Orange 21 Inc. consolidated net sales were flat at $9.4 million for the three months ended March 31, 2007 and 2006. A net loss of $1.8 million was incurred for the three months ended March 31, 2007 compared to a net loss of $1.7 million for the three months ended March 31, 2006.
Consolidated gross profit increased 9% to $4.9 million for the three months ended March 31, 2007 from $4.5 million for the three months ended March 31, 2006. Gross profit as a percentage of sales increased to 52.2% for the three months ended March 31, 2007 from 48.1% for the three months ended March 31, 2006. The increase in gross profit and gross profit as a percentage of sales is primarily due to sales during the three months ended March 31, 2007 of some inventory items that were previously written down and efficiencies achieved at LEM S.r.l., our subsidiary and primary manufacturer.
Sales and marketing expense increased 9% to $3.8 million for the three months ended March 31, 2007 from $3.5 million for the three months ended March 31, 2006. The increase was primarily due to increased depreciation expense on point-of-purchase store displays of $0.2 million due to a reduction in depreciable lives to two years on the point-of-purchase displays effective as of October 1, 2006 and employee-related compensation.
General and administrative expense increased 17% to $2.5 million for the three months ended March 31, 2007 from $2.1 million for the three months ended March 31, 2006. The increase in general and administrative expense was primarily due to increases in employee-related compensation expense in the U.S. of approximately $0.2 million, increased severance pay for LEM employees of $0.1 million, accounting and software consulting costs due to the implementation of our new enterprise resource planning system of $0.1 million, and increases in depreciation expense, bank fees related to the new BFI Loan Agreement, and share-based compensation in accordance with SFAS No. 123R. The increases were partially offset by a decrease in legal and audit fees of $0.3 million.
Shipping and warehousing expense consists primarily of wages and related payroll and employee benefit costs, packaging supplies, third-party warehousing and third-party fulfillment costs, facility costs and utilities. Shipping and warehousing expense increased 34% to $0.6 million for the three months ended March 31, 2007 from $0.5 million for the three months ended March 31, 2006. The increase was primarily due to increased costs related to shipping methods used (air freight versus sea shipment) as a result of manufacturing delays experienced in 2006 and the three months ended March 31, 2007.
Research and development expense currently consists primarily of wages and related payroll and employee benefit costs, consulting fees, travel expenses and prototype and sample expenses. Research and development expense decreased 27% to $0.2 million for the three months ended March 31, 2007 from $0.3 million for the three months ended March 31, 2006. The decrease is mainly due to an effort made late in 2006 to reduce research and development expense through a reduction in employee compensation expense.
Other net expense was $0.2 million for the three months ended March 31, 2007 compared to other net expense of $0.1 million for the three months ended March 31, 2006. The change in other net expense is primarily due to increases in net interest expense, foreign exchange losses and losses on disposals of fixed assets.
The income tax benefit for the three months ended March 31, 2007 was $0.7 million compared to $0.2 million for the three months ended March 31, 2006. The effective tax rate for the three months ended March 31, 2007 and 2006 was 27% and 11%, respectively. The increase in the effective tax rate was due to the significant proportion of the pretax losses incurred in the U.S. versus in Italy.
Cash, cash equivalents and short-term investments at March 31, 2007 totaled approximately $3.3 million compared to $3.5 million at December 31, 2006. At March 31, 2007, $2.1 million of cash and cash equivalents were restricted as collateral for an outstanding letter of credit and future earn-out payments for the purchase of LEM.
Commenting on the first quarter results, Mark Simo, Chairman and CEO, said: “We continue our efforts to stabilize the business and position it for long term growth, and we are making progress. In the first quarter we made gains in terms of the quality of our inventory and our overall ability to execute as we move into our peak sunglass season. We are now focusing on creating and meeting demand for our core styles through the summer season. My goal continues to be to demonstrate stability this year, while positioning the brand for future growth.”
John Pound, Co-Chairman, commented, “I believe that Mark's oversight and guidance continue to move us in the right direction. In order to keep our team fully focused on execution, we will be foregoing quarterly conference calls from this point forward, instead we will be providing public commentary on our results in our earnings release documents.”
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share figures)
Three Months Ended
March 31,
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2007 2006
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(Unaudited)
Net sales $9,389 $9,382
Cost of sales 4,480 4,867
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Gross profit 4,909 4,515
Operating expenses
Sales and marketing 3,822 3,507
General and administrative 2,510 2,139
Shipping and warehousing 637 476
Research and development 193 266
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Total operating expenses 7,162 6,388
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Loss from operations (2,253) (1,873)
Other expense:
Interest expense (67) (34)
Foreign currency transaction loss (51) (28)
Other expense (48) (6)
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Total other expense (166) (68)
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Loss before benefit for income taxes (2,419) (1,941)
Income tax benefit for income taxes (651) (207)
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Net loss $(1,768) $(1,734)
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Net loss per share of Common Stock
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Basic $(0.22) $(0.21)
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Diluted $(0.22) $(0.21)
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Shares used in computing net loss per share of
Common Stock
Basic 8,101 8,084
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Diluted 8,101 8,084
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