Orange 21 Inc. saw consolidated net sales increase 15.5% to $11.9 million for the second quarter from $10.3 million for the same period last year. Domestic net sales represented 80% and 86% of total net sales for the second quarter 2007 and 2006, respectively. Foreign net sales represented 20% and 14% of total net sales for the three months ended June 30, 2007 and 2006, respectively. The sales mix on a dollar basis for the three months ended June 30, 2007 and 2006 was 97% and 96%, respectively, for eyewear and 3% and 4%, respectively, for apparel and accessories.
The company's consolidated gross profit increased 33% to $7.3 million for the three months ended June 30, 2007 from $5.5 million for the three months ended June 30, 2006. Gross profit as a percentage of sales increased to 61% for the three months ended June 30, 2007 from 54% for the three months ended June 30, 2006. The increase in gross profit and gross profit as a percentage of sales is mainly due to efficiencies achieved at LEM, more favorable product mix and due to the sale of inventory that was previously written down.
Sales and marketing expense increased 58% to $5.5 million for the three months ended June 30, 2007 from $3.5 million for the three months ended June 30, 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 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.
General and administrative expense remained consistent at $2.5 million for the three months ended June 30, 2007 and 2006. We experienced increases in legal fees in the U.S. of $0.2 million, severance pay for LEM employees and related legal fees of $0.2 million, Canada GST taxes of $0.1 million and share-based compensation in accordance with SFAS No. 123R. These increases were offset by various decreases including decreases in travel, business insurance, employee-related compensation expenses in the U.S. and Italy and investor relations related costs.
Shipping and warehousing expense increased 36% to $0.6 million for the three months ended June 30, 2007 from $0.5 million for the three months ended June 30, 2006. The increase was primarily due to increased costs related to shipping methods used (air freight versus sea shipment) as a result of manufacturing and shipping delays experienced in 2006 and the six months ended June 30, 2007.
Research and development expense decreased slightly to $0.2 million for the three months ended June 30, 2007 from $0.3 million for the three months ended June 30, 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 $0.3 million for the three months ended June 30, 2007 compared to other net expense of $3,000 for the three months ended June 30, 2006. The change in other net expense is primarily due to increases in net interest expense and foreign exchange losses.
The income tax benefit for the three months ended June 30, 2007 and 2006 was $0.4 million. The effective tax rate for the three months ended June 30, 2007 and 2006 was 21% and 36%, respectively. The decrease in the effective tax rate was due to a larger tax liability recorded in Italy during the six months ended June 30, 2007 compared to the six months ended June 30, 2006.
A net loss of $1.5 million widened 87.5% from a loss of $0.8 million for the second quarter last year.
Six-Month Results
Consolidated net sales increased to $21.3 million for the six months ended June 30, 2007 from $19.7 million for the six months ended June 30, 2006. Domestic net sales represented 79% and 85% of total net sales for the six months ended June 30, 2007 and 2006, respectively. Foreign net sales represented 21% and 15% of total net sales for the six months ended June 30, 2007 and 2006, respectively. The sales mix on a dollar basis for the six months ended June, 2007 and 2006 was 95% and 96%, respectively, for eyewear and 5% and 4%, respectively, for apparel and accessories.
Our consolidated gross profit increased 22% to $12.2 million for the six months ended June 30, 2007 from $10.0 million for the six months ended June 30, 2006. Gross profit as a percentage of sales increased to 57% for the six months ended June 30, 2007 from 51% for the six months ended June 30, 2006. The increase in gross profit and gross profit as a percentage of sales is mainly due to efficiencies achieved at LEM, more favorable product mix and due to the sale of inventory that was previously written down.
Sales and marketing expense increased 34% to $9.4 million for the six months ended June 30, 2007 from $7.0 million for the six months ended June 30, 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 our customers.
