10-K 1 bdbd-2014x10k.htm 10-K BDBD-2014-10K
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, 2014
Commission File Number 001-33595
 
 
 
 
 
BOULDER BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-2949397
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1600 Pearl Street – Suite 300
Boulder, Colorado
 
80302
(Address of principal executive offices)
 
(Zip Code)
(303) 652-0521
(Issuer’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.0001 par value
 
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
(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 ý No o
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 ý
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 ý 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 ý 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 x
 
Accelerated filer o
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 ý
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, 2014, the last business day of the registrant's most recently completed second fiscal quarter ($14.18), as reported on the Nasdaq Global Market was approximately $822 million.
As of February 24, 2015, there were 61,268,908 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 2015 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.



BOULDER BRANDS, INC.
TABLE OF CONTENTS
 
 
 
Page
 
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
 
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
 
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
 
 
Exhibits and Financial Statement Schedules


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements made in this Annual Report on Form 10-K, or "Annual Report," that are not historical facts, including statements about the Company's plans, strategies, beliefs and expectations, are forward-looking and subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may include use of the words “expect”, “anticipate”, “plan”, “intend”, “project”, “may”, “believe” and similar expressions. Actual results may differ materially from such forward-looking statements for a number of reasons, including the risks and uncertainties set forth in "Item 1A. Risk Factors," located in Part I of this Annual Report, as well as the following factors:

the Company’s ability to implement its growth strategy, including without limitation enhancing the recognition and appeal of its brands, increasing distribution of its existing products across multiple channels, attracting new consumers to its products, and introducing new products and product extensions;
the Company’s ability to manage its supply chain effectively, including maintaining sufficient capacity and appropriate inventory levels to satisfy demand for its products;
the Company’s ability to drive compelling product innovation;
lack of growth in consumer demand for packaged food products in the health and wellness space, including gluten free products, generally and for the Company’s products in particular;
the Company’s ability to maintain distribution, particularly at key customer accounts;
the Company’s ability to generate purchase volume while maintaining or growing profitability;
the Company’s ability to maintain the health of its brands, and to prevent erosion of the reputation or appeal of the Company’s brands, through sufficient and effective marketing of, and investment in, the brands;
continued adverse developments with respect to the sale of the Company’s buttery spreads and related products;
adverse developments with respect to the demand for the Company’s gluten free products, including as a result of customer and consumer shifts to private label brands;
risks associated with maintaining and upgrading the Company’s manufacturing facilities in order to, among other things, keep up with demand, produce new products and increase margins;
the loss of a manufacturer or the inability of a manufacturer to timely fulfill the Company’s orders or to maintain the quality of its products;
the departure of one or more members of the Company’s executive management team;
risks related to the Company’s rapid growth, including the need to build and enhance its infrastructure and workforce sufficient to meet the growing demand for the Company’s products;
the termination of the Company’s relationship with Acosta, Inc. and/or Presence Marketing, Inc. to act as its primary sales agents for a significant portion of its products;
changes in consumer preferences and discretionary spending;
potential unavailability of necessary capital to fund the Company’s obligations and growth initiatives;
the Company’s ability to maintain existing pricing on its products and, where appropriate, effectuate price increases;
the Company’s ability to protect its intellectual property;
the expiration of certain patents utilized in some of the Company’s Balance segment products;
any sustained economic downturn in the U.S., Canada or abroad and related consumer sentiment;
fluctuations in various food and supply costs as well as increased costs associated with product processing and transportation;
regulation of the Company’s advertising;
adverse publicity or consumer concern regarding the safety and quality of food products or health concerns;
the absence of long-term contracts with the Company’s customers;
economic and political conditions in the U.S. and abroad;
foreign currency fluctuations;
the identification of new acquisition opportunities and the execution and integration of acquisitions;
the realization of the expected growth benefits from our acquisitions;
the risks involved in manufacturing gluten free products;
the Company’s internal control over financial reporting;
risks related to an increased number of employees, labor disputes and adverse employee relations;
risks associated with conducting business outside of the U.S.;
potential liabilities of litigation;
the potential unavailability of insurance for potential liabilities;
increases in costs of medical and other employee health and welfare benefits;
the failure of the Company’s information technology systems to operate effectively and securely;
a further impairment in the carrying value of goodwill and other intangible assets;

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volatility of the market price and trading volume of the Company’s common stock;
the numerous laws and governmental regulations the Company’s business operations may be subject to;
liabilities resulting from claims, including defense costs and negative publicity, should the consumption of any food or beverage products manufactured or marketed by the Company cause injury, illness or death;
risks that customers will not accept the Company’s products for their stores or set reasonable prices for the Company’s products;
changes in retail distribution arrangements and the trend toward fewer products stocked at retail;
competition; and
the Company’s cash requirements and debt, including compliance with financial covenants that restrict the Company’s operations.

Forward-looking statements speak only as of the date they are made, and, except for the Company's ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statement, whether to reflect actual results of operations, changes in financial condition, changes in general economic or business conditions, changes in estimates, expectations or assumptions, or circumstances or events arising after the filing of this Annual Report.








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PART I
Item 1. Business


Our Company

Boulder Brands is a leader in the natural foods industry and is committed to creating food solutions that give people opportunities to improve their lives, one product at a time. The Company’s health and wellness platform consists of brands that target specific health trends: the Glutino® and Udi’s® Gluten Free brands for gluten free diets; the Earth Balance® brand for plant-based diets; the Level Life™ brand for diabetic diets; EVOL® branded foods for consumers seeking convenient foods made with pure and simple ingredients; and the Smart Balance® brand for heart healthier diets. We distribute our products in all major retail channels, including natural, grocery, club and mass merchandise, and we also have a presence in the foodservice and industrial channels. The Company’s stated purpose is to “Lead change and improve lives.” Our promise is to empower people, respect our planet, create profit and build brave brands. Our principles embody humility, accountability, collaboration, tenacity, wellness and transparency.

Key Strategies
 
The Company has experienced meaningful growth over the past several years through both internal growth and acquisitions. Sustainable growth and improved profitability remain our key focal points at this stage in the Company’s lifecycle. Our primary operating strategies for our brands and products include:

(1)
Renovation and Innovation: Renovating our existing products and brands through continuous improvement with a focus on improving product quality and profit margin; and delivering compelling new product innovation with a focus on current foods and ingredients that address consumer trends;

(2)
Distribution: Maintaining and expanding distribution for our brands in established and newer channels such as club, drug and foodservice;

(3)
Investments in Operations: Investing, developing and integrating our systems, processes, infrastructure and human resources so we can continue to pursue our growth strategies with a focus on gaining efficiencies through manufacturing and supply chain;

(4)
Profitability: Building long-term profitable growth through our margin improvement processes; and

(5)
Acquisitions: Acquiring health and wellness food companies that emanate from the natural channel, address a consumer concern with unique and innovative recipes or ingredients and with brands that are category elastic.

Our brands give us a broad platform with which to introduce new products and create further innovation. We are focused on introducing new products (and extensions of existing products), expanding distribution of our products, and attracting new customers and consumers to our brands. Our Natural segment brands, Udi's, Glutino, and EVOL are expected to grow through distribution gains at retail and product innovation, both increasing sales to existing customers and consumers and attracting new customers and consumers, and to increase profitability through manufacturing and supply chain efficiencies. We continue to focus on maintaining the profitability of our Balance segment, while improving the quality of Smart Balance buttery spreads vis-a-vis the competition, as well as expanding distribution for our Earth Balance brand. We also plan to continue to seek out and selectively pursue acquisition opportunities of attractive brands in the health and wellness space. As our business grows, we focus on building our infrastructure, consolidating facilities and building our management team at all layers of the business.

Corporate History
 
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 Brands, Inc., or “GFA,” which owned and marketed the Smart Balance line of products, among others. GFA became our wholly-owned subsidiary and is currently one of our operating entities. After the merger, the Boulder Specialty Brands, Inc. corporate name was changed to Smart Balance, Inc.

On August 3, 2011, we acquired Glutino Food Group, or “Glutino.” Glutino became our wholly-owned subsidiary and is currently one of our operating entities. Pursuant to the share purchase agreement for the Glutino acquisition, we paid an aggregate

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of $66.3 million in cash consideration. The cash consideration for the acquisition was funded with borrowings under our revolving credit facility.

On July 2, 2012, we acquired Udi's Healthy Foods, LLC, or “Udi's.” Total cash consideration was $126.9 million. The acquisition, as well as the refinancing of existing outstanding debt, was financed with the proceeds of a new $280.0 million senior secured credit facility.

On December 31, 2012, the Smart Balance, Inc. corporate name was changed to Boulder Brands, Inc. (“Boulder Brands” or the “Company”). “We,” “us” and “our” mean Boulder Brands, Inc. and its consolidated subsidiaries.

On March 5, 2013, the Company formed a new partnership called Boulder Brands Investment Group, LLC, or “BIG,” with a third party. BIG will look to invest in early-stage growth companies in the natural and organic food and beverage sectors.  All investments have been accounted for under the cost method.  As the Company has a controlling financial interest in BIG, it is consolidated in the Company’s consolidated financial statements, and the applicable noncontrolling interest is reflected in the financial statements.

On May 1, 2013, we acquired Davies, a United Kingdom based gluten free bakery and bread manufacturer, for approximately $3.9 million, and we operate this business under the name, Boulder Brands UK, Ltd (“BBUK”).

On July 10, 2013, we acquired 80% of GlucoBrands, LLC, owner of Level Life, or "Level," for $2.4 million. In connection with this acquisition, we simultaneously entered into a call agreement with the sellers, whereby we have the right, but not the obligation, to purchase the remaining equity interests in GlucoBrands, LLC, starting on January 1, 2016, at an amount based on certain predefined profit metrics. In February 2014, we acquired an additional 8% of Level for $0.2 million, and in July 2014, we acquired approximately an additional 1% of Level for $42 thousand. Level provides convenient food products to consumers which help them create a diabetes-friendly diet as part of their daily management of diabetes.

On December 23, 2013, we acquired 100% of the equity interests of Phil’s Fresh Foods, LLC, owner of EVOL Foods, or "EVOL," for approximately $48.9 million. Based in Boulder, Colorado, EVOL manufactures and markets frozen foods with a focus on pure and simple ingredients.  EVOL’s products include those that are antibiotic-free, hormone-free, GMO-free, and have no artificial preservatives or flavors.

On December 31, 2013, Udi’s was merged into GFA. On December 31, 2014, Phil's Fresh Foods was merged into GFA, and we now operate GFA under the name Boulder Brands, USA, Inc.

In October, 2014, GFA acquired 100% of the assets of a natural foods research and development firm called Real Food Matters, LLC (“RFM”) for $0.8 million.

These transactions have been accounted for using the acquisition method of accounting in accordance with GAAP and the operating results of the acquisitions are included in our consolidated statement of operations.

Our Business Segments

With the Company's acquisitions, its previous Natural and Smart Balance segments have evolved into the Company's current Natural and Balance segments, which align with the way the Company began to operate its business in the first quarter of 2014. The Natural segment consists of our Udi's, Glutino and EVOL branded products. The Balance segment consists of Smart Balance, Earth Balance and Level Life branded products. Prior period amounts have been reclassified to conform with current period's presentation.

In the years ended December 31, 2014, 2013 and 2012, net sales in our Natural segment were $314.3 million, $237.4 million and $122.6 million, respectively, and net sales in our Balance segment were $202.3 million, $223.9 million and $247.0 million, respectively. In the years ended December 31, 2014, 2013 and 2012, net sales in the U.S. were $462.5 million, $412.4 million and $342.3 million, respectively, and net sales internationally were $54.1 million, $48.9 million and $27.3 million, respectively. For further information on our business segments, including financial information for the years ended December 31, 2014, 2013 and 2012, see Note 17 to the Notes to our consolidated financial statements included in this Annual Report under the caption “Item 8- Financial Statements and Supplementary Data.”

Natural Segment

Products sold by the Natural segment include Udi's, Glutino, and EVOL branded products.

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Udi's

We have marketed Udi's products since our acquisition of Udi's in July 2012. We believe Udi's is the leading gluten free brand in North America, focusing primarily on gluten free bread and baked goods.  In addition, Udi's markets other gluten free products including frozen pizza and granola. Our UK subsidiary, BBUK, markets a variety of gluten free foods in the United Kingdom, primarily under the Udi’s brand. Major Udi’s product categories include:

Bagels, such as plain, whole grain and cinnamon raisin, the “everything” bagel and the “mighty bagel”
Breads, rolls and buns, such as white sandwich bread, millet-chia bread, whole grain bread, cinnamon raisin bread, omega flax and fiber, whole grain hamburger buns, classic hamburger buns, classic hot dog buns, whole grain dinner rolls, French baguettes and French dinner rolls
Cookies and brownies, in flavors such as chocolate chip, oatmeal, Snickerdoodle, maple pecan chocolate chip, salted caramel cashew and ginger, as well as dark chocolate brownie bites
Chips, such as aged cheddar ancient grain crisps and sea salt ancient grain crisps
Granola, in flavors such as gluten free original, gluten free vanilla, gluten free cranberry and gluten free au naturel
Granola bars, in favors such as chocolate chip, cranberry almond and ancient grain
Muffins and cinnamon rolls, such as cinnamon rolls, blueberry muffins, double chocolate muffins, lemon streusel muffins, double vanilla muffins, pumpkin muffins and blueberry oat muffin tops
Pizza and crust, including three cheese pizza, pepperoni, margarita pizza, pizza crusts and spinach & feta pizza
Tortillas, in various sizes

Glutino

      We have marketed Glutino products since our acquisition of Glutino in August 2011. Glutino offers a wide range of shelf stable and frozen gluten free products, including snack foods, frozen baked goods, and baking mixes, throughout the United States and Canada. Major Glutino product categories include:

Chips, crisps & pretzels, such as salted potato chips, sour cream and onion potato chips, BBQ potato chips, tortilla & dippers, pretzel chips, pretzel sticks, pretzel twists, chocolate covered pretzels, yogurt covered pretzels and bagel chips
Baking mixes, such as mixes for sugar cookies, pancakes, chocolate brownies, cornbread, yellow cake, muffins, chocolate chip cookies, flour, pizza crust, pie crust and chocolate cake
English muffins
Breads
Breakfast bars, including flavors such as apple, blueberry, cherry, strawberry, wildberry, chocolate banana and chocolate peanut
Cookies and wafers, such as chocolate chip cookies, vanilla cream cookies, milk chocolate wafers, vanilla wafers and lemon wafers
Crackers, such as sea salt crackers, cheddar crackers, table crackers, multigrain crackers and vegetable crackers
Toaster pastries, in flavors such as apple cinnamon and strawberry
    
EVOL

     We have marketed EVOL products since our acquisition of EVOL in December 2013. EVOL manufactures and markets frozen foods with a focus on pure and simple ingredients. Its products - including burritos, meals and quesadillas - include those that are antibiotic-free, hormone free, GMO-free and have no artificial preservatives or flavors. Primary EVOL product categories include:

Burritos, including chicken fajita, beef, spicy steak, cilantro lime chicken, sausage egg & cheese, chicken bean & rice, shredded beef, veggie bean & cheese, potato egg & cheese, chipotle chicken, egg & sausage, egg & potato, bean rice & cheddar and egg & green chile
Single and multiserve meals, such as chicken tikka masala, butternut squash & sage ravioli, macaroni & cheese, teriyaki chicken, lemongrass chicken, chicken tandoori, and chicken penne pomodoro
Quesadillas, including fire grilled streak, chipotle chicken, and gluten free chicken

Balance Segment
    
The Balance segment includes products sold under the Smart Balance, Earth Balance and Level Life brands.
 

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Smart Balance

The Smart Balance line of products was introduced in 1996 with the launch of our buttery spreads 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. Some of our buttery spreads are also available in bulk and individual serving formats for use in the industrial and foodservice channels. Major Smart Balance product categories include:

Buttery spreads, including the original buttery spread, light buttery spread with flaxseed oil, omega-3 buttery spread, light omega-3 buttery spread, buttery spread with extra virgin olive oil (EVOO), light buttery spread with EVOO, organic buttery spread, and low sodium buttery spread. All of the Smart Balance spreads are now made with Non-GMO ingredients
Spreadable butters, including butter and canola oil blend, light butter and canola oil blend, and butter & canola and EVOO blend
Enhanced milks (sold through a license agreement), including fat free milk and omega-3’s, lactose-free fat free milk and omega-3’s, heartright fat free milk and omega-3’s and plant sterols.
Peanut butter spreads, including rich roast creamy peanut butter, rich roast chunky peanut butter, natural dark chocolate creamy peanut butter, and natural dark chocolate chunky peanut butter.
Cooking oil
Cooking sprays, including non-stick cooking spread-original and non-stick cooking spray-butter flavor
Popcorn (sold through a license agreement), including smart ‘n healthy popcorn, smart movie style popcorn, light butter flavored popcorn and light butter flavored mini bags
Light mayonnaise dressing

In addition, we created the Smart Balance 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. Research has 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

     The Earth Balance line of products offers a variety of buttery spreads, buttery sticks, nut butters, vegan snack items and vegan mayo dressings formulated for consumers interested in plant-based, Non-GMO, dairy-free, and organic products. Earth Balance products are primarily available in the natural and organic channel of distribution and have a growing presence in traditional retail outlets. Primary Earth Balance product categories include:

Buttery spreads, with varieties such as original, olive oil, soy free, omega-3, soy garden and organic whipped
Baking sticks, such as vegan buttery sticks, soy free sticks and shortening sticks
Nut butters, such as crunchy coconut & peanut spread, creamy coconut & peanut spread, creamy peanut and crunchy peanut
Culinary spreads, such as coconut, sweet cinnamon and garlic & herb
Snacks, such as vegan buttery flavored popcorn and vegan aged white cheddar flavor puffs
Sandwich dressings, including original, organic and olive oil

Level Life

     We have marketed Level Life products since we acquired 80% of GlucoBrands, LLC, owner of Level, in July 2013. Level provides diabetic-friendly food products to consumers to help in the daily management of diabetes through diet. Its primary products include Level Life glucose gels, bars, shakes, and decadent snacks. Level’s products are designed to help control carbohydrates, support healthy blood sugar levels and help satisfy hunger for those managing carbohydrate and sugar intake. Level's products are sold primarily in the drug store channel and pharmacy sections of many retailers.

