares,  in the
event that we forced the conversion of the shares prior to three years after
they were issued.  On January 3, 2008, we forced the conversion of the
Series A convertible preferred stock into common shares.  Accordingly,
we accrued the value of these shares to be distributed as the dividend earned at
December 31, 2007.  For both basic and diluted shares, our loss per
common shares for 2007 was $4.12 compared with a loss in 2006 of
$0.96.




Smart
Balance, Inc. Cash Flows




The
following discussion includes the cash flows of GFA, our wholly-owned
subsidiary, from May 21, 2007 through December 31, 2008.




Year
Ended December 31, 2008 Compared to the Year Ended December 31, 2007 and for the
Year Ended December 31, 2007 Compared to the Year Ended December 31,
2006




Cash
provided from operating activities in 2008 was $19.1 million compared to $0.7
million in 2007.  This increase was largely due to lower working
capital and a full year of operations in 2008 after deducting non-cash charges
for stock based compensation of $14.9 million and derivative losses of $5.1
million.




Cash
provided from operating activities was $0.7 million for the year ended December
31, 2007 compared to cash provided from operating activities of $2.4 million in
the corresponding period in 2006.  For the year ended December 31,
2007, we had a loss of $64.5 million, which included non-cash charges for
derivative losses of $45.5 million, $6.7 million for stock based compensation
expenses and $18.5 million for performance based founders’ shares released from
escrow.  Higher working capital needs in 2007 largely offset the
benefit of these non-cash charges including depreciation and deferred income
taxes.  For the year ended December 31, 2006, the cash flow provided
by operating activities resulted from interest income, which offset operating
expenses.


8


In 2008,
cash used for investing activities of $2.6 million was primarily for the
purchase of software development costs and equipment.  Cash used in
investing activities totaled $388.1 million during the year ended December 31,
2007, which was primarily from our acquisition of GFA of $486.2 million less the
decrease of cash held in trust of $101.1 million.  In 2006, we had a
net use of $2.7 million, which resulted from the purchase of treasury bills in
excess of the proceeds received.




Cash used
for financing activities was $48.7 million in 2008 primarily for the repayment
of debt of $50.0 million related to the acquisition of GFA.  Cash
provided by financing activities was $424.4 million for the year ended December
31, 2007 compared to a use of $0.7 million for 2006.  2007 included
the proceeds from the issuance of our common and preferred stock of $107.5
million and $138.5 million, respectively, and the issuance of debt of $160.0
million, all of which was issued in conjunction with our acquisition of
GFA.  In addition, in December 2007, we received $76.5 million from
the exercise of public warrants, of which approximately $40 million was used to
repay debt.  For 2006, the payment of offering costs accounted for the
use of cash.




GFA
Results of Operations




(in millions)
                      
                      January 1 to
                      
                      
                      Year Ended
                        December 31,May 20, 2007
                      
                      
                      2006Net
      Sales
                      
                      $
                      72.4
                      
                      
                      $
                      158.5Cost
      of Goods Sold
                      
                      
                      32.7
                      
                      
                      
                      69.8Gross
      Profit
                      
                      
                      39.7
                      
                      
                      
                      88.7Operating
      Expenses
                      
                      
                      48.7
                      
                      
                      
                      64.7Operating
      Income (Loss)
                      
                      
                      (9.0
                      )
                      
                      
                      24.0Other
      Income (Expenses)
                      
                      
                      (0.4
                      )
                      
                      
                      (1.5
                      )Income
      (Loss) before Income Taxes
                      
                      
                      (9.4
                      )
                      
                      
                      22.5Provision
      (Benefit) for Income Tax
                      
                      
                      (3.8
                      )
                      
                      
                      9.1Net
      Income (Loss)
                      
                      $
                      (5.6
                      )
                      
                      $
                      13.4





Results
of Operations for the Period From January 1, 2007 to May 20, 2007




Net
revenue for the period from January 1, 2007 to May 20, 2007 was $72.4 million
compared to a full year’s results ended December 31, 2006 of $158.5
million.  Cost of goods sold for the period was $32.7
million.  Gross profit as a percentage of revenues decreased slightly
from 56.0% for the year ended December 31, 2006 to 54.8% for period from January
1, 2007 to May 20, 2007. This decline was due to slightly higher input costs.
Selling, general and administrative expenses (SG&A) were $48.7 million for
the period from January 1, 2007 to May 20, 2007 compared to $64.7 million for
the full year ended December 31, 2006.  As a percent of net
revenue, this represents an increase from 40.8% for the year ended December 31,
2006 to 67.2% for the period from January 1, 2007 to May 20,
2007.  This increase was due entirely to the inclusion of a bonus
accrual of approximately $21.8 million as part of the pending merger with
Boulder Specialty Brands, Inc. on May 21, 2007. Excluding this amount, SG&A
as a percentage of net revenue was 37.2%. Interest expense, which also includes
amortization of deferred financing costs, was $1.0 million for the period
compared with $2.2 million for the full year ended December 31,
2006.  Interest income, dividend and other income totaled $0.5
million, slightly less than the full year results of 2006.  The $9.4
million loss before taxes, resulting tax benefit of $3.8 million and net loss of
$5.6 million for the period primarily reflect the impact of the bonus
accrual.




9





Results
of Operations for the Year Ended December 31, 2006




Net Revenue. Net revenue for
GFA is comprised mainly of revenue from product brands. In addition, GFA
licenses use of some of its patents and derives royalty income. For the year
ended December 31, 2006 net revenue was $158.5 million. For the year ended
December 31, 2006, royalty income amounted to $263,000. GFA’s increased
sales volume was brought about by increased consumer demand for GFA’s core Smart
Balance® Buttery
Spread products and the introduction of new Smart Balance® products
such as peanut butter, popcorn and cooking oil.




Cost of Goods Sold. GFA does
not manufacture any of the products it currently sells. It negotiates the
production of its products with contract manufacturers. Cost of goods sold
includes the cost of the materials the contract manufacturer incurs on GFA’s
behalf and a per unit fee the manufacturer charges GFA for production. For the
year ended December 31, 2006, cost of goods sold was $69.8 million, or
46.2%. The increase was due to higher costs for soy, canola and palm oil, which
are used in the production of GFA’s products.




Selling, General and
Administrative. Selling, general and administrative expenses include
costs for distribution, advertising, transportation, recruiting, training, human
resources, marketing and depreciation. For the year ended December 31,
2006, selling, general and administrative expenses were $64.7 million. Selling,
general and administrative expenses decreased as a percentage of revenue for the
year ended December 31, 2006 to 40.8%. The increase in total expense was
attributable primarily to trade deals and marketing costs, freight and handling
charges and management fees. Increased trade deals and marketing costs resulted
from an increase in spending on coupons and related redemption costs, including
free-standing inserts and in-store promotions. Freight and handling costs
increased due to the growth in sales discussed above and also from the
utilization of additional third party warehouses around the country to better
service customers. The management fee increase was principally due to a
performance bonus recorded in the year ended December 31, 2006 in
accordance with a transitional services agreement.




Interest Expense. For the
year ended December 31, 2006, interest expense was $2.2, though decreasing
to 1.4% of net revenue in the year ended December 31. 2006.




Interest, Dividend and Other
Income. Interest, dividend and other income was $663,700 for the year
ended December 31, 2006. The increase was due to having greater amounts of
cash available for investment combined with higher interest rates on
investments.




Income Taxes. For the year
ended December 31, 2006, income tax expense was $9.1 million. The increase
was primarily the result of higher taxable income.




Net Income. Net income for
the year ended December 31, 2006 was $13.4 million. As described above, net
income growth was driven by increased revenue, which was the result of increased
sales volume. This revenue increase was partially offset by a higher percentage
increase in cost of goods sold and an increase in selling, general and
administrative costs.




GFA
Cash Flows




Cash
Flows  for the Period From January 1, 2007 to May 20,
2007




Cash
provided by operating activities totaled $11.9 million for the period from
January 1, 2007 through May 20, 2007.  This was due to a $21.6
increase in accounts payable and accrued expenses which was entirely
attributable to a merger-related bonus accrual in the amount of $21.8 million,
payable by Boulder Specialty Brands, Inc. as part of the merger agreement. This
more than offset a $5.6 million net loss for the period and a $4.8 million
increase in prepaid expenses which included the tax benefit associated with the
bonus accrual. Trade working capital increased on higher accounts receivable
partially offset by a reduction of inventory levels.





Cash
provided by investing activities of $7.7 million for the period from January 1,
2007 through May 20, 2007 was primarily attributable to proceeds from the sale
of investments of $15.2 million, partially offset by purchases of investments of
$7.5 million.




10




Cash used
in financing activities of $4.7 million for the period from January 1, 2007
through May 20, 2007 resulted from repayment of debt.





Cash
Flows for the Year Ended December 31, 2006




Cash
provided by operating activities totaled $15.9 million for the year ended
December 31, 2006 and was generated by business operations, offset
primarily by an increase in accounts receivable and inventory. The increase in
cash flow from operations was reduced primarily due to the increase of accounts
receivable of $1.7 million and the increase in inventory of $2.2 million for the
year ended December 31, 2006. Sources of cash included $0.7 million for
deferred income taxes, $1.5 million increase in accounts payable and accrued
expenses, and $2.8 million increase in amounts due to related party for the year
ended December 31, 2006.




Cash used
in investing activities totaled $1.2 million for the year ended
December 31, 2006, primarily attributable to the purchase of
investments.




Cash used
in financing activities of $14.0 million for the year ended December 31,
2006 resulted from paying principal on outstanding
indebtedness.




Liquidity
and Capital Resources




Liquidity:




Our
liquidity and capital resource planning is largely dependent on the generation
of operating cash flows, which is highly sensitive to changes in demand and to a
lesser extent, pricing, for our major products. While changes in key operating
costs, such as outsourced production, advertising, promotion and distribution,
may adversely affect cash flows, we generate significant cash flows as demand
for our products grows. Our principal liquidity requirements are to finance
current operations, pay down existing indebtedness and fund future expansion.
Currently, our primary source of liquidity requirements to meet these needs is
cash generated by operations.




We
believe that cash flows generated from operations, existing cash and cash
equivalents, and borrowing capacity under the revolving credit facility should
be sufficient to finance working capital  requirements for our
business for the foreseeable future.  As of December 31, 2008, $20
million was available for borrowing under our revolving credit
facility.  Developing and bringing to market other new brands and
business opportunities may require additional outside funding, which may require
us to seek out additional borrowing arrangements.




Secured
Debt Financing:




In
conjunction with the GFA merger, on May 21, 2007, the Company entered into a
loan arrangement with Banc of America Securities LLC and Bank of America, N.A.
for $180 million in secured debt financing consisting
of:  (1) a $140 million first lien facility comprised of a
$120 million term loan and a $20 million revolver and (2) a
second lien facility comprised of a $40 million term loan. The first lien
facility is secured by a first lien on all of the Company’s assets and the
second lien facility is secured by a second lien on all of the Company’s
assets.  Through December 31, 2008, the Company paid a total of $90.5
million, consisting of $60.5 million in principal on its first lien term loan
and $30.0 million on its second lien debt.  During the third quarter
of 2007, the Company made two quarterly principal payment requirements of
$300,000.  During the fourth quarter of 2007, the Company received
approximately $76.5 million from the redemption of its public
warrants.  The Company used $39.9 million of this amount to prepay the
next eight quarterly principal payment requirements of $300,000 and applied the
balance against principal on the first lien term loan. During the first quarter
of 2008, the Company used $30.0 million of that amount to pay down the second
lien debt. During the third and fourth quarters of 2008, the Company prepaid
$5.0 million and $15.0 million, respectively, of the first lien debt, using
primarily cash flows from operations.  As a result of the prepayments,
the Company wrote off approximately $1,450,000 of deferred financing costs,
which is included in other income, net for the year ended December 31, 2008 and
$1,174,936 for the year ended December 31, 2007.


11


The term
loan of the first lien facility will mature on May 21, 2014 and the revolving
loan under the first lien facility will mature on May 21, 2013. The term loan of
the second lien facility will mature on November 18, 2014.




The
interest rate on the first lien facility is LIBOR plus an applicable margin of
3.25% per annum beginning July 1, 2007.  In accordance with a pricing
grid based on the Company’s leverage ratio, the applicable margin was reduced to
3.00% per annum beginning March 28, 2008, which resulted in an interest rate of
4.47% at December 31, 2008. The  interest rate on the second lien
facility is LIBOR plus an applicable margin of 6.00% per annum, beginning
July 1, 2007, which resulted in an interest rate at December 31, 2008 of
7.47%.




The
Company uses interest rate swaps to effectively manage interest rate exposure by
locking in the variable interest rate on our debt into a fixed rate of
5.05%.  The Company recognizes the mark-to-market movement of the
interest rate swap in income as the rate changes.  Through December
31, 2008, the Company realized a non-cash loss of $5.1 million which represents
the present value of the future quarterly interest payments, through the end of
the swap agreement of September 30, 2010, based on the difference between the
three month LIBOR floating interest at December 31, 2008 and the fixed interest
rate of the debt of 5.05% on $80 million notional amount. At the end of each
quarter, the Company makes or receives quarterly cash payments based on the
actual difference between these two rates. At December 31, 2008, the Company has
opted to let the notional amount of the interest rate swap exceed the amount of
its debt by approximately $10.5 million assuming that the current interest rate
environment would improve allowing the Company to pay off the quarterly swap
requirements on more favorable terms.




There is
no prepayment penalty for optional prepayments (see above) on the first lien
facility and the following penalties for optional prepayments on the second lien
facility: 2.00% premium if prepaid the first year; 1.00% premium if prepaid the
second year; and no prepayment penalty thereafter. As a result of prepaying
$30.0 million of the second lien facility, the Company paid a $0.6 million
prepayment penalty, which is included in interest expense for the year ended
December 31, 2008.  Mandatory prepayments under the first lien
facility include 50% of excess cash flow (as defined in the credit agreement)
and 50% of all net cash proceeds from the issuance of additional equity
interests by us.  After the first lien facility is re-paid in full,
the second lien facility requires mandatory prepayments, which include 50% of
excess cash flow (as defined in the credit agreement) and 50% of all net cash
proceeds from the issuance of additional equity interests by us.  In
addition, the term loan of the first lien facility is subject to quarterly
amortization of principal with 1.00% of the initial aggregate advances under
such loan to be payable in each of the first six years and the remainder of the
initial aggregate advance to be payable in a balloon payment at
maturity.




The first
and second lien credit facilities can be accelerated upon the occurrence of
certain events, including:




·
            nonpayment
      of debt including interest and
fees;




·
            failure
      to perform or observe covenants;




·
            cross
      defaults to other indebtedness exceeding $5.0
  million;




·
            bankruptcy
      and insolvency; and




·
            certain
      other events.




The first
lien credit facility requires that the Company:




·
            maintain
      a ratio of Consolidated EBITDA (as defined in the first lien credit
      facility) to consolidated cash interest charges of at least 3.00 to
      1;




·
            a
      leverage ratio for all Company’s debt which restricts the Company from
      allowing its total debt to be greater than 3.25 times its Consolidated
      EBITDA(as defined in the first lien credit facility), stepping down to
      2.25 to 1 on December 31, 2009; and




12


·
            a
      leverage ratio which restricts the Company from allowing its first lien
      debt to be greater than 2.25 times its Consolidated EBITDA (as defined in
      the first lien credit facility), stepping down to 1.25 to 1 on December
      31, 2009.




The
second lien credit facility contains one financial covenant consisting of a
leverage ratio for all debt which restricts the Company from allowing its total
debt to be greater than 3.75 times its Consolidated EBITDA (as defined in the
second lien credit facility), stepping down to 2.75 to 1 on December 31,
2009.  The Company was in compliance with all of its debt covenants at
December 31, 2008.




Under the
terms of both credit facilities, the Company is precluded from reacquiring its
own shares.




Long term
debt as of December 31, 2008 is as follows:




First
      lien term loan
                  
                  $
                  59,504,174Second
      lien term loan
                  
                  
                  10,000,000Total
      Debt:
                  
                  
                  69,504,174Less:
      Current maturities
                  
                  
                  -Total
      long term debt
                  
                  $
                  69,504,174




The
Company is required to pay the following amounts in each of the next four
years:




2009
                  
                  $
                  -2010
                  
                  
                  -2011
                  
                  
                  -2012
                  
                  
                  157,421Thereafter
                  
                  
                  69,346,753Total
                  
                  $
                  69,504,174




Contractual
Obligations




The
following table summarizes contractual obligations and borrowings as of
December 31, 2008 and the timing and effect that such commitments are
expected to have on our liquidity and capital requirements in future
periods.  We expect to fund other commitments primarily with operating
cash flows generated in the normal course of business.




Contractual
Obligations




Total
              
              
              Due in less
                than 1 year
              
              
              Due
                1-3 years
              
              
              Due
                3-5 years
              
              
              More than
                5 yearsBuilding
      Leases(1)
              
              $
              3,695,786
              
              
              $
              559,349
              
              
              $
              1,275,800
              
              
              $
              1,132,476
              
              
              $
              728,161Oil
      and Peanuts Purchase Commitments(2)
              
              
              38,621,982
              
              
              
              38,621,982
              
              
              
              —
              
              
              
              —
              
              
              
              —Debt
      Obligations(3)
              
              
              69,504,174
              
              
              
              —
              
              
              
              —
              
              
              
              787,092
              
              
              
              68,717,082$
              111,821,942
              
              
              $
              39,181,331
              
              
              $
              1,275,800
              
              
              $
              1,919,568
              
              
              $
              69,445,243





(1)Includes: (i) a lease
agreement for the lease of a corporate office facility located in Paramus, NJ
with an approximate seven year life with the option to extend the lease for two
additional five year terms, and (ii) three lease agreements for the lease of a
corporate office facility located in Niwot, Colorado with an approximate five
year life with the option to extend each lease for 36 months.


13




(2)Forward purchase commitments for a portion of the Company’s projected
requirement for peanuts and for palm, soy and canola oil.  These
commitments may be stated at a firm price, or as a discount or premium from a
future commodity market price.  Based on the most recent prices the
Company realized, these commitments would total approximately $38.6 million as
of December 31, 2008.  The commitments are expected to be liquidated
by September 30, 2009.




(3)For more information on
our debt obligations, see the section entitled “Secured Debt Financing” located
elsewhere in this report.




Off
Balance Sheet Arrangements




We do not
have off-balance sheet arrangements, financings, or other relationships with
unconsolidated entities or other persons, also known as “variable interest
entities.”




Supply,
Availability and General Risk Conditions




We
contract for significant amounts of soy, palm and canola oil products to support
the needs of our brands. The price and availability of these commodities
directly impacts our results of operations and can be expected to impact our
future results of operations. In addition, we contract for the manufacture of
our products with several contract manufacturers. Two contract manufacturers
produce nearly all of our Smart Balance® buttery
spreads products.  Each of those manufacturers produce approximately
one-half of the total production and one uses multiple facilities to service the
required volume.  We are dependent on these manufacturers for the
necessary production capacity in order for us to meet our customer
demands.




