UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549









FORM
10-Q







QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934




For
      The Quarter Ended March 31, 2009
              
              Commission
      File Number 000-51506







Smart
Balance, Inc.


(Exact
name of registrant as specified in its charter)










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




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




Registrant’s
telephone number, including area code: (201) 568-9300









Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No   ̈.





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).    Yes o   No  o




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




Large
      Accelerated Filer     £
                Accelerated
      Filer                           TNon-Accelerated
      Filer       £ (Do not check if a smaller
      reporting company)
                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.




As of May7, 2009the Registrant had62,630,683shares of common stock, par value
$.0001 per share, outstanding.













SMART
BALANCE, INC.




INDEX




PagePart
      I.
                Financial
      Information
                1Item 1.
                Financial
      Statements
                1Item 2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                16Item 3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                23Item 4.
                Controls
      and Procedures
                24Part
      II.
                Other
      Information
                25Item 1.
                Legal
      Proceedings.
                25Item 1A.
                Risk
      Factors.
                25Item 6.
                Exhibits.
                25




i





Part
I.        Financial
Information


Item 1.       Financial
Statements




SMART
BALANCE, INC. AND SUBSIDIARY


Consolidated
Balance Sheets


(In thousands, except share
data)





March
      31,
                        
                        
                        December
      31,2009
                            (unaudited)
                        
                        
                        2008AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        8,136
                        
                        
                        $
                        5,492Accounts
      receivable, net of allowance of: 2009 – $313 and  2008 -
      $256
                        
                        
                        14,832
                        
                        
                        
                        14,283Accounts
      receivable - other
                        
                        
                        889
                        
                        
                        
                        692Inventories
                        
                        
                        8,421
                        
                        
                        
                        9,322Prepaid
      taxes
                        
                        
                        840
                        
                        
                        
                        709Prepaid
      expenses and other assets
                        
                        
                        10,103
                        
                        
                        
                        1,019Deferred
      tax asset
                        
                        
                        509
                        
                        
                        
                        650Total
      current assets
                        
                        
                        43,730
                        
                        
                        
                        32,167Property
      and equipment, net
                        
                        
                        4,389
                        
                        
                        
                        4,301Other
      assets:Goodwill
                        
                        
                        374,886
                        
                        
                        
                        374,886Intangible
      assets, net
                        
                        
                        154,207
                        
                        
                        
                        155,223Deferred
      costs, net
                        
                        
                        1,674
                        
                        
                        
                        1,737Other
      assets
                        
                        
                        428
                        
                        
                        
                        222Total
      other assets
                        
                        
                        531,195
                        
                        
                        
                        532,068Total
      assets
                        
                        $
                        579,314
                        
                        
                        $
                        568,536Liabilities
      and Stockholders' EquityCurrent
      liabilitiesAccounts
      payable and accrued expenses
                        
                        $
                        30,591
                        
                        
                        $
                        24,938Income
      taxes payable
                        
                        
                        2,482
                        
                        
                        
                        1,080Total
      current liabilities
                        
                        
                        33,073
                        
                        
                        
                        26,018Long
      term debt
                        
                        
                        69,504
                        
                        
                        
                        69,504Derivative
      liability
                        
                        
                        4,587
                        
                        
                        
                        5,132Deferred
      tax liability
                        
                        
                        45,165
                        
                        
                        
                        46,268Other
      liabilities
                        
                        
                        377
                        
                        
                        
                        163Total
      liabilities
                        
                        
                        152,706
                        
                        
                        
                        147,085Commitment
      and contingenciesStockholders'
      equityPreferred
      stock, $.0001 par value, 50,000,000
      shares  authorized
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, $.0001 par value, 250,000,000 shares authorized; 62,630,683 (2009)
      and 62,630,683 (2008) issued and outstanding
                        
                        
                        6
                        
                        
                        
                        6Additional
      paid in capital
                        
                        
                        511,388
                        
                        
                        
                        507,377Retained
      deficit
                        
                        
                        (84,786
                        )
                        
                        
                        (85,932
                        )Total
      stockholders' equity
                        
                        
                        426,608
                        
                        
                        
                        421,451Total
      liabilities and stockholders' equity
                        
                        $
                        579,314
                        
                        
                        $
                        568,536




See
accompanying notes to the consolidated financial statements





1





SMART
BALANCE, INC. AND SUBSIDIARY


Consolidated
Statements of Operations


(Unaudited)


(In
thousands, except share data)





Three
      Months Ended
                          March
      31,2009
                        
                        
                        2008Net
      sales
                        
                        $
                        62,599
                        
                        
                        $
                        50,790Cost
      of goods sold
                        
                        
                        34,345
                        
                        
                        