GlutenFree.com and theBestlife.com

     We also own and operate health and wellness websites at www.glutenfree.com and www.thebestlife.com.

Industry Overview and Trends

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We believe several factors are increasing consumer awareness of nutrition and driving consumer demand for gluten free and health and wellness products, including:

interest in the relationship between diet and health;
interest in the sourcing and purity of ingredients;
interest in the relationship between ingredients and health;
interest in less processed foods;
people with certain need states, such as those affected by gluten sensitivities and diabetes;
increasing health care costs;
changes in media attention and laws affecting labeling and product claims; and
interest in prolonging life and the quality of life.
 
As consumers have increasingly sought out new ways to maintain and improve their personal health, they are increasingly aware of the ingredients contained in, or absent from, their food. In addition, certain consumers seek out products to satisfy specific need states, such as gluten free need states. The medical community, restaurants, food service providers and food and drink manufacturers are increasingly responding to these demands.

Sales and Distribution
 
We sell products in all 50 states. We also sell certain products in Canada and the United Kingdom. A majority of our products are sold through supermarket chains and food wholesalers. Since September 2007, we have utilized Acosta, Inc., or "Acosta," and its affiliates as our primary national sales agency in the U.S. grocery, military, drug and mass market channels. We utilize Presence Marketing, Inc., or "Presence," as our primary national sales agency for the natural channel. We also utilize sales representatives in Canada and for sales to the club channel and for e-commerce and export sales. Additionally, a small portion of our products are sold through independent distributors.

Through our sales brokers and our internal sales managers in the U.S. and Canada, we work with each distributor and retailer to ensure that our products are effectively distributed and 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 customers in 2014 in terms of sales revenue were United Natural Foods, Inc. and Wal-Mart Stores, Inc., accounting for approximately 17% and 12% of gross sales, respectively. No other single customer accounted for more than 10% of our gross sales revenues in 2014.
 
Marketing
 
Our marketing efforts are designed to increase consumer awareness of and demand for our products. We employ a broad mix of marketing, including coupons, in-store product sampling, consumer and trade events, advertising (online and print) and recipe and food plans, to specifically target our unique consumer and customer segmentation. We use online resources, including social media sites, to communicate with consumers. We use coupons (freestanding insert newspaper, store register, on-pack, online and direct mail coupons) to help stimulate product trial and repeat purchases by providing consumers with economic incentives. In the Natural segment, we use principally in-store product sampling and online marketing. In the Balance segment, we use primarily traditional marketing and advertising, such as freestanding newspaper inserts and coupons, and have been exploring alternative advertising vehicles as well.
 
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. We have devoted portions of our website to interactive communities designed to promote consumer dialogue about the nutritional values and benefits of our products and suggestions for their use. 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 to answer questions and educate consumers on nutrition, new products and developments.
 
Manufacturing and Distribution

We operate manufacturing facilities which produce products that comprise approximately 78% of our Natural segment gross sales. We operate and lease an approximately 360,000 square foot manufacturing facility in Denver, Colorado that produces

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the majority of our Udi’s products and some Glutino products. We believe that this facility is the largest dedicated gluten free manufacturing facility in North America in terms of square footage. We also operate additional manufacturing facilities including a leased facility located in Quebec, Canada that produces some of Glutino’s and Udi’s products; a leased facility in Boulder, Colorado that produces EVOL and Udi’s products; and an owned facility of BBUK, in the United Kingdom, which manufactures products for our gluten free bakery and bread business in the United Kingdom. We believe that these manufacturing facilities give us a strategic advantage because, aside from the Boulder facility, they are among the few facilities in North America and Europe which exclusively manufacture gluten free products.

For our Balance segment and a growing portion of our Natural segment, we outsource manufacturing of our products to third-party co-packers. Outsourcing is designed to allow us to enhance production flexibility and capacity, leverage working capital, and focus our energy and resources on product innovation, marketing and sales. Our buttery spreads are produced by two manufacturers, one of whom has multiple locations. Most of our other products are each supplied by a separate sole source. We believe our manufacturers have the capacity to fulfill our production needs. We utilize warehouses owned by third parties for the distribution and storage of our products. Frozen storage capacity is limited in certain key geographic areas, which can cause distribution challenges and even delays from time to time. We will monitor capacity, service and costs and will qualify alternative sources of supply as needed and available.
 
Most of our raw materials are commodities that are broadly available from multiple sources. Key raw materials used for our products are vegetable oils, peanuts, rice products, butter, tapioca and egg whites. When we consider it appropriate, we maintain varying positions in certain of our key raw materials (to the extent possible) in an effort to stabilize supply and price.
 
Most of our third party manufacturers supply products to us at a price equal to the cost of ingredients and certain packaging plus a contracted toll charge and others supply products to us at a negotiated price on a per order basis. We work with these 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 most of our products to our co-packers for the products they produce. We receive production reports, quality control reports and samples from product runs from these manufacturers. In addition, our research and development and quality control personnel visit each manufacturing facility for our co-packed food products on a regular basis to ensure compliance with good manufacturing practices. We also employ quality control systems with respect to our self-manufactured gluten free and frozen food products. In addition to standard quality control procedures, specific testing is performed at both internal and external laboratories to ensure the gluten free status of Glutino and Udi's gluten free products.
 
Competition
 
The natural foods 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, ability to satisfy specific consumer need states (including gluten free needs), brand recognition, brand loyalty, service, marketing, advertising, proprietary formulas and processing techniques 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.

In the Natural segment, our larger competitors now include General Mills (owner of Annie’s), Hain Celestial Group, Inc. (owner of Rudi’s), Hillshire Farms (owner of Van’s), Schär and Amy’s Gluten Free. There are also many smaller companies dedicated to gluten free, allergen-free or other natural products that compete with us. In our Balance segment, our largest principal competitors are Unilever, ConAgra 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.
Working Capital Practices
We generate cash from operations with which we finance the day-to-day operations of our business. We control credit risk through credit approvals, credit limits and monitoring procedures, and perform periodic credit evaluation of our customers.
If cash from operations is not sufficient to fund our day-to-day operations or other expenditures, we have a revolving credit facility of $115.0 million which is available to us for future borrowings through July 2018. As of December 31, 2014, we had $115.0 million of availability under this credit facility.

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Backlog
Our backlog of unshipped orders was $21.4 million and $14.1 million at December 31, 2014 and 2013, respectively.
 
Intellectual Property
 
We consider our intellectual property rights, including our trademarks, patents, trade secrets, copyrights, and licenses, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, and trade secret laws, as well as licensing agreements, third-party confidentiality, nondisclosure, and assignment agreements, and by policing third-party misuses of our intellectual property.

In 1996, GFA licensed technology from Brandeis University, or “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 (the “First Generation Patents”). Approximately 29% of our gross sales in 2014 included this licensed, patented technology. The First Generation Patents in the United States and our related technology licenses in the United States will be expiring in April of 2015.

Our agreements with Brandeis have resulted in the development of two new platforms of patentable technologies for vegetable oil blends. We have already introduced some products that take advantage of these new technologies, and we may introduce additional new products based in part on these technologies during the coming years.

We have also acquired certain rights to various other technologies developed for us by Brandeis University and Perlman Consulting, LLC, primarily relating to the stabilization or other enhancement of ingredients that could be used in one or more of our products. We are required to pay up-front fees, royalties, patent expenses, or a combination of the foregoing, depending on the rights obtained. Generally, for licensed rights, we pay royalties based on net sales of products covered by the licensed technology as well as patent-related expenses. Our license agreements also permit us to sub-license the underlying technologies to third parties provided that we pay a portion of the sub-license fees to Brandeis University or Perlman Consulting, LLC, as applicable.  
In total, royalty expense was $1.1 million in 2014, of which $0.8 million was related to our spreads business. In 2013, royalty expense was $1.9 million in total, of which $1.0 million was related to our spreads business. In 2012, royalty expense was $1.6 million in total, of which $1.0 million was related to our spreads business.
 
In addition, our total external research and development expenses during the last three years were $1.4 million in 2014, $1.3 million in 2013 and $1.0 million in 2012. 
 
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, or “FDA,” and the United Stated Department of Agriculture, of “USDA.” 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 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 and USDA, 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. At some point in the future, the federal government could combine the FDA with the USDA to establish a single, independent federal food safety agency, which could result in a significant undertaking to ensure compliance with new standards.

Our advertising is subject to regulation by the Federal Trade Commission, or “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

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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., or 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 of our products are highly regulated by various federal and state agencies. These regulations include laws concerning restrictions on product labeling, offering sizes and minimum markup requirements. We have been, and likely will be, required to modify certain product offerings and certain activities related thereto to comply with the many different regulatory rules and standards. For example, in August of 2013, the FDA issued a new regulation requiring that any food label bearing the claim “gluten free” must contain less than 20 parts per million of gluten or would be deemed misbranded. All food labels bearing the claim “gluten free” were required to be in compliance by August of 2014. Prior to the effective date of the regulation, we enacted measures to ensure compliance with these new regulations, targeting no more than 10 parts per million of gluten as our more aggressive internal standard for Udi’s and Glutino gluten free items.

We are also subject to regulation by the Food Safety and Inspection Service; 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. Glutino's manufacturing facility in Canada is also subject to inspection by Canadian federal, provincial and local authorities.

Our operations and products are also subject to foreign and provincial regulation and oversight by governmental agencies in the countries in which we operate, including the Food Standards Agency in the United Kingdom, the European Food Safety Authority in the European Commission, and the Canadian Food Inspection Agency and the Ministry of Agriculture in Canada, which regulate the processing, packaging, storage, distribution, advertising and labeling of the products we manufacture, including food safety standards. We have been, and we may be, required to alter certain products to comply with foreign or other regulatory standards.

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, the USDA 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 Balance segment is subject to seasonal fluctuations. Significant portions of the net sales and profits of the Balance segment have historically been, 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 Smart Balance and Earth Balance products during the Easter holiday season. Because of the seasonality of the Balance segment’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Our Natural segment has not historically shown any significant amount of seasonal fluctuations.

Employees
 
As of December 31, 2014, we had approximately 900 full and part time employees. Of our approximately 900 employees, approximately 240 are non-production employees. We outsource certain of the production and distribution of our products, as well as certain selling activities. Functions performed by our employees include general management; sales, marketing and customer service; operations, quality control/quality assurance and research and development; manufacturing and production; finance and accounting; human resources; legal and investor relations. Employees at our Glutino manufacturing facility in Laval,

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Quebec, Canada formed a labor union in 2012, which was expanded in 2014. We have had no material work stoppage as a result of labor problems and we believe our labor relations to be good.
 
Company Website and SEC Filings

     Our corporate website is www.boulderbrands.com. We also maintain a number of websites dedicated to certain of our brands, including www.smartbalance.com, www.glutino.com, www.udisglutenfree.com, www.glutenfree.com, www.udisglutenfree.co.uk, www.udisgranola.com, www.earthbalancenatural.com, www.levelfoods.com, www.evolfoods.com, and www.thebestlife.com. The information on these websites is not incorporated by reference in this annual report on Form 10-K.
 
All of our filings with the Securities and Exchange Commission, or the "SEC," can be accessed through our corporate website promptly after filing; however, in the event that the website is inaccessible, we will provide paper copies of our most recent Annual Report, 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 Annual 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

We may not be successful in implementing our growth strategy, including without limitation enhancing the recognition and appeal of our brands, increasing distribution of our products across multiple channels, attracting new consumers to our products, and introducing new products and product extensions, either on a timely basis or at all.

     Our future success depends in large part on our ability to implement our growth strategy, including without limitation enhancing our brand recognition, increasing distribution of our products within existing channels and new channels, attracting new consumers to our brands, and introducing new products and product extensions. Our ability to implement our growth strategy depends, among other things, on our ability to develop new products, acquire additional product lines and businesses, secure shelf space in grocery stores and supermarkets, increase customer awareness of our brands, enter into distribution and other strategic arrangements with third party retailers and other potential distributors of our products, and compete with numerous other companies and products. We cannot assure you that we will be able to successfully implement our growth strategy and continue to maintain growth in our sales and EBITDA. If we fail to implement our growth strategy, our sales, EBITDA and profitability will be adversely affected.

If we do not manage our supply chain effectively, including maintaining a mix of our own manufacturing facilities as well as co-packers who manufacture our products, our operating results may be adversely affected.

The inability of any supplier of raw materials, independent co-packer, third party distributor or warehouse, or our own manufacturing facilities to deliver or perform in a timely or cost-effective manner could cause our operating costs to increase and our profit margins to decrease, especially as it relates to our products that have a short shelf life. Given our rapid growth, broad product portfolio and constant development of new products, we are subject to the risk that our manufacturing capacity-both internal and external-will be insufficient to meet demand for our products, particularly where products can experience rapid consumer acceptance and require us to produce significantly more of particular products than we had anticipated. Constraints within our frozen distribution network could cause delays in shipments and other supply chain complications. We must continuously monitor our inventory and product mix against forecasted demand or risk having inadequate supplies to meet consumer demand as well as having too much inventory on hand that may slow the flow of future orders and shipments or even result in inventory reaching code date restrictions and become unsalable. If we are unable to produce and effectively distribute sufficient quantities in response to demand for our products, consumers may look to purchase alternative or competitive products. Moreover, if we are unable to manage our supply chain efficiently and ensure that our products are available to meet consumer demand, our operating costs could increase and our profit margins could decrease.

Our continued success depends to a large extent on our ability to innovate successfully and on a cost-effective basis.

A key element of our growth strategy is to introduce new products and to successfully renovate our existing products. Success in product development is affected by our ability to anticipate consumer preferences, to obtain adequate funding to pay for R&D efforts, to leverage our research and development capabilities, and to utilize our management’s ability to launch new or improved products successfully and on a cost-effective basis. The development and introduction of new products requires substantial R&D and marketing expenditures, which we may not be able to finance or which we may be unable to recover if the new products do not achieve commercial success and gain widespread market acceptance. Product innovation may also result in increased costs resulting from the use of new manufacturing techniques, capital expenditures, new raw materials and ingredients, new product formulas and possibly new co-packers. Some raw materials may be difficult, or impossible, to purchase at prices that we deem acceptable, particularly with respect to innovative products. In addition, typically we have started selling new products in smaller volumes in order to evaluate consumer demand, and it may be difficult to find co-packers who will manufacture small volumes of our new products at a reasonable price. Historically we have sustained losses on new products until they reached a substantial volume of sales. In addition, many new products do not achieve success in the marketplace, due to lack of demand or otherwise. If we are unsuccessful in our product innovation efforts and demand for our products does not materialize as planned, our business could be negatively affected.


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The Company’s ability to maintain distribution, particularly at key customer accounts, could have a material adverse effect on our business.

Product distribution can be discontinued with little to no notice by our customers. A limited number of retailers and food wholesalers account for a substantial portion of our revenues. Our ten largest customers accounted for approximately 65% of our gross sales in 2014. Our largest customers are United Natural Foods, Inc. and Wal-Mart Stores, Inc., which accounted for approximately 17% and 12%, respectively, of our gross sales in 2014. 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 United Natural Foods, Inc. or Wal-Mart Stores, Inc. or other major customers could have a material adverse effect on business, results of operations and financial condition.

The Company’s ability to generate purchase volume while maintaining or growing profitability could have a material adverse effect on our business.

Many retailers measure unit sales per store and establish product velocity hurdles to determine whether a product continues to warrant space on the store shelf. Product velocities can be improved by, among other things, decreasing price and increasing promotion. On certain items, the Company could be required to lower prices or increase promotional spend depending on item velocities, both of which can negatively impact profitability, which could have a material adverse effect on our business. Moreover, notwithstanding lower prices and increased promotional spend, the Company’s products may lose shelf space, potentially giving rise to a material adverse effect on our business.

The Company’s ability to invest in the health of its brands to prevent erosion of the reputation or appeal of one or more of our leading brands could negatively impact our sales and results of operations.

