Orange 21 Inc. Reports 2007 Financial Results

CARLSBAD, Calif.--(BUSINESS WIRE)--April 8, 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 year ended December 31, 2007.

Years Ended December 31, 2007 and 2006

Consolidated net sales increased 10% to $46.5 million for the year ended December 31, 2007 from $42.4 million for the year ended December 31, 2006. The increase is partly due to increased sales and marketing efforts, including an increase in sales force, and an improvement in product mix. A net loss of $8.0 million was incurred for the year ended December 31, 2007 compared to a net loss of $7.2 million for the year ended December 31, 2006.

Our consolidated gross profit increased 30% to $22.8 million for the year ended December 31, 2007 from $17.5 million for the year ended December 31, 2006. Gross profit as a percentage of sales increased to 49% for the year ended December 31, 2007 from 41% for the year ended December 31, 2006. The increase in gross profit and gross profit as a percentage of sales is partly due to efficiencies achieved at LEM, our subsidiary and primary manufacturer, and a more favorable product mix. The increase 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 $1.4 million. During the year ended December 31, 2007, inventory with an adjusted basis of $0.8 million was sold for approximately $1.8 million in revenue, affecting margins by $1.0 million or 2% 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 increased 12% to $16.2 million for the year ended December 31, 2007 from $14.5 million for the year ended December 31, 2006. The increase was primarily due to a $2.0 million write off of point-of-purchase displays in the U.S., which was a result of transferring ownership of the point-of-purchase displays to our customers during June 2007. In addition, in the U.S., further 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. We do not expect this change to materially affect our results of operations in future periods.

General and administrative expense increased 2% to $9.6 million for the year ended December 31, 2007 from $9.4 million for the year ended December 31, 2006. The increase in general and administrative expense was primarily due to increased legal fees of $0.4 million which included $0.2 million in legal fees related to negotiations for the acquisition of the retail stores division of No Fear which did not materialize, a $0.3 million increase for employee-related compensation expense at LEM including severance pay for LEM employees and related legal fees, increased consulting fees of $0.3 million, increased share-based compensation in accordance with SFAS No. 123(R) of $0.2 million, and increases in depreciation and amortization costs and rent expense. The increases were partly offset by decreases in audit fees of $0.4 million, bad debt expense of $0.3 million, $0.2 million payroll costs in the U.S., investor relations related costs, travel and business insurance.

Shipping and warehousing expense remained consistent at $1.8 million for each of the years ended December 31, 2007 and 2006.

Research and development expense increased 24% to $1.2 million for the year ended December 31, 2007 from $1.0 million for the year ended December 31, 2006. The increase is mainly due to an increase in employee-related compensation expense.

Other net expense was $0.5 million for the year ended December 31, 2007 compared to other net expense of $0.4 million for the year ended December 31, 2006. The change in other net expense is primarily due to increases in net interest expense partly offset by an increase in foreign currency transaction gains in 2007 compared to foreign currency losses in 2006.

The income tax provision for the year ended December 31, 2007 was $1.5 million compared to a $2.3 million benefit for the year ended December 31, 2006. The effective tax rate for the years ended December 31, 2007 and 2006 was (22%) and 25%, respectively. The decrease in the effective tax rate was due to a larger proportion of the pretax losses incurred in the U.S. versus in Italy, offset by the valuation allowance of $3.2 million recorded in the U.S. booked in 2007 versus no valuation allowance recorded in 2006 for the U.S.

Non-GAAP Financial Information

During the year ended December 31, 2007, we incurred certain non-recurring items including $268,000 in legal costs and $50,000 in banking and underwriting fees for negotiations related to the potential acquisition of the retail stores division of No Fear that did not materialize, increased share-based compensation expense in accordance with SFAS No. 123(R) of $98,000 for acceleration of vesting of share-based grants made to one employee and severance pay of $91,000 in the U.S. In addition we had $2,375,000 in point-of-purchase display expense related to amounts capitalized as of December 31, 2006 in the U.S., which was depreciated through June 2007 with the balance written off in June 2007 as a result of transferring ownership of the point-of-purchase displays to our customers during June 2007. Additionally, we incurred $377,000 of recurring expense in accordance with SFAS No. 123(R). Absent these charges during the period, we would have had a loss before tax of approximately $3,283,000 compared to a loss before tax of approximately $9,527,000 during 2006.

