ITEM 1. BUSINESS
Overview
We happily design, market and distribute premium sunglasses, goggles and prescription frame eyewear, as well as apparel, consumer electronics, bags and other accessories. In 1994, we began as a grassroots brand in Southern California with the goal of creating innovative and aesthetically progressive eyewear, and, in doing so, we believe we captured the imagination of the action sports market with authentic, distinctive, performance-driven products marketed and sold under the SPY® brand. Today, we believe the SPY® brand, symbolized by the distinct “cross” logo, is a well recognized eyewear brand in the action sports industry and abroad, with a reputation for high quality products, style and innovation, most notably showcased in its Happy Lens™ technology.
We were incorporated as Sports Colors, Inc. in California in August 1992, but had no operations until April 1994, when we changed our name to Spy Optic, Inc. In November 2004, we reincorporated in Delaware and changed our name to Orange 21 Inc. In February 2012, we changed our name from Orange 21 Inc. to SPY Inc. to better reflect the focus of our business going forward.
References in this report to “we,” “our,” “us,” “SPY,” and “SPY Inc.” refer to SPY Inc. and its two operating subsidiaries - Spy Optic Inc. (“SPY North America”) and Spy Optic Europe S.r.l. S.U. (“SPY EUROPE”) - except where the context clearly indicates that the term refers only to SPY Inc.
SPY® and Spy Optic® are the registered trademarks of SPY Inc. and its subsidiaries.
Our Products and Target Markets
We have a happy disrespect for the usual way of looking (at life) and this helps drive our innovative design, marketing and distribution of premium products, especially eyewear for youth-minded people who love to be outside doing what makes them feel most alive and happy. We feel a primary strength is our ability to create distinctive products that embody our unique, happy, and irreverent point of view, and this has helped us become what we believe is one of the most recognizable action sports and eyewear brands in the world, with a twenty-year heritage in surfing, motocross, snowboarding, cycling, skateboarding, snow skiing, motorsports, wakeboarding, multi-sports and mountain biking. Our position as a premier brand is underscored by the development of innovative, proprietary, performance-based products with quality materials and lens technologies that have a definitive styling along with an incredible value proposition. Our core products - sunglasses, goggles and prescription frames - marketed under the SPY® brand have allowed us to develop collaborations with athletes, artists, musicians, and celebrities as well as important multi-store action sports, sporting goods, sunglass specialty and lifestyle retailers in North America and other strategically-selected, individually owned-and-operated specialty retailers worldwide.
We create products that we believe lead our industry in terms of style and quality, and we continually seek to serve both active lifestyle participants and their aspirational counterparts. We separate our eyewear products into three groups: (i) sunglasses, which includes fashion, performance sport and women specific sunglasses; (ii) goggles, which includes snowsport and motocross goggles created for our core demographics; and (iii) prescription frames, which includes optical-quality frames and sunglasses for our youthful, yet widening demographic. In addition, we sell branded accessories for sunglasses and goggles, as well as a variety of other accessories and apparel. In December 2013, we entered into a merchandising license agreement, pursuant to which we licensed certain trade styles, trademarks, logos, designs and other proprietary materials (“SPY IP”) to a third party (“Licensee”). The agreement provides that the Licensee shall develop, introduce, market and sell certain licensed products incorporating SPY IP, including men’s and boy’s apparel, bags and luggage, consumer electronics, protective cases, and other unisex accessories, throughout North America through certain distribution channels, other than deep discount retail channels. We currently anticipate that licensed products incorporating SPY IP will generate revenue beginning in the first quarter of 2015.
The SPY® brand, as symbolized by the SPY® cross icon is a creative, performance-driven brand that is fueled by collaborative efforts across various facets of youth culture, including competition, art, music and day-to-day athletic performance. We strive to ensure that our products are relevant in function and design, as well as style. We do this, in part, through partnerships with our world class athletes who help us design, then wear and test our products during training and competition. We believe that the intimate knowledge of our customers' lifestyles is what helps us develop a stronger, more relevant product offering for our market. We reinforce our irreverent brand profile through unique and disruptive marketing, using traditional and non-traditional means to convey our branded point of view to both entertain and edify people across a multitude of demographics and psychographics.
One of our most important product innovations is the Happy Lens™, which is a patent-pending proprietary technology that was developed over the course of several years and released in February of 2013. The Happy Lens™ enjoyed a successful initial pre-launch marketing and promotion campaign during the fall of 2012, which was followed by strong sales of the collection during 2013 and 2014. We believe Happy Lens™ is a natural product extension of the happy and irreverent SPY® brand positioning and it is an integral part of the current and future SPY® collections. Another one of our product innovations is the Lock Steady™ lens changing system, which we launched in 2014 and then followed up with the Quick Draw™ lens changing system for goggles that will be featured in both snow and moto products in 2015.
Business Strategy
Our goal is to capitalize on the strengths of the SPY® brand by providing consumers with stylish, high-quality and performance-driven products. We strive to differentiate our brand through three primary means: (i) emphasizing our unique irreverent and happy brand personality that is authentic to our reason for being and compelling our customer base, one that includes a Super Service mantra for all our customers; (ii) achieving recognition for high-quality products and innovative product designs; and (iii) integrating innovative lens technologies, such as the Happy Lens™, Lock Steady™, and Quick Draw™. To this end, we are pursuing the following operating and growth strategies:
Brand Development. Brand development is a cornerstone of our company. SPY® reflects a collaboration of talented athletes, designers, and creative people connected by a common obsession with the happiness that action sports, riding, technology, style, music, and world-class performance - all with an irreverent, but fun attitude. We strive to design products that continuously evolve in style and performance in order to remain attractive to core consumers in our target markets and to our retail accounts. Our product development process is organized in ways that we believe allow us to respond more quickly to changing consumer tastes and preferences. We expertly support our brand positioning through disruptive marketing initiatives, including our vibrant advertising campaign, our unique events and our digital story telling that effectively express our unique point of view. We intend to continue these initiatives.
Drive Product Demand Through Quality, Innovative Design and Leading Edge Technologies. We focus on what helped build our brand from its inception - technological performance through the development of proprietary features and lens technologies. For example, in 2012 we filed a non-provisional utility patent application with the United States Patent and Trademark Office (“USPTO”) for the first ever “Therapeutic Lens,” called the Happy Lens™, which we believe is an innovative branded technology, that, among other attributes, is intended to filter out harmful short-wave blue light and Ultraviolet sunlight while intending to enable the right amount of “good” long wave blue light rays to pass through the lens into the eyes. All of our sunglasses contain our Accurate Radius Curvature or ARC® lenses that are engineered to provide 100% Ultraviolet or UV protection. Our sunglasses are forged from high-quality materials such as Grilamid®, propionate or acetate. These technologies and materials provide performance features and product characteristics, such as flexible sport frames, more comfortable fashion frames, and in the case of acetate, allow us to hand cut and polish our fashion frames. Our use of hand painting techniques and specialized trims, including metal logos, hinges and temple plates, help us to create distinctive premium sunglasses, goggles and prescription frames. We intend to continue developing innovative styles and products and expand the breadth of our new light filtering technologies in order to further strengthen our brand. We believe our continued focus on innovation will help drive demand for our products.
Brand Authenticity. Recently, to sustain and enhance the relevancy of our brand to our target market and beyond, we realigned our branding efforts in order to better reflect the original intent of our brand, and have continued to underscore this positioning since then. We collaborate closely with our team riders, our music and art community and our key retailers. Our grassroots and broader marketing programs include outdoor advertising, television and online commercials, the participation, ownership and sponsorship of events, online storytelling, and feature advertising in action sports and lifestyle media. Our advertising campaign, found in many vertical print media titles, on television, in outdoor media and online, showcases our unique, irreverent branded point of view with humor and creativity, combining athletes, lifestyle, product and innovation into one dynamic and engaging presentation. Our approach to event marketing utilizes our SPY® branded vehicles to showcase our products and athletes at a wide variety of events. We also are involved in a myriad of motocross, motorsport, snowboarding, cycling, wakeboarding and music events worldwide. Most importantly, we create and own unique branded events that best allow us to tell the SPY story through the prism of participation. These events, like the SPY Belgian Waffle Ride, The SPY Belgian Wafer Ride, The SPY Joker Ride and the SPY Del Moto Derby, enable us to provide different sporting communities an opportunity to compete in the most unique of all settings.
Actively Manage Retail Relationships. We manage our retail sales process by monitoring customer sales and inventory levels by product category and style with the objective of ensuring optimal brand representation and product offerings. Our sales programs include in-store clinics, point-of-purchase displays, and online sales support. Our marketing materials are designed to assist our authorized retailers in promoting the authenticity of our brand and products and to maximize the implementation of our consumer marketing initiatives. We will continue to develop strategic partnerships with specialty and national retailers, designed to help ensure brand authenticity and maximum point-of-sale opportunities. We maintain very good relationships with our retailers, which help us influence the assortments and positioning of our products at retail. We also have our own SPY showroom, called the Happy Camp, which showcases all of our products in one place exactly the way we want retailers to showcase our products and we use this showroom to help edify and entertain our retailers the SPY way.
Expand Domestic Distribution and Brand Recognition Outside of California. We believe opportunities exist to increase our sales outside of California by building partnerships with our key retailers through brand management, product positioning and managing account expectations for turn and profitability. Additionally, we intend to continue to expand our prescription frame business and e-commerce through targeted strategies to increase our doors in these channels.
Expand International Distribution. We believe significant opportunities exist to increase our sales outside of North America, including sales of our prescription frame, our recently introduced performance sport sunglass products, and our expanding line of Happy Lens™ products. To increase the distribution of these products and our existing core products internationally, we recently transitioned from a combination of direct and traditional distribution, to now using traditional distribution in virtually all international markets, except Canada, which like the U.S. is substantially all direct. We believe that traditional distribution is more cost effective and will allow us to leverage our distribution partners into greater coverage of existing territories and expand into new markets, such as the optical channel distribution in Europe.
Introduce New Products. We intend to increase our sales by developing and introducing new products that embody our branded point of view, style, and standards of design, performance, value and quality. We expanded our prescription frame and performance sport sunglasses in both the North America and international markets in 2012. We launched the Happy Lens™ products and have been continually adding new products, like snow and moto goggles, as well as prescription sunglasses to the Happy Lens™ collection. We plan to introduce additional new eyewear product lines, new lens technology innovations, fashion eyeglass frames for women, product lines with premium lenses and special limited edition collections.
Our Products
We design, market and distribute premium sunglasses, goggles, prescription frames, apparel and accessories. Our current eyewear product line consists of seven product categories, including fashion sunglasses, women-specific sunglasses, performance sport sunglasses, prescription frames, snowsport goggles, motocross goggles and accessories. Additionally, in 2014, the majority of our sunglass styles feature our Happy Lens™ and in 2015 we anticipate to feature the Happy Lens™ in the majority of our goggle styles.
Happy Lens™
We currently offer the Happy Lens™, which was launched in early 2013, in a wide variety of products and styles. Happy Lens™ is designed to, among other things, filter out short-wave blue light and harmful Ultraviolet sunlight, while still enabling the right amount of “good” long wave blue light rays to get through the lens. We believe studies have shown that the right amounts of long wave blue light rays have beneficial attributes. During 2012, we filed a non-provisional utility patent application with the USPTO for a patent protecting the lens technology developed by the Company incorporated into the Happy Lens™. Retail prices for these models with the Happy Lens™ range from $75 to $220.
Fashion Sunglasses
We currently offer a broad selection of fashion sunglass products. The majority of our fashion sunglass frames are constructed of propionate, Grilamid® or acetate, which enable us to produce smooth, dense products that are adjustable to facial contours and are comfortable to wear. These frames are engineered using a wide variety of distinctive colorations and color fades that are created and/or polished for a premium finish. The majority of our fashion sunglass frames, including all color fades, are hand-painted in Italy or China. We also incorporate adjustable wire-core temples into many of our fashion sunglass products so that our sunglass frames will provide a more custom fit for each individual. In addition, we offer metal sunglass frames and eyewear forged from pliable yet strong monel alloy, a metal compound made from nickel, silver and aluminum. Retail prices for these models range from $75 to $210.
Women-Specific Sunglasses
We currently offer several models of women-specific sunglass products. These models are constructed of propionate, Grilamid® or acetate, which are engineered utilizing a wide variety of distinctive colorations and color fades. Other materials utilized in this product line include Grilamid® and monel alloy. Retail prices for these models range from $90 to $188.
Performance Sport Sunglasses
We currently offer several SPY® branded performance sport sunglass products, which are designed to meet the demands of cyclists and other action sports athletes while offering innovative styling. Retail prices for these models range from $100 to $220.
Prescription Frames
We currently offer a broad selection of unisex prescription eyewear frames, made of hand-milled acetate, stainless steel and monel alloy. These frames are available worldwide and retail prices for these frames range between from $150 to $188.
