UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

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

For the fiscal year ended December 31, 2010

Commission file number 001-33595

 

SMART BALANCE, INC.

(Name of issuer in its charter)

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

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

(201) 568-9300

(Issuer’s telephone number, including area code)

Securities registered under Section 12(b) of the Act:

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

Common Stock, $.0001 par value per share

(Title Of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the 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		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

The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the registrant, computed by reference to the closing sales price for the Registrant’s Common Stock on June 30, 2010 ($4.09), as reported on the Nasdaq Global Market was approximately $240 million.

As of February 23, 2011, there were 59,999,832 shares of common stock, par value $.0001 per share, of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement in connection with its 2011 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.

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SMART BALANCE, INC.

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		Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			1
PART I			2
Item 1. Business			2
Item 1A. Risk Factors			9
Item 1B. Unresolved Staff Comments			18
Item 2. Properties			18
Item 3. Legal Proceedings			19
Item 4. Reserved			19
PART II			20
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			20
Item 6. Selected Historical Financial Information			22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			34
Item 8. Consolidated Financial Statements and Supplementary Data			35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			35
Item 9A. Controls and Procedures			35
Item 9B. Other Information			35
PART III			37
Item 10. Directors, Executive Officers and Corporate Governance			37
Item 11. Executive Compensation			40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			40
Item 13. Certain Relationships and Related Transactions, and Director Independence			41
Item 14. Principal Accounting Fees and Services			41
PART IV			42
Item 15. Exhibits and Financial Statement Schedules			42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS			F-1

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this annual report constitutes forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. You can identify these statements 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

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. The risk factors and cautionary language discussed in this annual report, including the risk factors described under “Item 1A — Risk Factors”, provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations we describe in our forward-looking statements. These risks include, among other things, our ability to:

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

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PART I

Item 1. Business

Overview

We are a marketer of functional food products in the U.S. and Canada primarily under the Smart Balance®, Earth Balance® and Bestlife^TM trademarks. Functional food is defined as a food or a food ingredient that has been shown to support normal, healthy structures, functions and systems in the body. Our signature spreads products utilize a proprietary licensed, patented technology that is naturally free of trans fats and enhances good-to-bad cholesterol ratios when used as part of the Smart Balance^TM Food Plan. We have other product offerings utilizing our heart healthier positioning and brand leverage, including enhanced milks, peanut butters, cooking oils, mayonnaise dressing and popcorn.

We sell Smart Balance® and Bestlife^TM products in grocery, mass merchandise and convenience stores. We sell similar natural and organic products under the Earth Balance® trademark primarily in the natural food channel. Our products are available in all 50 states with little presence in international markets. Earth Balance® spreads are also available in select markets in Canada. The Company also has a presence in the foodservice and industrial channels. The Smart Balance® line of products was introduced in 1996 with the launch of our buttery spreads products. Our brands of buttery spreads, as a group, have achieved growth in the total spreads market share every year since introduction. Our market share in the spreads category in 2010 was 15.3%, according to Nielsen data. We outsource production and distribution and, therefore, have no owned manufacturing facilities or warehouses.

Smart Balance® Products

The Smart Balance® line of products is available in a variety of categories, formats and sizes in the supermarket, mass merchandise and convenience store channels of distribution. In 2010, 2009 and 2008, Smart Balance® labeled products represented approximately 85%, 89% and 88% of our sales, respectively. In addition, in 2010, 2009 and 2008, our Smart Balance® buttery spreads products represented approximately 60%, 67% and 66% of our sales, respectively. The buttery spreads products are generally available throughout the United States while the other products have less distribution at the current time. The buttery spreads are also available in bulk and individual serving formats for use in the industrial and foodservice channels.

Buttery Spreads, Sticks and Sprays

Our buttery spreads are made from a patented blend of natural oils to help balance fats in the consumer’s diet and to help improve the good-to-bad cholesterol ratio when used as part of the Smart Balance^TM Food Plan. They contain no hydrogenated or partially hydrogenated oils and only trace amounts of trans fat. The original buttery spread has won awards as the best-tasting product in its category.

There are a number of varieties of our buttery spreads that offer different benefits depending on consumers’ needs. Buttery spreads are available in regular, light, low sodium, calcium, and organic versions as well as versions that use flax oil, fish oil, plant sterols and olive oil to achieve desired benefit and taste profiles.

Smart Balance® Buttery Sticks are a blend of creamery fresh butter and Smart Balance® buttery spread in a convenient stick, with 28% less saturated fat than regular butter. We also sell versions of buttery sticks with a special mix of Omega-3s from flax and fish oil. All versions are non-hydrogenated and contain zero grams of trans fat per serving.

We also market a Smart Balance® Buttery Burst^TM Spray. The spray has zero calories, zero carbs and zero fats per serving and can be used as a pan spray or as a topping.

Enhanced Milks

We offer a range of enhanced milk products, with different varieties containing EPA/DHA Omega-3s, plant sterols, and added levels of calcium and protein. We use low and no fat milks enhanced with non-fat milk solids to give the taste and texture of whole or reduced fat milk. Our milk varieties include fat-free milk, 1% lowfat milk and lactose-free milk and are available in markets across the U.S.

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Peanut Butters

Our peanut butter products contain ALA Omega-3 from flax oil. They have no hydrogenated oil and zero grams of trans fat per serving. Each variety is made from premium, deep-roasted peanuts and is all-natural and does not require refrigeration.

Cooking Oil and Cooking Sprays

Our cooking oil and cooking sprays are designed for use in cooking, baking and salads to aid in avoiding trans fat and hydrogenated oils. They are intended to be used for healthier food preparation.

Light Mayonnaise Dressing

Our Smart Balance® Omega Plus^TM Light Mayonnaise Dressing has half the fat of regular mayonnaise, is non-hydrogenated, contains zero grams of trans fat and contains natural plant sterols and ALA Omega-3.

Microwave Popcorns

Smart Balance® Popcorns feature our patented oil blend and all varieties contain no hydrogenated oil or trans fat. Smart Balance® Popcorn varieties include Smart ‘n Healthy^TM, Light Butter, and Smart Movie-Style^TM.

Smart Balance^TM Food Plan

We created the Smart Balance^TM Food Plan, incorporating many of our Smart Balance® products, in order to help consumers achieve a healthy balance of natural fats in their daily diet. The plan includes menus as well as numerous recipes. Regular exercise is required by the plan as well. Years of research have shown that combining regular exercise with the right balance of fats as a significant part of a varied diet can, among other benefits, improve a consumer’s ratio of “good” HDL cholesterol to his or her “bad” LDL cholesterol. Following our food plan will help consumers limit their intake of saturated fat, and provide valuable Omega-3s while avoiding hydrogenated oil and harmful trans fat.

Earth Balance® Products

The Earth Balance® line of products offers a variety of buttery spreads, sticks, soymilks and nut butters formulated for consumers interested in natural and organic products. Earth Balance® products represented approximately 9% of sales in 2010 and 8% in 2009 and 2008. They are primarily available in the natural and organic channel of distribution and have a small but growing presence in traditional retail outlets.

Bestlife^TM Products

In the fall of 2009, we signed an exclusive global agreement with the Best Life Corporation to develop a popularly priced Bestlife^TM brand, consisting of food and beverage products that offer great taste, nutrition and convenience. We introduced the Bestlife^TM line of spread products in 2010, which feature partially hydrogenated oil-free products targeted to the value segment consumer. In the fourth quarter of 2010, we strengthened our control of the Bestlife^TM brand by acquiring full rights for the branded food products as well as ownership of the Best Life website. We believe the brand and the website are unique assets that should provide an effective platform for expansion in the coming years.

Industry Overview and Trends

We believe several factors are increasing consumer awareness of nutrition and driving consumer demand for functional foods, including:

As Americans have increasingly sought out new ways to maintain and improve their personal health, functional food has played an increasing role in diets. The medical community and food and drink manufacturers are responding to these demands. Goods and services that make claims of contributing to personal health through natural and non-interventionist means are becoming increasingly available.

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Growth Strategy

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. 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. Our current dairy aisle initiative is an important 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 a key driver toward our growth goals.

Sales and Distribution

We sell products in all 50 states. A majority of our products are sold through supermarket chains and food wholesalers. Since September 2007, we have utilized Acosta, Inc. as our primary national sales agency. We utilize Presence Marketing as our national sales agency for our Earth Balance® products in natural channels. Additionally, a small portion of our products are sold through independent food and beverage distributors.

Through Acosta, Presence and our internal regional sales managers, we work with each distributor and retailer to ensure that our products are effectively promoted. We employ periodic in-store promotions that can include informational materials about our products, sale pricing, store advertising, product sampling and product displays to generate consumer interest in our products.

We use third party distributors and a network of public warehouses to deliver product from our manufacturers to our customers.

Our largest customer in 2010 in terms of sales revenue was Wal-Mart Stores, Inc., accounting for approximately 17% of sales dollars. No other single customer accounted for more than 10% of our sales revenues in 2010.

Marketing

Our marketing efforts are designed to increase consumer awareness of and demand for our products. We employ a broad mix of marketing, including advertising (television, online and print), coupons, in-store product sampling, consumer and trade events and recipe and food plans. We use television advertising to reach a larger number of target consumers. We use online resources, including social media sites, to communicate with consumers. We use print ads in magazines with wide circulation and in special interest publications targeted to groups such as health food consumers, athletes and diabetics. We use coupons (freestanding insert newspaper and magazine coupons and store register and on-pack coupons) to help stimulate product trial and repeat purchases by providing consumers with economic incentives.

We believe that an effective marketing tool is the dissemination of educational information through events and our websites explaining the nutritional qualities of our products. Our sales and marketing team gathers information and feedback from consumers and retailers to enable us to better meet changing consumer needs. We provide access to consumer service representatives through our toll free number to answer questions and educate consumers on nutrition, new products and developments.

Manufacturing

We outsource manufacturing of our products to third-party co-packers. 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 avoiding capital expenditures and the complication of managing a production work force. Our buttery spreads are produced by two manufacturers, one of whom has multiple locations. Our enhanced milk products have

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regional suppliers. Most of our other products are each supplied by a separate sole source. We believe our manufacturers have the capacity to fulfill our production needs. We will monitor capacity, service and costs and will qualify alternative sources of supply as needed.

Most of our raw materials are commodities that are broadly available from multiple sources. Key raw materials used for our products are vegetable oils, milk and peanuts. We maintain varying positions in key raw materials from time to time to stabilize supply and price as appropriate.

Our manufacturers supply our products at a price equal to the cost of ingredients and certain packaging plus a contracted toll charge. We work with our manufacturers to source high quality ingredients at attractive pricing. We also negotiate certain commodities and packaging costs directly with the suppliers. We bear all freight costs associated with shipping finished products.

We provide proprietary formula and processing information for our products to our manufacturers. We receive production reports, quality control reports and samples from product runs. In addition, our research and development and quality control personnel visit each manufacturing facility on a regular basis to ensure compliance with good manufacturing practices.

Competition

The food and beverage 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 benefits, brand recognition, brand loyalty, service, marketing, advertising, patent protections and price. Some competitors may have different profit or strategic objectives than we do. Substantial advertising and promotional expenditures are required to maintain or improve a brand’s market position or to introduce a new product. Our largest principal competitors are Unilever, ConAgra Foods, Dean Foods and Land O’ Lakes, each of whom has substantially greater market presence, longer operating histories, better distribution, and greater financial, marketing, capital and other resources than we do. Our competitors may also introduce new products or reformulate existing products that may appeal to our consumers. Most recently, some of our competitors have reformulated some of their products to remove partially hydrogenated oils; removal of partially hydrogenated oils has minimized our competitive advantage of comparing trans fat levels which was one advantage featured in our marketing programs in 2009 and 2010.

Intellectual Property

In 1996, GFA Brands, Inc. (“GFA”), with whom we merged in 2007, licensed technology from Brandeis University (“Brandeis”) 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 the HDL/LDL cholesterol ratio. Approximately 74% of our sales in 2010 were dependent upon this licensed, patented technology. Our agreement with Brandeis provides us with an exclusive license to this technology, which includes the following patents and applications:

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The license also covers any corresponding foreign patents and subsequent U.S. or foreign applications and any continuations, continuations-in-part, divisions and re-issues. The license agreement imposes certain obligations on us including diligently pursuing the development of commercial products under the licensed technologies. The license will terminate: (1) with respect to the U.S. patents described above, on April 7, 2015, which is when the patents expire, (2) with respect to any other patent, upon the expiration of the patent and (3) with respect to unpatented technology, on June 18, 2013. We pay royalties to Brandeis for the use of the licensed technology based on an agreed formula.

We pay royalties to an individual who assigned a certain concept relative to peanut butter to us for U.S. Patent No. 7,344,747 encompassing our peanut butter concept. The patent will expire on January 24, 2026.

We have acquired the rights from Brandeis for the use of certain technology embodied in U.S. Patent No. 6,156,354 entitled “Hyper-absorption of vitamin E dispersed in milks” and U.S. Patent No. 6,503,545 entitled “Hyper-absorption of vitamin E combined with milk protein.”

In 2008, GFA licensed technology from Perlman Consulting, LLC (“Perlman Consulting”) relating to the stabilization of Omega-3 fatty acids in milk. Our agreement with Perlman Consulting provides us with an exclusive license to this technology. The license also includes any corresponding foreign patents and subsequent U.S. or foreign applications and any continuations, continuations-in-part, divisions and re-issues. There is a U.S. patent pending on the technology. We are required to pay royalties to Perlman Consulting for the use of the licensed technology. The amount of royalties due is based on the net sales of products covered by the licensed technology.

In 2008, we entered into a multi-year agreement with Brandeis to fund research to develop new product technologies for existing and future categories. Under the agreement, $1 million will be paid over ten years, with an option to increase funding. The bulk of support, $0.6 million, has been paid over the first three years. In return, we will receive an option to license any of the resulting technologies for use in our products. Under a new, separate agreement, we have committed $0.5 million to support research of new food technologies.

We are allowed to sublicense the licensed technology to third parties and must pay a portion of the sublicense fees to Brandeis.

We also own Patent No. 5,147,134 for a process for the continuous production of emulsions used in the blending of ingredients and Patent No. 5,027,901 for a method minimizing the corrosion of machinery via emulsions.

In total, royalty expense was $1.4 million in 2010, of which $1.1 million was related to our spreads business. In 2009, royalty expense was $1.3 million in total, of which $1.0 million was related to our spreads business.

In addition, our total research and development expenses during the last three years were approximately $0.6 million in 2010, $0.9 million in 2009 and $0.3 million in 2008.

