STKL 10-Q Quarter ended April 3, 2010

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2010

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________ .

Commission file number: 001-34198

SUNOPTA INC.
(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X ]             No [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [    ]             No [    ]

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. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [    ]             No [ X ]

Aggregate market value of the common shares held by non-affiliates of the registrant, computed using the closing price of the NASDAQ Global Select Market for the registrant’s common stock on May 3, 2010 was $299,992,020. The registrant’s common shares trade on the NASDAQ Global Select Market under the symbol STKL and on the Toronto Stock Exchange under the symbol SOY.

The number of shares of the registrant’s common stock outstanding as of May 3, 2010 was 65,065,907.

SUNOPTA INC.

FORM 10-Q
For the quarterly period ended April 3, 2010

All financial information is expressed in United States Dollars. The closing rate of exchange on May 3, 2010 was CDN $1 = U.S. $0.9895.

Forward-Looking Statements

This report contains forward-looking statements which are based on our current expectations and assumptions and involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and are typically accompanied by words such as “anticipate,” “believe,” “expect,” “could,” “might,” “plan,” “will,” and words and phrases of similar impact and include, but are not limited to references to proposed operational consolidation, reduction of non-core assets and operations, business strategies, plant and production capacities, revenue generation potential and anticipated construction costs, competitive strengths, goals, capital expenditure plans, business and operational growth and expansion plans, anticipated operating margins and operating income increases, gains or losses associated with business transactions, cost reductions, rationalization and improved efficiency initiatives, proposed new product offerings, and references to the future growth of the business and global markets for the Company’s products. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on certain assumptions and analyses we make in light of our experience and our interpretation of current conditions, historical trends and expected future developments as well as other factors that we believe are appropriate in the circumstance.

Whether actual results and developments will agree with our expectations and predictions is subject to many risks and uncertainties including, but not limited to, general economic, business, weather or market risk conditions; the achievement of business forecasts; the outcome of any pending litigation; competitive actions by other companies; changes in laws or regulations or policies of local governments in the regions where the Company operates; construction delays; and labour issues, many of which are beyond our control. Consequently all forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that our actual results or the developments we anticipate will be realized. For a fuller discussion of the risks facing us and our operations refer to Item 1A, Risk Factors, in our December 31, 2009 Form 10-K.

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

Consolidated Financial Statements

SunOpta Inc.

For the quarters ended April 3, 2010 and March 31, 2009

(Unaudited)

SunOpta Inc.
Consolidated Statements of Operations
For the quarters ended April 3, 2010 and March 31, 2009
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

(See accompanying notes to consolidated financial statements)

SunOpta Inc.
Consolidated Statements of Comprehensive Earnings (Loss)
For the quarters ended April 3, 2010 and March 31, 2009
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

(See accompanying notes to consolidated financial statements)

SunOpta Inc.
Consolidated Balance Sheets
As at April 3, 2010 and December 31, 2009
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

(See accompanying notes to consolidated financial statements)

SunOpta Inc.
Consolidated Statements of Shareholders’ Equity
As at and for the quarters ended April 3, 2010 and March 31, 2009
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

(See accompanying notes to consolidated financial statements)

SunOpta Inc.
Consolidated Statements of Cash Flow
For the quarters ended April 3, 2010 and March 31, 2009
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

Supplemental cash flow information (notes 7 and 11)

(See accompanying notes to consolidated financial statements)

1. Basis of presentation, fiscal year-end and new accounting pronouncements

Basis of presentation

The interim consolidated financial statements of SunOpta Inc. (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and in accordance with accounting principles generally accepted in the United States of America. Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter ended April 3, 2010 are not necessarily indicative of the results that may be expected for the full year ending January 1, 2011. For further information, see the Company’s consolidated financial statements, and notes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 2009.

The interim consolidated financial statements include the accounts of the Company and its subsidiaries, and have been prepared on a basis consistent with the financial statements for the year ended December 31, 2009. Intercompany accounts and transactions have been eliminated on consolidation.

Fiscal year-end

On March 9, 2010, the Board of Directors of the Company approved a change to the Company’s fiscal year period from a fiscal year ending on December 31 to a floating year-end on the Saturday closest to December 31, based on a 52 week calendar, wherein every fiscal quarter (except for the current quarter which included two additional days) is comprised of 13 weeks or 91 days. This change is effective for fiscal 2010, resulting in a year-end of January 1, 2011 and the quarterly periods for fiscal 2010 ending on April 3, July 3 and October 2. The fiscal year of Opta Minerals Inc., (“Opta Minerals”), which is 66.4% owned by the Company, ends on December 31, 2010, and its quarterly periods for fiscal 2010 end on March 31, June 30 and September 30. The consolidated statements of operations, cash flows and balance sheets for the Company in the current quarter include the results of Opta Minerals through March 31, 2010.

New accounting pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 810 (formerly Statement of Financial Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)”). This accounting standard is a revision to a previous FASB Interpretation and changes how a reporting entity evaluates whether an entity is a variable interest entity (“VIE”) and which entity is considered the primary beneficiary of a VIE and is therefore required to consolidate the VIE. This accounting standard will also require continuous reassessments of which party within the VIE is considered the primary beneficiary. ASC 810 became effective January 1, 2010. As a result of adopting this standard, the Company reassessed its investments and did not change its position as the primary beneficiary of its VIE’s.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Topic 820, “Fair Value Measures and Disclosures.” ASU No. 2010-06 amends the ASC to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also requires more detailed disclosure about the activity within Level 3 fair value measurements. The Company adopted the guidance in ASU No. 2010-06 on January 1, 2010, except for the requirements related to Level 3 disclosures, which will be effective for annual and interim reporting periods beginning after December 15, 2010 (January 1, 2011 for the Company). This guidance requires expanded disclosures only, and did not have any impact on the Company’s consolidated financial statements.