Snow Sport Goggles
We currently offer myriad models of snowsport goggle products. Our snowsport goggle models are constructed of injected polyurethane, anti-fog lens construction and hypoallergenic foam, and offer 100% ultraviolet, or UV, protection. The Doom and Bravo style snow goggle features our innovative Lock Steady™ fingerprint free quick-change system, which is a strong new technological feature added to our existing offering that was called by Wired Magazine, “the Holy Grail of lens changing systems.” Select styles incorporate our patented Scoop® airflow technology, Happy Lens™ and Isotron™ face foam with Dri-Force™ Fleece. Four of the SPY® models use our ARC® spherical, dual-lens system and the other models utilize cylindrical, dual-pane lens technology. In 2015, we are introducing a new state-of-the-art Quick Draw™ lens changing system that will be featured in several styles for snow and moto goggles. All of our goggles are helmet compatible. Retail prices for these models range from $35 to $205.
Motocross Goggles
We currently offer several models of motocross goggle products. Similar to our line of snowsport goggles, our motocross goggles are constructed of injected polyurethane and incorporate our patented Scoop® airflow technology, Isotron™ face foam and Lexan hard-coated scratch-resistant lenses. For perspiration absorption, we use either our moisture-wicking Dri-Force™ fleece, which is bonded to our Isotron™ face foam, or our high performance Geo Force™ face foam. All of the models of motocross goggles use our high-quality, anti-fog coating and are compatible with tear-off lens systems. Retail prices for these models range from $30 to $95.
Apparel, Accessories and Licensed Products
We currently offer a broad selection of accessory lens replacement kits for motocross, performance sports, and snowsports, which enable consumers to interchange the color of lenses in their sunglasses or goggles to adjust to various light conditions. SPY® currently offers a line of branded and licensed apparel and accessories featuring, tee-shirts, hooded sweatshirts, cycling apparel, hats, head sets, speakers and other electronic accessories sold primarily through our e-commerce website. In December 2013, we entered into a merchandising license agreement, pursuant to which we licensed the SPY IP to a third party, including certain trade styles, trademarks logos, designs and other proprietary materials. The agreement provides that the licensee shall develop, introduce, market and sell certain licensed products incorporating the SPY IP, including men’s and boy’s apparel, bags and luggage, consumer electronics, protective cases, and other unisex accessories, throughout North America through certain distribution channels, other than deep discount retail channels. We currently anticipate that licensed products incorporating SPY IP will generate revenue beginning in the first quarter of 2015. Retail prices for our licensed products range from $12 to $180.
Sales and Distribution
Our strategic growth is rooted in the careful selection of retail accounts that are able to effectively serve our target market. We sell our products directly to numerous retail locations in North America. We also sell to numerous retail locations internationally, supported by our international distributors.
Our distribution strategy, focused on the action sports and lifestyle markets, is important to developing new channel business and fostering stronger business with our current national account partners. We believe the largest current growth opportunity for our brand, outside of the Happy Lens™, is expanding our presence in the prescription frame and performance sport sunglasses distribution channels and increasing other product sales into additional sporting goods, sunglass specialty and optical retailers domestically and internationally. As a result, we intend to focus substantial resources towards our brand development and growing sales of our products to these types of retail accounts and to larger, more mainstream retail accounts integrating products with the Happy Lens™. We will continue to provide our core accounts with unique and specific products for their exclusive selling proposition, and our marketing efforts will be aimed at serving these accounts in ways that differ from the larger key accounts. Additionally, we also sell direct to consumers primarily in North America through our e-commerce website, www.spyoptic.com, as well as through several other on-line channels.
North America Sales and Distribution
We sell our products to retailers who merchandise our products in a manner consistent with the image of our brand and the quality of our products, such as Zumiez, Pacific Sunwear, Dick’s Sporting Goods, Tilly’s, Costco, Zappos, Amazon and Sport Chalet. We have developed collaborations with multi-store action sport, sporting goods, sunglass specialty, lifestyle retailers and prescription optical retailers in North America and other individually-owned-and-operated specialty retailers focusing on surfing, cycling and multi-sports, skateboarding, snowboarding, snow skiing, motocross, wakeboarding and mountain biking. Our domestic sales force consists of independent non-exclusive field sales representatives and an internal sales organization.
We require our retailers and distributors to maintain specific standards in representing our brand at the point of sale, including minimum inventory levels, point-of-purchase branding, authorized dealer identification and an agreement designed to ensure that store inventory is consistent with our current product collection. Our retailers also must agree not to resell or divert products through unauthorized distribution channels, or to advertise the resale of SPY products below the published manufactured suggested retail price (MSRP) in accordance with SPY’s Minimum Advertised Price (MAP) policy. To preserve and enhance our brands, retailers not adhering to strict guidelines are coached to ensure compliance to such guidelines. Retailers that do not comply with our guidelines are eliminated from our authorized dealer network.
We understand that our retail partners represent the connection between our brand and the consumer; therefore, we are focused on building strong relationships with our top accounts and their senior management, buyers, merchandisers and retail sales staff. Our retail marketing and sales support teams assist our sales representatives and retailers with the tools, knowledge and support to sell our products. We provide dealer catalogs, clinic tools, displays, point-of-purchase materials, dealer mailings, sales representative training and an in-house support staff designed to ensure that we focus on all aspects of selling our products and building relationships with our retailers. We also utilize SPY® branded support vehicles operated by key sales and marketing representatives. These vehicles help promote our SPY® brand at regional action sports events and provide a variety of retailer support services, including merchandising and onsite training.
International Sales and Distribution
Our products are currently sold in over 60 countries outside of North America. International sales to foreign countries outside of North America accounted for 16.5% and 13.7% of our total net sales for years ended December 31, 2014 and 2013, respectively.
Effective January 1, 2013, we converted nearly all our direct model markets in European countries to traditional distributors so that substantially all of our international sales (except Canada) use a traditional distribution model supported by SPY North America. The traditional distribution model allows us to sell products within certain countries without making a substantial investment in that country and penetrate new markets more quickly by leveraging our distributors’ existing sales and service structure. Products are sold to an authorized distributor in the country who, in turn, provides all sales, service, marketing and accounting functions for the dealer base within that country and reduces our administrative costs. The effectiveness of this model is directly related to the effectiveness of the distribution partners in the relevant markets, which, in turn, is affected by our brand’s overall strength in the action sports market.
Our international distributors utilize an independent or hired sales force consisting of non-exclusive sales representatives in the regions of Europe, Middle East and Africa, Asia Pacific, Central America and South America. These distributors help us ensure that each region is provided with the marketing, sales support and product mix that is complementary to the needs of retailers within their respective territories.
We regularly evaluate alternative distribution models with the goal of increasing our international sales.
Promotion and Advertising
The marketing, promotions and public relations of our SPY® brand are all managed by our in-house staff, with the assistance of specialized athlete consultants and a PR consultant. This structure is designed to enable us to deliver a targeted, consistent, happy and recognized advertising message across all consumer touch points. We primarily rely on our internal marketing and art departments to create and manage our advertisements and various marketing initiatives. Our marketing is informed through collaboration with our roster of athletes, many of which we believe are “world class” in stature.
We market at the grassroots level in the action sports market and its attendant lifestyle markets. At the same time, we have recently expanded to include higher profile media through broadcast and outdoor advertising.
Our promotions and advertising emphasize the distinguishing features of our SPY® brand, and build upon the authenticity and credibility of our athletes. Marketing efforts are focused on the youth culture, with an emphasis on the 18 to 35 year old demographic. Our advertising and promotional strategy primarily consists of athlete sponsorship, online/digital communications, television, outdoor media, SPY® branded and co-sponsored events, promotional vehicle tours, print advertisements, music, film and online marketing programs.
We employ managers and/or consultants to coordinate our surf, cycling, snowboard, ski, motocross, motor sports and wakeboard sectors of the action sports market, all of whom possess expertise within their specific discipline. Most of our managers were professional athletes and remain involved within their specific sports. Our managers are responsible for selecting sponsored athletes, grassroots marketing and creating special event initiatives, maintaining industry relationships and directing print advertising placement within their segment.
We are extremely selective with athlete and ambassador sponsorships and seek to work with those who are the right fit for our brand in their athletic pursuits, lifestyle and ability to influence youth culture on a regional, domestic and/or international level. We sponsor domestic and international teams of world-class athletes who wear our eyewear and goggles, use our products and prominently display the SPY® brand and its distinctive “cross” logo in competitions and in other public appearances. We also produce or sponsor films featuring our athletes, and support contests and other events in which our athletes promote our products. Some of our best-known athletes and ambassadors across a multitude of demographics include:
Surfers-John John Florence, Nate Tyler, Joel Tudor, Alex Gray and Alana Blanchard
Snowboarders -Louie Vito, Eero Niemela and Darrell Mathes
Skiers-Ahmet Dadali, Wiley Miller and Phil Casabon
Snowmobile Rider-Tucker Hibbert
Wakeboarders-Bob Soven, Daniel Grant and Shane Bonifay
Anglers-Conway Bowman and Tyrol (Ty) Ponder
Motocross Riders-Justin Hill, Jeremy McGrath and Cole Seely
NASCAR Driver-Dale Earnhardt Jr.
Rally Car Racer-Ken Block
Cyclists-Christopher Horner, Ryan Trebon, Jonathan Page and Nicole Duke
Mountain Bikers-Mike Montgomery and Troy Brosnan
Triathletes-Chris McDonald, Leon Griffin, Karl Bordine, Tommy Zaferes, Katie Hursey, Taylor Spivey and Jenna Parker
Climbing-Sierra Blair-Coyle
Musicians-Ray Barbee, HTFU, Ithaka, Saint Motel, and Lindsay Perry
We sponsor national and regional action sports events and employ a SPY® vehicle-marketing program designed to fortify the SPY® brand at trade shows and action sports, music and lifestyle events.
Our marketing program, which includes our outdoor and print campaigns, combines our happy, irreverent brand attributes with our sponsored athletes’ personalities and lifestyles and creative product photography. We benefit from the exposure generated by our athletes as an editorial endorsement of our product performance and style. We work with major trade magazines, including Velo News, Transworld Business and Snow Industries of America Daily News, who publish special product reports, including reports featuring our products, in conjunction with international and domestic action sports and power sports trade shows. We also attend relevant major action sport, cycling, outdoor and prescription optical trade shows in North America, Europe and the Asia/Pacific region to promote our brand and products. Some of the major trade shows that we attend are SnowSports Industries America (SIA), Agenda, Outdoor Retailer, Surf Expo, Vision Expo East and West, Silmo (Paris), and Mido (Milan). Additionally we are increasing our marketing efforts related to our prescription frame and sporting and outdoor channels. One way we intend to achieve this is through new sponsorship opportunities, such as our recent investment with Powdr Resorts and future opportunities with Boyne Resorts.
Product Design and Development
Our products are designed for individuals who embrace the action sports, performance and lifestyle markets. We believe that valuable input comes from our managers, employees, sponsored athletes, retailers and sales representatives who are actively involved in action sports. This connection with the action sports and lifestyle markets greatly influences our product design and features.
In order to respond effectively to changing consumer preferences, we stay abreast of emerging lifestyle, technical and fashion trends in the action sports, performance and lifestyle markets. Our design team and marketing staff regularly monitor regional, domestic and international fashion in order to identify trends that may be incorporated into future product designs.
Every eyewear design starts with a hand-drawn sketch, which is then converted into a computer-rendered technical drawing. The computer-rendered technical drawing is then fabricated into a hand-finished prototype. This prototype is extensively analyzed and measured through laboratory and field-testing to ensure that it reflects the design integrity of the original sketch and that the fit meets our standards. In addition, we often incorporate key changes and improvements for our eyewear through input from our sponsored athletes, sales representatives, managers, retailers and employees. Once the prototype is thoroughly tested and optimized, the design is translated into a hand-polished, steel injection-mold or a “tool” for handmade product.
Our goal is to differentiate our products from those of our competitors by incorporating innovative designs, advanced optical technology, and premium components and materials. We believe that the experience of our design team will help us maintain our position as a recognized brand in the action sports and lifestyle markets and help us expand the scope of our products into the prescription frame and performance sport sunglass markets.
Research and development expenses during the years ended December 31, 2014 and 2013 were approximately $0.7 million and $0.5 million, respectively.
Product Technologies
Sunglass Lens Technology
Our Accurate Radius Curvature, or ARC®, prismatic lenses are used in all of our sunglasses and are designed to provide optically correct, distortion-free vision and a total absence of prismatic aberration and astigmatism. Our ARC® lens becomes thinner as it moves away from the optical center of the lens. This feature is designed to complement the natural curvature of the human eye to provide clarity at all angles of vision, eliminate distortion and selectively filter out light waves that cause eye fatigue and discomfort. The lens properties, combined with high-quality, vacuum-applied surface coatings, are designed to manipulate the light spectrum to ensure maximum visual performance with no distortion. We also offer a number of surface coatings to achieve different lens colors by absorbing and reflecting different wavelengths in the light spectrum. In addition, we integrate filtering agents into our lens manufacturing process, which is designed to provide eye protection in every type of environment. All of our lenses provide complete UV protection, including UVA, UVB, and UVC energy, and are designed to protect against the harmful effects of solar radiation.
Some of our products incorporate high-quality injected polarized lenses. Our Trident™ polarized lenses are designed to diffuse glare through the use of a highly advanced polarizing filter placed between two injected lens layers. All of our sunglasses are ANSI Z80.3d compliant and some of our products are ANSI Z87.1 certified, which stipulates criteria for aspects of quality and safety that the consumer would not be able to assess visually. This includes elements such as transmittance (e.g., being able to distinguish between a green and yellow light in average daylight), high impact, cosmetic quality (eliminating cracks or bubbles in the plastic), and durability tests (including flame resistance).