Nearly all of our net sales derive from sales of our branded products, and growth in our business has resulted from the strength of our brands. Our financial success is directly dependent on consumer and customer perception of our brands, including Glutino, Udi’s, Smart Balance, Earth Balance, EVOL and Level. The success of our brands may suffer if our marketing plans, marketing spend levels, or product initiatives do not have the desired impact on a brand’s image or its ability to attract consumers or if consumer or customer perceptions of our brands or our products change unfavorably. Our results of operations could be negatively affected if the reputation of one or more of our brands suffers damage due to real or perceived quality issues with our products, or if we are found to have violated any applicable laws or regulations.

Sales of our buttery spreads products contribute a significant portion of our profitability and cash flow. A continued reduction in the sale of our Smart Balance buttery spreads products, which is not offset by increased sales of Earth Balance buttery spreads or our other high-growth products, could have a material adverse effect on our ability to remain profitable and achieve future growth.

Approximately 22% of our gross sales for the year ended December 31, 2014 resulted from sales of our Smart Balance buttery spreads products. There has been a decline in the margarine/buttery spreads category in recent years and generally over the past 30 years. In addition, our gross sales from sales of our Smart Balance buttery spreads products for the year ended December 31, 2014 was 5% less than it was in the prior year and we cannot ensure that this trend will not continue in future years. We cannot be certain that we will be able to continue to commercialize our buttery spreads products or that any of our buttery spreads products will continue to be accepted in their markets. Because sales of our buttery spreads products have contributed substantially to our profitability and cash flows, continued reductions in sales of these products will have an adverse effect on our profitability and ability to generate cash to fund our product development, R&D efforts or potential acquisitions.

The following factors, among others, could affect continued market acceptance and profitability of our buttery spreads products:

the introduction of competitive products;
changes in consumer preferences among buttery spreads, margarine, butter, olive oil and other products;
changes in consumer eating and baking habits, including trends toward increased eating outside of the home;
the level and effectiveness of our sales and marketing efforts;
continued or accelerating decline in the buttery spreads category, particularly the premium segment of the buttery spreads category;
any unfavorable publicity regarding buttery spread products or similar products;
litigation or threats of litigation with respect to these products;

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the price of the product relative to other competing products;
price increases resulting from rising commodity costs;
potential capacity constraints concerning certain non-GMO ingredients;
any changes in government policies and practices related to our products and markets;
regulatory developments affecting the manufacture, marketing or use of these products;
new products or technologies which effectively render our buttery spreads products obsolete;
the expiration of First Generation Patents or new science or research which undermines the efficacy of our buttery spreads products; and
adverse decisions or rulings limiting our ability to promote the benefits of our buttery spreads products and technology.

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

Sales of our gluten free products contribute a meaningful and growing portion of our sales. A failure to continue to grow sales of these products could have a material adverse effect on our ability to remain profitable and achieve future growth.

Approximately 50% of our gross sales for the year ended December 31, 2014 resulted from sales of our Udi’s and Glutino gluten free products. There has been rapid growth in the gluten free category over the past few years. We cannot be certain that all of our gluten free products will continue to be accepted in their markets. Because sales of our gluten free products have contributed substantially to our net sales, any meaningful decline in growth trends of gluten free products could have an adverse effect on our overall net sales.

The following factors, among others, could affect continued market acceptance and profitability of our gluten free products:

the introduction of competitive products, including private label;
changes in consumer preferences;
the entrance into and increased focus on the gluten free market by large consumer packaged goods companies such as General Mills or Nestle and by large direct store delivery (DSD) distributors such as Bimbo Bakeries or Flowers Foods;
new science or research which addresses celiac disease or gluten intolerances;
the level and effectiveness of our sales and marketing efforts;
a decline in the growth of demand for gluten free products;
any unfavorable publicity regarding gluten free products;
litigation or threats of litigation with respect to these products;
our ability to effectively renovate existing products for quality improvement and margin enhancement;
the price of the product relative to other competing products;
price increases resulting from rising commodity costs;
any changes in government policies and practices related to our products and markets;
regulatory developments affecting the manufacture, marketing or use of these products; and
new products or technologies which effectively render our gluten free products obsolete;

Adverse developments with respect to the sale of gluten free products could significantly reduce our revenues and profitability and have a material adverse effect on our ability to maintain profitability and achieve our business plan.

We are subject to the risks associated with operating, maintaining and continuously upgrading our manufacturing facilities. Loss of one or more of our manufacturing facilities could harm our business.

While historically we have mainly outsourced the manufacturing of our products to third parties, as a result of our recent acquisitions, we now lease and operate manufacturing facilities which produce approximately 78% of the products sold by our Natural segment. This subjects us to the risks associated with operating, and the capital expenditures necessary to maintain and continue to upgrade, manufacturing facilities and machinery and equipment. We need to maintain and upgrade our manufacturing facilities in order to, among other things, keep up with the demand for our products, retain sufficient capacity to manufacture new products, and increase our margins. If we are unable to maintain sufficient manufacturing capacity to keep up with the demand for our products and ensure that our sales and production teams adequately coordinate their planning and production efforts, we risk losing potential product sales due to not having a sufficient amount of available inventory to meet the growing demand for our products.


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Any loss of the use of all or a portion of any of our facilities due to accidents, fires, explosions, labor issues, adverse weather conditions, natural disasters such as floods, tornadoes, hurricanes, ice storms and earthquakes, supply interruptions, transportation interruptions, human error, mechanical failure, terrorist acts, power outages, discharges or releases of hazardous substances and other environmental issues, or otherwise, whether short or long-term, could have a material adverse effect on us and our operations. In particular, any loss of the use of the Denver-based facility where we manufacture our Udi’s gluten free products and a portion of our Glutino gluten free products, or any loss of the use of the Canadian facility where we manufacture most of our Glutino gluten free products, would have a material adverse effect on us. We also only have one manufacturing facility for Udi's gluten free bread, and any loss of the use of this facility would have an adverse effect on our business as well. Any loss of the use of all or a portion of any of our facilities could result in substantial business losses, production delays, third party lawsuits and significant repair costs, as well as personal injury and/or loss of life, which could materially and adversely affect our business, financial condition, results of operations, prospects and cash flows.

Moreover, unexpected failures of our equipment and machinery could result in production delays, revenue loss and significant repair costs, as well as injuries to our employees. In some cases facilities are designated for certain types of products based on the unique equipment involved and it is more difficult, or impossible, for us to shift production of these products among our facilities. Our Boulder facility, which produces a significant portion of our EVOL and Udi’s frozen items, utilizes equipment and machinery that may require significant repair or upgrading. Any interruption in production capability may require us to make large capital expenditures to remedy the situation and could require significant lead time replacing, which could have a negative impact on our profitability and cash flows. A loss or interruption of production at certain of our facilities could disrupt our operations and affect a large number of customers, decreasing our revenues. The operation of manufacturing facilities also requires us to hire, train and evaluate large numbers of production employees, which involves additional labor and employment related risks and uncertainties.

We are also subject to losses associated with equipment shutdowns, which may be caused by the loss or interruption of electrical power to our facilities due to unusually high demand, blackouts, adverse weather, equipment failure or other catastrophic events. Losses caused by disruptions in the supply of electrical power could materially and adversely affect our business, financial condition, results of operations, prospects and cash flows.

Finally, our ownership and operation of manufacturing facilities require us to incur potentially significant capital and other expenditures from time to time to maintain those facilities and, where necessary, expand and upgrade those facilities to satisfy demand for our existing products, in connection with the introduction of new products and to comply with applicable regulatory requirements, including requirements of the FDA and USDA.

We are dependent on third-party manufacturers to manufacture all of our Balance segment products and a growing portion of the products sold in our Natural segment. 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 are dependent on third parties to manufacture all of our spreads and a growing portion of the products sold in our Natural segment. The ability of any of our manufacturers to produce our products could be affected by catastrophic events. In particular, we face risks of disruption to our production and sales processes where we rely on only one or two co-packers to manufacturer certain of our products. For example, 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. Similarly, we rely on a single co-packer for manufacturing our Smart Balance peanut butter, and several other Smart Balance products are sourced from a single supplier. From time to time, 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 our products at the volumes we need, and it could take a significant period of time to locate and qualify such alternative production sources. Moreover, it may be difficult or expensive to find co-packers to produce small volumes of our new products. Co-packers may impose minimum order requirements and any failure on our part to meet these requirements could increase our costs. In addition, we may be unable to negotiate pricing or other terms with our existing or new co-packers 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, particularly in our growing frozen foods business. Currently, some of our products

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are produced by a single third party source maintaining only one facility. The risks of interruption are exacerbated with respect to these single source, single facility manufacturers.

Shipments to and from the warehouses or from overseas on certain ingredients could be delayed for a variety of reasons, including system failures, weather conditions, strikes, shipping delays and capacity constraints. Any significant delay in the shipments of ingredients and products 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 or key ingredients.

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. However, 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, and we cannot guarantee that we will be able to identify instances in which our manufacturers fail to comply with our standards or 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.

We also face risks of losing control of our intellectual property when co-packers require access to our formulas and trade secrets as a condition to doing business with us. For example, if we qualify a co-packer for dual sourcing on our gluten free baked goods, we face the risk of sharing our trade secrets with the co-packer.

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, adversely affect our entrepreneurial culture and 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. 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.

As a result of our rapid growth over the past few years, we need to continue developing an infrastructure and workforce sufficient to meet the growing demands for our products.

We have experienced rapid growth in the past few years, with our net sales growing from $461.3 million in 2013 to $516.6 million in 2014. In particular, we have shifted from a company primarily focused on selling a single brand (i.e., Smart Balance), with products manufactured by co-packers, to a company with a broad portfolio of multiple brands, serving multiple consumer needs, some manufactured by our own facilities and others produced by third parties.

Rapid growth involves various risks related to ensuring that our infrastructure and personnel are sufficient to meet the growing demand for our products. For example, we must seek to identify our personnel needs in light of expected demand for our products, and we will need to identify, recruit, train and retain qualified employees in order to serve this anticipated demand, in all areas of the company’s operations. Because we may hire additional employees in order to meet potential future needs, in order to insure that our sales growth does not outgrow our infrastructure, we may experience higher levels of cost of goods sold and lower overall profitability as we build this infrastructure. Moreover, as we grow and add additional layers of management, process and bureaucracy into our governing structure, we risk losing qualified employees and members of management who were attracted to the company’s entrepreneurial culture but who may not want to remain at a larger company. As we transition our operations and customer service teams from our New Jersey office to our Colorado headquarters, we face certain transition-related risks, such as employees separating from the Company before new employees are adequately trained to assume the necessary responsibilities.

In addition, with sales and demand growing rapidly, we need to ensure that we have sufficient manufacturing and warehousing capacity, both internal and via third parties, to meet actual and potential demand for our products. This could require us to make significant capital expenditure investments in order to make sure we have sufficient manufacturing and warehousing capacity. Given our limited funds available for capital expenditures, it will be incumbent upon our management

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to carefully evaluate and correctly select the most important and profitable capital expenditures projects. If growth does not materialize as planned, these large investments could increase our cost of goods sold.

We also need to make sure that our information systems are constantly updated and integrated throughout our business, which can be costly and time-consuming, that we have sufficient information technology personnel to manage our growing IT infrastructure, and that our systems generate sufficient information and reports so that our management team can better anticipate future business needs. As we grow, we may decide in the future to install a new company-wide information technology system. Any future migration to a new company-wide information technology system would be costly and potentially disruptive to our business.

There can be no assurance that the Company will be successful in all of these efforts, and any failure to maintain sufficient infrastructure and personnel will have an adverse effect on the Company’s ability to grow and improve its profitability.

We rely on Acosta, Inc. and Presence Marketing, Inc. to act as our primary sales agents for a significant portion of our products and there could be significant disruption in our ability to sell products to our customers for a substantial portion of our sales if our relationship with either sales agent is terminated.

Acosta, Inc. and Presence Marketing, Inc. represent a significant portion of our product line to thousands of supermarkets and food stores. There are a very limited number of national brokers. Our agreements with Acosta and Presence Marketing are terminable by either us or Acosta or Presence Marketing, respectively, after satisfaction of a short notice period. The termination of either agreement would require us to seek other sales agents, likely causing significant disruption to our business, and could affect our relationships with our customers. New sales agents would also potentially face conflicts of interest with respect to their existing customers.

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

The natural foods industry in general, and the need-state specific industries (including the gluten free industry) in particular, are subject to changing consumer trends, demands and preferences. Trends within the food and gluten free industries 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 trends may require use of certain specialized ingredients that may be more difficult to source and entail higher costs, which we may not be able to pass on to customers. Factors that may affect consumer tastes and preferences include dietary trends and attention to different nutritional aspects of foods and beverages, concerns regarding the health effects and sourcing practices relating to specific ingredients and nutrients, a shift in preference from non-organic to organic, from GMO to non-GMO, and from non-natural products to natural products, the availability of competing private label products offered by retailers, trends toward eating and baking outside of the home, concerns regarding the public health consequences associated with obesity, and increasing awareness of the environmental and social effects of product production. Consumer perceptions of the nutritional profile of gluten free products may shift, and consumers may prefer food products with fewer carbohydrates, higher levels of protein and additional fiber. Consumer preferences may shift among buttery spreads, margarine, butter, olive oil, coconut and other products. 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 needs and preferences on a timely and affordable basis. If consumer demand for our products declines, our sales and business would be negatively affected.

We may need additional capital in the future, and it may not be available on acceptable terms.

We may require more capital in the future to fund our operations, finance investments in equipment and infrastructure, enhance and expand the range of products we offer, and respond to potential strategic opportunities, such as investments, acquisitions and international expansion. Our business has become more capital-intensive in recent years and our capital expenditures have increased significantly compared to prior periods, both to keep up with demand for our products and to improve our margins. We can give no assurance that additional financing will be available on terms favorable to us, or at all. The terms of available financing may place limits on our financial and operating flexibility. If adequate funds are not available on acceptable terms, we may be forced to reduce our operations or delay, limit or abandon expansion opportunities. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could reduce our competitiveness.

Current pricing levels or future price increases could result in a loss of consumer loyalty and sales.


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From time to time we may elect to increase or decrease the prices of certain of our products, either in response to competitor actions or for other business purposes, including commodity cost increases. Price increases or failure to decrease pricing could result in a loss of consumer loyalty, potentially leading to lower volumes and sales. As consumers become increasingly price sensitive, there can be no assurance that any price increases we may effectuate will not result in a loss to us of consumers and market share or that we will be able to maintain our sales volumes as prices increase.

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 brands 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 (including formulas) 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 (including, by reverse-engineering our products), 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. Moreover, as we move into new and additional distribution channels for our products, such as foodservice, and as we seek to establish relationships with additional co-packers for our gluten free products, and as we manage through turnover of employees over time, it may become increasingly difficult or impossible for us to fully protect our intellectual property (including trade secrets) and knowhow.

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. When we seek to enforce our patents, 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. In addition, patent infringement cases can involve hearings in which the court determines the boundaries of the patent in dispute, which could limit the utility of our patents.

We rely on a combination of common law trademark rights, U.S. and Canadian 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,” “Glutino,” “Udi's,” “EVOL” or “Level” 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 and could dilute the value of our trademarks. As we expand our product lines, we may need to apply for additional trademark protection. We are currently involved in several trademark opposition proceedings involving the registration of the Smart Balance and Earth Balance marks 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. A written decision of the panel ruled against the Company and we have filed 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.


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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,” “Glutino,” “Udi's,” “EVOL” or “Level” 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.

The expiration of the First Generation Patents we license from Brandeis University in the United States 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 First Generation Patents we license from Brandeis in the United States are set to expire in April of 2015, together with the related rights the Company has in the United States under its license agreement with Brandeis. Following the expiration of the First Generation Patents, the Company's ability to maintain market share in the spreads category will be largely dependent on overall brand strength, marketing efforts and development and incorporation of new technologies and failure to do so effectively could have a material adverse effect on our financial performance and condition.

Any sustained economic downturn in the U.S., Canada 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.

Any sustained difficult economic conditions in the U.S., Canada and abroad would negatively impact us in several ways. First, high unemployment, loss of savings and retirement funds, and declines in the housing market, can lead 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 and could make it more difficult to sell our premium priced products, convince shoppers to switch to our 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. 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 and volatility in various food and supply costs as well as increased costs associated with product processing and transportation could materially adversely affect our operating results.

Both we and our third party 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 (including government programs and mandates relating to ethanol), 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. As a result, we are not assured of continued supply, pricing, or exclusive access to raw materials from any of our suppliers.

There can be no assurance that we or our manufacturers will be able to obtain alternative sources of raw materials at favorable prices, or at all, should there be shortages or other unfavorable conditions. In some instances, we enter into forward purchase commitments to secure 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 or directly with ingredient/packaging suppliers. There can be no assurance that our pricing commitments will result in the lowest available cost for the commodities used in our products.

In addition, not all of the commodities that we need for our products can be hedged. For example, a key raw material in the production of gluten free bread is egg whites. Egg whites cannot be hedged in the current market and we are subject

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to volatility in the pricing of egg whites. As we expand our business into new product categories, we may not be able to hedge the prices of all of the commodities which we need for our business at reasonable prices or at all.

