Orange 21 Inc. reported consolidated net sales increased 10% to $46.5 million for the year ended December 31, 2007 from $42.4 million a year ago. The Carlsbad, CA-based company, whose primary brand is the Spy Optic sunglass and goggle line, lost $7.99 million, or 98 cents a share, in the period versus $7.2 million, or 89 cents, a year earlier.


The sales increase is partly due to increased sales and marketing efforts, including an increase in sales force, and an improvement in product mix.


Its consolidated gross profit increased 30% to $22.8 million for the year ended December 31, 2007 from $17.5 million for the year ended December 31, 2006. Gross profit as a percentage of sales increased to 49% for the year ended December 31, 2007 from 41% for the year ended December 31, 2006. The increase in gross profit and gross profit as a percentage of sales is partly due to efficiencies achieved at LEM, our subsidiary and primary manufacturer, and a more favorable product mix. The increase is also due to net decreases in inventory reserves for slow moving and obsolete inventory that is no longer being marketed for resale of approximately of $1.4 million. During the year ended December 31, 2007, inventory with an adjusted basis of $0.8 million was sold for approximately $1.8 million in revenue, affecting margins by $1.0 million or 2% of net sales. The remaining decrease in the inventory reserve was mainly due to the disposal of product which has no effect on the results of operations.


Sales and marketing expense increased 12% to $16.2 million for the year ended December 31, 2007 from $14.5 million for the year ended December 31, 2006. The increase was primarily due to a $2.0 million write off of point-of-purchase displays in the U.S., which was a result of transferring ownership of the point-of-purchase displays to our customers during June 2007. In addition, in the U.S., further purchases of point-of-purchase displays will no longer be capitalized since the displays will be owned by the customers. The cost of these displays will be charged to sales and marketing expense. We do not expect this change to materially affect our results of operations in future periods.


General and administrative expense increased 2% to $9.6 million for the year ended December 31, 2007 from $9.4 million for the year ended December 31, 2006. The increase in general and administrative expense was primarily due to increased legal fees of $0.4 million which included $0.2 million in legal fees related to negotiations for the acquisition of the retail stores division of No Fear which did not materialize, a $0.3 million increase for employee-related compensation expense at LEM including severance pay for LEM employees and related legal fees, increased consulting fees of $0.3 million, increased share-based compensation in accordance with SFAS No. 123(R) of $0.2 million, and increases in depreciation and amortization costs and rent expense. The increases were partly offset by decreases in audit fees of $0.4 million, bad debt expense of $0.3 million, $0.2 million payroll costs in the U.S., investor relations related costs, travel and business insurance.


Shipping and warehousing expense remained consistent at $1.8 million for each of the years ended December 31, 2007 and 2006.


Research and development expense increased 24% to $1.2 million for the year ended December 31, 2007 from $1.0 million for the year ended December 31, 2006. The increase is mainly due to an increase in employee-related compensation expense.


Other net expense was $0.5 million for the year ended December 31, 2007 compared to other net expense of $0.4 million for the year ended December 31, 2006. The change in other net expense is primarily due to increases in net interest expense partly offset by an increase in foreign currency transaction gains in 2007 compared to foreign currency losses in 2006.


The income tax provision for the year ended December 31, 2007 was $1.5 million compared to a $2.3 million benefit for the year ended December 31, 2006. The effective tax rate for the years ended December 31, 2007 and 2006 was (22%) and 25%, respectively. The decrease in the effective tax rate was due to a larger proportion of the pretax losses incurred in the U.S. versus in Italy, offset by the valuation allowance of $3.2 million recorded in the U.S. booked in 2007 versus no valuation allowance recorded in 2006 for the U.S.


During the year ended December 31, 2007, the company incurred certain non-recurring items including $268,000 in legal costs and $50,000 in banking and underwriting fees for negotiations related to the potential acquisition of the retail stores division of No Fear that did not materialize, increased share-based compensation expense in accordance with SFAS No. 123(R) of $98,000 for acceleration of vesting of share-based grants made to one employee and severance pay of $91,000 in the U.S. In addition we had $2,375,000 in point-of-purchase display expense related to amounts capitalized as of December 31, 2006 in the U.S., which was depreciated through June 2007 with the balance written off in June 2007 as a result of transferring ownership of the point-of-purchase displays to our customers during June 2007. Additionally, we incurred $377,000 of recurring expense in accordance with SFAS No. 123(R). Absent these charges during the period, we would have had a loss before tax of approximately $3,283,000 compared to a loss before tax of approximately $9,527,000 during 2006.


 


“Last year was a year of transition for us at Orange 21. We entered 2007 with a great deal to fix: our product offering, our production efficiency, our inventory levels and quality, our relationships with our dealers, our internal management processes, and our marketing efficacy,” said Mark Simo, Orange 21’s chairman and CEO. “Our goals were to stabilize the business on a revenue and cash flow basis, while working on multiple fronts to improve our business operations.”


“I am pleased to report that we largely met our goals for 2007. It was far from a perfect year, and, from the outside, our consolidated financial results do not look inspiringly improved. But, internally, we believe we largely succeeded in our core, underlying goals. We believe we have addressed many of the key problems that were present when I assumed oversight of the business in late 2006. We believe we have streamlined and improved the product offering; increased production efficiencies significantly; restructured our internal management team and processes; and re-invigorated our brand and our marketing programs.”


“In 2008 we will continue to tackle important operating challenges. Primary among those will be a physical consolidation of our production operations at LEM. While we will continue to work on operating challenges, I believe that the hard work done by the management team in 2007 has largely completed the task of stabilizing the business and the business model at Spy.”


“With a year of transition behind us, I am pleased to be able to say that I believe the key story in 2008 will in fact be growth — the beginning of a new growth period for the Spy Optic brand and business. We see a new level of interest in our brand and product, at a national level. We need to be careful in managing this expected growth trajectory, so that we do not get ahead of our own capabilities as a company, as we have done in the past. Our goal is to lay a strong growth foundation. We believe that this year will see the first real evidence of new expansion of the brand, in terms of both revenues, and, in terms of the scope of accounts that we service. We are particularly gratified to be able to say this, in the face of the macroeconomic forces at work at home and abroad – softness in the domestic economy coupled with the dramatic decrease in the value of the dollar – both of which create a headwind for our expansion. We believe that our ability to grow in the face of these constraints is particularly strong evidence of the power of the Spy brand.”