                                                           (Thousands)
GAAP Loss before provision for income taxes                    (6,542)

    No Fear legal costs                                           268
    No Fear banking/underwriting costs                             50
    Acceleration of SFAS No. 123 (R) costs                         98
    Severance costs                                                91
    POP display expense for displays purchased prior to
     1/1/07                                                     2,375
                                                           -----------

Non-GAAP Loss before benefit for income taxes, excluding
    non-recurring items                                        (3,660)
    Recurring SFAS No. 123 (R) costs                              377
                                                           -----------

Non-GAAP Loss before benefit for income taxes, excluding
    non-recurring items and recurring SFAS No. 123 R costs     (3,283)
                                                           ===========

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 and non-recurring 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 December 31, 2007 totaled approximately $555,000 compared to $3.5 million at December 31, 2006.

Management Commentary and Analysis

Mark Simo, Orange 21's Chairman and CEO, commented:

"Last year was a year of transition for us at Orange 21. We entered 2007 with a great deal to fix: our product offering, our production efficiency, our inventory levels and quality, our relationships with our dealers, our internal management processes, and our marketing efficacy. Our goals were to stabilize the business on a revenue and cash flow basis, while working on multiple fronts to improve our business operations.

I am pleased to report that we largely met our goals for 2007. It was far from a perfect year, and, from the outside, our consolidated financial results do not look inspiringly improved. But, internally, we believe we largely succeeded in our core, underlying goals. We believe we have addressed many of the key problems that were present when I assumed oversight of the business in late 2006. We believe we have streamlined and improved the product offering; increased production efficiencies significantly; restructured our internal management team and processes; and re-invigorated our brand and our marketing programs.

In 2008 we will continue to tackle important operating challenges. Primary among those will be a physical consolidation of our production operations at LEM. While we will continue to work on operating challenges, I believe that the hard work done by the management team in 2007 has largely completed the task of stabilizing the business and the business model at Spy.

With a year of transition behind us, I am pleased to be able to say that I believe the key story in 2008 will in fact be growth -- the beginning of a new growth period for the Spy Optic brand and business. We see a new level of interest in our brand and product, at a national level. We need to be careful in managing this expected growth trajectory, so that we do not get ahead of our own capabilities as a company, as we have done in the past. Our goal is to lay a strong growth foundation. We believe that this year will see the first real evidence of new expansion of the brand, in terms of both revenues, and, in terms of the scope of accounts that we service. We are particularly gratified to be able to say this, in the face of the macroeconomic forces at work at home and abroad - softness in the domestic economy coupled with the dramatic decrease in the value of the dollar - both of which create a headwind for our expansion. We believe that our ability to grow in the face of these constraints is particularly strong evidence of the power of the Spy brand.

About Orange 21 Inc.

Orange 21 designs, develops, markets and produces premium products for the action sport and youth lifestyle markets. Orange 21's primary brand, Spy Optic (TM), manufactures sunglasses and goggles targeted toward the action sports and youth lifestyle markets.

Safe Harbor Statement

This press release contains forward-looking statements. These statements relate to future events or future financial performance and are subject to risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "feel," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. Specifically, comments in this press release regarding the stabilization of the business, growth prospects, the rebound in dealer goodwill, the rekindled buzz around Spy, our ability to increase revenues and expand into new channels and markets, strength of our brand, and our ability to turn accumulated inventory into cash are forward-looking statements and are subject to inherent risks. These statements are only predictions. Actual events or results may differ materially. Factors that could cause actual results to differ materially from those contained in the forward-looking statements include, but are not limited to: risks related to the Company's ability to manage growth; risks related to the limited visibility of future orders; the ability to identify and work with qualified manufacturing partners and consultants; the ability to expand distribution channels and retail operations in a timely manner; unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; the ability to continue to develop, produce and introduce innovative new products in a timely manner; the ability to source raw materials and finished products at favorable prices; the ability to identify and execute successfully cost-control initiatives; uncertainties associated with the Company's ability to maintain a sufficient supply of products and to manufacture successfully products; the integration of the LEM acquisition; the performance of new products and continued acceptance of current products; the execution of strategic initiatives and alliances; uncertainties associated with intellectual property protection for the Company's products; matters generally affected by the domestic and global economy, such as changes in interest and currency rates; and other risks identified from time to time in the Company's filings made with the U.S. Securities and Exchange Commission. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company can not guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company, nor any other person, assumes responsibility for the accuracy or completeness of such forward-looking statements. The Company undertakes no obligation to update any of the forward-looking statements.