One of our key raw materials is palm fruit oil. We currently obtain palm fruit oil from multiple responsible sources in Malaysia, West Africa and South America. Any inability to obtain responsibly-sourced palm fruit oil, whether due to political instability in the regions where we source it or otherwise, or an increase in the cost of palm fruit oil for any reason, could have an adverse effect on our business.

In addition, energy is required to process and produce our products. Transportation costs, including fuel and labor, also impact the cost of manufacturing our products. These costs fluctuate significantly over time due to factors that may be beyond our control.

     Our inability or our manufacturers' inabilities to obtain adequate supplies of raw materials for our products or energy 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 conditions. 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 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, or “GMO's,” obesity, trans fat, diacetyl, artificial growth hormones, arsenic in rice and bacterial contamination, such as salmonella and aflatoxin. Consumers may increasingly require that foods meet stricter standards than are required by applicable governmental agencies, which would increase the cost of manufacturing such foods and ingredients. 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, increase our costs and hurt our operating results, perhaps significantly.

The food industry has been experiencing a significant trend in which an increasing number of consumers are requiring only non-GMO and other specialized ingredients in their foods. Legislation could also require companies to move to non-GMO labeling or other higher cost ingredients. This could result in changes to our labeling, advertising and/or packaging or require us to purchase non-GMO ingredients, which would increase our costs. Sourcing non-GMO (and other specialized) ingredients increases costs because non-GMO (and other specialized) ingredients and raw materials are generally less widely available and therefore more expensive and we may not be able to increase our prices to reflect this increased cost. Companies that fail to source non-GMO (and other specialized) ingredients could, over time, lose market share and face decreasing sales. As additional retailers require or consider requiring all of their products to be non-GMO, additional pressure may come to

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bear on manufacturers to find sources of raw materials which are non-GMO. This may be particularly difficult in the United States, where most farmers produce genetically modified foods, causing it to be difficult to source non-GMO ingredients and raw materials. There is also a risk of contamination of non-GMO farms by neighboring GMO farms. Our second biggest customer, Walmart, does not currently sell only non-GMO foods, but this could change in the future. As a result, the trend toward non-GMO products could have a material adverse effect on our business, particularly as we pursue additional business in Europe and outside the United States.

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 ensure 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 Facility (as defined below).

Conversely, we are increasingly selling products to distributors who sell our products to retailers, particularly in the Natural segment, and we may experience unanticipated increased orders for our products from these distributors which are not correlated to consumer demand. Unanticipated fluctuations in product requirements by our distributor customers could result in fluctuations in our results from quarter to quarter.

Our performance may be adversely affected by economic and political conditions in the U.S. and abroad.

Our 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. Consumers could also choose to purchase private label products rather than branded products, which generally have lower retail prices than do their branded counterparts. In addition, the prices of our key commodities inputs, such as palm oil, soybean oil and egg whites, could fluctuate greatly as a result of economic and political factors.

Foreign currency fluctuations could adversely affect our business.

     We do business in Canada and the United Kingdom, may seek to do more business outside the United States in the future, and also have third-party manufacturers located outside the U.S., and, as such, are subject to the risk of foreign currency fluctuations as it pertains to the receipt and payment of foreign currencies into or out of U.S. dollars. In some instances, we may enter into foreign exchange contracts to hedge against currency risks. However, with or without hedging, currency fluctuations could have an adverse effect on our business.

We may be unable to successfully execute or effectively integrate acquisitions.

One of our strategies is to selectively pursue acquisitions, in order to continue to grow and increase our sales and profitability. Our acquisition strategy is based on identifying and acquiring brands with products that complement our existing product mix and identifying and acquiring brands in new categories and in new geographies for purposes of expanding our business internationally. However, we cannot be certain that we will be able to successfully identify suitable acquisition candidates, negotiate acquisitions of identified candidates on terms acceptable to us, or integrate acquisitions that we complete. Acquisitions involve numerous risks and uncertainties, including intense competition for suitable acquisition targets, which could increase prices and/or adversely affect our ability to consummate deals on favorable or acceptable terms, the potential unavailability of financial resources necessary to consummate acquisitions in the future, the risk that we improperly value and price a target, the potential inability to identify all of the risks and liabilities inherent in a target company notwithstanding the Company's due diligence efforts, the diversion of management's attention from the operations of our business and strain

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on the Company's existing personnel, increased leverage due to additional debt financing that may be required to complete an acquisition, dilution of our stockholders' net current book value per share if we issue additional equity securities to finance an acquisition, difficulties in identifying suitable acquisition targets or in completing any transactions identified on sufficiently favorable terms and the need to obtain regulatory or other governmental approvals that may be necessary to complete acquisitions. In addition, any future acquisitions may pose risks associated with entry into new geographic markets, distribution channels, lines of business and/or product categories, where we may not have significant or any prior experience and where we may not be as successful or profitable as we are in businesses and geographic regions where we have greater familiarity and brand recognition. Potential acquisitions may also entail significant transaction costs and require a significant amount of management time, even where we are unable to consummate or decide not to pursue a particular transaction.

In addition, even when acquisitions are completed, integration of acquired entities can involve significant difficulties, such as failure to achieve financial or operating objectives with respect to an acquisition, strain on the Company's personnel, systems, supply chain network and operational and managerial controls and procedures, the need to modify systems or to add management resources, difficulties in the integration and retention of customers or personnel and the integration and effective deployment of operations or technologies, amortization of acquired assets (which would reduce future reported earnings), possible adverse short-term effects on inventory levels, cash flows or operating results, diversion of management's attention from the operations of our business, integrating personnel with diverse backgrounds and organizational cultures, coordinating sales and marketing functions and failure to obtain and retain key personnel of an acquired business. Failure to manage these acquisition growth risks could have an adverse effect on us.

We may fail to realize the revenue enhancements and other benefits expected from our acquisitions.

Since August 2011, we have acquired Glutino and Udi's, manufacturers and marketers of gluten free products; Davies, a United Kingdom based gluten free bakery and bread manufacturer; 89% of Level Life foods, which produces foods for diabetes-friendly diets; and EVOL Foods, a manufacturer of frozen foods from pure and simple ingredients. The success of these acquisitions and other acquisitions we may make in the future will depend, in part, on our ability to improve and maintain their gross margin, expand and maintain their product offerings, increase and maintain their distribution, leverage our infrastructure, maintain or accelerate their sales growth, realize anticipated synergies and successfully integrate their businesses into our company. If we are not able to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits of the acquisitions may not be realized fully or at all or may take longer to realize than expected and our business may be adversely affected. In addition, efforts to integrate the businesses into our company may also divert management attention and resources.

Issues that may arise in connection with integrating businesses include, among other things:

integrating certain distribution, marketing and promotion activities and information systems;
integrating and executing appropriate demand and supply chain planning;
conforming other companies’ standards, controls, procedures and accounting and other policies to our own;
consolidating corporate and administrative infrastructures;
retaining key management;
retaining existing customers and consumers and attracting new customers and consumers; and
making any necessary modifications to acquired entities’ operating control standards to comply with the
    Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder.
        
We cannot assure you that we will be able to integrate the operations of acquired entities successfully, improve their gross margin, expand their product offerings, increase their distribution, leverage our infrastructure, maintain or accelerate their sales growth, fully realize anticipated synergies from the acquisitions or operate acquired entities as profitably as anticipated. Our beliefs regarding the benefits to be derived from our acquisitions are based on numerous assumptions that are subject to risks and uncertainties that could deviate materially from our expectations.

A large portion of our sales involves the manufacturing of gluten free products, which involve various risks and uncertainties.

Prior to the Glutino and Udi's acquisitions, we had no experience in the gluten free business and we had no prior manufacturing experience. Our purchases of Glutino and Udi's have resulted in our operating three gluten free manufacturing facilities, which involves the risks inherent in manufacturing. Further, we expect that we will need to increase our capital expenditures in order to keep up with growing demand for our products and to improve our gross margin. In addition, as our gluten free business increases, we will need to locate qualified co-packers with sufficient dedicated space for our gluten free products and contract with them on commercially viable terms, and there is no assurance that we will be able to do so. In

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some cases, we rely on a single co-packer for certain products. The use of co-packers increases the risk of a potential loss of control over our intellectual property (including formulas and trade secrets) on co-packed items. We also face the potential loss of control over our intellectual property as we expand into the foodservice channel of distribution, as many of the companies with whom we may enter into business relationships may require ownership of relevant gluten free formulas as a condition to working with us. In addition, as demand for gluten free products grows, we will need to increase our production, both through internal manufacturing and external co-packers, in order to ensure that we have sufficient supply to meet increasing demand. Our failure to successfully operate the gluten free business may have a material adverse effect on our results of operations.

In August of 2013, the FDA issued a new regulation requiring that any food label bearing the claim “gluten free” must contain less than 20 parts per million of gluten or would be deemed misbranded. All food labels bearing the claim “gluten free” were required to be in compliance by August of 2014. Prior to the effective date of the regulation, we enacted measures to ensure compliance with these new regulations, targeting no more than 10 parts per million of gluten as our more aggressive internal standard for Udi’s and Glutino gluten free items. Any single instance of noncompliance with the federal standards could result in products being deemed mislabeled, which could significantly damage the credibility of our gluten free brands, which could have a material adverse effect on our overall business.

Failure of our internal control over financial reporting could harm our business and financial results.

Our management is responsible for establishing and maintaining effective internal control over financial reporting. Our acquisitions of companies with procedures not identical to our own could place significant additional pressure on our system of internal control over financial reporting. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and a decline in the market price of our common stock.

Our recent acquisitions have significantly increased the number of employees we have, subjecting us to the risks inherent in a larger and broader workforce, including labor disputes and adverse employee relations, which could disrupt our business and increase our costs.

As a result of our recent acquisitions, the number of employees we have has increased from 70 on June 30, 2011 to approximately 900 as of December 31, 2014. This has significantly changed our workforce from primarily sales and marketing personnel (with co-packers) to a broader workforce including all aspects of manufacturing and production. As a result of our bigger and broader workforce, we are now required to handle a broad range of human resources issues (on a broader scale) involving, among other things, training, quality control, employee evaluations, employee benefits, EEOC claims, compliance policies and federal and state OSHA requirements.

While we believe that our relations with our employees are good, employees at our Glutino manufacturing facility in Laval, Quebec, Canada have formed a labor union and our other employees could in the future seek to form labor unions. These labor unions could seek to enter into collective bargaining arrangements with us, which could result in, among other things, strikes, work stoppages, labor disturbances or other slowdowns by the affected workers. We could experience significant disruption in our operations, particularly in connection with the transition of several employees from Paramus to Boulder, which would cause higher ongoing labor costs and impact our ability to satisfy our customers' requirements. Any such cost increases, stoppages or disturbances could materially and adversely affect our business, financial condition, results of operations, prospects and cash flows by limiting plant production, sales volumes and profitability.

To the extent we grow our business outside of the United States, we will face risks associated with conducting business in foreign markets.

We currently conduct most of our business in the United States, but our acquisitions of Glutino and Udi's have significantly increased our presence in Canada, our acquisition of Davies has increased our presence in the United Kingdom and we are evaluating the possibility of growing our business in certain other foreign countries. The substantial up-front investment required, the lack of consumer awareness of our products in jurisdictions outside the United States, differences in consumer preferences and trends between the United States and other jurisdictions (involving matters such as GMO and fresh products), the risk of inadequate intellectual property protections, and differences in packaging, labeling, food and related laws, rules and regulations are all substantial matters that need to be evaluated prior to doing business in new territories. To the extent we grow our business outside of the United States, we could be adversely affected by economic, legal, political and regulatory developments in the countries in which we do business in the future or in which we expand our business, particularly those countries which have historically experienced a high degree of political or economic instability.

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Examples of risks inherent in doing business outside of North America include changes in the political and economic conditions in the countries in which we operate, unexpected changes in regulatory requirements, changes in tariffs, the adoption of foreign or domestic laws limiting exports to or imports from certain foreign countries, fluctuations in currency exchange rates and the value of the U.S. dollar, restrictions on repatriation of earnings, expropriation of property without fair compensation, weak protection of intellectual property rights, and the acceptance of business practices which are not consistent with or are antithetical to prevailing business practices we are accustomed to in the United States, including export compliance and anti-bribery practices and governmental sanctions. We may also face difficulties in operations and diversion of management time in connection with establishing our business in countries where we have not operated before.

Doing business outside the United States will also require us to comply with the laws and regulations of the U.S. government and various foreign jurisdictions which place restrictions on our operations, trade practices, partners and investment decisions. In particular, our operations will be subject to U.S. and foreign anti-corruption and trade control laws and regulations, such as the Foreign Corrupt Practices Act, or “FCPA,” export controls and economic sanctions programs, including those administered by the U.S. Treasury Department's Office of Foreign Assets Control, or “OFAC.” As a result of doing business in foreign countries and with foreign partners, we will be exposed to a heightened risk of violating anti-corruption and trade control laws and sanctions regulations. The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. In addition, the United Kingdom Bribery Act, or the “Bribery Act,” extends beyond bribery of foreign public officials and also applies to transactions with individuals that a government does not employ. The provisions of the Bribery Act are also more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Our continued expansion outside the U.S., including in developing countries, and our development of new partnerships and joint venture relationships worldwide, could increase the risk of FCPA, OFAC or Bribery Act violations in the future. Violations of anti-corruption and trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment.

Litigation, legal proceedings or tax audits could expose us to significant liabilities and have a negative impact on our reputation.

We are party to various litigation claims and legal proceedings in the ordinary course of business, which may include lawsuits or claims related to contracts, intellectual property, product recalls, product liability, the marketing and labeling of products, employment matters, environmental matters or other aspects of our business. Even when such lawsuits in our judgment have little or no merit, the defense of these lawsuits may be costly and divert our management’s attention. The costs of litigation and resulting settlements, as applicable, can vary from quarter to quarter based on the status of the proceedings and could be material to our results in any given quarter.

We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of judgment. Actual outcomes or losses may differ materially from our current assessments and estimates.

From time to time, we may be subject to state, federal and foreign tax audits. We are not currently undergoing an audit by the Internal Revenue Service, however we do have a pending state audit in process for the tax years 2009, 2010, and 2011. We do not believe that there are any uncertain tax positions related to the state audit. As of December 31, 2014, our 2011 through 2013 tax years remain subject to examination by the IRS. State income tax returns are generally subject to examination for a period of three to four years after filing. As of December 31, 2014, the audits of our Canadian subsidiary's 2011 and 2012 tax returns have been closed with respect to withholding taxes. Our Canadian subsidiary remains under the tax audit with respect to other issues for the 2011 tax year. There can be no assurance that we will prevail in such audits, and failure to prevail could negatively impact our results of operations.

We may not have adequate insurance for potential liabilities, including liabilities arising from litigation.

In the ordinary course of business, we have and in the future may become the subject of various claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, employees and other matters. Some of these claims may relate to the activities of businesses that we have acquired, even though these activities may have occurred prior to our acquisition of the businesses. We maintain insurance to cover certain of our potential losses, and we are subject to various self-retentions, deductibles and caps under our insurance. It is possible, however, that judgments

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could be rendered against us in cases in which we would be uninsured and beyond the amounts that we currently have reserved or anticipate incurring for these matters. Even a partially uninsured claim, if successful and of significant size, could have a material adverse effect on us. Furthermore, we may not be able to continue to obtain insurance on commercially reasonable terms in the future, and we may incur losses from interruption of our business that exceed our insurance coverage. Finally, even in cases where we maintain insurance coverage, our insurers may raise various objections and exceptions to coverage that could make uncertain the timing and amount of any possible insurance recovery.

Increases in costs of medical and other employee health and welfare benefits may reduce our profitability.

As the number of our employees has grown, our profitability is substantially affected by costs of medical and other employee health and welfare benefits. These costs can vary substantially as a result of changes in health care laws and costs. These factors may increase the cost of providing medical and other employee health and welfare benefits. We can provide no assurance that we will succeed in limiting future cost increases. If we do not succeed, our profitability could be negatively affected. In particular, President Obama signed the Patient Protection and Affordable Care Act into law in 2010, which was amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act”). The Affordable Care Act is designed to expand access to affordable health insurance, among other objectives. Many aspects of the Affordable Care Act are being implemented through new regulations and regulatory guidance, which are continuing to be issued, which has produced considerable uncertainty as to how significant the increase to the healthcare costs will be and the effect of the plan modifications on the behavior of our employees. While we cannot accurately predict at this time the full effect of the Affordable Care Act on our business, compliance may adversely impact our labor costs, our ability to negotiate favorable terms under our benefits plans for our employees, our ability to attract or retain employees or our operations to the extent that compliance may affect the composition of our workforce, any or all of which could be costly and adversely affect our profitability.

Our business operations could be disrupted if our information technology systems fail to perform adequately.

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business and results of operations to suffer. In particular, as we grow, we need to make sure that our information technology systems are upgraded and integrated throughout our business and able to generate reports sufficient for management to run our business. In addition, our information technology systems may be vulnerable to damage, interruption or security breaches from circumstances beyond our control, including fire, natural disasters, system failures, cyber-attacks, corporate espionage, and viruses. Any such damage, interruption or security breach could have a material adverse effect on our business.

An impairment in the carrying value of goodwill or other acquired intangible assets could materially and adversely affect our results of operations.