                        27,940Gross
      profit
                        
                        
                        28,254
                        
                        
                        
                        22,850Operating
      expenses:Marketing
                        
                        
                        8,800
                        
                        
                        
                        7,398Selling
                        
                        
                        4,517
                        
                        
                        
                        4,146General and
      administrative
                        
                        
                        11,729
                        
                        
                        
                        9,346Total operating
      expenses
                        
                        
                        25,046
                        
                        
                        
                        20,890Operating
      income
                        
                        
                        3,208
                        
                        
                        
                        1,960Other
      income (expense):Interest
income
                        
                        
                        1
                        
                        
                        
                        251Interest
    expense
                        
                        
                        (1,679
                        )
                        
                        
                        (3,232
                        )Gain on derivative
      liability
                        
                        
                        546
                        
                        
                        
                        -Other expense,
    net
                        
                        
                        (143
                        )
                        
                        
                        (941
                        )Total other income
      (expense)
                        
                        
                        (1,275
                        )
                        
                        
                        (3,922
                        )Income
      (loss) before income taxes
                        
                        
                        1,933
                        
                        
                        
                        (1,962
                        )Provision
      (benefit) for income taxes
                        
                        
                        787
                        
                        
                        
                        (785
                        )Net
      income (loss)
                        
                        $
                        1,146
                        
                        
                        $
                        (1,177
                        )Income
      (loss) per share:Basic
                        
                        $
                        0.02
                        
                        
                        $
                        (0.02
                        )Diluted
                        
                        $
                        0.02
                        
                        
                        $
                        (0.02
                        )Weighted
      average shares outstanding:Basic
                        
                        
                        62,630,683
                        
                        
                        
                        62,196,988Diluted
                        
                        
                        62,706,184
                        
                        
                        
                        62,196,988




See
accompanying notes to the consolidated financial statements





2





SMART
BALANCE, INC. AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)


(In
thousands)





Three
      Months Ended
                      March
      31,2009
                    
                    
                    2008Cash
      flows from operating activitiesNet
      income (loss)
                    
                    $
                    1,146
                    
                    
                    $
                    (1,177
                    )Adjustments
      to reconcile net income (loss) to net cashprovided
      by operating activities:Depreciation and
      amortization
                    
                    
                    1,273
                    
                    
                    
                    2,035Deferred income
      taxes
                    
                    
                    (962
                    )
                    
                    
                    -Stock based
      compensation
                    
                    
                    4,010
                    
                    
                    
                    3,534(Decrease) in derivative
      liabilities
                    
                    
                    (545
                    )
                    
                    
                    -Changes
      in assets and liabilities:Accounts
      receivable
                    
                    
                    (549
                    )
                    
                    
                    (94
                    )Inventories
                    
                    
                    900
                    
                    
                    
                    (474
                    )Prepaid expenses and other
      current assets
                    
                    
                    (9,412
                    )
                    
                    
                    (6,231
                    )Accounts payable and accrued
      expenses
                    
                    
                    7,065
                    
                    
                    
                    2,316Net
      cash provided by (used in) operating activities
                    
                    
                    2,926
                    
                    
                    
                    (91
                    )Cash
      flows from investing activitiesPurchase
      of property and equipment
                    
                    
                    (282
                    )
                    
                    
                    (892
                    )Proceeds
      from legal settlement
                    
                    
                    -
                    
                    
                    
                    367Net
      cash (used in) investing activities
                    
                    
                    (282
                    )
                    
                    
                    (525
                    )Cash
      flows from financing activitiesRepayment
      of debt
                    
                    
                    -
                    
                    
                    
                    (30,000
                    )Net
      cash (used in) financing activities
                    
                    
                    -
                    
                    
                    
                    (30,000
                    )Net
      increase (decrease) in cash for the period
                    
                    
                    2,644
                    
                    
                    
                    (30,616
                    )Cash
      - Beginning of period
                    
                    
                    5,492
                    
                    
                    
                    37,649Cash
      - End of period
                    
                    $
                    8,136
                    
                    
                    $
                    7,033Cash
      paid during the period for:Income
      taxes
                    
                    $
                    344
                    
                    
                    $
                    650Interest
                    
                    $
                    1,588
                    
                    
                    $
                    3,297Supplemental
      disclosure of non-cash activity:Conversion
      of Series A Convertible Preferred Stock
                    
                    $
                    -
                    
                    
                    $
                    175,659




See
accompanying notes to the consolidated financial statements





3




SMART
BALANCE, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements


(Unaudited)


(In
thousands, except share data)




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 should be considered
to include the predecessor company Boulder.