Happy Lens™ Technology
The SPY® Happy Lens™ technology fuses years of optics design experience with contemporary research into human color preference. The SPY® Happy Lens™ technology provides 100 percent UV protection, blocks more than 99 percent of glare, provides remarkable contrast, depth perception and color enhancement, and it is also designed to “harmonize” with the body’s physiological preference for a specific color transmission, optimized through the important long-wave blue light wavelengths where the “uplifting” effects of long wave blue (i.e. happy) light are most prevalent. During 2012, we filed a non-provisional utility patent application with the USPTO for a patent to protect the Happy Lens™ technology.
During 2014, we introduced 48 styles and 396 SKUs containing our Happy Lens™ technology in addition to the 42 styles and 147 skus introduced in 2013.
Snow Sport Goggle Technology
•
ARC® Spherical Goggle Lenses. Our ARC® spherical goggle lenses employ the same technology as our sunglass lenses. Our goggle lenses consist of an integrated dual lens system that is designed to enable the inner lens to conform to body temperature and the outer lens to conform to environmental temperature to eliminate fogging of the lenses. The outer lens is a high-density, scratch-resistant injected ARC® polycarbonate lens. The thermal spacer between the two lenses consists of an engineered acrylic-based bonding agent and closed-cell 3M foam gasket. The inner lens is made of spherically thermoformed, anti-fog impregnated propionate.
•
Isotron™ Foam. The interior lining of our snow sport goggles that makes contact with an individual’s face, which we refer to as Isotron™ foam, is engineered from high-quality, ergonomic thermoformed foam designed to provide each user with a comfortable, custom fit and a superior seal around his or her face. On several models, our Isotron™ foam is designed to work in conjunction with our Dri-Force™ fleece to wick moisture away from an individual’s face.
Motocross Goggle Technology
•
Engineered Visual Optics. We use Lexan hard-coated, scratch-resistant extruded lens material on all of our motocross goggles. We also impregnate a high-quality anti-fog coating into the internal surface of the lenses on our motocross goggles. The hard coating on the external surface of our lenses is designed to prevent scratching.
•
Tear-Offs. We offer engineered thin, antistatic, low-haze tear-off lens sheets to be used with our motocross goggles to help riders retain a clear field of vision. The tear-off lens sheets are designed to enable a rider to stack them onto the goggle lens and tear them off while riding in order to maintain a clear field of vision without having to wipe off the goggle lens.
•
Sweat Absorption System. We have developed a patented, two-stage moisture-wicking system that absorbs significantly more perspiration than our standard fleece-lined Isotron foam, which we refer to as Sweat Absorption System, or SAS. Our patented SAS consists of a removable pad, which can be replaced to prevent perspiration from entering a user’s eyes.
•
Isotron™ Foam. Our motocross goggles, like our snowboard goggles, utilize our Isotron™ foam designed to create a comfortable, ergonomic fit and superior seal around an individual’s face. All of our motocross goggles also utilize high-density filter foam, designed to prevent dust and dirt from entering the rider’s field of vision and to enhance air circulation to minimize fogging of the lens.
•
Geo Force™ Face Foam. Our high-performance face foam features a unique, embossed, reticulated geometric pattern and face seal groove. It reduces skin contact area by approximately 35%, allowing air to cool the face while also increasing fleece surface area for greater moisture wicking and absorption.
Manufacturing
We purchase our sunglasses sourced from several manufacturers in China and Italy. In addition, our Happy Lens™ products are currently available from two suppliers located in France and China.
Our sunglass manufacturing process for injection begins with fabrication of the eyewear frames. The final mold for each model of our eyewear products is injected with intensely heated materials, such as Grilamid® or propionate. The components of each Grilamid® or propionate frame are then placed in a wood chip or ceramic chip tumbling machine designed to ensure that every frame piece is smooth. After the tumbling process, the frames are washed in high-speed ultra-sonic vibration machines to clean them prior to the inspections, polish and painting process. The manufacturing process for acetate begins with slabs or blocks of acetate that are pre-colored and cut into sheets. Each sheet is inserted into a CNC cutting machine that is programmed to cut each frame shape. CNC machines are used for precision and accuracy. They are then placed in a wood chip or ceramic chip tumbling machine designed to ensure that every frame piece is smooth.
Our painting process includes up to five layers of paint. Each of these layers includes a multi-day painting, drying and curing process. We also hand set all of our polished metal logos and accents.
Once the assembly process is completed, we test all of our products for optical clarity based on United States, European and Australian standards. The American National Standards Institute and the American Society for Testing and Materials have established specific testing criteria for eyewear. These tests analyze product safety and provide quantitative measures of optical quality, UV protection, light transmission and impact resistance. In addition, we perform a broad range of eyewear durability testing and mechanical integrity testing that includes extremes of UV, heat, condensation and humidity. Our testing process also utilizes a laser-based lens testing technique to test whether our lenses meet a variety of optical distortion standards. After lens testing, each product is inspected for paint quality, fit, finish and overall appearance.
Our goggle products are produced by two manufacturers in China, principally by Korea OGK Co. Ltd. (“OGK”). We expect to continue manufacturing a majority of our goggles through OGK for the foreseeable future. Our goggle manufacturing process begins with the fabrication of the goggle frame. The final mold for each goggle model is injected with intensely heated polyurethane. The frame components are then washed using a cleaning process that is designed to ensure secure paint adherence. After cleaning, each frame is subjected to our painting process, which can include up to four layers of paint and often includes printing custom paint designs. Several key components of our products are assembled using over-molding or a sonic welding process to help secure the bond between materials, and all of our metal logos and details are hand painted and set into the frame.
Once the assembly process is completed, we test our goggles against all international directives for goggle safety and performance. These directives analyze product safety by testing for optical clarity, impact resistance, anti-fog protection, light transmission, UV protection and quality of frame materials. In addition to independent laboratory testing, we perform testing at each of our manufacturers, including analyzing our goggles for product strength, wear and accelerated weather testing. Prior to shipment, each goggle is inspected for paint quality, fit, finish and overall appearance.
Each of our apparel and accessory manufacturers is carefully selected based upon quality standards, manufacturing methods and ability to produce custom designed products. All apparel and accessories are manufactured to exacting standards and specifications using high-quality materials. Treatments and fits are carefully inspected upon receipt, and products that do not fall within our specification sheets are rejected. To help ensure quality, we require our manufacturers to source specific materials.
Source and Availability of Raw Materials
The principal raw materials and parts purchased for the manufacturing of our products include plastic resins, metal alloys and plastic lenses and frame parts, which are sourced from several foreign manufacturers.
Any shortage of raw materials or inability of a manufacturer to procure from other vendors or to manufacture or ship our products in a timely manner, or at all, could impair our ability to ship orders of our products in a timely manner and could cause us to miss the delivery requirements of our customers. However, we believe that most of the components for our products can be obtained from one or more alternative sources within a relatively short period of time, if necessary.
Customers
Our products are currently sold in the United States, Canada and in over 60 other countries outside of North America. Our customer base reflects our heritage and influence across the action sports and lifestyle markets and a distribution strategy that focuses on action sports, sporting goods, sunglass specialty and lifestyle retailers. Our sales are spread over a large customer base. One customer accounted for 10% of our net sales during the year ended December 31, 2014 and no single customer account for more than 10% of our net sales during the year ended December, 31 2013.
Government Regulation
Our products are subject to governmental health safety regulations in most countries where they are sold, including the United States and the European Union, as well as import duties and tariffs on products being imported into countries outside of the United States. In addition, we are subject to various state and federal regulations generally applicable to similar businesses. We regularly inspect our production techniques and standards to ensure compliance with applicable requirements.
Intellectual Property
We use a combination of patent, trademark, copyright, trade secret and trade dress laws, as well as confidentiality agreements, to aggressively protect our intellectual property, including product designs, product research and development and recognized trademarks. We believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, identifying our brand and distinguishing our products from those of our competitors. We have six U.S. utility patents with respect to our products as follows: one regarding our sports goggle (expires August 2022); four regarding our Scoop® airflow technology (all expiring November 2015); and one regarding our screen for eye protection goggles (expires September 2025). We have 22 U.S. design patents with respect to our products as follows: 20 regarding our sunglasses (expire between 2015 and 2027); and two of our sports goggle patents (expiring 2026 and 2028). We continue to file patent applications on our inventions that are significant to our business and pursue significant trademarks where applicable.
Our federally registered trademarks include, Spy (various), SpyOptic, EyeSpy, Windows For Your Head, Scoop, Dri-Force, ARC, a “trident” design, Plus System, Zed, Hielo, Logan, Tron, Whip, Platoon, Doom, Spy Crosstown Collection (Plus Design), Happy Lens, Spectra, McCoy, Recompose, a “triangle with cross” design, a “cross with bar” design, and three “cross” designs. Our unregistered or pending marks include, but are not limited to, Spy (various), Spy with cross design, Geo Force, Rise Ventilation System, Victory Lens, See Better. Feel Better, See Happy., See Better, Feel Better, Perform Better., Happiness Guaranteed, Spy Optic, Hear Happy, Happy Buds, Spy Discord, Spy Touring, Spy Flynn, Spy Bravo, Spy Optics, Spy Goggles, Spy Ski Goggles, Spy Snow Goggles, Spy Logan, Spy Hielo, Spy Doom, Quick Draw, and Discord. We seek to dissuade counterfeiting by monitoring the domestic and international marketplace through our staff and services provided by outside firms that specialize in anti-counterfeiting measures. Our employees, sales representatives, distributors and retailers also help us to police against infringing products by notifying us of any suspect products, confiscating counterfeit products, and assisting law enforcement agencies. Our sales representatives are also educated on our patents and trade dress and assist in preventing potentially infringing products from obtaining retail shelf space.
Competition
SPY® competes with sunglass and goggle brands in various niches of the action sports and other sport markets, including brands such as Oakley, Ray-Ban, Dragon Optical, Anon Optics, Von Zipper, Electric Visual, Arnette, Costa Del Mar, Scott and Smith Optics. We also compete with broader lifestyle brands that offer eyewear products, such as Quiksilver, Fox and Maui Jim. In both markets, we compete primarily on the basis of design, performance, price, value, quality, brand name, marketing and distribution.
Seasonality
Our net sales fluctuate from quarter to quarter as a result of changes in demand for our products. Historically, we experience greater net sales in the second and third quarters of the fiscal year as a result of the seasonality of our products and the markets in which we sell our products, and our first and fourth fiscal quarters are traditionally our weakest operating quarters due to seasonality. We generally sell more of our sunglass products in the first half of the fiscal year and a majority of our goggle products in the second half of the fiscal year. We anticipate this seasonal impact on our net sales will continue. As a result, our net sales and operating results have fluctuated significantly from period to period in the past and are likely to do so in the future.
Employees
As of December 31, 2014, SPY North America employed a total of 87 full-time employees and 7 part-time employees. This aggregate number of employees consists of 42 in sales and marketing, 18 in general and administration, 5 in research and development and 29 in manufacturing support and fulfillment operations. We have never had a work stoppage. We consider our employee relations to be good.
Corporate Information
We operate our business through our subsidiaries, and currently have one wholly owned subsidiary incorporated in California, Spy Optic Inc and one wholly owned subsidiary incorporated in Italy, Spy Optic Europe S.r.l.S.U.
Compliance with Environmental Laws
Our business does not require us to comply with any particular environmental regulations.
Available Information
As a public company, we are required to file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other information (including any amendments) with the Securities and Exchange Commission (the “SEC”). You may read and copy such material at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also find the Company’s SEC filings at the SEC’s website at http://www.sec.gov.
Our e-commerce Internet address is http://www.spyoptic.com. Information contained on our website is not part of this Annual Report on Form 10-K. Our SEC filings (including any amendments) will be made available free of charge on our investor relations website, http://investor.spyoptic.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to the SEC.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should consider each of the following factors as well as the other information in this report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case, the trading price of our common stock could decline. You should also refer to the other information set forth in this report, including our financial statements and the related notes.
Risks Related to Our Business
We have approximately $28.5 million in outstanding indebtedness due under our lines of credit, term notes and capital leases, and may be required to increase the amount borrowed under existing debt facilities and/or seek additional debt or equity financing to fund our short-term working capital requirements, which borrowings and financing may not be available to us.
On December 31, 2014, our subsidiary, SPY North America, had outstanding borrowings as follows:
•
A short-term line of credit with BFI Business Finance (“BFI”) with a maximum borrowing limit of $8.0 million. The maximum availability based on eligible accounts receivable and inventory at December 31, 2014 was $8.0 million, of which $6.8 million was outstanding at that date. (“BFI Line of Credit”);
•
A $9.0 million subordinated line of credit with Costa Brava, due December 31, 2016, of which $8.5 million outstanding as of December 31, 2014 (excluding Accrued PIK Interest of $2.1 million). ("Costa Brava Line of Credit");
•
$7.0 million term loan issued to Costa Brava, due December 31, 2016 (excluding Accrued PIK Interest of $2.1 million and unamortized debt premium of $0.1 million). ("Costa Brava Term Note");
•
$1.5 million aggregate term loans issued to Harlingwood (Alpha) LLC (“Harlingwood”), due December 31, 2016 (excluding Accrued PIK Interest of $0.2 million) (the “Harlingwood Notes”); and
•
$4.4 million of unpaid accrued interest, added to the outstanding principal amounts due under term loans issued to Costa Brava and Harlingwood rather than paid in cash (sometimes referred to as “Accrued PIK Interest”).