2. Inventories

3. Capital stock

(a) Capital Stock

Transactions involving capital stock in the quarter ended April 3, 2010 and the quarter ended March 31, 2009 were as follows:

(b) Warrants

On February 5, 2010, the Company issued warrants pursuant to an Advisory Services Agreement. A fair value of $441 was assigned to these warrants, using the Black-Scholes option pricing model, and was expensed in full during the quarter with the offset recorded as an increase to additional paid in capital. Inputs used in the Black-Scholes option pricing model for the warrants were as follows:

3. Capital stock, continued

(c) Options

There were no options granted in the quarter ended April 3, 2010. For the quarter ended March 31, 2009, 40,000 options were granted, using the following inputs to the Black-Scholes option pricing model:

4. Earnings (loss) per share

The calculation of basic earnings per share is based on the weighted average number of shares outstanding. Diluted earnings per share reflect the dilutive effect of the exercise of warrants and options. The number of shares for the diluted earnings per share was calculated as follows:

For the quarter ended April 3, 2010, options to purchase 1,310,825 common shares have been excluded from the calculations of diluted earnings per share due to their anti-dilutive effect. Due to the net loss for the quarter ended March 31, 2009, options to purchase 1,820,875 common shares were excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.

5. Bank indebtedness

(a) Canadian Line of Credit Facility:

The Company has a Canadian line of credit of Cdn $20,000 (U.S. - $19,833). As at April 3, 2010, $nil (2009 - $nil) of this facility was utilized, and there were no amounts committed through letters of credit. Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including Canadian or U.S. bank prime, or Canadian bankers’ acceptances, plus a margin based on certain financial ratios. At April 3, 2010, the interest rate on this facility was 4.75%, calculated as Canadian prime plus a premium of 2.50%. The maximum availability of this line is based on a borrowing base which includes certain accounts receivables and inventories of the Company’s Canadian business as defined in the Credit Agreement. At April 3, 2010, the borrowing base supported draws to the maximum line of credit.

(b) U.S. Line of Credit Facility:

The Company has a U.S. line of credit of $80,000. As at April 3, 2010, $62,135 (2009 - $45,754) of this facility was utilized, including $2,375 (2009 - $1,624) committed through letters of credit. Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including U.S. bank prime, or U.S. LIBOR, plus a margin based on certain financial ratios. At April 3, 2010, the weighted average interest rate on this facility was 3.75%, based on LIBOR plus a premium of 3.50%. The maximum availability of this line is based on the borrowing base which includes certain accounts receivables and inventories of the Company’s U.S. business as defined in the Credit Agreement. At April 3, 2010, the borrowing base supported draws to the maximum line of credit.

The above line of credit facilities as well as certain long-term debt balances (note 6) are collateralized by a first priority security against substantially all of the Company’s assets in both Canada and the United States, excluding the assets of Opta Minerals, SunOpta BioProcess and The Organic Corporation.

The Company has certain financial covenants that it is measured against quarterly. See note 6 for a discussion of the Company’s compliance with respect to these covenants.

(c) Opta Minerals Canadian Line of Credit Facility:

Opta Minerals has a line of credit facility of Cdn $15,000 (U.S. - $14,717). At April 3, 2010, Cdn $5,555 (U.S. - $5,509) (2009 - Cdn $4,686 (U.S. - $4,459)) of this facility has been utilized, including letters of credit in the amount of Cdn $1,150 (U.S. - $1,141) (2009 - Cdn $1,160 (U.S. - $1,104)). Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including prime, U.S. dollar base rate, bankers’ acceptances or LIBOR plus a margin based on certain financial ratios of the Company. At April 3, 2010, the weighted average interest rate on this facility was 6.84% (2009 - 7.50%).

Opta Minerals’ line of credit facility, along with its unused portion of the revolving acquisition facility (note 6(c)), is subject to annual extensions, and were extended on July 30, 2009 to August 17, 2010.

5. Bank indebtedness, continued

(d) TOC Line of Credit Facilities:

The Organic Corporation (“TOC”) has a line of credit facility of €30,000 (U.S. - $40,671). At April 3, 2010, €17,770 (U.S. - $24,091) (2009 - €12,746 (U.S. - $18,247) of this facility had been utilized, including letters of credit in the amount of €2,347 (U.S. - $3,184) (2009 - €2,119 (U.S. - $3,034)). Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including U.S. LIBOR and Euro LIBOR plus a premium of 1.85%. At April 3, 2010, the weighted average interest rate on this facility was 2.25%. The maximum availability of this line is based on a borrowing base which includes certain accounts receivables and inventories of TOC and its subsidiaries. At April 3, 2010, the borrowing base securing this facility supported draws to €18,418 (U.S. - $24,969) (2009 - €17,019 (U.S. - $24,364)).

A less-than-wholly owned subsidiary of TOC has line of credit facilities with availability of $1,377 (2009 - $1,394) which are fully guaranteed by TOC. As at April 3, 2010, $809 (2009 - $783) of these facilities had been used. Interest on borrowings under these facilities accrues at a base rate of 0.4% plus a premium of 6.00%, and a fixed rate of 9.75%. At April 3, 2010, the weighted average interest rate on these facilities was 8.4% (2009 - 8.6%) and TOC is in compliance with all requirements under this facility.

Details of the Company’s long-term debt are as follows:

(a) Term loan facility:

The term loan facility balance at April 3, 2010 was $45,000 (2009 - $45,000). The entire loan principal is due December 20, 2010 and, at that time, is renewable at the option of the lender and the Company. Interest on the term loan facility is payable at a fixed rate of 6.44% plus a margin of up to 360 basis points based on certain financial ratios of the Company. As at April 3, 2010, the interest rate was 9.54% (2009 - 9.74%).

The term loan facility, and the U.S. line of credit facility (note 5), are collateralized by a first priority security against substantially all of the Company’s assets in Canada, the United States and Mexico, excluding the assets of Opta Minerals, SunOpta BioProcess and TOC.

6. Long-term debt, continued

(b) Opta Minerals Term Loan Facility:

The term loan facility has a maximum available borrowing amount of Cdn $9,280 (U.S. - $9,105). This facility matures on July 30, 2012, is renewable at the option of the lender and Opta Minerals, and has quarterly principal repayments of Cdn $312 (U.S. - $309). At March 31, 2010, the term loan facility was fully drawn (2009 - Cdn $9,280 (U.S. - $8,830)). At March 31, 2010, the weighted average interest rate on this facility was 8.24% (2009 - 7.50%).

