Attached files
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EX-31.2 - BOULDER BRANDS, INC. | v201059_ex31-2.htm |
EX-32.1 - BOULDER BRANDS, INC. | v201059_ex32-1.htm |
EX-32.2 - BOULDER BRANDS, INC. | v201059_ex32-2.htm |
EX-31.1 - BOULDER BRANDS, INC. | v201059_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
The Quarter Ended September 30, 2010
|
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
o.
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
o
|
Accelerated Filer
x
|
Non-Accelerated Filer
o
(Do not check if a smaller reporting company)
|
Smaller Reporting Company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x.
As of
November 4, 2010, the Registrant had 60,818,156 shares of common stock, par
value $.0001 per share, outstanding.
SMART
BALANCE, INC.
INDEX
Page
|
||
Part
I.
|
Financial
Information
|
2
|
Item 1.
|
Financial
Statements
|
2
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
30
|
Item 4.
|
Controls
and Procedures
|
31
|
Part
II.
|
Other
Information
|
32
|
Item 1.
|
Legal
Proceedings
|
32
|
Item 1A.
|
Risk
Factors
|
32
|
Item 6.
|
Exhibits
|
32
|
i
Cautionary
Note Regarding Forward Looking Statements
This
document contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
statements may be identified by forward-looking words such as “may,” “expect,”
“anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or
similar words. In addition, forward-looking statements are statements
which
·
|
discuss
future expectations or expansions of business
lines;
|
·
|
contain
projections of future results of operations or financial condition;
or
|
·
|
state
other “forward-looking”
information.
|
We
believe that communicating our expectations to our stockholders is important.
However, there are always events in the future that we are not able to
accurately predict or over which we have no control, and consequently, actual
results may differ from those anticipated in the forward-looking
statements. Important factors that could cause actual results to
differ from our expectations include, but are not limited to, the factors
discussed in the section of this report entitled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” the “Risk Factors”
section in our annual report on Form 10-K for the year ended December 31, 2009,
as well as our ability to:
·
|
maintain
margins during periods of commodity cost
fluctuation;
|
·
|
introduce
and expand our distribution of new
products;
|
·
|
meet
marketing and infrastructure needs;
|
·
|
respond
to changes in consumer demand;
|
·
|
respond
to adverse publicity affecting our Company or
industry;
|
·
|
comply
with regulatory requirements;
|
·
|
maintain
existing relationships with and secure new
customers;
|
·
|
continue
to rely on third party distributors, manufacturers and
suppliers;
|
|
·
|
sell
our products in a competitive environment and with increasingly price
sensitive consumers;
|
|
·
|
continue
to rely on the estimates or judgments related to our impairment analysis,
which if changed could have a significant impact on recoverability of the
Company’s goodwill and could have a material impact on its consolidated
financial statements; and
|
|
·
|
improve
future operations in connection with our realignment
program.
|
You are
cautioned not to place undue reliance on our forward-looking statements, which
speak only as of the date of this report.
All
forward-looking statements included in this report attributable to us are
expressly qualified in their entirety by the cautionary statements contained or
referred to in this section. Except to the extent required by applicable laws
and regulations, we undertake no obligation to update these forward-looking
statements to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.
1
Part
I. Financial Information
Item 1. Financial
Statements
SMART
BALANCE, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(In
thousands, except share data)
September 30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
8,553
|
$
|
7,538
|
||||
Accounts
receivable, net of allowance of: $274 (2010) and $345
(2009)
|
13,119
|
11,970
|
||||||
Accounts
receivable - other
|
1,019
|
650
|
||||||
Income
taxes receivable
|
-
|
1,131
|
||||||
Inventories
|
7,335
|
5,812
|
||||||
Prepaid
taxes
|
-
|
405
|
||||||
Prepaid
expenses and other assets
|
9,529
|
3,392
|
||||||
Deferred
tax asset
|
1,656
|
462
|
||||||
Total
current assets
|
41,211
|
31,360
|
||||||
Property
and equipment, net
|
4,744
|
4,634
|
||||||
Other
assets:
|
||||||||
Goodwill
|
244,886
|
374,886
|
||||||
Intangible
assets, net
|
148,140
|
151,089
|
||||||
Deferred
costs, net
|
1,587
|
2,111
|
||||||
Other
assets
|
2,093
|
985
|
||||||
Total
other assets
|
396,706
|
529,071
|
||||||
Total
assets
|
$
|
442,661
|
$
|
565,065
|
||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$
|
23,956
|
$
|
22,626
|
||||
Income
taxes payable
|
891
|
-
|
||||||
Current
portion of long term debt
|
3,350
|
5,500
|
||||||
Total
current liabilities
|
28,197
|
28,126
|
||||||
Long
term debt
|
54,650
|
51,143
|
||||||
Deferred
tax liability
|
40,968
|
43,824
|
||||||
Other
liabilities
|
2,088
|
965
|
||||||
Total
liabilities
|
125,903
|
124,058
|
||||||
Commitment
and contingencies
|
||||||||
Stockholders'
equity
|
||||||||
Common
stock, $.0001 par value, 250,000,000 shares authorized; 62,630,683 (2010
and 2009) issued and 60,818,156 and 62,630,683 outstanding in 2010 and
2009, respectively
|
6
|
6
|
||||||
Additional
paid in capital
|
531,960
|
523,467
|
||||||
Retained
deficit
|
(207,868
|
) |
(82,466
|
)
|
||||
Treasury
stock at cost (2010 –1,812,527 shares)
|
(7,340
|
) |
-
|
|||||
Total
stockholders' equity
|
316,758
|
441,007
|
||||||
Total
liabilities and stockholders' equity
|
$
|
442,661
|
$
|
565,065
|
See
accompanying notes to the consolidated financial statements
2
SMART
BALANCE, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
(Unaudited)
(In
thousands, except share data)
Three Months Ended
September 30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
sales
|
$ | 59,939 | $ | 59,806 | $ | 179,207 | $ | 180,590 | ||||||||
Cost
of goods sold
|
31,389 | 30,045 | 90,446 | 94,303 | ||||||||||||
Gross
profit
|
28,550 | 29,761 | 88,761 | 86,287 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Marketing
|
9,754 | 9,952 | 30,252 | 27,573 | ||||||||||||
Selling
|
4,994 | 4,225 | 14,614 | 13,012 | ||||||||||||
General
and administrative
|
10,401 | 12,126 | 33,528 | 36,518 | ||||||||||||
Goodwill
impairment
|
- | - | 130,000 | - | ||||||||||||
Total
operating expenses
|
25,149 | 26,303 | 208,394 | 77,103 | ||||||||||||
Operating
income (loss)
|
3,401 | 3,458 | (119,633 | ) | 9,184 | |||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
- | 1 | - | 3 | ||||||||||||
Interest
expense
|
(841 | ) | (1,237 | ) | (2,553 | ) | (3,573 | ) | ||||||||
Other
income (expense), net
|
222 | (135 | ) | (363 | ) | (588 | ) | |||||||||
Total
other income (expense)
|
(619 | ) | (1,371 | ) | (2,916 | ) | (4,158 | ) | ||||||||
Income
(loss) before income taxes
|
2,782 | 2,087 | (122,549 | ) | 5,026 | |||||||||||
Provision
for income taxes
|
1,128 | 816 | 2,853 | 1,618 | ||||||||||||
Net
income (loss)
|
$ | 1,654 | $ | 1,271 | $ | (125,402 | ) | $ | 3,408 | |||||||
Income
(loss) per share:
|
||||||||||||||||
Basic
|
$ | 0.03 | $ | 0.02 | $ | (2.02 | ) | $ | 0.05 | |||||||
Diluted
|
$ | 0.03 | $ | 0.02 | $ | (2.02 | ) | $ | 0.05 | |||||||
Weighted
average shares outstanding:
|
||||||||||||||||
Basic
|
61,154,018 | 62,630,683 | 62,076,439 | 62,630,683 | ||||||||||||
Diluted
|
61,154,018 | 62,691,742 | 62,076,439 | 62,741,513 |
See
accompanying notes to the consolidated financial statements
3
SMART
BALANCE, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
(Unaudited)
(In
thousands)
Nine Months Ended
September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
(loss) income
|
$ | (125,402 | ) | $ | 3,408 | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization of intangibles
|
3,908 | 3,663 | ||||||
Amortization
of deferred financing costs
|
545 | 323 | ||||||
Deferred
income taxes
|
(4,050 | ) | (3,141 | ) | ||||
Stock
based compensation
|
8,492 | 12,092 | ||||||
Interest
rate swaps
|
- | (1,532 | ) | |||||
Goodwill
impairment
|
130,000 | - | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,149 | ) | (197 | ) | ||||
Inventories
|
(1,523 | ) | 5,251 | |||||
Income
taxes receivable
|
1,131 | - | ||||||
Prepaid
expenses and other current assets
|
(6,101 | ) | (7,708 | ) | ||||
Accounts
payable and accrued expenses
|
2,237 | (3,532 | ) | |||||
Net
cash provided by operating activities
|
8,088 | 8,627 | ||||||
Cash
flows from investing activities
|
||||||||
Purchase
of property and equipment
|
(965 | ) | (749 | ) | ||||
Patent
defense costs
|
(104 | ) | - | |||||
Net
cash (used in) investing activities
|
(1,069 | ) | (749 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from issuance of long term debt
|
9,000 | - | ||||||
Repayment
of debt
|
(7,643 | ) | (5,000 | ) | ||||
Payments
for loan costs
|
(21 | ) | - | |||||
Purchase
of treasury stock
|
(7,340 | ) | - | |||||
Net
cash (used in) financing activities
|
(6,004 | ) | (5,000 | ) | ||||
Net
increase in cash for the period
|
1,015 | 2,878 | ||||||
Cash
- Beginning of period
|
7,538 | 5,492 | ||||||
Cash
- End of period
|
$ | 8,553 | $ | 8,370 | ||||
Cash
paid during the period for:
|
||||||||
Income
taxes
|
$ | 4,897 | $ | 5,203 | ||||
Interest
|
$ | 2,210 | $ | 4,806 |
See
accompanying notes to the consolidated financial statements
4
SMART
BALANCE, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
(In
thousands, except share and per share data)
1.