Government Regulation

The manufacturing, packaging, labeling, advertising, distribution and sale of our products are subject to regulation by various government agencies, principally the Food and Drug Administration (“FDA”). The FDA regulates our products pursuant to the Federal Food, Drug, and Cosmetic Act, which we refer to as the FDCA, the new Food Safety Modernization Act, which we refer to as the FSMA, and the Fair Packaging and Labeling Act, which we refer to as the FPLA, and regulations thereunder. The FDCA is intended, among other things, to ensure that foods and beverages are wholesome, safe to eat and drink, and produced under sanitary conditions, and that food and beverage labeling is truthful and not deceptive. The FSMA aims to improve food safety, with an emphasis on preventing food-borne illness, by, among other things, authorizing the FDA to increase inspections of food facilities and to order recalls of tainted food products and by requiring companies to implement written food safety plans. The FPLA provides requirements for the contents and

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placement of information required on consumer packages to ensure that labeling is useful and informative. Our products are generally classified and regulated as food and beverage under the FDCA and are, therefore, not subject to premarket approval by the FDA. However, our products are subject to the comprehensive labeling and safety regulations of the FDA, the violation of which could result in product seizure and condemnation, injunction of business activities, or criminal or civil penalties. Furthermore, if the FDA determines, on the basis of labeling, promotional claims, or marketing by us, that the intended use of any of our products is for the diagnosis, cure, mitigation, treatment or prevention of disease, it could regulate those products as drugs and require, among other things, premarket approval for safety and efficacy.

Our advertising is subject to regulation by the Federal Trade Commission (“FTC”), pursuant to the Federal Trade Commission Act, which we refer to as the FTCA, which prohibits unfair or deceptive acts or practices including the dissemination of false or misleading advertising. Violations of the FTCA may result in a cease and desist order, injunction, or civil or criminal penalties. The FTC monitors advertising and entertains inquiries and complaints from competing companies and consumers. It also reviews referrals from industry self-regulatory organizations, including the National Advertising Division of the Council of Better Business Bureaus, Inc. (the “NAD”). The NAD administers a voluntary self-regulatory, alternative dispute resolution process that is supported by the advertising industry and serves the business community and the public by fostering truthful and accurate advertising. Any future NAD inquiries or FTC actions that result in modifications to our advertising or the imposition of fines or penalties could have a material adverse effect on our business, results of operations and financial condition.

Many dairy products, such as our enhanced milk, are highly regulated by various federal and state agencies. These regulations include laws concerning restrictions on product labeling, offering sizes and couponing activities and laws regarding minimum markup requirements. We have been, and likely will be, required to modify these product offerings and certain activities related thereto to comply with the many different regulatory rules and standards. Our products are also regulated by various agencies of the jurisdictions and foreign countries in which our products are sold. We have been, and we may be, required to alter certain products to comply with foreign or other regulatory standards.

We are also subject to the Lanham Act; state consumer protection laws; federal, state and local workplace health and safety laws; various federal, state and local environmental protection laws; and various other federal, state and local statutes and regulations applicable to the production, sale, safety, advertising, labeling and ingredients of food products.

We believe that we presently comply in all material respects with the foregoing laws and regulations. There can be no assurance, however, that future compliance with such laws or regulations will not have a material adverse effect on our business, results of operations and financial condition.

We may be subject to additional laws or regulations administered by the FDA or other federal, state, or foreign regulatory authorities, the repeal of laws or regulations, or more stringent interpretations or enforcements of current laws or regulations, from time to time in the future. We cannot predict the nature of such future laws, regulations, interpretations or applications, nor can we predict what affect additional government regulations or administrative orders, when and if promulgated, would have on our business in the future. Such laws could, however, require the reformulation of products, the recall, withholding or discontinuance of products, the imposition of additional recordkeeping requirements, the revision of labeling, advertising or other promotional materials, and changes in the level of scientific substantiation needed to support claims. Any or all such government actions could have a material adverse effect on our business, results of operation and financial condition.

Seasonality

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

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Employees

Because we outsource the production and distribution of our products as well as certain selling activities, we have a small number of employees. As of December 31, 2010, we had 69 full and part time employees. We have no unionized employees. Functions performed by our employees include general management; sales, marketing and customer service; operations, quality control/quality assurance and research and development; finance and accounting; and legal and investor relations. During 2010, we streamlined our organization to fit our evolving business model.

Background

We were 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, we completed a merger with GFA, which owned and marketed the Smart Balance® line of products, among others. GFA became our wholly-owned subsidiary and is currently our operating entity. After the merger, the Boulder Specialty Brands, Inc. corporate name was changed 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 as merger consideration. The cash consideration for the merger was funded with cash from our December 2005 initial public offering, the proceeds of a private placement and secured debt financings.

Company Website and SEC Filings

Our corporate website is www.smartbalance.com. The information on our website is not incorporated by reference in this annual report on Form 10-K.

All of our filings with the Securities and Exchange Commission (the “SEC”) can be accessed through our website promptly after filing; however, in the event that the website is inaccessible, we will provide paper copies of our most recent annual report on Form 10-K, the most recent quarterly report on Form 10-Q, current reports filed or furnished on Form 8-K and all related amendments, excluding exhibits, free of charge upon request. These filings are also accessible on the SEC’s website at www.sec.gov.

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Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods. The risks described below are not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.

Risks Associated with Our Business

A substantial portion of our revenues are derived from the sales of our Smart Balance® buttery spreads products and our future ability to maintain and grow our revenues depends upon continued sales of these products. Any adverse developments with respect to the sale of Smart Balance® buttery spreads products could significantly reduce revenues and have a material adverse affect on our ability to remain profitable and achieve future growth.

Approximately 60% of our revenues for the year ended December 31, 2010 resulted from sales of our Smart Balance® buttery spreads products, which we expect will continue to be a large percentage of sales in the future. We cannot be certain that we will be able to continue to commercialize our products or that any of our products will continue to be accepted in their markets. Specifically, the following factors, among others, could affect continued market acceptance and profitability of Smart Balance® buttery spreads products:

Any adverse developments with respect to the sale of Smart Balance® buttery spreads products could significantly reduce our revenues and have a material adverse effect on our ability to maintain profitability and achieve our business plan.

The loss of a significant customer or significant reduction in purchase volume by any such customer could have a material adverse affect on our revenues and net income.

A limited number of supermarket chains and food wholesalers account for a substantial portion of our revenues. Smart Balance’s ten largest customers accounted for approximately 63% of sales in 2010. Our largest customer is Wal-Mart Stores, Inc., which accounted for approximately 17% of our sales in 2010. There can be no assurance that our customers will continue their relationships with us. In addition, there is no assurance that our customers will not reduce our shelf space, continue to carry the same number of our products, charge us more for shelf space or shelve our new products. A significant reduction or loss in purchase volume from Wal-Mart Stores, Inc. or other major customers could have a material adverse effect on Smart Balance’s business, results of operations and financial condition.

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We are dependent on third-party manufacturers, and the loss of a manufacturer or the inability of a manufacturer to fulfill our orders or to maintain the quality of our products could adversely affect our ability to make timely deliveries of product or result in product recalls.

We do not own or operate any manufacturing facilities and are dependent on third parties for the manufacture of our products. The ability of any of our manufacturers to produce our products could be affected by catastrophic events. We currently rely on and may continue to rely on two manufacturers to produce all of our spreads. If either manufacturer were unable or unwilling to produce sufficient quantities of our products in a timely manner or renew contracts with us, we would have to identify and qualify new manufacturers, which we may be unable to do. As we expand our operations, we may have to seek new manufacturers and suppliers or enter into new arrangements with existing ones. However, only a limited number of manufacturers may have the ability to produce a high volume of our products, and it could take a significant period of time to locate and qualify such alternative production sources. In addition, we may encounter difficulties or be unable to negotiate pricing or other terms as favorable as those we currently enjoy.

There can be no assurance that we would be able to identify and qualify new manufacturers in a timely manner or that such manufacturers could allocate sufficient capacity in order to meet our requirements, which could materially adversely affect our ability to make timely deliveries of product. In addition, there can be no assurance that the capacity of our current manufacturers will be sufficient to fulfill our orders and any supply shortfall could materially and adversely affect our business, results of operations, and financial condition. Currently, some of our products are produced by a single third party source maintaining only one facility. The risks of interruption described above are exacerbated with respect to these single source, single facility manufacturers.

Shipments to and from the warehouses could be delayed for a variety of reasons, including weather conditions, strikes, and shipping delays. Any significant delay in the shipments of product would have a material adverse effect on our business, results of operations and financial condition and could cause our sales and earnings to fluctuate during a particular period or periods. We have from time to time experienced, and may in the future experience, delays in the production and delivery of product.

Our manufacturers are required to maintain the quality of our products and to comply with our Product Manual specifications and requirements for certain certifications. In addition, our manufacturers are required to comply with all federal, state and local laws with respect to food safety. There can be no assurance that our manufacturers will continue to produce products that are consistent with our standards or in compliance with applicable laws. We would have the same issue with new suppliers. We have occasionally received, and may from time to time receive, shipments of products that fail to conform to our standards. The failure of any manufacturer to produce products that conform to our standards could materially and adversely affect our reputation in the marketplace and result in product recalls, product liability claims and severe economic loss.

Our business model relies heavily on the skill set, experience, industry knowledge and industry contacts of our executive management team. The departure of one or more members of our executive management team could be disruptive and could have a material adverse effect on our business.

The business model we operate requires specialized skill sets to operate and manage both internal and external teams and operating entities in an efficient coordinated effort. There is a limited available talent pool for these skill sets. If we experience turnover in our executive management ranks there can be no assurance that we can smoothly transition replacements in a timely and efficient manner. Unique skill sets and industry contacts may be difficult or in some instances impossible to duplicate. In addition, historically a significant portion of our senior management’s compensation has consisted of stock options. The stock options previously granted to our senior management are currently significantly under water, meaning that the exercise prices of these options are greater than the current market value of our common stock. This decreased financial incentive could cause members of management to seek employment elsewhere. Disruption to our organization as a result of executive management turnover may have a detrimental impact on our ability to maintain our business performance on a consistent level and could have a material adverse effect on our business, financial condition, results of operations, and liquidity.

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We rely on Acosta, Inc. to act as our primary sales agent and there could be significant disruption in our ability to sell products to our customers for the vast majority of our sales if our relationship was terminated

Acosta, Inc. is the largest sales agency in the U.S. and represents our product line to thousands of supermarkets and food stores. Our agreement with Acosta is terminable by either us or Acosta after satisfaction of a short notice period. The termination of our agreement would require us to seek other sales agents, likely causing significant disruption to our business, and could affect our relationships with our customers. Acosta is under new ownership which may affect our current business contacts and/or overall relationship with Acosta.

Changes in consumer preferences and discretionary spending may have a material adverse effect on our revenue, results of operations and financial condition.

The food processing industry in general and the functional food industry in particular are subject to changing consumer trends, demands and preferences. Trends within the functional food industry change often and our failure to anticipate, identify or react to changes in these trends could, among other things, lead to reduced demand and price reductions, and could have a material adverse effect on our business, results of operations and financial condition. These changes might include consumer demand for new products or formulations that include health-promoting ingredients such as nutraceuticals. In 2010, repeated lower price promotions by competitors may have created expectations of future price declines and promotions. There can be no assurance that these pricing actions will not result in a loss to us of consumers and market share. Our success depends, in part, on our ability to anticipate the tastes and dietary habits of consumers and to offer products that appeal to their preferences on a timely and affordable basis.

Our business depends on our ability to protect our intellectual property effectively. Our inability to protect our intellectual property could harm the value of our brand and adversely affect our business.

Our business depends substantially on the legal protection of proprietary rights in intellectual property that we own or license. We also claim proprietary rights in various unpatented technologies, know-how, trade secrets and trademarks relating to our products and manufacturing processes. Our ability to implement our business plan depends in part on our ability to expand brand recognition using trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos. If existing contractual measures fail to protect our proprietary rights, or if any third party misappropriates or infringes on our intellectual property, any advantage those proprietary rights provide may be negated and the value of our brands may be harmed, which could have a material adverse effect upon our business and might prevent our brands from achieving or maintaining market acceptance. Monitoring infringement of intellectual property rights is difficult and we cannot be certain that the precautions we have taken will prevent the unauthorized use of our intellectual property and know-how, particularly in countries where we do not have trademarks or patents at all or where the laws of such country may not protect our proprietary rights as adequately as the laws of the United States or at all. Accordingly, other parties, including competitors, may duplicate our products using our proprietary technologies.

Pursuing legal remedies against persons infringing on our patents or otherwise improperly using our proprietary information is a costly and time-consuming process that would divert management’s attention and other resources from the conduct of our business, which could cause delays and other problems with the marketing and sales of our products, as well as delays in deliveries. We have commenced legal actions against third parties infringing on the patents in the past and may commence similar legal actions in the future. In these legal actions, defendants are permitted to raise issues like prior art which could have the impact of invalidating or limiting the claims of our owned or licensed patents which may cause harm to our image, brand or competitive position.

We rely on a combination of common law trademark rights, U.S. federal registration rights, and trade secret laws to protect our proprietary rights. There can be no assurance that we will be able to enforce our trademark rights for current products or register trademarks or obtain common law trademark rights using “Smart Balance”, “Earth Balance” or “Bestlife” for any new product lines we may introduce. The inability to have the exclusive right to use these terms in new product names could weaken our ability to create strong brands in existing and new product categories. We are currently involved in several trademark opposition

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proceedings involving the registration of the Smart Balance mark in new categories. Adverse outcomes in one or more of these proceedings may hamper our ability to expand into desired categories as part of our overall growth plan.

In addition, in 2007, three parties filed Oppositions to European Patent No. 820,307 relating to increasing the HDL level and the HDL/LDL ratio in Human Serum by Balancing Saturated and Polyunsaturated Dietary Fatty Acids. We recently received a written decision of the panel which ruled against the Company. We have reviewed the written decision and intend to file an appeal. We believe that neither this proceeding, nor its outcome, will have a material adverse effect on our current business.

Although we rely in part on common law trademarks to protect our proprietary rights, common law trademark rights do not provide the same level of protection as afforded by the United States federal registration of a trademark. Common law trademark rights are limited to the geographic area in which the trademark is actually used, plus a reasonable zone of future expansion, while U.S. federal registration on the Principal Register provides the registrant with superior rights throughout the United States, subject to certain exceptions.

To the extent that we have registered our trademarks in foreign jurisdictions where our products are or may be sold, the protection available in such jurisdictions may not be as extensive as the protection available in the United States. Additionally, we may be unable to register the “Smart Balance”, “Earth Balance” or “Bestlife” trademarks for the products that we may want to sell in certain markets, which could adversely affect our ability to expand into any such countries.

If we fail to meet our obligations under our principal license agreement with Brandeis University, we may lose our rights to key technologies on which our business depends.

Approximately 74% of our sales for the year ended December 31, 2010 were dependent upon our principal license of certain technology from Brandeis University. The licensed technology covers all Smart Balance® spreads, shortenings and popcorn, all Earth Balance® spreads and shortenings, Bestlife^TM spreads and sticks and Nucoa® spreads and sticks. The license agreement imposes obligations upon us, such as payment obligations and obligations to diligently pursue the development of commercial products under the licensed patents. If the licensor believes that we have failed to meet our obligations under the license agreement, the licensor could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigation and, potentially, a loss of the licensed rights. During the period of any such litigation, our ability to continue to sell existing products and to carry out the development and commercialization of potential products or sub-license the technology could be materially adversely affected. It is difficult to accurately quantify the economic impact on us if we defaulted under our license agreement except to conclude that our ability to continue our business could be severely adversely affected.

The expiration of our rights under the principal license agreement with Brandeis University may result in the loss of one of our key competitive advantages in the buttery spreads category, which could result in a material adverse effect on revenue and spreads volume.

