Smart Balance Announces 2008 Third-Quarter Results

PARAMUS, N.J., Nov. 6 /PRNewswire-FirstCall/ -- Smart Balance, Inc. today announced its results for the third quarter ended September 30, 2008. The Company reported net sales of $57.5 million, an increase of 38.6% versus year ago, and a net loss of $1.6 million, reflecting the after-tax impact of $5.0 million of non-cash items, including $2.5 million of stock-based compensation expense, $1.7 million of change in fair value of an interest rate swap and $0.9 million of amortization and depreciation. The net loss was $0.03 on both diluted and basic shares.

"The 38.6% increase in net sales was the result of the broad-based distribution gains from our 'Plus Six' initiative and acceptance of our new spreads products. The increase in sales also reflected support from our loyal consumer base in traditional supermarkets as well as the addition of new users in supercenters and warehouse clubs," said Stephen B. Hughes, Smart Balance Chairman and CEO. "We are pleased with the performance in the third quarter and we are prepared for a very competitive environment during the upcoming holiday periods. Key elements of our fourth quarter will be our new 50/50 butter blend stick for the cooking and baking season and a strong promotional program supporting our core categories."

The net sales increase versus 2007 was due to higher pricing to recover commodity cost increases and a 15% increase in case shipments. Selling prices in the Company's core category of spreads were increased in February, June, and August to cover rising costs.

The Company's spreads products, which represent approximately 70% of its sales, increased market share by 1.5 points to 13.9% in the third quarter versus the prior year.

Gross profit margin for the quarter was 43.8%, versus 48.0% in the prior year, as the rate of selling price increases lagged the rate of commodity cost increases. Costs continued to rise in the third quarter versus prior periods but are expected to stabilize and begin to trend lower late in the fourth quarter.

The Company paid down $5.0 million of long-term debt during the quarter and met its debt covenants. Year-to-date, $35 million of long-term debt has been paid down. The Company plans to pay down additional debt in the fourth quarter.

The Company recently signed a multi-year agreement with Brandeis University to fund research to develop new product technologies for existing and future categories. Under the terms of the collaborative partnership, Smart Balance will contribute funding and consumer research to identify areas of consumer focus and Brandeis will provide technological expertise. In return, Smart Balance will receive an option to license any of the resulting technologies for use in its products.

"Our business is on solid ground. We continue to grow market share and sales despite the difficult economic environment. We are encouraged by the strengthening of the spreads category, reflecting a trend toward more in-home dining," said Hughes. "Our performance in the second half of 2008 will give us a great base for expansion and growth in 2009."

Change in Accounting Principles

In 2008, the Company began accounting for certain trade incentives and marketing costs as prepaid expenses to better match recognition of expense to revenue, consistent with the general practice in the consumer product goods industry. This methodology is a change from prior years. While this methodology may create timing differences between prior year's quarters on an operating basis, it has no impact on full year results. In accordance with FAS No. 154, a retrospective application of the change in accounting principle has been applied to 2007 quarterly results included herein to improve comparability.

2008 Third Quarter Results

Net sales increased 38.6% to $57.5 million in 2008, from $41.5 million in 2007, primarily due to higher prices and a 15% increase in cases shipped. The Company increased prices on its products in August to cover rising costs, following similar pricing actions in February and June. In addition, reduced sizes of its largest volume spreads products were shipped to all customers during the third quarter, bringing Smart Balance in line with the rest of the industry.

The increase in cases shipped was due primarily to the success of new products (extra virgin olive oil spreads, omega-3 enhanced spreads, 50/50 butter blend, and milk) and higher sales of cooking oil. The Company's 'Plus Six' distribution drive achieved improved placement of Smart Balance (R) products, facilitating the gain in cases shipped.

Market share for Smart Balance(R) family of spreads increased versus the prior year for the 27th consecutive quarter. The spreads category continued to experience higher prices to cover rising costs together with promotional activity in the last six weeks of the quarter to attract increasingly price sensitive consumers. Market share for cooking oil increased in the quarter while shares for peanut butter and microwave popcorn declined.

On an operating basis(1), net sales increased 38% in the quarter versus prior year and were above the 36% growth in estimated consumer purchases of our products across all channels - dollar sales at retail. For the first nine months of 2008, net sales growth of 25% versus prior year was similar to the 25% growth in estimated consumer purchases of our products across all channels for the same period.