|
General
|
Smart
Balance, Inc. (the “Company”) was incorporated in Delaware on May 31, 2005
under the name Boulder Specialty Brands, Inc. in order to serve as a vehicle for
the acquisition of a then unidentified operating business and/or brand in the
consumer food and beverage industry. On May 21, 2007, the Company
completed a merger with GFA Brands, Inc. (“GFA”), which owned and marketed the
Smart Balance ® line of
products, among others. GFA became a wholly-owned subsidiary of the
Company.
The
accompanying 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 and notes thereto of Smart Balance, Inc.
included in the Company's 2009 annual report on Form 10-K. The reported results
for the three month and nine month periods ended September 30, 2010 are not
necessarily indicative of the results to be expected for the full
year.
2.
|
Summary of significant
accounting policies
|
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. There were no cash
equivalents as of September 30, 2010 or December 31, 2009.
Accounts
Receivable
Accounts
receivable are carried at original invoice amount less allowances for cash
discounts and doubtful receivables based on a review of all outstanding amounts.
Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customer’s
financial condition, credit history and current economic conditions. Accounts
receivable are written off when deemed uncollectible. Recoveries of
receivables previously written off are recorded when received. The Company does
not charge interest on past due receivables.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or market and consist
primarily of finished goods.
5
Property and
Equipment
Property
and equipment are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets ranging from 5 to 10 years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life of the
improvement. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long lived assets may warrant revision, or that the remaining balance of these
assets may not be recoverable. When deemed necessary, the Company
completes this evaluation by comparing the carrying amount of the assets against
the estimated undiscounted future cash flows associated with them. If
such evaluations indicate that the future undiscounted cash flows of amortizable
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their estimated fair values.
Goodwill
Goodwill
is tested annually for impairment or more frequently if events or changes in
circumstances indicate that impairment may have occurred. The impairment
analysis for goodwill 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. We completed our impairment analysis at June 30,
2010 and concluded that our estimated fair value was less than the carrying
value of the recorded goodwill, and, accordingly, the Company recorded an
impairment loss of $130,000 (see footnote 5 for further details). At
September 30, 2010, the Company reviewed its assessment of fair value and made a
determination that no further impairment was warranted.
Intangible
Assets
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.
6
An
intangible asset is determined to have an indefinite useful life when there are
no legal, regulatory, contractual, competitive, economic, or any other factors
that may limit the period over which the asset is expected to contribute
directly or indirectly to the future cash flows of the Company. In each
reporting period, the Company also evaluates the remaining useful life of an
intangible asset that is not being amortized to determine whether events and
circumstances continue to support an indefinite useful life. If an intangible
asset that is not being amortized is determined to have a finite useful life,
the asset will be amortized prospectively over the estimated remaining useful
life and accounted for in the same manner as intangible assets subject to
amortization.
The
Company has determined that its Smart Balance ® and
Earth Balance ®
trademarks have indefinite lives and these assets are not being amortized. The
Company has performed its annual assessment of its indefinite lived intangible
assets for impairment at June 30, 2010 and determined there was no
impairment. 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 if
previously capitalized with any excess recorded as income.
Deferred
Costs
Deferred
loan costs associated with the Company’s secured debt financing are being
amortized over the life of the loan, using the effective interest
method.
Revenue
Recognition
Revenue
is recognized when the earnings process is complete and the risks and rewards of
ownership have transferred to the customer, which is generally considered to
have occurred upon the receipt of product by the customer. The earnings process
is complete once the customer order has been placed and approved and the product
shipped has been received by the customer. Product is sold to customers on
credit terms established on an individual basis. The credit factors used include
historical performance, current economic conditions and the nature and volume of
the product.
7
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, 2010 of $8,560 which will be charged to expense over the
remaining quarter. The Company sells its products to customers
without a right of return and is not obligated to accept any
returns.
Earnings per Share of Common
Stock
Basic
earnings per share is computed by dividing net income applicable to common
stockholders by the weighted-average number of shares of common stock
outstanding for the period. Diluted earnings per share is computed by dividing
net income by the number of 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. For the
three and nine months ended September 30, 2010, 11,265,375 and 11,225,375
stock options, respectively, were excluded from the dilutive EPS calculation
because their exercise price was greater than the average market
price. Additionally, for the nine months ended September 30, 2010,
40,000 stock options were excluded from the dilutive EPS calculation because the
result would be anti-dilutive.
The
following table summarizes stock options not included in the computation of
diluted earnings per share:
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Stock
options excluded due to option price being greater than market
value
|
11,265,375
|
12,005,000
|
11,225,375
|
11,885,000
|
||||||||||||
Stock
options excluded due to anti-dilution
|
-
|
277,569
|
40,000
|
401,313
|
Segments
Authoritative
accounting guidance requires segment information to be prepared using the
“management” approach. The management approach is based on the method that
management organizes the segments within the Company for making operating
decisions and assessing performance. The Company evaluates all products, makes
operating decisions and performance assessments based on a total company
approach and therefore considers itself as having only one
segment. The Company’s buttery spreads business, marketed under Smart
Balance®, Earth
Balance®,
Bestlife™, Smart Beat® and
Nucoa®, is by
far the most developed product segment and accounted for approximately 70% and
76% of revenue for the three months ended September 30, 2010 and
2009, respectively, and 72% and 75% for the nine months ended September 30, 2010
and 2009, respectively.
Fair Value of Financial
Instruments
The
Company’s financial instruments consist of cash and cash equivalents, short term
trade receivables, payables, note payables and accrued expenses. The carrying
value of cash and cash equivalents, short term receivables and payables and
accrued expenses approximate fair value because of their short maturities. The
Company’s debt is determined by comparable quoted market prices and, therefore,
approximates fair value. The Company measures fair value based on
authoritative accounting guidance for “Fair Value Measurements”, which requires
a three-tier fair value hierarchy that prioritizes inputs to measure fair
value. These tiers include: Level 1, defined as inputs,
such as unadjusted quoted prices in an active market for identical assets or
liabilities; Level 2, defined as inputs other than quoted market prices in
active markets that are either directly or indirectly observable; or Level 3,
defined as unobservable inputs for use when little or no market value exists
therefore requiring an entity to develop its own assumptions. When
available, the Company uses quoted market prices to determine the fair value of
an asset or liability. If quoted market prices are not available, the Company
measures fair value using valuation techniques that use, when possible, current
market-based or independently-sourced market parameters.
