Orange 21 Inc. reported that net sales for the fourth quarter of 2006 increased 28% to $11.4 million compared to $8.9 million in the fourth quarter of 2005. LEM S.r.l., the companys primary manufacturer which it acquired in January of 2006, accounted for $1.7 million of the total. Excluding the sales from LEM, the companys sales increased approximately 9% in the fourth quarter of 2006 compared to the fourth quarter of 2005. The company reported a net loss for the fourth quarter of 2006 of approximately $4.0 million, or 49 cents per diluted share, compared to a net loss of approximately $1.8 million, or 22 cents per diluted share, in the same period a year ago.
Gross profit for the fourth quarter was $1.9 million or 17% of net sales, as compared to $3.7 million or 41% of net sales for the comparable period last year. The decrease in gross profit and gross profit as a percentage of sales is primarily due to increases in inventory reserves for slow moving and obsolete inventory that is no longer being marketed for resale.
Total operating expenses for the fourth quarter of 2006 were $7.2 million, or 63% of net sales, as compared to $6.2 million or 70% of net sales, for the comparable period last year. The increase in operating expenses is mainly due to increased point-of-purchase display expense, including increased depreciation expense of $0.7 million due to a reduction in depreciable lives of the point-of purchase displays to two years.
For the full year of 2006, net sales were $42.4 million, a 10% increase over 2005. LEM accounted for $4.5 million of the total. Excluding LEM, net sales declined slightly by 1.8% from 2005. The company reported a net loss for the year of $7.3 million or $0.90 per diluted share on approximately 8.1 million weighted average shares outstanding. This compares to a net loss of approximately $1.7 million or $0.21 per diluted share on approximately 8.0 million weighted average shares outstanding in 2005.
Gross profit for the full year was $17.5 million or 41% of net sales, as compared to $18.9 million or 49% of net sales for the comparable period last year. The decrease in gross profit and gross profit as a percentage of sales is primarily due to increases in inventory reserves for slow moving and obsolete inventory that is no longer being marketed for resale of approximately $3.0 million.
Cash, cash equivalents and short-term investments at December 31, 2006 totaled approximately $3.5 million compared to $8.1 million at December 31, 2005. At year-end 2006, $1.7 million of cash and cash equivalents was restricted as collateral for an outstanding letter of credit and future earn-out payments for the purchase of LEM.
Business Status and Outlook
Mark Simo, Co-Chairman and CEO, offered the following comments on the results and the state of the business:
“The results that we are reporting today we believe represent the first step in restructuring the company and moving ahead to profitable growth. Our reported loss reflects our decision to stop marketing unproductive inventory a result of off-brand designs and production in the past two years and generally simplifying the business to create the right base for future comparisons. We are now moving forward with a focused strategy and the goal, we believe realizable, of creating business stability in 2007 and growth in 2008.”
“After six months as CEO, I feel confident in saying that our brand is very strong and will serve as the cornerstone for an exciting era of continued growth at Orange 21. Our problems in 2006 were the result of some off-brand strategic initiatives and failures in execution. In response, we are simplifying the business, tightening up strategy, and upgrading execution. We believe that we are making progress on all fronts.”
“Since I arrived we have:
–focused the product line, dramatically reducing SKUs, reducing our exposure in off-brand fashion lines, and re-orienting to serve our core action sports customer;
–eliminated the apparel business, except for a small amount of collateral product that our dealers want for brand-building purposes;
–shifted the focus of our international expansion to the core European markets where we can have a significant impact;
–significantly increased production efficiency at LEM;
–changed production schedules to ensure that we are in stock on key styles and can satisfy dealer demand as we head into peak season;
–strengthened the balance sheet through securing a new credit facility; and
–eliminated distractions by settling the Oakley and Class Action lawsuits.
“Based on these initiatives, we are seeing encouraging signs from this years sunglass season (our most significant product from both a revenue and profit perspective). We are seeing a good response to our more focused product offering, and we are making progress on re-energizing our dealer base, by offering them the right product and having it in stock to meet their needs. We have introduced several new core action sports styles and our sell through on these new styles is particularly encouraging, showing, I believe, the continued intrinsic strength of the brand.”
“Going forward, I want to emphasize that the turnaround is not yet complete and that we will be working on it through the balance of the year. Our goal, once again, is to demonstrate stability (not growth) this year in a focused, streamlined business. For example, we will continue to evaluate how we manage our point-of-purchase displays, which could result in additional non-cash charges later in 2007. Also, we will be undertaking new initiatives later in the year to further streamline execution, with the goal of shortening lead times in production and increasing both sales force and production efficiency. We will be focused closely on the goal of producing, marketing, and selling our core product, to our core customer, through our core distribution channel, through the balance of 2007.”
John Pound, Orange 21s Co-Chairman, commented, “I continue to be enthused about my partnership with Mark and the future of Orange 21. Marks energy and enthusiasm are apparent by virtue of what we have accomplished in a relatively short period of time. He has brought a core entrepreneurial focus back to the company, and I believe that we have a promising future based on his leadership. I look forward to continuing to partner with him as we work to stabilize the business through the balance of 2007, and I am excited to begin the process of growth, based on a stabilized business platform.”
Mr. Pound added, “As I mentioned during the last quarters announcement, the company will not be giving guidance at this time. We feel that the focus of the company has to be on developing long-term stability and value, and we dont feel its the right time to become involved in the external guidance process. We will monitor our progress in the coming quarter and keep you apprised.”