We will be required to maintain our ability to borrow the full amounts under the BFI Line of Credit and the Costa Brava Line of Credit, and may be required to increase our outstanding borrowings under these lines in the event our cash flow from operations are insufficient to fund our working capital requirements. The amount we can borrow under the BFI Line of Credit is heavily dependent on our sales levels and eligible inventory, and the actual amount available for borrowing may be substantially less than $8.0 million. In addition, BFI may reduce our borrowing availability under the BFI Line of Credit in certain circumstances, including if BFI determines, in good faith, that SPY North America’s creditworthiness has declined, the collectability of its accounts receivables has deteriorated, the turnover of SPY North America’s inventory has changed materially or the liquidation value of such inventory has decreased. Further, BFI may declare SPY North America to be in default if SPY North America experiences a material adverse change in its business, financial condition or in its ability to perform its obligations under the BFI Line of Credit loan agreement. In addition, if we are unable to extend the maturity date of all of our Costa Brava and Harlingwood borrowings before their maturity date on December 31, 2016, BFI may determine such inability to be a material adverse change, and therefore terminate the BFI Line of Credit and declare all amounts thereunder due and payable. In the event we are unable to access available borrowings under the BFI Line of Credit or Costa Brava Line of Credit, we will likely be unable to fund our short-term working capital requirements or otherwise continue as a going concern.
The Chairman of our board of directors, Seth Hamot, is the president and sole member of Roark, Rearden & Hamot, which is the sole general partner of Costa Brava. Fir Geenen, a member of our board of directors, is the manager of the limited liability company that is the manager of Harlingwood. Costa Brava and Harlingwood are major shareholders of the Company with common stock ownership of 47.3% and 5.3%, respectively, or 57.0% and 13.3% on an as converted basis, respectively, at December 31, 2014.
Most of our outstanding indebtedness is due and payable on December 31, 2016 and if not extended on or before its maturity date, we expect to be unable to pay such indebtedness when due. If we are unable to extend the maturity date, or otherwise restructure such indebtedness, we will be in default and will need to raise additional capital to continue our operations.
At December 31, 2014, we had total borrowings from Costa Brava of approximately $19.8 million due and payable on December 31, 2016, approximately $6.8 million in total borrowings from BFI due and payable on the annual anniversary date in February, unless renewed, and approximately $1.7 million payable to Harlingwood due and payable on December 31, 2016. We do not anticipate generating sufficient revenue and profit to repay these borrowings in full when due. Therefore, we will need to seek renewal of the BFI Line of Credit at its next annual renewal in February 2016, and to extend the December 2016 maturity dates of the Costa Brava and Harlingwood indebtedness. If we are unable to renew the BFI Line of Credit or extend the maturity dates of the Costa Brava and Harlingwood indebtedness, we will be required to raise additional capital through debt and/or equity financing to continue our operations. No assurances can be given that any such financing will be available to us on favorable terms, if at all. At this time, we do not have any commitments for alternative financings or for an extension of the maturity dates of the Costa Brava or Harlingwood indebtedness. The inability to obtain debt or equity financing in a timely manner and in amounts sufficient to fund our operations, if necessary, would have an immediate and substantial adverse impact on our business, financial condition or results of operations.
The level of our future capital needs are uncertain, and we may need to raise additional funds, which funds may not be available on acceptable terms or at all.
Although we have had income from operations during 2014 and 2013, we have a history of incurring significant negative cash flow from operations, operating and net losses in prior periods. We anticipate that we will continue to have ongoing cash requirements to finance our seasonal and ongoing working capital requirements. Our capital requirements will depend on many factors, including:
•
the acceptance of and demand for our products;
•
the costs associated to maintain and grow our business;
•
the costs of developing, producing and selling new and/or existing products;
•
the costs of marketing the SPY® brand; and
•
working capital requirements, including working capital necessary to support growth, if any.
If required, we intend to continue borrowing under our existing BFI Line of Credit and Costa Brava Line of Credit, provided they remain available, and on terms acceptable to us. If our existing credit arrangements do not provide us with sufficient liquidity, we intend to raise capital through a combination of debt and/or equity financings. However, no assurances can be given that any such financing will be available to us on favorable terms, if at all.
Economic conditions could adversely impact our liquidity and our ability to obtain financing, including counterparty risk.
Disruptions in the credit and financial markets and resulting decline in general economic and business conditions may adversely impact our access to capital through our BFI Line of Credit and other sources. The economic environment could cause lenders to fail to extend credit to us, and cause lenders and other counterparties who provide credit to us to breach their obligations to us, which could include, without limitation, lenders or other financial services companies failing to fund required borrowings under our credit arrangements, any of which would have an immediate and substantial adverse impact on our business, financial condition and results of operations. Also, if we require additional financing as a result of the foregoing or other factors, turmoil in capital markets could negatively impact our ability to obtain such financing. Our access to additional financing will depend on a variety of factors (many of which we have little or no control over) such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity, as well as the possibility that lenders could develop a negative perception of our long or short-term financial prospects.
We have a history of significant losses. If we do not achieve or sustain profitability, our financial condition and stock price could suffer.
We have a history of losses and we may continue to incur losses for the foreseeable future. As of December 31, 2014, our accumulated deficit was $63.5 million and, during the year ended December 31, 2014, we incurred a net loss of $1.9 million. We have not achieved profitability for a full fiscal year since our initial public offering. If we are unable to maintain or grow our revenues, or if we are unable to reduce operating expenses sufficiently, we will not be able to achieve profitability in the near future or at all. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If we are unable to achieve profitability within a short period of time, or at all, or if we are unable to sustain profitability at satisfactory levels, our financial condition and stock price could be adversely affected.
Substantially all of our assets are pledged to secure obligations under our outstanding indebtedness.
SPY North America granted a security interest in substantially all of its assets to BFI as security for its obligations under the BFI Line of Credit. SPY North America also has established bank accounts in BFI’s name into which collections on U.S. and Canadian accounts receivable and other collateral are deposited. BFI is entitled to sweep all amounts deposited into the BFI collateral accounts and apply such amounts to outstanding obligations under the BFI Line of Credit. Additionally, we guaranteed SPY North America’s obligations under the BFI Line of Credit and granted BFI a blanket security interest in substantially all of its assets as security for its obligations under its guaranty.
If SPY North America defaults on any of its obligations under the BFI Line of Credit, BFI will be entitled to exercise remedies available to it resulting from such default, including increasing the applicable interest rate on all amounts outstanding under the BFI Line of Credit, declaring all amounts due thereunder immediately due and payable, assuming control of the BFI collateral accounts or any other assets pledged by us or SPY North America, and directing our customers to make payments directly to BFI. Our results of operations and financial condition would be harmed as a result of BFI’s exercise of its remedies in the event of a default.
Any failure to maintain ongoing sales through our independent sales representatives or maintain our international distributor relationships could harm our business.
We sell our products to retail locations in the United States and Canada through our direct sales team and a network of independent sales representatives in the United States and Canada, and internationally through our international distributors. We rely on these independent sales representatives and distributors to provide customer contacts and market our products directly to our customer base. Our independent sales representatives are not obligated to continue selling our products, and they may terminate their arrangements with us at any time, with limited notice. We currently do not have long-term agreements with most of our international distributors. Our ability to maintain or increase our sales will depend in large part on our success in developing and maintaining relationships with our independent sales representatives and our international distributors. It is possible that we may not be able to maintain or expand these relationships successfully or secure agreements with additional sales representatives or distributors on commercially reasonable terms, or at all. Any failure to develop and maintain our relationships with our independent sales representatives or our international distributors, and any failure of our independent sales representatives or international distributors to effectively market our products, could harm our sales.
If we are unable to recruit and retain key personnel necessary to operate our business, including Michael Marckx, our Chief Executive Officer, our ability to develop and market our products successfully may be harmed.
We are heavily dependent on our current executive officers and management team, including Michael Marckx, our Chief Executive Officer. The loss of any key employee, including Michael Marckx, or the inability to attract or retain qualified personnel, including product design and sales and marketing personnel, could harm our ability to sell and develop new products which could damage our brand. Our future success may also depend on our ability to attract and retain additional qualified management, design and sales and marketing personnel. We do not currently have key man insurance on any of our employees. If our management team is unable to execute our business strategy, our business may be harmed, which could adversely impact our branding strategy, product development strategy and sales.
If our marketing efforts are not effective or if the amounts we are able to invest in our brands are insufficient as a result of recent restructuring actions, or if we have insufficient financial resources, our SPY® brand may not achieve the broad recognition necessary for our success.
We believe that broader recognition and favorable perception of our SPY® brand is essential to our future success. Accordingly, we intend to continue our brand development strategy through a variety of marketing initiatives designed to foster recognition for our brands in action sports and its attendant lifestyle cultures. If we are unsuccessful, these marketing expenses may never be offset, and we may be unable to maintain or increase our sales. Successful positioning of our brands depends largely on:
•
the success of our advertising and promotional efforts;
•
preservation of the relevancy and authenticity of our SPY® brand in our target demographic;
•
our ability to continue to provide innovative, stylish and high-quality products to our customers; and
•
managing the recognition and perception of our SPY® brand.
To increase brand recognition, we must continue to spend significant amounts of time and resources on advertising and promotions. These expenditures may not result in a sufficient increase in net sales to cover such advertising and promotional expenses. In addition, even if brand recognition increases, our customer base may decline or fail to increase and our net sales may not continue at present levels or may decline.
Economic conditions and the resulting decline in consumer spending could continue to adversely affect our business and financial performance.
Our performance depends on general economic conditions and their impact on consumer confidence and discretionary consumer spending, both domestically and internationally. Our business and financial performance, including our sales and the collection of our accounts receivable, may be adversely affected by any future weakness in economic activity and consumer spending in North America, Europe and in other regions of the world in which we do business. Further, economic factors such as a reduction in the availability of credit, increased or continuing unemployment levels, higher fuel and energy costs, rising interest rates, adverse conditions in the housing markets, financial market volatility, recession, reduced consumer confidence, savings rates, acts of terrorism, major epidemics and other factors affecting consumer spending behavior could adversely affect demand for our products. If consumer spending fails to increase, we may not be able to improve our sales. In addition, reduced consumer spending may cause us to lower prices or suffer increases in product returns, which would have a negative impact on gross profit.
We may not be able to compete effectively, which will cause our sales and market share to decline.
The action sports and lifestyle markets in which we compete are intensely competitive. Our SPY® brand competes with sunglass and goggle brands in various niches of the action sports market, including Oakley, Ray-Ban, Dragon Optical, Anon Optics, Von Zipper, Electric Visual, Arnette, Scott and Smith Optics. We also compete with broader lifestyle brands that offer eyewear products, such as Quiksilver, Fox and Maui Jim. In addition, our entry into the prescription frame market and performance sunglasses in 2011 and the Happy Lens™ introduction in 2013 exposes us to various other competitors, most of which have been in this market for significant periods of time. In all markets, we compete primarily on the basis of fashion trends, design, performance, value, quality, brand recognition, marketing and distribution channels.
The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as marketing programs, product design and brand image. Several of our competitors enjoy substantial competitive advantages, including greater brand recognition, longer operating history, more comprehensive lines of products and greater financial resources for competitive activities, such as sales and marketing, research and development and strategic acquisitions. Our competitors may enter into business combinations or alliances that strengthen their competitive positions or prevent us from taking advantage of such combinations or alliances. They also may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or consumer preferences.
Our business may suffer if we fail to develop innovative and stylish products that are received favorably by our target customer audience.
We are continuously evaluating potential entries into or expansion of new product offerings. In expanding our product offerings, we intend to leverage our sales and marketing platform and customer base to develop these opportunities. While we believe we have generally been successful promoting our SPY® branded products in our target domestic and international markets. We cannot predict whether we will be successful in gaining market acceptance for any new products that we may develop, or those products anticipated to be introduced in the future. In addition, expansion of our business into new product offerings has required and will require us to incur significant sales and marketing and research and development expenses, and, in the case of our prescription frame and performance sport sunglass product lines, may target different retail and distribution sales channels where our SPY® brand could be weaker. These requirements could strain our management, financial and operational resources. Additional challenges that may affect our ability to expand our product offerings include our ability to:
•
increase awareness and popularity of, and the demand for, our existing brand;
•
establish awareness of and customer demand for any new brands or products we may introduce or acquire;
•
attract, acquire and retain customers at a reasonable cost;
•
achieve and maintain a critical mass of customers and orders across all of our product offerings;
•
maintain or improve our gross margins;
•
produce and receive product on-time and according to specification through third party manufacturers;
•
compete effectively in highly competitive markets; and
•
expand our international penetration through a traditional distribution model.
