UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-Q









QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF
1934




For
      The Quarter Ended September 30, 2009
            Commission
      File Number 001-33595









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                        xNon-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 ofNovember 3, 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
              18Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              27Item
      4.
              Controls
      and Procedures
              28Part
      II.
              Other
      Information
              29Item
      1.
              Legal
      Proceedings.
              29Item
      1A.
              Risk
      Factors.
              29Item
      6.
              Exhibits.
              29




i


Part
      I.
            Financial
      Information


Item
      1.
            Financial
      Statements




SMART
BALANCE, INC. AND SUBSIDIARY


Consolidated
Balance Sheets


(Unaudited)


(In thousands, except share
data)





September
      30,
                
                
                December
      31,2009
                
                
                2008AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                8,370
                
                
                $
                5,492Accounts
      receivable, net of allowance of: 2009 – $363 and 2008 -
    $256
                
                
                14,480
                
                
                
                14,283Accounts
      receivable - other
                
                
                531
                
                
                
                692Inventories
                
                
                4,071
                
                
                
                9,322Prepaid
      taxes
                
                
                554
                
                
                
                709Prepaid
      expenses and other assets
                
                
                9,043
                
                
                
                1,019Deferred
      tax asset
                
                
                419
                
                
                
                650Total
      current assets
                
                
                37,468
                
                
                
                32,167Property
      and equipment, net
                
                
                4,436
                
                
                
                4,301Other
      assets:Goodwill
                
                
                374,886
                
                
                
                374,886Intangible
      assets, net
                
                
                152,173
                
                
                
                155,223Deferred
      costs, net
                
                
                1,414
                
                
                
                1,737Other
      assets
                
                
                827
                
                
                
                222Total
      other assets
                
                
                529,300
                
                
                
                532,068Total
      assets
                
                $
                571,204
                
                
                $
                568,536Liabilities
      and Stockholders' EquityCurrent
      liabilitiesAccounts
      payable and accrued expenses
                
                $
                22,215
                
                
                $
                24,938Income
      taxes payable
                
                
                253
                
                
                
                1,080Total
      current liabilities
                
                
                22,468
                
                
                
                26,018Long
      term debt
                
                
                64,504
                
                
                
                69,504Derivative
      liability
                
                
                3,600
                
                
                
                5,132Deferred
      tax liability
                
                
                42,894
                
                
                
                46,268Other
      liabilities
                
                
                786
                
                
                
                163Total
      liabilities
                
                
                134,252
                
                
                
                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
                
                
                519,470
                
                
                
                507,377Retained
      deficit
                
                
                (82,524
                )
                
                
                (85,932
                )Total
      stockholders' equity
                
                
                436,952
                
                
                
                421,451Total
      liabilities and stockholders' equity
                
                $
                571,204
                
                
                $
                568,536




See
accompanying notes to the consolidated financial statements


1


SMART
BALANCE, INC. AND SUBSIDIARY


Consolidated
Statements of Operations


(Unaudited)


(In
thousands, except per share data)





Three
                                Months
                                ended
                                September
      30,2009
                              
                              
                              Three
                                Months
                                ended
                                September
      30,2008
                              
                              
                              Nine
      Months
                                ended
                                September
      30,2009
                              
                              
                              Nine
      Months
                                ended
                                September
      30,2008Net
      sales
                              
                              $
                              59,806
                              
                              
                              $
                              57,532
                              
                              
                              $
                              180,590
                              
                              
                              $
                              156,311Cost
      of goods sold
                              
                              
                              30,045
                              
                              
                              
                              32,345
                              
                              
                              
                              94,303
                              
                              
                              
                              88,397Gross
      profit
                              
                              
                              29,761
                              
                              
                              
                              25,187
                              
                              
                              
                              86,287
                              
                              
                              
                              67,914Operating
      expenses:Marketing
                              
                              
                              9,952
                              
                              
                              
                              8,806
                              
                              
                              
                              27,573
                              
                              
                              
                              23,598Selling
                              
                              
                              4,225
                              
                              
                              
                              4,304
                              
                              
                              
                              13,012
                              
                              
                              
                              11,859General and
      administrative
                              
                              
                              12,126
                              
                              
                              
                              9,502
                              
                              
                              
                              36,518
                              
                              
                              
                              28,422Total operating
      expenses
                              
                              
                              26,303
                              
                              
                              
                              22,612
                              
                              
                              
                              77,103
                              
                              
                              
                              63,879Operating
      income
                              
                              
                              3,458
                              
                              
                              
                              2,575
                              
                              
                              
                              9,184
                              
                              
                              
                              4,035Other
      income (expense):Interest
income
                              
                              
                              1
                              
                              
                              
                              19
                              
                              
                              
                              3
                              
                              
                              
                              284Interest
    expense
                              
                              
                              (1,237
                              )
                              
                              
                              (4,547
                              )
                              
                              
                              (3,573
                              )
                              
                              
                              (9,768
                              )Other income (expense),
      net
                              
                              
                              (135
                              )
                              
                              
                              (434
                              )
                              
                              
                              (588
                              )
                              
                              
                              (1,413
                              )Total other
      (expense)
                              
                              
                              (1,371
                              )
                              
                              
                              (4,962
                              )
                              
                              
                              (4,158
                              )
                              