The
accompanying condensed consolidated financial statements include all adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, considered necessary for a fair presentation of the results for the
periods presented. These financial statements should be read in conjunction with
the consolidated financial statements of Smart Balance, Inc. included in the
Company's 2008 annual report on Form 10-K. The reported results for the three
month period ended March 31, 2009 are not necessarily indicative of the results
to be expected for the full year.




2.
            Summary of significant
      accounting policies




Cash andCashEquivalents




The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.




AccountsReceivable




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.




4




Inventories




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




Property andEquipment




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 capitalizes software development costs
related to its new Enterprise Resource Planning (ERP) and Trade Promotion Spend
(TPS) management software packages.  Amortization of these costs
commenced in May 2008 and January 2009, respectively, when the programs were
fully ready for their intended use.




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
would be 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.




IntangibleAssets




Other
intangible assets 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.




The
Company has determined that its Smart Balance® and
Earth Balance®
trademarks have indefinite lives and 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.




5




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 are 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.




DeferredCosts




Deferred
loan costs associated with the secured debt financing are being amortized over
the life of the loan, 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 and consumers 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.
For interim reporting, the Company estimates the total annual sales incentives
for most programs and records a pro rata share in proportion to forecasted
annual revenue.  As a result, the Company has recorded a prepaid asset
at March 31, 2009 of $9,236 which will be charged to expense over the remaining
three quarters.  The Company sells their products to customers without
the right of return and is not obligated to accept any returns.




Net Income (Loss)per Share of Common
Stock




Net
income (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 primarily include stock options and founders’
warrants.  At March 31, 2009, no stock options were dilutive
because the weighted average market price, including the unrecognized
compensation expense related to such shares, was in excess of their exercise
price. However, the founders’ warrants were dilutive because the weighted
average market price was in excess of their exercise price, which resulted in
75,501 additional shares being assumed issued during the first quarter of
2009.




6




The
following table summarizes stock options not included in the computation of
diluted earnings per share:




Three
      Months Ended
                  March
      31,2009
                
                
                2008Stock
      options excluded due to option price being greater thanmarket
      value
                
                
                11,897,500
                
                
                
                10,085,000Stock
      options excluded due to anti-dilution
                
                
                230,000
                
                
                
                37,500Founding
      director warrants excluded due to anti-dilution
                
                
                -
                
                
                
                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.




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 values of cash and
cash equivalents and short term receivables and payables approximate fair value
because of their short maturities. The Company’s notes payable are determined by
quoted market prices that are reset every three months and, therefore,
approximates fair value.




Research and
Development




Research
and development expenses are charged to operations when incurred and amounted to
$88 and $41 respectively, for the three months ended March 31, 2009 and
2008.




Derivative
Instruments




The
Company recognizes derivatives as either assets or liabilities and measures
those instruments at fair value. The accounting for changes in fair value is
included in earnings when the hedged exposure affects earnings. The Company uses
interest rate swaps to cover exposure to changes in interest rates.




7




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 March 31, 2009, no valuation allowances
were recorded.




Advertising




Advertising
costs are charged to operations (classified as marketing expenses) and amounted
to $5,157 and $4,763 for the three months ended March 31, 2009 and 2008,
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 March 31, 2009, 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 during the three months ended March 31, 2009. The aggregate
accounts receivable from this customer amounted to approximately 20% of the
accounts receivable balance outstanding at March 31, 2009. The Company also has
one product, “spreads,” which, for the three months ended March 31, 2009,
accounted for approximately 76% of total revenue.  Approximately 81%
of the Company’s revenues during the first quarter of 2009 came from products
utilizing 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 became effective in the first quarter of
2009 requires 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 adopted EITF 07-5,
effective January 1, 2009, and it had no effect on the Company’s financial
statements.




8




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 after
November 15, 2008. The Company adopted SFAS No. 161, effective January 1,
2009, and it had no effect on the Company’s financial statements.




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 Company adopted SFAS 141R, effective January 1, 2009
and it had no effect on the Company’s financial statements.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” as
it relates to nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value in the financial statements on at least an
annual basis. FSP SFAS 157-2 deferred the Statements effective date for certain
nonfinancial assets and non financial liabilities to fiscal years beginning
after November 15, 2008. SFAS 157 establishes a framework for measuring
fair value and expands disclosures about fair value measurements. The provisions
of this standard apply to other accounting pronouncements that require or permit
fair value measurements and are to be applied prospectively with limited
exceptions. The Company adopted SFAS 157, as it relates to nonfinancial assets
and nonfinancial liabilities on January 1, 2009 and it had no effect on the
Company’s financial statements.