At
September 30, 2010 and December 31, 2009, information about inputs
into the fair value measurements of the Company’s assets and liabilities that
are made on a recurring basis was as follows:
As of September 30, 2010
|
||||||||||||||||
Fair Value Measurements at Reporting Date Using
|
||||||||||||||||
Total Fair
Value and
Carrying Value
on Balance
Sheet
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Goodwill
|
$
|
244,886
|
$
|
-
|
$
|
-
|
$
|
244,886
|
* | |||||||
Deferred
compensation
|
854
|
-
|
854
|
-
|
||||||||||||
Derivative
assets
|
730
|
-
|
730
|
-
|
||||||||||||
Total
assets
|
$
|
246,470
|
$
|
-
|
$
|
1,584
|
$
|
244,886
|
||||||||
Liabilities:
|
||||||||||||||||
Deferred
compensation
|
$
|
1,121
|
$
|
-
|
$
|
1,121
|
$
|
-
|
As of December 31, 2009
|
||||||||||||||||
Fair Value Measurements at Reporting Date Using
|
||||||||||||||||
Total Fair
Value and
Carrying Value
on
Balance
Sheet
|
Quoted Prices
in
Active
Markets for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Goodwill
|
$
|
374,886
|
$
|
-
|
$
|
-
|
$
|
374,886
|
||||||||
Deferred
compensation
|
857
|
-
|
857
|
-
|
||||||||||||
Derivative
assets
|
155
|
-
|
155
|
-
|
||||||||||||
Total
assets
|
$
|
375,898
|
$
|
-
|
$
|
1,012
|
$
|
374,886
|
||||||||
Liabilities:
|
||||||||||||||||
Deferred
compensation
|
$
|
966
|
$
|
-
|
$
|
966
|
$
|
-
|
Research and
Development
Research
and development expenses are charged to operations when incurred and amounted to
$135 and $322, respectively, for the three months ended September 30, 2010 and
2009 and $570 and $594 for the nine months ended September 30, 2010 and 2009,
respectively.
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, 2010, no valuation
allowances were recorded.
Advertising
Advertising
costs are charged to operations (classified as marketing expenses) and amounted
to $6,219 and $4,854 for the three months ended September 30, 2010 and
2009, respectively, and $19,480 and $15,465 for the nine months ended September
30, 2010 and 2009, respectively.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of Credit
Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash, cash equivalents, short term investments and
trade receivables. The Company maintains the majority of its cash and cash
equivalents in the form of demand deposits with financial institutions that
management believes are creditworthy. At September 30, 2010, 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 17% of
sales during the three and nine months ended September 30, 2010, respectively.
The aggregate accounts receivable from this customer amounted to approximately
16% of the accounts receivable balance outstanding at September 30, 2010. The
Company also has one product, “spreads,” which, accounted for approximately 70%
and 72 % of total revenue for the three and nine months ended September 30,
2010, respectively. Approximately 81% of the Company’s revenues
during the three and nine months ended September 30, 2010, respectively, came
from products utilizing licenses from Brandeis University.
10
Recently Issued Accounting
Pronouncements
There
have been no significant developments to recently issued accounting standards,
including the expected dates of adoption and estimated effects on the Company’s
consolidated financial statements from those disclosed in our 2009 Annual Report
on Form 10-K.
3.
|
Property and
equipment
|
Property
and equipment consist of the following:
September
30,
2010
|
December
31,
2009
|
|||||||
Software
development costs
|
$
|
4,394
|
$
|
3,857
|
||||
Equipment
|
1,154
|
771
|
||||||
Furniture
and fixtures
|
1,021
|
976
|
||||||
Leasehold
improvements
|
342
|
342
|
||||||
6,911
|
5,946
|
|||||||
Less:
accumulated depreciation
|
(2,167
|
) |
(1,312
|
) | ||||
Property
and equipment, net
|
$
|
4,744
|
$
|
4,634
|
Depreciation
expense was $269 for the three months ended September 30, 2010, compared to $215
for the three months ended September 30, 2009, and $856 for the nine months
ended September 30, 2010, compared to $613 for the nine months ended September
30, 2009.
4.
|
Intangible
assets
|
The
following is a summary of intangible assets and goodwill as of
September 30, 2010:
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Impairment
|
Accumulated
Adjustments
|
Net Balance,
September 30,
2010
|
||||||||||||||||
Patent
technology
|
$
|
40,000
|
$
|
13,468
|
$
|
-
|
$
|
36
|
$
|
26,568
|
||||||||||
Supply
relationship
|
1,000
|
230
|
-
|
-
|
770
|
|||||||||||||||
Trademarks
|
121,152
|
-
|
-
|
(350
|
) |
120,802
|
||||||||||||||
Goodwill
|
374,886
|
-
|
(130,000
|
)
|
-
|
244,886
|
||||||||||||||
$
|
537,038
|
$
|
13,698
|
$
|
(130,000
|
)
|
$
|
(314
|
) |
$
|
393,026
|
Adjustments
to trademarks relate to a legal settlement received of $367 and serve to reduce
related costs previously capitalized. Additional spending of $16 during the
period accounted for the difference. Adjustments to patent technology
primarily relate to the capitalization of legal defense costs associated with
the Company’s licensed patents from Brandeis University. Amortization
expense was $3,052 for the nine months ended September 30, 2010 and $3,050 for
the nine months ended September 30, 2009. At June 30, 2010, the
Company recognized an impairment loss of $130,000 (see footnote 5 for further
details).
5.
|
Goodwill
Impairment
|
As
required under ASC Topic 350 “Goodwill and Other Intangible Assets”, the Company
routinely reviews the carrying value of its net assets, including goodwill, to
determine if any impairment has occurred. A review was
conducted at year-end 2009, at which time, based on existing conditions and
management’s outlook, the Company determined there was no
impairment.
Revenue
and earnings expectations for full year 2010 and the longer-term outlook did not
appreciably change in the first quarter of 2010 from those at year-end 2009.
However, during the second quarter of 2010, it became apparent that some of the
underlying growth rates and market assumptions used in the December 2009 outlook
were not materializing as projected and that an indication of impairment was
likely. The main contributors to this change in outlook were the persistent
softness in U.S. consumer confidence, which the Company believes has heightened
consumer price sensitivity for the premium priced branded products in its
markets. In addition, in response to the impact of this ongoing
macroeconomic softness, the competitive environment for the Company’s premium
products continued to intensify during the second quarter, requiring the Company
to reevaluate and increase its planned levels of marketing and promotional
support to remain competitive. This change in go-to-market strategy
had a dampening effect on the Company’s overall financial expectations for the
second quarter as well as its forward-looking financial projections for the
balance of the year. As a result, the Company issued a press
release on June 14, 2010, revising downward its financial outlook for 2010,
which resulted in a significant reduction in the Company’s share price and
related market capitalization.
Given
this decline, in connection with the preparation of the June 30, 2010 financial
statements, the Company performed an impairment test of goodwill following a two
step process as defined in ASC Topic 350. The first step in this process
compares the fair value of the Company’s net assets, including goodwill, to
their carrying value. If the carrying value exceeds the fair value, the second
step of the impairment test is performed to measure the impairment. In the
second step, the fair value is allocated to all assets and liabilities to
determine the implied goodwill value. This allocation is similar to a purchase
price allocation done under purchase accounting.
The
Company determined the fair value of its net assets using a discounted cash flow
(income) approach. The Company used growth assumptions it considered reasonable
in light of current conditions and its change in strategies and goals. The
Company also used numerous other assumptions including weighted average costs of
capital to discount cash flows. Accordingly, the carrying value of the Company’s
net assets exceeded the estimated fair value of the Company’s net assets,
indicating the second step of the impairment test was necessary.
To
perform the second step of the impairment test, the Company estimated the fair
value of all its individual assets and liabilities, including identifiable
intangible assets. The carrying value of current assets and
liabilities, such as receivables, inventories and payables, were considered to
be their fair value given their short-term nature. The carrying value
of the Company’s fixed assets were considered at their fair value since they
were acquired in the last few years and are being depreciated or amortized in
line with their useful life. The Company determined the fair value of
its identifiable intangible assets (namely, trade names and patents) using
generally accepted valuation methodologies. The goodwill value
implied from this analysis resulted in a goodwill impairment loss of $130,000 at
June 30, 2010.
At
September 30, 2010, the Company reviewed its assessment of fair value and made a
determination that no further impairment was warranted. However, any
significant adverse change in the assumptions the Company used in determining
fair value could have a further significant impact on the recoverability of the
Company’s goodwill and could have a material impact on its consolidated
financial statements. The Company’s growth plans include new products
which are highly dependent on consumer acceptance, retail placement and the
Company’s effectiveness in marketing strategies.
12
In
conjunction with performing an impairment test of goodwill in connection with
the preparation of the June 30, 2010 financial statements, the Company also
performed an impairment test of its indefinite-lived intangible assets, namely,
trade-names. The Company used an income approach (relief-from-royalty
method) to measure the fair value of these intangibles. The result of this
assessment indicated that the fair value of these other intangible assets was
not below their carrying values and therefore no impairment was
recorded. For other long-lived intangible assets, namely patents, the
Company complied with the general valuation requirements set forth under ASC
Topic 360 “Accounting for the Impairment of Long-Lived Assets.” The
result of this assessment indicated that no impairment existed.