Seasonality
and Quarterly Results




Our
business is subject to seasonal fluctuations. Historically, significant portions
of  net revenue and profits were, and may continue to be realized
during the fourth quarter of our fiscal year, reflecting the holiday baking and
cooking season in which several of our products are utilized.  In
addition, there are increased sales of these products during the Easter holiday
season.  Because of the seasonality of our business, results for any
quarter are not necessarily indicative of the results that may be achieved for
the full fiscal year.




Critical
Accounting Policies




Revenue
Recognition




Revenue
is recognized when the earnings process is complete and the risks and rewards of
ownership have transferred to the customer, which is generally considered to
have occurred upon the receipt of product by the customer. The earnings process
is complete once the customer order has been placed and approved and the product
shipped has been received by the customer. Product is sold to customers on
credit terms established on an individual basis. The credit factors used include
historical performance, current economic conditions and the nature and volume of
the product. The Company offers its customers a variety of sales and incentive
programs, including discounts, allowances, coupons, slotting fees, and co-op
advertising; such amounts are estimated and recorded as a reduction in revenue.
The Company sells their products to customers without the right of return and is
not obligated to accept any returns, and has historically not accepted
returns.




Goodwill




Goodwill
is tested annually for impairment or more frequently if events or changes in
circumstances indicate that impairment may have occurred. The impairment
analysis for goodwill included a comparison of our carrying value (including
goodwill) to our estimated fair value. If the fair value does not exceed its
carrying value, then an additional analysis is performed to allocate the fair
value to all assets and liabilities as if it had been acquired in a business
combination and the fair value was its purchase price. If the excess of the fair
value of our identifiable assets and liabilities is less than the carrying value
of recorded goodwill, an impairment charge is recorded for the
difference.  We completed our impairment analysis at June 30, 2008
with estimated fair value greater than the carrying value of the recorded
goodwill.  At December 31, 2008, management reviewed the Company’s
fair value compared with its carrying value and does not believe there are any
indications of impairment, and thus, we have not recorded an impairment of
goodwill.  This review was required since during the second half of
2008 the Company’s market capitalization periodically fell below book
value.


14


Other
intangibles




Other
intangibles are comprised of both definite and indefinite life intangible assets
which are not amortized but are tested annually for impairment, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. In assessing the recoverability of indefinite life intangible
assets, we will make assumptions about the estimated future cash flows and other
factors to determine the fair value of these assets.




An
intangible asset is determined to have an indefinite useful life when there are
no legal, regulatory, contractual, competitive, and economic or any other
factors that may limit the period over which the asset is expected to contribute
directly or indirectly to our future cash flows. In each reporting period, we
will also evaluate the remaining useful life of an intangible asset that is not
being amortized to determine whether events and circumstances continue to
support an indefinite useful life. If an intangible asset that is not being
amortized is determined to have a finite useful life, the asset will be
amortized prospectively over the estimated remaining useful life and accounted
for in the same manner as intangible assets subject to
amortization.




We have
determined that our Smart Balance® and
Earth Balance®
trademarks have an indefinite life and these assets are not being amortized. We
believe that these trademarks, collectively, will contribute indefinitely to the
cash flows of the Company. Certain
other assets acquired, primarily patent technology, have been determined to have
definite lives ranging from 10 to 20 years and their costs are being amortized
over their expected lives.




We will
generally expense legal and related costs incurred in defending or protecting
our intellectual property unless we can demonstrate that such costs added
economic value to the business enterprise in which case the Company will
capitalize such costs as part of intangible assets. The primary consideration in
making this determination is whether or not we can legally demonstrate that it
has been successful in defending itself against such intellectual property
challenges. The second consideration for capitalization will be that such costs
have, in fact, increased the economic value of our intellectual property. Legal
defense costs which don’t meet the above criteria will be expensed as incurred.
Recovery of legal defense costs as part of a settlement agreement will be
recorded as a reduction of capitalized legal costs with any excess recorded in
income.




Income
Taxes




Deferred
income taxes are provided for the differences between the basis of assets and
liabilities for financial reporting and income tax purposes.




In
January 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109, which provides
criteria for the recognition, measurement, presentation and disclosure of
uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits. The adoption of FIN 48 did not have a material
effect on the company’s results of operations or financial
condition.




Interest
Rate Swaps




We use
interest rate swaps to cover exposure to changes in interest
rates.  We recognize changes in the fair value of interest rate swaps
in earnings in the period when the change occurs.




Forward
Purchase Commitments




We enter
into forward purchase commitments of projected commodity requirements needed to
produce our finished goods.  These commitments are stated at a firm
price, or as a discount or premium from a future commodity price and are placed
with our manufacturers.


15


Accounting
for Warrants – Derivative Liability




On
December 21, 2005, we consummated our offering of 12,760,840 units. Each
unit consists of one share of common stock and one redeemable common stock
purchase warrant. Each warrant entitled the holder to purchase from the Company
one share of its common stock at an exercise price of $6.00. In addition,
certain initial shareholders of the Company purchased 1,000,000 warrants for
$1.70 per warrant with an exercise price of $6.00 per share.




It was
determined that the public warrants were derivative liabilities under the
guidance of EITF 00-19 “Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock,” as these warrants could
potentially require net cash settlement.  The public warrants began
trading separately from the units in January 2006. Consequently, the fair value
of these warrants was estimated at the market price of a warrant at each period
end. To the extent that the market price increased or decreased, our derivative
liabilities also increased or decreased, with a corresponding effect on the
Company’s consolidated statement of operations.  The net change in the
valuation from December 31, 2006 through the redemption date of $45.6
million was recorded as a non-operating loss.  When the public
warrants were exercised, we removed the total derivative liability by
reclassifying it to additional paid in capital.




In early
October 2007, we notified the warrant holders that the public warrants would be
redeemed, effective December 3, 2007 unless exercised.  Almost all of
the public warrants were exercised with the Company receiving approximately
$76.5 million of cash, which was used to pay down approximately $40 million of
debt.




Acquisitions




We have
accounted for the GFA acquisition using the purchase method of
accounting.  Under the purchase method, our consolidated financial
statements reflect the operations of GFA starting from the date of the
acquisition, May 21, 2007.  In addition, the assets acquired and
liabilities assumed were recorded at the date of acquisition at their respective
estimated fair values, with any excess of the purchase price over the estimated
fair values of the net assets acquired recorded as goodwill.




Significant
judgment is required in estimating the fair value of intangible assets and in
assigning their respective useful lives.  Accordingly, we obtained the
assistance of third-party valuation specialists for significant
terms.  The fair value estimates are based on available historical
information and on future expectations and assumptions deemed reasonable by
management, but are inherently uncertain.




We
typically use an income method to estimate the fair value of intangible assets,
which is based on forecasts of the expected future cash flows attributable to
the respective assets.  Significant estimates and assumptions inherent
in the valuations reflect a consideration of other marketplace participants, and
include the amount and timing of future cash flows (including expected growth
rates and profitability), the underlying product life cycles, economic barriers
to entry, a brand’s relative market position and the discount rate applied to
the cash flows.  Unanticipated market or macroeconomic events and
circumstances may occur, which could affect the accuracy or validity of the
estimates and assumptions.




Share-Based
Compensation Expense




In
conjunction with the acquisition of GFA on May 21, 2007, we adopted SFAS 123(R)
which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options based on estimated fair values.  For 2008, employee
share-based compensation expense was $14.9 million.




Recently
Issued Accounting Pronouncements




In June
2008, the Emerging Issues Tax Force (“EITF”) issued EITF 07-5 “Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock.”  This EITF, which will become effective in the first quarter
of 2009, will require that a company which has an instrument that is determined
to be a derivative under this guidance to take an initial charge as an
adjustment to opening retained earnings and thereafter reflect any adjustment in
the market price through the income statement.  The Company has made
the determination that the adoption of EITF 07-5 will not have an impact on the
Company.


16


In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosure about Derivative
Instruments and Hedging Activities,” an amendment of FASB No. 133, “Accounting
for Derivative Instruments and Hedging Activities.”  SFAS No. 161
requires increased qualitative, quantitative and credit risk disclosures, but
does not change the scope or accounting requirements of FASB No.
133.  SFAS No. 161 is effective for financial statements issued and
interim periods beginning after November 15, 2008.  The Company is
evaluating the impact of this amendment.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”), which replaces FASB Statement No.
141.  SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired, and establishes that acquisition costs will
be generally expensed as incurred.  This statement also establishes
disclosure requirements which will enable users to evaluate the nature and
financial effects of the business combination.  SFAS 141R is effective
as of the beginning of an entity’s fiscal year that begins after December 15,
2008.  The adoption of SFAS 141R will not have an impact on the
Company’s financial statements.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statement—amendments of ARB No. 51.”  SFAS No.
160 states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity.  The SFAS No. 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners.  This statement is effective as of the beginning of an
entity’s first fiscal year beginning after December 15, 2008.  The
adoption of SFAS No. 160 will not have an impact on the Company’s financial
statements.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement
No. 115.”  SFAS No. 159 provides for an election to expand
the use of fair value accounting but does not affect existing standards which
require assets or liabilities to be carried at fair value. Under SFAS No. 159, a
company may elect to use fair value to measure accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity method investments,
accounts payable, guarantees and issued debt. Other eligible items include firm
commitments for financial instruments that otherwise would not be recognized at
inception and non-cash warranty obligations where a warrantor is permitted to
pay a third party to provide the warranty goods or services. If the use of fair
value is elected, any upfront costs and fees related to the item must be
recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair
value election is irrevocable and generally made on an instrument-by-instrument
basis, even if a company has similar instruments that it elects not to measure
based on fair value. At the adoption date, unrealized gains and losses on
existing items for which fair value has been elected are reported as a
cumulative adjustment to beginning retained earnings. Subsequent to the adoption
of SFAS No. 159, changes in fair value are recognized in earnings. SFAS No. 159
is effective for fiscal years beginning after November 15,
2007.  The Company has elected to adopt SFAS No. 159 on an
instrument-by-instrument basis effective January 1, 2008.




Item
      9A.
            Controls
      and Procedures




Conclusion regarding the
effectiveness of disclosure controls and procedures. Our management, with
the participation of our Chief Executive Officer and Principal Financial and
Accounting Officers, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2008. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Principal Executive Officer and Principal Financial and Accounting
Officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on management’s evaluation of our disclosure controls and procedures as of
December 31, 2008, our Chief Executive Officer and Principal Financial and
Accounting Officers concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.


17




Internal Control Over Financial
Reporting.  Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f). Under the supervision and with the
participation of our management, including our chief executive officer, chief
operating officer and chief financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework in Internal Control - Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2008.




Ehrhardt
Keefe Steiner & Hottman PC, an independent registered public accounting
firm, has audited the consolidated financial statements included in this annual
report on Form 10-K and, as part of their audit, has issued a report, included
herein, on the effectiveness of our internal control over financial
reporting.




Our
system of internal control over financial reporting was designed to provide
reasonable assurance regarding the preparation and fair presentation of
published financial statements in accordance with accounting principles
generally accepted in the United States. All internal control systems, no mater
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance and may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Changes
in Internal Control Over Financial Reporting




During
the fiscal quarter ended December 31, 2008, there was no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


18


PART
IV




Item
      15.
            Exhibits;
      Financial Statement Schedules




(a)
            Financial Statements
      and Financial Statement
Schedules.




The
following financial statements are presented at the end of this
report:




·
            Smart
      Balance’s financial statements for the years ended December 31, 2008, 2007
      and 2006, together with the report of Ehrhardt Keefe Steiner &
      Hottman PC;




·
            GFA’s
      financial statements for the period from January 1, 2007 to May 20, 2007,
      together with the report of Ehrhardt Keefe Steiner & Hottman PC;
      and




·
            GFA’s
      financial statements for the year ended December 31, 2006, together with
      the report of McGladrey & Pullen,
LLP.




(b)
            Exhibits.




Exhibit
                                                            No.
                                                          
                                                          Description2.1.1
                                                          
                                                          Agreement
      and Plan of Merger by and among Boulder Specialty Brands, Inc., BSB
      Acquisition Co., Inc., GFA Holdings, Inc., and Stockholders’
      Representative dated as of September 25, 200612.1.2
                                                          
                                                          Letter
      Agreement dated as of February 15, 2007 between Boulder Specialty Brands,
      Inc., TSG4, L.P. (as shareholders’ representative), GFA Holdings, Inc.,
      and BSB Acquisition Co., Inc. to amend the Merger Agreement34.1
                                                          
                                                          Restated
      Certificate of Incorporation of Smart Balance, Inc.54.2
                                                          
                                                          Bylaws
      of Smart Balance, Inc.210.1
                                                          
                                                          Promissory
      Note, dated June 21, 2005, issued to Stephen B. Hughes210.2
                                                          
                                                          Promissory
      Note, dated June 21, 2005, issued to James E. Lewis210.3
                                                          
                                                          Form
      of Registration Rights Agreement among Boulder Specialty Brands, Inc. and
      the Initial Stockholders210.4
                                                          
                                                          Form
      of Founding Director Warrant Purchase Agreement among Boulder Specialty
      Brands, Inc., Messrs. Stephen B. Hughes and James E. Lewis, certain
      Directors of Boulder Specialty Brands, Inc. and a Senior Advisor2*10.5
                                                          
                                                          Form
      of Indemnity Agreement between Boulder Specialty Brands, Inc. and each of
      its directors and executive officers2*10.6
                                                          
                                                          Form
      of Non-Compete Agreement between Boulder Specialty Brands, Inc. and each
      of its officers and directors2*10.7
                                                          
                                                          Promissory
      Note dated February 15, 2007 executed by Boulder Specialty Brands, Inc. in
      favor of Stephen B. Hughes310.8
                                                          
                                                          Securities
      Purchase Agreement between Boulder Specialty Brands, Inc. and certain
      investors dated as of September 25, 2006110.9
                                                          
                                                          Letter
      Agreement dated as of February 15, 2007 between Boulder Specialty Brands,
      Inc. and certain investors to amend the Purchase Agreement310.10
                                                          
                                                          First
      Lien Credit Agreement dated as of May 21, 2007 among BSB Acquisition
      Co., Inc., as borrower, Boulder Specialty Brands, Inc., as holdings, Bank
      of America, N.A., as administrative agent, Swing Line Lender and L/C
      Issuer, and the other lenders party thereto and Banc of America Securities
      LLC, as sole lead arranger and sole book manager5




19




Exhibit
                                              No.
                                            
                                            Description10.11
                                            
                                            Second
      Lien Credit Agreement dated as of May 21, 2007 among BSB Acquisition
      Co., Inc., as borrower, Boulder Specialty Brands, Inc., as holdings, Bank
      of America, N.A., as administrative agent, and the other lenders party
      thereto and Banc of America Securities LLC, as sole lead arranger and sole
      book manager510.12
                                            
                                            Form
      of Registration Rights Agreement between Boulder Specialty Brands, Inc.
      and certain investors210.13
                                            
                                            Smart
      Balance, Inc. Stock and Awards Plan4*10.14
                                            
                                            Processing
      and Packaging Agreement dated as of January 7, 2003, by and between GFA
      Brands, Inc. and Creative Foods LLC510.15
                                            
                                            License
      Agreement dated as of June 18, 1996, by and between Brandeis University
      and GFA Brands, Inc.510.16
                                            
                                            Manufacturing
      Agreement for Margarine and Spreads dated March 2, 2007 by and between GFA
      Brands, Inc. and Ventura Foods, LLC510.17
                                            
                                            Form
      of Stock Option Award Agreement5*10.18
                                            
                                            Form
      of Change of Control Agreement5*10.19
                                            
                                            Amended
      and Restated Smart Balance, Inc. Inducement Award Plan610.20
                                            
                                            Amended
      Form of Stock Option Agreement7*10.21
                                            
                                            Amended
      Form of Change of Control Agreement7*18.1
                                            
                                            Preferability
      Letter from Independent Public Accountants821.1
                                            
                                            Subsidiaries23.1
                                            
                                            Consent
      of Ehrhardt Keefe Steiner & Hottman PC923.2
                                            
                                            Consent
      of Ehrhardt Keefe Steiner & Hottman PC23.3
                                            
                                            Consent
      of McGladrey & Pullen, LLP31.1
                                            
                                            Certification
      of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a)
      and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
                                            
                                            Certification
      of Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a)
      and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
                                            
                                            Certification
      of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
                                            
                                            Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002





1
                  Incorporated
      by reference to our current report on Form 8-K, filed with the SEC on
      September 27,
2007.




2
                    Incorporated
      by reference to our registration statement on Form S-1 or amendments
      thereto (File
No. 333-126364).




3
                  Incorporated
      by reference to our current report on Form 8-K, filed with the SEC on
      February 16,
2007.




4
                Incorporated
      by reference to our Definitive Proxy Statement filed with the SEC on April
      27, 2007.




5
                Incorporated
      by reference to our current report on Form 8-K filed with the SEC on May
      25, 2007.


20




6
              Incorporated
      by reference to our registration statement on Form S-8 or amendments
      thereto (File No.
333-156338).




7
              Incorporated
      by reference to our current report on Form 8-K filed with the SEC on
      November 6, 2008.




8
              Incorporated
      by reference to our quarterly report on Form 10-Q filed with the SEC on
      May 9, 2008.




9
              Incorporated
      by reference to our annual report on Form 10-K filed with the SEC on
      February 27, 2009.




*
                  Management
      remuneration
contract.




21




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on this 29th day of July,
2009.





SMART
      BALANCE, INC.By:
            /s/Stephen B. HughesStephen
      B. HughesChairman
      and Chief Executive Officer




22


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




PageSmart
      Balance, Inc. and SubsidiaryReport
      of Independent Registered Public Accounting Firm
                  F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  F-3Consolidated
      Statement of Operations for the years ended December 31, 2008, 2007 and
      2006
                  F-4Consolidated
      Statement of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
                  F-5Statement
      of Changes in Stockholders’ Equity for the years ended December 31, 2008,
      2007 and 2006
                  F-7Notes
      to Consolidated Financial Statements
                  F-8GFA
      Holdings, Inc. and SubsidiaryReport
      of Independent Registered Public Accounting Firm
                  F-26Report
      of Independent Auditor
                  F-27Consolidated
      Balance Sheets as of May 20, 2007 and December 31, 2006
                  F-28Consolidated
      Statements of Income for the period from January 1, 2007 to May 20, 2007
      and the year ended December 31, 2006
                  F-29Consolidated
      Statement of Cash Flows for the period from January 1, 2007 through May
      20, 2007 and the year ended December 31, 2006
                  F-30Statement
      of Changes in Stockholders’ Equity for the for the period from January 1,
      2007 through May 20, 2007 and the year ended December 31,
    2006
                  F-31Notes
      to Consolidated Financial Statements
                  F-32




F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board
of Directors and Stockholders


Smart
Balance, Inc:




We have
audited the accompanying consolidated balance sheets of Smart Balance, Inc and
subsidiary as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the
three years in the period ended December 31, 2008.   We also have
audited the Company’s internal control over financial reporting based on
criteria established inInternal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO Criteria”). 
The Company’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying management’s report.  Our responsibility is to
express an opinion on these financial statements and the effectiveness of the
Company’s internal control over financial reporting based on our
audits.