3.
            Property and
      equipment




Property
and equipment consist of the following:




March
      31,
                    2009
                    (unaudited)
                  
                  
                  December 31,
                    2008Software
      development costs
                  
                  $
                  3,452
                  
                  
                  $
                  3,198Equipment
                  
                  
                  416
                  
                  
                  
                  394Furniture
      and fixtures
                  
                  
                  855
                  
                  
                  
                  849Leasehold
      improvements
                  
                  
                  332
                  
                  
                  
                  332Gross
      assets
                  
                  
                  5,055
                  
                  
                  
                  4,773Less:
      accumulated depreciation
                  
                  
                  (666
                  )
                  
                  
                  (472
                  )Property
      and equipment, net
                  
                  $
                  4,389
                  
                  
                  $
                  4,301




9




Depreciation
expense was $194 for the three months ended March 31, 2009 compared
to $53 for the three months ended March 31, 2008.




4.
            Accounts payable and
      accrued expenses




Accounts
payable and accrued expenses consist of the following:




March
      31,
                2009
              
              
              December 31,
                2008(unaudited)Accounts
      payable
              
              $
              18,038
              
              
              $
              16,971Trade
      spend accruals
              
              
              8,713
              
              
              
              3,547Other
      accrued expenses
              
              
              3,840
              
              
              
              4,420Total
              
              $
              30,591
              
              
              $
              24,938





5.
            Intangible
      assets




The
following is a summary of intangible assets and goodwill as of March 31,
2009:




Gross
                  Carrying
                  Amount
                
                
                Accumulated
                  Amortization
                
                
                Accumulated
                  Adjustments
                
                
                Net Balance,
                  March 31,
                  2009
                  (unaudited)Patent
      technology
                
                $
                40,000
                
                
                $
                7,464
                
                
                $
                -
                
                
                $
                32,536Supply
      relationship
                
                
                1,000
                
                
                
                130
                
                
                
                -
                
                
                
                870Trademarks
                
                
                121,152
                
                
                
                -
                
                
                
                (351
                )
                
                
                120,801Goodwill
                
                
                374,886
                
                
                
                -
                
                
                
                -
                
                
                
                374,886$
                537,038
                
                
                $
                7,594
                
                
                $
                (351
                )
                
                $
                529,093




Adjustments
to trademarks relate to a legal settlement received of $367 and serve to reduce
related costs previously capitalized. Additional spending of $16 during the
period accounted for the difference.  Amortization expense was $1,017
and $1,023 for the three months ended March 31, 2009 and 2008,
respectively.





6.
            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 March 31, 2009, 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.  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.




10




In
accordance with a pricing grid based on the Company’s leverage ratio, the
applicable margin is LIBOR plus 3.00% per annum beginning March 28, 2008, which
resulted in an interest rate of 4.23% at March 31, 2009. 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 March 31, 2009 of 7.23%.




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.  As of March 31,
2009, the Company had a derivative liability of $4,587 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 March 31, 2009 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 March 31, 2009, 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 LIBOR interest rate
environment would increase allowing the Company to pay off the quarterly swap
requirements on more favorable terms.




There is
no prepayment penalty for optional prepayments on the first lien facility and
the following penalties for optional prepayments on the second lien facility:
1.00% premium if prepaid before May 21, 2009; 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.




11




The first
lien credit facility requires the Company to comply with certain financial
covenants, such as ratios of Consolidated EBITDA (as defined in the first lien
credit facility) to each of consolidated cash interest charges, total debt and
first lien debt.  The second lien credit facility requires the Company
to comply with one financial covenant consisting of a leverage ratio of total
debt to Consolidated EBITDA (as defined in the second lien credit
facility).  The Company was in compliance with all of its debt
covenants at March 31, 2009.




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




The
following is a summary of long-term debt:




March
      31,
                            2009
                          
                          
                          December 31,
                            2008(unaudited)First
      lien term loan
                          
                          $
                          59,504
                          
                          
                          $
                          59,504Second
      lien term loan
                          
                          
                          10,000
                          
                          
                          
                          10,000Total
      Debt:
                          
                          
                          69,504
                          
                          
                          
                          69,504Less:
      Current maturities
                          
                          
                          -
                          
                          
                          
                          -Total
      long term debt
                          
                          $
                          69,504
                          
                          
                          $
                          69,504




7.
            Stock-based
      compensation




The
Company and its stockholders have authorized the issuance of up to 12,150,000
stock options under its Stock and Award’s Plan.  Through March 31,
2009, the Company had granted a total of 10,967,500 stock options under the
Stock and Awards Plan, of which 215,000 were forfeited.




In
addition, during the first quarter of 2008, the compensation committee and a
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.




