Spy Optics (Orange 21) Sept. 30 Quarter and 9 Month Results

I also like them because since their change in management, when Stone Douglass came in first as a consultant and then as CEO, they’ve done a lot of things right. They’ve controlled their inventory and reduced expenses (employee expenses have been cut 10% in the U.S. and 20 to 30% at their Italian factory on a temporary basis). They raised some capital (About $2.5 million net as of November 16^th). The lawsuit with Mark Simo and No Fear has been settled. Their factory in Italy is being rationalized and its overall performance improved. As far as I can tell, the brand is well positioned.

So why are they losing money? Well, to nobody’s surprise, it’s a lot about the lousy economy.   But let’s start with their balance sheet. I went and pulled the balance sheet from a year ago so we can make a reasonable comparison between September 30 2009 and 2008.

Total assets are down 51% from $41.4 to $20.3 million. A huge chunk of that is goodwill (remember, that’s a non cash item) of $9.6 million that’s been written off over the year. Most of the rest is in current assets, and those changes are appropriate to their changing sales level and the overall business environment.

Cash has grown from $413,000 to $717,000. Inventory and receivables are down almost $8 million in total. You’d expect that. Deferred taxes have fallen $1.25 million to $0.00.

Total liabilities, of course, are also way down from $20.3 to $$13.8 million, a decline of 32%. Most of that decline is in current liabilities, down from $18.8 to $12.1 million. The line of credit outstanding, at $2.1 million, is less than half of what it was a year ago. Accounts payable and accrued expenses are down a total of $3.1 million.

The current ratio is basically the same, having fallen only very slightly from 1.31 to 1.26.

Stockholders’ Equity is down 69% from $21.1 to $6.6 million. As a result, total debt to equity has doubled from 0.96 to 2.06.

Net sales for the quarter fell 27% from $12 to $8.8 million. For nine months, they were down from $37.6 to $25.3 million, or 32.7%. The gross margin percentage for the quarter fell from 49% to 33%. The biggest reason for the decline in the quarter’s gross margin was “…a $0.7 million increase in inventory reserves for slow moving and obsolete inventory…” For nine months, it was down from 49% to 42% in the same period the previous year. Expenses in the quarter fell from $5.9 to $4 million, or 32%. The percentage decline was about the same for the nine months, from $19.1 to $12.9 million.

Sales and marketing expenses as a percentage of net sales fell from 25% to 20% in the quarter compared to the same quarter the prior year, and from 25% to 22% for nine months. Those percentages do need to come down, but you’d rather see it happen because of rising sales. Half a million of the decline during the quarter was from reduced commissions due to lower sales. 

In last year’s quarter ended Sept. 30, Orange 21 made $6,000. In the same quarter this year, they lost $1.136 million. The numbers for nine months are a loss of $2,194 million this year compared to a loss of $1,118 million in the nine months last year.

Orange 21 thinks “…its cash on hand and available loan facilities will be sufficient to enable the Company to meet their operating requirements for at least the next 12 months.” If the economy gets worse, or doesn’t improve, there may be a need for some additional capital. I guess we all have that problem.

Orange21 will have a hard time prospering with its existing sales levels and a 33% gross margin. One or both of those just has to improve. As I said, the low gross margin is at least partly the result of writing down some bad inventory, and that impact will go away.

The sunglass business, as we all know, has attracted a lot of competitors because of the historically high gross margins that have been earned both by brands and retailers. Even ignoring the impact of a lousy economy, those high margins didn’t persist in skate shoes or snowboards, and I can’t imagine why they would persist in sunglasses and goggles. But Orange 21, as a smaller company with a 100% focus on sunglasses and goggles, may have some advantages in the market over large companies that look at these products as accessories. Let’s hope that works for them.