Orange 21 Divestitute Hurts Sales, Helps Margins

The majority of the $1.6 million decrease in net sales was attributable to the sale and deconsolidation of our former Italian manufacturing subsidiary, LEM, S.r.l. (“LEM”), on Dec. 31, 2010. LEM’s net sales of products manufactured for third parties of approximately $900,000 were included in the company’s consolidated results for the three months ended March 31, 2010. No such sales were included in the company’s consolidated results for the three months ended March 31, 2011. In addition, the company had approximately $400,000 less in sales from closeouts during the three months ended March 31, 2011, compared to the three months ended March 31, 2010, as a result of changes in inventory mix. Domestic net sales represented 93% and 79% of total net sales for the three months ended March 31, 2011 and 2010, respectively, with this increase in percentage being primarily due to the sale and deconsolidation of LEM as of Dec. 31, 2010. International net sales represented 7% and 21% of total net sales for the three months ended March 31, 2011 and 2010, respectively.

Gross margin increased by 600 basis points to 51% for the three months ended March 31, 2011 compared to 45% for the three months ended March 31, 2010, primarily attributable to the sale and deconsolidation of LEM as of Dec. 31, 2010, and, to a lesser extent, less in sales from closeouts during the three months ended March 31, 2011, when compared to the three months ended March 31, 2010.

We incurred a net loss of $1.6 million for the three months ended March 31, 2011, compared to a net loss of $937,000 for the three months ended March 31, 2010. The net losses for the three months ended March 31, 2011 and 2010, included $139,000 and $134,000, respectively, in non-cash share-based compensation costs calculated in accordance with FASB authoritative guidance.

“We are encouraged by the positive impact on our gross margin performance due to the sale of LEM combined with the reduction in close-out sales; however, we are disappointed with the approximately 9% quarter-over-quarter decline in sales, excluding the impact of LEM,” said Orange 21 Chairman of the Board of Directors Seth Hamot. “With the new management team in place as of mid-April, we hope to see improvements to the business in the future.”

Carol Montgomery, Orange 21 Chief Executive Officer, said: “The organization anticipates being able to move from managing within a turnaround environment, to one which can focus on growing the business in the future. I am thrilled to team with Michael Marckx. His knowledge of the core consumer and innovative marketing orientation, combined with my experience building sunglass businesses, will bring complimentary skills leading a capable team which is eager to execute and win.”

Orange 21 President Michael Marckx added: “We are optimistic that we can improve our sales execution and implement growth strategies to recapture our market position. Our team is initially focusing on the marketing, product development and sales programs to leverage the core SPY Optic brand.”