(c) Opta Minerals Revolving Acquisition Facility:

The revolving acquisition facility has a maximum available borrowing amount of Cdn $14,043 (U.S. - $13,926) to finance future acquisitions and capital expenditures. Principal is payable quarterly equal to 1/40 of the drawdown amount. Any remaining outstanding principal under this facility is due upon maturity. The facility is revolving for one year, with a five year term out option. The outstanding balance on the revolving acquisition facility at March 31, 2010 was Cdn $12,515 (U.S. - $12,279) (2009 - Cdn $12,992 (U.S. - $12,362)). At March 31, 2010, the weighted average interest rate on this facility was 8.07% (2009 - 6.99%).

The Opta Minerals’ credit facilities described above are collateralized by a first priority security against substantially all of the Opta Minerals assets in both Canada and the United States.

Opta Minerals entered into a cash flow hedge in 2007. The cash flow hedge entered into exchanged a notional amount of Cdn $17,200 (U.S. - $17,057) from a floating rate to a fixed rate of 5.25% from August 2008 to August 2012. The estimated fair value of the interest rate swap at March 31, 2010 was a loss of $1,216 (2009 - loss of $1,387). The incremental gain in fair value of $120 (net of income taxes of $51) has been recorded in other comprehensive loss for the period. The fair value liability is included in long-term liabilities on the consolidated balance sheets.

(d) Subordinated debt to former shareholders of TOC:

In conjunction with the acquisition of TOC on April 2, 2008, its former shareholders provided a subordinated loan to TOC in the amount of €3,000 (U.S. - $4,067). The loan bears interest at 7% payable to the former shareholders on a semi-annual basis. The subordinated loan, as well as €453 (U.S. - $614) previously loaned to TOC, is repayable in full on March 31, 2011.

(e) Promissory Notes:

Promissory notes consist of notes issued to former shareholders as a result of business acquisitions. As consideration in the acquisition of TOC, the Company issued a total of €9,000 (U.S. - $12,201) in promissory notes which are secured by a pledge of the common shares of TOC. Of the €9,000 (U.S. - $12,201) issued, €1,000 (U.S. - $1,356) was paid in cash on April 5, 2010, with the remaining €8,000 (U.S. - $10,845) due March 31, 2011. Due to TOC’s opening balance sheet not meeting pre-determined working capital targets, and an undisclosed liability that existed prior to the Company’s April 2, 2008 acquisition, €654 (U.S. - $887) of the promissory notes due March 31, 2011 will not be paid.

In addition, $3,000 remains owing to various former shareholders at a weighted average interest of 5.3%. Of the $14,524 in total promissory notes, $14,099 are due in the next 12 months, with the remaining balances due in varying installments through 2012.

(f) Other long-term debt

A less-than-wholly owned subsidiary of TOC has a maximum borrowing amount of 6,500 Ethiopia Birr (“ETB”) (U.S. - $490). The outstanding balance at April 3, 2010, was $247 (2009 - $380). At April 3, 2010, the weighted average interest rate on borrowed funds was 10.3% (2009 - 10.1%).

6. Long-term debt, continued

(g) Term Loans Payable:

Term loans payable bear a weighted average interest rate of 5.3% (2009 - 5.3%) due in varying installments through 2013 with principal payments of $13 due in the next 12 months.

(h) Capital Lease Obligations:

Capital lease obligations are due in monthly payments, with a weighted average interest rate of 7.1% (2009 - 7.1%).

The long-term debt and capital leases described above have required repayment terms in the next five years ending April 3, as follows:

At April 3, 2010, the Company was in compliance with its covenants, which relate to the Canadian line of credit facility, the U.S. line of credit facility (notes 5(a) and (b)), as well as the term loan facilities. In addition, Opta Minerals was in compliance with its financial covenants which relate to the Canadian Line of Credit Facility (note 5(c)), as well as the term loan facility and revolving acquisition facility.

7. Supplemental cash flow information

8. Commitments and contingencies

(a) Securities class action lawsuits

The Company and certain officers (one of whom is a director) and a former director were named as defendants in proposed class action lawsuits in the United States. These lawsuits were filed between January 28, 2008 and March 19, 2008 in the United States District Court for the Southern District of New York. These actions were also filed against two Company Officers, one of whom is a director, as well as a former director who was named in certain actions. The Company was alleged to have violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the United States Securities and Exchange Commission (“SEC”). Additionally, the named officers and directors (one of whom is a former director) were alleged to have violated Section 20(a) of the Securities Exchange Act of 1934. The complaints alleged different proposed class periods. On January 28, 2009, the Court appointed Western Washington Laborers-Employers Pension Trust and Operating Engineers Construction Industry and Miscellaneous Pension Fund (the “Pension Funds”) as the lead plaintiffs in one consolidated class action aggregating the various class action lawsuits. On April 14, 2009, the lead plaintiffs filed their consolidated and amended complaint in the US District Court in the Southern District of New York. The new complaint included new allegations under Sections 11, 12 and 15 of the Securities Act of 1933 as well as four new individual defendants, two of whom are former senior management employees (one also a former director and officer), a current director and chairman and a current senior employee. The new complaint also added three corporate defendants namely, Cleugh’s Frozen Foods, Inc. and Pacific Fruit Processors, Inc. (each of which are now part of the merged subsidiary, SunOpta Fruit Group, Inc.) and Organic Ingredients, Inc. (which is now known as SunOpta Global Organic Ingredients, Inc.).

Similarly, one proposed class action lawsuit has also been filed in Canada in the Ontario Superior Court of Justice on behalf of shareholders who acquired securities of the Company between May 8, 2007 and January 25, 2008 (and further amended to cover the period from February 23, 2007 and to January 27, 2008) against the Company and certain officers (one of whom is a director), alleging misrepresentation and proposing to seek leave from the Ontario court to bring statutory misrepresentation civil liability claims under the Ontario Securities Act. On August 29, 2008, the plaintiff filed a motion to amend the claims against the Company to include additional allegations. The Canadian plaintiffs claim compensatory damages of Cdn $100,000 and punitive damages of Cdn $10,000 and other monetary relief.