We may not be able to address successfully any or all of these challenges in a manner that will enable us to expand our business in a cost-effective or timely manner. If new products we develop are not received favorably by consumers, our reputation and the value of our brand could be damaged. The lack of market acceptance of new products we develop or our inability to generate satisfactory net sales from any new products to offset their cost could harm our business.
We will be unable to compete effectively and our sales may decrease if we fail to develop innovative and stylish products, anticipate product opportunities based upon emerging technologies and standards and fail to develop products and solutions that incorporate these trends, technologies and standards in a timely manner.
The action sports and lifestyle markets are subject to constantly changing consumer preferences based on fashion and performance trends. Our success depends largely on the continued strength of our SPY® brand and our ability to continue to introduce innovative and stylish products that are accepted by consumers in our target markets. We must anticipate the rapidly changing preferences of consumers and provide products that appeal to their preferences in a timely manner while preserving the relevancy and authenticity of our SPY® brand. Decisions regarding product designs must be made months in advance of the time when consumer acceptance can be measured. If we do not continue to develop innovative and stylish products that provide greater performance and design attributes than the products of our competitors and that are accepted by our targeted consumers, we may lose customer loyalty, which could result in declines in our sales, gross profit and market share.
To date, we have introduced various sunglass and goggle products developed around various technologies and standards, and we may spend significant time and money on research and development to design and develop products around any new emerging technologies or industry standards. If an emerging technology or industry standard that we have identified or innovative technology that we have developed fails to achieve broad market acceptance in our target markets, we may be unable to generate significant revenue from our research and development efforts. Moreover, even if we are able to develop products using adopted standards, our products may not be accepted in our target markets or may have excess inventory or require inventory write-offs. As a result, our business would be materially harmed.
If we are unable to maintain and expand our endorsements by professional athletes, our ability to market and sell our products or develop new products may be harmed.
A key element of our marketing strategy is to obtain endorsements from prominent athletes to sell our products, preserve the relevancy and authenticity of our brands and to support new products. We generally enter into endorsement contracts with our athletes for terms of one to three years. There can be no assurance that we will be able to maintain our existing relationships with these athletes in the future or that we will be able to attract new athletes to endorse our products in order to grow our brands or product categories. Further, we may not select athletes that are sufficiently popular with our target demographics or successful in their respective sports. Even if we do select successful athletes, we may not be successful in negotiating commercially reasonable terms with those individuals. If we are unable in the future to secure athletes or arrange athlete endorsements of our products on terms we deem to be reasonable, we may be required to modify our marketing platform and to rely more heavily on other forms of marketing and promotion which may not prove to be as effective as endorsements, or may adversely affect our ability to develop new products. In addition, negative publicity concerning any of our sponsored athletes could harm our brands and adversely impact our business.
Our business could be harmed if we fail to maintain proper inventory levels.
The vast majority of our business is at once and therefore we do not have significant backlog. We place orders with our manufacturers for the vast majority of our products prior to the time we receive orders for these products from our customers because the product purchase lead times required by our manufacturers is generally longer than our customer order fulfillment requirements. We do this to minimize purchasing costs, reduce the time necessary to fill customer orders and the risk of non-delivery. We also maintain an inventory of selected products that we anticipate will be in high demand. We may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand have historically, and may in the future result in inventory write-downs and the sale of excess inventory at discounted prices, which could significantly impair our brand’s image and harm our operating results and financial condition.
Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require at the time our customers need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships and diminish brand loyalty, thereby harming our business.
Our manufacturers must be able to continue to procure raw materials and we must continue to receive timely deliveries from our manufacturers to sell our products profitably.
The capacity of our manufacturers to manufacture our products is dependent in substantial part, upon the availability of raw materials used in the fabrication of sunglasses, goggles and prescription frames. Any shortage of raw materials or inability of a manufacturer to procure from other vendors or to manufacture or ship our products in a timely manner, or at all, could impair our ability to ship orders of our products in a timely manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could harm our net sales, result of operations and reputation. Our manufacturers may experience shortages of raw materials and other production delays, which have resulted in, and may in the future result in, delays in deliveries of our products of up to several months.
Any interruption or termination of our relationships with our manufacturers could harm our business.
We purchase the majority of our sunglass products from several manufacturers in China and Italy. The vast majority of our goggle products are manufactured by Korea OGK Co. Ltd. (“OGK”) in China. We expect to continue to manufacture a majority of our goggles through OGK for the foreseeable future. In addition, the lenses for our Happy Lens™ products are currently available from only two manufacturers located in France and China. We do not have long-term agreements with any of our manufacturers. We cannot be certain that we will not experience difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines or increases in manufacturing costs and failures to comply with our requirements for the proper utilization of our intellectual property. In addition, our international manufacturers are subject to economic, regulatory and market conditions in their respective countries. Most of our manufacturers have extended credit to us and there can be no assurances that they will continue to do so on commercially reasonable terms, or at all. If our relationship with any of our manufacturers is interrupted or terminated for any reason, including the failure of any manufacturer to perform its obligations to us, we would need to locate alternative manufacturing sources. The establishment of new manufacturing relationships involves numerous uncertainties, and we may not be able to obtain alternative manufacturing sources in a manner that would enable us to meet our customer orders on a timely basis or on satisfactory commercial terms. If we are required to change any of our major manufacturers, we would likely experience increased costs, substantial disruptions and delays in the manufacture and shipment of our products and a loss of net sales.
We face international business, political, operational, financial and economic risks because a significant portion of our sales are to customers outside of the United States and virtually all of our inventory is purchased from foreign suppliers.
We are subject to risks inherent in international business, many of which are beyond our control, including:
•
difficulties in obtaining domestic and foreign export, import and other governmental approvals, permits and licenses and compliance with foreign laws, including employment laws in foreign countries in which we have employees and consultants;
•
transportation delays and difficulties of managing international distribution channels and suppliers;
•
longer payment cycles for, and greater difficulty collecting customer accounts receivable;
•
ability to finance our foreign operations;
•
fluctuations in currency exchange rates;
•
economic downturns in foreign countries or geographic regions in which our manufacturers are located, such as China and Italy, which among other things, may expose the operations of our manufacturers to risk and increase our manufacturing costs;
•
trade restrictions, higher tariffs or the imposition of additional regulations relating to import or export of our products;
•
unexpected changes in regulatory requirements, royalties and withholding taxes that restrict the repatriation of earnings and affect our effective income tax rate due to profits generated or lost in foreign countries;
•
political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions; and
•
difficulties in obtaining the protections of the intellectual property laws of other countries.
Any of these factors could reduce our sales, decrease our gross margins or increase our expenses.
Fluctuations in foreign currency exchange rates could harm our results of operations.
We sell a majority of our products in transactions denominated in U.S. dollars, including sales to our European distributors. We sell most of our products in Canada in transactions denominated in the Canadian dollar. If the U.S. dollar strengthens against foreign currencies such as the Canadian dollar or other foreign currencies in countries in which we have significant sales, then the price that our customers are willing to pay may require renegotiation in order for our distributors or customers to achieve their desired gross margin targets. Additionally, we purchase a small amount of product in transactions denominated in Euros and some of our manufacturing suppliers purchase raw materials for our products, such as the Happy Lens™, denominated in foreign currencies. If the U.S. dollar weakens against the Euro in the future, our cost of products purchased or raw materials sourced from Europe to Chinese manufacturing suppliers, including the Happy Lens™, could increase.
If we fail to secure or protect our intellectual property rights, or upon expiration of our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our net sales or increase our costs.
We rely on patent, trademark, copyright, trade secret and trade dress laws to protect our proprietary rights with respect to product designs, product research and trademarks. Although our new Happy Lens™ products have a patent pending lens technology, the patent has not yet been approved. Our efforts to protect our intellectual property may not be effective and may be challenged by third parties. Despite our efforts, third parties may have violated and may in the future violate our intellectual property rights. In addition, other parties may independently develop similar or competing technologies. If we fail to protect our proprietary rights adequately, our competitors could imitate our products using processes or technologies developed by us and thereby potentially harm our competitive position and our financial condition. We are also susceptible to injury from parallel trade (i.e. gray markets) and counterfeiting of our products, which could harm our reputation for producing high-quality products from premium materials. Infringement claims and lawsuits likely would be expensive to resolve and would require substantial management time and resources. Any adverse determination in litigation could subject us to the loss of our rights to a particular patent, trademark, copyright or trade secret, could require us to obtain licenses from third parties, could prevent us from manufacturing, selling or using certain aspects of our products or could subject us to substantial liability, any of which would harm our results of operations.
Since we sell our products internationally and are dependent on foreign manufacturing in China and Italy, we also are dependent on the laws of foreign countries to protect our intellectual property. These laws may not protect intellectual property rights to the same extent or in the same manner as the laws of the U.S. Although we will continue to devote substantial resources to the establishment and protection of our intellectual property on a worldwide basis, we cannot be certain that these efforts will be successful or that the costs associated with protecting our rights abroad will not be significant. We have been unable to register SPY® as a trademark for our products in a few selected markets in which we do business. We currently have SPY® trademark applications pending for wearing apparel products in certain markets.
We may face significant expenses and liability in connection with the protection of our intellectual property rights both inside and outside of the United States and, if we are unable to successfully protect our intellectual property rights or resolve any conflicts, our results of operations may be harmed.
We may be subject to claims by third parties for alleged infringement of their proprietary rights, which are costly to defend, could require us to pay damages and could limit our ability to use certain technologies in the future.
From time to time, we may receive notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. Some of these claims may lead to litigation. Any intellectual property lawsuit, whether or not determined in our favor or settled, could be costly, could harm our reputation and could divert our management from normal business operations. Adverse determinations in litigation could subject us to significant liability and could result in the loss of our proprietary rights. A successful lawsuit against us could also force us to cease sales or to develop redesigned products or brands. In addition, we could be required to seek a license from the holder of the intellectual property to use the infringed technology, and it is possible that we may not be able to obtain a license on reasonable terms, or at all. If we are unable to redesign our products or obtain a license, we may have to discontinue a particular product offering. If we fail to develop a non-infringing technology on a timely basis or to license the infringed technology on acceptable terms, our business, financial condition and results of operations could be harmed.
If we fail to manage any growth that we might experience, our business could be harmed and we may have to incur significant expenditures to address this growth.
If we experience unexpected growth in our operations, our operational and financial systems, procedures and controls may need to be expanded and we may have to use or train and manage an increasing number of employees, any of which will distract our management team from our business plan and involve increased expenses. Our future success will depend substantially on the ability of our management team to manage any growth and spending effectively. These challenges may include:
•
maintaining our cost structure at an appropriate level based on the net sales we generate;
•
implementing and improving our operational and financial systems, procedures and controls;
•
managing operations in multiple locations and multiple time zones; and
•
ensuring the distribution of our products in a timely manner.
Our eyewear products and business may subject us to product liability claims or other litigation, which are expensive to defend, distracting to our management and may require us to pay damages.
Due to the nature of our products and the activities in which our products may be used, we may be subject to product liability claims or other litigation, including claims for serious personal injury, breach of contract, shareholder litigation or other litigation or governmental actions such as by the U.S. Federal Food and Drug Administration or U.S. Federal Trade Commission. Successful assertion against us of one or a series of large claims could harm our business by causing us to incur legal fees, distracting our management or causing us to pay damage awards.
In the event we are unable to remedy any deficiency we identify in our system of internal controls over financial reporting, or if our internal controls are not effective, our business and our stock price could suffer.
Under Section 404 of the Sarbanes-Oxley Act, or Section 404, management is required to assess the adequacy of our internal controls, remediate any deficiency that may be identified for which there are no compensating controls in place, validate that controls are functioning as documented and implement a continuous reporting and improvement process for internal controls. As part of this continuous process, we may discover deficiencies that require us to improve our procedures, processes and systems in order to ensure that our internal controls are adequate and effective and that we are in compliance with the requirements of Section 404. If any deficiency we may find from time to time is not adequately addressed, or if we are unable to complete all of our testing and any remediation in time for compliance with the requirements of Section 404 and the rules thereunder, we would be unable to conclude that our internal controls over financial reporting are effective, which could adversely affect investor confidence in our internal controls over financial reporting.
Risks Related to the Market for Our Common Stock
Our common stock is thinly traded and our stock price may be volatile.
The trading price of our common stock fluctuates due to numerous factors. Our stock is relatively illiquid, or “thinly traded,” which can enhance volatility in the share price and make it difficult for investors to buy or sell shares in the public market without materially affecting the quoted share price. For example, between January 1, 2014 and December 31, 2014, our stock has traded as high as $1.51 and as low as $0.65. In addition, the trading market for our common stock may be influenced by the public float that exists in our common stock from time to time. For example, as of December 31, 2014, we have approximately 13.4 million shares outstanding, approximately 8.7 million, or approximately 65.1% of those shares are held by four stockholders, with Costa Brava and Harlingwood owning approximately 47.3% and 5.3% of our outstanding shares, respectively, excluding 3.0 million and 1.2 million shares which Costa Brava and Harlingwood may acquire, respectively through conversion of outstanding debt into shares of common stock. If any of those investors were to decide to sell a substantial portion of their respective shares, it would place substantial downward pressure on our stock price. The limited trading in our stock may make it difficult for investors to sell their shares in the public market at any given time at prevailing prices.