                              
                              (10,897
                              )Income
      (loss) before income taxes
                              
                              
                              2,087
                              
                              
                              
                              (2,387
                              )
                              
                              
                              5,026
                              
                              
                              
                              (6,862
                              )Provision
      (benefit) for income taxes
                              
                              
                              816
                              
                              
                              
                              (773
                              )
                              
                              
                              1,618
                              
                              
                              
                              (2,535
                              )Net
      income
      (loss)
                              
                              $
                              1,271
                              
                              
                              $
                              (1,614
                              )
                              
                              $
                              3,408
                              
                              
                              $
                              (4,327
                              )Income
      (loss) per share:Basic
                              
                              $
                              0.02
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              0.05
                              
                              
                              $
                              (0.07
                              )Diluted
                              
                              $
                              0.02
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              0.05
                              
                              
                              $
                              (0.07
                              )Weighted
      average shares outstanding:Basic
                              
                              
                              62,630,683
                              
                              
                              
                              62,630,683
                              
                              
                              
                              62,630,683
                              
                              
                              
                              62,487,703Diluted
                              
                              
                              62,691,742
                              
                              
                              
                              62,630,683
                              
                              
                              
                              62,741,513
                              
                              
                              
                              62,487,703




See
accompanying notes to the consolidated financial statements




2


SMART
BALANCE, INC. AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)


(In
thousands)





Nine Months
                    ended
                    September
      30, 2009
                  
                  
                  Nine Months
                    ended
                    September
      30, 2008Cash
      flows from operating activitiesNet income
    (loss)
                  
                  $
                  3,408
                  
                  
                  $
                  (4,327
                  )Adjustments to reconcile net
      (loss) to net cash
                    provided by operating
      activities:Depreciation and
      amortization
                  
                  
                  3,851
                  
                  
                  
                  3,585Deferred income
      taxes
                  
                  
                  (3,141
                  )
                  
                  
                  (3,777
                  )Stock based
      compensation
                  
                  
                  12,092
                  
                  
                  
                  10,925Interest rate
      swaps
                  
                  
                  (1,532
                  )
                  
                  
                  2,583Acceleration of deferred loan
      amortization
                  
                  
                  135
                  
                  
                  
                  1,017Changes in assets and
      liabilities:Accounts
      receivable
                  
                  
                  (197
                  )
                  
                  
                  (2,368
                  )Inventories
                  
                  
                  5,251
                  
                  
                  
                  (2,476
                  )Prepaid expenses and other
      current assets
                  
                  
                  (7,708
                  )
                  
                  
                  (2,969
                  )Accounts payable and accrued
      expenses
                  
                  
                  (3,532
                  )
                  
                  
                  2,472Net
      cash provided by (used in) operating activities
                  
                  
                  8,627
                  
                  
                  
                  4,665Cash
      flows (used in) provided by investing activitiesPurchase of property and
      equipment
                  
                  
                  (749
                  )
                  
                  
                  (2,484
                  )Capitalization/recovery of
      legal fees
                  
                  
                  -
                  
                  
                  
                  351Net
      cash (used in) investing activities
                  
                  
                  (749
                  )
                  
                  
                  (2,133
                  )Cash
      flows from financing activitiesRepayment of
    debt
                  
                  
                  (5,000
                  )
                  
                  
                  (35,000
                  )Proceeds from stock-related
      legal settlement
                  
                  
                  -
                  
                  
                  
                  2,204Net
      cash (used in) financing activities
                  
                  
                  (5,000
                  )
                  
                  
                  (32,796
                  )Net
      increase (decrease) in cash for the period
                  
                  
                  2,878
                  
                  
                  
                  (30,264
                  )Cash
      - Beginning of period
                  
                  
                  5,492
                  
                  
                  
                  37,649Cash
      - End of period
                  
                  $
                  8,370
                  
                  
                  $
                  7,385Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Income taxes
                  
                  $
                  5,203
                  
                  
                  $
                  2,668Interest
                  
                  $
                  4,806
                  
                  
                  $
                  6,316Supplemental
      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 and Amendment No. 1
thereto.  Certain amounts have been reclassified to conform with the
current year presentation.




The
reported results for the three and nine month periods ended September 30,
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 capitalized software development costs
related to its 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.




5


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.




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.




Stock Based Compensation
Expense




The
Company accounts for share based payments for an award of equity instruments
based on the estimated grant-date fair value over the requisite service
period.




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 September 30, 2009 of $6,436 which will be charged to expense over the
remaining quarter.  The Company sells their products to customers
without the right of return and is not obligated to accept any
returns.




6


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 September 30, 2009, 3,687 stock options were
dilutive because their exercise price was less than the weighted average market
price, including the unrecognized compensation expense related to such
shares.  In addition, the founders’ warrants were dilutive because the
weighted average market price was in excess of their exercise price, which
resulted in 107,143 additional shares being assumed issued during the
first three quarters of 2009.




