Orange 21 Inc. net sales increased 16% to $13.2 million for the three months ended September 30, 2007 from $11.4 million for the three months ended September 30, 2006. The increase is partly due to increased sales and marketing efforts, including an increase in sales force, and an improvement in product mix. As a result of these increased sales, consolidated gross profit increased 16% to $6.4 million for the three months ended September 30, 2007 from $5.5 million for the three months ended September 30, 2006. Gross profit as a percentage of sales remained consistent at 49% for each of the three months ended September 30, 2007 and September 30, 2006.
Sales and marketing expense decreased 16% to $2.9 million for the three months ended September 30, 2007 from $3.5 million for the three months ended September 30, 2006. The decrease was largely due to the $0.4 million decrease in depreciation expense for point-of-purchase displays in the U.S. partly offset by $0.2 million in expenses related to purchases of new point-of-purchase displays. During June 2007, the point-of-purchase displays in the U.S. were transferred to customers and written off. There was also a decrease in employee-related compensation expense at LEM.
General and administrative expense increased 12% to $2.6 million for the three months ended September 30, 2007 from $2.3 million for the three months ended September 30, 2006. The increase is largely due to an increase of $0.3 million in legal fees in the U.S., which includes $0.2 million for negotiations related to the potential acquisition of the retail stores division of No Fear that did not materialize. The increase is also due to severance pay of $0.2 million in the U.S. and LEM, $0.1 million increase for share-based compensation expense in accordance with SFAS No. 123(R) and depreciation and amortization costs. These increases were offset by decreases in various items, including bad debt expense of $0.2 million in the U.S., as well as audit fees, business insurance, employee-related compensation expenses in the U.S. and information technology expenses.
Shipping and warehousing expense increased 18% to $0.4 million for the three months ended September 30, 2007 from $0.3 million for the three months ended September 30, 2006. The increase is mainly due to increased employee-related compensation expense at LEM.
Research and development expense increased 60% to $0.4 million for the three months ended September 30, 2007 from $0.3 million for the three months ended September 30, 2006. The increase is mainly due to an increase in employee-related compensation expense at LEM.
Other net expense was $0.1 million for the three months ended September 30, 2007 compared to other net expense of $0.2 million for the three months ended September 30, 2006. The change in other net expense is primarily due to foreign exchange gains offset by increases in net interest expense.
The income tax benefit for the three months ended September 30, 2007 and 2006 was $47,000 and $0.2 million, respectively. The effective tax rate for the three months ended September 30, 2007 and 2006 was 336% and 24%, respectively. The change in the effective tax rate was due to minimum taxes recorded in Italy, which are due regardless of the companies operating results, during the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006.
Net income of $33,000 was earned for the three months ended September 30, 2007 compared to a net loss of $0.8 million for the three months ended September 30, 2006.
Nine Month Results
Consolidated net sales increased 11% to $34.5 million for the nine months ended September 30, 2007 from $31.0 million for the nine months ended September 30, 2006. The increase is partly due to increased sales and marketing efforts, including an increase in sales force, and an improvement in product mix. During the nine months ended September 30, 2006, we experienced delays in manufacturing and shipping of our sunglass and goggle products and distributor transitions in Australia and Asia, which we believe adversely impacted sales. These delays have been a result of poor logistical operations, lack of manufacturing equipment and weak management infrastructure in our Italian subsidiary, LEM. We have experienced similar delays during 2007 and anticipate that we may continue to experience manufacturing and shipping delays during the rest of 2007, and that such delays may have a material impact on our results of operations.
Our consolidated gross profit increased 17% to $18.2 million for the nine months ended September 30, 2007 from $15.5 million for the nine months ended September 30, 2006. Gross profit as a percentage of sales increased to 53% for the nine months ended September 30, 2007 from 50% for the nine months ended September 30, 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 $1.0 million. During the nine months ended September 30, 2007, inventory with an adjusted basis of $0.6 million was sold for approximately $1.4 million in revenue, affecting margins by $0.8 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 17% to $12.3 million for the nine months ended September 30, 2007 from $10.5 million for the nine months ended September 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 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 10% to $7.6 million for the nine months ended September 30, 2007 from $6.9 million for the nine months ended September 30, 2006. The increase in general and administrative expense was primarily due to a $0.4 million increase for employee-related compensation expense at LEM including severance pay for LEM employees and related legal fees, 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, increased consulting fees of $0.2 million, increased share-based compensation in accordance with SFAS No. 123(R) of $0.2 million, and increases in depreciation and amortization costs, rent expense and sales and use taxes. The increases were partly offset by decreases in audit fees of $0.3 million, bad debt expense of $0.2 million, investor relations related costs of $0.2 million, travel, business insurance, and information technology expenses.
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 decreased 6% to $1.2 million for the nine months ended September 30, 2007 from $1.3 million for the nine months ended September 30, 2006. The decrease was primarily due to decreased rent expense and employee-related compensation expense in the U.S. offset partly by increased employee-related compensation expense at LEM.
Research and development expense increased 9% to $0.9 million for the nine months ended September 30, 2007 from $0.8 million for the nine months ended September 30, 2006 due to increased employee-related compensation expense.
Other net expense was $0.5 million for the nine months ended September 30, 2007 compared to other net expense of $0.2 million for the nine months ended September 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 nine months ended September 30, 2007 was $1.1 million compared to $0.9 million for the nine months ended September 30, 2006. The effective tax rate for the nine months ended September 30, 2007 and 2006 was 25% and 21%, 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 $3.2 million was incurred for the nine months ended September 30, 2007 compared to a net loss of $3.3 million for the nine months ended September 30, 2006.
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ORANGE 21 INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Thousands, except per share amounts) |
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| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||
| Net sales | $ | 13,179 | $ | 11,379 | $ | 34,524 | $ | 31,032 | ||||||||||
| Cost of sales | 6,764 | 5,859 | 16,346 | 15,487 | ||||||||||||||
| Gross profit | 6,415 | 5,520 | 18,178 | 15,545 | ||||||||||||||
| Operating expenses: | ||||||||||||||||||
| Sales and marketing | 2,932 | 3,492 | 12,286 | 10,494 | ||||||||||||||
| General and administrative | 2,561 | 2,287 | 7,604 | 6,887 | ||||||||||||||
| Shipping and warehousing | 404 | 343 | 1,211 | 1,293 | ||||||||||||||
| Research and development | 426 | 267 | 860 | 786 | ||||||||||||||
| Total operating expenses | 6,323 | 6,389 | 21,961 | 19,460 | ||||||||||||||
| Income (loss) from operations | 92 | (869 | ) | (3,783 | ) | (3,915 | ) | |||||||||||
| Other expense: | ||||||||||||||||||
| Interest expense | (188 | ) | (44 | ) | (402 | ) | (168 | ) | ||||||||||
| Foreign currency transaction gain (loss) | 79 | (94 | ) | (102 | ) | (47 | ) | |||||||||||
| Other income(expense) | 3 | (20 | ) | (44 | ) | (14 | ) | |||||||||||
| Total other expense | (106 | ) | ||||||||||||||||