General and administrative expense increased 10% to $5.0 million for the six months ended June 30, 2007 from $4.6 million for the six months ended June 30, 2006. The increase in general and administrative expense was primarily due to increases in severance pay for LEM employees and related legal fees of $0.2 million, consulting fees of $0.2 million, Canada GST Taxes of $0.1 million, legal fees of $0.1 million, employee-related compensation in the U.S. of $0.1 million and share-based compensation in accordance with SFAS No. 123R. The increases were partly offset by decreases in audit fees of $0.2 million, travel, business insurance and investor relations related costs.
Shipping and warehousing expense increased 35% to $1.3 million for the six months ended June 30, 2007 from $1.0 million for the six months ended June 30, 2006. The increase was primarily due to increased costs related to shipping methods used (air freight versus sea shipment) as a result of manufacturing and shipping delays experienced in 2006 and the six months ended June 30, 2007.
Research and development expense decreased 16% to $0.4 million for the six months ended June 30, 2007 from $0.5 million for the six months ended June 30, 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 $0.4 million for the six months ended June 30, 2007 compared to other net expense of $0.1 million for the six months ended June 30, 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 six months ended June 30, 2007 was $1.1 million compared to $0.6 million for the six months ended June 30, 2006. The effective tax rate for the six months ended June 30, 2007 and 2006 was 24% and 20%, respectively. The increase in the effective tax rate was due to a larger proportion of the pretax losses incurred in the U.S. versus in Italy.
A net loss of $3.3 million was incurred for the six months ended June 30, 2007 compared to a net loss of $2.5 million for the six months ended June 30, 2006.
Cash, cash equivalents and short-term investments at June 30, 2007 totaled approximately $3.2 million compared to $3.5 million at December 31, 2006. At June 30, 2007, $2.0 million of cash and cash equivalents was restricted as collateral for a line of credit in Italy and future earn-out payments for the purchase of LEM.
Commenting on the second quarter results, Mark Simo, Co-Chairman and CEO, said: “Our Q2 results reflect continued progress at Orange 21. We have improved stability for the Spy brand and believe that its equity is untarnished. We are working to build – and rebuild – our dealer relationships, and also re-engineering our sales force. We believe both of these initiatives will pave the way for resumed growth next year.”
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts)Three Months Ended Six Months Ended
June 30, June 30,
—————————————–
2007 2006 2007 2006
———– ——– ———– ——–
(Unaudited) (Unaudited)Net sales $ 11,956 $10,271 $ 21,345 $19,653
Cost of sales 4,626 4,761 9,106 9,628
———– ——– ———– ——–
Gross profit 7,330 5,510 12,239 10,025
Operating expenses:
Sales and marketing 5,532 3,495 9,354 7,002
General and administrative 2,533 2,461 5,043 4,600
Shipping and warehousing 646 474 1,283 950
Research and development 241 253 434 519
———– ——– ———– ——–
Total operating expenses 8,952 6,683 16,114 13,071
———– ——– ———– ——–
Loss from operations (1,622) (1,173) (3,875) (3,046)
Other expense:
Interest expense (147) (89) (214) (124)
Foreign currency
transaction (loss) gain (130) 75 (181) 47
Other (expense) income 1 11 (47) 5
———– ——– ———– ——–
Total other expense (276) (3) (442) (72)
———– ——– ———– ——–
Loss before benefit for
income taxes (1,898) (1,176) (4,317) (3,118)
Income tax benefit (403) (418) (1,054) (626)
———– ——– ———– ——–
Net loss $ (1,495) $ (758) $ (3,263) $(2,492)
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Net loss per share of Common
Stock
=========== ======== =========== ========
Basic $ (0.18) $ (0.09) $ (0.40) $ (0.31)
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Diluted $ (0.18) $ (0.09) $ (0.40) $ (0.31)
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Shares used in computing net
loss per share of Common
Stock
Basic 8,108 8,084 8,104 8,084
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Diluted 8,108 8,084 8,104 8,084
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