6.
|
Realignment and Other
Actions
|
In
connection with the realignment of the Company to improve future operations,
severance charges associated with workforce reductions and other facility
closure and exit costs were recorded during the second quarter of
2010. For the nine months ended September 30, 2010, the consolidated
statement of operations includes realignment charges of $3,191 which are
comprised of $2,736 of severance benefits, $401 for abandoned leased office
space costs and $54 in other costs. These costs were incurred during
the second quarter and are included within operating expenses and classified as
general and administrative charges on the consolidated income
statement.
The
consolidated balance sheet as of September 30, 2010 includes accruals relating
to the realignment program of $2,628. The following table sets forth
the activity affecting the accrual during the nine months ended September 30,
2010:
Severance
|
Other Closure
and Exit Costs
|
Total
|
||||||||||
Balance
as of December 31, 2009
|
$ | - | $ | - | $ | - | ||||||
Charges
incurred
|
2,790 | 401 | 3,191 | |||||||||
Cash
payments
|
(481 | ) | (14 | ) | (495 | ) | ||||||
Adjustments
|
(68 | ) | - | (68 | ) | |||||||
Balance
as of September 30, 2010
|
$ | 2,241 | $ | 387 | $ | 2,628 |
Adjustments
recorded during the third quarter of 2010 relate to the resolution of
contractual conditions related to severance agreements.
The
current portion of liabilities for accrued severance as of September 30, 2010 is
$1,662 and is reflected in accrued expenses and the remaining liability of $966
is reflected in other liabilities. The liabilities for other closure and exit
costs as of September 30, 2010 are included in accrued expenses and primarily
relate to contractually required lease obligations and other contractually
committed costs associated with abandoned office space. The Company
expects to pay the remaining realignment obligations within 3 years, with the
majority of the obligations being paid within 2 years.
7.
|
Accounts payable and
accrued expenses
|
Accounts
payable and accrued expenses consist of the following:
September
30,
2010
|
December
31,
2009
|
|||||||
Accounts
payable
|
$
|
11,379
|
$
|
8,374
|
||||
Accrued
expenses
|
12,577
|
14,252
|
||||||
Total
|
$
|
23,956
|
$
|
22,626
|
8.
|
Long term
debt
|
On
November 4, 2009, the Company, through its wholly-owned subsidiary GFA Brands,
Inc. (the “Borrower”), entered into a Credit Agreement (the “Credit Agreement”)
with the various Lenders named therein (the “Lenders”), and Bank of Montreal, as
Administrative Agent (the “Agent”). The Credit Agreement provides for
$100,000 in secured debt financing consisting of a $55,000 term loan (the
“Term Loan”) and a $45,000 revolving credit facility (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. Subject to certain conditions, the Borrower, to the extent
existing Lenders decline to do so by adding additional Lenders, may increase the
Term Loan or increase the commitments under the Revolver (or a combination of
the two) up to an aggregate additional amount of $5,000, at the Borrower’s
option.
The
Credit Agreement replaced the Company’s prior first lien and second lien credit
facilities with Bank of America Securities LLC and Bank of America, N.A. (the
“Prior Facilities”). Proceeds of the Credit Agreement were used
to repay the debt outstanding under the Prior Facilities and have also been used
for general corporate purposes and general working capital
purposes.
The Term
Loan and the loans made pursuant to the Revolver will mature on November 3,
2013. The Credit Agreement requires annual principal payments on the
Term Loan of $5,500.
Loans
outstanding under the Credit Agreement bear interest, at the Borrower’s option,
at either a base rate (defined in the Credit Agreement as the greatest of (i)
2.5%, (ii) the Agent’s prime rate, (iii) the federal funds rate plus 0.50% and
(iv) a reserve adjusted one-month LIBOR rate plus 1.0%) or a Eurodollar rate (of
no less than 1.5%), in each case plus an applicable margin. The
applicable margin is determined under the Credit Agreement based on the ratio of
the Company’s total funded debt to EBITDA for the prior four fiscal quarters
(the “Leverage Ratio”), and may range from 2.25% to 3.25%, in the case of base
rate loans, and 3.25% to 4.25%, in the case of Eurodollar rate
loans. The Borrower must also pay a commitment fee on the unused
portion of the Revolver (determined under the Credit Agreement based on the
ratio of the Company’s Leverage Ratio) which may range from 0.50% to
0.75%.
Subject
to certain conditions, the Borrower may voluntarily prepay the loans under the
Credit Agreement in whole or in part, without premium or penalty (other than
customary breakage costs). Mandatory prepayments that are required
under the Credit Agreement include:
●
|
100%
of the net cash proceeds (as defined in the Credit Agreement) upon certain
dispositions of property or upon certain damages or seizures of property,
subject to limited exceptions;
|
●
|
50%
of all net cash proceeds from the issuance of additional equity securities
of the Company, subject to limited exceptions, provided, however, if the
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;
and
|
●
|
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
Credit Agreement contains covenants that are customary for agreements of this
type. These covenants include, among others: a limitation on the
incurrence of additional indebtedness; a limitation on mergers, acquisitions,
investments and dividend payments; and maintenance of specified financial
ratios. Under the Credit Agreement, the Company must maintain (1) a
Leverage Ratio that is not greater than 2.75 to 1.0 until December 30, 2011 and
not greater than 2.50 to 1.0 thereafter and (2) a ratio of EBITDA to Debt
Service (as defined in the Credit Agreement), in each case for the prior four
fiscal quarters, of not less than 2.00 to 1.00. 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. At
September 30, 2010, the Company was in compliance with all of its
covenants.
The
failure to satisfy covenants under the Credit Agreement or the occurrence of
other specified events that constitute an event of default could result in the
acceleration of the repayment obligations of the Borrower. The Credit
Agreement contains customary provisions relating to events of default for
agreements of this type. The events of default include, among others: the
nonpayment of any outstanding principal, interest, fees or other amounts due
under the Credit Agreement; certain bankruptcy events, judgments or decrees
against the Company or the Borrower; cross defaults to other indebtedness
exceeding $5,000; a change in control (as defined in the Credit Agreement) of
the Company or the Borrower; and the failure to perform or observe covenants in
the Credit Agreement.
The
obligations under the Credit Agreement are guaranteed by the Company and all
existing and future subsidiaries of the Borrower. The Borrower, the
Company and the other guarantors granted to the Agent, for the benefit of the
Lenders, a security interest in substantially all of its respective assets,
including, among other things, patents, patent licenses, trademarks and
trademark licenses.
After the
close of the transaction, total debt outstanding under the Credit Agreement
totaled approximately $60,600 comprised of $55,000 of Term Loan debt and $5,600
of borrowings under the Revolver. During the fourth quarter of 2009,
the Company paid approximately $4,000 on its Revolver and during the first
quarter of 2010 it paid $1,100 of its scheduled requirements. During
the second quarter of 2010, the Company paid $6,500 of which $1,600 reduced the
Revolver to zero and $4,900 was applied against the Term Loan. During
the third quarter of 2010, the Company borrowed $9,000 under the Revolver
bringing the total debt outstanding to $58,000 as of September 30,
2010.
The
Company is required to pay the following amounts in each of the next four
years:
2010
|
$
|
-
|
||
2011
|
5,000
|
|||
2012
|
5,500
|
|||
2013
|
47,500
|
|||
Total
|
$
|
58,000
|
As of
September 30, 2010, $3,350 is due in the next twelve months. The
interest rate under the Credit Agreement at September 30, 2010 was 4.75% while
the interest rate on the unused line was 0.5%. This amount does not
take into account the amount, if any, of the requirement that, beginning on
December 31, 2010, the Company make an annual payment equal to 25% of excess
cash flow, as defined by the Credit Agreement, unless its leverage ratio is 2.0
or less. The Company currently has a ratio of less than 2.0 and
expects to remain at that level on December 31, 2010.
9.
|
Stock-based
compensation
|
The
Company and its stockholders have authorized the issuance of up to 12,150,000
stock options under its Stock and Awards Plan. Through September 30,
2010, the Company had granted a total of 12,707,500 stock options under the
Stock and Awards Plan, of which 2,817,125 have been forfeited. This
resulted in 9,890,375 shares issued and outstanding at September 30,
2010.
15
In
addition, during the first quarter of 2008, the compensation committee and
sub-committee of the compensation committee approved the issuance of up to
1,375,000 inducement stock options grants to new employees outside of the
Company’s stock plan pursuant to NASDAQ Marketplace Rule 4350. During
the twelve months ended December 31, 2008, the Company issued all of the
1,375,000 inducement grant stock options to new employees.