The exclusive rights granted to the Company under the principal license agreement with Brandeis are set to expire upon the expiration of the term of the subject patent rights. Accordingly, in the US, the rights granted to the Company under the license agreement will expire in April of 2015. Following the expiration of these rights, the Company’s ability to maintain market share in the spreads category will be largely dependent on overall brand strength, marketing efforts and development of new technologies and failure to do so effectively could have a material adverse effect on our financial performance and condition.

The sustained economic downturn in the U.S. and abroad and related consumer sentiment could make it more difficult to sell our premium priced products and may have a detrimental impact on our third-party manufacturers, suppliers, distributors and customers, which could result in a material adverse effect on our revenue, results of operations and financial condition.

The sustained difficult economic conditions in the U.S. and abroad may negatively impact us in several ways. First, high unemployment, loss of savings and retirement funds, and a dramatic decline in the housing market, have led to a lack of consumer confidence and widespread reduction of business activity generally. Economic pressures and/or negative consumer sentiment may result in consumers purchasing less expensive alternatives, make it more difficult to sell our premium priced products, convince shoppers to switch to our

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brands or convince new users to choose our brands without expensive sampling programs and price promotions. Second, one or more of our manufacturers, suppliers, distributors and customers may experience cash flow problems and, therefore, such manufacturers, suppliers, distributors and customers may be forced to reduce their output, shut down their operations or file for bankruptcy protection, which in some cases would make it difficult for us to continue production of certain products, could require us to reduce sales of our products or could result in uncollectable accounts receivable. Financial difficulties or solvency problems at these manufacturers, suppliers and distributors could materially adversely affect their ability to supply us with products, which could disrupt our operations. It may be difficult to find a replacement for certain manufacturers, suppliers or distributors without significant delay or increase in cost.

We do not expect that the difficult economic conditions are likely to improve significantly in the near future. Any negative effect on the ability of consumers to purchase our premium products, or any interruption of our manufacturing, supply chain or distribution for any reason (including but not limited to financial distress, natural disaster or production difficulties), could substantially adversely affect our financial condition and results of operations.

Fluctuations in various food and supply costs could materially adversely affect our operating results.

Our manufacturers obtain most of the key ingredients used in our products from third-party suppliers. As with most food products, the availability and cost of raw materials used in our products can be significantly affected by a number of factors beyond our control, such as general economic conditions, growing decisions, government programs, weather conditions such as frosts, drought, and floods, and plant diseases, pests and other acts of nature. Because we do not control the production of raw materials, we are also subject to delays caused by interruptions in production of raw materials based on conditions not within our control. Such conditions include job actions or strikes by employees of suppliers, weather, crop conditions, transportation interruptions, natural disasters, palm oil sustainability issues and boycotts of products or other catastrophic events. There can be no assurance that our manufacturers will be able to obtain alternative sources of raw materials at favorable prices, or at all, if any of them experience supply shortages. In some instances, we enter into forward purchase commitments to hedge the costs of projected commodity requirements needed to produce our finished goods. These commitments are stated at a firm price, or as a discount or premium from a future commodity price and are placed with our manufacturers. There can be no assurance that our hedging commitments will result in the lowest available cost for the commodities used in our products.

The inability of our manufacturers to obtain adequate supplies of raw materials for our products at favorable prices, or at all, as a result of any of the foregoing factors or otherwise could cause an increase in our cost of sales and a corresponding decrease in gross margin, or cause our sales and earnings to fluctuate from period to period. Such fluctuations and decrease in gross margin could have a material adverse effect on our business, results of operations and financial condition. There is no assurance that we would be able to pass along any cost increases to our customers.

Our advertising is regulated for accuracy, and if our advertising is determined to be false or misleading, we may face fines or sanctions.

Our advertising is subject to regulation by the Federal Trade Commission under the Federal Trade Commission Act, which prohibits dissemination of false or misleading advertising. In addition, the National Advertising Division of the Council of Better Business Bureaus, Inc., which we refer to as NAD, administers a self-regulatory program of the advertising industry to ensure truth and accuracy in national advertising. NAD both monitors national advertising and entertains inquiries and challenges from competing companies and consumers. Should our advertising be determined to be false or misleading, we may have to pay damages, withdraw our campaign and possibly face fines or sanctions, which could have a material adverse effect on our sales and operating results.

Adverse publicity or consumer concern regarding the safety and quality of food products or health concerns, whether with our products or for food products in the same food group as our products, may result in the loss of sales.

We are highly dependent upon consumers’ perception of the safety, quality and possible dietary benefits of our products. As a result, substantial negative publicity concerning one or more of our products or other foods and beverages similar to or in the same food group as our products could lead to a loss of consumer

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confidence in our products, removal of our products from retailers’ shelves and reduced sales and prices of our products. Product quality issues, actual or perceived, or allegations of product contamination, even when false or unfounded, could hurt the image of our brands and cause consumers to choose other products. Further, any product recall, whether our own or by a third party within one of our categories, whether due to real or unfounded allegations, could damage our brand image and reputation. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

If we conduct operations in a market segment that suffers a loss in consumer confidence as to the safety and quality of food and beverage products, our business could be materially adversely affected. The food industry has recently been subject to negative publicity concerning the health implications of genetically modified organisms, obesity, trans fat, diacetyl, mad cow disease, avian flu and bacterial contamination, such as salmonella. Developments in any of these areas including, but not limited to, a negative perception about our proprietary formulations, could cause our operating results to differ materially from expected results. Any of these events could harm our sales and our operating results, perhaps significantly.

We have no long-term contracts with our customers which require the purchase of a minimum amount of our products. The absence of long-term contracts could result in periods during which we must continue to pay costs and service indebtedness without current revenues or with reduced revenues.

As is generally the case in the retail consumer goods industry, our customers do not provide us with firm, long-term volume purchase commitments. As a result of the absence of long-term contracts, we could have periods during which we have no or only limited orders for our products, but we will continue to have to pay our costs including costs to maintain our work force and service our indebtedness, without the benefit of current revenues or with reduced revenues. We cannot assure you that we will be able to timely find new customers to supplement periods where we experience no or limited purchase orders or that we can recover fixed costs as a result of experiencing reduced purchase orders. Periods of no or limited purchase orders for our products could have a material adverse effect on our net income, cause us to incur losses or result in violations of the debt covenants contained in our credit agreement.

The Company’s performance may be adversely affected by economic and political conditions in the U.S. and abroad.

The Company’s performance is affected by economic and political conditions in the United States and abroad. Such conditions and factors include changes in applicable laws and regulations, including changes in food and drug laws, accounting standards, taxation requirements and environmental laws. Other factors impacting our operations include recessionary conditions, the performance of businesses in hyperinflationary environments, terrorist acts and political unrest. Such changes could materially and adversely affect our business and results of operations and financial condition. In addition, unfavorable general economic conditions could affect the affordability of, and consumer demand for, some of our products. Under difficult economic conditions, consumers may seek to reduce discretionary spending by foregoing purchases of our products or by purchasing lower-priced alternatives from our competitors. The prices of our key commodities inputs, such as palm oil, soybean oil and milk, could fluctuate greatly as a result of economic and political factors.

The market price and trading volume of our common stock may be volatile.

The market price of our common stock could fluctuate significantly for many reasons, including reasons not specifically related to our performance, such as industry or market trends, reports by industry analysts, investor perceptions, actions by credit rating agencies, negative announcements by our customers or competitors regarding their own performance or actions taken by our competitors, as well as general economic and industry conditions. For example, to the extent that other companies within our industry experience declines in their stock price, our stock price may decline as well. Our common stock price is also affected by announcements we make about our business, analyst reports related to our company, changes in financial estimates by analysts, rating agency announcements about our business, and future sales of our common stock, among other factors. Our stock price may also be affected by fluctuations in the market share of our products. As a result of these factors, investors in our common stock may not be able to resell their shares at or above the price at which they purchase our common stock. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating

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performance of companies like us. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.

Risks Related to the Food and Beverage Industries

Our business operations may be subject to numerous laws and governmental regulations, exposing us to potential claims and compliance costs that could adversely affect our operations.

Manufacturers and marketers of food and beverage products are subject to extensive regulation by the Food and Drug Administration, which we refer to as the FDA, the United States Department of Agriculture, which we refer to as the USDA, and other national, state and local authorities. For example, the Food, Drug and Cosmetic Act and the new Food Safety Modernization Act and their regulations govern, among other things, the manufacturing, composition and ingredients, packaging and safety of foods and beverages. Under these acts, the FDA regulates manufacturing practices for foods and beverages through its current “good manufacturing practices” regulations, imposes ingredient specifications and requirements for many foods and beverages and inspects food and beverage facilities and issues recalls for tainted food and beverage products. Additionally, the USDA has adopted regulations with respect to a national organic labeling and certification program. Food and beverage manufacturing facilities and products are also subject to periodic inspection by federal, state and local authorities.

We are also subject to numerous other laws and regulations, including laws and regulations relating to competition, product safety, the protection of the environment, and employment and labor practices, and the production, distribution and sale of many of our products are subject to, among others, the Lanham Act, state consumer protection laws, the Occupational Safety and Health Act, various environmental statutes, as well as various state and local statutes and regulations.

Any changes in laws and regulations applicable to food and beverage products could increase the cost of developing and distributing our products and otherwise increase the cost of conducting our business, which would materially adversely affect our financial condition. In addition, if we fail to comply with applicable laws and regulations, including future laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, any of which could have a material adverse effect on our business, financial condition, results of operations or liquidity.

The growth of our business will rely on our ability to successfully introduce products in numerous new categories and distribution channels. Recently, we have expanded Smart Balance presence in the dairy category with enhanced milks. The milk industry is highly regulated at the national, state and local levels and requires significant compliance and reporting activities. If we fail to comply with applicable laws and regulations, including future laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, any of which could have a material adverse effect on our business, financial condition, results of operations or liquidity.

We could also be affected by climate change. There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Decreased agricultural productivity in certain regions as a result of changing weather patterns could limit availability or increase the cost of key agricultural commodities. We are a large user of palm oil and could be affected by sustainability issues related to rain forests and the impact this would have on palm oil production. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt suppliers or impact demand for our products. In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs.

We may be subject to significant liability should the consumption of any food or beverage products manufactured or marketed by us cause injury, illness or death. Regardless of whether such claims against us are valid, they may be expensive to defend and may generate negative publicity, both of which could materially adversely affect our operating results.

The sale of food and beverage products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties or product contamination or spoilage, including the presence of bacterial contamination, foreign objects, substances, chemicals, other agents or

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residues introduced during production processes. Although we believe that we and our manufacturers are in material compliance with all applicable laws and regulations, if the consumption of our products causes or is alleged to have caused an illness in the future, we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding an illness, injury or death could materially adversely affect our reputation with existing and potential customers on a permanent basis and our corporate image and operating results. Moreover, claims or liabilities of this nature might not be covered by insurance or by any rights of indemnity or contribution that we may have. While we have product liability insurance coverage in amounts we believe to be adequate, we cannot be sure that claims or liabilities will be asserted for which adequate insurance will be available or that such claims or liabilities will not exceed the available amount of insurance coverage.

Our food or beverage products may also experience product tampering, contamination or spoilage or be mislabeled or otherwise damaged. Under certain circumstances a product recall could be initiated, leading to a material adverse effect on our reputation, operations and operating results. Recalls may be required to avoid seizures or civil or criminal litigation or due to market demands. Even if such a situation does not necessitate a recall, product liability claims could be asserted against us. A products liability judgment or a product recall involving us or a third party within one of our categories could have a material adverse effect on our business, financial condition, results of operations or liquidity and could impair the perception of our brands for an extended period of time.

We are also heavily dependent on our manufacturers for compliance with sound and lawful production of our products. Therefore, even if we have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our business, results of operations, liquidity, financial condition and brand image.

Regardless of whether any claims against us are valid, or whether we are ultimately held liable, claims may be expensive to defend and may divert time and money away from our operations, which could have a detrimental effect on our performance. A judgment that is significantly in excess of our insurance coverage for any claims could materially and adversely affect our financial condition or results of operations. Any adverse publicity resulting from these allegations may also materially and adversely affect our reputation, which could materially adversely affect our results.

The food and beverage industry has been subject to a growing number of claims including class action lawsuits based on the nutritional content of food products as well as disclosure and advertising practices. We are currently facing and in the future may continue to face these types of claims and proceedings and, even if not, publicity about these matters (particularly directed at the quick-service and fast-casual segments of the industry) may harm our reputation and adversely affect our results. In addition, suits against our competitors can harm our business. Furthermore, the significant costs of defending these class action lawsuits often times are not covered by insurance.

Successful new product introductions are important to sustaining or growing our business and there is no guarantee that customers will accept our products for their stores or set reasonable prices for our products Even where customers accept our products, the Company still must expend resources to create consumer awareness and generate trial. In addition, competitors may offer significant price reductions, and we cannot ensure that consumers will find our products suitably differentiated from products of our competitors.

The food industry and retailers in the grocery industry use new products as a way of creating excitement and variety of choices in order to attract consumers. Our ability to develop, market, and sell new products at an appropriate price may be hampered by the inability to get shelf space for our products at a reasonable cost or once placed, have an attractive price set for our products. Competitors, many of whom have greater resources than us, vie for the same shelf placement and may offer incentives to the retailers that we cannot match. In addition, unattractive shelf placement and pricing may put us at a disadvantage to our competitors. We may need to increase our marketing and advertising spending in order to create consumer awareness, protect and grow our existing market share or to promote new products, which could impact our operating results. The inability to stay current with functional foods trends through new products could materially adversely affect our business performance.

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Changes in retail distribution arrangements and the trend toward less products stocked at retail can result in the loss of retail shelf space and disrupt sales of food or beverage products, which could cause our sales to fall.

From time to time, retailers change distribution centers that supply some of their retail stores or change sales agencies that are responsible for stocking and maintaining food and beverage products in parts of their stores. If a new distribution center has not previously distributed our products in that region or if a sales agency is not familiar with our products, there will be a delay in a distribution center’s ability to begin distributing new products in its region or to arrange for a sales agency to represent and stock our products. If we do not get approval to have our products offered in a new distribution region or if getting this approval takes longer than anticipated, our operating results may suffer. Likewise, if we cannot establish a relationship with a sales agent to stock food or beverage products in one or a number of stores or if we temporarily lose shelf space during the time it takes to do so, our sales may decline. In addition, the trend by retailers of reducing the number and inventory of items in stock and on shelf can lead to loss of sales and less availability of our products to consumers.

The food industry is highly competitive and we compete with many companies who have greater resources than us.

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

Risks Relating to Our Secured Debt Financing

Our ability to service our debt may be limited, which could force us to reduce or delay advertising and promotional expenditures, restructure our indebtedness or seek additional equity capital.

As of December 31, 2010, we had outstanding approximately $49.0 million of secured debt.

The level of our indebtedness could have important consequences to our stockholders, including:

Our ability to pay interest and principal on the secured debt financing will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. In addition, due to the unprecedented weakness in the U.S. economy, our ability to pay interest and principal on the secured debt financing may depend on our customers’ financial stability and their ability to pay us for their purchases in a timely fashion, or at all. Any significant default or delay in our customers’ payments could result in our inability to pay interest and principal on the secured debt financing in a timely fashion.