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




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




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




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Smart Balance Inc, and
subsidiary as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.  Also in our opinion, Smart
Balance Inc, and subsidiary maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008 based on
the COSO Criteria.





/s/Ehrhardt Keefe
      Steiner & Hottman PCDenver,
      ColoradoFebruary
      27, 2009




F-2




SMART
BALANCE, INC. AND SUBSIDIARY


Consolidated Balance Sheets





December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007AssetsCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      5,492,330
                      
                      
                      $
                      37,648,754Accounts
      receivable, net of allowance of: 2008 - $256,100 and 2007 -
      $228,871
                      
                      
                      14,282,956
                      
                      
                      
                      11,733,117Accounts
      receivable – other
                      
                      
                      691,823
                      
                      
                      
                      799,470Inventories
                      
                      
                      9,322,093
                      
                      
                      
                      7,202,198Prepaid
      taxes
                      
                      
                      708,828
                      
                      
                      
                      6,517,833Prepaid
      expenses and other assets
                      
                      
                      1,018,927
                      
                      
                      
                      1,454,866Deferred
      tax asset
                      
                      
                      650,100
                      
                      
                      
                      1,079,509Total
      current assets
                      
                      
                      32,167,057
                      
                      
                      
                      66,435,747Property
      and equipment, net
                      
                      
                      4,300,642
                      
                      
                      
                      1,805,331Other
      assets:Goodwill
                      
                      
                      374,885,923
                      
                      
                      
                      374,885,923Intangible
      assets, net
                      
                      
                      155,223,243
                      
                      
                      
                      159,645,634Deferred
      costs, net
                      
                      
                      1,737,220
                      
                      
                      
                      3,519,412Other
      assets
                      
                      
                      221,516
                      
                      
                      
                      74,975Total
      other assets
                      
                      
                      532,067,902
                      
                      
                      
                      538,125,944Total
      assets
                      
                      $
                      568,535,601
                      
                      
                      $
                      606,367,022Liabilities
      and Stockholders' EquityCurrent
      liabilitiesAccounts
      payable and accrued expenses
                      
                      $
                      24,937,236
                      
                      
                      $
                      20,355,419Income
      taxes payable
                      
                      
                      1,080,466
                      
                      
                      
                      1,035,149Total
      current liabilities
                      
                      
                      26,017,702
                      
                      
                      
                      21,390,568Long
      term debt
                      
                      
                      69,504,174
                      
                      
                      
                      119,504,174Derivative
      liability
                      
                      
                      5,132,231
                      
                      
                      
                      -Deferred
      tax liability
                      
                      
                      46,268,286
                      
                      
                      
                      53,293,528Other
      liabilities
                      
                      
                      161,711
                      
                      
                      
                      -Total
      liabilities
                      
                      
                      147,084,104
                      
                      
                      
                      194,188,270Commitment
      and contingenciesStockholders'
      equitySeries
      A Convertible Preferred stock, $.0001 par value, 50,000,000 shares
      authorized; 15,388,889 issued and outstanding, liquidation preference,
      $175,659,013(converted
      on January 3, 2008)
                      
                      
                      -
                      
                      
                      
                      175,659,013Common
      stock, $.0001 par value, 250,000,000 shares authorized; 62,630,683 (2008)
      and 43,113,863 (2007) issued and outstanding
                      
                      
                      6,263
                      
                      
                      
                      4,311Additional
      paid in capital
                      
                      
                      507,377,418
                      
                      
                      
                      315,479,759Retained
      deficit
                      
                      
                      (85,932,184
                      )
                      
                      
                      (78,964,331
                      )Total
      stockholders' equity
                      
                      
                      421,451,497
                      
                      
                      
                      412,178,752Total
      liabilities and stockholders' equity
                      
                      $
                      568,535,601
                      
                      
                      $
                      606,367,022




See
accompanying notes to the consolidated financial statements


F-3


SMART
BALANCE, INC. AND SUBSIDIARY
 Consolidated
Statements of Operations
 
 Year ended
                              December 31, 2008
                            
                            
                            Year ended
                              December 31, 2007
                            
                            
                            Year ended
                              December 31, 2006Net
      sales
                            
                            $
                            221,871,912
                            
                            
                            $
                            111,038,295
                            
                            
                            $
                            -Cost
      of goods sold
                            
                            
                            126,903,498
                            
                            
                            
                            58,715,013
                            
                            
                            
                            -Gross
      profit
                            
                            
                            94,968,414
                            
                            
                            
                            52,323,282
                            
                            
                            
                            -Operating
      expenses:Marketing
                            
                            
                            33,286,061
                            
                            
                            
                            15,118,184
                            
                            
                            
                            -Selling
                            
                            
                            17,671,462
                            
                            
                            
                            12,268,066
                            
                            
                            
                            -General
      and administrative
                            
                            
                            38,317,244
                            
                            
                            
                            17,931,109
                            
                            
                            
                            -Performance
      based shares releasedfrom
      escrow
                            
                            
                            -
                            
                            
                            
                            18,455,815
                            
                            
                            
                            -Formation
      and operating costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,924,602Total
      operating expenses
                            
                            
                            89,274,767
                            
                            
                            
                            63,773,174
                            
                            
                            
                            1,924,602Operating
      Income (loss)
                            
                            
                            5,693,647
                            
                            
                            
                            (11,449,892
                            )
                            
                            
                            (1,924,602
                            )Other
      income (expense):Interest
      income
                            
                            
                            291,949
                            
                            
                            
                            2,449,614
                            
                            
                            
                            4,220,026Interest
      expense
                            
                            
                            (9,049,019
                            )
                            
                            
                            (9,677,881
                            )
                            
                            
                            -Loss
      on derivative liability
                            
                            
                            (5,132,231
                            )
                            
                            
                            (45,556,199
                            )
                            
                            
                            (15,266,445
                            )Other
      expense, net
                            
                            
                            (2,335,752
                            )
                            
                            
                            (1,019,607
                            )
                            
                            
                            -Total
      other income (expense)
                            
                            
                            (16,225,053
                            )
                            
                            
                            (53,804,073
                            )
                            
                            
                            (11,046,419
                            )Loss
      before income taxes
                            
                            
                            (10,531,406
                            )
                            
                            
                            (65,253,965
                            )
                            
                            
                            (12,971,021
                            )(Benefit)
      provision for income taxes
                            
                            
                            (3,563,553
                            )
                            
                            
                            (705,897
                            )
                            
                            
                            808,140Net
      loss
                            
                            $
                            (6,967,853
                            )
                            
                            $
                            (64,548,068
                            )
                            
                            $
                            (13,779,161
                            )Less:
      Unpaid dividends on convertiblepreferred
      stock
                            
                            $
                            -
                            
                            
                            $
                            37,159,011
                            
                            
                            $
                            -Net
      loss available for common shares
                            
                            $
                            (6,967,853
                            )
                            
                            $
                            (101,707,079
                            )
                            
                            $
                            (13,779,161
                            )Net
      loss per share - basic and diluted
                            
                            $
                            (0.11
                            )
                            
                            $
                            (4.12
                            )
                            
                            $
                            (0.96
                            )Weighted
      average shares outstanding -basic
      and diluted
                            
                            
                            62,523,742
                            
                            
                            
                            24,667,344
                            
                            
                            
                            14,355,945
  See
accompanying notes to the consolidated financial statements
  F-4
  SMART
BALANCE, INC. AND SUBSIDIARY
 Consolidated
Statements of Cash Flows
  Year ended
                    December 31, 2008
                  
                  
                  Year ended
                    December 31, 2007
                  
                  
                  Year ended
                    December 31, 2006Cash
      flows from operating activitiesNet
      (loss)
                  
                  $
                  (6,967,853
                  )
                  
                  $
                  (64,548,068
                  )
                  
                  $
                  (13,779,161
                  )Adjustments
      to reconcile net (loss) to net cashprovided
      by operating activities:Depreciation
      and amortization
                  
                  
                  6,279,127
                  
                  
                  
                  4,023,543
                  
                  
                  
                  -Deferred
      income taxes
                  
                  
                  (6,595,836
                  )
                  
                  
                  (2,767,763
                  )
                  
                  
                  (555,283
                  )Accrued
      interest receivable in trust
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (117,840
                  )Stock
      based compensation
                  
                  
                  14,895,940
                  
                  
                  
                  6,689,477
                  
                  
                  
                  -Performance
      based shares released from escrow
                  
                  
                  -
                  
                  
                  
                  18,455,815
                  
                  
                  
                  -Increase
      in derivative liabilities
                  
                  
                  5,132,231
                  
                  
                  
                  45,556,199
                  
                  
                  
                  15,266,445Deferred
      interest income
                  
                  
                  -
                  
                  
                  
                  (432,623
                  )
                  
                  
                  432,623Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  (2,549,839
                  )
                  
                  
                  (619,994
                  )
                  
                  
                  -Inventories
                  
                  
                  (2,119,895
                  )
                  
                  
                  (2,417,075
                  )
                  
                  
                  -Prepaid
      expenses and other current assets
                  
                  
                  6,352,591
                  
                  
                  
                  (3,071,788
                  )
                  
                  
                  (1,237
                  )Accounts
      payable and accrued expenses
                  
                  
                  4,642,305
                  
                  
                  
                  (151,162
                  )
                  
                  
                  1,173,673Net
      cash provided by (used in) operating activities
                  
                  
                  19,068,771
                  
                  
                  
                  716,561
                  
                  
                  
                  2,419,220Cash
      flows from investing activitiesPurchase
      of GFA
                  
                  
                  -
                  
                  
                  
                  (486,228,418
                  )
                  
                  
                  -Purchase
      of property and equipment
                  
                  
                  (2,920,405
                  )
                  
                  
                  (1,744,002
                  )
                  
                  
                  -Purchase
      of intangible assets
                  
                  
                  -
                  
                  
                  
                  (1,152,483
                  )
                  
                  
                  -Capitalization/recovery
      of legal fees
                  
                  
                  350,552
                  
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from maturity of treasury bills – held in trust
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  698,691,157Purchase
      of treasury bills – held in trust
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (701,408,491
                  )(Increase)
      decrease in cash held in trust
                  
                  
                  -
                  
                  
                  
                  101,073,611
                  
                  
                  
                  (1,519
                  )Net
      cash (used in) investing activities
                  
                  
                  (2,569,853
                  )
                  
                  
                  (388,051,292
                  )
                  
                  
                  (2,718,853
                  )Cash
      flows from financing activitiesProceeds
      from issuance of long term debt
                  
                  
                  -
                  
                  
                  
                  160,000,000
                  
                  
                  
                  -Repayment
      of debt
                  
                  
                  (50,000,000
                  )
                  
                  
                  (40,495,826
                  )
                  
                  
                  -Proceeds
      from issuance of common stock
                  
                  
                  -
                  
                  
                  
                  107,500,002
                  
                  
                  
                  -Proceeds
      from issuance of preferred stock
                  
                  
                  -
                  
                  
                  
                  138,500,001
                  
                  
                  
                  -Proceeds
      from sale of warrants
                  
                  
                  -
                  
                  
                  
                  76,515,668
                  
                  
                  
                  -Payments
      for offering and loan costs
                  
                  
                  -
                  
                  
                  
                  (17,399,226
                  )
                  
                  
                  (811,441
                  )Proceeds
      from (repayment of) advances from stockholders
                  
                  
                  -
                  
                  
                  
                  (206,276
                  )
                  
                  
                  131,607Proceeds
      from stock-related legal settlement
                  
                  
                  1,344,658
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      cash provided by (used in) financing activities
                  
                  
                  (48,655,342
                  )
                  
                  
                  424,414,343
                  
                  
                  
                  (679,834
                  )Net
      increase (decrease) in cash for the period
                  
                  
                  (32,156,424
                  )
                  
                  
                  37,079,612
                  
                  
                  
                  (979,467
                  )Cash
      – Beginning of period
                  
                  
                  37,648,754
                  
                  
                  
                  569,142
                  
                  
                  
                  1,548,609Cash
      – End of period
                  
                  $
                  5,492,330
                  
                  
                  $
                  37,648,754
                  
                  
                  $
                  569,142
  See
accompanying notes to the consolidated financial statements
  F-5
  Year ended
                    December 31, 2008
                  
                  
                  Year ended
                    December 31, 2007
                  
                  
                  Year ended
                    December 31, 2006Supplemental
      disclosure of cash flow information:Accrual
      of deferred acquisition costs
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  3,163,628Accrued
      dividend on Series A preferred stock
                  
                  $
                  -
                  
                  
                  $
                  37,159,011
                  
                  
                  $
                  -Cash
      paid during the year for:Income
      taxes, net of refunds
                  
                  $
                  (2,031,678
                  )
                  
                  $
                  4,583,244
                  
                  
                  $
                  1,020,000Interest
                  
                  $
                  8,112,461
                  
                  
                  $
                  9,214,891
                  
                  
                  $
                  -
  See
accompanying notes to the consolidated financial statements
  F-6
  SMART
BALANCE, INC. AND SUBSIDIARY
 Statement
of Changes in Stockholders’ Equity
 For
the years ended December 31, 2008, 2007 and 2006
  Preferred
      Stock
                        
                        
                        Common
      StockShares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Additional
                          Paid
      in
                          Capital
                        
                        
                        Retained
                          Deficit
                        
                        
                        Stockholders’
                          EquityBalance
      at December 31, 2005
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        15,951,050
                        
                        
                        $
                        1,595
                        
                        
                        $
                        59,746,819
                        
                        
                        $
                        (637,102
                        )
                        
                        $
                        59,111,312Issuance
      costs
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (4,847
                        )
                        
                        
                        
                        
                        
                        
                        (4,847
                        )Net
      loss for the year
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (13,779,161
                        )
                        
                        
                        (13,779,161
                        )Balance
      at December 31, 2006
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        15,951,050
                        
                        
                        
                        1,595
                        
                        
                        
                        59,741,972
                        
                        
                        
                        (14,416,263
                        )
                        
                        
                        45,327,304Issuance
      of Series A convertible preferred
      shares
                        
                        
                        15,388,899
                        
                        
                        
                        138,500,002
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        138,500,002Issuance
      of common stock
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        14,410,188
                        
                        
                        
                        1,441
                        
                        
                        
                        107,498,561
                        
                        
                        
                        
                        
                        
                        
                        107,500,002Proceeds
      from public warrants
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        12,752,625
                        
                        
                        
                        1,275
                        
                        
                        
                        76,514,393
                        
                        
                        
                        
                        
                        
                        
                        76,515,668Stock
      compensation expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        6,689,477
                        
                        
                        
                        
                        
                        
                        
                        6,689,477Conversion
      of common stockheld
      in escrow
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        19,661,116
                        
                        
                        
                        
                        
                        
                        
                        19,661,116Equity
      issuance costs
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (13,763,685
                        )
                        
                        
                        
                        
                        
                        
                        (13,763,685
                        )Performance
      based sharesreleased
      from escrow
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        18,455,815
                        
                        
                        
                        
                        
                        
                        
                        18,455,815Reclassification
      of derivativeliability
      on warrants toequity
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        77,841,121
                        
                        
                        
                        
                        
                        
                        
                        77,841,121Accrued
      dividend on convertible preferred
      stock
                        
                        
                        
                        
                        
                        
                        37,159,011
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (37,159,011
                        )
                        
                        
                        
                        
                        
                        
                        -Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (64,548,068
                        )
                        
                        
                        (64,548,068
                        )Balance
      at December 31, 2007
                        
                        
                        15,388,899
                        
                        
                        
                        175,659,013
                        
                        
                        
                        43,113,863
                        
                        
                        
                        4,311
                        
                        
                        
                        315,479,759
                        
                        
                        
                        (78,964,331
                        )
                        
                        
                        412,178,752Conversion
      of preferred stock
                        
                        
                        (15,388,899
                        )
                        
                        
                        (175,659,013
                        )
                        
                        
                        19,516,820
                        
                        
                        
                        1,952
                        
                        
                        
                        175,657,061
                        
                        
                        
                        
                        
                        
                        
                        -Stock
      compensation expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        14,895,940
                        
                        
                        
                        
                        
                        
                        
                        14,895,940Legal
      settlement, net of tax
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,344,658
                        
                        
                        
                        
                        
                        
                        
                        1,344,658Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (6,967,853
                        )
                        
                        
                        (6,967,853
                        )Balance
      at December 31, 2008
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        62,630,683
                        
                        
                        $
                        6,263
                        
                        
                        $
                        507,377,418
                        
                        
                        $
                        (85,932,184
                        )
                        
                        $
                        421,451,497
  See
accompanying notes to the consolidated financial statements
  F-7
  SMART
BALANCE, INC. AND SUBSIDIARY
  Notes
to Consolidated Financial Statements
  1.
              General
  On
May 21, 2007, Smart Balance, Inc. (formerly known as Boulder Specialty
Brands, Inc. or “Boulder”), completed a merger pursuant to an Agreement and Plan
of Merger dated September 25, 2006, as extended by a letter agreement dated
as of February 15, 2007, between Boulder and GFA Holdings, Inc. (“GFA
Holdings”), the sole stockholder of GFA Brands, Inc. (“GFA Brands”) (on May 21,
2007, GFA Holdings was merged into GFA Brands, the surviving company is referred
to herein as “GFA”). Pursuant to the merger agreement, a wholly-owned Delaware
subsidiary of Boulder merged with and into GFA, and GFA became a wholly-owned
subsidiary of Boulder.
  Immediately
following the merger, Boulder changed its name to Smart Balance, Inc. All
references to Smart Balance, Inc. (or the “Company”) herein include the
predecessor company Boulder.
  Basis
of presentation
  The
consolidated financial statements included herein reflect the acquisition of GFA
on May 21, 2007, with results of operations included from that date and the
estimated fair value of the net assets of GFA included on May 21, 2007 (see note
2).  Prior
to May 21, 2007, the Company was a blank check company with no operating
activities, whose sole purpose was to serve as a vehicle for an acquisition in
the consumer foods or beverage industry.  The Company was capitalized
through an initial public offering on December 21, 2005, which raised
approximately $96 million. Of this amount, approximately 96% was placed in a
trust account until an acquisition was completed or until the Company was
liquidated, as required by its charter.
  2.
              Merger with
      GFA
  On May
21, 2007, the Company, as part of the merger agreement, acquired 100% of the
stock of GFA Holdings, Inc., the parent company of GFA Brands,
Inc.  GFA Brands, Inc. sells and markets consumer foods products
(primarily dairy products) under the Smart Balance® and Earth Balance® brand
names to regional and national grocery stores. Concurrent with this acquisition,
the Company changed its name to Smart Balance, Inc. The cost of the acquisition
was approximately $491 million.  Prior to the merger, the Company was
a blank check company whose sole purpose was to acquire a consumer foods or
beverage company.  After analyzing several alternative opportunities,
the Company acquired GFA Brands, Inc. because of its leading brand name
products.
  Under the
GFA merger agreement, stockholders of GFA Holdings were paid an aggregate of
$491.4 million in cash which included the assumption of post-closing bonus
payments, net of tax benefits. The acquisition cost was paid with:
(i) $101.1 million of cash held in a trust account established in
connection with the Company’s initial public offering; (ii) the net
proceeds of a private placement (see note 16) of $246.0 million
($107.5 million for common stock and $138.5 million for the Series A convertible
preferred stock together with the investor warrants); and (iii) proceeds
from a secured debt financing (see note 7) of $160.0 million.
  The
purchase price consists of the following:
  Cash
      purchase price (excluding bonus assumption)
                              