As of December 31, 2014, we had $425.0 million of goodwill and other intangible assets on our balance sheet. The value of these intangible assets depends on a variety of factors, including the success of our business, market conditions, earnings growth and expected cash flows. Impairments to these intangible assets may be caused by factors outside of our control, such as increasing competitive pricing pressures, changes in discount rates based on changes in market interest rates or lower than expected sales and profit growth rates. Pursuant to generally accepted accounting principles in the United States, we are required to perform impairment tests on our goodwill and indefinite-lived intangible assets annually or at any time when events occur which could impact the value of our reporting units or our indefinite-lived intangible assets. Impairment analysis and measurement is a process that requires considerable judgment. Significant and unanticipated changes in the value of our reporting units or our intangible assets could require a charge for impairment in a future period that would substantially affect our earnings in the period of such charge.

 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 and other third parties, 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, notwithstanding our company's performance. Our common stock price is also affected by announcements we make about our business, market data that is available to subscribers, analyst reports related to our company, changes in financial

25


estimates by analysts, whether or not we meet the financial estimates of analysts who follow our company, rating agency announcements about our business, variations in our quarterly results of operations and those of our competitors, general economic and stock market conditions, future sales of our common stock, perceptions of the investment opportunity associated with our common stock relative to other investment alternatives, the public’s reaction to our public announcements and filings with the Securities and Exchange Commission, or "SEC," actual or anticipated growth rates relative to our competitors, and speculation by the investment community regarding our business, among other factors. Our stock price may also be affected by fluctuations in the market share of our products. Our results could also fluctuate from quarter to quarter as a result of fluctuations in orders from distributors, which do not necessarily correlate to consumer demand for our products. In addition, if we fail to successfully integrate our acquisitions or our integration of the acquisitions takes longer than anticipated, our stock price may be adversely affected.

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 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. In addition, in the past, some companies that have had volatile market prices for their securities have been subject to class action or derivative lawsuits. The filing of a lawsuit against us, regardless of the outcome, could have a negative effect on our business, financial condition and results of operations, as it could result in substantial legal costs and a diversion of management’s attention and resources.

    In addition, the market for our common stock is not as large as the market for the common stock of some other public companies, including public companies in the food and beverage industry. As of December 31, 2014, we had approximately 61.2 million shares of common stock outstanding. Our shares of common stock may be sporadically and/or thinly traded. This may cause investors to have difficulty in gaining liquidity in their shares. Also, as a consequence of this lack of liquidity, the trading of relatively small quantities of shares of common stock by our stockholders may disproportionately influence the price of those shares in either direction. This may result in volatility in our stock price and could exacerbate the other volatility-inducing factors described above.

Risks Related to the Food and Beverage Industries

Our business operations may be subject to numerous laws and governmental regulations, including laws and regulations relating to climate change, 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, the United States Department of Agriculture, and other national, state and local authorities. For example, the Food, Drug and Cosmetic Act and the 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. State regulations are not always consistent with federal regulations or other state regulations. As we have grown, we have shifted our product mix from products almost exclusively regulated by the FDA to products regulated also by the USDA; this has resulted in a more difficult and complex regulatory environment.

Our operations are also subject to foreign and provincial regulation and oversight by governmental agencies in the countries in which we operate, including the Food Standards Agency in the United Kingdom, the European Food Safety Authority in the European Commission, and the Canadian Food Inspection Agency and the Ministry of Agriculture in Canada, which regulate the processing, packaging, storage, distribution, advertising and labeling of the products we manufacture, including food safety standards.

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. Our Canadian manufacturing facilities are also subject to inspection by Canadian federal, provincial and local authorities.

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

26


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. 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. In addition, through our acquisitions of Glutino and Udi's, we have expanded our product offerings into the gluten free market, including snack foods, frozen baked goods, frozen entrees, granola, bread and baking mixes, and through our acquisition of EVOL, we have expanded our product offerings into the “conventional” frozen market.

We could also be affected by climate change and any regulations implemented to address such concerns. 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 and governmental expectations or demands 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 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 and consumers 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 product 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.

Our manufacturing facilities will need to comply with regulatory requirements, and we are also dependent on our third party manufacturers for compliance with sound and lawful production of many of our products. 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.


27


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 we are successful in defending these claims, publicity about these matters may harm our reputation and adversely affect our results. In addition, suits against our competitors can harm our business. These types of class action lawsuits can also make it more difficult for us to market our products, by restricting our ability to differentiate our products from other products on the market. Furthermore, the defense of class action lawsuits can result in significant costs, which are often times not covered by insurance, can be time consuming and can divert the attention of management from other matters relating to our business.

Successful new product introductions are important to sustaining or growing our business and there is no guarantee that customers will accept 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 interest in our products. 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 to justify a higher price.

The food industry and retailers in the grocery industry use new products as a way of creating excitement and a variety of choices in order to attract consumers. There is a risk that we will be unable to develop new product technologies to address consumer needs. Even if we identify new innovations, the cost may be prohibitive, the product's taste may not meet consumer standards, there may be high introductory costs, we may have limited financial resources available for new product launches, there may be regulatory restrictions on the production and advertising of our new products, and our new products may take away sales from other of our products. In addition, underperformance on new product launches can damage overall brand credibility with customers and consumers.

Our ability to develop, market, and sell new products at an appropriate price may be hampered by unfavorable terms of sale imposed by our customers, the inability to get shelf space for our products at a reasonable cost or, once placed, the failure to 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.
    
    Furthermore, there is a trend among retailers in the grocery industry to reduce the overall number of products offered in their stores, which further increases competition for shelf space and makes it more difficult for us to keep existing products on the shelf and introduce new products with these retailers. Even if we do obtain shelf placement, our new and existing products may fail to achieve the sales expectations set by our retailers, potentially causing these retailers to remove our products from the shelf. As companies face more pressure for shelf space within each category, the increase in the number and quality of private label products continues to affect branded products. Gluten free private label offerings could also adversely affect our sales.

In order to obtain and keep shelf placement for our products, 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 food and consumer trends through new products could materially adversely affect our business performance.

In addition, we constantly evaluate our product lines to determine whether or not to discontinue certain products and whether or not to stay in particular lines of business. Exiting product lines may increase our profitability but could reduce our sales, and a reduction in sales of certain products could result in a reduction in sales of other products. We cannot ensure that the discontinuation of product lines will not have an adverse effect on our business.

In addition, many food retailers are caught between the rising costs of the products they sell and consumers who are demanding lower prices. We are adversely affected by efforts by retailers to increase their margins by increasing the prices of products they sell, over which we have no control, because this can result in some consumers electing to purchase lower-cost alternatives. This is compounded by a shift by retailers to using pricing departments, which are separate from their buyers/merchandisers, so we have less influence over final retailer pricing. The expanding retailer margins make it more difficult for us to offer adequate value to the consumers and create brand loyalty.

Changes in retail distribution arrangements and the trend toward fewer 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 and/or profitability 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

28


center has not previously distributed our products in that region or if a sales agency is not familiar with our products, there could be a delay in a distribution center's ability to begin distributing our 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, food service providers and cooperatives. We compete primarily on the basis of product quality, ability to satisfy specific consumer need states (including gluten free needs), brand recognition, brand loyalty, service, marketing, advertising, patent protections and price. Some competitors may have different profit or strategic objectives than we do. Some competitors may invest in discounts or trade credit at a time when we are investing in new packaging and promotion, or vice versa. Competitors may develop new patentable technology which results in products which are able to compete successfully with our products. Substantial advertising and promotional expenditures are required to maintain or improve a brand's market position or to introduce a new product, and participants in our industry are engaging with new media, including consumer outreach through social media and web-based vehicles.

In the Natural segment, our larger competitors now include General Mills (Annie’s), Hain Celestial Group, Inc. (Rudi’s), Hillshire Farms (Van’s), Schär and Amy’s Gluten Free. There are also many smaller companies dedicated to gluten free, allergen-free or other natural products that compete with us, and large companies with superior resources and distributions systems, many smaller niche companies and/or private label sellers could elect to enter the gluten free market. Pricing and margins in gluten free categories may be reduced as private label and competitive activity increases. Our business could be adversely affected if large consumer packaged goods companies such as General Mills or Nestle began to focus on selling low cost gluten free products, or if large direct store delivery (DSD) distributors such as Bimbo Bakeries or Flowers Foods began distributing shelf stable gluten free bread and baked goods through their nationwide distribution channels. We also face the risk that competitors may eventually catch up with us with respect to the taste and quality of the gluten free foods they sell. In our Balance segment, our largest principal competitors are Unilever, ConAgra 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 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. If our products fail to compete successfully, demand for our products and our sales volumes and profitability could be negatively impacted.

Risks Relating to Our Indebtedness
 
Our indebtedness could have important consequences to our stockholders. 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, 2014, we had an aggregate amount of $298.6 million of secured debt outstanding under our Credit Facility with $115 million of unused commitments under the Revolving Facility (as defined below). Our indebtedness could have important consequences to our stockholders, including:

limiting our ability to obtain additional financing to fund our working capital, acquisitions, expenditures, debt service requirements or other general corporate purposes;
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service debt;
limiting our ability to compete with other companies who are not as highly leveraged;
subjecting us to restrictive financial and operating covenants in the agreements governing our and our subsidiaries' long-term indebtedness;
exposing us to potential events of default (if not cured or waived) under financial and operating covenants that could have a material adverse effect on our business, results of operations and financial condition;
increasing our vulnerability to a downturn in general economic conditions or in pricing of or demand for our products; and
limiting our ability to react to changing market conditions in our industry and in our customers' industries.

29



In addition, borrowings under our Credit Facility bear interest at variable rates. If market interest rates increase, the variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow.

Our ability to pay interest, principal and fees on our Credit Facility will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory, legislative and other factors, many of which are beyond our control. In addition, our ability to pay interest, principal and fees on our Credit Facility 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, principal and fees on our Credit Facility in a timely fashion.

Our debt levels and leverage ratio may be perceived as high for a growth company. If we are unable to generate sufficient cash flow to service our indebtedness, fund our advertising and promotional expenditures and satisfy our capital expenditure requirements, 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, regulatory, legislative and other factors, many of which are beyond our control.
 
If we are obligated for any reason to repay our Credit Facility 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, 2014, we had outstanding an aggregate amount of $298.6 million of secured debt under our Credit Facility. Any event of default could require the early repayment of our Credit Facility in whole or in part together with accrued interest on the outstanding principal balance of our Credit Facility and any other applicable penalties, including a default interest rate. If, prior to the maturity date, we are required to repay our Credit Facility in full, we would be required to use our limited working capital and raise additional funds. If we were unable to repay our Credit Facility, and other applicable penalties, when required, our lenders could commence legal action against us to recover the amounts due, which could include, among other things, a termination of their commitments to loan money, a requirement that certain obligations be cash collateralized, and foreclosure against the assets securing their borrowings. Any such action would be materially harmful to us and could require us to curtail or cease operations, and the Company could in such case be forced into bankruptcy or liquidation.
 
Our Credit Facility 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.
 
Our Credit Facility 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:

incur more debt or issue certain equity interests;
pay dividends, redeem or purchase our equity interests or make other distributions;
make certain acquisitions or investments;
make investments in foreign subsidiaries;
use assets as security in other transactions or otherwise create liens;
enter into transactions with affiliates;
enter into certain burdensome contracts;
change the nature of our business in a material manner;
merge or consolidate with others; and
transfer or sell assets, including the equity interests of our subsidiaries, or use asset sale proceeds.
 
Our failure to comply with the covenants described above could result in an event of default under our Credit Facility. See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”

Item 1B. Unresolved Staff Comments


30


None.


31


Item 2. Properties

Our corporate headquarters are located at 1600 Pearl Street - Suite 300, Boulder, Colorado 80302 and our telephone number is (303) 652-0521. The initial term of the lease for our corporate headquarters expires in 2025 and we have two options to extend for additional three-year terms.

We have three leases in Paramus, New Jersey for office space. The initial term of the leases expires May 31, 2015 and we have two options to extend for additional five-year terms.

Glutino has lease agreements for manufacturing and storage space in Laval, Quebec, Canada.  These leases expire in March of 2020 and provide an option to extend for additional four-year terms.

We have a lease agreement for manufacturing, storage and office space in Denver, Colorado and we believe this “Florence St.” manufacturing facility is the largest gluten free manufacturing facility in North America as measured by square feet. We have a lease agreement for additional manufacturing space in Aurora, Colorado and we have two additional lease agreements for properties which are not currently used in/for production. The lease terms and optional extensions are as follows:

Location and Purpose
Lease Term Expiration
Extension Option
Denver, Colorado offices, manufacturing and storage
November 2023
Five years
Denver, Colorado manufacturing
February 2016
Three one-year extensions
Aurora, Colorado manufacturing
June 2016
46 months
Denver, Colorado, manufacturing
September 2020
none
    
We also have a lease agreement for manufacturing, storage and office space in Boulder, Colorado. The Boulder lease expires December 31, 2015, with an option to extend for an additional four year term.

We own property in the United Kingdom for office, manufacturing and storage space for BBUK.

Item 3. Legal Proceedings

We are currently involved in the following legal proceedings:

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 us. We have appealed the ruling. The appeal is fully briefed and oral proceedings are scheduled for March 10, 2015. We believe that neither this proceeding, nor its ultimate outcome, will have any material adverse effect on our business.

On July 28, 2012, a putative class action lawsuit was filed in the U.S. District Court for the Southern District of California claiming that the labeling and marketing of Smart Balance® Butter & Canola Oil Blend products is false, misleading and deceptive (the "California Case"). The plaintiffs filed a Second Amended Complaint and substituted a new plaintiff. The Company moved to dismiss the Second Amended Complaint. That motion is pending. A substantially similar class action lawsuit related to the labeling and marketing of Smart Balance® Butter & Canola Oil Blend products was filed on August 9, 2012 in the Southern District of New York. In light of its similarity to the California Case, the Southern District of New York stayed all activity in that case pending a decision in the California Case on class certification. The Company believes the allegations contained in both of these complaints are without merit and intends to vigorously defend itself against these allegations.

On August 29, 2012, legal proceedings were filed against the Company and others in Canada, Province of Quebec, District of Montreal, by Stepworth Holdings Inc. in connection with an indemnification claim made by the Company against Stepworth, which sold Glutino to the Company. In those legal proceedings, Stepworth seeks a declaration that it is not required to indemnify the Company for losses arising from claims made against the Company by Osem and Carmit, two Glutino suppliers. As such, it seeks a declaration that it is entitled to the purchase price for Glutino placed in escrow to cover indemnification claims made by the Company against Stepworth. In a related proceeding, on September 24, 2012, the Company filed proceedings in the same court in Canada against the Glutino suppliers and others, seeking a declaration that the suppliers' claims against the Company are not valid. On December 4, 2012, Osem filed proceedings against the Company, in the same Canadian court, seeking $16.9 million (in Canadian dollars) for the Company's reduction in the volume of purchases from Osem. The Company intends to vigorously

32


defend itself in this litigation and continues to assert its indemnification claim against Stepworth. The Company does not expect that the resolution of this matter will have a material adverse effect on its business.

We do not expect that the resolution of any of the matters described above will have a material adverse effect on our business, although it could have a material adverse effect on our results in any given quarter in the event of an adverse judgment or settlement.

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. Mine Safety Disclosures

Not applicable.

      




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PART II

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

Market Information

Our common stock is listed on the Nasdaq Global Market under the symbol “BDBD.” The following table sets forth, for the quarterly periods indicated, the high and low sales prices per share for our common stock on the Nasdaq Global Market.
 
 
Common Stock
  
 
High
 
Low
2013 First Quarter
 
$
13.99

 
$
7.74

2013 Second Quarter
 
$
12.64

 
$
8.16

2013 Third Quarter
 
$
17.17

 
$
12.11

2013 Fourth Quarter
 
$
17.98

 
$
13.79

2014 First Quarter
 
$
17.79

 
$
13.10

2014 Second Quarter
 
$
18.46

 
$
11.38

2014 Third Quarter
 
$
15.47

 
$
11.01

2014 Fourth Quarter
 
$
13.73

 
$
7.77


Holders

As of December 31, 2014, there were 24 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. The payment of dividends is within the discretion of our board of directors and our board presently intends to retain all earnings for use in our business operations and to support our growth strategy. Furthermore, our Credit Facility prohibits the payment of any cash dividends. Accordingly, we do not anticipate declaring any dividends in the foreseeable future.

Stock Performance Graph

The performance graph furnished below compares the annual cumulative total stockholder return (assuming reinvestment of dividends) from investing $100 on January 1, 2010 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.


34


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

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.