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




Three months
                        ended
                        Sept. 30, 2009
                      
                      
                      Three months
                        ended
                        Sept. 30, 2008
                      
                      
                      Nine months
                        ended
                        Sept. 30, 2009
                      
                      
                      Nine months
                        ended
                        Sept. 30, 2008Stock
      options excluded due to option price being greater than market
      value
                      
                      
                      12,005,000
                      
                      
                      
                      11,510,000
                      
                      
                      
                      11,885,000
                      
                      
                      
                      10,957,500Stock
      options excluded due to anti-dilution
                      
                      
                      277,569
                      
                      
                      
                      32,500
                      
                      
                      
                      401,313
                      
                      
                      
                      585,000Founding
      director warrants excluded due to anti-dilution
                      
                      
                      -
                      
                      
                      
                      1,000,000
                      
                      
                      
                      -
                      
                      
                      
                      1,000,000





Segments




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 has made this assessment under
the “management” approach, which is based upon the method that management
organizes segments within the Company for making operating
decisions.




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 September 30, 2009 and
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 had
recorded $3,600 and $5,132, respectively, as non-current
liabilities.  Fair value measurements are categorized into 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 September 30, 2009 and
December 31, 2008.




7


Research and
Development




Research
and development expenses are charged to operations when incurred and amounted to
$322 and $70 for the three months ended September 30, 2009 and 2008,
respectively, and $594 and $163 for the nine months ended September 30,
2009 and 2008, respectively.




Derivative
Instruments




The
Company uses certain financial instruments to manage its commodity price and
interest rate risks.  The Company maintains commodity price risk
management strategies that seek to reduce significant, unanticipated earnings
fluctuations that may arise from volatility in commodity prices, principally
through the use of derivative instruments, mostly through the purchase of
forward contracts with its suppliers, or in the case of milk, through the U.S.
commodity markets.  The Company also uses interest rates swaps to
cover its exposure to changes in interest rates.




Except
for the purchase of forward contracts with its suppliers which the Company has
designated as normal course of business purchases, and, as such, recognizes the
underlying contract costs as part of its normal inventory purchases, the Company
records derivative financial instruments at fair value in its consolidated
balance sheets as either current assets or current liabilities.  Cash
flows from these hedging instruments are classified in the same manner as the
affected hedged item in the consolidated statements of cash flows.




The
Company considers all derivative instruments to be economic hedges but has not
designated the instruments for hedge accounting treatment.  As a
result, the Company recognizes gains and losses directly as a component of Other
income (expense), except for its purchase of forward contracts which are treated
as described above.




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 September 30, 2009, no valuation
allowances were recorded.




Advertising




Advertising
costs are charged to operations (classified as marketing expenses) and amounted
to $4,854 and $5,794 for the three months ended September 30, 2009 and
2008, respectively, and $15,465 and $15,433 for the nine months ended
September 30, 2009 and 2008, respectively.




8


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 September 30, 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 18% and 19% of sales during the three and nine
months ended September 30, 2009, respectively. The aggregate accounts
receivable from this customer amounted to approximately 18% of the accounts
receivable balance outstanding at September 30, 2009. The Company also has
one product, “spreads,” which, for the three and nine months ended
September 30, 2009, accounted for approximately 76% of total
revenue.  Approximately 82% of the Company’s revenues during the three
and nine months ended September 30, 2009 came from products utilizing a
license from Brandeis University.




Recently Issued Accounting
Pronouncements




In
October 2009, the FASB issued an amendment to the accounting standards related
to the accounting for revenue in arrangements with multiple deliverables
including how the arrangement consideration is allocated among delivered and
undelivered items of the arrangement. Among the amendments, this standard
eliminates the use of the residual method for allocating arrangement
consideration and requires an entity to allocate the overall consideration to
each deliverable based on an estimated selling price of each individual
deliverable in the arrangement in the absence of having vendor-specific
objective evidence or other third party evidence of fair value of the
undelivered items. This standard also provides further guidance on how to
determine a separate unit of accounting in a multiple-deliverable revenue
arrangement and expands the disclosure requirements about the judgments made in
applying the estimated selling price method and how those judgments affect the
timing or amount of revenue recognition. This standard, for which the Company
does not expect the impact of its adoption to be material to its consolidated
financial statements, will become effective for the Company on January 1,
2011.




9


3.
            Property and
      equipment




Property
and equipment consist of the following:




September
      30,
                    2009
                  
                  
                  December
      31,
                    2008Software
      development costs
                  
                  $
                  3,704
                  
                  
                  $
                  3,198Equipment
                  
                  
                  502
                  
                  
                  
                  394Furniture
      and fixtures
                  
                  
                  973
                  
                  
                  
                  849Leasehold
      improvements
                  
                  
                  342
                  
                  
                  
                  332Gross
      assets
                  
                  
                  5,521
                  
                  
                  
                  4,773Less:
      accumulated depreciation
                  
                  
                  (1,085
                  )
                  
                  
                  (472
                  )Property
      and equipment, net
                  
                  $
                  4,436
                  
                  
                  $
                  4,301




Depreciation
expense was $215 and $613 for the three and nine months ended
September 30, 2009 compared to $133 and $275 for the three
and nine months ended September 30, 2008.