                              $
                              466,802,920Acquisition
      costs
                              
                              
                              9,640,806Total
      purchase price
                              
                              $
                              476,443,726
  F-8
  The
Company’s purchase price allocation, subject to final adjustment, for the net
ass ets
acquired is as follows:
  Cash
                          
                          $
                          16,675,065Accounts
      receivable
                          
                          
                          11,362,725Inventories
                          
                          
                          4,657,010Prepaid
      assets
                          
                          
                          5,153,157Other
      assets
                          
                          
                          160,599Intangible
      assets
                          
                          
                          161,000,000Goodwill
                          
                          
                          374,885,923Total
      assets
                          
                          
                          573,894,479Accounts
      payable, accrued expenses and other liabilities
                          
                          
                          40,163,743Deferred
      taxes and other
                          
                          
                          57,287,010Total
      liabilities assumed
                          
                          
                          97,450,753Net
      assets acquired
                          
                          $
                          476,443,726
  The
weighted average amortization period is approximately 10.2 years.  The
Company recognized approximately $56.8 million of deferred tax liabilities at
the date of the acquisition of GFA, which amount represents the difference
between the assigned values and tax bases of recognized assets acquired and
liabilities assumed. The Company did not carry over any deferred tax liabilities
from GFA.
  Selected
Unaudited Pro Forma Financial Information
  The
unaudited pro forma financial information in the table below summarizes the
combined results of operations of the Company for the years ended December 31,
2007 and 2006, as though the GFA merger had occurred as of the beginning of each
applicable fiscal year. Net sales reflect the reclassification of certain trade
and consumer promotion expenditures that had previously been classified as
selling, general and administrative expenses.  The unaudited pro forma
financial information is presented for informational purposes only and is not
indicative of the results of operations that would have been achieved if the
merger had taken place at the beginning of the period presented, or that may
result in the future.
  
 Year Ended
                      December 31, 2007
                      Pro forma
                      (unaudited)
                    
                    
                    Year Ended
                      December 31, 2006
                      Pro forma
                      (unaudited)Net
      sales
                    
                    $
                    175,562,021
                    
                    
                    $
                    137,404,155Operating
      income (loss)
                    
                    
                    (853,895
                    )
                    
                    
                    16,654,428Net
      (loss)
                    
                    
                    (57,940,049
                    )
                    
                    
                    (16,807,668
                    )Less:
      Unpaid dividends on cumulative preferred shares
                    
                    
                    37,159,011
                    
                    
                    
                    37,159,011Net
      (loss) available for EPS
                    
                    
                    (95,099,060
                    )
                    
                    
                    (53,966,679
                    )(Loss)
      per share
                    
                    $
                    (3.15
                    )
                    
                    $
                    (1.88
                    )Weighted
      average shares outstanding
                    
                    
                    30,194,539
                    
                    
                    
                    28,766,133
  3.
              Summary of Significant
      Accounting Policies
  Cash
and cash equivalents
  The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.  At December 31, 2008 and
2007, the Company did not have any cash equivalents.
  F-9
  Accounts
receivable
  Accounts
receivable are carried at original invoice amount less allowances for cash
discounts and doubtful receivables based on a review of all outstanding amounts.
Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer’s
financial condition, credit history and current economic conditions. Accounts
receivable are written off when deemed uncollectible. Bad debt expense was not
material to the Company for the years ended December 31, 2008 and 2007,
Recoveries of receivables previously written off are recorded when received. The
Company does not charge interest on past due receivables.
  Inventories
  Inventories
are stated at the lower of cost (first-in, first-out) or market and consist
primarily of finished goods.
  Property
and equipment
  Property
and equipment are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets ranging from 5 to 10 years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life of the
improvement.  The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long-lived assets may warrant revision, or that the remaining balance of these
assets may not be recoverable.  When deemed necessary, the Company
completes this evaluation by comparing the carrying amount of the assets against
the estimated undiscounted future cash flows associated with them.  If such
evaluations indicate that the future undiscounted cash flows of amortizable
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their estimated fair
values.
  Goodwill
  Goodwill
is tested annually for impairment or more frequently if events or changes in
circumstances indicate that impairment may have occurred. The impairment
analysis for goodwill included a comparison of the Company’s carrying value
(including goodwill) to the Company’s estimated fair value. If the fair value of
the Company does not exceed its carrying value, then an additional analysis is
performed to allocate the fair value to all assets and liabilities as if it had
been acquired in a business combination and the fair value was its purchase
price. If the excess of the fair value of the Company over the fair value of its
identifiable assets and liabilities is less than the carrying value of recorded
goodwill, an impairment charge is recorded for the difference.  The
Company completed an impairment analysis at June 30, 2008 with estimated fair
value greater than the carrying value of the recorded goodwill.  At
December 31, 2008, management reviewed the Company’s fair value compared with
its carrying value and does not believe there are any indications of impairment,
and thus, the Company has not recorded an impairment of
goodwill.  This review was required since during the second half of
2008 the Company’s market capitalization periodically fell below book
value.
  Intangible
assets
  Other
intangibles are comprised of both definite and indefinite life intangible
assets. Indefinite life intangible assets are not amortized but are tested
annually for impairment, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. In assessing the
recoverability of indefinite life intangible assets, the Company must make
assumptions about the estimated future cash flows and other factors to determine
the fair value of these assets.
  An
intangible asset is determined to have an indefinite useful life when there are
no legal, regulatory, contractual, competitive, economic or any other factors
that may limit the period over which the asset is expected to contribute
directly or indirectly to the future cash flows of the Company. In each
reporting period, the Company also evaluates the remaining useful life of an
intangible asset that is not being amortized to determine whether events and
circumstances continue to support an indefinite useful life. If an intangible
asset that is not being amortized is determined to have a finite useful life,
the asset will be amortized prospectively over the estimated remaining useful
life and accounted for in the same manner as intangible assets subject to
amortization.
  F-10
  The
Company has determined that its Smart Balance® and
Earth Balance®
trademarks have an indefinite life and accordingly these assets are not being
amortized.  Certain other assets acquired, primarily patent
technology, have been determined to have definite lives ranging from 10 to 20
years and their costs are being amortized over their expected
lives.
  The
Company generally expenses legal and related costs incurred in defending or
protecting its intellectual property unless it can be established that such
costs have added economic value to the business enterprise, in which case the
Company capitalizes the costs incurred as part of intangible
assets.  The primary consideration in making the determination of
whether to capitalize the costs is whether the Company can prove that it has
been successful in defending itself against such intellectual property
challenges.  The second consideration for capitalization is whether
such costs have, in fact, increased the economic value of the Company’s
intellectual property.  Legal defense costs that do not meet the
considerations described above will be expensed as incurred.  Recovery
of legal expenses as part of a settlement agreement will be recorded as a
reduction of capitalized legal fees with any excess recorded as
income.  During 2007, the Company capitalized approximately $1.2
million of legal defense costs.  These costs related to a challenge to
the use of the Smart Balance trademark for new product lines which the Company
successfully defended.  The successful defense should expand the
Company’s potential profitability.
  Shipping
and handling costs
  Shipping
and handling costs to external customers  for 2008 and from May 21,
2007 (inception) to December 31, 2007 was approximately $12,772,518 and
$7,051,434, respectively, and was included in selling expense.  On a
pro forma basis, shipping and handling cost for the years ended December 31,
2007 and 2006 were $11,197,782 and $9,390,087, respectively.
  Deferred
costs
  Costs
related to the acquisition of GFA were deferred through the date of acquisition
and then capitalized as part of purchase price. These costs included,
principally, accounting fees, legal fees and other fees, which were allocated to
the purchase price; private placement fees and deferred offering costs. Deferred
offering costs related to the private placement were recorded as a reduction of
equity upon the completion of the merger transaction. Deferred loan costs
associated with the secured debt financing are being amortized over the life of
debt, using the effective interest method.
  Revenue
recognition
  Revenue
is recognized when the earnings process is complete and the risks and rewards of
ownership have transferred to the customer, which is generally considered to
have occurred upon the receipt of product by the customer. The earnings process
is complete once the customer order has been placed and approved and the product
shipped has been received by the customer. Product is sold to customers on
credit terms established on an individual basis. The credit factors used include
historical performance, current economic conditions and the nature and volume of
the product. The Company offers its customers a variety of sales and incentive
programs, including discounts, allowances, coupons, slotting fees, and co-op
advertising; such amounts are estimated and recorded as a reduction in revenue.
The Company sells their products to customers without the right of return and is
not obligated to accept any returns, and has historically not accepted
returns.  For interim reporting, the Company estimates certain annual
sales incentives and marketing costs for most programs and records a pro rata
share in proportion to forecasted annual revenue.  The difference
between the actual costs incurred to date and the amount deferred is shown as a
prepaid asset.
  Warrants
– derivative liability
  Common
Stock Units:
  On
December 21, 2005, the Company consummated its initial public offering of
12,760,840 units. Each unit consists of one share of common stock and one
redeemable common stock purchase warrant (which we refer to as public warrants).
Each public warrant entitled the holder to purchase from the Company one share
of its common stock at an exercise price of $6.00. In addition, certain initial
shareholders of the Company purchased 1,000,000 warrants for $1.70 per warrant
with an exercise price of $6.00 per share, which we refer to as the founding
director warrants.
  F-11
  Emerging
Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”), requires freestanding contracts that are settled in a company’s own
stock, including common stock warrants, to be designated as an equity
instrument, asset or a liability. Under the provisions of Statement of Financial
Accounting Standard No. 133 (“SFAS No. 133”), “Accounting for
Derivative Instruments and Hedging Activities,” as amended, a contract
designated as an asset or a liability must be carried at fair value on a
company’s balance sheet, with any changes in fair value recorded in the
company’s results of operations. A contract designated as an equity instrument
must be included within equity, and no fair value adjustments are required from
period to period. In accordance with EITF 00-19, the 12,760,840 public warrants
were separately accounted for as liabilities and the 1,000,000 founding director
warrants are accounted for as equity.
  SFAS
No. 133 requires all derivatives to be recorded on the balance sheet at
fair value. Furthermore, paragraph 11 (a) of SFAS No. 133 precludes
contracts issued or held by a reporting entity that are both (1) indexed to
its own stock and (2) classified as stockholders’ equity in its statement
of financial position from being treated as derivative instruments. While the
public warrants are indexed to the Company’s common stock, the fact that the
shares underlying the warrants require that they are settled in registered
shares requires the Company to classify these instruments as a liability in
accordance with EITF 00-19 paragraph 14. This derivative liability is adjusted
to fair value, and any changes are recorded as non-operating gains or
losses.
  The
public warrants began trading separately from the units in January 2006.
Consequently, the fair value of these warrants was estimated at the market price
of a warrant at each period end. To the extent that the market price increased
or decreased, the Company’s derivative liabilities also increased or decreased,
with a corresponding effect on the Company’s consolidated statement of
operations. The net change in the valuation from December 31, 2006 through
the redemption date of $45.6 million was recorded as a non-operating
loss.
  On
October 31, 2007, the Company called for redemption of all of its
outstanding public warrants to purchase common stock for $.01 per
warrant.  Under the terms of the warrant agreement, the holders of the
warrants had thirty days to exercise the warrants once called. Each public
warrant entitled the holder to purchase one share of common stock of the Company
at a price of $6.00 per public warrant share exercised. The majority of the
public warrants were exercised by early December.  The fair value of
these warrants on the date the redemption was announced was $6.10 per warrant
which resulted in a decrease in the derivative liability from September 30, 2007
of $4,976,728 with a corresponding effect on the Company’s consolidated
statement of operations. The remaining balance of $77,841,121 reclassified from
derivative liability to additional paid in capital.
  Series
A Convertible Preferred Stock:
  In
connection with the acquisition of GFA, the Company entered into a private
placement transaction for common stock and Series A convertible preferred stock
together with investor warrants, pursuant to a Securities Purchase Agreement
dated September 25, 2006, as amended by letter agreement, dated February 15,
2007.  The Agreement included 14,410,188 of shares of common stock and
15,388,889 of Series A convertible preferred stock along with an equal number of
investor warrants (the "Series A Warrants"). The Series A Warrants were
determined to have a de minimis value as the Company has assessed the
probability very low that the warrants would ever be exercisable.  The
net proceeds of approximately $246 million received by the Company were used to
fund a portion of the acquisition costs of GFA.
  The
Company has made a determination under the guidance of EITF 00-19 that the
conversion feature and the anti-dilution rights were not derivatives and
therefore no fair value measurement was required.
  The
Company forced the conversion of the Series A convertible preferred stock into
common stock, on January 3, 2008.  As a result of this conversion, the
Series A warrants are no longer exercisable.
  F-12
  Loss
per share of common stock
  Basic
earnings (loss) per share is computed by dividing net income or loss applicable
to common stockholders by the weighted-average shares of common stock
outstanding for the period.  Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted-average shares
outstanding adjusted for any additional common shares that would have been
outstanding if all of the potential dilutive common shares had been
issued.  Potential dilutive common shares outstanding would include
primarily stock options and founders’ warrants.  The following table
summarizes stock options not included in the computation of diluted
EPS:
  Year Ended December 31,2008
                  
                  
                  2007Stock
      options excluded due to option price being greater than market
      value
                  
                  
                  11,327,000
                  
                  
                  
                  485,000Stock
      options excluded due to anti-dilution
                  
                  
                  717,500
                  
                  
                  
                  8,312,500Founding
      director warrants excluded due to anti-dilution
                  
                  
                  1,000,000
                  
                  
                  
                  1,000,000
  Segments
  SFAS 131,
“Disclosures about Segments of an Enterprise and Related Information” requires
segment information to be prepared using the “management”
approach.  The management approach is based on the method that
management organizes the segments within the Company for making operating
decisions and assessing performance.  The Company evaluates all
products, makes operating decisions and performance assessments based on a total
company approach and therefore considers itself as having only one
segment.  The Company’s buttery spreads business, marketed under
Smart Balance®,
Earth Balance®,
SmartBeat® and
Nucoa®, is by
far the most developed product segment and accounted for approximately 75% of
2008 sales.
  Fair
value of financial instruments
  The
Company’s financial instruments consist of cash and cash equivalents, short term
trade receivables, payables and note payables.  The carrying value of
cash and cash equivalents and short term receivables and payables approximate
fair value because of their short maturities.   The Company’s
note payable is determined by quoted market prices that are reset every three
months and, therefore, approximates fair value.  At December 31, 2008,
the Company used the income approach to determine the fair value of the interest
rate swap utilizing the present value techniques and recorded $5,132,231 as a
non-current liability with an increase to interest expense. The fair value
measurement used to determine this amount was based on SFAS 157, “Fair Value
Measurements”, which requires a three-tier fair value hierarchy that prioritizes
inputs to measure fair value. These tiers include: Level 1, defined as inputs,
such as unadjusted quoted prices in an active market for identical assets or
liabilities; Level 2, defined as inputs other than quoted market prices in
active markets that are either directly or indirectly observable; or Level 3,
defined as unobservable inputs for use when little or no market value exists
therefore requiring an entity to develop its own assumptions. The Company used
Level 2 inputs to measure fair value at December 31, 2008.
  Research
and development
  Research
and development expenses are charged to the Consolidated Statement of Operations
when incurred and amounted to $255,697 for 2008 and $64,385 from May 21, 2007
(inception) to December 31, 2007.  On a pro forma basis, research and
development expenses for the years ended December 31, 2007 and 2006, were
$93,822 and $85,075, respectively.
  Derivative
Instruments
  The
primary risks managed by derivative instruments are exposure to changes in
 interest rate. The Company accounts for its derivative instruments under
the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. SFAS No. 133 requires the
recognition of all derivative instruments as either assets or liabilities in the
Consolidated Balance Sheet at fair value.
  F-13
  In
accordance with SFAS No. 133, on the date on which the Company enters into a
derivative, it is determined whether or not to designate the derivative as a
hedge. The Company currently has one interest rate swap outstanding that is not
designated as a hedge, and thus, recognizes the change in fair value through
earnings currently. Although the interest rate swap is not considered a hedge
under the guidance of SFAS 133, they are believed to be hedges of the underlying
economic exposure. The change in fair value is included in interest expense on
the consolidated statement of operations.
  Income
taxes
  Deferred
income taxes are provided for the differences between the basis of assets and
liabilities for financial reporting and income tax purposes. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized. As of December 31, 2008, no valuation allowances
were recorded.  For the years ended December 31, 2008, 2007 and 2006,
the effective tax rate was higher than the statutory tax rate primarily due to
the effect of the change in derivative liabilities since such losses are not
deductible for income tax purposes.
  In
January 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109, which provides
criteria for the recognition, measurement, presentation and disclosure of
uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits.
  Advertising
  Advertising
costs are charged to operations (selling, general and administrative expenses)
when incurred and amounted to $21,518,960 for 2008 and $12,063,028 for the
period from May 21, 2007 (inception) to December 31, 2007.  On a pro
forma basis, advertising costs for the years ended December 31, 2007 and 2006
were $22,009,890 and $20,499,312, respectively.
  Use
of estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
  Concentration
of credit risk
  Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash, cash equivalents, short term investments and
trade receivables.  The Company maintains the majority of its cash and
cash equivalents in the form of demand deposits with financial institutions that
management believes are creditworthy.  At December 31, 2008, the cash
balances in these institutions exceeded federally insured
amounts.  Concentrations of credit risk relative to trade receivables
are limited due to our diverse client base.  The Company does have one
customer that accounted for approximately 20% of sales for 2008.  The
aggregate accounts receivable from this customer amounted to approximately 16%
of the accounts receivable balance outstanding at December 31,
2008.  The Company also has one product cateogory, “spreads” which
accounts for 75% of total revenue and 73% of its revenues came from a license
from Brandeis University.
  Recently
issued accounting pronouncements
  In June
2008, the Emerging Issues Tax Force (“EITF”) issued EITF 07-5 “Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock.”  This EITF, which will become effective in the first quarter
of 2009 will require that a company which has an instrument that is determined
to be a derivative under this guidance to take an initial charge as an
adjustment to opening retained earnings and thereafter reflect any adjustment in
the market price through the income statement.  The Company has made
the determination that the adoption of  EITF 07-5 will not have an
impact on the Company.
  F-14
  In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosure about Derivative
Instruments and Hedging Activities,” an amendment of FASB No. 133, “Accounting
for Derivative Instruments and Hedging Activities.”  SFAS No. 161
requires increased qualitative, quantitative and credit risk disclosures, but
does not change the scope or accounting requirements of FASB No.
133.  SFAS No. 161 is effective for financial statements issued and
interim periods beginning after November 15, 2008.  The Company is
evaluating the impact of this amendment.
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”), which replaces FASB Statement No.
141.  SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired, and establishes that acquisition costs will
be generally expensed as incurred.  This statement also establishes
disclosure requirements which will enable users to evaluate the nature and
financial effects of the business combination.  SFAS 141R is effective
as of the beginning of an entity’s fiscal year that begins after December 15,
2008.  The adoption of SFAS 141R will not have an impact on the
Company’s financial statements.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statement—amendments of ARB No. 51.”  SFAS No.
160 states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity.  SFAS No. 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners.  This statement is effective as of the beginning of an
entity’s first fiscal year beginning after December 15, 2008.  The
adoption of SFAS No. 160 will not have an impact on the Company’s financial
statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement
No. 115.”  SFAS No. 159 provides for an election to expand
the use of fair value accounting but does not affect existing standards which
require assets or liabilities to be carried at fair value. Under SFAS No. 159, a
company may elect to use fair value to measure accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity method investments,
accounts payable, guarantees and issued debt. Other eligible items include firm
commitments for financial instruments that otherwise would not be recognized at
inception and non-cash warranty obligations where a warrantor is permitted to
pay a third party to provide the warranty goods or services. If the use of fair
value is elected, any upfront costs and fees related to the item must be
recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair
value election is irrevocable and generally made on an instrument-by-instrument
basis, even if a company has similar instruments that it elects not to measure
based on fair value. At the adoption date, unrealized gains and losses on
existing items for which fair value has been elected are reported as a
cumulative adjustment to beginning retained earnings. Subsequent to the adoption
of SFAS No. 159, changes in fair value are recognized in earnings. SFAS No. 159
is effective for fiscal years beginning after November 15,
2007.  The Company has elected to adopt SFAS No. 159 on an
instrument-by-instrument basis effective January 1, 2008.
  4.
              Property and
      Equipment
  Property
and equipment consist of the following:
  December 31, 2008
                    