On September 24, 2009 the Company announced that it entered into a tentative agreement to settle all claims raised in these proposed class action proceedings. In return for the dismissal of the class actions and releases from proposed class members of settled claims against the Company and other named defendants, the settlement agreement provides for a total cash contribution of $11,250 to a settlement fund, the adoption of certain governance enhancements to the Company’s Audit Committee charter and Internal Audit Charter and the adoption of an enhanced information technology conversion policy. The settlement has been entirely funded by the Company’s insurers. The settlement is conditional upon the Courts’ approval and subject to SunOpta’s option to terminate it in the event of valid opt-outs by proposed class members that exceed a pre-agreed threshold.

Class members wishing to opt out of the settlement had until April 12, 2010 to do so. Based on information available to the Company, the Company has determined that the number of class members electing to opt-out of the settlement will not cause it to terminate the settlement agreement. Accordingly, the Company intends to request final court approval of the settlement.

The Ontario Superior Court and U.S. District Court each granted preliminary approval of the settlement agreement and, for the purposes of the settlement only, have certified the lawsuits as class actions. The courts have scheduled hearings on May 3, 2010 (Canada) and May 17, 2010 (US) to determine whether they will grant final approval of the proposed settlement agreement. The Canadian hearing was held as scheduled on May 3, 2010 and the presiding judge has requested time to review the final order, which he expects to be completed in advance of the U.S. hearing on May 17, 2010. Class members have until June 11, 2010 to file claims related to the proposed settlement.

In the event the proposed settlement agreement is not approved by the courts, the settlement agreement will be void and management’s intention is to vigorously defend these actions. Given the current status of the class actions it is not possible to determine the probability of liability, if any, or estimate the loss, if any, that might arise from these lawsuits. Accordingly, no accrual has been made at this time for these contingencies.

8. Commitments and contingencies, continued

(b) Formal investigation by the SEC

In 2008 the Company received letters from the SEC requesting additional information in connection with the restatement of the Company’s filings for each of the quarterly periods ended March 31, 2007, June 30, 2007, and September 30, 2007. Additionally, the SEC has conducted interviews with certain current and past employees, current and former members of the Company’s Audit Committee, as well as the Company’s previous external auditors. The Company continues to cooperate with the requests from the SEC in connection with its formal investigation. An enforcement action by the SEC could result in expense in the form of sanctions, fines or other levies. Management cannot conclude whether the prospect of an unfavourable outcome in this matter is probable, or estimate the loss, if any, that might arise from any enforcement action taken against the Company or its officers. Accordingly, no accrual has been made at this time for this contingency.

(c) SunOpta BioProcess lawsuit against Abengoa and Abener arbitration

The Company commenced a suit on January 17, 2008, against Abengoa New Technologies Inc. (“Abengoa”) and a former employee of the Company alleging theft of trade secrets, breach of contract, tortious interference with contract and civil conspiracy, and filed motions for expedited discovery and a preliminary injunction. Abengoa filed a counterclaim alleging breach of contract, misappropriation of trade secrets and other contractual violations. The United States District Court, Eastern District of Missouri, referred the core claims to arbitration and stayed the other claims pending the outcome of the arbitration. The arbitration was held during the period of July 20 to July 24 and October 19 to October 23 inclusive, in St. Louis before a single arbitrator. The arbitrator issued a ruling on February 1, 2010 denying all monetary damage claims, but also holding that the Company could independently commercialize, without payment of royalty or other obligation to Abengoa, the dilute acid hydrolysis technology the Company developed with Abengoa and implemented at Abengoa’s cellulosic ethanol facility in Salamanca, Spain. Prior to the arbitrator’s ruling, Abengoa had exclusive use, and rights to exploit, the jointly developed technology in the field of fermentable sugars and cellulosic ethanol production.

In January 2008, a customer of the Company, Abener Energia S.A. (an affiliate of Abengoa), terminated a contract valued at approximately $7,000 for the delivery of equipment and related services, forcing the matter into arbitration under its provisions. In December 2008, the arbitrator rendered his final decision, partially allowing Abener’s claim and awarding Abener approximately €1,329 (U.S. - $1,903) in damages. During the quarter ended April 3, 2010, the Company paid all outstanding amounts related to this award.

(d) Vargas Class Action

In September 2008, a single plaintiff and a former employee filed a wage and hour dispute, against SunOpta Fruit Group, Inc., as a class action alleging various violations of California’s labour laws (the “Vargas Class Action”). On July 16, 2009, the parties attended a mediation in San Francisco, and no settlement was reached. A second mediation was held on January 15, 2010. A tentative settlement of all claims was reached at mediation, subject to agreement on final terms of the settlement, including a plan of distribution, and approval of the settlement by the court. The parties are in the process of finalizing details related to the settlement and will then present the final settlement agreement to the court for approval. As a result of the tentative settlement, the Company accrued a liability of $1,200 as at December 31, 2009.

(e) Colorado Sun Oil Processors, LLC dispute

Colorado Mills LLC (“Colorado Mills”) and Sunrich LLC, a wholly-owned subsidiary of the Company, organized a joint venture in 2008 to construct and operate a vegetable oil refinery next to Colorado Mills’ sunflower seed crush plant located in Lamar, Colorado. During the relationship, disputes arose between the parties concerning management of the joint venture, record-keeping practices, certain unauthorized expenses incurred on behalf of the joint venture by Colorado Mills, procurement of crude oil by Sunrich from Colorado Mills for processing at the joint venture refinery, and the contract price of crude oil offered for sale under the joint venture agreement.

8. Commitments and contingencies, continued

The parties initiated a dispute resolution process as set forth in the joint venture agreement, which Colorado Mills aborted prematurely through the initiation of suit in Colorado State Court. Subsequent to the filing of that suit, and after expiration of a contractual standstill period, Sunrich initiated suit against Colorado Mills in federal court in Colorado to compel arbitration. Sunrich has also moved to dismiss the premature state court action filed by Colorado Mills. That motion is pending. No discovery has yet been taken or exchanged in either lawsuit. Management cannot conclude whether the prospect of an unfavourable outcome in this matter is probable, or estimate the loss, if any, that might arise from an unfavourable outcome. Accordingly, no accrual has been made at this time for this contingency.