(1) In addition to its GAAP results, the Company has provided operating basis results to explain year -over-year changes. The operating basis should not be viewed in isolation or as a substitute for GAAP results. A reconciliation of operating basis results to GAAP results is provided in the accompanying tables.

Comparison of Net Sales to Consumer Purchases Across All Channels Change versus Prior Year First Second Third First Nine Quarter Quarter Quarter Months Net Sales +25 % +13 % +38 % +25 % Consumer Purchases Across All Channels (Dollar Sales at Retail)(1) +15 % +21 % +36 % +25 % (1) Source: IRI, Company estimates

Gross profit increased $5.3 million to $25.2 million in 2008 from $19.9 million in 2007 due to the growth in case shipments and the impact of higher pricing, partially offset by increases in input costs, primarily in commodity raw materials, and higher coupon redemption expenses. Gross profit as a percent of net sales decreased to 43.8% in 2008 from 48.0% in the third quarter of 2007, as the rate of selling price increases lagged the rate of input cost increases, in addition to higher coupon redemption expenses.

Operating income increased $1.7 million to $2.6 million in 2008 from $0.9 million in 2007 due primarily to the increase in gross profit partially offset by higher marketing costs of $2.3 million and an increase in selling and distribution costs of $1.1 million. The increases in marketing, selling and distribution costs were in line with the net sales growth versus prior year. General and administrative expenses increased less than $0.1 million in 2008 versus 2007 as higher costs from the expansion of the Company's infrastructure were offset by timing of legal expenses in the prior year.

Operating income in the third quarters of 2008 and 2007 included non-cash charges of $4.9 million and $4.7 million, respectively. See the table below for the non-cash items affecting operating income.

Items Affecting GAAP Operating Income - Third Quarter $ in Millions 2008 2007 Operating Income 2.6 0.9 Non-cash charges affecting Operating Income: FAS 123R Stock Option Expense 3.7 3.7 Depreciation & Amortization 1.2 1.0 4.9 4.7 Operating Income excluding non-cash charges 7.5 5.6

Net Loss was lower by $31.4 million to $1.6 million in 2008 versus $33.0 million in 2007. Excluding the after-tax impact of non-cash charges, net income in 2008 was $3.5 million versus a net loss in 2007 of $0.6 million. Interest expense was $4.5 million in the third quarter and included a $2.6 million non-cash change in fair value of an interest rate swap related to the Company's long-term debt. The after-tax impact of the adjustment was a loss of $1.7 million. See the table below for non-cash items affecting net income (loss).

Items Affecting GAAP Net Income (Loss) - Third Quarter $ in Millions 2008 2007 Net Income (Loss) (1.6) (33.0) Non-cash charges after-tax affecting Net Loss: FAS 123R Stock Option Expense 2.5 2.2 Depreciation & Amortization 0.8 0.6 Accelerated Financing Amortization 0.1 - Change in Fair Value of an Interest Rate Swap 1.7 - Loss on Derivative Liability - 29.6 5.1 32.4 Net Income (Loss) excluding non-cash charges after-tax 3.5 (0.6)

2008 Year-to-date Results

The Company's GAAP financial statements include the results of its acquisition of GFA Brands, Inc. since the date of acquisition on May 21, 2007. Because there were no operations prior to the acquisition, year-to-date results are not comparable to prior periods. The Company has provided operating basis results that include the operating results of Smart Balance Inc. from the date of its acquisition of GFA Brands, Inc. and the operating results of GFA Brands prior to the acquisition. Management believes that this presentation provides more useful information because it reflects the performance of the operating entity in both the current and prior periods presented. The operating basis results should not be viewed in isolation or as a substitute for reported GAAP results. Year-to-date operating results and a reconciliation of operating basis results to GAAP results are provided in the accompanying table.