                    
                    December 31, 2007Software
      development costs
                    
                    $
                    3,197,872
                    
                    
                    $
                    701,249Equipment
                    
                    
                    394,089
                    
                    
                    
                    227,473Furniture
      and fixtures
                    
                    
                    849,471
                    
                    
                    
                    653,933Leasehold
      improvements
                    
                    
                    331,873
                    
                    
                    
                    270,245Gross
      assets
                    
                    
                    4,773,305
                    
                    
                    
                    1,852,900Less:
      Accumulated depreciation
                    
                    
                    (472,663
                    )
                    
                    
                    (47,569
                    )Property
      and equipment, net
                    
                    $
                    4,300,642
                    
                    
                    $
                    1,805,331
  F-15
  Depreciation
expense for the years ended December 31, 2008 and December 31, 2007 were
$425,094  and $47,569, respectively.
  5.
              Intangible
      Assets
  The
following is a summary of intangible assets and goodwill as of December 31,
2008 and 2007:
  Gross
      Carrying
                        Amount
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      Adjustments
                      
                      
                      Net
      Carrying
                        ValuePatent
      technology
                      
                      $
                      40,000,000
                      
                      
                      $
                      6,465,753
                      
                      
                      $
                      -
                      
                      
                      $
                      33,534,247Supply
      relationship
                      
                      
                      1,000,000
                      
                      
                      
                      112,935
                      
                      
                      
                      -
                      
                      
                      
                      887,065Trademarks
                      
                      
                      121,152,483
                      
                      
                      
                      -
                      
                      
                      
                      (350,552
                      )
                      
                      
                      120,801,931Goodwill
                      
                      
                      374,885,923
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      374,885,923December
      31, 2008
                      
                      $
                      537,038,406
                      
                      
                      $
                      6,578,688
                      
                      
                      $
                      (350,552
                      )
                      
                      $
                      530,109,166
 
 GrossCarrying
                        Amount
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      Adjustments
                      
                      
                      Net
      Carrying
                        ValuePatent
      technology
                      
                      $
                      40,000,000
                      
                      
                      $
                      2,465,753
                      
                      
                      $
                      -
                      
                      
                      $
                      37,534,247Supply
      relationship
                      
                      
                      1,000,000
                      
                      
                      
                      41,096
                      
                      
                      
                      -
                      
                      
                      
                      958,904Trademarks
                      
                      
                      121,152,483
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      121,152,483Goodwill
                      
                      
                      374,885,923
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      374,885,923December
      31, 2007
                      
                      $
                      537,038,406
                      
                      
                      $
                      2,506,849
                      
                      
                      $
                      -
                      
                      
                      $
                      534,531,557
  Adjustments
to trademarks relate to a legal settlement received of $367,215 and serve to
reduce related costs previously capitalized.  Additional spending of
$16,663 during the period accounted for the difference.  The
amortization expense for the next five years is approximately $4.1 million in
each year.
  6.
              Accounts Payable and
      Accrued Expenses
  Accounts
payable and accrued expenses consist of the following:
  December 31, 2008
                        
                        
                        December 31, 2007Accounts
      payable
                        
                        $
                        16,971,060
                        
                        
                        $
                        17,866,526Accrued
      expenses
                        
                        
                        7,966,176
                        
                        
                        
                        2,488,893Total
                        
                        $
                        24,937,236
                        
                        
                        $
                        20,355,419
  7.
              Long Term
      Debt
  In
conjunction with the GFA merger, on May 21, 2007, the Company entered into a
loan arrangement with Banc of America Securities LLC and Bank of America, N.A.
for $180 million in secured debt financing consisting
of:  (1) a $140 million first lien facility comprised of a
$120 million term loan and a $20 million revolver and (2) a
second lien facility comprised of a $40 million term loan. The first lien
facility is secured by a first lien on all of the Company’s assets and the
second lien facility is secured by a second lien on all of the Company’s
assets.  Through December 31, 2008, the Company paid a total of $90.5
million, consisting of $60.5 million in principal on its first lien term loan
and $30.0 million on its second lien debt.  During the third quarter
of 2007, the Company made two quarterly principal payment requirements of
$300,000.  During the fourth quarter of 2007, the Company received
approximately $76.5 million from the redemption of its public warrants (see note
3).  The Company used $39.9 million of this amount to prepay the next
eight quarterly principal payment requirements of $300,000 and applied the
balance against principal on the first lien term loan. During the first quarter
of 2008, the Company used $30.0 million of that amount to pay down the second
lien debt. During the third and fourth quarters of 2008, the Company prepaid
$5.0 million and $15.0 million, respectively, of the first lien debt, using
primarily cash flows from operations.  As a result of the prepayments,
the Company wrote off approximately $1,450,000 of deferred financing costs,
which is included in other income, net for the year ended December 31, 2008 and
$1,174,936 for the year ended December 31, 2007.
  F-16
  The term
loan of the first lien facility will mature on May 21, 2014 and the revolving
loan under the first lien facility will mature on May 21, 2013. The term loan of
the second lien facility will mature on November 18, 2014.
  The
interest rate on the first lien facility is LIBOR plus an applicable margin of
3.25% per annum beginning July 1, 2007.  In accordance with a pricing
grid based on the Company’s leverage ratio, the applicable margin was reduced to
3.00% per annum beginning March 28, 2008, which resulted in an interest rate of
4.47% at December 31, 2008. The  interest rate on the second lien
facility is LIBOR plus an applicable margin of 6.00% per annum, beginning
July 1, 2007, which resulted in an interest rate at December 31, 2008 of
7.47%.
  The
Company uses interest rate swaps to effectively manage interest rate exposure by
locking in the variable interest rate on our debt into a fixed rate of
5.05%.  The Company recognizes the mark-to-market movement of the
interest rate swap in income as the rate changes.  Through December
31, 2008, the Company realized a non-cash loss of $5.1 million which represents
the present value of the future quarterly interest payments, through the end of
the swap agreement of September 30, 2010, based on the difference between the
three month LIBOR floating interest at December 31, 2008 and the fixed interest
rate of the debt of 5.05% on $80 million notional amount. At the end of each
quarter, the Company makes or receives quarterly cash payments based on the
actual difference between these two rates. At December 31, 2008, the Company has
opted to let the notional amount of the interest rate swap exceed the amount of
its debt by approximately $10.5 million assuming that the current interest rate
environment would improve allowing the Company to pay off the quarterly swap
requirements on more favorable terms.
  There is
no prepayment penalty for optional prepayments (see above) on the first lien
facility and the following penalties for optional prepayments on the second lien
facility: 2.00% premium if prepaid the first year; 1.00% premium if prepaid the
second year; and no prepayment penalty thereafter. As a result of prepaying
$30.0 million of the second lien facility, the Company paid a $0.6 million
prepayment penalty, which is included in interest expense for the year ended
December 31, 2008.  Mandatory prepayments under the first lien
facility include 50% of excess cash flow (as defined in the credit agreement)
and 50% of all net cash proceeds from the issuance of additional equity
interests by us.  After the first lien facility is re-paid in full,
the second lien facility requires mandatory prepayments, which include 50% of
excess cash flow (as defined in the credit agreement) and 50% of all net cash
proceeds from the issuance of additional equity interests by us.  In
addition, the term loan of the first lien facility is subject to quarterly
amortization of principal with 1.00% of the initial aggregate advances under
such loan to be payable in each of the first six years and the remainder of the
initial aggregate advance to be payable in a balloon payment at
maturity.
  The first
and second lien credit facilities can be accelerated upon the occurrence of
certain events, including:
  ·
              nonpayment
      of debt including interest and
fees;
  ·
              failure
      to perform or observe covenants;
  ·
              cross
      defaults to other indebtedness exceeding $5.0
  million;
  ·
              bankruptcy
      and insolvency; and
  ·
              certain
      other events.
  F-17




The first
lien credit facility requires that the Company:




·
            maintain
      a ratio of Consolidated EBITDA (as defined in the first lien credit
      facility) to consolidated cash interest charges of at least 3.00 to
      1;




·
            a
      leverage ratio for all Company’s debt which restricts the Company from
      allowing its total debt to be greater than 3.25 times its Consolidated
      EBITDA(as defined in the first lien credit facility), stepping down to
      2.25 to 1 on December 31, 2009; and




·
            a
      leverage ratio which restricts the Company from allowing its first lien
      debt to be greater than 2.25 times its Consolidated EBITDA (as defined in
      the first lien credit facility), stepping down to 1.25 to 1 on December
      31, 2009.




The
second lien credit facility contains one financial covenant consisting of a
leverage ratio for all debt which restricts the Company from allowing its total
debt to be greater than 3.75 times its Consolidated EBITDA (as defined in the
second lien credit facility), stepping down to 2.75 to 1 on December 31,
2009.  The Company was in compliance with all of its debt covenants at
December 31, 2008.




Under the
terms of both credit facilities, the Company is precluded from reacquiring its
own shares.




Long term
debt as of December 31, 2008 is as follows:




First
      lien term loan
                  
                  $
                  59,504,174Second
      lien term loan
                  
                  
                  10,000,000Total
      Debt:
                  
                  
                  69,504,174Less:
      Current maturities
                  
                  
                  -Total
      long term debt
                  
                  $
                  69,504,174





The
Company is required to pay the following amounts in each of the next four
years:




2009
                    
                    $
                    -2010
                    
                    
                    -2011
                    
                    
                    -2012
                    
                    
                    157,421Thereafter
                    
                    $
                    69,346,753Total
                    
                    
                    69,504,174




8.
            Stock-Based
      Compensation




On
October 19, 2006, the compensation committee of the board of directors
unanimously approved the Company’s Stock and Awards Plan, which we refer to as
the stock plan, and directed it be submitted to the stock holders for
approval.  During a special stockholders meeting on May 17, 2007, the
stock plan was approved, pursuant to which the Company reserved up to 9,650,000
shares of common stock for issuance to its officers, directors, employees and
consultants. On May 21, 2008, the Company, after a shareholder meeting and vote,
amended the stock plan to increase the number of shares available for award to a
total of 12,150,000.  During 2007, the Company granted options to
purchase 8,797,500 shares of stock under the stock plan.  During the
twelve months ended December 31, 2008, the Company granted options to purchase
2,062,500 shares of stock under the stock plan.




During
the first quarter of 2008, the compensation committee and sub-committee of the
compensation committee approved the issuance of up to 1,375,000 inducement stock
options grants to new employees outside of the Company’s stock plan pursuant to
NASDAQ Marketplace Rule 4350.  During the twelve months ended December
31, 2008, the Company issued all of the 1,375,000 inducement grant stock options
to new employees.


F-18


The
Company has two types of stock options, traditional service-based with a four
year graded (25% vest each year) vesting and market condition-based stock
options which vest when the underlying stock prices reaches either $16.75 and
$20.25, respectively, and remains there for 20 out of 30 consecutive trading
days. Stock options are granted to recipients at exercise prices equal to the
fair market value of the Company’s stock at the dates of grant and can consist
solely of the service-based options or market conditions-based options or a can
consist of a combination of both types of options.  Stock options
granted to employees have a term of 10 years.  The Company recognizes
stock-based compensation expense over the requisite service period of the
individual grants, which generally equals the vesting period, or as determined
by the  Monte Carlo valuation model.





Number of
                          Outstanding
                          Shares
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price
                        
                        
                        Weighted
                          Average
                          Remaining
                          Life (years)Shares
      at December 31, 2006
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      granted
                        
                        
                        8,797,500
                        
                        
                        $
                        9.88
                        
                        
                        
                        7.79Options
      exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      canceled/forfeited
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Shares
      at December 31, 2007
                        
                        
                        8,797,500
                        
                        
                        
                        9.88
                        
                        
                        
                        7.79Options
      granted
                        
                        
                        3,437,500
                        
                        
                        
                        8.39
                        
                        
                        
                        7.65Options
      exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      canceled/forfeited
                        
                        
                        (190,000
                        )
                        
                        
                        10.03
                        
                        
                        
                        7.45Shares
      at December 31, 2008
                        
                        
                        12,045,000
                        
                        
                        $
                        9.47
                        
                        
                        
                        7.03




The
Company accounts for its stock-based compensation awards under SFAS No. 123R,
Share-Based
Payment,which requires
companies to recognize compensation expense for all equity-based compensation
awards issued to employees that are expected to vest. Compensation cost is based
on the fair value of awards as of the grant date.




Pre-tax
stock-based compensation expense included in reported net income is as
follows:




Year ended
                      December31,2008
                    
                    
                    Year ended
                      December31,2007Service
      period-based
                    
                    $
                    6,855,869
                    
                    
                    $
                    3,031,911Market
      price-based $16.75
                    
                    
                    4,617,248
                    
                    
                    
                    2,099,688Market
      price-based $20.25
                    
                    
                    3,422,823
                    
                    
                    
                    1,557,878Total
                    
                    $
                    14,895,940
                    
                    
                    $
                    6,689,477




For the
traditional service-based stock options, the Company estimated the fair value,
as of the date of grant, using a Black-Scholes pricing model with the following
assumptions:  risk-free interest rate of 3.53%-4.67%, expected life 7
years for the service-based options and 10 years for the market price-based
options, no dividends and volatility of 35.9%-37.91%.  The cost of the
service-based stock options is being amortized over a four year estimated
vesting period.  In the case of the market price-based stock options,
the Company used the Monte Carlo valuation model and the same assumptions noted
above.  The Company recognizes compensation expense for the market
price-based options over the estimated vesting period, which has been determined
to be 2.75-4.82 years and 3.68-5.53 years for the $16.75 and $20.25 awards,
respectively.




9.
            Notes Payable to
      Stockholders and Related Party
  Transactions




On
February 15, 2007, Stephen B. Hughes, our founder and chief executive
officer, agreed to lend the Company up to $500,000 to cover operating expenses,
to be drawn as needed by the Company. The loan had interest at a rate equal to
the lowest applicable federal short term rate in effect pursuant to
Section 1274(d) of the Internal Revenue Code of 1986, as amended, as the
same may be adjusted from time to time. The total amount owed on the loan and
accrued interest of $4,000 were repaid in full on June 19,
2007.


F-19


In
June 2007, amounts owed to three Initial Stockholders for advances to the
Company to cover expenditures for approximately $256,000 were repaid, without
interest.




The
Company previously paid approximately $10,000 a month for office space and
general and administrative services to affiliates of two of the initial
stockholders.  This arrangement terminated on May 21,
2007.




Certain
stockholders, five of whom are directors and one senior advisor, purchased an
aggregate of 1,000,000 warrants concurrently with the closing of the Company’s
initial public offering at a price of $1.70 per warrant from the
Company.  The warrants are exercisable into common stock at $6.00 per
share.




10.
            Interest Rate
      Derivatives




In
conjunction with the variable-rate debt arrangements noted above, the Company
entered into notional $80,000,000 of interest rate swap agreement on August 16,
2007 which is designed to provide a constant interest rate on the variable rate
debt. The swap agreement expires on September 30, 2010. Under this swap
agreement, the Company receives the difference between its fixed-rate interest
payments and floating-rate payments based on LIBOR. The effect of this is to
convert floating-rate interest expense based on LIBOR into fixed-rate interest
expense. The arrangements require a cash payment for the quarterly difference
between these two rates on the last day of each calendar quarter. For the
quarter ended December 31, 2008, the Company paid 5.05% and received 3.76% with
the cost increasing interest expense by $263,349. At December 31, 2008, the cost
to settle this agreement with the counterparty based on the current interest
rate markets at December 31, 2008 was $5,132,231. As of December 31, 2008,
$10,495,826 of interest rate swaps did not have an underlying notional amount of
debt exposure.




11.
            License




A
substantial portion of the Company’s business is dependent on its exclusive
license of certain technology from Brandeis University. This license agreement,
dated June 1996, imposes certain obligations upon the Company, such as
diligently pursuing the development of commercial products under the licensed
technology. The agreement for each country expires at the end of the term of
each patent in such country and contains no minimum commitments. The amount of
royalties due is based on a formula of the percentage of oil and/or fat utilized
in the licensed products. Should Brandeis believe that the Company has failed to
meet its obligations under the license agreement, Brandeis could seek to limit
or terminate the Company’s license rights. Royalties earned by Brandeis in 2008
was approximately $943,900 and from the date of our initial business combination
(May 21, 2007) until December 31, 2007 were approximately
$551,800.