35


Item 6. Selected Financial Data

The following is a summary of selected financial data of the Company for the period from January 1, 2010 to December 31, 2014. 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):
 
 
Years Ended December 31,
  
 
2014
 
2013
 
2012
 
2011
 
2010
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
516,631

 
$
461,338

 
$
369,645

 
$
274,337

 
$
241,967

Cost of goods sold
 
325,479

 
269,291

 
210,752

 
151,198

 
125,131

Gross profit
 
191,152

 
192,047

 
158,893

 
123,139

 
116,836

 
 
 
 
 
 


 


 


Operating expenses:
 
  

 
  

 
  

 
  

 
  

Marketing
 
22,611

 
30,295

 
32,316

 
26,606

 
40,155

Selling
 
44,674

 
35,988

 
30,689

 
23,208

 
19,769

General and administrative
 
84,980

 
75,059

 
65,508

 
45,562

 
40,270

Restructuring, acquisition and integration-related costs
 
4,351


5,824

 
7,638

 
4,086

 
4,133

Goodwill and tradename impairment
 
150,507

 

 

 

 
130,000

Total operating expenses, net
 
307,123

 
147,166

 
136,151

 
99,462

 
234,327

Operating income (loss)
 
(115,971
)
 
44,881

 
22,742

 
23,677

 
(117,491
)
 
 
 
 
 
 
 
 


 


Other income (expense), net:
 
 
 
  

 
  

 
  

 
  

Interest expense
 
(18,131
)
 
(24,493
)
 
(15,046
)
 
(3,612
)
 
(3,598
)
Other income (expense), net
 
(805
)
 
(1,351
)
 
231

 
767

 
(266
)
Total other (expense), net
 
(18,936
)
 
(25,844
)
 
(14,815
)
 
(2,845
)
 
(3,864
)
Income (loss) before income taxes
 
(134,907
)
 
19,037

 
7,927

 
20,832

 
(121,355
)
(Benefit) provision for income taxes
 
(7,637
)
 
8,750

 
3,724

 
11,172

 
6,806

Net income (loss)
 
(127,270
)
 
10,287

 
4,203

 
9,660

 
(128,161
)
Less: Net loss attributable to noncontrolling interest
 
194

 
139

 

 

 

Net income (loss) attributable to Boulder Brands, Inc. and Subsidiaries common stockholders
 
$
(127,076
)
 
$
10,426

 
$
4,203

 
$
9,660

 
$
(128,161
)
 
 
 
 
 
 
 
 
 
 


Earnings (loss) per share attributable to Boulder Brands, Inc. and Subsidiaries common stockholders:
 
 
 
 
 
 
 
 
 


     Basic
 
$
(2.09
)
 
$
0.17

 
$
0.07

 
$
0.16

 
$
(2.08
)
     Diluted
 
$
(2.09
)
 
$
0.17

 
$
0.07

 
$
0.16

 
$
(2.08
)
 
 
 
 
 
 
 
 
 
 


Weighted average shares outstanding
 
  

 
  

 
 
 
 
 
  

     Basic
 
60,890,622

 
59,643,102

 
59,133,992

 
59,256,228

 
61,665,824

     Diluted
 
60,890,622

 
62,871,488

 
60,765,876

 
59,284,978

 
61,665,824

 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(127,270
)
 
$
10,287


$
4,203

 
$
9,660

 
$
(128,161
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
  Foreign currency translation adjustment
 
(2,603
)
 
(2,605
)
 
631

 
(1,260
)
 

Other comprehensive income (loss)
 
(2,603
)
 
(2,605
)
 
631

 
(1,260
)
 

Comprehensive income (loss)
 
(129,873
)
 
7,682

 
4,834

 
8,400

 
(128,161
)
Less: Comprehensive loss attributable to noncontrolling interest
 
194

 
139

 

 

 

Comprehensive income (loss) attributable to Boulder Brands, Inc. and Subsidiaries common stockholders
 
$
(129,679
)
 
$
7,821

 
$
4,834

 
$
8,400

 
$
(128,161
)


36


 
 
As of December 31,
  
 
2014
 
2013
 
2012
 
2011
 
2010
Balance sheet data:
 
  

 
  

 
  

 
  

 
  

Cash
 
$
31,660

 
$
16,732

 
$
11,509

 
$
7,959

 
$
3,840

Other current assets
 
115,212

 
99,307

 
70,075

 
45,281

 
26,635

Property and equipment, net
 
53,151

 
51,408

 
31,195

 
13,804

 
5,378

Goodwill
 
233,592

 
347,227

 
322,191

 
266,598

 
248,912

Intangible assets, net
 
191,400

 
242,296

 
233,691

 
183,822

 
150,017

Investments, at cost
 
11,751

 
8,751

 

 

 

Other non-current assets
 
9,826

 
9,762

 
13,293

 
4,168

 
3,621

Total assets
 
$
646,592

 
$
775,483

 
$
681,954

 
$
521,632

 
$
438,403

 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
57,875

 
$
71,179

 
$
63,127

 
$
49,725

 
$
28,938

Long-term debt
 
301,113

 
292,344

 
230,490

 
93,815

 
44,000

Deferred tax liability
 
41,536

 
52,873

 
48,867

 
51,474

 
44,165

Contract payable
 

 
1,375

 
2,750

 
4,125

 
5,500

Other liabilities
 
4,909

 
1,393

 
1,232

 
877

 
2,301

Total liabilities
 
405,433

 
419,164

 
346,466

 
200,016

 
124,904

Common stock – par value
 
6

 
6

 
6

 
6

 
6

Additional paid-in capital
 
574,721

 
560,120

 
548,470

 
539,432

 
534,568

Accumulated deficit
 
(313,414
)
 
(186,338
)
 
(196,764
)
 
(200,967
)
 
(210,627
)
Accumulated other comprehensive loss
 
(5,837
)
 
(3,234
)
 
(629
)
 
(1,260
)
 

Treasury stock
 
(15,595
)
 
(15,595
)
 
(15,595
)
 
(15,595
)
 
(10,448
)
Total Boulder Brands, Inc. and Subsidiaries stockholders' equity
 
239,881

 
354,959

 
335,488

 
321,616

 
313,499

Noncontrolling interest
 
1,278

 
1,360

 

 

 

Total equity
 
241,159

 
356,319

 
335,488

 
321,616

 
313,499

Total liabilities and equity
 
$
646,592

 
$
775,483

 
$
681,954

 
$
521,632

 
$
438,403



37


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, 2014, 2013 and 2012. This section should be read in conjunction with our consolidated financial statements for the periods mentioned above, including the notes thereto, which are included elsewhere in this Annual Report.

Company Overview

Boulder Brands is committed to creating food solutions that give people opportunities to improve their lives, one product at a time. We distribute our products in all major retail channels, including natural, grocery, club, mass, food, and drug. Our product portfolio consists of a wide variety of food products marketed under the Udi's®,  Glutino®, Gluten-Free Pantry®, Earth Balance®, Level Life™, EVOL and Smart Balance® brands.  Our corporate vision is to create a health and wellness innovation platform that builds brands targeted to highly motivated consumer needs. These “need states” include gluten free diets (Glutino and Udi's), plant-based diets (Earth Balance), diabetic diets (Level Life), pure & simple ingredients (EVOL), and heart-health (Smart Balance).

With our recent acquisitions, our previous Natural and Smart Balance segments have evolved into our current Natural and Balance segments, which aligns with the way we began to operate our business in the first quarter of 2014. The Natural segment consists of our Udi's, Glutino, Davies and EVOL branded products. The Balance segment consists of Smart Balance, Earth Balance and Level Life branded products.

On August 3, 2011, we acquired Glutino Food Group, or “Glutino.” Glutino became our wholly-owned subsidiary and is currently one of our operating entities. Pursuant to the share purchase agreement for the Glutino acquisition, we paid an aggregate of $66.3 million in cash consideration. The cash consideration for the merger was funded with borrowings under our revolving credit facility.

On July 2, 2012, we acquired Udi's Healthy Foods, LLC, or “Udi's.” Total cash consideration was $126.9 million. The acquisition, as well as the refinancing of existing outstanding debt, was financed with the proceeds of a new $280.0 million senior secured credit facility.

On December 31, 2012, the Smart Balance, Inc. corporate name was changed to Boulder Brands, Inc. (“Boulder Brands” or the “Company”). "We," "us" and "our" mean Boulder Brands, Inc. and its consolidated subsidiaries.

On March 5, 2013, we formed a new partnership called Boulder Brands Investment Group, LLC, or "BIG," with a third party. BIG invests in early-stage growth companies in the natural and organic food and beverage sectors.  In the second quarter of 2013, the partners of BIG made their initial capital contributions and BIG made its first investment totaling $2.1 million. In the third quarter of 2013, BIG made additional investments totaling $6.7 million. In the fourth quarter of 2014, BIG made two additional investments totaling $3.0 million. All investments have been accounted for under the cost method.

On May 1, 2013, we acquired Davies, a United Kingdom based gluten free bakery and bread manufacturer, for approximately $3.9 million.

On July 10, 2013, we acquired 80% of GlucoBrands, LLC, owner of Level Life, or "Level," for $2.4 million. In February 2014, we acquired an additional 8% of Level for $0.2 million, and in July 2014, we acquired approximately an additional 1% of Level for $42 thousand. Level provides convenient food products to customers which help them create a diabetes-friendly diet as part of their daily management of diabetes.
  
In July 2013, we entered into an exclusive licensing arrangement with Byrne Dairy, pursuant to which Byrne will distribute and market all of our Smart Balance milk products in exchange for making royalty payments to us.

On December 23, 2013, we acquired 100% of the equity interests of Phil’s Fresh Foods, LLC, owner of EVOL Foods, or "EVOL," for approximately $48.9 million. Based in Boulder, Colorado, EVOL manufactures and markets frozen foods with a focus on pure and simple ingredients.  EVOL’s products include those that are antibiotic-free, hormone-free, GMO-free, and have no artificial preservatives or flavors.

On December 31, 2013, Udi’s was merged into GFA. On December 31, 2014, EVOL was merged into GFA, and we now operate GFA under the name Boulder Brands, USA, Inc.



38


On October 15, 2014, we acquired Real Food Matters, LLC, for $0.8 million, a natural foods research and development firm.

Restructuring

As part of continuing efforts to increase efficiency and effectiveness and position us for success, we undertook an organizational restructuring in 2011. In 2012, in connection with the acquisition of Udi's and establishment of two reportable operating segments, we eliminated several senior management positions, streamlining our management team. In 2013, we began a process to increase efficiency at our Udi’s manufacturing facilities, which involved the consolidation of several facilities into one new, state-of the art facility.  During 2013, charges of $2.4 million were incurred for asset write-offs and $0.4 million were incurred for related expenses associated with this restructuring effort. During 2014, additional charges of $1.1 million were incurred in connection with the Udi's facility consolidation, of which $0.5 million were for lease exit costs, net of estimated subleases, and $0.6 million were incurred for asset write-offs. During 2014, we also incurred additional charges associated with the restructuring of certain executive management positions. Additionally in 2014, we determined in was necessary to relocate certain functional departments within the company to one central location. As a result of this, we expect to incur approximately $1,992 of one-time termination benefits, as well as approximately $400 for other associated exit costs. As of December 31, 2014, $517 of the one-time termination costs have been incurred.

Goodwill and tradename impairment

As required under ASC 350, “Goodwill and Other Intangible Assets,” we routinely review the carrying value of our net assets, including goodwill, to determine if any impairment has occurred. An assessment was conducted at June 30, 2014, at which time, based on existing conditions and management’s outlook, we determined there was no impairment. Due to the continued difficult environment for spreads and the Smart Balance brand’s lack of a key differentiator within the category, in early 2014, the Company began to implement a change in strategy to a non-GMO platform with respect to its Smart Balance spreads products. During the second quarter of 2014, the Company made capital investments relating to this strategy and also began to rollout the products to one of its largest customers. Initial performance at this customer, which the Company receives on a weekly basis, indicated that this transition to non-GMO was changing the trend by improving sales and serving to differentiate the Company’s Smart Balance spreads products and as such this was factored into the assumptions.

During the third quarter of 2014, our revenue, earnings expectations and long-term outlook for our Smart Balance reporting unit were not materializing as previously projected. In fact, the trend reversed at its largest customer and the initial improvement experienced after launching the non-GMO products did not significantly materialize at other conventional retailers. The rollout of the non-GMO products at other retailers occurred throughout the third quarter, as did the marketing support intended to drive consumer awareness. The Company analyzes performance at these customers via Nielsen consumption data, which is received on a monthly basis. As such, in connection with the annual operating plan for 2015, the Company made a strategic decision to substitute Earth Balance products for under-performing Smart Balance items and has lowered its long-term projections for Smart Balance. As a result, it became apparent that an indication of impairment was likely.

As such, in connection with the preparation of the September 30, 2014 financial statements, we performed an impairment test of our Smart Balance reporting unit goodwill following a two-step process as defined in ASC 350. The first step in this process compares the fair value of the Smart Balance reporting unit’s net assets, including goodwill, to its 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.

We determined the fair value of our Smart Balance reporting unit’s net assets primarily using a discounted cash flow (income) approach. Under the income approach, we used growth assumptions of our Smart Balance business we considered reasonable in light of current conditions and our change in strategies and goals. We also used numerous other assumptions including weighted average costs of capital to discount cash flows. Accordingly, the carrying value of our Smart Balance reporting unit’s net assets exceeded the estimated fair value of its net assets, indicating the second step of the impairment test was necessary.

To perform the second step of the impairment test, we, along with the help of an independent valuation firm, estimated the fair value of all of our Smart Balance reporting unit’s 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 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 goodwill value implied from this analysis resulted in a goodwill impairment loss of $113.5 million at September 30, 2014.
 

39


In conjunction with performing an impairment test of goodwill in connection with the preparation of the September 30, 2014 financial statements, we also performed an impairment test of our Smart Balance indefinite-lived intangible asset, namely, its tradename. We used an income approach (relief-from-royalty method) to measure the fair value of this intangible. The result of this assessment indicated that the fair value of the tradename was below its carrying value and therefore an impairment loss of $37.0 million was recorded.

For other long-lived intangible assets, namely patents, we performed an assessment of the recoverability in accordance 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 for other long-lived intangible assets.

Results of Operations

Results of Operations for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
 
 
Years Ended December 31, *
(In millions, except per share data)
 
2014
 
2013
 
$ Change
 
% Change
Net sales
 
$
516.6

 
$
461.3

 
$
55.3

 
12.0
 %
Cost of goods sold
 
325.5

 
269.3

 
56.2

 
20.9
 %
Gross profit
 
191.2

 
192.0

 
(0.8
)
 
(0.5
)%
 
 


 


 
 
 


Operating expenses:
 
  

 
  

 
 
 


  Marketing
 
22.6

 
30.3

 
(7.7
)
 
(25.4
)%
  Selling
 
44.7

 
36.0

 
8.7

 
24.1
 %
  General and administrative
 
85.0

 
75.1

 
9.9

 
13.2
 %
  Restructuring, acquisition and integration-related costs
 
4.4

 
5.8

 
(1.4
)
 
(25.3
)%
  Goodwill and tradename impairment
 
150.5



 
150.5

 
NM
     Total operating expenses
 
307.1

 
147.2

 
159.9

 
108.7
 %
Operating income (loss)
 
(116.0
)
 
44.9

 
(160.9
)
 
(358.4
)%
 
 


 


 
 
 


Other income (expense), net:
 
  

 
  

 
 
 


  Interest expense
 
(18.1
)
 
(24.5
)
 
6.4

 
(26.0
)%
  Other income (expense), net
 
(0.8
)
 
(1.4
)
 
0.6

 
(40.4
)%
     Total other (expense), net
 
(18.9
)
 
(25.8
)
 
6.9

 
(26.7
)%
Income (loss) before income taxes
 
(134.9
)
 
19.0

 
(153.9
)
 
(808.7
)%
Provision (benefit) for income taxes
 
(7.6
)
 
8.8

 
(16.4
)
 
(187.3
)%
Net income (loss)
 
(127.3
)
 
10.3

 
(137.6
)
 
NM
Less: Net loss attributable to noncontrolling interest
 
0.2

 
0.1

 
0.1

 
39.6
 %
Net income (loss) attributable to Boulder Brands, Inc. and Subsidiaries common stockholders
 
$
(127.1
)
 
$
10.4

 
$
(137.5
)
 
NM
 
 


 


 
 
 


Earnings (loss) per share attributable to Boulder Brands, Inc. and Subsidiaries common stockholders:
 


 


 
 
 


     Basic
 
$
(2.09
)
 
$
0.17

 
$
(2.26
)
 
NM
     Diluted
 
$
(2.09
)
 
$
0.17

 
$
(2.26
)
 
NM
* Amounts may not add due to rounding.
NM = Not meaningful

Net Sales

Total net sales of $516.6 million for the year ended December 31, 2014 increased by $55.3 million, or 12.0%, from $461.3 million in 2013. The increase was related to an increase in our Natural segment net sales, partly offset by a decrease in our Balance segment net sales.

40



Net sales from our Natural segment of $314.3 million for the year ended December 31, 2014 increased by $76.9 million from $237.4 million in 2013. The increase was related to increases in Udi’s products of $43.6 million and EVOL of $41.3 million (acquired in December 2013), partly offset by a decrease in Glutino products of $8.0 million.

Net sales from our Balance segment of $202.3 million for the year ended December 31, 2014 decreased by $21.6 million, or 9.6%, from $223.9 million in 2013. The decrease was primarily related to the licensing of milk in the third quarter of 2013 and a decrease in volume of Smart Balance spreads due to competitive promotional levels and continued consumer price sensitivity to premium products. The decrease in sales of Smart Balance spreads and milk was partly offset by an increase in sales of Earth Balance products. Volume decreases resulted in a decrease in net sales of approximately $19.3 million.