4.
            Accounts payable and
      accrued expenses




Accounts
payable and accrued expenses consist of the following:




September
      30,
                        2009
                      
                      
                      December
      31,
                        2008Accounts
      payable
                      
                      $
                      10,968
                      
                      
                      $
                      16,971Trade
      spend accruals
                      
                      
                      6,593
                      
                      
                      
                      3,547Other
      accrued expenses
                      
                      
                      4,654
                      
                      
                      
                      4,420Total
                      
                      $
                      22,215
                      
                      
                      $
                      24,938





5.
            Intangible
      assets




The
following is a summary of intangible assets and goodwill as of
September 30, 2009:




Gross
                    Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Accumulated
                    Adjustments
                  
                  
                  Net
      Balance,
                    September
      30,
                    2009Patent
      technology
                  
                  $
                  40,000
                  
                  
                  $
                  9,466
                  
                  
                  $
                  -
                  
                  
                  $
                  30,534Supply
      relationship
                  
                  
                  1,000
                  
                  
                  
                  163
                  
                  
                  
                  -
                  
                  
                  
                  837Trademarks
                  
                  
                  121,152
                  
                  
                  
                  -
                  
                  
                  
                  (350
                  )
                  
                  
                  120,802Goodwill
                  
                  
                  374,886
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  374,886$
                  537,038
                  
                  
                  $
                  9,629
                  
                  
                  $
                  (350
                  )
                  
                  $
                  527,059




10





Adjustments
to trademarks relate to a legal settlement received of $367 and serve to reduce
related costs previously capitalized. Additional spending of $17 during the
period accounted for the difference. Amortization expense was $1,017 for the
three months ended September 30, 2009 and 2008 and $3,050 and $3,056 for the
nine months ended September 30, 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 $180,000 in secured debt financing consisting of: (1) a $140,000 first lien
facility comprised of a $120,000 term loan and a $20,000 revolver and (2) a
second lien facility comprised of a $40,000 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. During the
second quarter of 2009, the Company prepaid $5,000 of the first lien debt. As a
result of the prepayment, the Company wrote off approximately $135 of deferred
financing costs, which is included in other income (expense). Through September
30, 2009, the Company paid a total of approximately $95,500, consisting of
$65,500 in principal on its first lien term loan and $30,000 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 3.28% at September 30, 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 September
30, 2009 of 6.28%.




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 September 30, 2009, the Company had a
derivative liability of $3,600 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 September 30, 2009 and the fixed interest rate of the debt of 5.05%
on $80,000 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 September 30, 2009, the Company has opted to let the notional
amount of the interest rate swap exceed the amount of its debt by approximately
$15,500 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 $30,000 of the second lien facility, the
Company paid a $600 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.




11




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
$5,000;




·
            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 September 30,
2009.




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




On
November 4, 2009, the Company, through its wholly-owned subsidiary GFA Brands,
Inc., completed the refinancing of its credit facilities. See Note 12 Subsequent
Event for further details.




12




The
following is a summary of long-term debt:




September 30,
                      2009
                    
                    
                    December 31,
                      2008First
      lien term loan
                    
                    $
                    54,504
                    
                    
                    $
                    59,504Second
      lien term loan
                    
                    
                    10,000
                    
                    
                    
                    10,000Total
      Debt:
                    
                    
                    64,504
                    
                    
                    
                    69,504Less:
      Current maturities
                    
                    
                    -
                    
                    
                    
                    -Total
      long term debt
                    
                    $
                    64,504
                    
                    
                    $
                    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 September 30, 2009, the
Company had granted a total of 11,215,000 stock options under the Stock and
Awards Plan, of which 300,000 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 grant stock options 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 price 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.




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 nine months  ended September 30, 2009
                    
                    
                    355,000
                    
                    
                    
                    6.68
                    
                    
                    
                    9.67Forfeited
      during the nine months  ended September 30, 2009
                    
                    
                    (110,000
                    )
                    
                    
                    9.52
                    
                    
                    
                    8.08Exercised
      during the nine months  ended September 30, 2009
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at September 30, 2009
                    
                    
                    12,290,000
                    
                    
                    $
                    9.39
                    
                    
                    
                    8.01




13




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




Three Months Ended
                        September 30,
                      
                      
                      Nine Months Ended
                        September 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Service
      period-based
                      
                      $
                      1,911
                      
                      
                      $
                      1,736
                      
                      
                      $
                      5,670
                      
                      
                      $
                      4,997Market
      price-based $16.75
                      
                      
                      1,230
                      
                      
                      
                      1,143
                      
                      
                      
                      3,686
                      
                      
                      
                      3,404Market
      price-based $20.25
                      
                      
                      914
                      
                      
                      
                      849
                      
                      
                      
                      2,736
                      
                      
                      
                      2,524Total
                      
                      $
                      4,055
                      
                      
                      $
                      3,728
                      
                      
                      $
                      12,092
                      
                      
                      $
                      10,925




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.
            Derivative
      Instruments




Interest
rate cash flow hedges:




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 September 30, 2009, the Company paid 5.05% and
received 0.60% with the difference increasing interest paid by $910. In
addition, the Company recorded the change in fair value of the interest rate
swap of $436, which is included as a charge in interest expense. The Company
measures the changes in the fair value of the interest rate swaps using Level 2
inputs (see note 2 under sub-heading “Fair Value of Financial
Instruments”).




Commodity
cash flow hedges:




For its
milk commodity hedges the Company considered them economic hedges but did not
designate them for hedge accounting treatment, the impact to earnings was
insignificant in 2009. The Company did not enter into any similar derivative
instruments in 2008. The Company uses Level 1 inputs to measure fair value at
September 30, 2009.




As of
September 30, 2009, the Company had hedged forecasted commodity transactions,
the majority of which do not exceed the next 6 months. These commodity hedges
are considered economic hedges but are exempt from hedge accounting as normal
forward purchases.