We also have 3.1 million shares of our common stock reserved for issuance upon the exercise of outstanding stock options, of which 2.2 million were fully vested and exercisable as of December 31, 2014. Additionally, we have 4.2 million and 0.2 million shares reserved for issuance upon the conversion of outstanding convertible debt and warrants, respectively. Additionally, existing Accrued PIK Interest on the Harlingwood debt may also convert into common shares. Most of our outstanding shares may be sold on the open market, subject to certain volume and other limitations on shares held by affiliates pursuant to Rule 144 pursuant to the Securities Act of 1933, as amended.
Our common stock now trades on the over-the-counter market, which may impact the liquidity of our common stock and our ability to raise additional capital.
Our stock is currently quoted on the OTCQB marketplace. Selling our stock may be difficult because the limited trading market for our shares on the over-the-counter market could result in lower prices and larger spreads in the bid and ask prices of our shares, as well as lower trading volume. Our average trading volume for the quarter ending December 31, 2014 was less than 1,900 shares per trading day. In addition, our ability to raise additional capital may be limited as a result of limited trading volume.
Our common stock is subject to “penny stock” rules.
Our stock is currently defined as a “penny stock” under Rule 3a51-1 promulgated under the Exchange Act. “Penny stocks” are subject to Rules 15g-2 through 15g-7 and Rule 15g-9, which impose additional sales practice requirements on broker-dealers that sell penny stocks to persons other than established customers and institutional accredited investors. Among other things, for transactions covered by these rules, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Consequently, these rules may affect the ability of broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. To the extent our common stock is subject to the penny stock regulations, the market liquidity for our shares will be adversely affected.
Fluctuations in our operating results on a quarterly and annual basis could cause the market price of our common stock to decline.
Our operating results fluctuate from quarter to quarter as a result of many factors, including changes in demand for our products, our effectiveness in managing our suppliers and costs, the timing of the introduction of new products seasonality and weather patterns. Historically, we have experienced greater sales in the second and third quarters of the fiscal year as a result of the seasonality of our products and the markets in which we sell our products, and our first and fourth fiscal quarters have traditionally been our weakest operating quarters due to seasonality. In addition, we generally have sold more of our sunglass products in the first half of the fiscal year and a majority of our goggle products in the last half of the fiscal year. We anticipate that this seasonal impact on our sales will continue. As a result, our net sales and operating results have fluctuated significantly from period to period in the past and are likely to do so in the future. These fluctuations could cause the market price of our common stock to decline. You should not rely on period-to-period or year over year comparisons of our operating results as an indication of our future performance. In future periods, our sales and results of operations may be below the expectations of analysts and investors, which could cause the market price of our common stock to decline.
Our expense levels in the future will be based, in large part, on our expectations regarding net sales and based on acquisitions we may complete or licensing agreements we may enter into. Many of our expenses are fixed in the short term or are incurred in advance of anticipated sales. We may not be able to decrease our expenses in a timely manner to offset any shortfall of sales and the vast majority of our sales are at once since we do not have significant backlog.
Because of their significant common stock ownership, some of our existing stockholders are able to exert control over us and our significant corporate decisions.
Four of our stockholders and affiliates controlled approximately 65.1% of our outstanding common stock as of December 31, 2014. Directors Seth Hamot and Fir Geenen have direct or indirect control over approximately 48.7% and 5.3%, respectively, of our common stock. In addition, as of December 31, 2014 (i) Mr. Hamot may convert a portion of a promissory note that he beneficially owns through Costa Brava into 3.0 million shares of our common stock, which equates to approximately an additional 9.6% of our currently outstanding common stock and (ii) Mr. Geenen may convert a portion of a promissory note that he beneficially owns through Harlingwood into 1.2 million shares of our common stock, which equates to approximately an additional 8.0% of our currently outstanding common stock and additionally future Accrued PIK Interest on the Harlingwood debt may also be converted into common stock. Our current executive officers, directors and their affiliates own or control, in the aggregate, approximately 57.9% of our outstanding common stock as of December 31, 2014. The interest of these stockholders may differ from that of minority holders. These stockholders are able to exercise influence over matters requiring stockholder approval, such as the election of directors and the approval of significant corporate transactions, including transactions involving an actual or potential change of control of the company or other transactions that non-controlling stockholders may not deem to be in their best interests. This concentration of ownership may harm the market price of our common stock by, among other things:
•
delaying, deferring, or preventing a change in control of our company;
•
impeding a merger, consolidation, takeover, or other business combination involving our company;
•
causing us to enter into transactions or agreements that are not in the best interests of all stockholders; and
•
discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters totals 32,551 square feet and is located in Carlsbad, California. In November 2010, we entered into an amended lease for this facility with average monthly rent payments of approximately $29,000 per month, which lease was amended in April 2013 to (i) extend the expiration date to December 31, 2019, and (ii) give the Company the right to terminate the lease commencing on April 1, 2015 with nine months written notice. The monthly rent payments after 2014 will increase by 3% per year. In addition, we lease an office space totaling approximately 400 square feet in Vancouver, Canada at a monthly rate of CAD 1,295 (approximately $1,161), and, effective August 2014, we entered into a five-year lease agreement to rent approximately 1,200 square feet of office and retail space in Encinitas, CA. Monthly base rent for the Encinitas space is $5,700, subject to annual 3% increases. We also lease certain computer equipment and vehicles.
Prior to September 2014, we also leased approximately 6,500 square feet of a facility in Varese, Italy with monthly lease payments effective March 2013 of €1,500 per month. On March 10, 2014, we elected to terminate the lease in Italy, effective September 10, 2014.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be party to lawsuits in the ordinary course of business. We are not currently a party to any legal proceedings which we believe would have a material adverse impact to us.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Principal Market and Holders
Our common stock is quoted on the OTCQB marketplace under the symbol “XSPY” (and until February 15, 2012 it was quoted under the symbol ORNG.OB). At February 27, 2015, there were 72 stockholders of record of our common stock. Many of the holders are brokers and other institutions on behalf of stockholders, therefore we are unable to estimate the total number of beneficial owners represented by these stockholders of record.
Dividends
We have never declared or paid any cash dividend on our common stock, nor do we currently intend to pay any cash dividend on our common stock in the foreseeable future. We expect to retain our earnings, if any, for the reduction of our debt and growth and development of our business. In addition, the terms of our credit facility limit our ability to pay cash dividends on our common stock. A description of our credit facility can be found in this report under Item 7
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerning future matters such as the development of new products, our ability to increase sales levels, manage expense levels, fund our operations and other statements regarding matters that are not historical are forward-looking statements. See “Special Note Regarding Forward-Looking Statements” at the beginning of this Annual Report.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include those described in Item 1A of Part I of this Annual Report under the caption “Risk Factors,” as well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report. Except as required by law, we undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
SPY®, Spy Optic® and Spy® are the registered trademarks of SPY Inc. and its subsidiaries.
Overview
We happily design, market and distribute premium sunglasses, goggles, prescription frame eyewear, as well as apparel and other accessories. In 1994, we began as a grassroots brand in Southern California with the goal of creating innovative and aesthetically progressive eyewear, and, in doing so, we believe we captured the imagination of the action sports market with authentic, distinctive, performance-driven products marketed and sold under the SPY® brand. Today, we believe the SPY® brand, symbolized by the distinct “cross” logo, is a well-recognized eyewear brand in its segment of the action sports industry, with a reputation for its high quality products, style and innovation, most notably showcased in our Happy Lens™ technology.
We were incorporated as Sports Colors, Inc. in California in August 1992, but had no operations until April 1994, when we changed our name to Spy Optic, Inc. In November 2004, we reincorporated in Delaware and changed our name to Orange 21 Inc. In February 2012, we changed our name from Orange 21 Inc. to SPY Inc. to better reflect the focus of our business going forward.
References in this report to “we,” “our,” “us,” “SPY,” and “SPY Inc.” refer to SPY Inc. and its two operating subsidiaries - Spy Optic Inc. (“SPY North America”) and Spy Optic Europe S.r.l.S.U. (“SPY EUROPE”) - except where the context clearly indicates that the term refers only to SPY Inc.
SPY® and Spy Optic® are the registered trademarks of SPY Inc. and its subsidiaries.
Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this report.
Year Ended December 31, 2014 and 2013
Net Sales
Consolidated net sales increased by $0.3 million or 0.9% to $38.1 million for the year ended December 31, 2014 from $37.8 million for the year ended December 31, 2013. Consolidated net sales amounts included approximately $2.0 million and $2.8 million of sales during the years ended December 31, 2014 and 2013, respectively, which were considered to be closeouts, defined as (i) older styles not in the current product offering or (ii) the sales of certain excess inventory of current products sold at reduced pricing levels.
The overall increase in net sales during 2014 was principally attributable to higher sales of our prescription frames which increased by 43.3% or $1.2 million to $4.0 million for the year ended December 31, 2014, compared to $2.8 million during the same period last year, and our goggle line which increased by 12.8% or $1.0 million to $9.2 million for the year ended December 31, 2014, compared to $8.2 million during the same period last year. These increases were partially offset by lower sales of our sunglasses by 5.7% or $1.5 million to $24.4 million for the year ended December 31, 2014 compared to $25.9 million during the same period last year. The decrease in sunglass sales during the year ended December 31, 2014 is principally attributable to an overall decline in the consumer market, particularly during the second quarter of 2014, coupled with several key retailers currently holding lower levels of inventory, lower closeout sales of our sunglass products and the loss of a key account. Management is focused on deepening our relationships with key sales representatives along with other changes designed to increase penetration into key accounts to reverse our sales decline in our sunglass product line.
Cost of Sales and Gross Profit
Our consolidated gross profit increased by $0.4 million or 2.3% to $19.3 million for the year ended December 31, 2014 from $18.9 million for the year ended December 31, 2013, primarily attributable to the sales increase at a higher gross profit as a percent of sales in 2014, as discussed below.
Gross profit, as a percentage of net sales, increased to 50.6% for the year ended December 31, 2014, from 49.9% for the year ended December 31, 2013, primarily due to (i) a higher percentage of lower cost inventory purchases from China as a result of manufacturing efficiency; and (ii) lower sales of closeout products at reduced price levels.
Sales and Marketing Expense
Sales and marketing expense increased by $0.2 million or 1.7% to $11.5 million for the year ended December 31, 2014 from $11.3 million for the year ended December 31, 2013. The increase is primarily due to higher salary related expenses of $0.4 million, marketing events and promotions of $0.3 million, consulting and outside services of $0.1 million, and other miscellaneous expenses of $0.1 million. The increase is partially offset by lower shipments of in-store displays of $0.3 million, decrease in athletes and royalty expense of $0.2 million, and lower incentive commission expense of $0.1 million.
General and Administrative Expense
General and administrative expense decreased by $0.4 million or 6.9% to $5.7 million for the year ended December 31, 2014, from $6.1 million for the year ended December 31, 2013. The decrease was primarily due to lower stock compensation expenses of $0.2 million, consulting and outside services expenses of $0.3 million, lower bad debt of $0.3 million primarily due to better collections, offset by increases of $0.4 million in salary and salary related expenses in 2014 compared to 2013.
Shipping and Warehousing Expense
Shipping and warehousing expense was essentially unchanged at $0.5 million for the year ended December 31, 2014 compared to the year ended December 31, 2013.
Research and Development Expense
Research and development expense increases by $0.2 million or 31.6% to $0.7 million for the year ended December 31, 2014 from $0.5 million for the year ended December 31, 2013. The increase was due to increases of $0.1 million in consulting and outside services and $0.1 million in salary and salary related expenses in 2014 compared to 2013.
Income Tax Provision
The income tax expense for the year ended December 31, 2014 and 2013 was approximately $3,200 and $1,600, respectively, and is mainly comprised of minimum taxes related to regulatory filing fees in the United States. We have recorded a full valuation allowance for deferred tax assets both in the U.S. and in Italy at December 31, 2014 and 2013, respectively. During 2013, income tax expense was recorded in general and administrative expense.
Liquidity and Capital Resources
We have financed our net-losses, working capital needs and capital expenditures through a combination of operating cash flows and revolving lines of credit provided by our U.S. based lenders. We have also required debt and equity financing because cash used by operations and net losses were substantial due to ongoing and seasonal working capital requirements.
Cash on hand at December 31, 2014 was $0.4 million. At December 31, 2014, we had a total of $28.5 million in debt under all lines of credit and notes payable, of which $6.9 million was classified as short-term liabilities and $21.6 million was classified as long-term liabilities in the Company's Consolidated Balance Sheet. Our primary debt arrangements as of December 31, 2014 are further described below in Short-Term Debt and Long-Term Debt.
Future Capital Requirements
During the year ended December 31, 2014, we had negative cash flow from operations of $2.8 million largely due to timing of seasonal inventory purchases, interest payments on related party debt, and lower collections on accounts due to timing of December sales. During the year ended December 31, 2013, we had positive cash flow from operations principally as a result of a significant reduction in operating expenses, increases in gross profit as a percentage of net sales, and by paying interest on notes payable to stockholders in-kind as an addition to principal. However, we have a history of incurring significant negative cash flow from operations, operating and net losses and significant working capital requirements. The Company anticipates that it will continue to have ongoing cash requirements to finance its seasonal and ongoing working capital requirements and net losses.