We anticipate that our operating cash flow will be sufficient to meet our operating expenses and advertising and promotional expenditures, to sustain operations and to service our interest and principal requirements as they become due. If we are unable to generate sufficient cash flow to service our indebtedness

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and fund our advertising and promotional expenditures, we will be forced to adopt an alternative strategy that may include reducing or delaying advertising and promotional expenditures, restructuring or refinancing our indebtedness or seeking additional equity capital. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all. 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, many of which are beyond our control.

If we are obligated for any reason to repay our secured debt financing before the scheduled installment dates, we could deplete our working capital, if available, or make raising additional funds necessary. Our failure to repay the secured debt financing, if required, could result in legal action against us which could materially harm our business.

As of December 31, 2010, we had outstanding approximately $49.0 million of secured debt. Any event of default could require the early repayment of the secured debt financing in whole or in part together with accrued interest on the outstanding principal balance of the secured debt financing and any other applicable penalties, including a default interest rate. If, prior to the maturity date, we are required to repay the secured debt financing in full, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the secured debt financing, and other applicable penalties, when required, our lenders could commence legal action against us to recover the amounts due. Any such action would be materially harmful to us and could require us to curtail or cease operations.

The loan agreement for the secured debt financing contains covenants that significantly restrict our operations, which may negatively affect our ability to operate our business and limit our ability to take advantage of potential business opportunities.

The loan agreement with respect to the secured debt financing contains numerous covenants imposing financial and operating restrictions on our business. Any other future debt agreements may contain similar covenants. These restrictions may affect our ability to operate our business, limit our ability to take advantage of potential business opportunities as they arise and adversely affect the conduct of our current business. These covenants place restrictions on our ability to, among other things:

Our failure to comply with the covenants described above could result in an event of default under the secured debt. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Item 1B. Unresolved Staff Comments

We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding December 31, 2010 that remain unresolved.

Item 2. Properties

Our corporate headquarters are located at 115 West Century Road — Suite 260, Paramus, New Jersey 07652 and our telephone number is (201) 568-9300. We have two leases in place at this location. The initial term of the primary lease for our corporate headquarters expires May 31, 2015 and we have two

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options to extend for additional five-year terms. In 2009, we leased an adjacent business suite at the same facility with an initial term expiring November 30, 2013. We have an option to renew this separate lease through May 31, 2015. The annual aggregate rent for the corporate headquarters is approximately $550,000 through November 30, 2013.

We also have three lease agreements for corporate office space in Niwot, Colorado. The initial term of each of these leases expires July 31, 2012 and has the option to extend each lease for an additional thirty-six months. The annual aggregate rental expense for this facility is approximately $145,000 through July 31, 2012.

Management believes that our facilities are suitable and adequate for the Company’s needs.

Item 3. 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. This suit relates only to our Nucoa® stick margarine product, which represented less than 1% of our sales in 2010. We have answered the complaint, commenced discovery and intend to continue vigorously defending the Company against this suit. A ruling on plaintiff’s class certification motion is expected in March. No matter the outcome, we do not expect that the resolution of this matter will have a material adverse effect on our 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. We recently received the panel’s written decision and reviewed the findings and intend to appeal the ruling. We believe that neither this proceeding, nor its ultimate outcome, will have any material adverse effect on our business.

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

Item 4. Reserved

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the Nasdaq Global Market under the symbol “SMBL”. The following table sets forth, for the quarterly periods indicated, the high and low prices per share for the Company’s common stock on the Nasdaq Global Market.

		Common Stock
		High				Low
2009 First Quarter		$	8.10			$	5.26
2009 Second Quarter		$	8.73			$	6.94
2009 Third Quarter		$	6.93			$	5.54
2009 Fourth Quarter		$	6.35			$	4.83
2010 First Quarter		$	6.90			$	4.95
2010 Second Quarter		$	6.92			$	3.85
2010 Third Quarter		$	4.37			$	3.57
2010 Fourth Quarter		$	4.73			$	3.35

Holders

As of December 27, 2010, there were 28 holders of record of our common stock. This figure does not include a substantially greater number of “street name” holders or beneficial holders of our common stock, whose shares are held of record by banks, brokers and other financial institutions.

Dividends

We have not paid any dividends on our common stock to date. Our secured debt financing prohibits the payment of any cash dividends. Furthermore, the payment of dividends is within the discretion of our board of directors and our board presently intends to retain all earnings, if any, for use in our business operations. Accordingly, we do not anticipate declaring any dividends in the foreseeable future. Any decision to pay dividends would depend on many factors including, but not limited to, our earnings, financial condition, contractual obligations and regulatory considerations, and would be at the discretion of our board of directors.

Unregistered Equity Sales

During the year ended December 31, 2010, no equity securities of the Company were sold by the Company that were not registered under the Securities Act of 1933, as amended.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table displays equity compensation plan information as of December 31, 2010. For further information, see note 9 of “Notes to Consolidated Financial Statements.”

Equity Compensation Plan Information

		Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a)				Weighted-average exercise price of outstanding options, warrants, and rights (b)				Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders			10,131,625			$	8.91				2,018,375
Equity compensation plans not approved by security holders*			1,375,000				8.84				—
Total			11,506,625			$	8.90				2,018,375

Stock Performance Graph

The performance graph furnished below compares the annual cumulative total stockholder return (assuming reinvestment of dividends) from investing $100 on January 23, 2006 in each of (i) our common stock, (ii) a peer group index consisting of the S&P Packaged Foods & Meats Index, and (iii) the S&P SmallCap 600 Index. We completed our initial public offering on December 21, 2005. We sold 12,760,840 units (consisting of one share of common stock and one public warrant to purchase common stock) in our initial public offering. The units became separable on January 23, 2006. Prior to January 23, 2006, there was no established public trading market for our common stock. For compatibility purposes, the performance graph below compares the total return from our common stock beginning January 23, 2006. To date, we have not paid dividends, and no dividends are included in the representation of our performance.

The stock price performance on the graph below is not necessarily indicative of future price performance.

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This stock performance graph should not be deemed filed or incorporated by reference into any other filing made by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate the stock performance graph by reference in another filing.

Item 6. Selected Historical Financial Information

The following is a summary of selected financial data of the Company for the period from January 1, 2006 to December 31, 2010. The selected financial data should be read in conjunction with “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and the notes thereto included elsewhere in this annual report (in thousands, except share data):

		Twelve Months Ended December 31,
		2010				2009				2008				2007(1)				2006
Net sales		$	241,967			$	239,503			$	221,872			$	111,038			$	—
Cost of goods sold			125,131				123,974				126,904				58,715				—
Gross profit			116,836				115,529				94,968				52,323				—
Operating expenses:
Marketing			40,155				37,383				33,034				15,118				—
Selling			19,769				17,580				16,662				12,268				—
General and administrative			44,403				48,756				39,578				17,931				—
Performance based shares released from escrow			—				—				—				18,456				—
Formation and operating costs			—				—				—				—				1,925
Impairment			130,000				—				—				—				—
Total operating expenses			234,327				103,719				89,274				63,773				1,925
Operating (loss) profit			(117,491	)			11,810				5,694				(11,450	)			(1,925	)
Other income (expense):
Interest income			—				3				292				2,450				4,220
Interest expense			(3,420	)			(3,653	)			(9,049	)			(9,678	)			—
(Loss) on derivative liability			—				(1,045	)			(5,132	)			(45,556	)			(15,266	)
Other (expense), net			(444	)			(2,291	)			(2,336	)			(1,020	)			—
Total other (expense) income			(3,864	)			(6,986	)			(16,225	)			(53,804	)			(11,046	)
(Loss) income before income taxes			(121,355	)			4,824				(10,531	)			(65,254	)			(12,971	)
Provision (benefit) for income taxes			6,806				1,358				(3,563	)			(706	)			808
Net (loss) income		$	(128,161	)		$	3,466			$	(6,968	)		$	(64,548	)		$	(13,779	)
Less: unpaid dividends on cumulative preferred stock		$	—			$	—			$	—			$	37,159			$	—
Net (loss) income available for common shares		$	(128,161	)		$	3,466			$	(6,968	)		$	(101,707	)		$	(13,779	)
Net (loss) income per share – basic and diluted		$	(2.08	)		$	0.06			$	(0.11	)		$	(4.12	)		$	(0.96	)
Weighted average shares outstanding
Basic			61,665,824				62,630,683				62,523,742				24,667,344				14,355,945
Diluted			61,665,824				62,703,434				62,523,742				24,667,344				14,355,945

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		Twelve Months Ended December 31,
		2010				2009				2008				2007(1)				2006
Balance sheet data:
Cash and cash equivalents		$	3,840			$	7,538			$	5,492			$	37,649			$	569
Investments held in trust –  restricted			—				—				—				—				101,073
Other current assets			26,635				23,822				26,675				28,787				1,051
Property and equipment, net			5,378				4,634				4,301				1,805				—
Goodwill			248,912				374,886				374,886				374,886				—
Other intangible assets			150,017				151,089				155,223				159,646				—
Other non-current assets			3,621				3,096				1,959				3,594				3,591
Total assets		$	438,403			$	565,065			$	568,536			$	606,367			$	106,284
Current liabilities		$	28,938			$	28,126			$	26,018			$	21,390			$	8,578
Derivative liabilities			—				—				5,132				—				32,285
Long-term debt			44,000				51,143				69,504				119,504				—
Contract payable			5,500				—				—				—				—
Other liabilities			2,301				965				162				—				—
Deferred tax liability			44,165				43,824				46,268				53,294				—
Total liabilities			124,904				124,058				147,084				194,188				40,863
Common stock subject to possible conversion			—				—				—				—				19,661
Deferred interest income			—				—				—				—				—
Series A convertible preferred stock			—				—				—				175,657				—
Series A convertible preferred stock – par value			—				—				—				2				—
Common stock – par value			6				6				6				4				1
Additional paid-in capital			534,568				523,467				507,378				315,480				59,742
Retained deficit			(210,627	)			(82,466	)			(85,932	)			(78,964	)			(14,416	)
Treasury stock			(10,448	)			—				—				—				—
Total stockholders’ equity			313,499				441,007				421,452				412,179				45,327
Total liabilities and stockholders’ equity		$	438,403			$	565,065			$	568,536			$	606,367			$	106,284

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

The following is a discussion of our financial condition and results of operations for the years ended December 31, 2010, 2009 and 2008. This section should be read in conjunction with our consolidated financial statements including the notes thereto for the periods mentioned above, which are included elsewhere in this report.

Company Overview

We are a consumer food products company that competes primarily in the retail branded food products industry and focuses on providing value-added, functional food products to consumers. Functional food is defined as a food or a food ingredient that has been shown to support normal, healthy structures, functions and systems in the body. We market buttery spreads, enhanced milks, popcorn, peanut butter, cooking oil, mayonnaise dressing 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. For the value consumer, we sell buttery spreads and sticks under the Bestlife^TM 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®, Bestlife^TM and Nucoa®, is by far our most developed product category and accounted for approximately 72% of sales for the year ended December 31, 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.

In 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. In 2009 we created 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, led by our enhanced milk products, and refinanced our credit facility with a strategically flexible capital structure. In 2010, we launched our three-tier spreads initiative, with products in all segments of the category. We also began national expansion of milk distribution in 2010.

We are now the number two marketer of spreads in the U.S. on a dollar basis. For the year ended December 31, 2010, our market share was 15.3%, up 0.1 points from the year ended December 31, 2009. Our market share by unit volumes sold increased to 10.1% for the year ended December 31, 2010, from 10.0% for the year ended December 31, 2009. Our strategy for Smart Balance® spreads has been to maintain price and product positioning as a premium brand. As a result, while we strengthened our margins, we lost some volume opportunities over the last 18 months as consumers continued to be price sensitive and competitors sought to increase unit share through price promotion. During the 2010 year-end holiday period we increased our promotional levels to help mitigate volume declines.

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

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Bestlife^TM 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.

Commodity costs have been rising across the food industry since mid-2010. Price increases have been announced by our competitors at the end of 2010 in the spreads category and we are following with price increases in the low double digit percentages effective February 2011. Due to the continued economic conditions and the price sensitive consumer, it is difficult to predict consumer reaction to the planned price increases or the challenging implications to our sales volumes.

Our current dairy aisle initiative is an important 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 a key driver toward our growth goals. For our dairy initiative in 2009, we expanded distribution of milks to the Northeast, beyond the initial Florida market. 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 the year ended December 31, 2010, the market share of our milks was 0.3% of the total milk category for the food channel, compared to 0.2% in 2009, according to Nielsen data.

In 2009, we signed an exclusive license agreement to use the Bestlife^TM 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^TM spreads in March 2010. In the fourth quarter of 2010, we strengthened our control of the Bestlife^TM brand by acquiring full rights for the branded food products as well as ownership of the Best Life website. We believe the brand and the website are unique assets that should provide an effective platform for expansion in the coming years as we broaden the scope of our products beyond our heart health focus.

In the third quarter of 2010, we announced the launch of Earth Balance^TM organic soymilk into Whole Foods markets nationwide. This marks a strategic expansion of the Earth Balance® brand beyond spreads into a higher velocity category and other categories over time. We plan to broaden distribution of Earth Balance^TM organic soymilk to other natural food customers in 2011.

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 December 2010, our debt was $49.0 million, a reduction of $111.0 or 69% from May 21, 2007, the date of the GFA acquisition. In the fourth quarter of 2009 our board authorized a two-year, $25 million stock repurchase program, which became effective starting in March 2010. As of December 31, 2010, approximately $10.4 million was used to repurchase the Company’s shares.

During the second quarter of 2010, our revenue and earnings expectations and longer term outlook were not materializing as previously projected. The main contributors to this change in our outlook were the persistent softness in U.S. consumer confidence and the resulting intensified competitive environment for the Company’s premium products. This change in outlook for the rest of the year 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, we performed an impairment test of goodwill in accordance with ASC Topic 350 “Goodwill and Other Intangible Assets.” This test resulted in a goodwill impairment loss of $130.0 million at June 30, 2010. At December 31, 2010, the Company made a determination that there was no further impairment. See footnote 5 of our audited consolidated financial statements included elsewhere in this report.

As part of continuing efforts to right-size and realign our staff to increase efficiency and effectiveness and position Smart Balance for success in 2011 and beyond, the Company undertook two organizational restructurings in 2010. The Company reduced its total number of employees by approximately 12%. The one-time cost of the combined actions in the second quarter and the fourth quarter totaled approximately $4 million, with corresponding expected ongoing annualized savings in excess of $4 million. Due primarily to the 2010 restructurings, stock options for certain former employees were forfeited, resulting in an income statement charge to reduce related deferred tax assets (future tax benefits previously recorded). The full year

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amount was $3.2 million of which $3.1 million will be applied to the second quarter of 2010. Second quarter results will be revised to a net loss of $(133.1) million and a loss per share of $(2.13).

There will be additional forfeitures in 2011 related to the 2010 restructurings. Accordingly, the Company expects to recognize additional tax charges of approximately $1.0 million in the first quarter and $0.8 million in the second quarter, unless the related market value of these stock options exceed their exercise price.