14




9.
            License




A
substantial portion of the Company’s business is dependent on its exclusive
license of certain technology from Brandeis University (“Brandeis”). 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
three and nine months ended September 30, 2009 were $265 and $730, respectively.
Royalties earned by Brandeis for the three and nine months ended September 30,
2008 were $203 and $610, respectively.




10.
            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 34%, which benefited in the second quarter from the
positive resolution of a liability recorded in conjunction with an uncertain tax
position, which lowered the effective rate for the year. The deferred tax
liability represents primarily the difference between the tax and accounting
basis of intangible assets acquired in the GFA merger.




11.
            Commitment and
      contingencies




As of
September 30, 2009, the Company had the following commitments and contractual
obligations:




·
            Two
      lease agreements for the lease of a corporate office facility located in
      Paramus, NJ. The leases have an approximate five-year life with the option
      to extend one lease for two additional five-year terms and the other for
      18 months. The annual rental expense is approximately $500 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.




·
            Forward
      purchase commitments for a portion of the Company's projected requirements
      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, these commitments
      would total approximately $31,000 as of September 30, 2009. The
      commitments are expected to be liquidated by the second quarter of 2010
      with the majority being liquidated by December
  2009.




15




·
            Futures
      purchases and collars (puts and calls) for a portion of the Company’s
      projected requirement for milk. These instruments net settle in cash and
      are classified as derivatives. As of September 30, 2009, these commitments
      total approximately $2,364.




·
            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.




12.
            Subsequent
      Event




The
Company’s management has evaluated events subsequent to September 30, 2009
through November 5, 2009, which is the issuance date of this
report.




On
November 4, 2009, the Company, through its wholly-owned subsidiary GFA Brands,
Inc., entered into a Credit Agreement (the “Credit Agreement”) with Bank of
Montreal, as lender and as administrative agent for the lenders signatory
thereto (the “Lenders”) pursuant to which the Lenders have agreed to make a
$55,000 term loan (“Term Loan”) and loans on a revolving basis of up to $45,000
(the “Revolver”). The Revolver includes a $5,000 sublimit for the issuance of
letters of credit and a $5,000 sublimit for swing line loans (the “Swing line
facility”). Subject to certain conditions, the Term Loan or Revolver
can be increased by $5,000 at the Company’s option by the Company with the
existing Lenders or to the extent existing Lenders decline to do so by adding
additional Lenders. This new credit facility (the “Facility”) replaced the
Company’s prior first lien and second lien credit facilities with Banc of
America Securities LLC and Bank of America, N.A. As of September 30, 2009,
outstanding debt under the previous facilities totaled approximately $65,000. By
allowing for acquisitions, the new Facility will provide added flexibility to
the Company with regards to its strategic plans compared to the previous
facility.




Both the
Term Loan and the loans made pursuant to the Revolver mature on November 4,
2013. At the Company’s option, borrowings on the Term Loan and Revolver can
either be Base Rate Loans or LIBOR Loans. Base Rate Loans bear interest at the
Base Rate (as defined in the Credit Agreement) (which may be no less than 2.5%)
plus the pricing margin from 2.25% to 3.25% based on the Company’s total funded
debt to EBITDA ratio (the “Leverage Ratio”). LIBOR Rate Loans bear interest at
the greater of 1.5% or the Adjusted LIBOR (as defined in the Credit
Agreement) plus the pricing margin from 3.25% to 4.25% based on the Leverage
Ratio. There are other fees for unused amounts of the Revolver payable
quarterly.




There are
no prepayment penalties for optional prepayments of the Facility. However the
Company must reimburse the Lenders for any losses, costs or expenses incurred by
the Lenders as a result of any prepayment of certain loans made under the
Facility. Mandatory prepayments that are required under the Facility
include:




·
            100%
      of the net cash proceeds (as defined in the Credit Agreement) upon certain
      dispositions of property or upon certain damage or seizures of property,
      subject to limited exceptions;




16




·
            50%
      of all net cash proceeds from issuance of additional equity securities of
      the Company, subject to limited exceptions, provided, however, if
      Company’s Leverage Ratio is less than 2.0 as of the end of the most
      recently ended quarter, the prepayment is limited to 25% of such
      proceeds;




·
            100%
      of the amount of net cash proceeds for certain issuances of additional
      indebtedness for borrowed money;




·
            Beginning
      on December 31, 2010 and each fiscal year thereafter, an annual prepayment
      equal to 25% of excess cash flow of the Company (as defined in the Credit
      Agreement) for such fiscal year, provided such prepayment is not required
      if the Company has a Leverage Ratio of 2.0 or less, measured as of the end
      of such fiscal year;




The
financial covenants of the Facility include maintaining a Leverage Ratio of not
greater than 2.75 based on the most recently ended four quarters, declining to
2.5 at December 31, 2011 and thereafter. The Company is also required to
maintain a minimum debt service coverage ratio of 2.0 for the term of the
facility. The Company is also limited to spending not more than $6,000 of
capital expenditures per year with any unspent funds carried over to the next
twelve months.