Cost of Goods Sold

Total cost of goods sold of $325.5 million for the year ended December 31, 2014 increased by $56.2 million, or 20.9%, from $269.3 million in 2013. The increase was related to an increase in our Natural segment cost of goods sold, partly offset by a decrease in our Balance segment cost of goods sold.

Cost of goods sold for our Natural segment was $217.1 million for the year ended December 31, 2014, an increase of $66.0 million from $151.1 million in 2013. The increase was primarily related to increases in cost of goods sold for Udi's of $37.9 million and EVOL (acquired in December 2013) of $30.6 million, partly offset by a decrease in Glutino of $2.1 million. The increases primarily related to the increases in net sales as well as an increase in certain raw material costs.

Cost of goods sold for our Balance segment was $108.4 million for the year ended December 31, 2014, a decrease of $9.8 million, or 8.3%, from $118.2 million in 2013. The decrease was primarily related to the decrease in net sales, partly offset by an increase in investments in product formulation.

Brand Profit

The Company uses the term "brand profit" as its segment measure of profitability. Brand profit is a non-GAAP measure. Brand profit is calculated as gross profit less marketing, selling and royalty expense (income), net. Brand profit is the measure utilized by the Chief Operating Decision Maker, or "CODM," in making decisions about allocating resources to segments and measuring their performance. For a reconciliation of brand profit to income (loss) before income taxes, see "Non-GAAP Financial Measure" below.

Total brand profit of $127.1 million for the year ended December 31, 2014 decreased by $0.5 million from $127.6 million in 2013. The decrease was related to a decrease in brand profit for our Balance segment, partly offset by an increase in our Natural segment.

Brand profit from our Natural segment of $53.4 million for the year ended December 31, 2014 increased by $0.5 million from $52.9 million in 2013. Gross profit increased $10.8 million in 2014 compared to 2013 and as a percentage of net sales was 30.9% for the year ended December 31, 2014 compared to 36.4% during the same period in 2013. The decrease in gross margins primarily relates to increased costs for certain raw materials and an increase in plant capacity associated with a new production facility at Udi’s, which resulted in lower utilization. The increase in gross profit was partly offset by increases in selling expenses of $9.5 million and non-promotional marketing of $1.2 million. The increase in selling expenses primarily relates to increased freight costs related to an increase in net sales.

Brand profit from our Balance segment of $73.7 million for the year ended December 31, 2014 decreased by $1.0 million from $74.7 million in 2013. Gross profit decreased $11.7 million in 2014 compared to 2013, and as a percentage of net sales was 46.4% for the year ended December 31, 2014 compared to 47.2% during the same period in 2013. The decrease in gross profit was partly offset by decreases in non-promotional marketing of $8.9 million and selling expenses of $0.8 million and an increase in royalty income, net of $1.0 million. The decrease in non-promotional marketing expenses primarily relates to spreadable butter and the licensing of milk in 2013.

General and Administrative

General and administrative expenses of $85.0 million for the year ended December 31, 2014 increased $9.9 million, or 13.2%, from $75.1 million in 2013. The increase primarily related to increased compensation, benefits and employee related costs of approximately $5.0 million due primarily to increased headcount and the inclusion of EVOL, acquired in December 2013. The

41


increase also related to a $1.6 million increase in depreciation and amortization expense primarily relating to the inclusion of EVOL and a $1.6 million increase in severance, relocation expenses and a settlement of a class action lawsuit.

Restructuring, Acquisition and Integration-related Costs

Restructuring, acquisition and integration-related costs for the year ended December 31, 2014 were $4.4 million, comprised of restructuring costs associated with the consolidation of several of Udi’s manufacturing facilities, the restructuring of certain executive management positions and the relocation of certain functional departments within the company to one central location of $3.7 million and acquisition and integration-related costs of $0.7 million, primarily related to the acquisition of EVOL. Restructuring, acquisition and integration-related costs for the year ended December 31, 2013 were $5.8 million comprised of $3.2 million of acquisition and integration-related costs associated with the acquisitions of Davies, EVOL and Level as well as the integration of Udi’s and $2.6 million of restructuring costs associated with the consolidation of several of Udi’s manufacturing facilities.

Goodwill and Tradename Impairment

During the third quarter of 2014, we recorded an impairment charge of $150.5 million, of which $113.5 million related to goodwill of our Smart Balance reporting unit and $37.0 million related to our Smart Balance tradename.

Total Other Income (Expense), Net

We had total other expenses, net of $(18.9) million for the year ended December 31, 2014 and $(25.8) million in the corresponding period in 2013. The results for 2014 and 2013 included interest expense of $(18.1) million and $(24.5) million, respectively. Interest expense included write-offs of debt costs associated with the refinancing of our debt of $1.0 million in 2014 and $7.0 million in 2013. Also included in total other income (expense), net in 2014 were currency translation losses of $(0.7) million and other taxes of $(0.3) million, partly offset by gains of $0.4 million on commodity hedging. Also included in other expense in 2013 were currency translation losses of $(0.8) million, other taxes of $(0.4) million and losses on the disposal of assets of $(0.3) million.

Provision/Benefit for Income Taxes

The benefit for income taxes for the year ended December 31, 2014 was $7.6 million compared with a provision of $8.8 million in 2013. The effective tax rate for the year ended December 31, 2014 was 5.7% primarily as a result of the goodwill impairment charge, which is not deductible for tax purposes. The effective tax rate for the year ended December 31, 2013 was 46.0%, primarily as a result of a $0.3 million adjustment relating to nondeductible employee compensation.

Net Income (Loss) Attributable to Boulder Brands, Inc. and Subsidiaries Common Stockholders, or “Net Income (Loss) Attributable to Boulder Brands”

Our net loss attributable to Boulder Brands, Inc. for the year ended December 31, 2014 was $127.1 million compared to net income of $10.4 million in 2013. The $137.5 million decrease was primarily due to the goodwill and intangible impairment charges in 2014 of $136.1 million, net of tax, as well as the reasons noted above.
  
Results of Operations for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

42


 
 
Years Ended December 31, *
(in millions)
 
2013
 
2012
 
$ Change
 
% Change
Net sales
 
$
461.3

 
$
369.6

 
$
91.7

 
24.8
 %
Cost of goods sold
 
269.3

 
210.7

 
58.6

 
27.8
 %
Gross profit
 
192.0

 
158.9

 
33.1

 
20.9
 %
 
 


 


 
 
 


Operating expenses:
 
  

 
  

 
 
 


  Marketing
 
30.3

 
32.3

 
(2.0
)
 
(6.3
)%
  Selling
 
36.0

 
30.7

 
5.3

 
17.3
 %
  General and administrative
 
75.1

 
65.5

 
9.6

 
14.6
 %
  Restructuring, acquisition and integration-related costs
 
5.8

 
7.6

 
(1.8
)
 
(23.7
)%
     Total operating expenses
 
147.2

 
136.2

 
11.0

 
8.1
 %
Operating income
 
44.9

 
22.7

 
22.2

 
97.3
 %
 
 


 


 
 
 


Other income (expense):
 
  

 
  

 
 
 


  Interest expense
 
(24.5
)
 
(15.0
)
 
(9.5
)
 
62.8
 %
  Other income (expense), net
 
(1.4
)
 
0.2

 
(1.6
)
 
NM

     Total other (expense)
 
(25.8
)
 
(14.8
)
 
(11.0
)
 
74.4
 %
Income (loss) before income taxes
 
19.0

 
7.9

 
11.1

 
140.2
 %
Provision for income taxes
 
8.8

 
3.7

 
5.1

 
135.0
 %
Net income
 
10.3

 
4.2

 
6.1

 
144.8
 %
Less: Net loss attributable to noncontrolling interest
 
0.1

 

 
0.1

 
NM

Net income attributable to Boulder Brands, Inc. and Subsidiaries common stockholders
 
$
10.4

 
$
4.2

 
6.2

 
148.1
 %
 
 


 


 
 
 


Earnings per share attributable to Boulder Brands, Inc. and Subsidiaries common stockholders:
 


 


 
 
 


     Basic
 
$
0.17

 
$
0.07

 
0.10

 
142.9
 %
     Diluted
 
0.17

 
$
0.07

 
0.10

 
142.9
 %
* Amounts may not add due to rounding.
    
Net Sales

Total net sales of $461.3 million for the year ended December 31, 2013 increased by $91.7 million, or 24.8%, from $369.6 million in 2012. The increase was related to an increase in our Natural segment net sales, partly offset by a decrease in our Balance segment net sales.

Net sales from our Natural segment of $237.4 million for the year ended December 31, 2013 increased by $114.8 million from $122.6 million in 2012. The increase was related to increases in Udi’s products (acquired in July 2012) of $93.9 million and Glutino products of $20.5 million.

Net sales from our Balance segment of $223.9 million for the year ended December 31, 2013 decreased by $23.1 million, or 9.4%, from $247.0 million in 2012. The decrease was primarily related to a decrease in volume of Smart Balance spreads due to competitive promotional levels and continued consumer price sensitivity to premium products, the licensing of milk in the third quarter of 2013 and the winding down of Bestlife spreads and Smart Balance butter blends. The decrease was partly offset by the introduction of spreadable butter in 2012 and an increase in Earth Balance products of $8.6 million.

Cost of Goods Sold
    
Total cost of goods sold of $269.3 million for the year ended December 31, 2013 increased by $58.6 million, or 27.8%, from $210.7 million in 2012. The increase was related to an increase in our Natural segment cost of goods sold, partly offset by a decrease in our Balance segment cost of goods sold.    

43



Cost of goods sold for our Natural segment was $151.1 million for the year ended December 31, 2013, an increase of $72.3 million from $78.7 million in 2012. The increase was primarily related to increases in Udi's products (acquired in July 2012) of $61.3 million and Glutino of $10.8 million. The increases primarily related to the increases in net sales.
    
Cost of goods sold for our Balance segment was $118.2 million for the year ended December 31, 2013, a decrease of $13.8 million, or 10.5%, from $132.0 million in 2012. The decrease was primarily related to the decrease in net sales, partly offset by an increase in commodity costs.

Brand Profit

The Company uses the term "brand profit" as its segment measure of profitability. Brand profit is a non-GAAP measure. Brand profit is calculated as gross profit less marketing, selling and royalty expense (income), net. Brand profit is the measure utilized by the Chief Operating Decision Maker, or "CODM," in making decisions about allocating resources to segments and measuring their performance. For a reconciliation of brand profit to income (loss) before income taxes, see "Non-GAAP Financial Measure" below.

Total brand profit of $127.6 million for the year ended December 31, 2013 increased by $31.4 million, or 32.6%, from $96.2 million in 2012. The increase was related to increases in our Natural and Balance segments brand profit.

Brand profit from our Natural segment of $52.9 million for the year ended December 31, 2013 increased by $26.7 million from $26.2 million in 2012. Gross profit increased $42.4 million in 2013 compared to 2012 and as a percentage of net sales was 36.4% for the year ended December 31, 2013 compared to 35.8% during the same period in 2012. The increase in gross margins primarily relates to product mix, partly offset by an increase in plant capacity associated with a new production facility at Udi’s, which resulted in lower utilization. The increase in gross profit was partly offset by increases in selling expenses of $8.2 million and non-promotional marketing of $7.2 million primarily due to the acquisition of Udi's in July 2012 and increases in net sales.

Brand profit from our Balance segment of $74.7 million for the year ended December 31, 2013 increased by $4.7 million, or 6.7%, from $70.0 million in 2012. Gross profit decreased $9.3 million in 2013 compared to 2012, but as a percentage of net sales was 47.2% for the year ended December 31, 2013 compared to 46.5% during the same period in 2012. The increase in gross margins was primarily due to the licensing of milk, which had lower margins and is no longer in our results, as well as decreased costs associated with new product launches, partially offset by higher costs associated with space saver packaging. Gross margins in 2012 were also impacted negatively by the introduction of spreadable butter in 2012. The decrease in gross profit was more than offset by decreases in non-promotional marketing of $9.2 million, selling expenses of $2.9 million and an increase in royalty income, net of $1.9 million.

General and administrative

General and administrative expenses of $75.1 million for the year ended December 31, 2013 increased $9.6 million, or 14.6%, from $65.5 million in 2012. The increase primarily related to the acquisition of Udi’s (acquired in July 2012) which added additional amortization of intangibles and payroll expenses, partly offset by a decrease in stock-based compensation of $2.5 million. The decrease in stock-based compensation primarily related to accelerated expense recognized in 2012 as a result of market price units vesting.

Restructuring, acquisition and integration-related costs

Restructuring, acquisition and integration-related costs for the year ended December 31, 2013 were $5.8 million comprised of $3.2 million of acquisition and integration-related costs associated with the acquisitions of Davies, EVOL and Level as well as the integration of Udi’s and $2.6 million of restructuring costs associated with the consolidation of several of Udi’s manufacturing facilities. Restructuring, acquisition and integration-related costs for the year ended December 31, 2012 were $7.6 million comprised primarily of $5.2 million of acquisition and integration-related costs associated with the acquisition of Udi's and $2.4 million of restructuring costs associated with the actions taken in the third quarter of 2012 (streamlining our management team and establishing two reportable operating segments).

Total Other Income (Expense), Net

We had other expenses, net of $(25.8) million for the year ended December 31, 2013 and $(14.8) million in the corresponding period in 2012. The results for 2013 and 2012 included interest expense of $(24.5) million and $(15.0) million, respectively.  The increase in interest expense in 2013 was primarily due to the write-off of debt costs in the third quarter of 2013,

44


associated with the refinancing of our Prior Credit Facility, as well as higher average debt balances, which were partially offset by lower interest rates associated with the New Credit Facility. Also included in other expense in 2013 were currency translation losses of $(0.8) million, other taxes of $(0.4) million and losses on the disposal of assets of $(0.3) million. Also included in other expense in 2012 was a gain of $0.6 million on commodity hedging derivatives, partly offset by other taxes of $(0.3) million and currency translation losses of $(0.1) million.

Provision for Income Taxes

The provision for income taxes for the year ended December 31, 2013 was $8.8 million compared with $3.7 million in 2012. The effective tax rate for the year ended December 31, 2013 was 46.0%, primarily as a result of a $0.3 million adjustment relating to nondeductible employee compensation. The effective tax rate for the year ended December 31, 2012 was 47.0%, primarily as a result of a $1.6 million adjustment to reduce deferred tax assets resulting from the forfeiture of certain non-qualified stock options.

Net Income Attributable to Boulder Brands, Inc. and Subsidiaries Common Stockholder, or “Net Income Attributable to Boulder Brands”

Our net income attributable to Boulder Brands for the year ended December 31, 2013 was $10.4 million compared to $4.2 million in 2012. The $6.2 million increase was primarily due to higher operating income, partly offset by higher interest expense and an increase in the provision for income taxes.
   
Non-GAAP Financial Measure

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

The Company uses the term “brand profit” as its segment measure of profitability. Brand profit is a non-GAAP measure. Brand profit is calculated as gross profit less marketing, selling and royalty expense (income), net. Brand profit is the measure utilized by the CODM in making decisions about allocating resources to segments and measuring their performance. Management believes this measure best reflects each segment's financial results from ongoing operations. The following table reconciles brand profit by segment to income (loss) before income taxes calculated in accordance with GAAP:

 
Years Ended December 31,
 
2014
 
2013
 
2012
Brand Profit:
 
 
 
 
 
Natural
$
53.4

 
 
$
52.9

 
 
$
26.2

 
Balance
73.7
 
 
 
 
74.7

 
 
 
70.0

 
Total brand profit for reportable segments
127.1
 
 
 

127.6

 
 

96.2

 
     Less adjustments:
 
 
 
 
 
General and administrative, excluding royalty expense (income), net
 
88.2

 
 

76.9

 
 

65.9

 
Restructuring, acquisition and integration-related costs
 
4.4

 
 
 
5.8

 
 
 
7.6

 
Goodwill and tradename impairment
150.5
 
 
 
 
 
 
 

 
Interest expense
 
18.1

 
 

24.5

 
 
15.0
 
 
Other (income) expense, net
 
0.8

 
 
 
1.4

 
 
(0.2
)
 
Income (loss) before income taxes
$
(134.9
)
 
 
$
19.0

 
 
$
7.9

 

Liquidity and Capital Resources

Cash Flows

As of December 31, 2014, we had cash and cash equivalents of $31.7 million, an increase of $14.9 million from December 31, 2013. The following table summarizes the change:

45


 
 
Years Ended December 31,
 
 
 
 
(in millions)
 
2014
 
2013
 
2012
 
2014 vs. 2013 $ Change
 
2013 vs. 2012 $ Change
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Operating activities
 
$
19.1

 
 
$
33.6

 
 
$
27.6

 
 
$
(14.5
)
 
 
$
6.0

 
    Investing activities
 
(16.4
)
 
 
(89.6
)
 
 
(139.3
)
 
 
73.2
 
 
 
49.7
 
 
    Financing activities, net
 
12.2
 
 
 
61.3
 
 
 
115.2
 
 
 
(49.1
)
 
 
(53.9
)
 
Effect of exchange rate changes
 
(0.1
)
 
 
 
 
 
 
 
 
(0.1
)
 
 
 
 
Net change in cash and cash equivalents
 
$
14.9

 
 
$
5.2

 
 
$
3.6

 
 
$
9.7

 
 
$
1.6

 
* Amounts may not add due to rounding.