Smart Balance — Results of Operations

Results of Operations for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009 and for the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

		Years Ended December 31,
(in millions, except per share data)		2010				2009				2008
Net sales		$	242.0			$	239.5			$	221.9
Cost of goods sold			125.1				124.0				126.9
Gross profit			116.9				115.5				95.0
Operating expenses			234.3				103.7				89.3
Operating (loss) income			(117.4	)			11.8				5.7
Other (expenses) income			(4.0	)			(7.0	)			(16.2	)
(Loss) income before income taxes			(121.4	)			4.8				(10.5	)
Provision (benefit) for income taxes			6.8				1.3				(3.6	)
Net (loss) income		$	(128.2	)		$	3.5			$	(6.9	)
Net (loss) income available to common shares		$	(128.2	)		$	3.5			$	(6.9	)
Net (loss) income per common available share		$	(2.08	)		$	0.06			$	(0.11	)

Net Sales:

Our net sales for the year ended December 31, 2010 increased 1.0% to $242.0 million compared with $239.5 million for 2009. The increase was due primarily to the national expansion of Smart Balance^TM enhanced milks and the introduction and distribution of Bestlife^TM spreads. Offsetting this growth, Smart Balance® spreads and grocery products sales declined due to competitive promotional levels and continued consumer price sensitivity to premium products. Our net sales for the year ended December 31, 2009 increased 7.9% to $239.5 million compared with $221.9 million for 2008. The increase was primarily due to the regional expansion of milk and higher prices for spreads due to the carryover effect of increases in 2008. Net sales in 2008 reflected three price increases for our spreads products due to rapidly rising commodity costs.

Cost of Goods Sold:

The cost of goods sold for the year ended December 31, 2010 was $125.1 million compared with $124.0 million in 2009. The increase reflects higher case shipments partially offset by lower input costs. The cost of goods sold for the year ended December 31, 2009 was $124.0 million compared with $126.9 million for the year ended December 31, 2008. Increases in case shipments were more than offset by lower input costs.

Gross Profit:

Gross profit for the year ended December 31, 2010 increased 1.2% to $116.9 million compared with $115.5 million in 2009. The increase in gross profit was primarily due to higher sales volumes and lower input costs partially offset by unfavorable product mix. Gross profit for the year ended December 31, 2009 was $115.5 million compared with $95.0 million for the year ended December 31, 2008. The increase was primarily due to higher prices for our products, increased shipments and lower input costs.

Gross profit as a percentage of net sales was 48.3% for the year ended December 31, 2010 compared to 48.2% in 2009, and 42.8% in 2008. This was due primarily to lower input costs and promotion spending, partially offset by unfavorable product mix.

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Operating Expenses:

Operating expenses, which includes selling, marketing and general and administrative expenses, were $234.3 million for the year ended December 31, 2010, compared with $103.7 million in 2009 and $89.3 million in 2008. Included in the 2010 amount are a goodwill impairment charge of $130 million, a restructuring charge of $4.1 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 year ended December 31, 2010 were $101.5 million, a decrease of $2.2 million from 2009. The decrease primarily resulted from lower stock based compensation costs and other compensation related costs, partially offset by higher marketing and distribution costs. Operating expenses increased $14.4 million in 2009 versus 2008 primarily due to increased headcount and related costs to support future growth and higher marketing expenses to increase awareness and trial of our products. Included in operating expenses was stock-based compensation expense, as determined under authoritative accounting guidance for “share-based payments,” of approximately $11.1 million for 2010, $16.1 million for 2009 and $14.9 million for 2008. Also included in operating expenses were depreciation and amortization expenses of $5.2 million in 2010, $4.9 million in 2009, and $4.5 million in 2008.

Operating (Loss) Income:

We had an operating loss of $(117.4) million in 2010 compared to income of $11.8 million in 2009 and $5.7 million in 2008. Included in the 2010 amount are a goodwill impairment charge of $130 million, a restructuring charge of $4.1 million and a one-time benefit in the change in stock-based compensation expense of $1.3 million. Excluding these items, we had operating income of $15.4 million for 2010, a $3.6 million increase from 2009. The increase was due to lower operating expenses and increased gross profits. Operating income increased $6.1 million in 2009 versus 2008 due to the $20.5 increase in gross profit partially offset by the $14.4 million increase in operating expenses.

Other (Expense) Income:

We had other expenses of $(4.0) million in 2010 compared with $(7.0) million in 2009 and $(16.2) million in 2008. Included in 2010 other expenses was $(3.4) million of net interest expense. Included in the 2009 other expenses was $(3.7) million of net interest expense, $(1.0) million of derivative losses related to the Company’s interest rate swap, and $(1.5) million related to our debt refinancing in the fourth quarter, which included the write-off of $(1.4) million of unamortized financing costs. Included in other expenses in 2008 was net interest expense of $(8.8) million and $(5.1) million of derivative losses related to the Company’s interest rate swap.

(Loss) Income before Income Taxes:

Our income before income taxes was a loss of $(121.4) million in 2010 compared with income of $4.8 million in 2009 and a loss of $(10.5) million in 2008. Included in the 2010 amount are a goodwill impairment charge of $(130) million, a restructuring charge of $(4.1) million and a one-time benefit in the change in stock-based compensation expense of $1.3 million. Included in the operating income for 2009 were $(1.5) million of one-time expenses related to our refinancing. Excluding these items, we had income of $11.4 million in 2010, an increase of $5.1 million compared to $6.3 million in 2009. The increase was due to lower other expenses and higher operating income.

Income Taxes:

The provision for income taxes for the year ended December 31, 2010 was $6.8 million compared with $1.3 million in 2009. The effective tax rate for the year ended December 31, 2010 was (5.6%) primarily as a result of a pre-tax goodwill impairment charge, which had no tax benefit, offset by an adjustment to reduce deferred tax assets resulting from the forfeiture of certain non-qualified stock options. Excluding the impairment charge and the adjustment to deferred taxes, the effective tax rate for the year ended December 31, 2010 was 41.4%. The provision for income taxes for the year ended December 31, 2009 was $1.3 million or 28.1% of pre-tax income, and included the one-time benefit of a state tax resolution. The provision for income taxes for the year ended December 31, 2008 was a benefit of $3.6 million or 33.8% of pre-tax loss.

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Net (Loss) Income:

Our net loss for the year ended December 31, 2010 was $(128.2) million compared to income of $3.5 million in 2009 and a net loss of $(6.9) million in 2008. Included in the 2010 net loss are a goodwill impairment charge of $(130) million (which derived no tax benefit), a $(3.2) million reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options, a restructuring charge of $(2.4) million (after tax) and a one-time benefit in the change in stock-based compensation expense of $0.8 million (after tax). Included in the net income for 2009 were $(0.8) million (after tax) of one-time expenses related to our refinancing. Excluding these items, net income for 2010 was $6.6 million, compared to $4.3 million in 2009. The increase of $2.3 million was due to lower income before taxes partially offset by higher taxes.

Net (Loss) Income Available to Common Shares:

Our net loss available to common shares in 2010 was $(128.2) million or $(2.08) per share compared with income of $3.5 million or $0.06 per share in 2009. Our net loss available to common shares in 2008 was $(6.9) million or $(0.11) per share. Included in the 2010 net loss is a goodwill impairment charge of $(2.11), a reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options of $(0.05), a restructuring charge of $(0.04) and a one-time benefit in the change in stock-based compensation expense of $0.01. Included in the net income available to common shares for 2009 was $(0.01) of one-time expenses related to our refinancing. Excluding these items, net income per common share for the year ended December 31, 2010 was $0.11, compared to $0.07 in 2009.

Smart Balance — Non-GAAP Financial Measures

The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”).

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, restructuring charges and stock option expense. 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.

Our cash operating income was $33.0 million for the year 2010 compared to $32.8 million for the year 2009.

		Three Months Ended																Year Ended December 31, 2010
(in millions)		March 31, 2010				June 30, 2010				September 30, 2010				December 31, 2010
Operating income (loss)		$	5.8			$	(128.8	)		$	3.4			$	2.2			$	(117.4	)
Add back:
Depreciation and amortization of intangibles			1.3				1.3				1.3				1.3				5.2
Goodwill impairment			—				130.0				—				—				130.0
Restructuring			—				3.2				(0.1	)			1.0				4.1
Stock option expense			3.8				1.8				3.0				2.5				11.1
Cash operating income		$	10.9			$	7.5			$	7.6			$	7.0			$	33.0

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		Three Months Ended																Year Ended December 31, 2009
		March 31, 2009				June 30, 2009				September 30, 2009				December 31, 2009
Operating income		$	3.2			$	2.5			$	3.5			$	2.6			$	11.8
Add back:
Depreciation and amortization of intangibles			1.2				1.2				1.2				1.3				4.9
Goodwill impairment			—				—				—				—				—
Restructuring			—				—				—				—				—
Stock option expense			4.0				4.0				4.1				4.0				16.1
Cash operating income		$	8.4			$	7.7			$	8.8			$	7.9			$	32.8

Smart Balance — Cash Flows

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009 and the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

Cash provided by operating activities for the year ended December 31, 2010 was $17.9 million compared with $18.2 million in 2009. For the year ended December 31, 2010, we had a net loss of $(124.9) million, which included a non-cash goodwill impairment charge of $(130.0) million, $(11.1) million of non-cash stock-based compensation and $(5.9) million of depreciation and amortization expense. Cash provided by operating activities in 2009 was $18.2 million compared with $19.1 million in 2008. The $0.9 million decrease was primarily due to the $5.1 million decrease in derivative liabilities from the pay down of the interest rate swap and slightly higher working capital, partially offset by higher net income of $3.5 million.

For the year ended December 31, 2010, cash used for investing activities was $(3.5) million, primarily due to the acquisition of Best Life assets. Cash used for investing activities was $(1.1) million in 2009, primarily for software development costs and the purchase of equipment. Cash used in investing activities totaled $2.6 million for the year ended December 31, 2008, which was also mainly for software development costs and the purchase of equipment.

Cash used in financing activities was $(18.1) million for the year ended December 31, 2010 compared to $(15.1) million in 2009, resulting from the repayment of debt of $(16.6) million and the purchase of treasury stock of $(10.4) million, partially offset by new financing of long term debt of $9.0. Cash used in financing activities was $(15.1) million in 2009 primarily for the repayment of debt of $(73.5) million, offset by new financing of $60.6 million. Cash used for financing activities was $(48.7) million for the year ended December 31, 2008.

Liquidity and Capital Resources

Liquidity:

Our liquidity planning is largely dependent on our operating cash flows, which is 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 have been 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 (as defined below), the Company can also repurchase common stock subject to a determination of its excess cash flow as defined in that agreement. In December 2009, our board of directors approved the repurchase of up to $25.0 million of shares over a two year period. During 2010, the Company repurchased approximately 2.6 million shares of its common stock for an aggregate purchase price of $10.4 million. Currently, our primary source of liquidity 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 next twelve months. As of December 31, 2010, $45.0 million was available for borrowing under our revolving credit facility and we had $3.8 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.

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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 $100.0 million in secured debt financing consisting of a $55.0 million term loan (the “Term Loan”) and a $45.0 million revolving credit facility (the “Revolver”). The Revolver includes a $5.0 million sublimit for the issuance of letters of credit and a $5.0 million sublimit for swing line loans. Subject to certain conditions, the Borrower, at its option, 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 $5.0 million. Such increase may be provided by existing Lenders, or to the extent they decline to do so, by adding additional Lenders.

The Credit Agreement replaced the Company’s prior first lien and second lien credit (the “Prior Facilities”). As of September 30, 2009, outstanding debt under the Prior Facilities totaled approximately $65 million. Proceeds of the Credit Agreement were used to repay the debt outstanding under the Prior Facilities and may also be 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 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; the fee ranges from 0.50% to 0.75% depending on the Company’s Leverage Ratio.

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:

The Credit Agreement 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 $6.0 million of capital expenditures per year with any unspent funds carried over to the next twelve months. At December 31, 2010, the Company was in compliance with all of its debt covenants.

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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.

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 their 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 $55.0 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 $9.0 million under the Revolver. During the fourth quarter of 2010, the Company paid $9.0 million under the Revolver, bringing the total debt outstanding to $49.0 million as of December 31, 2010.

The interest rate under the Credit Agreement at December 31, 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. As of December 31, 2010, the Company had a ratio of less than 2.0 and thus no prepayment was required.

The Company has recorded a contract payable of $5.5 million representing the unpaid balance on an acquisition. This amount will be paid in annual installments over the next four years, together with related interest.

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

2011		$	5.0
2012			6.9
2013			39.8
2014			1.4
2015			1.4
Total		$	54.5

Contractual Obligations

The following table summarizes contractual obligations and borrowings as of December 31, 2010 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods. We expect to fund other commitments primarily with operating cash flows generated in the normal course of business.

Contractual Obligations

		Total				Due in Less Than 1 Year				Due in 1 – 3 Years				Due in 3 – 5 Years				Due in More Than 5 Years
Building Leases(1)		$	2.8			$	0.7			$	1.4			$	0.7			$	—
Oil and Peanuts Purchase Commitments(2)			23.8				23.8				—				—				—
Debt Obligations(3)			54.5				5.0				46.7				2.8				—
Brandeis Contract			0.5				0.2				0.14				0.1				0.1
		$	81.6			$	29.7			$	48.2			$	3.6			$	0.1

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Off Balance Sheet Arrangements

We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons.

Supply, Availability and General Risk Conditions

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

Seasonality and Quarterly Results

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

Impact of Inflation

In general, we believe that, over time, we are able to increase prices to counteract the majority of the inflationary effects of increasing costs.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We discuss below what we believe to be our most critical accounting policies and estimates. While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of the Company’s significant accounting policies, please see Note 1 of the notes to our consolidated audited financial statements.

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 shipped product has been received by the customer. Product is sold to customers on credit terms established on an individual basis. The credit factors used include historical performance, current economic conditions and the nature and volume of the product. The Company offers its customers a variety of sales and

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incentive programs, including discounts, allowances, coupons, slotting fees, and co-op advertising; such amounts are estimated and recorded as a reduction in revenue. The Company sells its products to customers without a right of return, is not obligated to accept any returns, and has historically not accepted returns.

Goodwill

Goodwill is tested annually for impairment or more frequently if events or changes in circumstances indicate that impairment may have occurred. The impairment analysis for goodwill includes a comparison of our carrying value (including goodwill) to our 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 it had been acquired in a business combination and the fair value was its purchase price. If the excess of the fair value of our identifiable assets and liabilities is less than the carrying value of recorded goodwill, an impairment charge is recorded for the difference. We completed our impairment analysis at June 30, 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 $130.0 million (see footnote 5 for further details). At December 31, 2010, management reviewed its assessment of fair value and made a determination that there was no further impairment.

Other Intangibles

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, management 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.

We have determined that our Smart Balance® and Earth Balance® trademarks have indefinite lives and these assets are not being amortized. We have performed our annual assessment of the Company’s 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.

We generally expense legal and related costs incurred in defending or protecting our intellectual property unless it can be established that such costs have added economic value to the business enterprise, in which case we capitalize the costs incurred as part of intangible assets. The primary consideration in making the determination of whether to capitalize the costs is whether or not we can prove that the Company 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 our 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.

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired.

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Income Taxes

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

Interest Rate Swaps

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

Forward Purchase Commitments

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

Acquisitions

We account for acquisitions using the purchase method of accounting. Under the purchase method, our consolidated financial statements reflect the operations of the acquiree starting from the date of the acquisition. In addition, assets acquired and liabilities assumed are recorded at the date of acquisition at their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill.