2008 Outlook

Smart Balance's outlook for the second half of 2008 continues to reflect growth in net sales on an operating basis in line with its long-term target of approximately 30%. Increased distribution achieved through the Company's 'Plus Six' drive and the innovations in its core category - extra virgin olive oil spreads, omega-3 enhanced spreads and 50/50 butter blend - will begin to have a solid impact. The Company's target for second half sales growth is unchanged at 25%-35% versus 2007. Because of the highly competitive, highly promotional holiday season, the fourth quarter growth rate is expected to be lower than third quarter growth rate of 39%. The fourth quarter will likely experience continued uncertainty around consumer reaction to higher prices throughout the store. The Company has maintained a loyal base of consumers, as evidenced by its market share growth; however, the ability to generate trial of the Company's premium priced products by potential new consumers may become more difficult in the current environment. Gross profit as a percent of net sales will be lower in 2008 versus 2007 as pricing actions are expected to continue to trail rising input costs. The Company anticipates additional non-cash changes in fair value of an interest rate swap, given the current interest rate environment. The Company plans to continue to meet the covenants related to its long-term debt.

FORWARD-LOOKING STATEMENTS

Statements made in this press release 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. 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 issuance of this press release. Actual results may differ materially from such forward-looking statements for a number of reasons, including those risks and uncertainties set forth in the Company's filings with the SEC and the Company's ability to:

-- raise prices as fast as commodity costs increase; -- introduce and expand distribution of new products; -- meet marketing and infrastructure needs; -- meet long-term debt covenants; and -- continue to grow net sales in a competitive environment with rising costs and an increasingly price sensitive consumer.

About Smart Balance, Inc.

Smart Balance, Inc. is committed to providing superior tasting heart healthier alternatives in every category it enters by avoiding trans fats naturally, balancing fats and/or reducing saturated fats, total fat and cholesterol. The Company's products include Smart Balance(R) Buttery Spreads, Milk, Butter Blend Sticks, Cream Cheese, Peanut Butter, Microwave Popcorn, Cooking Oil, Mayonnaise, Non-Stick Cooking Spray and Cheese. For more information about products and the Smart Balance(TM) Food Plan, visit http://www.smartbalance.com.

SMART BALANCE, INC. AND SUBSIDIARY Consolidated Balance Sheets September 30, December 31, 2008 2007 Assets (Unaudited) Current assets: Cash and cash equivalents $7,384,472 $37,648,754 Accounts receivable, net of allowance 2008- $260,056 and 2007-$228,871 14,100,748 11,733,117 Accounts receivable - other 446,883 799,470 Inventories 9,678,544 7,202,198 Prepaid taxes 4,453,155 6,517,833 Prepaid expenses and other assets 6,841,525 1,454,866 Deferred tax asset 1,072,297 1,079,509 Total current assets 43,977,624 66,435,747 Property and equipment, net 4,013,757 1,805,331 Other assets: Goodwill 374,885,923 374,885,923 Other intangibles, net 156,239,909 159,645,634 Deferred costs, net 2,247,754 3,519,412 Other assets 173,265 74,975 Total other assets 533,546,851 538,125,944 Total assets $581,538,232 $606,367,022 Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $21,550,173 $20,355,419 Income taxes payable 2,265,901 1,035,149 Total current liabilities 23,816,074 21,390,568 Long term debt 84,504,174 119,504,174 Deferred tax liability 49,516,398 53,293,528 Derivative liability 2,582,524 -- Other liabilities 137,302 -- Total liabilities 160,556,472 194,188,270 Commitment and contingencies: Stockholders' equity Series A Convertible Preferred stock, $.0001 par value, 50,000,000 shares authorized; 15,388,889 preferred shares converted into 19,516,832 shares of common stock on January 3, 2008 -- 175,659,013 Common stock, $.0001 par value, 250,000,000 shares authorized; 62,630,683 (September 30, 2008) and 43,113,863 (December 31, 2007) issued and outstanding 6,263 4,311 Additional paid in capital 504,266,685 315,479,759 Retained deficit (83,291,188) (78,964,331) Total stockholders' equity 420,981,760 412,178,752 Total liabilities and stockholders' equity $581,538,232 $606,367,022 SMART BALANCE, INC. AND SUBSIDIARY Consolidated Statements of Operations (Unaudited) Three Three Nine Nine months months Months Months ended ended ended ended September September September September 30, 2008 30, 2007 30, 2008 30, 2007 Net sales $57,531,521 $41,502,575 $156,311,306 $60,151,818 Cost of goods sold 32,344,738 21,591,160 88,397,643 31,499,243 Gross profit 25,186,783 19,911,415 67,913,663 28,652,575 Operating expenses: Marketing 8,898,048 6,472,666 23,738,638 9,520,155 Selling 4,565,600 3,459,572 12,677,592 5,099,652 General and administrative 9,147,806 9,063,951 27,462,573 12,860,284 Total operating expenses 22,611,454 18,996,189 63,878,803 27,480,091 Operating income 2,575,329 915,226 4,034,860 1,172,484 Other income (expense): Interest income 19,119 42,675 283,486 2,342,644 Interest expense (4,547,179) (3,922,836) (9,767,967) (6,022,417) Loss on derivative liability - (29,646,232) - (50,532,926) Other income (expense), net (434,153) 10,721 (1,412,869) 130,327 Total other (expense) (4,962,213) (33,515,672) (10,897,350) (54,082,372) (Loss) before income taxes (2,386,884) (32,600,446) (6,862,490) (52,909,888) (Benefit) provision for income taxes (772,811) 407,129 (2,535,633) 948,851 Net (loss) $(1,614,073) $(33,007,575) $(4,326,857) $(53,858,739) Less: Unpaid dividends on cumulative preferred stock - 2,817,868 - 4,062,467 Net (loss) available for common stock $(1,614,073) $(35,825,443) $(4,326,857) $(57,921,206) (Loss) per share: Basic $(0.03) $(1.25) $(0.07) $(2.71) Diluted $(0.03) $(1.25) $(0.07) $(2.71) Weighted average shares outstanding: Basic 62,630,683 28,766,133 62,487,703 21,376,293 Diluted 62,630,683 28,766,133 62,487,703 21,376,293 SMART BALANCE, INC. AND SUBSIDIARY Reconciliation of Operating Basis to GAAP Basis

