Orange 21 Inc. Reports Financial Results for Second Quarter 2008
CARLSBAD, Calif.--(BUSINESS WIRE)--Aug. 12, 2008--Orange 21 Inc. (NASDAQ:ORNG), a leading developer of brands that produce premium products for the action sports and youth lifestyle markets, today announced financial results for the three and six months ended June 30, 2008.
Three Months Ended June 30, 2008 and 2007
Consolidated net sales increased 17% to $14.0 million for the three months ended June 30, 2008 from $12.0 million for the three months ended June 30, 2007. The increase is largely due to an improvement in product mix and availability and increased prices. A net loss of $0.3 million was incurred for the three months ended June 30, 2008 compared to a net loss of $1.6 million for the three months ended June 30, 2007.
Our consolidated gross profit decreased 2% to $6.9 million for the three months ended June 30, 2008 from $7.1 million for the three months ended June 30, 2007. Gross profit as a percentage of sales decreased to 50% for the three months ended June 30, 2008 from 59% for the three months ended June 30, 2007 largely due to increased materials costs due to increased gas and oil prices and an increase in Euro foreign exchange rates, partly offset by a decrease in outsourcing costs at LEM, our subsidiary and primary manufacturer and an increase in selling prices. Gross profit for the three months ended June 30, 2008, includes net decreases in inventory reserves for slow moving and obsolete inventory that is no longer being marketed for resale of approximately of $0.3 million. During the three months ended June 30, 2008, inventory with an adjusted basis of $0.2 million was sold for approximately $0.3 million in revenue, affecting margins by $0.1 million or 0.8% of net sales. The remaining decrease in the inventory reserve was mainly due to the disposal of product which has no effect on the results of operations.
Sales and marketing expense decreased 38% to $3.5 million for the three months ended June 30, 2008 from $5.6 million for the three months ended June 30, 2007. The decrease was primarily due to a $0.4 million decrease in depreciation expense and a $1.9 million write off in June 2007 for point-of-purchase displays in the U.S. partly offset by a $0.3 million increase in expense related to purchases of new point-of-purchase displays. During June 2007, the point-of-purchase displays in the U.S. were written off as a result of transferring ownership of the point-of-purchase displays to our customers. In addition, in the U.S., future purchases of point-of-purchase displays will no longer be capitalized since the displays will be owned by the customers. The cost of these displays will be charged to sales and marketing expense.
General and administrative expense increased 5% to $2.7 million for the three months ended June 30, 2008 from $2.5 million for the three months ended June 30, 2007 primarily due to employee-related expenses and bad debt expense.
Shipping and warehousing expense increased 26% to $0.5 million for the three months ended June 30, 2008 from $0.4 million for the three months ended June 30, 2007 primarily due to increased employee-related expense.
Research and development expense increased 42% to $0.3 million for the three months ended June 30, 2008 from $0.2 million for the three months ended June 30, 2007 primarily due to an increase in employee-related expense.
Other net expense decreased 48% to $0.1 million for the three months ended June 30, 2008 from $0.3 million for the three months ended June 30, 2007. The decrease in other net expense is primarily due to decreases in foreign currency transaction losses.
The income tax (benefit) expense for the three months ended June 30, 2008 and 2007 was $38,000 and ($429,000), respectively. The effective tax rate for the three months ended June 30, 2008 and 2007 was 16% and (21%), respectively.
Six Months Ended June 30, 2008 and 2007
Consolidated net sales increased 20% to $25.5 million for the six months ended June 30, 2008 from $21.3 million for the six months ended June 30, 2007. The increase is largely due to an improvement in product mix and availability and increased prices. A net loss of $1.1 million was incurred for the six months ended June 30, 2008 compared to a net loss of $3.3 million for the six months ended June 30, 2007.
Our consolidated gross profit increased 3% to $12.4 million for the six months ended June 30, 2008 from $12.0 million for the six months ended June 30, 2007. Gross profit as a percentage of sales decreased to 49% for the six months ended June 30, 2008 from 56% for the six months ended June 30, 2007 largely due to increased materials costs due to increased gas and oil prices and an increase in Euro foreign exchange rates, partly offset by a decrease in outsourcing costs at LEM, our subsidiary and primary manufacturer and an increase in prices.