The
Company utilizes two types of stock options, traditional service-based with a
four year graded vesting (25% vest each year) and market condition-based stock
options which vest when the underlying stock price reaches either $16.75 and
$20.25, respectively, and remains there for 20 out of 30 consecutive trading
days. Stock options are granted to recipients at exercise prices not less than
the fair market value of the Company’s stock at the dates of grant and can
consist solely of the service-based options or market conditions-based options
or can consist of a combination of both types of options. Stock
options granted to employees have a term of 10 years. The Company
recognizes stock-based compensation expense over the requisite service period of
the individual grants, which generally equals the vesting period, or as
determined by the Monte Carlo valuation model.
Number of
Outstanding
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Life (Years)
|
||||||||||
Shares
at December 31, 2008
|
12,045,000
|
$
|
9.47
|
7.03
|
||||||||
Options
granted
|
500,000
|
6.46
|
9.56
|
|||||||||
Options
exercised
|
-
|
-
|
-
|
|||||||||
Options
canceled/forfeited
|
(289,000
|
) |
9.69
|
7.92
|
||||||||
Shares
at December 31, 2009
|
12,256,000
|
$
|
9.34
|
7.78
|
||||||||
Options
granted
|
1,347,500
|
7.09
|
9.57
|
|||||||||
Options
exercised
|
-
|
-
|
-
|
|||||||||
Options
canceled/forfeited
|
(2,338,125
|
) |
9.49
|
7.32
|
||||||||
Shares
at September 30, 2010
|
11,265,375
|
$
|
9.04
|
7.37
|
||||||||
Shares
exercisable at September 30, 2010
|
3,672,500
|
$
|
9.38
|
6.95
|
The
weighted-average grant-date fair values of options granted during 2010 and 2009
were $3.75 and $3.20, respectively.
The
following summarizes non-vested share activity as of September 30,
2010:
Shares
|
Grant-Date
Fair
Value
|
|||||||
Nonvested
at beginning of year
|
9,433,625
|
$
|
4.75
|
|||||
Granted
|
1,347,500
|
3.75
|
||||||
Vested
|
(1,293,250)
|
4.41
|
||||||
Forfeited
|
(1,895,000)
|
4.88
|
||||||
Non-vested
at end of quarter
|
7,592,875
|
$
|
4.59
|
As of
September 30, 2010, the total compensation cost related to non-vested awards not
yet recognized was $13,100 with a weighted average remaining period of 1.56
years over which it is expected to be expensed.
The
Company accounts for its stock-based compensation awards in accordance with
authoritative accounting guidance for share-based payment, which requires
companies to recognize compensation expense for all equity-based compensation
awards issued to employees that are expected to vest. Compensation cost is based
on the fair value of awards as of the grant date.
Pre-tax
stock-based compensation expense included in reported net income is as
follows:
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Service
period-based
|
$
|
1,949
|
$
|
1,911
|
$
|
4,497
|
$
|
5,670
|
||||||||
Market
price-based $16.75
|
300
|
1,230
|
1,627
|
3,686
|
||||||||||||
Market
price-based $20.25
|
703
|
914
|
2,369
|
2,736
|
||||||||||||
Total
|
$
|
2,952
|
$
|
4,055
|
$
|
8,493
|
$
|
12,092
|
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 of 7 years
for the service-based options and 10 years for the market price-based options,
no dividends and volatility of 35.9% - 52.08%. 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 has incorporated a forfeiture rate of 2.5% on all
time vested options. 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.
10.
|
Stock Repurchase
Activities
|
11.
|
Interest rate
derivatives
|
In
conjunction with the original variable-rate debt arrangement, which was
terminated on November 4, 2009, the Company entered into a notional $80,000
interest rate swap agreement which was designed to provide a constant interest
rate on the variable interest rate debt. The swap agreement was
settled when the new financing was put in place on November 4,
2009.
12.
|
License
|
A
substantial portion of the Company’s business is dependent on its exclusive
worldwide license of certain technology from Brandeis University. This license
agreement, dated September 1996, imposes certain obligations upon the Company,
such as diligently pursuing the development of commercial products under the
licensed technology. The agreement for each country expires at the end of the
term of each patent in such country and contains no minimum commitments. The
amount of royalties due is based on a formula of the percentage of oil and/or
fat utilized in the licensed products. Should Brandeis believe that the Company
has failed to meet its obligations under the license agreement, Brandeis could
seek to limit or terminate the Company’s license rights. Royalties earned by
Brandeis for the nine months ended September 30, 2010, were approximately
$742.
13.
|
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 effective tax rate for the third
quarter was 40.6%. The Company’s effective tax rate for the balance of
2010 is estimated to be 39%. The deferred tax liability represents
primarily the difference between the tax and accounting basis of intangible
assets acquired in the GFA merger.
14.
|
Commitments and
contingencies
|
As of
September 30, 2010, the Company had the following commitments and contractual
obligations:
●
|
An
amended lease agreement for the lease of a corporate office facility
located in Paramus, NJ. The lease was effective as of September
1, 2008 and has a seven year life with the option to extend the lease for
two additional five-year terms. The annual rental expense is
approximately $500 for each of the first five
years.
|
●
|
Three
lease agreements for the lease of a corporate office facility located in
Niwot, Colorado. The leases were effective as of August 1, 2007
and have a five-year life with the option to extend each lease for two 36
month terms. The annual rental expense is approximately $100
for each of the first five years.
|
●
|
Forward
purchase commitments for a portion of the Company's projected requirement
for peanuts and for palm, soy and canola oil. These commitments
may be stated at a firm price, or as a discount or premium from a future
commodity market price. These commitments total approximately $28.6
million as of September 30, 2010. The majority of these
commitments are expected to be liquidated by the second quarter of
2011.
|
15.
|
Legal
Proceedings
|
The
Company is currently involved in the following legal proceedings:
18
On
February 8, 2010 a lawsuit was filed against Smart Balance, Inc. in the Federal
District Court for the Central District in California in Santa Ana,
California. The complaint alleges, among other things, violations of
California’s unfair competition law, false advertising, and consumer remedies
act and seeks to identify all similarly situated plaintiffs and certify them in
a class action. The Company has not yet answered the complaint, and
intends to vigorously defend itself. The Company does not expect that
the resolution of this matter will have a material adverse effect on its
business.
In 2007,
three parties filed Oppositions to European Patent No. 0820307 relating to
increasing the HDL level and the HDL/LDL ratio in Human Serum by Balancing
Saturated and Polyunsaturated Dietary Fatty Acids. In July 2010, a
hearing was held on this matter in Munich, Germany and the patent panel ruled
against the Company. The Company is awaiting the panel’s written
decision and then will make a determination on whether to appeal the
ruling. The Company believes that neither this proceeding, nor its
ultimate outcome, will have any material adverse effect on its
business.
The
Company is not a party to any other legal proceeding that it believes would have
a material adverse effect on its business, results of operations or financial
condition.
19
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the September 30, 2010 Condensed
Consolidated Financial Statements and the related Notes contained in this
quarterly report on Form 10-Q and our annual report on Form 10-K for the year
ended December 31, 2009. Forward-looking statements in this section are
qualified by the cautionary statements included under the heading “Cautionary
Note Regarding Forward Looking Information,” above.
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, milk, sour cream and other
products primarily under the Smart Balance®
trademark. In the natural food channel, we sell similar natural and organic
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®,
Bestlife™ and Nucoa®, is by
far our most developed product group and accounted for approximately 71.5% of
sales for the nine months ended September 30, 2010. Our products are
sold throughout the U.S. A majority of our products are sold through
supermarket chains and food wholesalers.
We
outsource production of finished goods to third-party
manufacturers. We do not own or operate any manufacturing
facilities. Outsourcing allows us to 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
manufacturers supply our products at a price equal to the cost of ingredients
and certain packaging plus a contracted toll charge. We use third
party distributors and a network of public warehouses to deliver products from
our manufacturers to our customers.
Our goal
is to become a recognized leader in providing nutritious and good tasting
products for a wide variety of consumer needs. We believe the Smart
Balance® brand
has the potential to become a broad functional foods platform across multiple
food categories. Our primary growth strategy is two-fold: (1) to
drive consumer and trade awareness of our brands and (2) to increase purchase
frequency by expanding product offerings and distribution in our core category
of spreads and into other dairy categories. In order to drive
consumer and trade awareness of our brands and add more households that prefer
our products, we will continue to use marketing and promotional programs to
drive trial and encourage brand loyalty. We spent over $50 million in 2009 for
consumer marketing and promotion. In order to increase purchase
frequency and expand our product offerings and distribution, during 2008 we
launched a successful distribution initiative to increase shelf presence in
retailers. The effort substantially increased the average number of
our products that retailers have on the shelf, especially in the spreads
category.