The new
Facility, along with cash on hand from operations, was used to retire the
previous debt outstanding, pay off the interest rate swap of approximately
$3,800 and pay transaction-related costs which are expected to be approximately
$2,200 and will be amortized over the life of the loan using the effective
interest rate method. Outstanding deferred loan costs of $1,400 were expensed
upon closing the new Facility. As of November 4, 2009, total debt outstanding
was $60,600 including $5,600 in borrowings under the Revolver. The Company
maintained a cash balance of approximately $5,000 after the new Facility
closed.




The other
terms and conditions of the Facility are consistent with credit facilities of
this nature and consist of customary representations and warranties, affirmative
and negative covenants including financial covenants, conditions precedent,
events of default and indemnification provisions.




17




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 and Amendment No. 1 thereto.




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.




18




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 Smart
Balance®, Earth
Balance®,
SmartBeat® and
Nucoa®, is by
far the most developed product segment and accounted for approximately 76% of
sales for the three and nine months ended September 30, 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 18% and 19% of net sales for the three and nine
months ended September 30, 2009, respectively.




Our
signature buttery spreads and popcorn products utilize a proprietary licensed,
patented technology that is free of manufactured trans fats and enhances HDL to
LDL 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
U.S. patents until April 7, 2015, at which time the license for the U.S. 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.




19




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 primary 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.




20




Results
of Operations for the Three and Nine Months Ended September 30, 2009 and
2008




(in millions except per share)
                    
                    Three Months Ended
                      September 30,
                    
                    
                    Nine Months Ended
                      September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      sales
                    
                    $
                    59,806
                    
                    
                    $
                    57,532
                    
                    
                    $
                    180,590
                    
                    
                    $
                    156,311Cost
      of goods sold
                    
                    
                    30,045
                    
                    
                    
                    32,345
                    
                    
                    
                    94,303
                    
                    
                    
                    88,397Gross
      profit
                    
                    
                    29,761
                    
                    
                    
                    25,187
                    
                    
                    
                    86,287
                    
                    
                    
                    67,914Operating
      expenses
                    
                    
                    26,303
                    
                    
                    
                    22,612
                    
                    
                    
                    77,103
                    
                    
                    
                    63,879Operating
      income (loss)
                    
                    
                    3,458
                    
                    
                    
                    2,575
                    
                    
                    
                    9,184
                    
                    
                    
                    4,035Other
      (expenses) income, net
                    
                    
                    (1,371
                    )
                    
                    
                    (4,962
                    )
                    
                    
                    (4,158
                    )
                    
                    
                    (10,897
                    )Income
      (loss) before income taxes
                    
                    
                    2,087
                    
                    
                    
                    (2,387
                    )
                    
                    
                    5,026
                    
                    
                    
                    (6,862
                    )Provision
      (benefit) for income taxes
                    
                    
                    816
                    
                    
                    
                    (773
                    )
                    
                    
                    1,618
                    
                    
                    
                    (2,535
                    )Net
      income (loss)
                    
                    $
                    1,271
                    
                    
                    $
                    (1,614
                    )
                    
                    $
                    3,408
                    
                    
                    $
                    (4,327
                    )Net
      income (loss) per common share
                    
                    $
                    0.02
                    
                    
                    $
                    (0.03
                    )
                    
                    $
                    0.05
                    
                    
                    $
                    (0.07
                    )





Results
of Operations for the Three Months Ended September 30, 2009 Compared to the
Three Months Ended September 30, 2008




Net
sales:




Net sales
for the three months ended September 30, 2009 increased 4.0% to $59.8 million
from $57.5 million for the three months ended September 30, 2008. The increase
was primarily due to a 9% increase in case shipment volume, partially offset by
higher trade and consumer promotion expenses, related to the launch of the new
sour cream products. The increase in cases shipped was primarily due to growth
in the Company’s new milk line, due to regional expansion in the Northeast and
continued growth in the initial Florida market, gains in the core category of
spreads benefiting in part from promotions at club stores, and the initial
shipments of the new sour cream products, partially offset by declines in
cooking oil.




Cost
of goods sold:




Cost of
goods sold for the three months ended September 30, 2009 was $30.0 million, a
7.1% decrease from the same period in 2008.  The decrease was due to lower
input costs, partially offset by higher case shipments.




Gross
profit:




Gross profit increased 18% or $4.6
million to $29.8 million for the three months ended September 30, 2009 from
$25.2 million in 2008 due to the growth in case shipments and the benefit of
lower product input costs, partially offset by higher promotion
expenses.




Gross
profit as a percent of net sales was 49.8% for the three months ended September
30, 2009 compared to 43.8% in 2008, due to lower input costs, partially offset
by higher promotion expenses.




21




Operating
expenses:




Total
operating expenses for the three months ended September 30, 2009 were $26.3
million compared to $22.6 million for the corresponding period in 2008, an
increase of $3.7 million.  Operating expenses include selling,
marketing and general and administrative expenses. The increase in
operating expenses reflected additions to staff and staff related costs along
with higher marketing investments, both to support growth.  Included in
general and administrative costs in 2009 were approximately $4.1 million of
stock-based compensation expense, and $1.2 million in depreciation and
amortization.  In 2008 there were $3.7 million of stock-based compensation
expense and $1.2 million of depreciation and amortization.