12.
            Income
      Taxes




The
components of the Company’s income tax provision (benefit) for the years ended
December 31, 2008, 2007 and 2006 are of the following:




Year ended
                      December 31, 2008
                    
                    
                    Year ended
                      December 31, 2007
                    
                    
                    Year ended
                      December 31, 2006Income
      tax provision (benefit):Current
      taxes:Federal
                    
                    $
                    2,473,700
                    
                    
                    $
                    2,205,668
                    
                    
                    $
                    1,195,120State
                    
                    
                    558,583
                    
                    
                    
                    (143,802
                    )
                    
                    
                    168,3033,032,283
                    
                    
                    
                    2,061,866
                    
                    
                    
                    1,363,423Deferred
      taxes:Federal
                    
                    $
                    (6,025,638
                    )
                    
                    $
                    (2,676,515
                    )
                    
                    $
                    (510,846
                    )State
                    
                    
                    (570,198
                    )
                    
                    
                    (91,248
                    )
                    
                    
                    (44,437
                    )(6,595,836
                    )
                    
                    
                    (2,767,763
                    )
                    
                    
                    (555,283
                    )(Benefit)
      Provision for incometaxes
                    
                    $
                    (3,563,553
                    )
                    
                    $
                    (705,897
                    )
                    
                    $
                    808,140




F-20




The
reconciliation of the provision for income taxes based on the U.S. federal
statutory income tax rate to our provision for income taxes was as
follows:




Year ended
                    December 31, 2008
                  
                  
                  Year ended
                    December 31, 2007
                  
                  
                  Year ended
                    December 31, 2006Expected
      federal statutory taxes at 35%
                  
                  $
                  (3,685,992
                  )
                  
                  $
                  (22,186,348
                  )
                  
                  $
                  (4,410,147
                  )Performance
      based shares releasedfrom
      escrow
                  
                  
                  —
                  
                  
                  
                  6,274,977
                  
                  
                  
                  —Derivative
      liabilities
                  
                  
                  —
                  
                  
                  
                  15,489,107
                  
                  
                  
                  5,190,591Valuation
      allowance
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Other
                  
                  
                  122,439
                  
                  
                  
                  (283,633
                  )
                  
                  
                  27,696(Benefit)
      Provision for income taxes
                  
                  $
                  (3,563,553
                  )
                  
                  $
                  (705,897
                  )
                  
                  $
                  808,140




Deferred
income tax assets or liabilities are computed based on the temporary differences
between the financial statement and income tax basis of assets and liabilities
using the enacted marginal tax rate in effect for the year in which the
differences are expected to reverse. Deferred income expenses or credits are
based on the changes in the deferred income tax assets or liabilities from
period to period.




December 31,
                    2008
                  
                  
                  December 31,
                    2007Deferred
      tax assets:Derivative
      liabilities
                  
                  $
                  2,003,007
                  
                  
                  $
                  —Deferred
      interest income
                  
                  
                  —
                  
                  
                  
                  —Stock
      compensation
                  
                  
                  8,423,168
                  
                  
                  
                  2,596,654Inventory
                  
                  
                  293,824
                  
                  
                  
                  546,119Deferred
      financing costs
                  
                  
                  827,533
                  
                  
                  
                  407,590Net
      operating loss carryforwards
                  
                  
                  44,699
                  
                  
                  
                  147,693Other
                  
                  
                  396,956
                  
                  
                  
                  838,253Total
      deferred tax assets
                  
                  
                  11,989,187
                  
                  
                  
                  4,536,309Deferred
      tax liabilities:Intangible
      assets
                  
                  
                  (57,301,751
                  )
                  
                  
                  (56,743,132
                  )Other
                  
                  
                  (305,621
                  )
                  
                  
                  (7,196
                  )Total
      deferred tax liabilities
                  
                  
                  (57,607,372
                  )
                  
                  
                  (56,750,328
                  )Net
      deferred tax liability:
                  
                  $
                  (45,618,185
                  )
                  
                  $
                  (52,214,019
                  )Deferred
      tax asset current
                  
                  $
                  650,100
                  
                  
                  $
                  1,079,509Long-term
      deferred tax asset
                  
                  
                  11,339,087
                  
                  
                  
                  3,456,800Long-term
      deferred tax liability
                  
                  $
                  (57,607,372
                  )
                  
                  $
                  (56,750,328
                  )Net
      deferred tax (liabilities)
                  
                  $
                  (45,618,185
                  )
                  
                  $
                  (52,214,019
                  )




The
Company has state net operating loss ("NOL") carryforwards at December 31,
2008 of approximately $0.8 million for income tax purposes, which begin expiring
in 2013.  A valuation allowance was not established for the
realization of deferred tax assets, as the Company has determined that it is
more likely than not that the assets will be fully utilized.




Significant
judgment is required in evaluating the Company's tax positions and determining
its provision for income taxes.  During the ordinary course of
business, there are many transactions and calculations for which the ultimate
tax determination is uncertain.  The Company establishes reserves for
tax-related uncertainties based on estimates of whether, and the extent to
which, additional taxes will be due.  These reserves are established
when the Company believes that certain positions might be challenged despite its
belief that the Company's tax return positions are fully
supportable.  The Company adjusts these reserves in light of changing
facts and circumstances, such as the outcome of tax audits.  The
provision for income taxes includes the impact of reserve provisions and changes
to reserves that are considered appropriate.  Accruals for tax
contingencies are provided for in accordance with the requirements of FIN
48.  The Company has elected to retain its existing accounting policy
with respect to the treatment of interest and penalties attributable to income
taxes in accordance with FIN 48, and continues to reflect interest and penalties
attributable to income taxes, to the extent they arise, as a component of its
income tax provision or benefit as well as its outstanding income tax assets and
liabilities.


F-21


A
reconciliation of the beginning and ending amount of gross unrecognized tax
benefits as of December 31, 2008 was as follows:




Gross
      balance at January 1, 2008
                
                $
                823,440Additions
      based on tax positions related to the current year
                
                
                —Additions
      for tax provision of prior years
                
                
                19,549Deletions
      for tax positions of prior years
                
                
                (192,481
                )Gross
      balance at December 31, 2008
                
                
                650,508Interest
      and penalties
                
                
                308,638Balance
      at December 31, 2008
                
                $
                959,146





At
December 31, 2008, the total amount of gross unrecognized tax benefits
(excluding the federal benefit received from state positions) was
$650,508.  Of this total, $422,830 (net of the federal benefit on
state issues) represents the amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective tax rate in future
periods.  The total amount of accrued interest and penalties resulting
from such unrecognized tax benefits was $308,638 at December 31,
2008.




The
Company recorded an adjustment to the gross balance of unrecognized tax benefits
at May 21, 2007 of $790,000 comprised of FIN 48 liabilities in connection
with the acquisition of GFA Brands, Inc.  The Company is unaware of
any positions for which it is reasonably possible that the total amounts of
unrecognized tax benefits will significantly increase or decrease within the
next twelve months.




The IRS
is currently examining the Company's 2005 federal income tax
return.  The IRS is also examining the 2007 short-period tax return
which resulted in a $4.7 million tax refund.  The Company expects a
favorable outcome to this review.  Prior periods have either been
audited or are no longer subject to IRS audit.  In most state
jurisdictions, the Company is no longer subject to examination by tax
authorities for years prior to 2003.




13.
            Leases




Rental
expense under operating leases for 2008 was $509,411 and from the date of our
initial business combination (May 21, 2007) until December 31, 2007 was
$157,049.  Future minimum lease commitments under non-cancelable
operating leases during each of the next four years and thereafter are, as
follows:




Years
      Ending December 31,2009
                      
                      $
                      513,4032010
                      
                      
                      577,1952011
                      
                      
                      606,7142012
                      
                      
                      572,535Thereafter
                      
                      
                      1,242,157$
                      3,512,004





14.
            Commitments and
      Contingencies




The
following table summarizes contractual obligations and borrowings as of
December 31, 2008 and the timing and effect that such commitments are
expected to have on our liquidity and capital requirements in future
periods.  We expect to fund other commitments primarily with operating
cash flows generated in the normal course of business.


F-22


Contractual
Obligations




Total
              
              
              Due in less
                than 1 year
              
              
              Due
                1-3 years
              
              
              Due
                3-5 years
              
              
              More than
                5 yearsBuilding
      Leases(1)
              
              $
              3,695,786
              
              
              $
              559,349
              
              
              $
              1,275,800
              
              
              $
              1,132,476
              
              
              $
              728,161Oil
      and Peanuts Purchase Commitments(2)
              
              
              38,621,982
              
              
              
              38,621,982
              
              
              
              —
              
              
              
              —
              
              
              
              —Debt
      Obligations(3)
              
              
              69,504,174
              
              
              
              —
              
              
              
              —
              
              
              
              787,092
              
              
              
              68,717,082$
              111,821,942
              
              
              $
              39,181,331
              
              
              $
              1,275,800
              
              
              $
              1,919,568
              
              
              $
              69,445,243








(1)Includes: (i) a lease
agreement for the lease of a corporate office facility located in Paramus, NJ
with an approximate seven year life with the option to extend the lease for two
additional five year terms, and (ii) three lease agreements for the lease of a
corporate office facility located in Niwot, Colorado with an approximate five
year life with the option to extend each lease for 36 months.





(2)Forward purchase commitments for a portion of the Company’s projected
requirement for peanuts and for palm, soy and canola oil.  These
commitments may be stated at a firm price, or as a discount or premium from a
future commodity market price.  Based on the most recent prices, the
Company expects these commitments would total approximately $38.6 million as of
December 31, 2008.  The commitments are expected to be liquidated by
September 30, 2009.




(3)For more information on our debt
obligations, see the section entitled “Long-Term Debt” located elsewhere in
these notes to financial statements.




Legal
Proceedings





We are
currently involved in the following legal proceedings:




In 2007,
three parties filed Oppositions to European Patent No. 820,307 relating to
increasing the HDL level and the HDL/LDL ratio in Human Serum by Balancing
Saturated and Polyunsaturated Dietary Fatty Acids.  We believe that
neither this proceeding, nor its outcome, will have any adverse effect on our
current business.




We are
not a party to any other legal proceeding that we believe would have a material
adverse effect on our business, results of operations or financial
condition.




15.
            Selected Quarterly
      Financial Data (unaudited)




The
following table presents certain unaudited quarterly results for the years 2008
and 2007:




March 31,
                  2008
                
                
                June 30,
                  2008
                
                
                September 30,
                  2008
                
                
                December 31,
                  2008
                
                
                Full Year
                  2008Revenues
                
                $
                50,789,855
                
                
                $
                47,989,930
                
                
                $
                57,531,521
                
                
                $
                65,560,606
                
                
                $
                221,871,912Operating
      income (loss)
                
                
                1,960,108
                
                
                
                (500,583
                )
                
                
                2,575,329
                
                
                
                1,658,793
                
                
                
                5,693,647Net
      (loss)
                
                $
                (1,177,366
                )
                
                $
                (1,535,425
                )
                
                $
                (1,614,073
                )
                
                $
                (2,640,989
                )
                
                $
                (6,967,853
                )Less
      unpaid dividends on cumulative preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      (loss) available for common shares
                
                $
                (1,177,366
                )
                
                $
                (1,535,425
                )
                
                $
                (1,614,073
                )
                
                $
                (2,640,989
                )
                
                
                (6,967,853
                )(Loss)
      per  share—diluted
                
                $
                (0.02
                )
                
                $
                (0.02
                )
                
                $
                (0.03
                )
                
                $
                (0.04
                )
                
                $
                (0.11
                )Diluted
      weighted average common shares outstanding
                
                
                62,196,988
                
                
                
                62,630,683
                
                
                
                62,630,683
                
                
                
                62,630,683
                
                
                
                62,523,742





F-23





March 31,
                  2007
                
                
                June 30,
                  2007
                
                
                September
                  30,
                  2007
                
                
                December 31,
                  2007
                
                
                Full Year
                  2007Revenues
                
                $
                —
                
                
                $
                18,675,769
                
                
                $
                41,502,575
                
                
                $
                50,859,951
                
                
                $
                111,038,295Operating
      income (loss)
                
                
                (347,277
                )
                
                
                636,526
                
                
                
                915,226
                
                
                
                (12,654,367
                )
                
                
                (11,449,892
                )Net
      (loss)
                
                $
                (7,197,132
                )
                
                $
                (13,654,027
                )
                
                $
                (33,007,575
                )
                
                $
                (10,689,334
                )
                
                $
                (64,548,068
                )Less
      unpaid dividends on cumulative preferred stock
                
                
                —
                
                
                
                1,244,603
                
                
                
                2,817,868
                
                
                
                33,096,540
                
                
                
                37,159,011Net
      (loss) available for common shares
                
                
                (7,197,132
                )
                
                $
                (14,898,629
                )
                
                $
                (35,825,443
                )
                
                $
                (43,785,874
                )
                
                
                (101,707,079
                )(Loss)
      per  share—diluted
                
                $
                (0.50
                )
                
                $
                (0.71
                )
                
                $
                (1.25
                )
                
                $
                (1.27
                )
                
                $
                (4.12
                )Diluted
      weighted average common shares outstanding
                
                
                14,355,945
                
                
                
                20,848,447
                
                
                
                28,766,133
                
                
                
                34,433,180
                
                
                
                24,667,344





During
the first quarter of 2008, the Company changed its method of accounting for
certain trade incentives and marketing costs and began deferring a portion of
such items as prepaid expenses in proportion to forecasted revenues for the
year.  This change enhances the matching of the Company’s expenses
with revenues.  Additionally, this change provides better
comparability to the Company’s industry peers, most of whom defer a portion of
trade incentives and marketing costs as prepaid expenses earlier in the year and
recognize those expenses in subsequent quarters in line with actual revenue
earned.  While this methodology may create timing differences between
quarters in 2007 as previously reported, it had no impact on the full year
results.




Statement
of Financial Accounting Standards No. 154, “Accounting Changes and
Error Corrections,” requires that a change in accounting principle be
retrospectively applied to all prior periods presented.  Accordingly,
the quarterly results for 2007 shown above were changed to reflect this
change.




16.
            Stockholders’
      Equity




Private
Placement




In
connection with the GFA merger, the Company entered into a private placement
transaction for common stock and Series A convertible preferred stock together
with investor warrants, pursuant to a Securities Purchase Agreement dated,
September 25, 2006, as amended by letter agreement, dated February 15,
2007.  The Agreement included 14,410,188 shares of common stock and
15,388,889 shares of Series A convertible preferred stock along with warrants.
The net proceeds of approximately $246 million received by the Company were used
to fund a portion of the GFA merger acquisition costs.




Series
A Convertible Preferred Stock




The
Company forced the conversion of its Series A convertible preferred stock into
common stock, on January 3, 2008 (see note 3).  Dividends on the
Series A convertible preferred stock were cumulative and compounded from
May 21, 2007 at the annual rate of 8% (multiplied times the $9.00 per share
purchase price). The Series A convertible preferred stock was convertible at any
time, at the option of the holder, into the number of shares of common stock
arrived at by dividing $9.00 per share (which was the initial conversion price)
into the per share liquidation preference of $9.00 per share, plus accrued but
unpaid dividends. To the extent that dividends accrued but were not paid, the
number of shares of common stock issuable upon conversion of the Series A
convertible preferred stock increased.




Conversion
of all, or a portion of (but not less than 20% of the then outstanding) Series A
convertible preferred stock was mandatory, at the conversion price then in
effect, upon the first to occur of:




(1)           the
election to convert by holders of at least a majority of the Series A
convertible preferred stock, or




(2)           the
Company’s election to force a conversion if (i) a registration statement
for the resale of the common stock issuable upon conversion of the Series A
convertible preferred stock was effective, (ii) the Company had also
elected to redeem all the public warrants that we sold in the Company’s initial
public offering, and (iii) the last sales price of the Company’s common
stock had been at least $11.50 per share on each of 20 trading days within any
30-trading day period.


F-24




When the
Company elected to exercise its right to force conversion within three years of
the date of original issuance, the number of shares of common stock issued on
conversion was calculated assuming that the redemption occurred on the last date
of the dividend period to occur on or after such third-year anniversary.




Common
Shares in Escrow




All of
the shares of the Company’s common stock outstanding prior to the date of its
initial public offering were placed in escrow with an escrow
agent.  Of the 3,190,210 shares held in escrow, 1,595,105 were
released on October 11, 2007 because the last sales price of the Company’s
common stock was at least $11.50 per share for 20 out of 30 trading days, which
was a condition to the release of one-half of the shares. The Company recorded a
charge to earnings in the fourth quarter of 2007 of $18,455,815, as all of the
shares were held by officers, directors and related parties.  The
charges were based on the price of common stock of $12.31 on the date the above
conditions were met.  The remaining 1,595,105 shares in escrow were
released on December 16, 2008. Since these shares were released based on passage
of time, no charge to earnings was required to be made.




Redemption
of Public Warrants




During
December 2007, the Company received approximately $76.5 million from the
redemption of its public warrants.  The Company paid down
approximately $40 million of its first lien debt, as it was required to use
one-half of the proceeds of the public warrant redemption to pay off a portion
of its term loan.


F-25


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders of GFA Holdings, Inc and
subsidiary:





We have
audited the accompanying consolidated balance sheet of  GFA Holdings,
Inc  and subsidiary (the “Company”) as of May 20, 2007, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for the period from January 1, 2007 to May 20, 2007. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.




In our
opinion, the  consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GFA
Holdings, Inc.  and subsidiary as of May 20, 2007, and the results of
their operations and their cash flows for the period from January 1, 2007 to May
20, 2007, in conformity with accounting principles generally accepted in the
United States of America.




/s/
      Ehrhardt Keefe
      Steiner & Hottman PCDenver,
      ColoradoJuly
      29, 2009


F-26


REPORT
OF INDEPENDENT AUDITOR




To the
Board of Directors and Stockholders


GFA
Holdings, Inc.


Cresskill,
New Jersey





We have
audited the accompanying consolidated balance sheet of GFA Holdings, Inc. and
Subsidiary as of December 31, 2006, and the related consolidated statements of
income, cash flows, and stockholders’ equity for the year then
ended.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audit.





We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America.  Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement.  An audit includes examining,
on a test basis, evidence supporting the amounts and disclosure in the balance
sheet.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audit
provides a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of GFA Holdings, Inc. and
Subsidiary as of December 31, 2006, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.