The
Company has two types of stock options, traditional service-based options 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 or
$20.25, respectively, and remains there for 20 out of 30 consecutive trading
days. Stock options are granted to employees at exercise prices equal to the
fair market value of the Company's stock at the dates of grant. 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.




12




Number of
                      Outstanding
                      Shares
                    
                    
                    Weighted
                      Average
                      Exercise Price
                    
                    
                    Weighted
                      Average
                      Remaining Life
                      (Years)Balance
      at December 31, 2008
                    
                    
                    12,045,000
                    
                    
                    $
                    9.47
                    
                    
                    
                    8.71Granted
      during the three months  ended March 31, 2009
                    
                    
                    107,500
                    
                    
                    
                    6.42
                    
                    
                    
                    9.94Forfeited
      during the three months  ended March 31, 2009
                    
                    
                    (25,000
                    )
                    
                    
                    9.85
                    
                    
                    
                    8.39Exercised
      during the three months  ended March 31, 2009
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at March 31, 2009
                    
                    
                    12,127,500
                    
                    
                    $
                    9.44
                    
                    
                    
                    8.47





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 (loss) is as
follows:




Three
      Months Ended
                        March
      31,2009
                      
                      
                      2008Service
      period-based
                      
                      $
                      1,871
                      
                      
                      $
                      1,595Market
      price-based $16.75
                      
                      
                      1,228
                      
                      
                      
                      1,113Market
      price-based $20.25
                      
                      
                      911
                      
                      
                      
                      826Total
                      
                      $
                      4,010
                      
                      
                      $
                      3,534




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 vesting period.
In the case of the market price-based stock options, the Company used the Monte
Carlo valuation model.  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.




8.
            Liquidity and capital
      resources




The
Company’s current cash position at March 31, 2009 was $8,136.  At
March 31, 2009, the Company had outstanding payables, accrued expenses and
liabilities of $33,073.  The Company’s short term liabilities exceed
our available cash position by $24,937.  As noted in the long-term
debt footnote, the Company has a revolving credit facility of $20,000, which it
can use to augment cash requirements.





13




9.
            Interest rate
      derivatives




In
conjunction with the fixed-rate debt arrangements noted above the Company
entered into notional $80,000 of interest rate swaps on August 16, 2007,
which is designed to provide a constant interest rate on the variable rate debt.
Under these swaps, the Company receives or pays 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 settle on the last day of each
calendar quarter. For the quarter ended March 31, 2009, the Company paid 5.05%
and received 1.46% with the difference increasing interest expense by
$718.




10.
            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 license
products. The agreement expires at the end of each patent period of 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 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 for the quarterly period
ended March 31, 2009 were $289.




11.
            Income
      taxes




The
Company’s effective tax rate for the year is dependent on many factors,
including the impact of enacted tax laws in jurisdictions in which it operates
and the amount of taxable income it earns. The Company’s effective tax rate for
2009 is estimated to be 41%.  The deferred tax liability represents
primarily the difference between the tax and accounting basis of intangible
assets acquired in the GFA merger.




12.
            Commitment and
      contingencies




As of
March 31, 2009, the Company had the following commitments and contractual
obligations:




·
            A
      lease agreement for the lease of a corporate office facility located in
      Paramus, NJ.  The lease has an approximate five-year life with
      the option to extend the lease for two additional five-year
      terms.  The annual rental expense is approximately $300 for
      the first five years.




·
            Three
      lease agreements for the lease of a corporate office facility located in
      Niwot, Colorado.  The leases have an approximate five-year life
      with the option to extend each lease for 36 months.  The annual
      rental expense is approximately $120 for the first five
      years.




14




·
            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 $30.8
      million as of March 31, 2009.  The commitments are expected
      to be liquidated by the second quarter of 2010 with the majority being
      liquidated by December 2009.




·
            The
      Company uses interest rate swaps to cover exposure to changes in interest
      rates on its secured debt financing (see note
  6).




The
Company is party to various legal proceedings arising in the ordinary course of
business. Management believes that the resolution of these matters will not have
a material adverse affect on the Company’s financial position, results of
operations or cash flow.





15





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




Forward
Looking Statements




Certain
information included in this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” contains forward-looking statements made
in reliance upon the safe harbor provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements may be identified by the use
of words, such as “anticipate,” “estimates,” “should,” “expect,” “guidance,”
“project,” “intend,” “plan,” “believe” and other words and terms of similar
meaning, in connection with any discussion of our future business, results of
operations, liquidity and operating or financial performance. Such
forward-looking statements involve significant material known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. These
risks should be considered in connection with any written or oral
forward-looking statement that we or any person acting on our behalf may issue
in this document or otherwise, now or in the future. Further, certain
information contained in this document is a reflection of our intention as of
the date of this filing and is based upon, among other things, the existing
regulatory environment, industry conditions, market conditions and prices, the
economy in general and our assumptions as of such date. We may change our
intentions based upon any changes in such factors, in our assumptions or
otherwise.