20
2009 was
an important year in creating a foundation necessary to support growth over the
next several years. We increased our market share and profitability
in the core spreads category, established our dairy initiative, lead by our
enhanced milk products, and refinanced our credit facility with a strategically
flexible capital structure. In 2010, we launched our 3-tier spreads
initiative, with products in all segments of the category. We also
began expansion of milk distribution in 2010.
In our
core spreads category, for the year ended December 31, 2009 our dollar market
share was up 1.1 points to 15.2% according to Nielsen data for the food
channel. Accordingly, we were first among competitors in dollar
share growth in 2009 and second behind private label in unit share growth, an
accomplishment for a premium priced product in this economy. We are
now the number two marketer of spreads in the U.S. on a dollar basis. In the
first nine months of 2010, our market share was 15.7%, up .02 points, from the
same period in the prior year. Our strategy has always been to
maintain price and product positioning as a premium brand. As a
result, we lost some volume opportunities over the last twelve months as
consumers continued to be price sensitive and competitors sought to increase
unit share through price promotion.
Our
current dairy aisle initiative is the critical part of our growth
plan. Centered on the high purchase frequency of the milk category,
we believe success in expanding in the dairy aisle will be the driver toward our
growth goals. In 2010, we expanded milk nationally and are using
advertising and other marketing to drive trial. However, our ability
to build trial for milk continues to be slowed by the current economic
environment. For our dairy initiative in 2009, we expanded
distribution of milks to the Northeast, beyond the initial Florida
market. We launched sour cream products later in the
year. In 2010, we continued our expansion of the distribution of
milk across the U.S. Market share of our milks is .35% of the total
milk category for the food channel, twelve weeks ended October 2, 2010,
according to Nielsen data.
We
restructured our long-term debt in November 2009 to give the Company greater
flexibility in strategic areas such as acquisitions and capital structure with
higher available credit and less restrictive financial covenants than our
previous facility. At the end of September 2010 our debt was $58.0
million. Our board authorized a two-year, $25 million stock
repurchase program, which became effective starting in March 2010. As
of September 30, 2010, approximately $7.3 million was used to repurchase the
Company’s shares.
In 2009,
we signed an exclusive license agreement to use the Bestlife™ brand across
virtually all food and beverage categories. The Best Life® program
was developed by Bob Greene, Oprah’s trainer and nutritional
advisor. We believe that this relationship provides us with a
significant opportunity to use a targeted marketing approach to penetrate the
value segment of the spreads category and other categories where the Smart
Balance® brand
does not participate. We began distribution of Bestlife™ spreads in
March 2010. In the third quarter of 2010, we announced the launch of
Earth Balance® organic
soymilk into Whole Foods markets nationwide. We plan to expand Earth
Balance® organic
soymilk to other natural food customers in 2011.
In 2010,
we expanded milk and sour cream nationally and are using advertising and other
marketing to drive trial. However, as stated above, our ability to
build trial for milk continues to be slowed by the current economic environment.
To continue to grow our presence in the spreads category, we have developed our
three-tier strategy, which we believe allows us to compete in multiple segments
in the spreads category, with our Earth Balance® brand
in the super premium segment, our Smart Balance®
brand in the healthy premium segment and our new Bestlife™ brand in the value
segment. We expect pressure in the spreads category to continue due
to the economic conditions and competitive promotional activity that started
mid-year in 2009.
Our
results in the past quarter were adversely affected by the continuing weakness
in the US economy which is particularly affecting the premium priced branded
products the Company markets. This along with an unusually strong competitive
environment has had a dampening effect on our overall financial performance,
requiring us to revise our forward-looking business projections downward during
the second quarter of 2010 which, in turn, significantly reduced our market
capitalization. As required under ASC Topic 350, we performed an impairment test
of goodwill and determined the fair value of recorded goodwill was in excess of
implied goodwill and, accordingly, recorded a goodwill impairment loss of $130.0
million at June 30, 2010.
Results
of Operations
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.
Results
of Operations for the Three and Nine Months Ended September 30, 2010 and
2009
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
(In
millions except share data)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Net
sales
|
$
|
59.9
|
$
|
59.8
|
$
|
179.2
|
$
|
180.6
|
||||||||
Cost
of goods sold
|
31.3
|
30.0
|
90.4
|
94.3
|
||||||||||||
Gross
profit
|
28.6
|
29.8
|
88.8
|
86.3
|
||||||||||||
Operating
expenses
|
25.2
|
26.3
|
208.4
|
77.1
|
||||||||||||
Operating
income (loss)
|
3.4
|
3.5
|
(119.6)
|
9.2
|
||||||||||||
Other
expenses, net
|
(0.6
|
) |
(1.4
|
) |
(2.9
|
) |
(4.2
|
) | ||||||||
Income
(loss) before income taxes
|
2.8
|
2.1
|
(122.5
|
) |
5.0
|
|||||||||||
Provision
for income taxes
|
1.1
|
0.8
|
2.9
|
1.6
|
||||||||||||
Net
income (loss)
|
$
|
1.7
|
$
|
1.3
|
$
|
(125.4
|
) |
$
|
3.4
|
|||||||
Net
income (loss) per common share - basic and diluted
|
$
|
0.03
|
$
|
0.02
|
$
|
(2.02
|
) |
$
|
0.05
|
Results
of Operations for the Three Months Ended September 30, 2010 Compared to the
Three Months Ended September 30, 2009
Net
Sales:
Our net
sales for the three months ended September 30, 2010 increased slightly by 0.2%
to $59.9 million from $59.8 million for the three months ended September 30,
2009. This performance reflected the growth of the Company’s sales of
enhanced milks as well as declines in sales for spreads products and grocery
products. The Company’s enhanced milks sales growth resulted from the
national expansion of distribution in 2010 as well as continued growth in the
original markets of Florida and the Northeast. The sales performance of
the Company’s spreads products reflected declines in Smart Balance® spreads
partially offset by growth of Bestlife™ and Earth Balance® brands,
driven by distribution gains and increased case shipments, respectively.
The Smart Balance® spreads
sales decline was due to continued consumer price sensitivity, overall
category weakness—similar to other cooking and baking-related categories— and
competitive promotional pressure. Case shipments of our grocery products
including cooking oil, peanut butter, microwave popcorn and mayonnaise were down
10% versus the third quarter of 2009, as the environment surrounding these
product categories continues to be price promotion driven.
22
Cost
of Goods Sold:
Cost of
goods sold for the three months ended September 30, 2010 was $31.3 million, a
4.3% increase from the same period in 2009. The increase is due to
higher volumes due to the expansion of milk and introduction of Bestlife™
spreads partially offset by lower volumes of Smart Balance®
spreads.
Gross
Profit:
Our gross
profit decreased $1.2 million to $28.6 million for the three months ended
September 30, 2010 from $29.8 million from the same period in 2009, due to the
unfavorable product mix - higher volumes of lower margin products (milk and
Bestlife™ spreads) and lower volumes of higher margin products (Smart
Balance®
spreads), partially offset by lower promotion spending.
Gross
profit as a percentage of net sales was 47.7% for the three months ended
September 30, 2010 compared to 49.8% during the same period in 2009, reflecting
the unfavorable product mix, partially offset by lower promotion
spending.
Operating
Expenses:
Total
operating expenses for the three months ended September 30, 2010 were $25.2
million compared to $26.3 million for the corresponding period in 2009.
The decrease primarily resulted from lower stock-based compensation and other
employee related costs, partially offset by increased distribution
costs.
Operating
Income:
Our
operating income was $3.4 million for the three months ended September 30, 2010
compared with $3.5 million for the corresponding period in 2009. The
slight decrease was due primarily to lower gross profits, largely offset by
lower operating expenses.
Other
Income (Expense):
We
incurred other expenses of $0.6 million for the three months ended September 30,
2010 and $1.4 million in the corresponding period in 2009. The
results for 2010 and 2009 included net interest expense of $0.8 million and $1.2
million, respectively. Included in the 2010 other expense was a $0.3
million gain on commodity hedging derivatives.
Income
Taxes:
The
provision for income taxes for the three months ended September 30, 2010 was
$1.1 million compared with $0.8 million for the corresponding period in
2009. The effective tax rate for the three months ended September 30,
2010 was 40.6% compared to 39.1% in 2009.
23
Net
Income:
Our net
income for the three months ended September 30, 2010 was $1.7 million, an
increase of $0.4 million versus the corresponding period in
2009. This increase was due primarily to lower operating expenses and
lower interest expense partially offset by lower gross profit.
Net
Income Per Common Share:
Our basic
and diluted net loss per share for the three months ended September 30, 2010 was
$0.03 compared to net income per share of $0.02 in the corresponding period
in 2009, based on the basic and diluted weighted average shares outstanding of
61.2 million in 2010 and 62.6 and 62.7 million in 2009,
respectively.