                   ORANGE 21 INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS
      (Thousands, except number of shares and per share amounts)

                                                   December 31,
                                            --------------------------
                                                2007         2006
                                            ------------ -------------
                                                         (As Restated)
                    Assets
Current assets
   Cash and cash equivalents                  $    555        $ 1,279
   Restricted cash                                   -          1,728
   Short-term investments                            -            500
   Accounts receivable, net                     10,510         10,014
   Inventories, net                             11,297          9,098
   Prepaid expenses and other current assets     1,460          1,584
   Income taxes receivable                         123            606
   Deferred income taxes                         1,722          1,827
                                            ------------ -------------
       Total current assets                     25,667         26,636
Property and equipment, net                      5,775          8,042
Goodwill                                         9,735          8,727
Intangible assets, net of accumulated
 amortization of $504 and $376 at December
 31, 2007 and 2006, respectively                   493            530
Deferred income taxes                              719          1,632
Other long-term assets                             202             69
                                            ------------ -------------
Total assets                                  $ 42,591        $45,636
                                            ============ =============
        Liabilities and Shareholders' Equity
Current liabilities
   Lines of credit                            $  5,805        $ 2,976
   Current portion of capital leases               378            410
   Current portion of notes payable                498            251
   Accounts payable                              6,715          6,418
   Accrued expenses and other liabilities        4,964          4,458
   Deferred purchase price obligation                -          1,020
   Income taxes payable                            207              -
                                            ------------ -------------
       Total current liabilities                18,567         15,533
Notes payable, less current portion                837            593
Capitalized leases, less current portion           704            647
Deferred income taxes                              384            300
                                            ------------ -------------
Total liabilities                               20,492         17,073
Stockholders' equity
   Preferred stock: par value $0.0001;
    5,000,000 authorized; none issued                -              -
   Common stock: par value $0.0001;
    100,000,000 shares authorized; 8,161,814
    and 8,100,564                                    -
    shares issued and outstanding at
     December 31, 2007 and 2006,
     respectively                                    1              1
   Additional paid-in-capital                   36,845         36,336
   Accumulated other comprehensive income        2,526          1,505
   Accumulated deficit                         (17,273)        (9,279)
                                            ------------ -------------
       Total stockholders' equity               22,099         28,563
                                            ------------ -------------
       Total liabilities and stockholders'
        equity                                $ 42,591        $45,636
                                            ============ =============
                   ORANGE 21 INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS
                (Thousands, except per share amounts)

                                             Year Ended December 31,
                                            --------------------------
                                                2007         2006
                                            ------------ -------------
                                                         (As Restated)
Net sales                                      $ 46,541       $42,406
Cost of sales                                    23,727        24,881
                                            ------------ -------------
   Gross profit                                  22,814        17,525
Operating expenses:
   Sales and marketing                           16,244        14,486
   General and administrative                     9,597         9,372
   Shipping and warehousing                       1,768         1,768
   Research and development                       1,245         1,003
                                            ------------ -------------
       Total operating expenses                  28,854        26,629
                                            ------------ -------------
   Loss from operations                          (6,040)       (9,104)
Other expense:
   Interest expense                                (592)         (241)
   Foreign currency transaction gain (loss)         114           (53)
   Other expense                                    (24)         (129)
                                            ------------ -------------
       Total other expense                         (502)         (423)
                                            ------------ -------------
   Loss before benefit for income taxes          (6,542)       (9,527)
Income tax provision (benefit)                    1,452        (2,342)
                                            ------------ -------------
Net loss                                       $ (7,994)      $(7,185)
                                            ============ =============
Net loss per share of Common Stock
                                            ============ =============
   Basic                                       $  (0.98)      $ (0.89)
                                            ============ =============
   Diluted                                     $  (0.98)      $ (0.89)
                                            ============ =============
Shares used in computing net loss per share
 of Common Stock
   Basic                                          8,126         8,089
                                            ============ =============
   Diluted                                        8,126         8,089
                                            ============ =============

CONTACT: Orange 21 Inc.
Elicia Ritter, 760-804-8420
Fax: 760-804-8442
www.orangetwentyone.com

SOURCE: Orange 21 Inc.