Cash provided by operating activities decreased from $33.6 million for the year ended December 31, 2013 to $19.1 million for the year ended December 31, 2014, due primarily to increased working capital needs as well a decrease in net income before non-cash items.

Cash provided by operating activities increased from $27.6 million for the year ended December 31, 2012 to $33.6 million for the year ended December 31, 2013, due primarily to an increase in net income before depreciation, amortization and other non-cash expenses, partly offset by decreased working capital needs.

During the year ended December 31, 2014, we used $73.2 million less cash for investing activities compared with the same period of 2013. The decrease in investing activities was primarily due to the acquisitions of Davies, Level and EVOL and an investment purchase in 2013, as well as lower capital expenditures in 2014 compared to 2013.

During the year ended December 31, 2013, we used $49.7 million less cash for investing activities compared with the same period of 2012. The decrease in investing activities was primarily due to the acquisition of Udi's of $126.9 million in 2012 compared to the acquisitions of Davies, Level and EVOL, totaling $55.0 million, in 2013. This decrease was partly offset by increases in capital expenditures of $16.0 million in 2013 and purchases of investments of $8.8 million compared to 2012.

During the year ended December 31, 2014, we generated $49.1 million less cash from financing activities compared with the same period in 2013. The decrease was due primarily to decreased borrowings under our Term Loan (as defined below) in the 2014 period.

During the year ended December 31, 2013, we generated $53.9 million less cash from financing activities compared with the same period in 2012. The decrease was due primarily to increased repayments of debt of $118.5 million, partly offset by an increase in borrowings of $51.8 million.

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, key commodities, 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 Facility (as defined below), we can also repurchase common stock subject to the satisfaction of certain conditions. No shares were repurchased during the year ended December 31, 2014. Currently, our primary source of liquidity is cash generated by operations. We may from time to time, depending on market conditions, seek to refinance our debt, issue debt or equity securities or engage in other capital markets or financing activities. However, there can be no assurance that we will consummate such transactions.

We believe that cash flows generated from operations, existing cash and cash equivalents and borrowing capacity under our Revolving Facility should be sufficient to finance working capital requirements for our business for the foreseeable future.

As of December 31, 2014, $115.0 million was available for borrowing under our Credit Facility and we had $31.7 million of cash and cash equivalents.

Financing:

As of December 31, 2014, $296.5 million was outstanding under the Term Loan and no borrowings under our Revolving Facility.

46



Cash paid for interest during the year ended December 31, 2014 was $14.4 million. The interest rates for outstanding obligations at December 31, 2014 were 4.5% for the Term Loan while the commitment fee on the unused line was 0.5%.

During the year ended December 31, 2014, we repaid $2.2 million under the Term Loan.

On July 9, 2013, the Company entered into a credit agreement by and among GFA Brands, Inc., UHF Acquisition Corp. and Udi's Healthy Foods, LLC, as borrowers, or the “Borrowers,” the Company, as a guarantor, the other guarantors from time to time party thereto, the lenders from time to time party thereto, or the “Lenders,” and Citibank, N.A., as administrative agent, or the “Agent” (as subsequently amended, the “Credit Facility”), pursuant to which the Borrowers established a senior secured credit facility, or the “Credit Facility,” in an aggregate principal amount of $330.0 million, consisting of a term loan B, or the “Term Loan,” in an aggregate principal amount of $250.0 million and a revolving credit facility, or the “Revolving Facility,” in an aggregate principal amount of $80.0 million (with sublimits for swingline loans and the issuance of letters of credit). The Term Loan will mature on July 9, 2020 and the Revolving Facility will mature on July 9, 2018.

On December 20, 2013, the Company increased its senior secured term loan credit facility, at the same interest rate as the original loan, by $25 million to $275 million. In addition, the Company amended the financial covenants on its revolving credit facility to increase the senior secured funded debt-to-EBITDA covenant by 0.25x for each quarterly period.

On July 29, 2014, we entered into the Amendment Agreement (the “Third Amendment”) by and among GFA Brands, Inc., as borrower, the Company, as a guarantor, the other guarantors party thereto, the financial institutions party thereto, as lenders, and Citibank, N.A., as administrative agent.  The Third Amendment amends the Credit Facility to, among other things, (a) increase the aggregate principal amount of the term loan facility by $27.0 million, (b) increase the aggregate principal amount of the Revolving Facility from $80 million to $115 million, (c) subject to compliance with certain leverage-based criteria, decrease the interest rate margin with respect to the term loan facility by up to 0.5%, (d) increase the maximum total funded debt to consolidated EBITDA ratio to 6.50x for any fiscal quarter ending prior to December 31, 2015, and to 6.0x for the fiscal quarter ending December 31, 2015 and each fiscal quarter thereafter and (e) revise the “incremental” term loan provision so that, upon the satisfaction of certain conditions, the borrower may increase the term and/or revolving commitments by an amount not to exceed the sum of (i) $100 million and (ii) an additional amount so long as various specified leverage ratios are not exceeded, subject to receipt of additional lending commitments for such loans.  Proceeds of the new term loans borrowed in connection with the Third Amendment were used to repay outstanding revolving loans under the Credit Facility, to pay fees and expenses in connection with the Third Amendment and for cash on the balance sheet.

As of December 31, 2014, we were in compliance with our financial covenants.
    
Interest
    
Outstanding amounts under the Term Loan bears interest at a rate per annum equal to, at the Borrowers' option, either (a) LIBOR plus 3.50% or (b) a Base Rate (equal in this context to the greater of (i) the Agent's prime rate, (ii) the federal funds rate plus 1/2 of 1.00% and (iii) LIBOR plus 1.00%) (but subject to a minimum of 2.00%) plus 2.50%. The Term Loan amortizes in equal quarterly installments of 0.25% of the initial principal amount beginning on September 30, 2013, with the balance due at maturity. The margin over LIBOR and the Base Rate for the Term Loan may be adjusted periodically based on the Company's ratio of first lien funded debt to consolidated EBITDA, with 3.5% per annum being the maximum LIBOR margin and 2.5% per annum being the maximum Base Rate margin established by such adjustment mechanism.

Outstanding amounts under the Revolving Facility will initially bear interest at a rate per annum equal to, at the Borrowers' option, either (a) LIBOR plus 3.50% or (b) a Base Rate (equal in this context to the greatest of (i) the Agent's prime rate, (ii) the federal funds rate plus 1/2 of 1.00% and (iii) LIBOR plus 1.00%) plus 2.50%. The margin over LIBOR and the Base Rate for the Revolving Facility may be adjusted periodically based on the Company's ratio of total funded debt to consolidated EBITDA, with 3.50% per annum being the maximum LIBOR margin and 2.50% per annum being the maximum Base Rate margin established by such adjustment mechanism. The Borrowers are required to pay a commitment fee on the unused commitments under the New Revolving Credit Facility at a rate equal to 0.50% per annum.
    
Guarantees

The loans and other obligations under the Credit Facility (including in respect of hedging agreements and cash management obligations) are (a) guaranteed by the Company and its existing and future wholly-owned domestic subsidiaries and (b) secured by substantially all of the assets of the Company and its existing and future wholly-owned domestic subsidiaries, in each case subject to certain customary exceptions and limitations.

47



For more information on our debt obligations, see Note 10 to the Notes to our consolidated financial statements included in this Annual Report under the caption "Item 8 - Financial Statements and Supplementary Data."

Contract Payable and Capital Leases

In addition to the indebtedness under the Credit Facility, we have recorded a contract payable of $1.4 million representing the unpaid balance on a 2010 acquisition. This amount will be paid in the first quarter of 2015, together with related interest. As of December 31, 2014, this amount is included within "Accounts payable and accrued expenses" on the Consolidated Balance Sheets.

We have five capital leases resulting in $8.7 million of capital lease obligations for certain of our manufacturing equipment. These leases have terms that expire from June 30, 2015 through December 1, 2021.

Maturities
 
Under the Credit Facility, the contract payable and capital lease obligations, we are required to pay the following amounts for our debt and contract obligations during the years ended December 31:
2015
$
5.5

2016
4.2

2017
4.2

2018
4.3

2019
4.3

Thereafter
286.1

Total
$
308.6

    
Contractual Obligations

The following table summarizes contractual obligations and borrowings as of December 31, 2014 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.

 
 
Payments Due by Period *
 
 
Total
 
Less Than
1 Year
 

1 – 3 Years
 

3 – 5 Years
 
More Than
5 Years
 
Building Operating Leases
 
$
32.8

 
$
3.5

 
$
7.5

 
$
7.8

 
$
14.0

 
Commodity Purchase Commitments(1)
 
63.3

 
63.3

 

 

 

 
Debt Obligations(2)
 
308.6

 
5.5

 
8.4

 
8.6

 
286.1

 
Interest on Debt(3)
 
79.1

 
14.4

 
28.2

 
26.8

 
9.7

 
  
 
$
483.8

 
$
86.6

 
$
44.1

 
$
43.3

 
$
309.8

 
* Amounts may not add due to rounding.

(1)
Forward purchase commitments for a portion of the Company’s projected requirement for commodity purchase commitments. These commitments may be stated at a firm price, or as a discount or premium from a future commodity market price.
(2)
Amounts represent obligations under the Credit Facility entered into on July 9, 2013 (and as amended in December 2013 and July 2014), the contract payable and capital lease obligations. For more information on our debt obligations, see Note 10 to the Notes to our consolidated financial statements included in this Annual Report under the caption "Item 8 - Financial Statements and Supplementary Data."
(3)
Amounts represent the estimated commitment fees and interest payments based on the principal amounts and applicable interest rates on the debt at December 31, 2014.

The table above excludes deferred tax liabilities of $41.5 million and deferred compensation liabilities of $1.5 million because the ultimate payoff date of these liabilities cannot be reasonably established given the long term nature of these obligations.

Off Balance Sheet Arrangements

48



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 commodity purchase contracts to support the projected needs of our business. 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 all of our spreads, butter blends, oil and shortening products, one of whom produces approximately 69% of the total production and uses multiple facilities to service the required volume. A growing portion of our Natural segment products are being produced by contract manufacturers. We are dependent on these manufacturers for the necessary production capacity in order for us to meet our customer demands. Alternative sources are continuously being reviewed to ensure we have sufficiently reliable and efficient contract manufacturers that have capacity to grow with our business needs.

Seasonality and Quarterly Results

Our Balance segment is subject to seasonal fluctuations. Significant portions of the net sales and profits of the Balance segment have historically been, 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 Smart Balance products during the Easter holiday season. Because of the seasonality of the Balance segment’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Our Natural segment has not historically shown any significant amount of seasonal fluctuations.

Impact of Inflation

In general, we believe that over time we are able to pass a significant portion of our increased costs resulting from inflation on to customers by increasing prices.

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 2 to the Notes to our consolidated financial statements included in this Annual Report under the caption "Item 8 - Financial Statements and Supplementary Data."

Revenue Recognition

Revenue is recognized when the earnings process is complete and the risks and rewards of ownership have transferred to the customer, which occurs upon the receipt and acceptance 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. We offer our customers a variety of sales and incentive programs, including discounts, allowances, coupons, slotting fees and advertising; such amounts are estimated and recorded as a reduction in revenue. We sell our products to customers without a right of return, and are not obligated to accept any returns.

Goodwill

We have defined our reporting unit levels used for goodwill impairment assessment purposes as (1) Smart Balance, (2) Earth Balance, (3) Udi’s, (4) Glutino, (5) Level and (6) EVOL. Goodwill is tested annually for impairment or more frequently if events or changes in circumstances indicate that impairment may have occurred. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Otherwise, the impairment analysis for goodwill includes a comparison of our carrying value (including goodwill) to our estimated fair value. If the fair value does not exceed the carrying value, then an additional analysis would be performed to allocate the fair value to all of our assets and liabilities as if it had been acquired in a business combination and the fair value was our 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. Our estimates of fair value are determined based on a discounted cash flow model. Growth

49


rates for sales and profits are determined using inputs from our annual long-range planning process. We also make estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors. While we currently believe that our goodwill is not impaired, different assumptions regarding the future performance of our businesses could result in significant impairment losses.

Other Intangibles

Other intangible assets are comprised of both finite and indefinite-lived intangible assets. Indefinite-lived intangible assets are not amortized. We have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. Otherwise, indefinite-lived intangible assets 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-lived intangible assets, we 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 our future cash flows. In each reporting period, we also evaluate the remaining useful life of an intangible asset that is not being amortized to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is determined to have a finite useful life, the asset will be amortized prospectively over the estimated remaining useful life and accounted for in the same manner as intangible assets subject to amortization.

We have determined that our Smart Balance, Earth Balance, Glutino, Udi's and EVOL trademarks have indefinite lives and these assets are not being amortized. We continually monitor our projected future cash flows for each of our trademarks. If we do not realize the projected future cash flows or if declining trends were to continue, we may be required to record an impairment charge in the future.  Certain other assets acquired, primarily patent technology, have been determined to have finite lives ranging from 3 to 15 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 we have been successful in defending ourselves 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 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

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. We look primarily to the undiscounted future cash flows in our assessment of whether or not long-lived assets have been impaired.

Income Taxes

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

Acquisitions

We account for acquisitions using the acquisition method of accounting. Under the acquisition 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.

Stock-Based Compensation

50


We provide compensation benefits in the form of stock options and restricted stock units to employees and non-employee directors. We issue service-based and market condition-based awards. The cost of stock-based compensation is recorded at fair value at the date of grant and expensed in the consolidated statement of operations over the requisite service period or, in the case of market condition-based awards, as determined by the Monte Carlo valuation model. The fair value of service-based stock option awards is estimated on the date of grant using the Black-Scholes option pricing model and is recognized in expense over the vesting period of the options using the straight-line method. The Black-Scholes option pricing model requires various assumptions, including the expected volatility of our stock, the expected term of the option, the risk-free interest rate and the expected dividend yield. Expected volatility is based on historical volatility of our common stock. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair value of market condition-based awards is estimated on the grant date using the Monte Carlo valuation model. The fair value of restricted stock awards is equal to the market value of our common stock on the date of grant and is recognized in expense over the vesting period using the straight-line method. We recognize compensation expense for only that portion of stock based awards that are expected to vest. We utilize historical employee termination behavior to determine our estimated forfeiture rates. If the actual forfeitures differ from those estimated by management, adjustments to compensation expense will be made in future periods.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers." This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605, "Revenue Recognition," and most industry-specific guidance throughout the Codification. The standard requires entities to recognize the amount of revenue that reflects the consideration to which the company expects to be entitled in exchange for the transfer of promised goods or services to customers. This ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2014-09 on its financial position, results of operations, cash flows and financial statement disclosures.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern: Disclosures about an Entity’s Ability to Continue as a Going Concern." The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The new guidance is effective for annual periods ending after December 15, 2016, and interim periods thereafter. The Company is currently assessing the impact of the adoption of ASU No. 2014-15 on its financial position, results of operations and financial statement disclosures.

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 Facility, 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 1.25% for 20 of the last 30 consecutive business days. The three-month LIBOR rate at December 31, 2014 was 0.26%.

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 a potential reduction of future pre-tax earnings of approximately $3.0 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.

We purchase significant amounts of soy, palm and canola oil, peanuts and rice 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 ASC 815, “Accounting for Derivative Instruments and Hedging Activities.” Based on the most recent prices for soy, palm and canola oil and peanuts and rice products, as of December 31, 2014 we had commitments of $63.3 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 vegetable oil. These derivatives must be net settled in cash and are marked-to-market each period within the consolidated statement of operations.
    
We sell and produce products in Canada and the United Kingdom for both sale and distribution in the Canadian, U.S. and U.K. markets.  By doing business in foreign markets, we are subject to risks associated with currency fluctuations which can

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reduce the ultimate amount of money we receive for the sales of our products into other foreign markets or add costs to the products we purchase from others in other foreign markets. In order to minimize the adverse effect of foreign currency fluctuations, we may use foreign currency contracts and other hedging arrangements as needed.

Item 8. 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, 2014. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on management’s evaluation of our disclosure controls and procedures as of December 31, 2014, our Chief Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
    
Management's report on 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 and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting.

    In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control - Integrated Framework” (2013 Framework). Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.

Ernst & Young, LLP, 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 under Item 8, 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 year ended December 31, 2014, 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.

Transition of enterprise resource planning system

During the first and second quarters of 2014, the Company completed the process of installing an ERP system at one of its plants in the U.S. and one in Canada as part of a phased implementation schedule.  The installed ERP system was currently used by the legacy Company and will replace existing systems of acquired companies over the next several quarters.  The implementation of this ERP system involves changes in the Company’s procedures for internal control over financial reporting.  The Company follows a system implementation life cycle process that requires significant pre-implementation planning, design and testing.  The Company also conducted and will continue to conduct extensive post-implementation monitoring and process

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modifications to ensure that internal controls over financial reporting are properly designed.  The Company has not experienced any significant difficulties to date in connection with the implementation or the operation of this ERP system.

Item 9B. Other Information

Not Applicable