In order to finance our net losses and working capital requirements, we have relied and anticipate that we will continue to rely on SPY North America’s credit line with BFI Business Finance (“BFI”) (“BFI Line of Credit”) and our credit facilities with Costa Brava Partnership III, L.P. (“Costa Brava”). In addition, we have relied on debt and equity financing from Harlingwood (Alpha), LLC (“Harlingwood”). Costa Brava and Harlingwood are related parties (See Short-Term Debt and Long-Term Debt below and Note 11 “Related Party Transactions” in the Consolidated Financial Statements).
We believe that we will have sufficient cash on hand and cash available under existing credit facilities to enable us to meet our operating requirements for at least the next twelve months, if we are able to achieve some or a combination of the following: (i) achieve our desired sales growth and gross margin improvement, (ii) continue the improvements in the management of our working capital, and (iii) continue to manage and operate at appropriate levels of our sales, marketing, general and administrative, and other operating expenses in relation to overall sales. However, we will need to continue to access our existing credit facilities during the next twelve months to support our planned operations and working capital requirements, and intend to: (i) continue to borrow, to the extent available, from the BFI Line of Credit, (ii) continue discretionary deferral of interest payments which otherwise would have been payable to Harlingwood, (iii) if necessary, we may need to raise additional capital through debt or equity financings, or borrow up to the extent available on our Costa Brava Line of Credit.
We do not anticipate that we can generate sufficient cash from operations to repay the amounts due under the BFI Line of Credit, which as a result of its renewal in February 2015, is currently scheduled for its next annual renewal in February 2016, and the borrowings from Costa Brava and Harlingwood notes, as amended, when they become due in December 2016. Therefore, we will need to renew the BFI Line of Credit at its annual renewal in February 2016 and continue to extend the maturity dates of the Costa Brava and Harlingwood indebtedness. If we are unable to renew the BFI Line of Credit and further extend future maturity dates of the Costa Brava and Harlingwood indebtedness, we will need to raise substantial additional capital through debt or equity financing and/or seek another asset backed line of credit to continue our operations. No assurances can be given that any such financing will be available to us on favorable terms, if at all. The inability to obtain debt or equity financing in a timely manner and in amounts sufficient to fund our operations, or the inability to renew the BFI Line of Credit or to extend future maturity dates of the Costa Brava and Harlingwood indebtedness, if necessary, would have an immediate and substantial adverse impact on our business, financial condition or results of operations.
Our access to additional financing will depend on a variety of factors (many of which we maintain little or no control) such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity, as well as the possibility that lenders could develop a negative perception of our long-term or short-term financial prospects. The current economic environment could also cause lenders, vendors and other counterparties who provide credit to us to breach their obligations or otherwise reduce the level of credit granted to us, which could include, without limitation, lenders or other financial services companies failing to fund required borrowings under our credit arrangements. If access to our existing credit facilities is not available or is not available on acceptable terms, we may not be able to fund our planned operations if we require such capital, which could have an adverse effect on our business.
Cash Flow Activities
Cash used in operating activities consists primarily of the net loss adjusted for certain non-cash items, including depreciation and amortization, share-based compensation, non-cash board of directors’ fees, provision for doubtful accounts, foreign currency gains and losses, amortization of debt discount, extinguishment of debt, and the effect of changes in working capital and other activities.
Cash used in operating activities for the year ended December 31, 2014 was $2.8 million, which consisted of a net loss of $1.9 million, adjustments for aggregate non-cash items of $1.0 million (primarily share-based compensation of $0.5 million, depreciation and amortization of $0.3 million, and others of $0.2 million) and an aggregate $1.9 million used in working capital. Working capital changes include uses of cash of $2.8 million primarily from: (i) a net increase of $1.8 million related to inventory purchases, (ii) $0.7 million increase in accounts receivable, (iii) $0.2 million increase in prepaid expenses and other current assets, and (iv) a decrease in accounts payable of $0.1 million. The uses of cash from working capital were partially offset by sources of cash from working capital of $0.8 million primarily related to an increase in accrued expenses and other liabilities due to the timing of purchases.
Cash provided by operating activities for the year ended December 31, 2013 was $0.7 million, which consisted of a net loss of $2.9 million, adjustments for aggregate non-cash items of $4.2 million (primarily Accrued PIK Interest of $2.4 million, share-based compensation of $0.8 million, provision for doubtful accounts of $0.4 million, depreciation and amortization of $0.3 million and others of $0.3 million) and an aggregate $0.6 million used in working capital. Working capital changes include use of cash of $1.3 million from a net increase in accounts receivable due to increase sales attributable to growth and seasonality and $0.2 million in accounts payable due to timing of payables. The use of cash from working capital is partially offset by sources of cash from working capital of $0.9 million primarily related to increase in accrued expenses of $0.5 million due to timing of payments and decrease in inventory of $0.4 million due to increase in sales.
Cash used in investing activities during the year ended December 31, 2014 was $0.3 million, and was attributable to the purchase of property and equipment, as compared to less than $0.2 million used during the year ended December 31, 2013 for similar purposes.
Cash provided by financing activities for the year ended December 31, 2014 was $2.8 million, and was attributable primarily to $2.8 million in net borrowings under our BFI Line of Credit due to payment of interest in shareholder debt and timing of working capital payments.
Cash used in financing activities for the year ended December 31, 2013 was $0.7 million, and was attributable primarily to $0.6 million in reduction in debt under our BFI Line of Credit due to our improved liquidity and other debt reductions aggregating less than $0.1 million relate to lower capital lease balances due to normal principal payments.
Short-Term and Long-Term Debt Summary. As of December 31, 2014, we had a total of $28.5 million in debt under all lines of credit, capital leases and notes payable. A brief summary of our primary short-term and long-term debt facilities outstanding and available sources of liquidity from debt at December 31, 2014 is as follows:
•
BFI Line of Credit. A short-term line of credit with BFI with a maximum borrowing limit of $8.0 million at December 31, 2014. The maximum availability based on eligible accounts receivable and inventory at December 31, 2014 was $8.0 million, of which $6.8 million was outstanding at that date;
•
Costa Brava Term Note. A $7.0 million subordinated term loan with Costa Brava, of which $6.0 million is convertible into common stock; due December 31, 2016 as amended in April 2014, $7.0 million outstanding at December 31, 2014 (excluding Accrued PIK Interest of $2.1 million and unamortized debt premium of $0.1 million). (“Costa Brava Term Note”);
•
Costa Brava Line of Credit. A $9.0 million subordinated line of credit with Costa Brava, due December 31, 2016 as amended in April 2014; $8.5 million outstanding as of December 31, 2014 (excluding Accrued PIK Interest of $2.1 million). (“Costa Brava Line of Credit”);
•
Harlingwood Notes. Two subordinated convertible term loans with Harlingwood aggregating $1.5 million, of which $1.7 million is convertible into common stock; due December 31, 2016. $1.5 million outstanding at December 31, 2014 (excluding Accrued PIK Interest of $0.2 million). Interest attributable to Harlingwood Notes has been paid in kind. The Company made discretionary interest payments of $0.2 million to Harlingwood for accrued interest during the twelve months ended December 31, 2014. (“Harlingwood Notes”);
•
Interest attributable to the Costa Brava Term Note, from January 1, 2012 through December 31, 2013, was paid in kind. Aggregate Accrued PIK Interest was $2.1 million at December 31, 2014. Interest payable after April 30, 2014 is required to be paid in quarterly cash payments. The Company paid $0.9 million to Costa Brava for accrued interest on the Costa Brava Term Note during the twelve months ended December 31, 2014; and
•
Interest attributable to the Costa Brava Line of Credit from, January 1, 2012 through December 31 2013, was paid in kind. Aggregate Accrued PIK Interest was $2.1 million at December 31, 2014. Interest payable after April 30, 2014 is required to be paid in quarterly cash payments. The Company paid $1.0 million to Costa Brava for accrued interest on the Costa Brava Line of Credit during the twelve months ended December 31, 2014; and
Each of our primary debt facilities is more fully described in Note 8, “Long-Term Debt”, in the notes to our Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We did not enter into any off-balance sheet arrangements during the years ended December 31, 2014 and 2013, nor did we have any off-balance sheet arrangements outstanding at December 31, 2014 and 2013.
Income Taxes
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical operating results and the uncertainty of the economic conditions, we have recorded a full valuation allowance for SPY North America and SPY EUROPE at December 31, 2014 and December 31, 2013.
We may have had one or more ownership changes, as defined by Section 382 of the Internal Revenue Code (“IRC Section 382”) in the current and previous years, and, as such, the use of our net operating losses may be limited in future years. We have not completed a formal IRC Section 382 study and analysis to determine the annual limitation on the use of the net operating losses; however, the limitations could be substantial.
Backlog
Historically, purchases of sunglass, motocross and prescription frame eyewear products have not involved significant pre-booking activity. Purchases of our snow goggle products are generally pre-booked and shipped during August to October.
Seasonality
Our net sales fluctuate from quarter to quarter as a result of changes in demand for our products. Historically, we experience greater net sales in the second and third quarters of the fiscal year as a result of the seasonality of our products and the markets in which we sell our products, and our first and fourth fiscal quarters are traditionally our weakest operating quarters due to seasonality. We generally sell more of our sunglass products in the first half of the fiscal year and a majority of our goggle products in the second half of the fiscal year. We anticipate this seasonal impact on our net sales will continue. As a result, our net sales and operating results have fluctuated significantly from period to period in the past and are likely to do so in the future.
Inflation
We do not believe inflation has had a material impact on our operations in the past, although there can be no assurance that this will be the case in the future.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of Consolidated Financial Statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to inventories, sales returns, income taxes, accounts receivable allowances, share-based compensation, impairment testing, warranty and severance. We base our estimates on historical experience, performance metrics and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates under different assumptions or conditions.
We apply the following critical accounting policies in the preparation of our Consolidated Financial Statements:
Revenue Recognition and Reserve for Returns
Our revenue is primarily generated through sales of sunglasses, goggles, prescription frames, and apparel, net of returns and discounts. Revenue from product sales is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. These criteria are usually met upon delivery to our “common” carrier, which is also when the risk of ownership and title passes to our customers.
Generally, we extend credit to our customers after performing credit evaluations and do not require collateral. Our payment terms generally range from net-30 to net-90, depending on the country or whether we sell directly to retailers or to a distributor. Our distributors are a combination of prepaid and credit-term accounts. Credit is extended to certain distributors, sometimes upon receipt of a letter of credit or based on credit evaluation. We also use credit insurance with our international distributors. Generally, our sales agreements with our customers, including distributors, do not provide for any rights of return or price protection. However, we do approve returns on a case-by-case basis, at our sole discretion. We record an allowance for estimated returns when revenue is recorded based on historical data and make adjustments when we consider it necessary. The allowance for returns is calculated using a three step process that includes: (i) calculating an average of actual returns as a percentage of sales over a rolling twelve month period; (ii) estimating the average time period between a sale and the return of the product (13 months at December 31, 2014) and (iii) estimating the value of the product returned. The reserve is calculated as the average return percentage times sales less discounts for the average return period less the estimated value of the product returned and adjustments are made as we consider necessary. The average return percentages at December 31, 2014, along with the range of the weighted average cumulative return percentages over the past two years and the effect on the liability and net sales if the highest average percentage over the past years had been used at December 31, 2014 are shown below in our sensitivity analysis. Historically, actual returns have been within our expectations. If future returns are higher than our estimates, our earnings would be adversely affected.
Accounts Receivable and Allowance for Doubtful Accounts
Throughout the year, we perform credit evaluations of our customers, and we adjust credit limits based on payment history and the customer’s current creditworthiness. We continuously monitor our collections and maintain a reserve for estimated credits, which is calculated on a monthly basis. We make judgments as to our ability to collect outstanding receivables and provide allowances for anticipated bad debts and refunds. Provisions are made based upon a review of all significant outstanding invoices and overall quality and age of those invoices not specifically reviewed. In determining the provision for invoices not specifically reviewed, we analyze collection experience, customer credit worthiness and current economic trends.
If the data used to calculate these allowances does not reflect our future ability to collect outstanding receivables, an adjustment in the reserve for refunds may be required. Historically, our losses have been consistent with our estimates, but there can be no assurance that we will continue to experience the same credit loss rates that we have experienced in the past. Unforeseen, material financial difficulties experienced by our customers could have an adverse impact on our profits.
Share-Based Compensation Expense
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Stock options generally vest annually over a three year period and the corresponding expense is ratably recognized over the same time period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments.
Determining Fair Value of Stock Option Grants
Valuation and Amortization Method. We use the Black-Scholes option-pricing valuation model (single option approach) to calculate the fair value of stock option grants. For options with graded vesting, the option grant is treated as a single award and compensation cost is recognized on a straight-line basis over the vesting period of the entire award.
Expected Term. The expected term of options granted represents the period of time that the option is expected to be outstanding. We estimate the expected term of the option grants based on historical exercise patterns that we believe to be representative of future behavior as well as other various factors.
Expected Volatility. We estimate our volatility using our historical share price performance over the expected life of the options, which management believes is materially indicative of expectations about expected future volatility.