Prior to Smart Balance, Inc.'s May 21, 2007 acquisition of GFA Brands, Inc., operating income consisted largely of formation costs and other expenses incurred in seeking and evaluating potential business combinations. We have added these expenses back to the operating basis results below, as GFA incurred its own operating expenses for these periods, and the inclusion of the parent company's expenses prior to the date of acquisition make it difficult to compare operating results period to period. Additionally, in 2008, the Company began accounting for certain trade incentives and marketing costs as prepaid expense to better match recognition of expense to revenue. A retrospective application of the change in accounting principle is being applied to 2007 quarterly results to improve comparability. With the information set forth below, management and stockholders would be better able to determine whether or not sales or operating income of the acquired business have improved in 2008 compared with prior periods. The operating basis results provided below are intended to assist the reader in comparing the operating performance of the GFA business we acquired, for the periods before and after the acquisition. However, they do not indicate what consolidated results would have been had we acquired GFA on January 1, 2007. The operating basis results should not be viewed in isolation or as a substitution for GAAP results.

($ in millions) As Add GFA (unaudited) reported Results Form Prior to Operating 10-Q(1) Acquisition Adjustments(2) Basis Three Months Ended September 30, 2008 Net Sales $57.5 $ - $ - $57.5 Gross Profit 25.2 - - 25.2 Operating Income 2.6 - - 2.6 Three Months Ended September 30, 2007 Net Sales $41.5 $0.1 $ - $41.6 Gross Profit 19.9 0.1 - 20.0 Operating Income 0.9 (0.1) - 0.8 Nine Months Ended September 30, 2008 Net Sales $156.3 $ - $ - $156.3 Gross Profit 67.9 - - 67.9 Operating Income 4.0 - - 4.0 Nine Months Ended September 30, 2007 Net Sales $60.2 $64.4 $ - $124.6 Gross Profit 28.7 31.7 (0.1) 60.3 Operating Income 1.2 12.5 1.5 15.2

(1) The retrospective application of the change in accounting principle resulted in adjustments to previously reported amounts of $(0.2) million and $(4.4) million to net sales and operating income, respectively, for the third quarter of 2007 and $(0.2) million and $(4.7) million to net sales and operating income, respectively, for the nine month period ended September 30, 2007.

(2) To remove parent company pre-acquisition expenses from results prior to the acquisition date. Parent company expenses incurred beginning May 21, 2007 remain included in operating basis results.

Smart Balance, Inc.

CONTACT: Media, Mark Walsh, Senior Account Supervisor of TBC Public
Relations, +1-646-366-1470, mwalsh@tbc.us , or Investors, John Mintz, Vice
President Finance & Investor Relations of Smart Balance, Inc.,
+1-201-568-9300, investor@smartbalance.com

Web site: http://www.smartbalance.com/