Share-Based Compensation Expense

We have adopted appropriate accounting authoritative guidance regarding “share-based payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. For 2010, employee share-based compensation expense was $11.1 million.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements” (ASU 2010-06), to require new disclosures related to transfers into and out of Levels 1 and 2 of the fair value hierarchy and additional disclosure requirements related to Level 3 measurements. The guidance also clarifies existing fair value measurement disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The additional disclosure requirements are effective for the first reporting period beginning after December 15, 2009, except for the additional disclosure requirements related to Level 3 measurements, which are effective for fiscal years beginning after December 15, 2010. We adopted the fair value disclosures guidance on January 1, 2010. The adoption of the additional requirements has not had a significant impact on our financial statements.

Item 7A. 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 December 31, 2010 was 0.3%.

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. These forward purchase commitments qualify as normal purchases and sales in the normal course of business and accordingly, do not qualify as derivatives under existing authoritative accounting guidance, namely, “Accounting for Derivative Instruments and Hedging Activities.” Based on the most recent prices for soy, palm and canola oil products, as of December 31, 2010 we had commitments of $23.8 million. We are exposed to market risk from commodity pricing changes. In order to minimize price variability and to manage risk, we enter into derivative hedging arrangements with counterparties for butter and milk. These derivatives must be net settled in cash and are marked-to-market each period within the consolidated statement of operations.

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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 8. Consolidated Financial Statements and Supplementary Data

The consolidated financial statements and supplementary data are listed in Part IV, Item 15(a).

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Conclusion regarding the effectiveness of disclosure controls and procedures.  Our management, with the participation of our Chief Executive Officer and Principal Financial and Accounting Officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 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 Principal 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 December 31, 2010, our Chief Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

Internal control over financial reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our chief executive officer, chief operating officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.

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

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

Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended December 31, 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.

Item 9B. Other Information

On February 15, 2011, the Company held a special meeting of its stockholders. The special meeting was held in order to vote on the following matter:

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Proposal:  To approve the proposed employee stock option exchange program (“Option Exchange”) to give certain employees the opportunity to exchange stock options for a fewer number of new stock options that have approximately the same fair value as the options surrendered, as of the date of the exchange. The votes on this proposal were cast as follows:

For:			42,632,977
Against:			4,410,766
Abstain:			78,131
Broker Non-Votes			0

Therefore, in accordance with the voting results listed above, this Proposal was approved by the stockholders of the Company.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Executive Officers and Directors

Certain information regarding our directors and executive officers is provided below:

Name		Title
Stephen B. Hughes		Chairman of the Board, Chief Executive Officer and Director
Alan S. Gever		Executive Vice President and Chief Financial Officer
Norman Matar		Executive Vice President, General Counsel and Corporate Secretary
Peter Dray		Executive Vice President, Operations and Product Development
Terrence Schulke		Executive Vice President/General Manager, Commercial Operations
Gregory Venner		Executive Vice President and Chief Consumer Officer
Christine Sacco		Vice President, Controller and Principal Accounting Officer
Robert J. Gillespie		Director
William E. Hooper		Director
Gerald J. Laber		Director
James B. Leighton		Director
James E. Lewis		Director
Robert F. McCarthy		Director
Michael R. O’Brien		Director

Stephen B. Hughes, 56, has been our chairman of the board, chief executive officer and a director since our inception in May 2005. Mr. Hughes served as the sole officer and director of Hughes Consulting, Inc. from 2004 to 2007. From 2004 to 2007, Mr. Hughes served as a director of The Cambridge Group, a leading demand strategy consulting firm headquartered in Chicago, Illinois. While with Cambridge, Mr. Hughes led or participated in securing new marketing strategy engagements with a number of major consumer packaged goods companies. From 2002 to 2004, Mr. Hughes served first as vice president of sales and then as the senior vice president of marketing and sales for White Wave Foods Company, a division of Dean Foods Company. In June 2004, Mr. Hughes was also named senior vice president of marketing and research and development for Dean Foods’ newly formed White Wave division, a $1.1 billion division with brands including Silk, Horizon, International Delight, Land-o-Lakes and Marie’s. From 2000 to 2002, he served as chairman of the board and chief executive officer of Frontier Natural Product, Inc., a privately held cooperative providing distribution services, organic ingredients and spices to the natural foods industry. Mr. Hughes holds a Bachelor of Arts degree in economics and political science from Denison University and an MBA degree with a concentration in marketing and finance from the University of Chicago. He also serves on the board of trustees for the Alexander Dawson School and as a director of B.F. Bolthouse LLC.

Alan S. Gever, 56, served as our vice president of financial planning and analysis until January 7, 2008, when he was appointed to be our executive vice president and chief financial officer. Mr. Gever has a broad-based knowledge of the financial, accounting and administrative functions of a business. While serving as our vice president of financial planning and analysis, Mr. Gever was responsible for leading internal planning, financial operations, and investor relations efforts. Mr. Gever served, from 1992 to 1999, as chief financial officer and general manager of the Nabisco Refrigerated Foods Group which sold consumer branded margarine and egg substitute products. In 2000, Mr. Gever founded ShareMax.com, an internet-based provider of strategic sourcing services to the consumer packaged goods industry. From 2001 to 2003 Mr. Gever served as chief financial officer of the Ultimate Juice Company which was, at the time, the nation’s largest fresh juice manufacturer with juice brands such as Naked Juice, Orchid Island, and Ziegler’s along with Saratoga Spring bottled water. From 2003 to May 2007, Mr. Gever was a principal of Northpointe Consulting Group LLC providing management consulting services to startup and small-cap companies primarily in the food and beverage industry. Mr. Gever received his bachelor’s degree in business management from Seton Hall University in New Jersey.

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Norman Matar, 57, has been our executive vice president, general counsel and corporate secretary since January 2008. Mr. Matar comes to Smart Balance with 30 years of private practice, the last 20 with Davis & Kuelthau, S.C., where he has been on the board for 12 years. Mr. Matar has extensive experience handling all aspects of corporate legal work with both public and private firms including significant mergers and acquisitions experience. He was the lead attorney in the acquisition of GFA Brands, Inc. by the Company in May 2007. He played a key role in the development of Miller Park in Milwaukee. Mr. Matar attended Marquette University where he received his bachelor’s and doctor of jurisprudence degrees.

Peter Dray, 55, has been the company’s executive vice president of operations and product development since May 2007. Mr. Dray is a 19-year veteran of GFA Brands, has more than 30 years of food manufacturing, sales and marketing experience and 25 years as a senior operations executive. Dray has played a central role in building both the Weight Watchers® and Smart Balance® brands. He developed, perfected, and now manages the outsourced manufacturing model that is the cornerstone of the Smart Balance virtual business. Mr. Dray is a graduate of New York University, where he earned his bachelor’s degree in food & nutrition. He also received his AAS in food management from the State University of New York at Delhi.

Terrence Schulke, 56, has been our executive vice president and chief customer officer since June 2007 and has recently been appointed executive vice president/general manager, commercial operations. Mr. Schulke joined Smart Balance from Schick-Wilkinson Sword, where he most recently served as vice president North America. During Mr. Schulke’s five-year tenure there, Schick-Wilkinson Sword outpaced competition in share and profit growth in the highly innovative and hotly contested blades and razor category and posted a 9 percent annual revenue and 22 percent operating income gains. His extensive food industry experience was developed as senior vice president of U.S. Sales at Tropicana Products, a division of PEPSICO. Mr. Schulke is a graduate of State University of New York, College at Buffalo, where he earned his bachelor’s degree in communications.

Gregory Venner, 54, has been our executive vice president and chief consumer officer since June 2007. He is responsible for consumer marketing, advertising, public relations, promotion, and market research for all Smart Balance’s current brands and new products. Venner’s extensive background in the food industry comes from his various management positions at Tropicana Products, ConAgra’s Healthy Choice®, Lance and Nestle. He joined Smart Balance from Mead Johnson Nutritionals, a division of Bristol-Myers Squibb, where he most recently served as senior vice president and general manager, North America. During his six-year tenure there, he helped reverse the company’s decline through innovative initiatives in the infant formula category. Specifically, he was responsible for the growth of Enfamil’s revenue, profitability and market share from 34 to 44 percent. His efforts helped establish a category leadership position for Mead Johnson Nutritionals that they have held for the past four years that is an impressive 14 share points ahead of their competitors. Mr. Venner graduated from Lehigh University, Bethlehem, Pennsylvania, where he earned a master’s of business administration. Mr. Venner is also a graduate of Rider College in Lawrenceville, New Jersey, where he received a bachelor’s degree in marketing.

Christine Sacco, 35, has served as vice president and operations controller of the Company since January 2008. Prior to joining the Company, Ms. Sacco served as vice president, treasurer and director of financial reporting of Alpharma Inc., where she worked from October 2002 until January 2008. Alpharma Inc., which was a public company and is now a wholly-owned subsidiary of King Pharmaceuticals, Inc., provides a broad range of pharmaceutical and nutritional products for food producing animals. Ms. Sacco is a certified public accountant and holds a bachelor’s degree in accounting from St. Thomas Aquinas College.

Robert J. Gillespie, 67, has been a member of our board of directors since September 2005. Mr. Gillespie is currently the principal of Westmount Investments, LLC, a privately held investment company. In February 2006, Mr. Gillespie joined the board of directors of Kristian Regale, a private company engaged in the sparkling juice business. Mr. Gillespie also serves on the board of directors of SRV Bank and the Delbarton School. He formerly served on the boards of directors of Best Foods, FM Global Insurance Company, Advanced H2O Inc., Tiger 21, The Valley Hospital, Dominex, LLC and CSC Consumer Products, and he is the former chairman of the Sarah W. Stedman Center for Nutritional Studies at Duke University. Mr. Gillespie holds a Bachelors degree in Science from St. Mary’s University of Halifax, Canada; a Bachelors

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degree in mechanical engineering from Dalhousie University of Halifax, Canada; and a Master of Science degree in industrial administration from Purdue University.

William E. Hooper, 73, has been a member of our board of directors since June 2005 and has served as our marketing coordinator since May 2007. Mr. Hooper has been a senior executive in marketing and consumer communication companies for the past 40 years. As such, Mr. Hooper has had extensive experience in developing consumer marketing and advertising programs for major national consumer food companies. Mr. Hooper was an executive for 26 years, from 1964 to 1990, including serving as President and a director of WB Donor, one of the largest national independent advertising agencies in the United States. Mr. Hooper was principal of Hooper Consulting LLC, a marketing and communications consultancy working with large national advertisers and marketing companies heavily directed to the consumer food business, from 1990 to 2000. Clients included Florida Department of Citrus, Tropicana, ConAgra, Mead Johnson, Nabisco, Celestial Seasonings, and White Wave Foods. From 2000 to September 2005, Mr. Hooper served as chairman of Trahan, Burden & Charles Inc., or TBC, a mid-sized national advertising agency headquartered in New York and Baltimore that provides creative, public relations, media planning and buying, and direct marketing services to a broad spectrum of corporate customers. Among TBC’s clientele was Dow Jones & Company, Nextel Communications, Vanguard Securities, Yellow Book Directories, Gaylord Hotels, The Mills Corporation, the National Security Agency and Blue Cross and Blue Shield. Mr. Hooper holds a B.S. degree in business administration from Loyola College of Maryland and has served on the board of trustees of the Loyola College of Maryland, the National Aquarium and the St. Joseph’s Medical Center in Baltimore. He was also a member of the U.S. Army Reserve Military Police Corp. from 1958 to 1966.

Gerald J. “Bud” Laber, 67, has been a member of our board of directors since June 2005. Mr. Laber has been a private investor since 2000, when he retired after 33 years of service with Arthur Andersen. Mr. Laber was an audit partner with Arthur Andersen from 1980 to 2000 and, with the exception of a leave for military service from 1966 through 1968, was employed by Arthur Andersen from 1965 until retiring in 2000. Mr. Laber is a certified public accountant and is a member of the American Institute of Certified Public Accountants and the Colorado Society of Certified Public Accountants. Mr. Laber holds the National Association of Corporate Directors Certificate of Corporate Education. He is also a member of the advisory board of the Colorado Chapter of National Association of Corporate Directors. Currently, Mr. Laber is: (i) on the board of directors and chair of the audit committee of Scott’s Liquid Gold since February 2004, (ii) on the board of directors, chair of the audit committee and a member of the compensation committee of Allied Motion Technologies since November 2010 and (iii) president of The Catholic Foundation of Northern Colorado since January 2008. Formerly, Mr. Laber (i) served as a member of the board of directors and chair of the audit committee of Healthetech, Inc. from July 2003 to May 2006; (ii) served on the board of directors and as chair of the audit committee of Spectralink Corporation from April 2004 to March 2007; and (iii) served on the board of directors and audit committee of Applied Films Corporation from July 2004 to July 2007 (chair from October 2005 to July 2007). Each of these companies is, or was, publicly traded. Mr. Laber holds a B.S.B.A. degree with a major in accountancy from the University of South Dakota and is a member of the board of trustees of the University of South Dakota Foundation.

James B. Leighton, 54, has been a member of our board of directors since August 2007. From 2006 to 2009, Mr. Leighton served as the senior vice president of operations and supply chain and is currently president of foodservice and international businesses of Perdue Farms Incorporated, a large, privately-held poultry company. From 2002 to 2006, Mr. Leighton served as the senior vice president of operations of Conagra Foods, Inc., one of the largest food companies in the United States. Mr. Leighton holds a B.S.B.A. degree in business administration and industrial relations from the University of Iowa and a Masters degree in Business Administration from Keller Graduate School of Management. Mr. Leighton serves on the non-profit Foundation and Corporation Boards for Atlantic General Hospital.

James E. Lewis, 61, has been a director of Smart Balance since inception in May 2005 and served as our vice chairman until May 14, 2007. Since 1991, Mr. Lewis has served as chairman and chief executive of Jeltex Holdings, LLC. Currently, Mr. Lewis is the sole officer and director of Jeltex. The Jeltex group has been comprised of significant or controlling ownership stakes acquired, held and sold for Mr. Lewis’ personal account in a vertically integrated group of private food businesses engaged in vegetable farming, fresh produce distribution, manufacture of canned foods and retail grocery distribution. Today, Mr. Lewis and his

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spouse hold a controlling interest in Centennial Specialty Foods Corporation, a public company engaged in the manufacture and marketing of specialty branded, quality ethnic Southwestern canned sauces and food products. Mr. Lewis is a certified public accountant and is a member of the American Institute of Certified Public Accountants and the Colorado Society of Certified Public Accountants. He holds a BBA degree in accounting from Texas Tech University.

Robert F. McCarthy, 61, has been a member of our board of directors since June 2005. Since 2004, Mr. McCarthy has been active in advising several consumer packaged goods companies and managing his personal investments. From 1998 to 2004, Mr. McCarthy co-led the roll-up of the consumer packaged goods food sales agency business that resulted in the creation of a national agency, Acosta Sales and Marketing Company. From 1998 to 2004, Mr. McCarthy served as president of the Acosta Grocery Channel, the grocery division of Acosta Sales and Marketing. Mr. McCarthy holds a BBA degree in marketing from the University of Notre Dame and a Master of Management degree from the Kellogg School of Business at Northwestern University.