/s/
McGladrey and Pullen, LLP





New York,
New York


March 19,
2007


F-27


GFA
HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Balance Sheets


As
of May 20, 2007 and December 31, 2006





May 20,
                  
                  
                  December 31,2007
                  
                  
                  2006AssetsCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  17,293,420
                  
                  
                  $
                  2,373,011Investments
                  
                  
                  —
                  
                  
                  
                  7,725,000Accounts
      receivable, net of allowance for doubtful accounts and discounts of
      $199,094 and $199,485 in 2007 and 2006, respectively
                  
                  
                  11,443,774
                  
                  
                  
                  8,713,726Inventories
                  
                  
                  4,785,123
                  
                  
                  
                  5,530,149Prepaid
      expenses and other
                  
                  
                  4,902,222
                  
                  
                  
                  121,314Deferred
      taxes
                  
                  
                  235,358
                  
                  
                  
                  1,015,599Total
      current assets
                  
                  
                  38,659,897
                  
                  
                  
                  25,478,799Property
      and equipment, net
                  
                  
                  172,750
                  
                  
                  
                  165,774Other
      assets:Goodwill
                  
                  
                  75,213,104
                  
                  
                  
                  75,213,104Other
      intangibles
                  
                  
                  17,000,000
                  
                  
                  
                  17,000,000Deferred
      financing costs, net of accumulated amortization of $2,899,079 and
      $1,945,123 in 2007 and 2006, respectively
                  
                  
                  —
                  
                  
                  
                  953,956Security
      deposits and other
                  
                  
                  64,982
                  
                  
                  
                  64,982Total
      other assets
                  
                  
                  92,278,086
                  
                  
                  
                  93,232,042Total
      assets
                  
                  $
                  131,110,733
                  
                  
                  $
                  118,876,615Liabilities
      and Stockholders' EquityCurrent
      liabilities:Current
      maturities — long-term debt
                  
                  $
                  —
                  
                  
                  $
                  4,725,000Accounts
      payable
                  
                  
                  12,360,825
                  
                  
                  
                  10,538,795Accrued
      bonus payable
                  
                  
                  21,785,437
                  
                  
                  
                  —Accrued
      expenses
                  
                  
                  3,986,385
                  
                  
                  
                  2,442,234Due
      to related party
                  
                  
                  2,834,627
                  
                  
                  
                  2,834,627Income
      taxes payable
                  
                  
                  —
                  
                  
                  
                  3,519,138Total
      current liabilities
                  
                  
                  40,967,274
                  
                  
                  
                  24,059,794Deferred
      taxes
                  
                  
                  7,732,070
                  
                  
                  
                  6,801,304Commitment
      and contingencies (Note 8)Stockholders'
      equityCommon
      stock:Class
      A-1, $.001 par value, 700,000 authorized, 533,163 issued and
      outstanding
                  
                  
                  533
                  
                  
                  
                  533Class
      A-2, $.001 par value, 200,000 authorized, 25,123 issued and
      outstanding
                  
                  
                  25
                  
                  
                  
                  25Class
      L, $.001 par value, 100,000 authorized, 59,240 issued and
      outstanding
                  
                  
                  59
                  
                  
                  
                  59Additional
      paid-in capital
                  
                  
                  63,628,038
                  
                  
                  
                  63,628,038Common
      stock, no par value, authorized, issued and outstanding, 2,050
      shares
                  
                  
                  —
                  
                  
                  
                  —Common
      stock — affiliate
                  
                  
                  —
                  
                  
                  
                  —Retained
      earnings
                  
                  
                  18,782,734
                  
                  
                  
                  24,386,862Total
      stockholders' equity
                  
                  
                  82,411,389
                  
                  
                  
                  88,015,517Total
      liabilities and stockholders' equity
                  
                  $
                  131,110,733
                  
                  
                  $
                  118,876,615




See
accompanying notes to the consolidated financial statements


F-28


GFA
HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Statements of Income


Period
from January 1, 2007 to May 20, 2007 and the Year ended December 31,
2006





Period ended
                      May 20, 2007
                    
                    
                    December 31, 2006Net
      sales
                    
                    $
                    72,442,424
                    
                    
                    $
                    158,467,632Cost
      of goods sold
                    
                    
                    32,721,012
                    
                    
                    
                    69,760,681Gross
      profit
                    
                    
                    39,721,412
                    
                    
                    
                    88,706,951Selling,
      general and administrative expenses
                    
                    
                    48,673,859
                    
                    
                    
                    64,652,479Operating
      Income (Loss)
                    
                    
                    (8,952,447
                    )
                    
                    
                    24,054,472Other
      (income) expense:Interest
      expense
                    
                    
                    969,269
                    
                    
                    
                    2,166,209Interest
      and dividend income
                    
                    
                    (254,777
                    )
                    
                    
                    (462,295
                    )Other
      (income), net
                    
                    
                    (277,647
                    )
                    
                    
                    (201,367
                    )(436,845
                    )
                    
                    
                    1,502,547Income
      (loss) before income taxes
                    
                    
                    (9,389,292
                    )
                    
                    
                    22,551,925Provision
      (benefit) for income taxes
                    
                    
                    (3,785,164
                    )
                    
                    
                    9,121,638Net
      income (loss)
                    
                    $
                    (5,604,128
                    )
                    
                    $
                    13,430,287




See
accompanying notes to the consolidated financial statements


F-29


GFA
HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Statements of Cash Flows


Period
from January 1, 2007 to May 20, 2007 and the Year ended December 31,
2006




Period ended
                  May 20, 2007
                
                
                December 31,
                  2006Cash
      flows from operating activities:Net
      income (loss)
                
                $
                (5,604,128
                )
                
                $
                13,430,287Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
                
                
                10,825
                
                
                
                25,507Amortization
      of deferred financing costs
                
                
                953,956
                
                
                
                1,212,131Deferred
      taxes
                
                
                1,711,008
                
                
                
                746,587Changes
      in assets and liabilities:Accounts
      receivable
                
                
                (2,730,048
                )
                
                
                (1,698,933
                )Inventories
                
                
                745,026
                
                
                
                (2,242,053
                )Prepaid
      expenses and other
                
                
                (4,780,908
                )
                
                
                5,260Accounts
      payable and accrued expenses
                
                
                21,632,479
                
                
                
                1,543,552Due
      to related party
                
                
                —
                
                
                
                2,834,627Net
      cash provided by operating activities
                
                
                11,938,210
                
                
                
                15,856,965Cash
      flows from investing activities:Purchase
      of property and equipment
                
                
                (17,801
                )
                
                
                (7,070
                )Proceeds
      from sale of securities
                
                
                15,225,000
                
                
                
                14,525,000Purchases
      of investments
                
                
                (7,500,000
                )
                
                
                (15,750,000
                )Due
      to related party, net
                
                
                —
                
                
                
                11,869Net
      cash (used in) investing activities
                
                
                7,707,199
                
                
                
                (1,220,201
                )Cash
      flows from financing activities:Repayments
      of long-term debt
                
                
                (4,725,000
                )
                
                
                (14,000,000
                )Net
      cash (used in) provided by financing activities
                
                
                (4,725,000
                )
                
                
                (14,000,000
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                14,920,409
                
                
                
                636,764Cash
      and cash equivalents:Beginning
                
                
                2,373,011
                
                
                
                1,736,247Ending
                
                $
                17,293,420
                
                
                $
                2,373,011Cash
      paid during the year for:Income
      taxes
                
                $
                2,845,000
                
                
                $
                6,046,598Interest
                
                $
                39,818
                
                
                $
                1,156,376




See
accompanying notes to the consolidated financial statements


F-30


GFA
HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Statements of Stockholders' Equity


Period
from January 1, 2007 to May 20, 2007 and the Year ended December 31,
2006





Common Stock
                                                        
                                                        
                                                        Additional
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        TotalClass A-1
                                                        
                                                        
                                                        Class A-2
                                                        
                                                        
                                                        Class L
                                                        
                                                        
                                                        Paid-In
                                                        
                                                        
                                                        Retained
                                                        
                                                        
                                                        Stockholders'Shares
                                                        
                                                        
                                                        Amount
                                                        
                                                        
                                                        Shares
                                                        
                                                        
                                                        Amount
                                                        
                                                        
                                                        Shares
                                                        
                                                        
                                                        Amount
                                                        
                                                        
                                                        Capital
                                                        
                                                        
                                                        Earnings
                                                        
                                                        
                                                        EquityBalance,
      December 31, 2005
                                                        
                                                        
                                                        533,163
                                                        
                                                        
                                                        $
                                                        533
                                                        
                                                        
                                                        
                                                        25,123
                                                        
                                                        
                                                        $
                                                        25
                                                        
                                                        
                                                        
                                                        59,240
                                                        
                                                        
                                                        $
                                                        59
                                                        
                                                        
                                                        $
                                                        63,628,038
                                                        
                                                        
                                                        $
                                                        10,956,575
                                                        
                                                        
                                                        $
                                                        74,585,230Net
      income
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        13,430,287
                                                        
                                                        
                                                        
                                                        13,430,287Balance,
      December 31, 2006
                                                        
                                                        
                                                        533,163
                                                        
                                                        
                                                        
                                                        533
                                                        
                                                        
                                                        
                                                        25,123
                                                        
                                                        
                                                        
                                                        25
                                                        
                                                        
                                                        
                                                        59,240
                                                        
                                                        
                                                        
                                                        59
                                                        
                                                        
                                                        
                                                        63,628,038
                                                        
                                                        
                                                        
                                                        24,386,862
                                                        
                                                        
                                                        
                                                        88,015,517Net
      (loss)
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (5,604,128
                                                        )
                                                        
                                                        
                                                        (5,604,128
                                                        )Balance,
      May 20, 2007
                                                        
                                                        
                                                        533,163
                                                        
                                                        
                                                        $
                                                        533
                                                        
                                                        
                                                        
                                                        25,123
                                                        
                                                        
                                                        $
                                                        25
                                                        
                                                        
                                                        
                                                        59,240
                                                        
                                                        
                                                        $
                                                        59
                                                        
                                                        
                                                        $
                                                        63,628,038
                                                        
                                                        
                                                        $
                                                        18,782,734
                                                        
                                                        
                                                        $
                                                        82,411,389




See
accompanying notes to the consolidated financial statements


F-31


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
To Consolidated Financial Statements




Note 1—Summary of
Significant Accounting Policies




Basis of Presentation: The
consolidated financial statements include GFA Holdings, Inc. (“Holdings”) and
its wholly owned subsidiary, GFA Brands, Inc. (a Delaware Corporation),
collectively referred to as “the Company”. All intercompany balances and
transactions have been eliminated.




On
February 5, 2004, Holdings was organized and on March 31, 2004
acquired certain assets of New Industries Corporation, formerly known as GFA
Brands, Inc. (an Ohio Corporation), referred to as “GFA Ohio”. On the same date,
Holdings issued 100,000 shares of common stock to Fitness Foods, Inc. (“FFI”) in
exchange for certain of FFI’s assets as part of a contribution agreement between
FFI and the Company (see Note 3).




On May
21, 2007, Holdings was sold to Boulder Specialty Brands, Inc., who changed its
name after the acquisition to Smart Balance, Inc.  These statements
cover the operating results for the period from January 1, 2007 to
May 20, 2007 and the balance sheet at May 20, 2007 and for the year
ended December 31, 2006.




Business: The Company
distributes a line of heart healthy and low fat food products under specific
brand names, primarily through territorial food brokers, supermarket chains,
military commissionaires, and other distributors throughout the United
States.




Cash and Cash Equivalents:
For the purposes of reporting cash flows, the Company considers all overnight
investments and money market funds to be cash equivalents. The Company maintains
its cash in bank deposit accounts, which at times may exceed Federally insured
limits.




Investments: The Company
invests excess cash in various marketable equity securities which consisted
primarily of auction rate securities. The investments are managed by the Company
with the objective of minimizing the risk of loss of principal while maximizing
returns. At times, these objectives may cause sales of investments before their
maturity; therefore, they are classified as investments available for sale.
These investments are carried at fair value, which amounted to zero at
May 20, 2007 and $7,725,000 at December 31, 2006. Realized and
unrealized gains and losses during the period were not material. The cost of
investments sold is based on the specific identification method.




Accounts Receivable: Accounts
receivable are carried at original invoice amount less allowances for cash
discounts and doubtful receivables based on a review of all outstanding amounts.
Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer’s
financial condition, credit history, and current economic conditions. Accounts
receivable are written off when deemed uncollectible. Recoveries of receivables
previously written off are recorded when received. The Company does not charge
interest on past due receivables.




Inventories: Inventories are
stated at the lower of cost (first-in, first-out) or market and consist of
finished goods.




Property and Equipment:
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets ranging from
5 to 10 years. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
improvement.




Goodwill: Goodwill is tested
annually for impairment or more frequently if events or changes in circumstances
indicate that impairment may have occurred. The impairment analysis for goodwill
includes a comparison of the Company’s carrying value (including goodwill) to
the Company’s estimated fair value. If the fair value of the Company does not
exceed its carrying value, then an additional analysis is performed to allocate
the fair value to all assets and liabilities of the Company as if the Company
had been acquired in a business combination and the fair value was its purchase
price. If the excess of the fair value of the Company over the fair value of its
identifiable assets and liabilities is less than the carrying value of recorded
goodwill, an impairment charge is recorded for the difference.


F-32


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




In
assessing the fair value of the Company, management must make assumptions about
estimated future operating results and resulting cash flows and consider other
factors, including comparable company information. Assumptions about future
sales and cash flows require significant judgment involving economic conditions,
the fluctuation of actual revenues and the timing of expenses. Management
develops future sales estimates based on available customer information, planned
timing of new products, planned timing and cost of promotional events and
historical trends. Estimates of future cash flows assume that expenses will grow
at rates consistent with historical rates. If the expected cash flows are not
realized, impairment losses, may be recorded in the future.




Management
tests for impairment annually at December 31 of each year and has
determined that no impairment was required to be recognized during the year
ended December 31, 2006.




Other Intangibles: Other
intangibles are comprised of indefinite life intangible assets which are not
amortized but are tested annually for impairment, or more frequently if events
or changes in circumstances indicate that the asset might be impaired. In
assessing the recoverability of indefinite life intangible assets, the Company
must make assumptions about the estimated future cash flows and other factors to
determine the fair value of these assets.




Assumptions
about future revenue and cash flows require significant judgment because of the
fluctuation of actual revenue and the timing of expenses. The Company’s
management develops future revenue estimates based on projected growth and other
factors. Estimates of future cash flows assume that expenses will grow at rates
consistent with historical rates. If the expected cash flows are not realized,
impairment losses may be recorded in the future.




An
intangible asset is determined to have an indefinite useful life when there are
no legal, regulatory, contractual, competitive, economic or any other factors
that may limit the period over which the asset is expected to contribute
directly or indirectly to the future cash flows of the Company. In each
reporting period, the Company also evaluates the remaining useful life of an
intangible asset that is not being amortized to determine whether events and
circumstances continue to support an indefinite useful life. If an intangible
asset that is not being amortized is determined to have a finite useful life,
the asset will be amortized prospectively over the estimated remaining useful
life and accounted for in the same manner as intangible assets subject to
amortization.




The
Company has determined that its “Smart Balance” and “Smart Beat” trademarks have
an indefinite life and these assets are not being amortized.




Impairment of Long-Lived
Assets: The Company evaluates long-lived assets, which includes leasehold
improvements and equipment and other intangibles, for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable. If the estimated future cash flows (undiscounted and without
interest charges) from the use of an asset are less than the carrying value, a
write down-would be recorded to reduce the related asset to its estimated fair
value. No impairment was required to be recognized during the year ended
December 31, 2006.  No impairment was noted in the period from
January 1, 2007 to May 20, 2007.




Deferred Financing Costs: The
Company capitalized financing costs and fees incurred related to the procurement
of its long-term debt. The Company is amortizing such costs as additional
interest expense over the lives of the respective loans using the effective
interest method.  In February 2007, Holdings repaid all of its debt
outstanding and accordingly wrote off its unamortized deferred financing
costs.


F-33


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




Revenue Recognition: Revenue
is recognized when the earnings process is complete and the risks and rewards of
ownership have transferred to the customer, which is generally considered to
have occurred upon the receipt of product by the customer. The earnings process
is complete once the customer order has been placed and approved and the product
shipped and received by the customer. Product is sold to customers on credit
terms established on an individual basis. The credit factors used include
historical performance, current economic conditions and the nature and volume of
the product. The Company offers its customers a variety of sales and incentive
programs, including discounts, allowances, coupons, slotting fees, and co-op
advertising. Incentives that result in an identifiable benefit to the Company,
where the value can be reasonably estimated, are included as a component of
selling expenses. Incentives that do not meet this criteria are included as a
reduction of revenue. The Company sells their products to customers without the
right of return and is not obligated to accept any returns.




Shipping and Handling:
Shipping and handling charges are included as a component of selling expenses,
and amounted to $4,302,563 for the period from January 1, 2007 to
May 20, 2007 and $9,254,979 for the year ended December 31,
2006.




Advertising: Advertising
costs are charged to operations (selling, general and administrative expenses)
when incurred and amounted to $11,918,461 for the period January 1, 2007 to
May 20, 2007 and $22,167,467 for the year ended December 31,
2006.




Research and Development:
Research and development costs are charged to operations when incurred and
amounted to $41,353 for the period from January 1, 2007 to May 20,
2007 and $98,453 for the year ended December 31, 2006.




Use of Estimates: The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.




Deferred Taxes: Deferred
income taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss
carry-forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred taxes and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.




Recently Issued Accounting
Pronouncements: In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109”(“FIN 48”), which clarifies the accounting for uncertainty in tax
positions. This Interpretation requires the Company to recognize in its
financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. The provisions of FIN 48 did not have an effect on the Company’s
statements.


F-34


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




In
March 2006, Statement No. 156, “Accounting for Servicing of Financial
Assets, an amendment of FASB Statement No. 140” (“FAS 156”), was
released. FAS 156 amends Statement No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities”
(“FAS 140”), to require that all separately recognized servicing assets and
liabilities in accordance with FAS 140 be initially measured at fair value,
if practicable. Furthermore, this standard permits, but does not require, fair
value measurement for separately recognized servicing assets and liabilities in
subsequent reporting periods. FAS 156 did not have an effect on the
Company’s statements.




In
February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
Financial Instruments” which amends SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.”
SFAS 155 simplifies the accounting for certain derivatives embedded in
other financial instruments by allowing them to be accounted for as a whole if
the holder elects to account for the whole instrument on a fair value basis.
SFAS 155 also clarifies and amends certain other provisions of
SFAS 133 and SFAS 140. SFAS 155 did not have an effect on the
Company’s statements.




Note 2—Major
Customer




The
Company has one  major customer that accounted for approximately 18%
of sales for the period January 1, 2007 to May 20, 2007 and two major
customers that accounted for 23% of sales for the year ended December 31,
2006. The aggregate account receivable from this customer amounted to
approximately $1.7 million and 16% of the total accounts receivable at
May 20, 2007 and $2,100,000 and 24% of the total accounts receivable at
December 31, 2006.