Results
of Operations for the Nine Months Ended September 30, 2010 Compared to the Nine
Months Ended September 30, 2009
Net
Sales:
Our net
sales for the nine months ended September 30, 2010 declined 0.8% to $179.2
million from $180.6 million for the nine months ended September 30,
2009. The decrease was primarily due to lower volumes in Smart
Balance® spreads
and grocery products, and higher promotion spending, partially offset by
increased distribution of milk, Bestlife™ spreads, Earth Balance®
products, and sour cream.
24
Cost
of Goods Sold:
Cost of
goods sold for the nine months ended September 30, 2010 was $90.4 million, a
4.1% decrease from the same period in 2009. The decrease was
primarily due to lower input costs.
Gross
Profit:
Our gross
profit increased $2.5 million to $88.8 million for the nine months ended
September 30, 2010 from $86.3 million from the same period in 2009, primarily
due to lower input costs and promotion spending, partially offset by unfavorable
product mix.
Gross
profit as a percentage of net sales was 49.6% for the nine months ended
September 30, 2010 compared to 47.8% during the same period in
2009. This increase was primarily due to lower input costs and
promotion spending, partially offset by unfavorable product mix.
Operating
Expenses:
Total
operating expenses for the nine months ended September 30, 2010 were $208.4
million compared to $77.1 million for the corresponding period in
2009. Included in the 2010 amount are a goodwill impairment charge of
$130 million, a realignment charge of $3.1 million and a one-time benefit in the
change in stock-based compensation expense of $1.3 million. Excluding
these items, total operating expenses for the nine months ended September 30,
2010 were $76.6 million, a decrease of $0.5 million. The decrease
primarily resulted from lower stock based compensation costs and other
compensation related costs, partially offset by higher marketing and
distribution costs.
Operating
Income (Loss):
Our
operating loss was $119.6 million for the nine months ended September 30, 2010
compared with operating income of $9.2 million for the corresponding period in
2009. Included in the 2010 operating loss are a goodwill impairment
charge of $130 million, a realignment charge of $3.1 million and a one-time
benefit in the change in stock-based compensation expense of $1.3
million. Excluding these items, total operating income for the nine
months ended September 30, 2010 was $12.2 million, an increase of $3.0
million. This increase was due primarily to higher gross profits and
lower general and administrative costs, partially offset by higher marketing and
distribution costs.
Other
(Expense) Income:
We
incurred other expenses of $2.9 million for the nine months ended September 30,
2010 and $4.2 million in the corresponding period in 2009. The
results for 2010 and 2009 included net interest expense of $2.6 million and $3.6
million, respectively.
Income
Taxes:
The
provision for income taxes for the nine months ended September 30, 2010 was $2.9
million compared with $1.6 million for the corresponding period in
2009. The effective tax rate for the nine months ended September 30,
2010 was 2.3% as a result of recording a pre-tax goodwill impairment charge,
which had no tax benefit. Excluding the impairment charge, the
effective tax rate for the nine months ended September 30, 2010 was 37.9%
benefitting from resolution of prior years’ tax issues.
25
Net
Income (Loss):
Our net
loss for the nine months ended September 30, 2010 was $125.4 million compared
with net income of $3.4 million for the corresponding period in
2009. Included in the 2010 net loss are a goodwill impairment charge
of $130 million (which derived no tax benefit), a realignment charge of $2.1
million (after taxes) and a one-time benefit in the change in stock-based
compensation expense of $0.8 million (after taxes). Excluding these
items, net income for the nine months ended September 30, 2010 was $5.9, an
increase of $2.5 million. This increase was due primarily to higher
operating income and lower interest expense.
Net
Income (Loss) Per Common Share:
Our basic
and diluted net loss per share for the nine months ended September 30, 2010 was
$(2.02) compared to net income per share of $0.05 in the corresponding
period in 2009, based on the basic and diluted weighted average shares
outstanding of 62.1 million in 2010 and 62.6 million and 62.7 million in 2009,
respectively. Included in the 2010 net loss are a goodwill impairment
charge of $2.09, a realignment charge of $0.03 and a one-time benefit in the
change in stock-based compensation expense of $0.01. Excluding these
items, net income per common share for the nine months ended September 30, 2010
was $0.09.
Cash
Flows
Cash
provided by operating activities was $8.1 million for the nine months ended
September 30, 2010 compared to $8.6 million in the corresponding period in
2009. For the first nine months of 2010, we had a net loss of $125.4
million, which included a non-cash goodwill impairment charge of $130.0 million,
$8.5 million of non-cash stock-based compensation, and $4.5 million of
depreciation and amortization expense, offset by an increase in working capital
of $5.4 million and changes in deferred income taxes of $4.1
million. For the first nine months of 2009, we had 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 expense, offset by
increased working capital of $6.2 million and changes in deferred taxes and
derivative liability of $4.7 million.
26
Cash used
in investing activities totaled $1.1 million for the nine months ended September
30, 2010, compared to $0.7 million during the nine months ended September 30,
2009, resulting primarily from $1.0 million of software development
costs.
Cash used
in financing activities for the nine months ended September 30, 2010 was $6.0
million, compared to $5.0 million for the corresponding period in 2009,
resulting from the repayment of debt and purchase of treasury stock, partially
offset by new financing in the form of additional borrowings of $9.0 million
under the Revolver.
Cash Operating
Income
The
Company uses the term “cash operating income” as an important measure of
profitability and performance. Cash operating income is a non-GAAP
measure defined as operating income excluding depreciation, amortization of
intangibles, goodwill impairment, realignment charges and stock option
expense. Our cash operating income was $7.6 million in the third
quarter of 2010 compared to $8.7 million in the third quarter of
2009. Cash operating income was $25.9 million for the first nine
months of 2010 compared to $25.0 million for the corresponding period of
2009. Our management uses cash operating income for planning
purposes, and we believe this measure provides investors and securities analysts
with important supplemental information regarding the Company’s profitability
and operating performance. However, non-GAAP financial measures such as
cash operating income should be viewed in addition to, and not as an alternative
for, the Company's results prepared in accordance with GAAP. In addition,
the non-GAAP measures the Company uses may differ from non-GAAP measures used by
other companies. We have included reconciliations of operating income, as
determined in accordance with GAAP, to cash operating income.
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||
(in
millions)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Operating
income (loss)
|
$
|
3.4
|
$
|
3.5
|
$
|
(119.6
|
) |
$
|
9.2
|
|||||||
Add
back:
|
||||||||||||||||
Depreciation
and amortization of intangibles
|
1.3
|
1.2
|
3.9
|
3.7
|
||||||||||||
Goodwill
impairment
|
-
|
-
|
130.0
|
-
|
||||||||||||
Realignment
|
(0.1
|
) |
-
|
3.1
|
-
|
|||||||||||
Stock
option expense
|
3.0
|
4.0
|
8.5
|
12.1
|
||||||||||||
Cash
Operating Income
|
$
|
7.6
|
$
|
8.7
|
$
|
25.9
|
$
|
25.0
|
27
Liquidity and Capital
Resources
Liquidity:
Our
liquidity planning is largely dependent on our operating cash flows, which are
highly sensitive to changes in demand, operating costs and 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 are able to continue to generate significant cash flows by adjusting
costs. Our principal liquidity requirements are to finance current operations,
pay down existing indebtedness and fund future expansion. Under our
Credit Agreement the Company can also repurchase common stock subject to a
determination of its excess cash flow as defined in that agreement. In December
2009, the Board approved the repurchase of up to $25 million of shares over a
two year period. During the first nine months 2010, the Company
repurchased approximately $7.3 million of shares under this
program. Currently, our primary source of liquidity is cash generated
from 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
next twelve months. As of September 30, 2010, $36.0 million was
available for borrowing under our Revolver and we had $8.6 million of
cash. Developing and bringing to market other new brands and business
opportunities (such as joint ventures and/or acquisitions) may require
additional outside funding, which may require us to seek out additional
financing arrangements.
Secured
Debt Financing:
On
November 4, 2009, the Company, through its wholly-owned subsidiary GFA Brands,
Inc. (the “Borrower”), entered into a Credit Agreement (the “Credit Agreement”)
with the various Lenders named therein (the “Lenders”), and Bank of Montreal, as
Administrative Agent (the “Agent”). The Credit Agreement provides for
$100 million in secured debt financing consisting of a $55 million term
loan (the “Term Loan”) and a $45 million revolving credit facility (the
“Revolver”). The Revolver includes a $5 million sublimit for the
issuance of letters of credit and a $5 million sublimit for swing line
loans. Subject to certain conditions, the Borrower, to the extent
existing Lenders decline to do so by adding additional Lenders, may increase the
Term Loan or increase the commitments under the Revolver (or a combination of
the two) up to an aggregate additional amount of $5 million, at the Borrower’s
option.
