Orange 21 (Spy Optic) has been through a lot. The recession and resulting economic conditions were enough, I’m sure we’d all agree, for any company to deal with. But since CEO Stone Douglass came in, they’ve also settled a dispute with former CEO Mark Simo and No Fear, done a rights offering (they raise about $2.5 million net), replaced their bank line with an asset based line of credit, dealt with a bunch of bad inventory, rationalized and restructured their factory in Italy, borrowed $3 million from Costa Brava, which is owned by its largest shareholder, and cut expenses including ten percent pay cuts for employees, which are still in effect.
They’ve also negotiated deals with O’Neill, Jimmy Buffett and his Margaritaville brand and, recently, Mary J. Blige to design, manufacture and market sun glass lines under their names. If those lines are successful, it will give them volume and help utilize their factory’s capacity.
And as if doing all this wasn’t a full time job, they still had to run the business.
Yet every time I go in a shop and ask how Spy Optics is doing (most recently last week), people say good things and tell me it’s selling well. So in spite of all the distractions, the brand still seems to be well positioned.
Sales rose 11.4% to $8.3 million, and they saw improvement across all products lines. Sunglasses represent around 80% of sales and goggles, 20%. They believe “…the overall increase is partly due to an improvement in the economy and consumer confidence as well as an increase in our efforts with certain key accounts and focus on close out sales.”
You can see the impact of the closeout sales on the gross margin. There was “…an increase of $0.7 million in discounts related to an increase in close out and key accounts sales in the U.S.” Total gross profit grew 2.5% from $3.6 to $3.7 million, but gross profit margin fell from 48.9% to 45%.
Research and development expenses were up 69% to $400,000. There was some additional head count, travel and entertainment, and some expenses for the newly licensed brands. You’d expect that.
Overall, the loss from operations grew from $776,000 to $889,000 and the net loss went up from $804,000 to $937,000.
I retrieved the balance sheet from March 31, 2009 to compare to the most current one. We see that receivables have fallen 6% from $5.3 million to $4.9 million. You like to see receivables fall as sales increase, though typically they rise. Inventory was down 20% to $8.3 million, also a good thing. Total current assets were down 14.9%.
Current liabilities were down 25.2%. The biggest decreases were in the line of credit, which fell from $3.5 to $2.2 million, accounts payable, which were down 33.6% to $4.3 million. Looks a lot like good financial management and expense control. The current ratio improved from 1.21 to 1.38. Not a big improvement, but progress.
There were no big changes in the non-current assets. Long term notes payable jumped from $270,000 to $3.2 million due to the $3 million note from Costa Bravo. Much of the proceeds from that note were used to pay off the BFI line. I have to believe it’s easier and cheaper to have longer term money from a major shareholder than short term money from an asset based lender.
Total stockholders’ equity fell from $7 million to $4.6 million, or by 35%. Total debt to equity has increased (a bad thing) from 2.28 to 3.36 times.
Orange 21 is doing everything they can to control spending and improve their balance sheet. What they need most is higher revenue. Hopefully, a continuing economic recovery and sales from their new licensing arrangements will give them that. I guess it may also help that the cost of the product they make in their Italian factory will decline in dollars if the Euro continues to weaken.
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