Orange 21’s September 30 Quarter: Sales are Up, But So Is the Loss
This is one of the few times where it makes sense to start on the balance sheet to really understand what’s going on. It shows stockholders’ equity of a negative $4.3 million. How, you might ask, are they paying their bills? If you look under liabilities, you’ll see a “Note payable to stockholder” of $10.5 million.
That $10.5 million is owed to Costa Brava. Costa Brava “beneficially owns” approximately 50% (depends on how you calculate) of Orange 21’s common stock. The sole general partner of Costa Brava is Mr. Seth Hamot, who is the Chairman of the Board of Orange 21. To put it succinctly, if Mr. Hamot didn’t have a whole lot of money and wasn’t willing to lend a bunch of it to Orange 21, the company would have been closed or sold long ago.
It would be great fun to speculate on why this company went public in the first place, what the original plans for the public platform was, and why Mr. Hamot has been willing to commit this level of resources to the company (more to come according to the 10Q). But it would be only speculation and I guess I’ll stick to what we know. In any event, the fact that it is public has allowed us to watch it move through various management and strategic direction changes, and it’s been interesting. It continues to be interesting actually.
Since the end of the September 30 quarter, former CEO Carol Montgomery has resigned and been added to the board of directors. Michael Marcks is the new CEO, consultant Michael Angel has become the permanent CFO, and Greg Hagerman is the Executive VP for Sales and Operations. Meanwhile, as reported in the 10Q, the company has given up on its licensing agreements with O’Neill, Melodies by MJB, and Margaritaville and is still feeling the impact of the sale of its Italian factory (LEM). I should point out that I thought the licensing agreements were a good idea because, if successful, they’d give the company volume it needed to cover expenses it was going to incur in growing the Spy brand. I don’t know if licensing turned out to just be a bad idea or if there was some slippage in implementing the strategy.
Anyway, all this stuff has and is costing them a lot of money. They are refocused now on growing the Spy brand. Here’s how the company put it:
“We have recently decided to focus our development, marketing and sales activity on our SPY products. As part of that focus, we decided to cease any new purchase orders of additional inventory for the O’Neill , Melodies by MJB or Margaritaville eyewear brands.”
Reported sales for the quarter were up 11.7% to $9.2 million. If we ignore the LEM sales in the September 30 quarter last year, we see that proforma sales actually increased by $2.3 million, from $6.9 million to $9.2 million. Sales of Spy products were up $1.6 million. Closeout sales during the quarter were $900,000 and were primarily O’Neill and Melodies by MJB product. Sunglasses and goggles represented 57% and 43% of sales, respectively, during the quarter.
Reported gross profit fell from $3.9 million to $3.2 million. As a percentage of sales reported gross profit fell from 47.1% to 35.3%. This was largely the result of selling O’Neill and Melodies by MJB product at cost and of taking inventory reserves for Margaritaville product.
Sales and marketing expense rose almost 51% from $2.3 million to $3.4 million. $400,000 of the increase was for commission on higher sales (can’t argue with that). Another $400,000 was for staff additions and the remaining $300,000 represented additional marketing costs.
Total operating expenses were up 21.3%. $1.5 million of this was to terminate the Melodies by MJB deal. A million was paid in cash in July and $500,000 will be paid next March 31, but was accrued during the quarter.
The loss from operations rose from $819,000 to $2.4 million. Not unexpectedly given the borrowing from Costa Brava, interest expense was up from $160,000 to $413,000. The net loss was $3 million, up from $932,000 in the same quarter the previous year.
Cash flow remains an issue for Orange 21 and “The Company anticipates that it will need additional capital during the next 12 months to support its planned operations, and intends both to borrow more on its existing lines of credit from Costa Brava and BFI, provided they remain available and on terms acceptable to the Company, and to, if necessary, raise additional capital through a combination of debt and/or equity financings.”
It’s too long to quote, but they then go on to describe the circumstances under which the existing lines of credit from Costa Brava and BFI will be adequate. Recognizing that a 10Q is a legal document that’s by definition focused on what could go wrong, I still walked away with a sense there’s a not insignificant chance that capital from another source might be required. I know you let me read SEC filings so you don’t have to, but you might use the link above to look at the first three paragraphs of page 12 of the 10Q to see what I mean.
Where we’d like to focus now is on the potential and growth of the Spy brand. But there are still some significant required minimum purchases from LEM in 2012 and I don’t know if we’ll see any more write downs of licensed brand inventory or not. The saga continues.
Can you say ‘Time to short?’
Chris,
As I think you know I don’t make investment recommendations one way or the other. But shorting this would be technically difficult, if even possible. The number of shareholders is small, and there isn’t much float. And the stock price is already really low. If you were interested in shorting a stock, any stock, the time to do it is before the whole world knows it has issues.
thanks,
J.
and so it does…