The
Credit Agreement replaced the Company’s prior first lien and second lien credit
facilities with Bank of America Securities LLC and Bank of America, N.A. (the
“Prior Facilities”). Proceeds of the Credit Agreement were used to
repay the debt outstanding under the Prior Facilities and have also been used
for general corporate purposes and general working capital
purposes.
The Term
Loan and the loans made pursuant to the Revolver will mature on November 3,
2013. The Credit Agreement requires annual principal payments on the
Term Loan of $5.5 million.
Loans
outstanding under the Credit Agreement will bear interest, at the Borrower’s
option, at either a base rate (defined in the Credit Agreement as the greatest
of (i) 2.5%, (ii) the Agent’s prime rate, (iii) the federal funds rate plus
0.50% and (iv) a reserve adjusted one-month LIBOR rate plus 1.0%) or a
Eurodollar rate (of no less than 1.5%), in each case plus an applicable
margin. The applicable margin is determined under the Credit
Agreement based on the ratio of the Company’s total funded debt to EBITDA for
the prior four fiscal quarters (the “Leverage Ratio”), and may range from 2.25%
to 3.25%, in the case of base rate loans, and 3.25% to 4.25%, in the case of
Eurodollar rate loans. The Borrower must also pay a commitment fee on
the unused portion of the Revolver determined under the Credit
Agreement based on the ratio of the Company’s Leverage Ratio and may
range from 0.50% to 0.75%.
28
Subject
to certain conditions, the Borrower may voluntarily prepay the loans under the
Credit Agreement in whole or in part, without premium or penalty (other than
customary breakage costs). Mandatory prepayments that are required
under the Credit Agreement include:
●
|
100%
of the net cash proceeds (as defined in the Credit Agreement) upon certain
dispositions of property or upon certain damages or seizures of property,
subject to limited exceptions;
|
●
|
50%
of all net cash proceeds from issuance of additional equity securities of
the Company, subject to limited exceptions, provided, however, if the
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;
and
|
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
Credit Agreement contains covenants that are customary for agreements of this
type. These covenants include, among others: a limitation on the
incurrence of additional indebtedness; a limitation on mergers, acquisitions,
investments and dividend payments; and maintenance of specified financial
ratios. Under the Credit Agreement, the Company must maintain (1) a
Leverage Ratio that is not greater than 2.75 to 1.0 until December 30, 2011 and
not greater than 2.50 to 1.0 thereafter and (2) a ratio of EBITDA to Debt
Service (as defined in the Credit Agreement), in each case for the prior four
fiscal quarters, of not less than 2.00 to 1.00. The Company is also
limited to spending not more than $6 million of capital expenditures per year
with any unspent funds carried over to the next twelve months. At
September 30, 2010, the Company was in compliance with all of its
covenants.
The
failure to satisfy covenants under the Credit Agreement or the occurrence of
other specified events that constitute an event of default could result in the
acceleration of the repayment obligations of the Borrower. The Credit
Agreement contains customary provisions relating to events of default for
agreements of this type. The events of default include, among others: the
nonpayment of any outstanding principal, interest, fees or other amounts due
under the Credit Agreement; certain bankruptcy events, judgments or decrees
against the Company or the Borrower; cross defaults to other indebtedness
exceeding $5.0 million; a change in control (as defined in the Credit Agreement)
of the Company or the Borrower; and the failure to perform or observe covenants
in the Credit Agreement.
29
The
obligations under the Credit Agreement are guaranteed by the Company and all
existing and future subsidiaries of the Borrower. The Borrower, the
Company and the other guarantors granted to the Agent, for the benefit of the
Lenders, a security interest in substantially all of its respective assets,
including, among other things, patents, patent licenses, trademarks and
trademark licenses.
After the
close of the transaction, total debt outstanding under the Credit Agreement
totaled approximately $60.6 million comprised of $55 million of Term Loan debt
and $5.6 million of borrowings under the Revolver. During the fourth
quarter of 2009, the Company paid approximately $4.0 million on its Revolver and
during the first quarter of 2010 it paid $1.1 million of its scheduled
requirements. During the second quarter of 2010, the Company paid
$6.5 million of which $1.6 million reduced the Revolver to zero and $4.9 million
was applied against the Term Loan. During the third quarter of 2010,
the Company borrowed $9 million under the Revolver bringing the total debt
outstanding to $58 million as of September 30, 2010.
The
Company is required to pay the following amounts in each of the next four
years:
2010
|
$
|
-
|
||
2011
|
5.0
|
|||
2012
|
5.5
|
|||
2013
|
47.5
|
|||
Total
|
$
|
58.0
|
The
interest rate under the Credit Agreement at September 30, 2010 was 4.75% while
the interest rate on the unused line was 0.5%. This amount does not take into
account the amount, if any, of the requirement that, beginning on December 31,
2010, the Company make an annual payment equal to 25% of excess cash flow, as
defined by the Credit Agreement, unless its leverage ratio is 2.0 or
less. The Company currently has a ratio of less than 2.0 and expects
to remain at that level on December 31, 2010.
Contractual
Obligations
There has
been no material change to our contractual obligations as disclosed in the
fiscal year 2009 Form 10-K filed with the SEC on March 10, 2010.
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 are
exposed to financial market risks due primarily to changes in interest rates on
our variable interest rate debt. Under our Credit Agreement, we are
subject to changes in interest rates, but are not required to enter into an
interest rate swap until the market LIBOR rate exceeds 1.5%. The
three-month LIBOR rate at September 30, 2010 was 0.29%.
We
purchase significant amounts of soy, palm and canola oil products to support the
needs of our brands. The price and availability of these commodities directly
impacts our results of operations and can be expected to impact our future
results of operations. 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 existing authoritative accounting guidance, namely,
“Accounting for Derivative Instruments and Hedging Activities.” As of
September 30, 2010, we had commitments of $28.6 million related to soy, palm and
canola oil products.
We are
exposed to market risk from changes in interest rates charged on our debt. The
impact on earnings is subject to change as a result of movements in market
rates. A hypothetical increase in interest rates of 100 basis points would
result in potential reduction of future pre-tax earnings of approximately $0.6
million per year. 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, 2010. 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 Chief Executive Officer and Principal Financial Officer, 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, 2010,
our Chief Executive Officer and Principal Financial Officer concluded that, as
of such date, our disclosure controls and procedures were
effective.
Changes in internal control over
financial reporting. During the fiscal quarter ended September 30, 2010,
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.
Part
II.
|
Other
Information
|
Item 1.
|
Legal
Proceedings.
|
The
Company is currently involved in the following legal proceedings:
On
February 8, 2010 a lawsuit was filed against Smart Balance, Inc. in the Federal
District Court for the Central District in California in Santa Ana,
California. The complaint alleges, among other things, violations of
California’s unfair competition law, false advertising, and consumer remedies
act and seeks to identify all similarly situated plaintiffs and certify them in
a class action. The Company has not yet answered the complaint, and
intends to vigorously defend itself. The Company does not expect
that the resolution of this matter will have a material adverse effect on its
business.
In 2007,
three parties filed Oppositions to European Patent No. 0820307 relating to
increasing the HDL level and the HDL/LDL ratio in Human Serum by Balancing
Saturated and Polyunsaturated Dietary Fatty Acids. In July 2010, a
hearing was held on this matter in Munich, Germany and the patent
panel ruled against the Company. The Company is awaiting the panel’s
written decision and then will make a determination on whether to appeal the
ruling. The Company believes that neither this proceeding, nor its
ultimate outcome, will have any material adverse effect on its
business.
The
Company is not a party to any other legal proceeding that it believes would have
a material adverse effect on its business, results of operations or financial
condition.
Item 1A.
|
Risk
Factors.
|
An
investment in our securities involves a high degree of risk. There have been no
material changes to the risk factors previously reported under Item 1A of
our annual report on Form 10-K for the year ended December 31,
2009.
Exhibits.
|
See the
exhibit index located elsewhere in this quarterly report on Form
10-Q.
32
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 4,
2010
|
SMART
BALANCE, INC.
(Registrant)
|
/s/
Stephen B. Hughes
|
|
Stephen
B. Hughes
Chairman
and Chief Executive Officer
(Authorized
officer of Registrant)
|
|
/s/
Alan S. Gever
|
|
Alan
S. Gever
Executive
Vice President and
Chief
Financial Officer
(Principal
financial officer of Registrant)
|
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 2002
|
31.2
|
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 2002
|
32.1
|
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
2002
|
32.2
|
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
|
34