Orange 21 Year End Results and Management Restructuring
I unexpectedly had to spend about 10 days back east on family issues. Everything turned out fine, but I got way, way behind on my analysis. But sometimes things work out, and Orange 21’s management changes of last week gave me the perfect opportunity to tie those changes to their financial results and write a way more interesting piece.
I’ve been writing about the saga of Orange 21 (Spy Optic) for a while now. You remember the basic story. Solid, small brand has some self-inflicted management and operational problems (Bought a factory in Italy- now sold, too much inventory, the Mark Simo/No Fear episode, etc.). Went public for no reason I could ever figure out. Things are tough enough then the recession hits. Stone Douglass, a turnaround guy with no experience in our industry (that is not a criticism) is brought in to clean up the mess and get things back on the right track. He does, as far as I can tell, all the stuff he should do. But, so far at least, we haven’t seen sales growth and the company continues to lose money.
The income statement for the year ended December 31 showed a loss of $4.6 million on revenue of $35 million. When you read through the overview of the business, the target markets, the growth strategy and the products sections of the 10K report you can’t help but think that maybe a $34 million revenue business just doesn’t have the resources it needs to compete in the sunglass and goggle business given the competitors and their resources. Sunglasses and goggles represented 99% of Orange 21’s revenues in 2010.
Given those factors and the economic environment, I’d guess that Orange 21 management reached the same conclusion. They responded, in September of 2009, by licensing the O’Neill brand for eyewear. In February and May of 2010 respectively, they made deals with Jimmy Buffett and Mary J. Blige to design, produce and distribute a line of eyewear for each of them.
Seems like a good idea. But it required expenditures for royalties, design, production and building inventory before the first pair could be sold. In 2010, the company spent $1.2 million associated with those brands but generated “minimal” sales. Inventory increased between the end of 2009 and the end of 2010 by $1.14 million to $8.9 million. Much of that increase was in preparation for the launch of the new products. The discussion of cash flow activities (page 34 of the 10K if you care) states, “Working capital and other activities includes a $2.9 million increase in net inventories for the addition of the O’Neill™, Margaritaville™ and Melodies by MJB™ eyewear lines, and a buildup of mainly top selling Spy™ sunglasses in anticipation of both an increase in sales of such Spy™ sunglasses and the sale of 90% of LEM.” LEM is the factory in Italy they sold.
Anyway, they’ve got a lot of money tied up in these initiatives. Where’d it all come from since the company is losing money?
It came from the Chairman of Orange 21’s board and largest shareholder Seth Hamot. Actually, it came from Costa Brava Partnership III, L.P. Mr. Hamot “…is the President and sole member of Roark, Rearden & Hamot, LLC, which is the sole general partner of Costa Brava.” Costa Brava has invested $7 million in Orange 21 in 2010. Through Costa Brava, he put in $3 million, $1 million and another $ 1million in March 2010, October 2010 and November 2010, respectively. On December 20, he put in another $2 million and rolled all that debt into one promissory note for the entire $7 million.
The whole $7 million is subordinated to any borrowings under the asset based line of credit from BFI Business Finance. $2.235 million in borrowings were outstanding under that line at the end of 2010.
Basically, that $7 million funded the loss for the year and the inventory build for the newly licensed brands. But those brands still aren’t producing significant sales- at least as of the end of the year.
You know, it always seems to be the case that new deals have bumps in the road you don’t expect, cost more than you expect, and don’t produce revenue as quickly as you’d hoped. I’m guessing that might be the case here. Add that to the fact that the Spy brand isn’t growing as they had hoped, and you get to last week’s management restructuring.
Stone Douglas resigned, but he’s going to get paid his $300,000 salary for a year. Carol Montgomery, who has quite a background in the sunglass/optical industry, was hired as the CEO at a base salary of $360,000. I read that change mostly as the board of directors deciding that the clean up the mess and restructuring part of the job was largely done and that the strategic positioning build the brands part required somebody who knew the industry better. I agree with that thinking, though I imagine that if Spy was growing and sales of the Buffett and Blige brands were ahead of schedule, we might not have seen the change at this time.
Michael Marx, who joined the company in February as VP of Marketing, was promoted to President with a salary of $250,000. I’m not quite clear why a company this size needs a CEO and a President. There must be a plan.
And I think that partly because on April 11, Orange 21 entered into a retainer agreement with Regent Pacific Management Corporation to provide the services of Michael D. Angel as interim chief financial officer. Orange is paying $50,000 every four weeks for his services. Regent Pacific will also be paid some fees for achieving certain goals and get a warrant to purchase 1.5% of the company’s fully diluted common stock at an exercise price of $1.85.
I’m not sure that a company of this size expecting some modest growth and, I assumed, with Stone Douglass having done most of the blocking and tackling a turnaround usually requires, would really require this kind of management and financial fire power. Stone Douglass was acting chief financial officer after Jerry Collazo left in February, 2010 until his resignation last week.
The company’s costs, as a result of all these arrangements, have increased by north of $100,000 a month. With this new expense level, the required royalties for the Buffett and Blige brands, and even with some reasonable growth by the Spy Brand, it feels like Orange 21 could need some more cash or a different kind of deal in 2011 unless the Buffett, Blige and O’Neill brands really take off. Let’s hope they do.
Aaahhh… The great sunglass company that should bleed orange, bleeds only money… Where does it go? Nobody knows. Athletes, Executives and media must get the lions share. I mean, what does Marckx need $250k for? Lord! Further, who the hell wears Revos? Seriously?
Unfortunately, they pay the worker bees with peanuts and most of the once proud “Made In Italy” is now made in China… Bummer. Those guys at LEM were laughing all the way to the bank.
It was good to be there at the peak. The ride downhill is brutal. The SEC should have delisted ORNG years ago… The trading volume is literally zero.
Mark,
Come on, Michael gets $250,000 because somebody has decided he’s worth it and will pay it. What do you think he should do? Turn it down!?
Yes, they do seem to be spending a lot of money on high powered talent. As I noted, that makes me think there’s a plan beyond just hiring those people. But of course the other explanation is that Mr. Hamot is just worried about his $7 million, wasn’t satisfied with Stone Douglass’ progress, and didn’t know what else to do.
Thanks for the comment!
J.