(f) Other claims

In addition, various claims and potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that these claims or potential claims are without merit and the amount of potential liability, if any, to the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or results of the Company.

9. Segmented information

The Company operates in three industries divided into eight operating segments:

(a) SunOpta Foods sources, processes, packages, markets and distributes a wide range of natural, organic, kosher and specialty food products and ingredients with a focus on soy, corn, sunflower, fruit, fiber and other natural and organic food and natural health products. There are five operating segments within SunOpta Foods:

(b) Opta Minerals processes, distributes and recycles silica-free loose abrasives, roofing granules, industrial minerals and specialty sands for the foundry, steel, roofing shingles and bridge and ship-cleaning industries.

(c) SunOpta BioProcess provides a wide range of research and development and engineering services and owns a number of patents on its proprietary steam explosion technology. It designs and subcontracts the manufacture of these systems, which are used for processing biomass for use in the biofuel, paper, food and other industries.

(d) Corporate Services provide a variety of management, financial, information technology, treasury and administration services to the operating segments from the head office in Ontario, Canada, and information and shared services offices in Minnesota, U.S.A.

9. Segmented information continued

The Company’s assets, operations and employees are principally located in Canada, the United States, Mexico, Europe, China and Africa. Revenues are allocated to the United States, Canada and Europe and other external markets based on the location of the customer. Other expense (income) net, interest expense, net, and provision for (recovery of) income taxes are not allocated to the segments.

SunOpta Foods has the following segmented reporting:

9. Segmented information continued

SunOpta Foods has the following segmented reporting:

10. Other expense (income), net

During the fourth quarter of 2009, the Board of Directors of the Company approved the decision to permanently close a distribution center in Toronto, Canada, consolidate manufacturing facilities from British Columbia, Canada to Omak, Washington, and cease processing of fresh fruit at a leased facility in Buena Park, California.

The Company closed the distribution center in Toronto, Canada in the first quarter of 2010. In addition, the consolidation of the British Columbia manufacturing facility is expected to occur by the end of June 2010, and additional severance, lease termination and property, plant and equipment dismantling, moving and installation costs are expected to be incurred. Future costs related to involuntary severance will be recorded at the communication date with employees, and lease termination costs will be recorded at the cease-use date for leased facilities and other associated costs will be recorded as incurred. The Company also ceased production of fresh fruit processing at a leased facility in Buena Park, California, during the fourth quarter of 2009 and incurred costs to move assets to another facility during the first quarter of 2010.

10. Other expenses, net, continued

A summary of the expected total costs, and costs incurred to date included in other expense with respect to each of the rationalizations, is included below:

Costs recognized in other expense in the quarter ended April 3, 2010 include $87 for severance, a $35 non-cash loss on disposal of property, plant and equipment, and $64 of period costs to transfer property, plant and equipment to another location, and $111 of other closure costs recorded as incurred.

Of the total costs incurred of $297, $146 relates to the Distribution Group and $151 relates to the Fruit Group.

As at April 3, 2010, there was an $87 accrual for severance to be paid at the termination date for the British Columbia facility consolidation.

In addition to the rationalization costs noted above, the Company incurred a non-cash impairment charge of $164 for the write-off of long-lived assets within the Ingredients Group. Other income of $186 for the quarter ended March 31, 2009 related to the sale of redundant assets at Opta Minerals.

11. Cash and cash equivalents

Included in cash and cash equivalents is $21,476 (2009 - $19,735) in funds that cannot be utilized by the Company for general corporate purposes, and are maintained in separate bank accounts of the legal entities.

SunOpta BioProcess has $19,620 (2009 - $18,954) of cash, which is specific to SunOpta BioProcess, who will use these funds for the continued development of biomass conversion technologies and to build and operate commercial-scale facilities for the conversion of cellulosic biomass to ethanol. Of the $19,620, $5,000 (2009 - $nil) is held in a money market term deposit maturing on June 22, 2010. This term deposit earns interest at a rate of 0.22% annually, and has been classified as held for trading.

Also included in cash and cash equivalents is $1,856 (2009 - $781) that is specific to Opta Minerals.

12. Derivative financial instruments and fair value measurement

Effective January 1, 2008, the Company adopted the provisions of ASC 820-10-55 (formerly FASB FSP 157-2/SFAS 157, “Effective Date of FASB Statement No. 157”) applicable to financial assets and liabilities and to certain non-financial assets and liabilities that are measured at fair value on a recurring basis. Additionally, the Company applies the provisions of this standard to financial and non-financial assets and liabilities. This standard defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. In addition, this standard requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

This standard also provides a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions with respect to how market participants would price an asset or liability. These two inputs used to measure fair value fall into the following three different levels of the fair value hierarchy:

• Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that are observable
• Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are non-active; inputs other than quoted prices that are observable and derived from or are corroborated by observable market data
• Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable due to little or no market activity

This hierarchy requires the use of observable market data when available.

The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a recurring basis as of April 3, 2010:

12. Derivative financial instruments and fair value measurement, continued

(a) Commodity futures and forward contracts

The Company’s derivative contracts that are measured at fair value include exchange-traded commodity futures and forward commodity purchase and sale contracts. Exchange-traded futures are valued based on unadjusted quotes for identical assets priced in active markets and are classified as level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk, and the Company’s knowledge of current market conditions, the Company does not view non-performance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts. Local market adjustments use observable inputs or market transactions for identical assets or liabilities, and, as a result, are classified as level 2.

These exchange-traded commodity futures and forward commodity purchase and sale contracts are used as part of the Company’s risk management strategy, and represent economic hedges to limit risk related to fluctuations in the price of certain commodity grains. These derivative instruments are not designated as hedging instruments. For the quarter ended April 3, 2010, a $55 loss is recorded in cost of goods sold on the consolidated statements of operations related to changes in the fair value of these derivatives.