Note
3—Acquisition




On
March 31, 2004, the Company’s business, as described in Note 1, was
acquired from New Industries Corporation for $85,535,962, of which $82,000,000
was paid in cash. On the same date, the Holdings issued 100,000 shares of common
stock value at $10,000,000 to Fitness Foods, Inc. (“FFI”) in exchange for
certain of FFI’s assets as part of a contribution agreement between FFI and the
Holdings. These transactions have been accounted for as a business combination
under SFAS No. 141, “Business Combinations” (“SFAS 141”) and the result of
operation of GFA Ohio and FFI are included in the consolidated financial
statement since the date of acquisition. Pursuant to SFAS 141, Holdings was the
acquiring entity in the business combination (which Holdings accounted for as a
purchase) because Holding’s’ stockholders other than the FFI stockholders
control over 82% of Holding’s voting stock. The net purchase price, including
expenses directly related to the transaction of approximately $11,604,000, was
approximately $107,139,000. The consideration for this transaction was raised
through the issuance of common shares, the acquisition of a revolving line of
credit and two term loans, and certain affiliated debt.




In
connection with the incorporation of the Holdings and the acquisition of GFA
Brands, Inc. and certain of the assets of FFI, Holdings authorized 700,000 and
issued 533,163 Class A-1 common shares valued at $533, and authorized
100,000 and issued 59,240 Class L common shares valued at $59 and the initial
capitalization was $63,603,532.


F-35


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




The
following is a summary of the estimated fair value of the assets acquired and
the liabilities assumed at the date of acquisition:




New Industries Corp
                  
                  
                  FFIor
      GFA Ohio
                  
                  
                  Contribution
                  
                  
                  TotalWorking
      capital assets
                  
                  $
                  17,504,613
                  
                  
                  $
                  4,495
                  
                  
                  $
                  17,509,108Property
      and equipment
                  
                  
                  132,646
                  
                  
                  
                  6,480
                  
                  
                  
                  139,125Trademark
      inclusive of patent technology
                  
                  
                  7,010,975
                  
                  
                  
                  9,989,025
                  
                  
                  
                  17,000,000Goodwill
                  
                  
                  75,213,104
                  
                  
                  
                  —
                  
                  
                  
                  75,213,104Other
      assets
                  
                  
                  12,000
                  
                  
                  
                  —
                  
                  
                  
                  12,000Working
      capital liabilities
                  
                  
                  (2,733,844
                  )
                  
                  
                  —
                  
                  
                  
                  (2,733,844
                  )$
                  97,139,494
                  
                  
                  $
                  10,000,000
                  
                  
                  $
                  107,139,494





Note
4—License




A
substantial portion of the Company’s business depends upon its exclusive license
of certain technology from Brandeis University. This license agreement, dated
June 1996, imposes certain obligations upon the Company, such as diligently
pursuing the development of commercial products under the licensed patents. The
agreement expires at the end of each patent period or seventeen years after the
agreement execution date for products which do not have patents and contains no
minimum commitments. The amount of royalties due is based on a formula of the
percentage of oil and/or fat utilized in the licensed products. Should Brandeis
believe that GFA has failed to meet its obligations under the license agreement,
Brandeis could seek to limit or terminate the Company’s license rights.
Royalties to Brandeis for the period from January 1, 2007 to May 20,
2007 were approximately $328,115 and for the year ended December 31, 2006
were approximately $715,000.




Note 5—Property and
Equipment




Property
and equipment as of May 20, 2007 and December 31, 2006 consists of the
following:




May
      20,
                      2007
                    
                    
                    December
      31,
                      2006Machinery
      and equipment
                    
                    $
                    147,342
                    
                    
                    $
                    144,041Furniture
      and fixtures
                    
                    
                    50,610
                    
                    
                    
                    50,610Leasehold
      improvements
                    
                    
                    44,611
                    
                    
                    
                    30,111242,563
                    
                    
                    
                    224,762Less:
      Accumulated depreciation and amortization
                    
                    
                    69,813
                    
                    
                    
                    58,988$
                    172,750
                    
                    
                    $
                    165,774


F-36


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




Note
6—Intangible Assets




The
following is a summary of intangible assets acquired and goodwill as of
December 31, 2006:





December 31, 2006Gross Carrying
                      Amount
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Net Carrying
                      ValueNot
      subject to amortization:Trademarks,
      inclusive of patented technology
                    
                    $
                    17,000,000
                    
                    
                    $
                    —
                    
                    
                    $
                    17,000,000Goodwill
                    
                    
                    75,213,104
                    
                    
                    
                    —
                    
                    
                    
                    75,213,104$
                    92,213,104
                    
                    
                    $
                    —
                    
                    
                    $
                    92,213,104Deferred
      financing costs – subject to amortization
                    
                    $
                    2,899,079
                    
                    
                    $
                    1,945,123
                    
                    
                    $
                    953,956




The
following is a summary of intangible assets acquired and goodwill as of May 20,
2007:





May 20, 2007Gross Carrying
                        Amount
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      Net Carrying
                        ValueNot
      subject to amortization:Trademarks,
      inclusive of patented technology
                      
                      $
                      17,000,000
                      
                      
                      $
                      —
                      
                      
                      $
                      17,000,000Goodwill
                      
                      
                      75,213,104
                      
                      
                      
                      —
                      
                      
                      
                      75,213,104$
                      92,213,104
                      
                      
                      $
                      —
                      
                      
                      $
                      92,213,104Deferred
      financing costs – subject to amortization
                      
                      $
                      2,899,079
                      
                      
                      $
                      2,899,079
                      
                      
                      $
                      —





Note 7—Long-Term
Debt




In March
2004, the Company’s wholly owned subsidiary, GFA Brands, Inc., entered into an
agreement with a bank that provided for a revolving credit facility, through
September 2009, of up to $5,000,000 with interest at LIBOR plus or the Federal
funds effective rate plus, as determined by the Company. The LIBOR margin ranged
from 3.5% to 4.5% and the Federal funds effective margin ranged from 2% to 2.5%
based on the ratio of the Company’s total funded debt to adjusted EBITDA ratio.
The revolving credit facility was subject to an unused commitment fee of
0.5% per annum based on the average aggregate amount of available
borrowings.




The
agreement also provided for term loan A and term loan B notes in an aggregate
amount of $32,500,000 and $7,500,000, respectively. The term loan A notes were
payable through September 30, 2009, with quarterly payments commencing
June 30, 2004. The term loan B notes were payable through March 31,
2010, with quarterly payments commencing June 30, 2007. Interest rates on
both term loans were consistent with those applicable to the revolving line of
credit.




In May
2005, GFA Brands, Inc. entered into an amended credit agreement that, among
other things, cancelled their $5,000,000 revolving credit facility, for which
there were no outstanding borrowings.




Additionally,
the Company’s term loan A notes and term loan B notes aggregating $27,625,000 at
the time of the amendment were modified, and new term loan A notes were
issued.


F-37


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




The new
term loan A notes provide for an aggregate principal amount of $27,625,000
through March 31, 2011 with quarterly payments commencing June 30,
2005. Interest rates are at LIBOR plus 2% or the Federal funds effective rate
plus 0.5%, as determined by the Company.




In
February, 2007, the Company paid down the balance remaining under this loan
agreement in the amount of $4,725,000.




The
Company may prepay the loans upon notice to the lender. Each prepayment will be
applied to the relevant loans to reduce the remaining installments on a pro rata
basis. Term loan prepayments are not available for reborrowing.




At
December 31, 2006, the term loan outstanding amounted to $4,725,000, payable
with a 30-day rate at 5.35% plus 2%.  This loan was included in
current maturities.




The above
debt was collateralized by all the assets of GFA Brands, Inc. and is guaranteed
by Holdings. The agreement contains certain restrictive covenants, including
maintenance of certain financial ratios. The term loan A notes were repaid in
full during February 2007.




Note 8—Stockholders’
Equity




In
connection with the incorporation of Holdings and the acquisition of GFA Ohio
(Note 1), Holdings authorized 700,000 and issued 533,163 (including 443,163
shares for cash to unrelated parties as part of the initial capitalization)
Class A-1 common shares, and authorized 100,000 and issued 59,240
(including 49,240 shares for cash to unrelated parties as part of the initial
capitalization) Class L common shares. These shares were issued at an average of
$107 above par, net of $25,000 of offering costs, resulting in an initial
capital contribution of $63,603,532. Fitness Foods, Inc., a related party (Note
9), owns 90,000 of the Class A-1 shares and 10,000 of the Class L shares,
for which they contributed $10,000,000 of tangible and intangible assets to the
Company, with an estimated fair value of $10,000,000.




Holdings
also authorized the issuance of 200,000 Class A-2 common shares. The 25,123
Class A-2 common shares were issued to various employees of the Company at
approximately $1 above par, resulting in a capital contribution of
$25,123.




The
Class A-1 common shares are referred to as the “Voting Class A Common
Shares”. The holders of the Voting A-1 Common Shares have and possess all powers
and voting rights pertaining to the shares of the Company. The Class L common
shares are entitled to receive all distributions until there has been paid an
amount equal to the Class L base amount plus an amount sufficient to generate an
internal rate of return equal to 10% per annum, compounded quarterly. After
fulfilling the requirement of the Class L shares, any additional distributions
will be made to the Class A shares. The Class A-2 common shares are
non-voting shares and contain limited rights.




In
connection with the acquisition of Fitness Foods, Inc. assets (Note 3), Fitness
Foods, Inc. was also granted a “put option” which entitles them, upon the
occurrence of a change-of-control event, to require the Company to purchase all
of their Class A-1 common shares for $10 per share and their Class L common
shares for $910 per share. In connection with the proposed merger agreement
(Note 13), Fitness Foods, Inc. has agreed to waive this option.


F-38


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




Note 9—Commitments and
Contingencies




Lease Commitments: The
Company leases office space in New Jersey and Missouri under separate lease
agreements that expire on March 31, 2007 and June 30, 2008,
respectively. The New Jersey lease is with a related party (Note 10) and
contains an option to renew for one lease term of three years. Subsequent to
December 31, 2006 the New Jersey lease has been extended on a month to
month basis effective April 1, 2007.




Rent
expense for the period from January 1, 2007 to May 20, 2007 was
approximately $40,250 and for the year ended December 31, 2006 was
approximately $91,300.




Litigation: The Company is
subject to legal proceedings and claims that arise in the ordinary course of
business. In the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect the financial position of
the Company.




Commitment: As of
December 31, 2006 and May 20, 2007, the Company was committed to purchasing
approximately $4.7 million and $16.3 million, respectively, of peanuts, palm,
soy and canola oil products during the next year.




Note 10—Related Party
Transactions




In
connection with the acquisition of certain assets as discussed in Note 3, the
Company has a Transitional Services Agreement with New Industries Corporation, a
company controlled by the shareholders of Fitness Foods, Inc. to provide the
Company certain sales and marketing, management, administration and operational
services.




The
Company amended the Transitional Services Agreement in 2005 to extend the term
to the earlier of six months after a sale transaction or June 30, 2007.
Base fees in connection with this agreement are $141,667 per month. The
agreement also contains a provision for an additional payment, an EBITDA bonus,
in an amount equal to ten percent of the Company’s adjusted EBITDA for the
fiscal year ending December 31, 2006. The EBITDA bonus is payable on the
later of the termination of the agreement or thirty days after the receipt of
audited financial statements for the fiscal year ending December 31,
2006.




In July
2006, the Transitional Services Agreement was amended to include a provision for
an additional payment, an EBITDA bonus, in an amount equal to ten percent of the
Company’s adjusted EBITDA for the fiscal year ending December 31, 2006. The
EBITDA bonus is payable on the later of the termination of the agreement or
thirty days after the receipt of audited financial statements for the fiscal
year ending December 31, 2006 and is included with due to related party at
December 31, 2006. The Company expensed approximately $2,835,000 relating
to the EBITDA bonus for the year ended December 31, 2006 and this amount is
included with management fees, a component of selling, general and
administrative expenses.




The
Company expensed approximately $4,535,000 during the year ended
December 31, 2006 related to the base fees and EBITDA
bonus.


F-39


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




The
Transitional Services Agreement also contains a provision for an additional
payment, a sale bonus, in connection with the sale transaction with Boulder
Specialty Brands, Inc. (Note 13), in an amount equal to five percent
(5%) of the consideration that is actually received by the holders of all
outstanding shares of GFA Holdings, Inc.’s Class A-1 Common Stock and
Class A-2 Common Stock. Ninety percent (90%) of the non-contingent
portion of the sales bonus shall be payable in cash at the closing of the sale
transaction. The remainder of the sale bonus shall be payable upon the later to
occur of the agreement termination date or when the consideration is actually
received by the holders of the Class A-1 Common Stock and Class A-2
Common Stock. No amounts were accrued under the sale bonus provision for the
year ended December 31, 2006, as the sale transaction was not yet complete.
In May 2007, $19,047,823 was accrued since the sale was expected to be completed
on May 21, 2007.




The
Company has also entered into an agreement with an employee for the payment of a
sale bonus in the event of the successful completion of the sale of the Company.
No amounts were accrued under this sale bonus for the year ended
December 31, 2006, since the sale transaction was not yet complete. In May,
2007, $2,737,614 was accrued since the sale was expected to be completed on
May 21, 2007.




The
Company has a Management Agreement with Mason Sundown Management, LLC, an entity
controlled by certain shareholders of the Company. The agreement provides for
management and advisory services to the Company for an annual management fee of
$500,000 commencing March 31, 2004. The Company expensed $500,000 during
the year ended December 31, 2006.




The
Company leases its New Jersey office space from Woodland Company, an entity
controlled by the shareholders of Fitness Foods, Inc. The agreement provides for
annual lease payments of $78,000 commencing April 1, 2004 through
March 31, 2007. The Company expensed $78,000 for the year ended
December 31, 2006.




Note 11—Employee Benefit
Plan




The
Company sponsors a profit sharing and 401(k) plan, which provides for matching
contributions and profit sharing contributions for eligible participating
employees. The Company’s contribution to the profit sharing and 401(k) plan
amounted to approximately $128,000 for the year ended December 31, 2006.
The amount for the period January 1, 2007 to May 20, 2007 was not
material.




Note 12—Income
Taxes




The
components of income tax expense for the period from January 1, 2007 to
May 20, 2007 and for the year ended December 31, 2006, are as
follows:




January 1 to
                    May 20, 2007
                  
                  
                  December 31,
                    2006Current:Federal
                  
                  $
                  (4,633,866
                  )
                  
                  $
                  6,345,209State
                  
                  
                  (862,306
                  )
                  
                  
                  2,029,842(5,496,172
                  )
                  
                  
                  8,375,051Deferred:Federal
                  
                  
                  1,442,564
                  
                  
                  
                  (1,013,949
                  )State
                  
                  
                  268,444
                  
                  
                  
                  1,760,5361,711,008
                  
                  
                  
                  746,587$
                  (3,785,164
                  )
                  
                  $
                  9,121,638


F-40


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




The
following is a reconciliation between the amount of reported income tax expense
and the tax at the federal statutory rate for the period from January 1,
2007 to May 20, 2007 and for the year ended December 2006:




January 1 to
                          May 20, 2007
                        
                        
                        December 31,
                          2006Tax
      at federal rate
                        
                        $
                        (3,192,359
                        )
                        
                        $
                        7,667,654State
      and local taxes, net of federal benefit
                        
                        
                        (593,863
                        )
                        
                        
                        1,422,176Nondeductible
      expenses
                        
                        
                        1,058
                        
                        
                        
                        —Other
                        
                        
                        —
                        
                        
                        
                        31,808$
                        (3,785,164
                        )
                        
                        $
                        9,121,638





Net
deferred tax liabilities consist of the following components as of May 20,
2007 and December 31, 2006:





May
      20,
                        2007
                      
                      
                      December
      31,
                        2006Deferred
      tax assets (liabilities):Accounts
      receivable allowances
                      
                      $
                      71,630
                      
                      
                      $
                      71,788Inventory
      capitalization
                      
                      
                      155,369
                      
                      
                      
                      142,248Contributions
                      
                      
                      8,359
                      
                      
                      
                      —Property
      and equipment
                      
                      
                      17,183
                      
                      
                      
                      16,271Intangibles
                      
                      
                      (7,357,292
                      )
                      
                      
                      (6,817,576
                      )Deferred
      loan fees
                      
                      
                      (391,961
                      )
                      
                      
                      (391,961
                      )EBITDA
      bonus
                      
                      
                      —
                      
                      
                      
                      1,193,525$
                      (7,496,712
                      )
                      
                      $
                      (5,785,705
                      )





The
components that give rise to the net deferred tax liabilities described above
have been included in the accompanying balance sheet as of May 20, 2007 and
December 31, 2006 are as follows:




May
      20,
                        2007
                      
                      
                      December
      31,
                        2006Current
      assets
                      
                      $
                      235,358
                      
                      
                      $
                      1,015,599Noncurrent
      liabilities
                      
                      
                      (7,732,070
                      )
                      
                      
                      (6,801,304
                      )$
                      (7,496,712
                      )
                      
                      $
                      (5,785,705
                      )


F-41


GFA
HOLDINGS, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements—(Continued)




Note 13—Subsequent
Event




On May
21, 2007, as part of the merger agreement, Smart Balance, Inc., formerly known
as Boulder Specialty Brands, Inc., acquired 100% of the stock of GFA Holdings,
Inc., the parent company of GFA Brands, Inc.  Concurrent with this
acquisition, Boulder Specialty Brands, Inc. changed its name to Smart Balance,
Inc. The cost of the acquisition was approximately $491
million.  Under the GFA merger agreement, stockholders of GFA Holdings
were paid approximately $491 million in cash which included the assumption of
post-closing bonus payments, net of tax benefits.




Note 14—Selling, General and
Administrative Expenses




The major
components of the selling, general and administrative expenses for the period
from January 1, 2007 to May 20, 2007 and for the year ended
December 31, 2006 include the following:




January 1,
                    2007 to
                    May 20, 2007
                  
                  
                  December 31,
                    2006Advertising
                  
                  $
                  11,918,461
                  
                  
                  $
                  22,167,467Trade
      deal costs
                  
                  
                  4,839,957
                  
                  
                  
                  11,095,757Other
      marketing costs
                  
                  
                  2,988,916
                  
                  
                  
                  8,039,559Freight
      and handling charges
                  
                  
                  4,302,563
                  
                  
                  
                  9,254,979Management
      fees
                  
                  
                  19,964,490
                  
                  
                  
                  5,050,867Broker
      commissions
                  
                  
                  1,636,365
                  
                  
                  
                  3,320,444Other
                  
                  
                  3,023,107
                  
                  
                  
                  5,723,806$
                  48,673,859
                  
                  
                  $
                  64,652,479


F-42