Operating
income (loss):
  Operating
income increased 34% to $3.5million for the three
months ended September 30, 2009 compared with $2.6 million for the corresponding
period in 2008.  The $0.9 million increase reflects the $4.6 million
increase in gross margin, partially offset by the $3.7 million increase in
operating expenses.  Excluding non-cash charges for stock
based-compensation and depreciation and amortization of $5.3 million in
2009 and $4.9 million in 2008, operating income increased $1.3 million to $8.7
million in 2009 from $7.4 million in 2008.
  Other
income (expense):
  Other
expenses were $1.4 million for the three months ended September 30, 2009
compared to other expenses of $5.0 million in the corresponding period in
2008.  The results for 2009 and 2008 included net interest expense of
$1.2 and $4.5million,
respectively.  Included in the 2009 net interest expense is a $0.4
million loss on derivatives related to our interest rate swap, compared to a
$2.6 million loss in 2008.  Additionally, in 2008, there was $0.1
million expense of accelerated financing amortization due to the early paydown
of debt.
  Income
taxes:
  The
provision for income taxes for the three months ended September 30, 2009 was
$0.8 million compared with a benefit of $0.8 million for the corresponding
period in 2008.  The effective tax rate was approximately 39% in the
third quarter of 2009, compared to 32% in 2008.
  Net
income (loss):
  Net income for the three months ended
September 30, 2009 was $1.3 million compared with a loss of $1.6 million for the
corresponding period in 2008, an increase of $2.9 million, reflecting the
improvement in operating income and lower interest expenses and debt related
costs.  Excluding the after-tax impact of the non-cash charges, of
stock based-compensation, depreciation and amortization, change in fair value of
an interest rate swap, and accelerated financing amortization, net income for
the third quarter of 2009 increased 40% to $4.2 million versus $3.0 million in
2008.
  22
  Net
income (loss) per common share:
  Our basic
and diluted net income per share in the third quarter of 2009 was $0.02 compared
to a net loss of $(0.03) 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 third quarter of 2009 and 62.6 million basic and
diluted shares outstanding in the third quarter of 2008.
  Results
of Operations for the Nine Months Ended September 30, 2009 Compared to the
Nine Months Ended September 30, 2008
  Net
Sales:
  Net sales
for the nine months ended September 30, 2009 increased 15.5% to $180.6 million
from $156.3 million for the nine months ended September 30, 2008.  The
increase was primarily due to higher selling prices from pricing actions taken
in 2008 and increased case shipment volumes, partially offset by higher
promotion costs.
  Cost
of goods sold:
  Cost of
goods sold for the nine months ended September 30, 2009 was $94.3 million, a
6.7% increase from the same period in 2008.  The increase was
primarily due to higher volumes.
  Gross
profit:
  Our gross
profit increased $18.4 million to $86.3 million for the nine months ended
September 30, 2009 from $67.9 million in 2008 due primarily to higher selling
prices and increased case shipment volumes, partially offset by higher promotion
costs.
  Gross
profit as a percent of net sales was 47.8% for the nine months ended September
30, 2009 compared to 43.4% in 2008, as the benefit of higher selling
prices more than offset higher promotion costs.
  Operating
expenses:
  Total
operating expenses for the nine months ended September 30, 2009 were $77.1
million compared to $63.9 million for the corresponding period in 2008, an
increase of $13.2 million.  Operating expenses include selling,
marketing and general and administrative expenses. The increase in
operating expenses reflected additions to staff and staff related costs along
with higher marketing investments, both to support growth.  Included in
general and administrative costs in 2009 were approximately $12.1 million of
stock-based compensation expense, and $3.7 million in depreciation and
amortization.  In 2008 there were $10.9 million of stock-based compensation
expense and $3.3 million of depreciation and amortization.
  23




Operating
income (loss):




Operating
income was $9.2million for the nine
months ended September 30, 2009 compared to $4.0 million for the corresponding
period in 2008.  Operating income increased $5.2 million, as the $18.4
million increase in gross margin was largely offset by a $13.2 million increase
in operating expenses.  Excluding non-cash charges for stock
based-compensation and depreciation and amortization of $15.8 million in
2009 and $14.3 million in 2008, operating income increased $6.6 million to $24.9
million in 2009 from $18.3 million in 2008.




Other
income (expense):




Other
expenses were $4.2 million for the nine months ended September 30, 2009 compared
to other expenses of $10.9 million in the corresponding period in
2008.  The results for 2009 and 2008 included net interest expense of
$3.6 and $9.8million,
respectively.  Included in the 2009 net interest expense is a $0.9
million loss on derivatives related to our interest rate swap, compared to a
$2.6 million loss in 2008.  Additionally, in 2009, there was $0.1
million expense of accelerated financing amortization due to the early paydown
of debt, compared with $1.0 million in 2008.




Income
taxes:




The
provision for income taxes for the nine months ended September 30, 2009 was $1.6
million compared with a benefit of $2.5 million for the corresponding period in
2008.  Included in the second quarter of 2009 was a favorable
settlement of an uncertain tax position in the amount of $0.4 million which
resulted in an effective tax rate of approximately 32% for the nine months ended
September 30, 2009.  This compares to 37% in the same period last
year.




Net
income (loss):




Our net income for the nine months
ended September 30, 2009 was $3.4 million compared with a loss of $4.3 million
for the corresponding period in 2008, an increase of $7.7 million, reflecting
the improvement in operating income, lower interest expenses and debt related
costs, and lower taxes.  Excluding the after-tax impact of non-cash
charges, including stock based-compensation, depreciation and amortization,
change in fair value of an interest rate swap, and accelerated financing
amortization, net income for the nine months ended September 30, 2009 increased
$13.6 million versus $6.5 million in 2008.