Michael R. O’Brien, 66, was a member of our board of directors from June 2005 to November 2005 and was a senior advisor to us until August 2007, when he was appointed to our board of directors. Mr. O’Brien co-founded Catalina Marketing Corporation, a direct marketing company, in 1983, and served as Catalina’s president until 1989 and as its chairman of the board and chief executive officer until 1992. Since 1992, Mr. O’Brien has been chairman emeritus of, and a consultant to, Catalina. Catalina was founded to develop and distribute behavior-based communications for consumer packaged goods and pharmaceutical products manufacturers, marketers and retailers. Currently, Mr. O’Brien serves on Catalina’s board of directors. Mr. O’Brien has previously served on the boards of directors of MemberWorks and Imagitas, Inc. MemberWorks designs and markets innovative membership programs that offer members access to significant savings at national brand name service providers and merchants, while membership organizations receive royalties in exchange for providing MemberWorks with members. Imagitas is a targeted direct mail marketing company serving Federal and state governmental agencies such as the U.S. Postal Service and corporate clients such as Home Depot and Ford. Imagitas was sold to Pitney Bowes Inc. in 2005. Mr. O’Brien attended the University of Kansas from 1961 – 1965.

The Company has adopted a code of business conduct and ethics applicable to the Company’s officers (including the Company’s principal executive officer and principal financial officer) and employees, known as the Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on the Company’s website. In the event that we amend or waive any of the provisions of the code of business conduct and ethics applicable to our principal executive officer or principal financial officer that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, we intend to disclose the same on the Company’s website at www.smartbalance.com.

Other information concerning directors, executive officers and corporate governance is incorporated by reference pursuant to Instruction G of Form 10-K from our definitive proxy statement for the 2011 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before May 2, 2011.

Item 11. Executive Compensation

Information concerning executive compensation is incorporated by reference pursuant to Instruction G of Form 10-K from our definitive proxy statement for the 2011 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before May 2, 2011.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning security ownership of certain beneficial owners and management is incorporated by reference pursuant to Instruction G of Form 10-K from our definitive proxy statement for the 2011 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before May 2, 2011.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

Information concerning certain relationships and related transactions is incorporated by reference pursuant to Instruction G of Form 10-K from our definitive proxy statement for the 2011 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before May 2, 2011.

Item 14. Principal Accounting Fees and Services

Information concerning principal accountant fees and services is incorporated by reference pursuant to Instruction G of Form 10-K from our definitive proxy statement for the 2011 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before May 2, 2011.

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PART IV

Item 15. Exhibits; Financial Statement Schedules

(a) Financial Statements and Financial Statement Schedules. Smart Balance’s 2010 financial statements, together with the report of Ehrhardt Keefe Steiner & Hottman PC, are listed on the index preceding the financial statements at the end of this report. The schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.

(b) Exhibits.

Exhibit No.		Description
3.1		Restated Certificate of Incorporation of Smart Balance, Inc.(1)
3.2		Bylaws of Smart Balance, Inc. (f/k/a Boulder Specialty Brands, Inc.)(2)
4		Specimen Common Stock Certificate of Smart Balance, Inc.(3)
10.1		Credit Agreement, dated as of November 4, 2009, by and among GFA Brands, Inc., as borrower, Smart Balance, Inc., as parent, the Guarantors from time to time parties thereto, the Lenders from time to time parties thereto, and Bank of Montreal, as administrative agent(4)
10.2		Letter of Understanding by and between GFA Brands, Inc. and Kagome Creative Foods, Inc., dated as of March 5, 2010.(11)
10.3		License Agreement, dated as of June 18, 1996, by and between Brandeis University and GFA Brands, Inc.(5)
10.4		Manufacturing Agreement for Margarine and Spreads, dated March 2, 2007 by and between GFA Brands, Inc. and Ventura Foods, LLC(6)
10.5		Second Amended and Restated Stock and Award Plan(7)
10.6		Form of Stock Option Award Agreement(8)
10.7		Amended Form of Stock Option Agreement(9)
10.8		Form of Change of Control Agreement
10.9		Financial Performance Incentive Program
18		Preferability Letter from Independent Public Accountants(10)
21		Subsidiaries
23		Consent of Ehrhardt Keefe Steiner & Hottman PC
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

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In reviewing the agreements included as exhibit to this report, please remember that 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 or the other parties to the agreements. Some of the agreements may contain representations and warranties by the parties to the applicable agreement. To the extent that any agreement contains representations and warranties, such representations and warranties have been made solely for the benefit of the other parties to the applicable contract.

Moreover, any representations and warranties in the agreements attached to this report as exhibits (1) 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, (2) may 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, (3) may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors, and (4) 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.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on this 24^th day of February, 2011.

		SMART BALANCE, INC.
		By: /s/ Stephen B. Hughes Stephen B. Hughes Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities and on the date indicated.

Name		Title		Date
/s/ Stephen B. Hughes Stephen B. Hughes		Chairman and Chief Executive Officer, Director (Principal Executive Officer)		February 24, 2011
/s/ Alan S. Gever Alan S. Gever		Executive Vice President and Chief Financial Officer (Principal Financial Officer)		February 24, 2011
/s/ Christine Sacco Christine Sacco		Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)		February 24, 2011
/s/ Robert J. Gillespie Robert J. Gillespie		Director		February 24, 2011
/s/ William E. Hooper William E. Hooper		Director		February 24, 2011
/s/ Gerald J. Laber Gerald J. Laber		Director		February 24, 2011
/s/ James B. Leighton James B. Leighton		Director		February 24, 2011
/s/ James E. Lewis James E. Lewis		Director		February 24, 2011
/s/ Robert F. McCarthy Robert F. McCarthy		Director		February 24, 2011
/s/ Michael R. O’Brien Michael R. O’Brien		Director		February 24, 2011

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets as of December 31, 2010 and 2009			F-3
Consolidated Statement of Operations for the years ended December 31, 2010, 2009 and 2008			F-4
Consolidated Statement of Cash Flows for the years ended December 31, 2010, 2009 and 2008			F-5
Statement of Changes in Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008			F-7
Notes to Consolidated Financial Statements			F-8

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Smart Balance, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheets of Smart Balance, Inc. and Subsidiary (“the Company”) as of December 31, 2010 and 2009, and the related statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. We also have audited the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

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

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

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Smart Balance, Inc. and Subsidiary as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Smart Balance, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ Ehrhardt Keefe Steiner & Hottman PC

Denver, Colorado
February 24, 2011

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SMART BALANCE, INC. AND SUBSIDIARY
  
Consolidated Balance Sheets
(in thousands, except share data)

		December 31, 2010				December 31, 2009
Assets
Current assets:
Cash and cash equivalents		$	3,840			$	7,538
Accounts receivable, net of allowance of: $261 (2010) and $345 (2009)			12,960				11,970
Accounts receivable – other			755				650
Income taxes receivable			—				1,131
Inventories			7,949				5,812
Prepaid taxes			—				405
Prepaid expenses and other assets			2,651				3,392
Deferred tax asset			2,320				462
Total current assets			30,475				31,360
Property and equipment, net			5,378				4,634
Other assets:
Goodwill			248,912				374,886
Intangible assets, net			150,017				151,089
Deferred costs, net			1,467				2,111
Other assets			2,154				985
Total other assets			402,550				529,071
Total assets		$	438,403			$	565,065
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable and accrued expenses		$	23,481			$	22,626
Income taxes payable			457				—
Current portion of long term debt			5,000				5,500
Total current liabilities			28,938				28,126
Long-term debt			44,000				51,143
Deferred tax liability			44,165				43,824
Contract payable			5,500				—
Other liabilities			2,301				965
Total liabilities			124,904				124,058
Commitment and contingencies
Stockholders’ equity
Convertible Preferred stock, $.0001 par value, 50,000,000 shares authorized;			—				—
Common stock, $.0001 par value, 250,000,000 shares authorized; 62,630,683 (2010 and 2009) issued and 59,999,832 and 62,630,683 outstanding in 2010 and 2009, respectively			6				6
Additional paid in capital			534,568				523,467
Retained deficit			(210,627	)			(82,466	)
Treasury stock at cost (2010 – 2,630,851 shares)			(10,448	)			—
Total stockholders’ equity			313,499				441,007
Total liabilities and stockholders’ equity		$	438,403			$	565,065

 
 
See accompanying notes to the consolidated financial statements

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SMART BALANCE, INC. AND SUBSIDIARY
  
Consolidated Statements of Operations
(in thousands except per share data)

		Year Ended December 31, 2010				Year Ended December 31, 2009				Year Ended December 31, 2008
Net sales		$	241,967			$	239,503			$	221,872
Cost of goods sold			125,131				123,974				126,904
Gross profit			116,836				115,529				94,968
Operating expenses:
Marketing			40,155				37,383				33,034
Selling			19,769				17,580				16,662
General and administrative			44,403				48,756				39,578
Goodwill impairment			130,000				—				—
Total operating expenses			234,327				103,719				89,274
Operating (loss) income			(117,491	)			11,810				5,694
Other income (expense):
Interest income			—				3				292
Interest expense			(3,420	)			(3,653	)			(9,049	)
Loss on derivative liability			—				(1,045	)			(5,132	)
Other expense, net			(444	)			(2,291	)			(2,336	)
Total other income (expense)			(3,864	)			(6,986	)			(16,225	)
(Loss) profit before income taxes			(121,355	)			4,824				(10,531	)
Provision (benefit) for income taxes			6,806				1,358				(3,563	)
Net (loss) income		$	(128,161	)		$	3,466			$	(6,968	)
Net (loss) income available for common shares		$	(128,161	)		$	3,466			$	(6,968	)
Net (loss) income per share – basic and diluted		$	(2.08	)		$	0.06			$	(0.11	)
Weighted average shares outstanding:
Basic			61,665,824				62,630,683				62,523,742
Diluted			61,665,824				62,703,434				62,523,742

 
 
See accompanying notes to the consolidated financial statements

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SMART BALANCE, INC. AND SUBSIDIARY
  
Consolidated Statements of Cash Flows
(in thousands)

		Year Ended December 31, 2010				Year Ended December 31, 2009				Year Ended December 31, 2008
Cash flows from operating activities
Net (loss) income		$	(128,161	)		$	3,466			$	(6,968	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of intangibles			5,227				4,905				4,497
Amortization of deferred financing costs			665				1,820				1,782
Deferred income taxes			(1,518	)			(2,256	)			(6,596	)
Stock based compensation			11,101				16,090				14,896
Impairment loss			130,000				—				—
(Decrease) increase in derivative liabilities			—				(5,132	)			5,132
Changes in assets and liabilities:
Accounts receivable			(990	)			2,313				(2,550	)
Income tax receivable			1,131				(1,131	)			—
Inventories			(2,108	)			3,510				(2,120	)
Prepaid expenses and other current assets			1,041				(2,027	)			6,353
Accounts payable and accrued expenses			1,480				(3,354	)			4,642
Net cash provided by operating activities			17,868				18,204				19,068
Cash flows from investing activities
Acquisition of assets			(2,000	)			—				—
Purchase of property and equipment			(1,348	)			(1,172	)			(2,920	)
Patent defense costs			(106	)			—				—
Capitalization of legal settlement			—				68				350
Net cash (used in) investing activities			(3,454	)			(1,104	)			(2,570	)
Cash flows from financing activities
Proceeds from issuance of long term debt			9,000				60,643				—
Repayment of debt			(16,643	)			(73,504	)			(50,000	)
Payments for offering and loan costs			(21	)			(2,193	)			—
Purchase of treasury stock			(10,448	)			—				—
Proceeds from stock-related legal settlement			—				—				1,345
Net cash (used in) financing activities			(18,112	)			(15,054	)			(48,655	)
Net (decrease) increase in cash for the period			(3,698	)			2,046				(32,157	)
Cash – Beginning of period			7,538				5,492				37,649
Cash – End of period		$	3,840			$	7,538			$	5,492

 
 
See accompanying notes to the consolidated financial statements

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		Year Ended December 31, 2010				Year Ended December 31, 2009				Year Ended December 31, 2008
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes, net of refunds		$	6,245			$	5,201			$	(2,032	)
Interest		$	3,132			$	8,915			$	8,112

Summary of non-cash activity:

In connection with an acquisition, the Company acquired certain business assets for a purchase price of $7,500, of which $2,000 was paid upon closing. The remaining $5,500 is classified as a contract payable and is included within total liabilities. The related purchase price allocation is as follows:

Inventory		$	28
Property and equipment			545
Total net tangible assets			573
Identifiable intangible assets:
Subscription database			2,900
Goodwill			4,027
Total purchase price allocation		$	7,500

 
 
See accompanying notes to the consolidated financial statements

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SMART BALANCE, INC. AND SUBSIDIARY
  
Statement of Changes in Stockholders’ Equity
For the years ended December 31, 2010, 2009 and 2008
(in thousands except shares)

		Common Stock								Treasury Stock								Additional Paid in Capital				Retained Deficit				Stockholders’ Equity
		Shares				Amount				Shares				Amount
Balance at December 31, 2008			62,630,683			$	6				—			$	—			$	507,377			$	(85,932	)		$	421,451
Stock compensation expense			—				—				—				—				16,090				—				16,090
Net income			—				—				—				—				—				3,466				3,466
Balance at December 31, 2009			62,630,683				6				—				—				523,467				(82,466	)			441,007
Stock compensation expense			—				—				—				—				11,101				—				11,101
Purchase of treasury stock			(2,630,851	)							2,630,851				(10,448	)			—				—				(10,448	)
Net loss			—				—				—				—				—				(128,161	)			(128,161	)
Balance at December 31, 2010			59,999,832			$	6				2,630,851				(10,448	)		$	534,568			$	(210,627	)		$	313,499

 
 
See accompanying notes to the consolidated financial statements

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

1.  Basis of Presentation

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.

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. At December 31, 2010 and 2009, the Company did not have any cash equivalents.

Accounts receivable

Accounts receivable are carried at original invoice amount less allowances for cash discounts and doubtful receivables based on a review of all outstanding amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Accounts receivable are written off when deemed uncollectible. Bad debt expense was not material to the Company for the years ended December 31, 2010 and 2009. Recoveries of receivables previously written off are recorded when received. The Company does not charge interest on past due receivables.

Inventories

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

Property and equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets ranging from 5 to 10 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the improvement. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance of these assets may not be recoverable. When deemed necessary, the Company completes this evaluation by comparing the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of amortizable long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their estimated fair values.

Goodwill

Goodwill is tested annually for impairment or more frequently if events or changes in circumstances indicate that impairment may have occurred. The impairment analysis for goodwill 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 December 31, 2010, the Company reviewed its assessment of fair value and made a determination that there was no further impairment.

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

2.  Summary of Significant Accounting Policies  – (continued)

Intangible assets

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

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

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 and determined that 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 will be expensed as incurred. Recovery of legal expenses as part of a settlement agreement will be recorded as a reduction of capitalized legal fees if previously capitalized with any excess recorded as income.

Shipping and handling costs

Shipping and handling costs to external customers for 2010, 2009 and 2008 were approximately $15,900, $13,000 and $12,800 respectively, and were included in selling expense. Internal shipping and handling costs are capitalized within inventory and recognized within costs of goods sold in the consolidated statements of operations when related products are sold to external customers.