We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
We cannot assure you that any future results, performance or achievements will
be achieved. For a discussion of these risks, uncertainties and other factors,
see the “Risk Factors” and “Cautionary Note Regarding Forward-Looking
Statements” sections included in our annual report on Form 10-K for the year
ended December 31, 2008.




GFA
Merger




We were
incorporated in Delaware on May 31, 2005 under the name Boulder Specialty
Brands, Inc. On May 21, 2007, we completed a merger with GFA Brands, Inc.
(“GFA”), which owns and markets the Smart Balance® line of
products, among others. GFA is our wholly-owned subsidiary. After the merger,
the corporate name was changed from Boulder Specialty Brands, Inc. to Smart
Balance, Inc. (“Smart Balance” or the “Company”). Pursuant to the merger
agreement with GFA, we paid an aggregate of $491 million in cash (which included
post-closing bonus payments net of tax benefits) as merger consideration. The
cash consideration for the merger was funded with cash held in the trust account
established in connection with our initial public offering, the proceeds of a
private placement and a secured debt financing.





16




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
spreads products under the 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
SmartBalance®, Earth
Balance®,
SmartBeat® and
Nucoa®, is by
far the most developed product segment and accounted for approximately 76% of
sales for the three months ended March 31, 2009.




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. We utilize regional sales managers who are full-time
employees and work with food brokers to sell our products. In September 2007, we
entered into an agreement with Acosta, Inc. to become our national sales agency.
Additionally, we sell a small portion of our products through independent food
distributors. Our largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for approximately 20% of net sales for the three months ended March
31, 2009.




Our
signature buttery spreads and popcorn products utilize a proprietary licensed,
patented technology that is free of trans fats and enhances good-to-bad
cholesterol ratios. 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.  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.




We
outsource finished goods through 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 with 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.




17




Our
manufacturers supply our products at a price equal to the cost of ingredients
and certain packaging plus a fixed 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 two third party
distributors 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 has substantially greater
market presence, longer operating histories, better distribution, more
significant customer bases and greater financial, marketing, capital and other
resources than us.




Results
of Operations




The
following discussion includes the operating results of GFA, the Company’s
wholly-owned subsidiary.  The following discussion should be read in
conjunction with our unaudited consolidated financial statements and related
notes thereto included elsewhere in this Form 10-Q.


18




Results
of Operations for the Three Months Ended March 31, 2009 Compared to the Three
Months Ended March 31, 2008




(In
      millions except share data)
                  
                  Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008Net
      sales
                  
                  $
                  62.6
                  
                  
                  $
                  50.8Cost
      of goods sold
                  
                  
                  34.3
                  
                  
                  
                  27.9Gross
      profit
                  
                  
                  28.3
                  
                  
                  
                  22.9Operating
      expenses
                  
                  
                  25.1
                  
                  
                  
                  20.9Operating
      income
                  
                  
                  3.2
                  
                  
                  
                  2.0Other
      expenses, net
                  
                  
                  (1.3
                  )
                  
                  
                  (4.0
                  )Income
      (loss) before income taxes
                  
                  
                  1.9
                  
                  
                  
                  (2.0
                  )Provision
      (benefit) for income taxes
                  
                  
                  0.8
                  
                  
                  
                  (0.8
                  )Net
      income (loss)
                  
                  $
                  1.1
                  
                  
                  $
                  (1.2
                  )Net
      income (loss) per common share
                    -
      basic and
      diluted
                  
                  $
                  0.02
                  
                  
                  $
                  (0.02
                  )





Net
Sales:




Our net
sales for the three months ended March 31, 2009 increased 23.3% to $62.6 million
from $50.8 million for the three months ended March 31, 2008.  The
increase was primarily due to higher prices and a 6% increase in cases shipped,
partially offset by higher coupon redemption expenses.  We increased
prices on our spreads products three times in 2008 to cover rising costs,
consistent with competitive actions in the industry.




The
increase in cases shipped was due primarily to the introduction of milk in the
northeast, growth in the core category of spreads, and higher sales of cooking
oil. The spreads case increase came from the expansion of 50/50 butter blend
sticks while base retail tub volumes were relatively flat, compared to the first
quarter of 2008, when the Company built inventory at retail as part of its
distribution expansion.