Net
income (loss) per common share:




Our basic
and diluted net income per share for the nine months ended September 30, 2009
was $0.05 compared to a net loss of $(0.07) 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 2009 and 62.5 million basic and
diluted shares outstanding in 2008.




Cash
Flows




Cash
provided by operating activities was $8.6million for the nine
months ended September 30, 2009 compared to $4.7 million in the corresponding
period in 2008.  For the first nine months of 2009, we had a net
income of $3.4 million, which included $12.1 million of non-cash stock-based
compensation expenses and $3.9 million of depreciation and amortization, offset
by increased working capital of $6.2 million and changes in deferred taxes and
derivative liability of $4.7 million.  For the first nine months of
2008, we had net losses of $4.3 million, which included $10.9 million of
stock-based compensation expenses and $3.6 million of depreciation and
amortization.  Higher working capital needs in the first half of 2008
more than offset the benefit of these non-cash charges.




24




Cash used
in investing activities totaled $0.7million for the nine
months ended September 30, 2009, compared to $2.1million during the nine
months ended September 30, 2008, both of which resulted from the purchase of
software development costs and other fixed assets.




Cash used
in financing activities for the nine months ended September 30, 2009 was $5.0
million, compared to $32.8 million used in financing activities for the
corresponding period in 2008, resulting from the repayment of debt in both
periods.




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 $6.4 million through September 30, 2009, which will be charged to expense
over the remaining quarter.  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 September 30, 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.




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.  During the second quarter of 2009, the
Company prepaid $5.0 million of the first lien debt.  As a result of
the prepayment, the Company wrote off approximately $0.1 million of deferred
financing costs, which is included in other income (expense).  Through
September 30, 2009, the Company paid a total of approximately $95.5
million, consisting of $65.5 million in principal on its first lien term loan
and $30 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.




25




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 3.28% at September 30, 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 September 30, 2009 of 6.28%.




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
September 30, 2009, the Company had a derivative liability of $3.6 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 September 30,
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
September 30, 2009, the Company has opted to let the notional amount of the
interest rate swap exceed the amount of its debt by approximately $15.5 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 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
  million;




·
            bankruptcy
      and insolvency; and




26




·
            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 September 30, 2009.




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




On
November 4, 2009, the Company, through its wholly-owned subsidiary GFA Brands,
Inc., completed the refinancing of its credit facilities.  See Note 12
Subsequent Event for further details.




The
following is a summary of long-term debt:




September
      30,
                  2009
                
                
                December
      31,
                  2008First
      lien term loan
                
                $
                54.5
                
                
                $
                59.5Second
      lien term loan
                
                
                10.0
                
                
                
                10.0Total
      Debt:
                
                
                64.5
                
                
                
                69.5Less:
      Current maturities
                
                
                -
                
                
                
                -Total
      long term debt
                
                $
                64.5
                
                
                $
                69.5




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. For these raw materials, 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 have commitments of $31.0
million.




During
the second and third quarters of 2009, we entered into futures contracts to
cover our exposure to milk commodity costs.  These contracts, which
have a notional value at September 30, 2009 of approximately $2.4 million, cover
approximately 55% of 2009 requirements.  We have recognized a small
loss in other income and expenses related to the market-to-market movement in
these positions.  We did not elect for cash flow hedging accounting
treatment for these hedges.




27




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 September 30, 2009, the Company paid $1.0 million and
received $0.1 million with the difference increasing interest paid by $0.9
million.  In addition, the Company recorded the change in fair value
of the interest rate swap of $0.4 million, which is included as a charge
interest expense.




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, exclusive of the impact of the interest rate derivative, 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 September 30, 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
September 30, 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 September 30,
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.




28




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/A for the year ended December 31, 2008
and Amendment No. 1 thereto.




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/A for the year ended December 31, 2008
and Amendment No. 1 thereto.




Item 6.        Exhibits.




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




In reviewing the agreements included as
exhibits to this report, please remember they are included to provide you with
information regarding their terms and are not intended to provide any other
factual or disclosure information about the Company, its subsidiaries or other
parties to the agreements.  The Agreements contain representations and
warranties by each of the parties to the applicable agreement.  These
representations and warranties have been made solely for the benefit of the
other parties to the applicable agreement and:





●
            should
      not in all instances be treated as categorical statements of fact, but
      rather as a way of allocating the risk to one of the parties if those
      statements prove to be inaccurate;




●
            have
      been qualified by disclosures that were made to the other party in
      connection with the negotiation of the applicable agreement, which
      disclosures are not necessarily reflected in the
  agreement;




●
            may
      apply standards of materiality in a way that is different from what may be
      viewed as material to you or other investors;
  and




●
            were
      made only as of the date of the applicable agreement or such other date or
      dates as may be specified in the agreement and are subject to more recent
      developments.




Accordingly, these representations and
warranties may not describe the actual state of affairs as of the date they were
made or at any other time.  Additional information about the Company
may be found elsewhere in this report and the Company’s other public files,
which are available without charge through the SEC’s website at http://www.sec.gov.





29




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.




November
      5, 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)





30





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





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