Spy Inc., the parent of the Spy Optic goggles brand, reported sales increased 11 percent  in the fourth quarter, to $8.5 million.

Sales in the year were up 10 percent to $33.4 million.

“We are very pleased with the growth SPY generated in 2011, particularly having more than overcome the significant sales decline the Company experienced in the first quarter of 2011. Our fourth quarter sales growth was also gratifying in that this quarter is usually seasonally weak, and it followed particularly strong third quarter growth, which was driven by burgeoning snow goggle sales,” said Michael Marckx, president and CEO. “Our team's renewed focus and singular attention on our core Spy brand continues to give us added traction.”

“During the last three quarters of 2011 we took actions we believe will allow us to be better positioned for continued future growth, including:

  • hiring a new management team and restructuring a number of critical organizational functions;
  • empowering existing team members to drive key initiatives unencumbered;
  • significantly increasing investments in sales and marketing related to our core Spy brand;
  • reducing inventory levels to improve our working capital management achieved by lower margin product sales through closeout channels and by reducing the level of our inventory purchases;
  • deciding to cease making further purchases of our licensed brands in order to focus solely on our core Spy brand;
  • introducing a number of new products, including the design and release of a number of new sunglass and goggle styles, and establishing the new prescription frame and performance sport sunglass product lines; and
  • increasing amounts available under borrowing facilities,” Mr. Marckx concluded.

Net sales increased by $0.8 million on a “pro-forma” basis, or 11 percent, to $8.5 million for the three months ended December 31, 2011, compared to $7.7 million on a “pro forma” basis for the three months ended December 31, 2010, as described below. Sales of Spy brand products were $8.0 million for the 2011 period, an increase of $0.7 million over the 2010 period, of which increase $0.3 million were from closeout sales. Sales of our licensed brands, substantially all of which were from closeout sales, were $0.5 million for the 2011 period, an increase of $0.1 million over the 2010 period. Net sales for the three months ended December 31, 2010, including the net sales from LEM, were $9.0 million.

Net sales increased by $3.0 million on a “pro-forma” basis, or 10 percent, to $33.4 million for the year ended December 31, 2011, compared to $30.3 million on a “pro forma” basis for the year ended December 31, 2010, as described below. Sales of Spy products brand were $31.1 million for the 2011 period, an increase of $1.8 million over the 2010 period, of which increase $1.1 million were from closeout sales. Sales of our licensed brands, substantially all of which were from closeout sales, were $2.2 million for the 2011 period, an increase of $1.2 million over the 2010 period. Net sales for the year ended December 31, 2010, including the net sales from LEM, were reported as $35.0 million.

The 2010 “pro forma” net sales amounts and increases described above exclude $1.3 million and $4.6 million of net sales during the three months and the year ended December 31, 2010, respectively, relating to sales by LEM of products manufactured for third party customers rather than for Spy in those periods, reflecting the fact that we sold LEM effective December 31, 2010. As such LEM's operations were not included in our consolidated results for the three months or the year ended December 31, 2011. However, LEM sales remain included in our consolidated results for the three months and the year ended December 31, 2010. Set forth below are “pro forma” financial tables which present our operating results for the three months and the year ended December 31, 2010 as if we did not own LEM during those periods.

Spy incurred a net loss of $3.4 million for the three months ended December 31, 2011 compared to a net loss of $3.1 million for the three months ended December 31, 2010. We incurred a net loss of $10.9 million for the year ended December 31, 2011 compared to a net loss of $4.6 million for the year ended December 31, 2010.

The significant increase in the net loss for the year ended December 31, 2011 included the impact of lower gross margins as a percent of sales, which was generally attributable to (i) increased inventory reserves related primarily to our licensed brands (O'Neill®, Melodies by MJB and Margaritaville), (ii) significant closeout sales of licensed brands at no or low margin, (iii) increased closeout sales of certain overstock and non-current SPY® brand products in support of our inventory reduction programs, and (iv) charges related to our decision to purchase from LEM less than the full amount specified in our agreement for 2011.

Operating expenses also increased in 2011 compared to 2010 due to actions to support several company-wide strategic objectives. Sales and marketing expenses increased primarily related to the renewed focus on SPY® brand positioning, which involved increasing headcount in both the sales and marketing functions and expanding our sales support and marketing activities. General and administrative expenses increased primarily due to the restructuring of management, which contributed to increased consulting, legal, severance and share-based compensation costs. Other legal costs pertaining to securities and corporate affairs also contributed to the increase. Other operating expenses of $1.8 million for the year ended December 31, 2011 were primarily due to our determination during the year ended December 31, 2011 that the cash flows produced by the O'Neill and Melodies by MJB eyewear brands were insufficient to cover the net present value of the remaining royalty obligations with respect to such brands. Interest expense increased in 2011 compared to 2010 due to the increased level of outstanding borrowings. Sales, gross margin, operating expenses (primarily related to general and administrative, shipping and warehousing, and research and development expenses) and the loss on the deconsolidation of LEM all included the results of LEM during the year ended December 31, 2010, but were not applicable to the year ended December 31, 2011 due to the sale of LEM on December 31, 2010.