At April 3, 2010, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows:

(b) Inventories carried at market

Grains inventory carried at fair value is determined using quoted market prices from the Chicago Board of Trade (“CBoT”). Estimated fair market values for grains inventory quantities at period end are valued using the quoted price on the CBoT adjusted for differences in local markets, and broker or dealer quotes. These assets are placed in level 2 of the fair value hierarchy, as there are observable quoted prices for similar assets in active markets. Gains and losses on commodity grains inventory are included in cost of sales on the consolidated statements of operations. At April 3, 2010, the Company had 689 bushels of commodity soybeans, in inventories carried at market.

(c) Interest rate swap

Opta Minerals entered into an interest rate swap to minimize its exposure to interest rate risk. A notional amount of Cdn $17,200 (U.S. - $17,057) of floating rate debt was effectively converted to fixed rate debt at a rate of 5.25% for the period August 2008 to August 2012. At each period end, management calculates the mark-to-market fair value using a valuation technique using quoted observable prices for similar instruments as the primary input. Based on this valuation, the previously recorded fair value is adjusted to the current mark-to-market position. The mark-to-market gain or loss is placed in level 2 of the fair value hierarchy. The interest rate swap is designated as a cash flow hedge for accounting purposes and accordingly, gains and losses on changes in the fair value of the interest rate swap are included in other comprehensive income on the consolidated statements of operations. For the quarter ended March 31, 2010, a $120 gain (net of income taxes of $51) has been recorded in other comprehensive earnings due to the change in fair value for this derivative.

(d) Foreign forward currency contracts

As part of its risk management strategy, the Company enters into forward foreign exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are placed in level 2 of the fair value hierarchy, as there are quoted prices in active markets to observe the fair value determination. These forward foreign exchange contracts represent economic hedges and are not designated as hedging instruments. At April 3, 2010 the Company had open forward foreign exchange contracts with a notional value of €6,183, Cdn $3,906 and $6,067 that resulted in an unrealized gain of $244 which is included in foreign exchange gain (loss) on the consolidated statements of operations.

13. Subsequent events

On May 11, 2010, the Board of Directors and the Company announced the sale of its Canadian food distribution assets to UNFI Canada Inc., a wholly-owned subsidiary of United Natural Foods Inc. for cash consideration of approximately Cdn $68,000, subject to certain adjustments. As a result, the assets are considered held for sale as at May 11, 2010. The transaction is subject to customary closing conditions and is expected to be completed by early June 2010.

The following is a summary of the carrying amounts of assets and liabilities at April 3, 2010, that are expected to be included as part of the disposal group:

The Canadian food distribution assets included in this transaction form part of the Distribution Group. The Company will retain the natural health products distribution and manufacturing assets which represent the balance of the assets in the Distribution Group. For fiscal 2009, the Distribution Group realized revenues of $237,254. The Canadian food distribution operations generated revenues of $169,572 while the natural health products operations generated the balance of revenues.

Based on the expected sale price, the net assets of the disposal group and transaction and related closing costs of approximately $4,000, the Company expects to realize a pre-tax gain of $10,000 to $15,000 on disposition. Upon closing of the sale, the Company will be required to issue 600,000 warrants with similar terms and conditions to the Advisory Services Agreement (note 3(b)). The Company will use proceeds from the sale to repay approximately $8,000 against its outstanding term loan facility (note 6(a)) with the balance applied to its outstanding U.S. line of credit facility (note 5(b)).

The divestiture of the Canadian food distribution assets will significantly reduce the probability that certain Canadian tax assets (mainly non-capital loss carryforwards) will be realized by the Company. Because the operating assets contemplated in the sale transaction will cease to generate taxable income for the Company in the future, in accordance with ASC 740, the Company expects to record a valuation allowance of $7,000 to $8,000 against remaining tax assets in the Canadian jurisdiction in the second quarter of 2010.

Significant Developments During the First Quarter of 2010

On January 13, 2010, we announced that SunOpta BioProcess (“SBI”) had been awarded $5.5 million (CAD) in funding from Sustainable Development Technology Canada ("SDTC") to assist SBI and its partners to design, build and operate an integrated cellulosic ethanol plant and co-located xylitol production facility to be located in the Greater Toronto area. The fabrication of valuable co-products is expected to allow biofuel producers to increase their profitability and competitiveness. SBI and its partners have developed an integrated process that will produce both food grade xylitol, considered to be a healthy sugar substitute, and fuel grade cellulosic ethanol. By co-producing these products we expect to improve both the economic and environmental sustainability of cellulosic ethanol production. The project involves the construction of a demonstration facility at a total cost of approximately $17.0 million (CAD), to be funded approximately 67% by the partners and 33% by the SDTC grant. The facility is anticipated to produce up to a rated capacity of 620 tonnes of xylitol and two million litres of cellulosic ethanol per year. Operation of the facility is expected to commence December 2010 with process validation complete by December 2011. Thereafter the facility may be operated for process optimization, continuous improvement and to test new innovations. Upon completion of the SDTC project, construction of a 10,000 metric tonne commercial xylitol facility in connection with a minimum 40 million litre cellulosic ethanol facility is contemplated to commence in September 2011, with first xylitol production from this facility expected by December 2012.

In a related matter, on April 22, 2010, SBI’s interest in the integrated xylitol production technology that was developed with its joint venture partner, Sweet Diabetic Delight Foods, Inc., doing business as Xylitol Canada (“XC”), was consolidated with XC in exchange for 50% of the entity. Concurrent with this transaction, the shares of XC were sold to Chudleigh Ventures Inc (“CVI”), a capital pool company listed on TSX Venture Exchange, whereby SBI received common shares representing approximately 30% of the outstanding capital of CVI.