The increase in gross profit is also due to net decreases in inventory reserves for slow moving and obsolete inventory that is no longer being marketed for resale of approximately of $0.8 million. During the six months ended June 30, 2008, inventory with an adjusted basis of $0.3 million was sold for approximately $0.5 million in revenue, affecting margins by $0.2 million or 0.7% of net sales. The remaining decrease in the inventory reserve was mainly due to the disposal of product which has no effect on the results of operations.
Sales and marketing expense decreased 32% to $6.5 million for the six months ended June 30, 2008 from $9.5 million for the six months ended June 30, 2007. The decrease was primarily due to a $1.0 million decrease in depreciation expense and a $1.9 million write off in June 2007 for point-of-purchase displays in the U.S. partly offset by a $0.6 million increase in expense related to purchases of new point-of-purchase displays. During June 2007, the point-of-purchase displays in the U.S. were written off as a result of transferring ownership of the point-of-purchase displays to our customers. In addition, in the U.S., future purchases of point-of-purchase displays will no longer be capitalized since the displays will be owned by the customers. The cost of these displays will be charged to sales and marketing expense. The remaining decrease is largely due to decreases in the U.S. and at LEM for employee-related expenses and various other expenses in the U.S. due to an overall effort to decrease sales and marketing costs.
General and administrative expense remained consistent at $5.1 million for the six months ended June 30, 2008 and 2007.
Shipping and warehousing expense increased 28% to $1.0 million for the six months ended June 30, 2008 from $0.8 million for the six months ended June 30, 2007 primarily due to increased employee-related expenses.
Research and development expense increased 46% to $0.6 million for the six months ended June 30, 2008 from $0.4 million for the six months ended June 30, 2007 primarily due to an increase in employee-related expenses.
Other net expense was $0.5 million for the six months ended June 30, 2008 compared to other net expense of $0.4 million for the six months ended June 30, 2007. The increase in other net expense is primarily due to increases in net interest expense and foreign currency transaction losses.
The income tax benefit for the six months ended June 30, 2008 and 2007 was $0.2 million and $1.0 million, respectively. The effective tax rate for the six months ended June 30, 2008 and 2007 was 17% and 24%, respectively.
Non-GAAP Financial Information
During the three and six months ended June 30, 2008, we incurred $136,000 and $271,000, respectively, of non-cash expense in accordance with SFAS No. 123(R). Absent these charges during the periods, we would have had a loss before tax of approximately $99,000 and $1,084,000, respectively, compared to a loss before tax of approximately $235,000 and $1,355,000 during the three and six months ended June 30, 2008, respectively.
Three Months Ended Six Months Ended
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June 30, 2008
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(Thousands of Dollars)
GAAP Loss before provision for
income taxes (235) (1,355)
Recurring SFAS No. 123 (R)
costs 136 271
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Non-GAAP Loss before benefit for
income taxes, excluding recurring
SFAS No. 123 (R) costs (99) (1,084)
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We believe the presentation of Non-GAAP financial measures assists investors to better understand our operating performance. We believe that excluding the impact of certain non-cash items from earnings is helpful to investors in their review of information presented by us.
Liquidity and Capital Resources
Cash, cash equivalents, restricted cash and short-term investments at June 30, 2008 totaled approximately $1,209,000 compared to $555,000 at December 31, 2007.
Management Commentary and Analysis
Mark Simo, Orange 21's Co-Chairman and CEO, commented: "This quarter's and year to date results have been encouraging, but still short of my goal for Spy Optic. Our revenues have increased over the prior year, our costs have been managed within expectations and the net results are considerably better than the same periods in the prior year. However, this year we have had to manage our business with the U.S. dollar weakening against the Euro. This has significantly increased our costs of goods sold, as the majority of our products are sourced in Italy. In addition, higher oil prices have resulted in an increase in the cost of our frame and lens materials. We also believe that the slowdown in the global economy is having a significant negative impact on the demand for our products as consumers have less disposable income. Going into the second half of this year, we continue to be concerned by the weakness of the U.S. dollar against the Euro and the high cost of oil. For the remainder of the year, we plan to continue to focus on making our sales and marketing efforts more efficient and effective while at the same time reducing our operating expenses. We have substantially improved the flow of products from our factory to our retail customers. And we have introduced several new styles that have sold well in the market. Although general economic conditions appear to have impacted our business, we believe that the strength of and demand for our brand will allow us to be successful. Our goal is to continue to show revenue growth over the prior year irrespective of the current economic environment."
- Surfeyes.com