Cost
of Goods Sold:




Cost of
goods sold for the three months ended March 31, 2009 was $34.3 million, a 22.9%
increase from the same period in 2008.  The increase was due to higher
input costs, notably vegetable oils used in the Company’s products, and the
increase in cases shipped.




Gross
Profit:




Our gross
profit increased $5.4 million to $28.3 million for the three months ended March
31, 2009 from $22.9 million in 2008 due to the impact of higher pricing and the
growth in case shipments, partially offset by increases in input costs and
higher coupon redemption expenses.


19




Gross
profit as a percent of net sales was virtually flat versus last year at 45.1%,
as the benefit of selling price increases was offset by higher input costs and
coupon redemption expenses.




Operating
Expenses:




Total
operating expenses for the three months ended March 31, 2009 were $25.1 million
compared to $20.9 million for the corresponding period in 2008, an increase of
$4.2 million.  The operating expenses include selling, marketing and
general and administrative expenses.  The increase reflected higher
marketing investments behind product expansions.  Included in general
and administrative costs in 2009 were approximately $4.0 million of stock-based
compensation expense, as determined under Statement of Financial Reporting
Standard (SFAS) No. 123R, and $1.2 million in depreciation and
amortization.  In 2008 there were $3.5 million of stock-based compensation
expense and $1.1 million of depreciation and amortization.  Included
in depreciation and amortization was a $0.9 million charge for the accelerated
amortization of deferred loan costs resulting from March 2008 debt
prepayment.




Operating
Income (Loss):




Our
operating income was $3.2million for the first
three months of 2009 compared with operating income of $2.0 million for the
corresponding period in 2008.  Operating income increased $1.2
million, as the $5.4 million increase in gross margin was partially offset by a
$4.2 million increase in operating expenses.  Excluding non-cash
charges for stock based-compensation and depreciation and amortization of
$5.2 million in 2009 and $4.6 million in 2008, operating income increased $1.8
million to $8.4 million in 2009 from $6.6 million in 2008.




Other
Income (Expense):




We
incurred other expenses of $1.3 million for the three months ended March 31,
2009 compared to expenses of $4.0 million in the corresponding period in
2008.  The results for 2009 and 2008 included net interest expense of
$1.1 and $3.2million,
respectively.  Included in the 2009 net interest expense is a $0.5
million gain on derivatives related to our interest rate
swap.  Included in the 2008 net interest expense is a prepayment
penalty of $0.6 million for the March prepayment of the second lien debt in the
amount of $30 million.  We also had approximately $0.9million of other expenses
for the three months ended March 31, 2008 which represented almost entirely the
write off of our deferred financing costs related to the prepayment of
debt.




Income
Taxes:




The
provision for income taxes for the three months ended March 31, 2009 was $0.8
million compared with a benefit of $0.8 million for the corresponding period in
2008.




Net
Income (Loss):




Our net
income for the first three months of 2009 was $1.1 million compared with a loss
of $1.2 million for the corresponding period in 2008, an increase of $2.3
million, reflecting the gains at operating income, lower interest and other
expenses and the gain on derivatives, partially offset by higher provisions for
income taxes.


20




Net
Income (Loss) Per Common Share:




Our basic
and diluted net income per share in the first quarter of 2009 was $0.02 compared
to a net loss of $(0.02) in the corresponding period in 2008 based on the basic
and diluted weighted average shares outstanding of 62.6 million and 62.7
million, respectively, in the first quarter of 2009 and 62.2 million basic and
diluted shares outstanding in the first quarter of 2008.




Cash
Flows




Cash
provided by operating activities was $2.9million for the three
months ended March 31, 2009 compared to cash used in operating activities of
$0.09 million in the corresponding period in 2008.  For the first
three months of 2009, we had a net income of $1.1 million, which included $4.0
million of non-cash stock-based compensation expenses, offset by increased
working capital needs of $2.0 million.  For the first three months of
2008, we had net loss of $1.2 million, which included $3.5 million of
stock-based compensation expenses and $2.0 million of depreciation and
amortization.  Higher working capital needs in the first quarter of
2008 more than offset the benefit of these non-cash charges.




Cash used
in investing activities totaled $0.3million for the three
months ended March 31, 2009, compared to $0.5million during the three
months ended March 31, 2008 which resulted from purchase of software development
costs of $0.3 million and other fixed assets offset by recovery of certain legal
costs related to protecting our intangible assets.




No cash
was used in financing activities for the three months ended March 31, 2009,
compared to $30.0 million used in financing activities for the corresponding
period in 2008, resulting from the repayment of debt.