On January 21, 2010, we announced that SBI had been awarded a contract to supply a major ethanol producer in China with our proprietary fiber preparation and pretreatment equipment for use in the production of cellulosic ethanol. The Chinese client is one of the largest operators in the corn biochemical processing and new energy sectors in China and is owned by a consortium of leading Chinese companies including one of the largest petrochemical companies in China. Equipment provided by SunOpta BioProcess will be installed in a planned cellulosic ethanol demonstration plant scheduled for completion in late 2010. The plant will be located adjacent to an existing starch-to-ethanol facility and will utilize local corn stover as feedstock. The development of cellulosic ethanol alternatives has taken a high profile in China as the Central Government has discouraged further development of corn to ethanol plants due to environmental and food supply issues. Under the terms of the contract, SunOpta BioProcess expects to generate revenues of approximately $6.5 million from the supply of equipment and a technology license as well as certain design and engineering services.

On January 27, 2010, we announced the commencement of an environmentally responsible energy recovery project at our Cambridge, Minnesota oat fiber facility within our Ingredients Group. The project involves the extraction of methane from the digestion of waste-water resulting from the oat fiber production process, and subsequent conversion of that methane into pipeline quality natural gas that will be used to help power the facility. This project will significantly reduce the amount of greenhouse gases and various waste materials emitted from the facility, as well as provide an acceptable return on invested capital as a result of significantly lower utility expense. The installation is now being commissioned and this is expected to be completed by the end of the second quarter.

On February 18, 2010 we provided an update on the arbitrators ruling in the legal action SunOpta BioProcess initiated against Abengoa New Technologies Inc. (“Abengoa”) and one of its former employees. The lawsuit alleged, among other things, theft of trade secrets and breach of contract relating to the dilute acid hydrolysis technology that we developed jointly with Abengoa. The arbitrator ruled that, as a result of Abengoa's decision to not purchase the contracted number of systems under the Technology Development Agreement ("TDA"), it forfeited its exclusive rights to exploit the system, and that SunOpta BioProcess, in lieu of monetary damages, could sell the system to other cellulosic ethanol producers. Prior to the arbitrator's ruling, the TDA had precluded SunOpta BioProcess from entering the cellulosic ethanol market using the jointly developed technology. The arbitrator also ruled that the information SunOpta shared with Abengoa during the parties' joint development work was not a trade secret, as it could be found in the public domain. SunOpta BioProcess maintained its rights in its continuous auto hydrolysis system and Abengoa was awarded no rights in the system other than to information deemed to be available in the public domain and not patented by SunOpta BioProcess. Continuous auto hydrolysis remains the core fiber handling and pretreatment process utilized by SunOpta BioProcess in its various applications including the production of cellulosic ethanol.

On February 23, 2010, we announced that the Grains and Foods Group had completed an upgrade and retrofit at its Alexandria, Minnesota aseptic processing and packaging facility and had commenced its first production of natural broth and soup products for a major international packaged goods company. This upgrade gives us the capacity to produce approximately 175 million liters annually of natural and organic alternative beverages such as soy, rice, almond and others as well as broth and soup products and also expands our packaging size capabilities for these products for a variety of different formats. In tandem with the facility upgrade, the Grains and Foods Group entered into a three-year packaging agreement with a global consumer products company to produce aseptically processed and packaged natural broth products.

On May 11, 2010, we announced the sale of our Canadian food distribution assets to United Natural Foods Inc. (“UNFI”) for cash consideration of approximately Cdn $68,000. The transaction is subject to certain customary closing conditions, and is expected to be completed by early June 2010. The Canadian food distribution assets included in this transaction form part of the Distribution Group. We will retain the natural health products distribution and manufacturing assets which represent the balance of the assets in the Distribution Group. Based on the expected sale price, the net assets of the disposal group, and transaction and related closing costs of approximately $4,000, we expect to recognize a pre-tax gain of $10,000 to $15,000. We will use the proceeds from the sale to repay approximately $8,000 towards our term loan facility, and approximately $51,000 towards our U.S. line of credit facility, improving our overall liquidity. In addition, we expect to record a non-cash valuation allowance of $7,000 to $8,000 against certain Canadian tax assets, due to the reduced probability of realizing these tax assets.

Operations for the quarter ended April 3, 2010 compared to the quarter ended March 31, 2009

(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”)

Revenues for the first quarter of 2010 increased by 14.7% to $266,100 from $232,074 in the first quarter of 2009. Revenues in SunOpta Foods increased by 13.9% to $247,547, revenues in Opta Minerals increased by 21.8% to $17,931 and revenues in SunOpta BioProcess increased by $609 to $622. The increased revenue is due entirely to internal growth as there have been no acquisitions made in the last year. Internal growth includes the impact of foreign exchange movements and its effect on translation of foreign denominated revenue to U.S. dollars. The revenue growth experienced in the first quarter of 2010 includes the favourable impact of a stronger Canadian dollar and Euro on revenue generated in the Distribution Group and our European division of the International Sourcing and Trading Group. Excluding the positive impact of changes in foreign exchange, revenues increased 9.4% over the prior year.

Gross margins increased $15,248, or 45.3%, in the first quarter of 2010 to $48,895 from $33,647 during the same period in 2009. As a percentage of revenues, gross margin in the first quarter of 2010 was 18.4% compared to 14.5% in the first quarter of 2009, an increase of 3.9%. In the first quarter of 2010, we experienced increased gross margin in all of our operating segments. Within SunOpta Foods, higher volumes of fiber, fruit ingredient products, sunflower and consumer products, plant efficiencies, and favourable impact of foreign exchange on translation of foreign results all contributed to the increased gross margin. Also contributing to the increase in gross margin was a rebound in the steel and foundry markets for Opta Minerals and gross margin realized on an active supply contract in SunOpta BioProcess.

Warehouse and Distribution ("W&D") costs for the first quarter of 2010 were $6,029, an increase of $1,568, compared to $4,461 in the same period of 2009. These costs are solely related to the Distribution Group as warehousing and distribution costs for other groups are considered part of cost of goods sold. W&D costs as a percentage of Distribution Group revenues were 9.1% in 2010 compared to 7.9% in 2009. For further details see the Distribution Group analysis included within.

Selling, General and Administrative costs ("SG&A") including intangible asset amortization increased $5,331 to $33,614 in the first quarter of 2010 compared to $28,283 in the first quarter of 2009. The stronger Canadian dollar and Euro in the first quarter of 2010 led to a $3,522 increase in SG&A on Canadian and Euro borne costs. Additional SG&A costs of $2,551 relating to higher professional and related fees, compensation costs and non-cash stock compensation were offset by a $742 reduction in costs relating to severance and facility rationalizations that took place in the first quarter of 2009. As a percentage of revenues, SG&A costs were 12.8% in the first quarter of 2010 compared to 12.2% in 2009.