Deferred compensation plan

The Company implemented a deferred compensation plan, effective January 1, 2008, which is funded by whole life insurance in which employee participants elect to defer a certain portion of their base salary and or bonus. The participant’s cash deferrals earn a return based on the participant’s investment in several investment options.

During 2010, the plan assets were less than the liability by $183 due to slightly lower returns on plan assets and the up-front cost of life insurance and thus compensation expense was increased by this amount. The total of participant deferrals, which is reflected in long-term employee related liabilities and other, was $1,196 and $966 at December 31, 2010 and 2009, respectively.

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

2.  Summary of Significant Accounting Policies  – (continued)

Deferred costs

Deferred loan costs associated with the secured debt financing are being amortized over the life of the debt, using the effective interest method.

Revenue recognition

Revenue is recognized when the earnings process is complete and the risks and rewards of ownership have transferred to the customer, which is generally considered to have occurred upon the receipt of product by the customer. The earnings process is complete once the customer order has been placed and approved and the product shipped has been received by the customer. Product is sold to customers on credit terms established on an individual basis. The credit factors used include historical performance, current economic conditions and the nature and volume of the product.

The Company offers its customers 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. The Company sells its products to customers without a right of return and is not obligated to accept any returns.

Earnings (loss) per share of common stock

Basic earnings (loss) per share is computed by dividing net income or loss applicable to common stockholders by the weighted-average shares of common stock outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average shares outstanding adjusted for any additional common shares that would have been outstanding if all of the potential dilutive common shares had been issued. Potential dilutive common shares outstanding would primarily include stock options. The following table summarizes stock options not included in the computation of diluted earnings per share (EPS):

		Year Ended December 31, 2010				Year Ended December 31, 2009				Year Ended December 31, 2008
Stock options excluded due to option price being greater than market value			11,114,125				11,881,000				11,327,000
Stock options excluded due to anti-dilution			392,500				370,530				717,500
Founding director warrants excluded due to anti-dilution			—				—				1,000,000

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^TM and Nucoa®, is by far the most developed product segment and accounted for approximately 72% of sales in 2010 and 75% of 2009 sales.

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

2.  Summary of Significant Accounting Policies  – (continued)

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 December 31, 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 December 31, 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:
Deferred compensation		$	1,013			$	—			$	1,013			$	—
Derivative assets			287				—				287				—
Total assets		$	1,300			$	—			$	1,300			$	—
Liabilities:
Deferred compensation		$	1,196			$	—			$	1,196			$	—

		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:
Deferred compensation			857				—				857				—
Derivative assets			155				—				155				—
Total assets		$	1,012			$	—			$	1,012			$	—
Liabilities:
Deferred compensation		$	966			$	—			$	966			$	—

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

2.  Summary of Significant Accounting Policies  – (continued)

Research and development

Research and development expenses are charged to operations when incurred and amounted to $600 for 2010, $928 for 2009 and $256 for 2008.

Derivative instruments

The primary risks managed by derivative instruments are exposure to changes in commodity prices. The Company accounts for its derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging”, which requires the recognition of all derivative instruments as either assets or liabilities in the Consolidated Balance Sheet at fair value.

On the date on which the Company enters into a derivative, it must determine whether or not to designate the derivative as a hedge.

Income taxes

Deferred income taxes are provided for the differences between the basis of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. As of December 31, 2010, there was a valuation allowance of $160 recorded for certain state tax purposes, the realization of which is not determined to be “more likely than not”. For the year ended December 31, 2010, the effective tax rate was lower than the statutory rate because of a goodwill impairment that derived no tax benefit. For the year ended December 31, 2009, the effective tax rate was lower than the statutory rate because of a one-time benefit from a state tax resolution. For the year ended December 31, 2008, the effective tax rate was higher than the statutory tax rate primarily due to the effect of the change in derivative liabilities since such losses are not deductible for income tax purposes.

The Company records a liability for all tax positions if it is not “more likely than not” that the position is sustainable based on its technical merits.

Advertising

Advertising costs are charged to operations (selling, general and administrative expenses) when incurred and amounted to $25,868 for 2010, $20,098 for 2009 and $21,519 for 2008. The Company expenses the cost of production for commercials when the commercial is first run. As of December 31, 2010 and 2009, $836 and $2,067, respectively, were recorded as prepaid as these commercials had not yet run.

Share-based compensation expense

The Company records share-based compensation in accordance with ASC Topic 718, “Compensation —  Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. Employee share-based compensation expense was $11,101 for 2010, $16,090 for 2009 and $14,896 for 2008.

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.

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

2.  Summary of Significant Accounting Policies  – (continued)

Concentration of credit risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short term investments and trade receivables. The Company maintains the majority of its cash and cash equivalents in the form of demand deposits with financial institutions that management believes are creditworthy. At December 31, 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 for 2010. The aggregate accounts receivable from this customer amounted to approximately 21% of the accounts receivable balance outstanding at December 31, 2010. The Company also has one product category, “spreads” which accounted for 72% of total revenue for the year ended December 31, 2010. Approximately 74% of its revenues for 2010 came from products utilizing licenses from Brandeis University.

Recently issued accounting pronouncements

In January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements” (ASU 2010-06), to require new disclosures related to transfers into and out of Levels 1 and 2 of the fair value hierarchy and additional disclosure requirements related to Level 3 measurements. The guidance also clarifies existing fair value measurement disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The additional disclosure requirements are effective for the first reporting period beginning after December 15, 2009, except for the additional disclosure requirements related to Level 3 measurements, which are effective for fiscal years beginning after December 15, 2010. The Company adopted the fair value disclosures guidance on January 1, 2010. The adoption of the additional requirements has not had a significant impact on the Company’s financial statements.

3.  Property and Equipment

Property and equipment consist of the following:

		December 31, 2010				December 31, 2009
Software development costs		$	5,231			$	3,857
Equipment			1,244				771
Furniture and fixtures			1,021				976
Leasehold improvements			342				342
Gross assets			7,838				5,946
Less: Accumulated depreciation			(2,460	)			(1,312	)
Property and equipment, net		$	5,378			$	4,634

Depreciation expense for the years ended December 31, 2010 and December 31, 2009 were $1,149 and $839 respectively.

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

4.  Intangible Assets

The following is a summary of intangible assets and goodwill as of December 31, 2010 and 2009:

		Gross Carrying Amount				Accumulated Amortization				Impairment				Adjustments				Net Carrying Value
Patent technology		$	40,000			$	(14,477	)		$	—			$	38			$	25,561
Supply relationship			1,000				(246	)			—				—				754
Trademarks			121,152				—				—				(350	)			120,802
Subscription database			2,900				—				—				—				2,900
Goodwill			378,912				—				(130,000	)			—				248,912
December 31, 2010		$	543,964			$	(14,723	)		$	(130,000	)		$	(312	)		$	398,929

		Gross Carrying Amount				Accumulated Amortization				Impairment				Adjustments				Net Carrying Value
Patent technology		$	40,000			$	(10,465	)		$	—			$	(68	)		$	29,467
Supply relationship			1,000				(180	)			—				—				820
Trademarks			121,152				—				—				(350	)			120,802
Goodwill			374,886				—				—				—				374,886
December 31, 2009		$	537,038			$	(10,645	)		$	—			$	(418	)		$	525,975

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 costs associated with the Company’s licensed patents from Brandeis University. The subscription database recorded in connection with a 2010 acquisition will be amortized on a straight-line basis over a period of 5 years. Amortization expense was $4,078 for the twelve months ended December 31, 2010. At June 30, 2010, the Company recognized an impairment loss of $130,000 (see footnote 5 for further details).

Based on the Company’s amortizable intangible assets as of December 31, 2010, amortization expense is expected to be approximately $4,700 for each of the next five fiscal years.

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

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

5.  Goodwill Impairment  – (continued)

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 primarily using a discounted cash flow (income) approach. Under the income approach, the Company also considered a variation of the market approach which was based on the Company’s market capitalization. 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 December 31, 2010, the Company made a determination that there was no further impairment. 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.

In conjunction with performing an impairment test of goodwill in connection with the preparation of the December 31, 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.

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

6.  Restructuring and Other Actions

In connection with the restructuring of the Company to improve future operations, severance charges associated with workforce reductions and other facility closure and exit costs were recorded during 2010. For the year ended December 31, 2010, the consolidated statement of operations includes restructuring charges of $4,133 which are comprised of $3,732 of severance benefits and $401 for abandoned leased office space costs. These costs were incurred during the second and fourth quarters and are included within operating expenses and classified as general and administrative charges on the consolidated income statement.

The consolidated balance sheet as of December 31, 2010 includes accruals relating to the restructuring program of $3,266. The following table sets forth the activity affecting the accrual during the year ended December 31, 2010:

		Severance				Other Closure and Exit Costs				Total
Balance as of December 31, 2009		$	—			$	—			$	—
Charges incurred			3,848				401				4,249
Cash payments			(807	)			(60	)			(867	)
Adjustments			(116	)			—				(116	)
Balance as of December 31, 2010		$	2,925			$	341			$	3,266

Adjustments recorded during 2010 relate to the resolution of contractual conditions related to severance agreements and are included within the consolidated statement of operations.

The current portion of liabilities for accrued restructuring costs as of December 31, 2010 is $2,166 and is reflected in accrued expenses and the remaining liability of $1,100 is reflected in other liabilities. The liabilities for other closure and exit costs primarily relate to contractually required lease obligations and other contractually committed costs associated with abandoned office space. The Company expects to pay the remaining restructuring obligations within 3 years, with the majority of the obligations being paid within 1.5 years.

7.  Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

		December 31, 2010				December 31, 2009
Accounts payable		$	11,680			$	8,374
Accrued trade spend			3,402				4,068
Accrued marketing			1,455				4,221
Accrued restructuring			2,166				—
Accrued other			4,778				5,963
Total		$	23,481			$	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

TABLE OF CONTENTS

SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

8.  Long Term Debt  – (continued)

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”). As of September 30, 2009, outstanding debt under the Prior Facilities totaled approximately $65 million. Proceeds of the Credit Agreement were used to repay the debt outstanding under the Prior Facilities and may also be 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%.

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:

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 December 31, 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

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

8.  Long Term Debt  – (continued)

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. During the fourth quarter of 2010, the Company paid $9,000 under the Revolver bringing the total debt outstanding to $49,000 as of December 31, 2010.

The interest rate under the Credit Agreement at December 31, 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. As of December 31, 2010, the Company had a ratio of less than 2.0 and thus no prepayment was required.

The Company has recorded a contract payable of $5,500 representing the unpaid balance on the acquisition. This amount will be paid in annual installments over the next four years, together with related interest.

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

2011		$	5,000
2012			6,875
2013			39,875
2014			1,375
2015			1,375
Total		$	54,500

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 December 31, 2010, the Company had granted a total of 13,100,000 stock options under the Stock and Awards Plan, of which 2,968,375 were forfeited. This resulted in 10,131,625 shares issued and outstanding at December 31, 2010.

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.

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

9.  Stock-Based Compensation  – (continued)

The Company primarily has granted two types of stock options, traditional service-based with a four year graded (25% vest each year) vesting and performance-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 equal to the fair market value of the Company’s stock at the dates of grant and primarily consist of either service-based options or performance-based options or 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 for performance-based stock options.

		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			1,740,000				6.45				9.46
Options exercised			—				—				—
Options canceled/forfeited			(2,489,375	)			9.37				7.37
Shares at December 31, 2010			11,506,625			$	8.90				7.21
Shares exercisable at December 31, 2010			3,812,000			$	9.35				6.74

The weighted-average grant-date fair values of options granted during 2010, 2009 and 2008 were $3.45, $3.20 and $4.17, respectively.

The following summarizes nonvested share activity for 2010:

		Shares				Grant-Date Fair Value
Nonvested at beginning of year			9,433,625			$	4.75
Granted			1,740,000				3.45
Vested			(1,449,000	)			4.36
Forfeited			(2,030,000	)			4.83
Non-vested at end of year			7,694,625			$	4.50

As of December 31, 2010, the total compensation cost related to nonvested awards not yet recognized was $10.0 million with a weighted average period of 1.72 years over which it is expected to be recognized.

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.

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

9.  Stock-Based Compensation  – (continued)

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

		Year ended December 31, 2010				Year ended December 31, 2009				Year ended December 31, 2008
Service period-based		$	6,300			$	7,577			$	6,856
Market price-based $16.75			1,739				4,885				4,617
Market price-based $20.25			3,062				3,628				3,423
Total		$	11,101			$	16,090			$	14,896

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% – 52.08%. The cost of the service-based stock options is being amortized over a four year estimated vesting period. In the case of the market price-based stock options, the Company used the Monte Carlo valuation model and the same assumptions noted above. The Company recognizes compensation expense for the market price-based options over the estimated vesting period, which has been determined to be 2.75 – 4.82 years and 3.68 – 5.53 years for the $16.75 and $20.25 awards, respectively. (See footnote 17 for details related to an employee stock option exchange program.)

10.  Stock Repurchase Activities

In December 2009, the Company’s Board of Directors (the “Board”) approved a stock repurchase program which authorized the Company to repurchase up to $25,000 of its common stock over a two-year period. During 2010, the Company repurchased approximately 2.6 million shares of its common stock at an average price of $4.06 per share for an aggregate purchase price of $10,448. As of December 31, 2010, the stock repurchase program had remaining aggregate authorized funds of $14,552. The stock repurchase program will expire on December 31, 2011 unless extended by the Board.

11.  Interest Rate Derivatives

In conjunction with the original variable-rate debt arrangement, which was terminated on November 4, 2009, the Company entered into notional $80,000 of interest rate swap agreement which was designed to provide a constant interest rate on the variable rate debt. The swap agreement was cancelled 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 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 in 2010 were approximately $977, for 2009 approximately $991 for 2008 were approximately $943.

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SMART BALANCE, INC. AND SUBSIDIARY
  
Notes to Consolidated Financial Statements
(in thousands except shares and per share)

13.  Income Taxes

The components of the Company’s income tax provision (benefit) for the years ended December 31, 2010, 2009 and 2008 are of the following:

		Year ended December 31, 2010				Year ended December 31, 2009				Year ended December 31, 2008
Income tax provision (benefit):
Current taxes:
Federal		$	6,963			$	3,540			$	2,474
State			1,361				74				559
			8,324				3,614				3,033
Deferred taxes:
Federal			(1,880	)		$	(1,909	)		$	(6,026	)
State			362				(347	)			(570	)
			(1,518	)			(2,256	)			(6,596	)
Provision (benefit) for income taxes		$	6,806			$	1,358			$	(3,563	)

The reconciliation of the provision for income taxes based on the U.S. federal statutory income tax rate to the Company’s provision (benefit) for income taxes was as follows:

		Year ended December 31, 2010				Year ended December 31, 2009				Year ended December 31, 2008
Expected federal statutory taxes at 35%		$	(42,474	)		$	1,688			$	(3,686	)
Stock option forfeitures			3,224				—				—
Goodwill impairment			45,500				—				—
Valuation allowance			45				115				—
State refund benefit, net			976				(376	)			—
Other			(465	)			(69	)			123
Provision (benefit) for income taxes		$	6,806			$	1,358			$	(3,563	)