Spy Optics’ 3/31/07 Quarterly Report: Lemonade Out of Lemons

Apparently the Board of Directors got tired of this and over the last year a number of positive things have happened. The lawsuit was settled in early May. There have been a lot of personal changes over the last year or so. Mark Simo, the Chairman of the Board and former CEO, has stepped in as CEO, replacing former CEO Barry Buchholtz who was sent over to run the Italian operation (Hmmm. Feels a bit like, “You bought it, you go run it!”) Fran Richards, formerly of Transworld and Future USA came in as VP of Marketing in April of 2006. The old CFO resigned (I don’t quite know if that should be in quotes or not) and was replaced by Jerry Collazo in August of 2006. He’s a CPA with 20 years of diversified financial and accounting experience. They hired Jerry Kohlscheen as Chief Operating Officer giving them another 20 years of experience in manufacturing and operations.

 

So, what has all this high powered talent been doing exactly? A lot, I’d say judging from their recent quarterly releases.

 

 They must be making a lot of money now, right? Nope. Still losing it. Almost $1.8 million in the quarter ended March 31, 2007 (they were late filing the report) on sales of $9.4 million. But I am impressed with the way they are losing it. Okay, there’s no good way to lose money. But a lot of what they are doing, which is costing money, has the feel of getting their house in order. Let’s look.

 

They reported that gross profit increased to 52.2% from 48.1% in the same quarter the previous year. It was indicated that the increase was “primarily due to sales during the three months ended March 31, 2007 of some inventory items that were previously written down and efficiencies achieved at LEM S.r.l.  LEM is the acquired Italian manufacturer.

 

This particularly increase in gross margin may be partly a onetime event, but it shows that they are getting their inventory in order and improving operations at LEM.

 

Sales and marketing expense was up 9% while sales didn’t budge. But two-thirds of this increase was the result of additional depreciation on point of purchase store displays. Why is this good? First, it’s a non cash expense. More importantly, it implies a realistic approach to their numbers and balance sheet values much like the inventory write down mentioned above. That’s great to hear. Ever try and run a business without good numbers?

 

General and administrative expenses were up 17%, or $400,000. But half of that was employee related compensation in the US. Yes, these new people who are going to do wonderful things want to be paid. $100,000 was severance for employees at LEM- part of getting that operation working efficiently I assume. Another hundred grand was getting some new systems up and running. Like I said, you can’t run a business without good numbers. They also cut their legal and audit fees by $300,000 but had some additional expenses for depreciation and bank fees related to a new loan agreement.

 

See the trend here. Higher expenses- yes. But spent on the right things.

 

This continues when they talk about warehouse expense being higher because of air freight resulting from manufacturing delays. Well, nobody likes to pay air freight, but the only thing worse it not getting the product to the customer on time.

In the words of their Chairman, Mark Simo, “We continue our efforts to stabilize the business and position it for long term growth.” That’s what it looks like to me.