Foreign exchange gains were $1,469 in the first quarter of 2010 as compared to a loss of $1,263 in the comparable period in 2009. The increase is primarily due to favourable exchange rate movements for the Canadian dollar and the Euro relative to the U.S. dollar.

Operating income increased by $11,081 to $10,721 in the first quarter of 2010 compared to an operating loss of $360 in the first quarter of 2009 due to the factors noted above. Further details on revenue, gross margins and operating income variances are provided in the Segmented Operations Information provided below.

Other expense increased $647 in the quarter ended April 3, 2010 due to rationalization efforts that began in fiscal 2009 and continued into the first quarter of 2010. Included in the current period are $297 of severance, non-cash packaging inventory write-offs and other period costs expensed as incurred. In addition, a non-cash impairment charge of $164 was recorded to write-off certain long-lived assets in our Ingredients Group.

Interest expense was $3,121 during the first quarter of 2010 compared to $2,871 in first quarter of 2009, an increase of $250. Included in the first quarter of 2010 is approximately $350 of non-cash amortization related to capitalized deferred financing fees from the Fifth Amended and Restated Credit Agreement which was signed October 30, 2009. Excluding this amortization, interest expense was consistent with the first quarter of 2009.

Income tax provision for the quarter ended of 2010 was $2,498 compared to a recovery of income tax of $1,066 in the prior period, due to the higher consolidated earnings before tax in the current period. The expected annual effective income tax rate is between 34% and 36%.

Earnings attributable to non-controlling interest for the quarter ended April 3, 2010 were $28 compared to losses attributed of $322 in the first quarter of 2009. The $350 increase is due to higher net earnings in our less than wholly-owned subsidiaries.

Net earnings for the first quarter of 2010 were $4,613 as compared to a net loss of $1,657 in 2009, an increase of $6,270. Basic and diluted earnings per share was $0.07 for the first quarter of 2010 compared to a loss per share of $0.03 for the same period in 2009.

Segmented Operations Information

(Note: Certain prior year figures have been adjusted to conform with current year presentation and segmented reporting.)

(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”)

SunOpta Foods contributed $247,547 or 93.0% of consolidated revenue in the first quarter of 2010 compared to $217,336 or 93.6% of consolidated revenues in the first quarter of 2009, an increase of $30,211. The increased revenue is due entirely to internal growth as there have been no acquisitions made in the last year. The revenue growth experienced in the first quarter of 2010 includes the favourable impact of a stronger Canadian dollar and Euro on revenue generated in the Distribution Group and our European division of the International Sourcing and Trading Group. Excluding the positive impact of changes in foreign exchange, revenue in SunOpta Foods increased 8.3% over the prior year. In the first quarter of 2010, all operating groups within SunOpta Foods realized increased revenues, primarily as a result of increased volumes stemming from higher customer demand. Comparatively, in the first quarter of 2009 SunOpta Foods was impacted by a decline in demand as customers responded to the economic downturn with lower purchases.

Gross profit in SunOpta Foods increased $12,879 in the first quarter of 2010 to $44,080, or 17.8% of revenues, compared to $31,201, or 14.4% of revenues in the first quarter of 2009. Increased volumes of grains based products, fiber ingredients, fruit ingredients, and internationally sourced organic ingredients, coupled with efficiency improvements in many of our manufacturing facilities, and favourable foreign exchange movements all contributed to the higher gross margin and gross margin percentage.

Operating income in SunOpta Foods increased $9,782 in the first quarter of 2010 to $12,528, compared to $2,746 in the first quarter of 2009. Offsetting the increase in gross margin noted above was $4,162 higher combined SG&A and W&D expenses, of which $2,659 is due to the impact of the strengthened Canadian dollar and Euro in the first quarter of 2010 when translating foreign denominated expenses into U.S. dollars. The remaining increase in combined SG&A and W&D of $1,503 is due to higher professional fees, compensation and marketing costs across SunOpta Foods. In the first quarter of 2010 foreign exchange gains increased by $1,065 compared to the same period in 2009.

Further details on revenue, gross margins and operating income variances within SunOpta Foods are provided in the Segmented Operations Information that follows.

(Segment Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”)

The SunOpta Grains and Foods Group contributed $78,845 in revenues in the quarter ended April 3, 2010 compared to $74,339 during the quarter ended March 31, 2009, a 6.1% increase. The table below explains the increase in revenue:

Gross margin in the Grains and Foods Group increased by $1,485 to $9,893 in the first quarter of 2010 compared to the first quarter of 2009, and the gross margin percentage increased by 1.2% to 12.5%. The increase in gross margin as a percentage of revenue is primarily due to a favourable shift in sales mix, as soymilk and alternative beverage sales as well as sunflower products have higher inherent margins than our grain based sales. The table below explains the increase in gross margin:

Operating income increased by $1,081, or 27.5% to $5,016 in the quarter ended April 3, 2010 compared to $3,935 for the quarter ended March 31, 2009. The table below explains the increase in operating income:

Looking forward in 2010, we expect another year of strong revenue and improved operating margins in the Grains and Foods Group. Our west coast aseptic packaging facility has expanded our capacity to manufacture aseptic soy and alternate beverages including teas and broths. The international expansion of our soy base sales via strategic relationships for procurement of product is also expected to drive incremental sales volume. We also intend to focus our efforts on growing our IP grains business, expanding revenues from organic ingredients and continuing to focus on value-added product offerings. Our long-term expectation for this group is to achieve a segment operating margin of 6% to 8% which assumes we are able to secure consistent quantity and quality grains and sunflower stocks, improve product mix, and control costs. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. Increased supply pressure in the commodity-based markets in which we operate, volume decreases or loss of customers, or our inability to secure quality inputs or achieve our product mix or cost reduction goals could adversely impact our ability to meet these forward-looking expectations.