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. For interim reporting, the Company estimates the total
annual sales incentives for most programs and records a pro rata share in
proportion to forecasted annual revenue.  As a result, the Company has
paid $9.2 million through March 31, 2009, which will be charged to expense over
the remaining three quarters.  Our principal liquidity requirements
are to finance current operations, pay down existing indebtedness and fund
future expansion. Currently, our primary source of liquidity 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 March 31, 2009, $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.


21




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 March 31, 2009, 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.  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.




In
accordance with a pricing grid based on the Company’s leverage ratio, the
applicable margin is LIBOR plus 3.00% per annum beginning March 28, 2008, which
resulted in an interest rate of 4.23% at March 31, 2009. 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 March 31, 2009 of 7.23%.




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.  As of March 31,
2009, the Company had a derivative liability of $4,587 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 March 31, 2009 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 March 31, 2009, 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 LIBOR interest rate
environment would increase allowing the Company to pay off the quarterly swap
requirements on more favorable terms.




There is
no prepayment penalty for optional prepayments on the first lien facility and
the following penalties for optional prepayments on the second lien facility:
1.00% premium if prepaid before May 21, 2009; 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.


22




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 the Company to comply with certain financial
covenants, such as ratios of Consolidated EBITDA (as defined in the first lien
credit facility) to each of consolidated cash interest charges, total debt and
first lien debt.  The second lien credit facility requires the Company
to comply with one financial covenant consisting of a leverage ratio of total
debt to Consolidated EBITDA (as defined in the second lien credit
facility).  The Company was in compliance with all of its debt
covenants at March 31, 2009.




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




The
following is a summary of long-term debt (in thousands):




March
      31,
                        2009
                      
                      
                      December
      31,
                        2008(unaudited)First
      lien term loan
                      
                      $
                      59,504
                      
                      
                      $
                      59,504Second
      lien term loan
                      
                      
                      10,000
                      
                      
                      
                      10,000Total
      Debt:
                      
                      
                      69,504
                      
                      
                      
                      69,504Less:
      Current maturities
                      
                      
                      -
                      
                      
                      
                      -Total
      long term debt
                      
                      $
                      69,504
                      
                      
                      $
                      69,504




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.”




Item 3.      Quantitative
and Qualitative Disclosures About Market Risk




We
purchase significant amounts of soy, palm and canola oil products and peanuts to
support the needs of our brands. The price and availability of these commodities
directly impacts the results of operations and can be expected to impact the
future results of operations. We do not engage in any hedging activities because
we enter into agreements that qualify as normal purchases and sales in the
normal course of business.  Accordingly, the agreements do not qualify
as derivatives under SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” Based on the most recent prices for soy, palm and canola
oil products and peanuts, we would have commitments of $30.8
million.


23




In
conjunction with the fixed-rate debt arrangements discussed elsewhere in this
report, we entered into $80 million of interest rate swaps on August 16, 2007,
which are designed to fix the interest rate of the variable rate debt. Under
these swaps, we receive or pay the difference between our 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 settle on the last day of each calendar quarter. For
the quarter ended March 31, 2009, the Company paid $1.0 million and received
$0.3 million with the difference increasing interest expense by $0.7
million.




We are
exposed to market risk from changes in interest rates charged on our
debt.  The impact on earnings is subject to change as a result of
movements in market rates.  A hypothetical increase in interest rates
of 100 basis points would result in potential reduction of future pre-tax
earnings of approximately $0.1 million per year for every $10.0 million
outstanding under our first lien credit facility and approximately $0.1 million
per year under our second lien credit facility.  Our ability to meet
our debt service obligations will be dependent upon our future performance
which, in turn, is subject to future economic conditions and to financial,
business and other factors.




Item 4.       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 March 31, 2009. 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 March 31, 2009, 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.




Changes in internal control over
financial reporting.During the fiscal quarter ended March 31, 2009,
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.


24


Part
II.      Other Information




Item 1.       Legal
Proceedings.




There
have been no material changes to the litigation we previously reported under
Item 3 in our annual report on Form 10-K for the year ended December 31,
2008.




Item 1A.   
Risk Factors.




An
investment in our securities involves a high degree of risk. There have been no
material changes to the risk factors previously reported under Item 1A of
our annual report on Form 10-K for the year ended December 31,
2008.




Item 6.       Exhibits.




See the
exhibit index located elsewhere in this quarterly report on Form
10-Q.


25


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




May
      7, 2009
            SMART
      BALANCE, INC.
              (Registrant)/s/
      Stephen B. HughesStephen
      B. Hughes
              Chairman
      and Chief Executive Officer
              (Authorized
      officer of Registrant)/s/
      Alan S. GeverAlan
      S. Gever
              Executive
      Vice President and
              Chief
      Financial Officer
              (Principal
      financial officer of
Registrant)


26


Exhibit
Index:




31.1
            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


27