Risk-Free Interest Rate. We use risk-free interest rates in the Black-Scholes option valuation model that are based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options.
Dividend Rate. We have not paid dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Therefore, we use an expected dividend yield of zero.
Forfeitures. The FASB requires companies to estimate forfeitures at the time of grant and revise those estimates in subsequent reporting periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.
Inventories
Inventories consist primarily of finished products, including sunglasses, goggles, prescription frames, apparel and accessories, product components such as replacement lenses along with purchasing and quality control costs. Inventory items are carried on the books at the lower of cost or market and first-in first-out method for our distribution business. Periodic physical counts of inventory items are conducted to help verify the balance of inventory.
A reserve is maintained for obsolete or slow moving inventory. Products are reserved at certain percentages based on their probability of selling, which is estimated based on current and estimated future customer demands and market conditions. Historically, there has been variability in the amount of write offs, compared to estimated reserves. These estimates could vary significantly, either favorably or unfavorably, from actual experience if future economic conditions, levels of consumer demand, customer inventory or competitive conditions differ from expectations.
Income Taxes
We account for income taxes pursuant to the asset and liability method, whereby deferred tax assets and liabilities are computed at each balance sheet date for temporary differences between the consolidated financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. We consider future taxable income and ongoing, prudent and feasible tax planning strategies in assessing the value of our deferred tax assets. If we determine that it is more likely than not that these assets will not be realized, we will reduce the value of these assets to their expected realizable value, thereby decreasing our net income. Evaluating the value of these assets is necessarily based on our management’s judgment. If we subsequently determine that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.
We have established a valuation allowance against our deferred tax assets in each jurisdiction where we cannot conclude that it is more likely than not that those assets will be realized. In the event that actual results differ from our forecasts or we adjust the forecast or assumptions in the future, the change in the valuation allowance could have a significant impact on future income tax expense.
We are subject to income taxes in the United States and foreign jurisdictions. In the ordinary course of our business, there are calculations and transactions, including transfer pricing, where the ultimate tax determination is uncertain. In addition, changes in tax laws and regulations as well as adverse judicial rulings could materially affect the income tax provision.
Foreign Currency and Derivative Instruments
The functional currency of our foreign wholly owned subsidiary, SPY Europe, is the respective local currency. Accordingly, we are exposed to transaction gains and losses that could result from fluctuations in foreign currency. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses from the translation of foreign subsidiary financial statements are included in accumulated other comprehensive income (loss).
Debt Modifications
From time to time, we have modified and also anticipate modifying certain debt agreements. We have accounted for and expect to account for future changes in debt agreements as debt modifications and extinguishment of debt, where applicable, based on the relevant authoritative accounting guidance after considering the specific terms of any future debt modifications.
Recently Issued Accounting Principles
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from our contracts with customers. ASU 2014-09 will be effective beginning the first quarter of our fiscal year 2017 and early application is not permitted. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. Management is currently evaluating the effect ASU 2014-09 will have on our Consolidated Financial Statements and disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not intend to early adopt this standard. The adoption of this standard will not have an impact on the financial condition of our Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SPY INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
SPY Inc. and Subsidiaries
Carlsbad, California
We have audited the accompanying consolidated balance sheets of SPY Inc. (a Delaware corporation) and its subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive loss, stockholders’ deficit and cash flows for the years then ended. We have also audited the financial statement schedule listed at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SPY Inc. and its subsidiaries as of December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule listed at Item 15(a) presents fairly, in all material respects, the information set forth therein.
/s/ Mayer Hoffman McCann P.C.
San Diego, California
March 5, 2015
SPY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands, except number of shares and per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
SPY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
SPY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SPY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SPY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Description of Business
SPY Inc. (the “Company”) happily designs, markets and distributes premium sunglasses, goggles and prescription frame eyewear, as well as apparel and other accessories. In 1994, the Company began as a grassroots brand in Southern California with the goal of creating innovative and aesthetically progressive eyewear, and, in doing so, the Company believes it has captured the imagination of the action sports market with authentic, distinctive, performance-driven products under the SPY® brand. Today, the Company believes the SPY® brand, symbolized by the distinct “cross” logo, is a well recognized eyewear brand in its segment of the action sports industry, with a reputation for its high quality products, style and innovation, most notably showcased in its Happy Lens™ technology.
The Company was incorporated as Sports Colors, Inc. in California in August 1992, but had no operations until April 1994, when the Company changed its name to Spy Optic, Inc. In November 2004, the Company reincorporated in Delaware and changed its name to Orange 21 Inc. In February 2012, the Company changed its name from Orange 21 Inc. to SPY Inc. to better reflect the focus of its business going forward.
The Company operates through its subsidiaries and currently has one wholly-owned subsidiary incorporated in California, Spy Optic Inc. (“SPY North America”) and one wholly owned subsidiary incorporated in Italy, Spy Optics Europe S.r.l. S.U. (“SPY EUROPE”).
Basis of Presentation
The accompanying consolidated financial statements of SPY Inc. and its wholly owned subsidiaries have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. All intercompany transactions and balances have been eliminated in consolidation.
Capital Resources
During the year ended December 31, 2014, the Company had negative cash flow from operations principally as a result of a timing of inventory purchases and collections on accounts receivable. Although the Company had income from operations in 2013 and 2014, the Company has a history of incurring significant negative cash flow from operations, operating and net losses, and has significant working capital requirements. The Company anticipates that it will continue to have ongoing cash requirements to finance its seasonal and ongoing working capital needs and net losses.
In order to finance the Company's working capital requirements, the Company has relied and anticipates that it will continue to rely on SPY North America’s credit line with BFI Business Finance (“BFI”) (“BFI Line of Credit”) and its credit facilities with Costa Brava Partnership III, L.P. (“Costa Brava”). In addition, SPY North America has relied on debt and equity financing from Harlingwood (Alpha), LLC (“Harlingwood”). Costa Brava and Harlingwood are related parties. The total outstanding indebtedness of the Company was $28.5 million and $25.7 million at December 31, 2014 and 2013 respectively. (See Note 6 “Short-Term Debt”, Note 7 “Long-Term Deb” and Note 13 “Related Party Transactions”)
The Company believes it will have sufficient cash on hand and cash available under existing credit facilities to meet its operating requirements for at least the next twelve months, if the Company is able to achieve some or a combination of the following factors: (i) achieve its desired sales growth, (ii) continue the improvements in the management of working capital, and (iii) continue to manage and operate the Company at appropriate levels of sales, marketing, general and administrative, and other operating expenses in relation to overall sales. However, the Company will need to continue to access its existing credit facilities during the next twelve months to support its planned operations and working capital requirements, and intends to (i) continue to borrow, to the extent available, from the BFI Line of Credit, (ii) if necessary, continue discretionary deferral of interest payments otherwise payable to Harlingwood, and (iii) if necessary, raise additional capital through debt or equity financings, or borrow up to the extent available on the Company’s Costa Brava Line of Credit.
The Company does not anticipate that it can generate sufficient cash from operations to repay the amounts due under the BFI Line of Credit which is scheduled to renew in February 2016, and the borrowings from Costa Brava and Harlingwood due, as amended, on December 31, 2016, consisting of $19.8 million in borrowings from Costa Brava and $1.7 million in borrowings from Harlingwood as of December 31, 2014. The Company will therefore need to renew the BFI Line of Credit at its annual renewal in February 2016 and continue to extend the future maturity dates of the Costa Brava and Harlingwood indebtedness. If the Company is unable to renew the BFI Line of Credit and extend future maturity dates of the Costa Brava and Harlingwood indebtedness, it will need to raise substantial additional capital through debt or equity financing to continue its operations. No assurances can be given that any such financing will be available to the Company on favorable terms, if at all. The inability to obtain debt or equity financing in a timely manner and in amounts sufficient to fund the Company’s operations, or the inability to renew the BFI Line of Credit or to extend future maturity dates of the Costa Brava and Harlingwood indebtedness, if necessary, would have an immediate and substantial adverse impact on the Company’s business, financial condition and results of operations.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates used in preparing these consolidated financial statements include those assumed in computing allowance for doubtful accounts receivable, reserve for obsolete inventory, reserve for sales returns, assumptions used in calculating the fair value of stock options, the testing of long-lived assets for impairment and the valuation allowance on deferred tax assets. Accordingly, actual results could differ from those estimates.
Accounts Receivable and Allowance for Doubtful Accounts
Throughout the year, the Company performs credit evaluations on its customers, and adjusts credit limits based on payment history combined with the customer’s current creditworthiness. The Company continuously monitors its collections and maintains a reserve for estimated credits, which is calculated on a monthly basis. The Company makes judgments as to its ability to collect outstanding receivables and provide allowances for anticipated bad debts and refunds. Provisions are made based upon a review of all significant outstanding invoices and overall quality and age of those invoices not specifically reviewed. In determining the provision for invoices not specifically reviewed, the company analyzes collection experience, customer credit worthiness and current economic trends.
If the data used to calculate these allowances does not reflect the Company’s future ability to collect outstanding receivables, an adjustment in the reserve for refunds may be required. Historically, the Company’s losses have been consistent with its estimates, but there can be no assurance that the Company will continue to experience the same credit loss rates that it has experienced in the past. Unforeseen, material financial difficulties experienced by its customers could have an adverse impact on the Comapany’s profits.
Inventories
Inventories consist primarily of finished products, including sunglasses, goggles, prescription frames, apparel and accessories, product components such as replacement lenses along with purchasing and quality control costs. Inventory items are carried on the books at the lower of cost or market and the first-in first-out method for the Company’s distribution business. Periodic physical counts of inventory items are conducted to help verify the balance of inventory. A reserve is maintained for obsolete or slow moving inventory. Products are reserved at certain percentages based on their probability of selling, which is estimated based on current and estimated future customer demand and market conditions.
Long-Lived Assets
Property and equipment are recorded at cost and are depreciated over the estimated useful lives of the assets (generally two to five years) using the straight-line method. Amortization of leasehold improvements is computed on the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the assets. Expenditures for repairs and maintenance are expensed as incurred. Gains and losses from the sale or retirement of property and equipment are charged to operations in the period realized or incurred.
Intangible assets consist of trademarks and patents at December 31, 2014 and 2013, which are being amortized on a straight-line basis over 3.0 to 8.3 years. Amortization expense was approximately $35,000 and $55,000 for the years ended December 31, 2014 and 2013, respectively. Amortization expense related to intangible assets in each of the next two years is expected to be incurred as follows:
The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable. The Company estimates the future undiscounted cash flows derived from an asset to assess whether or not a potential impairment exists when events or circumstances indicate the carrying value of a long-lived asset may differ. If the sum of the undiscounted cash flows is less than the carrying value, an impairment loss will be recognized, measured as the amount by which the carrying value exceeds the fair value of the asset. The Company uses its best judgment based on the most current facts and circumstances surrounding its business when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of a potentially impaired asset. Changes in assumptions used could have a significant impact on the Company’s assessment of recoverability. Numerous factors, including changes in the Company’s business, industry segment or the global economy could significantly impact management’s decision to retain, dispose of or idle certain of its long-lived assets. See Note 4 “Property and Equipment”, for information regarding asset impairment charges recognized by the Company. At December 31, 2014 and 2013, no impairment of the intangible assets had occurred and the amortization periods remain appropriate.
Point-of-Purchase Displays
In the U.S., the cost of point-of-purchase displays is currently charged to sales and marketing expense as ownership is transferred to the customer upon shipment of the display. Displays are also sold to international distributors at which time, the sale is recognized in net sales and the cost is charged to cost of goods sold. The amount of displays sold is minimal.
Revenue Recognition
The Company’s revenue is primarily generated through sales of sunglasses, goggles, prescription frames, and apparel, net of returns and discounts. Revenue from product sales is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. These criteria are usually met upon delivery to the Company’s “common” carrier, which is also when the risk of ownership and title passes to the Company’s customers.
Generally, the Company extends credit to customers after performing credit evaluations and does not require collateral. The Company’s payment terms generally range from net-30 to net-90, depending on the country or whether product is sold directly to retailers or to a distributor. The Company’s distributors are a combination of prepay and credit-term accounts. Credit may be extended to certain distributors, sometimes upon receipt of a letter of credit, credit evaluation, or use of credit insurance. Generally, the Company’s sales agreements with its customers, including distributors, do not provide for any rights of return or price protection. However, the Company does approve returns on a case-by-case basis, at its sole discretion. The Company records an allowance for estimated returns when revenue is recorded based on historical data and make adjustments when then Company considers it necessary. The allowance for returns is calculated using a three step process that includes: (i) calculating an average of actual returns as a percentage of sales over a rolling twelve month period; (ii) estimating the average time period between a sale and the return of the product (13 months at December 31, 2014) and (iii) estimating the value of the product returned. The reserve is calculated as the average return percentage times sales less discounts for the average return period less the estimated value of the product returned and adjustments are made as the Company considers necessary. Historically, actual returns have been within the Company’s expectations. If future returns are higher than the Company’s estimates, then earnings could be adversely affected.
Advertising
The Company expenses advertising costs as incurred. Total advertising expense was approximately $540,000 and $394,000 for the years ended December 31, 2014 and 2013, respectively.
Product Warranty
The Company warrants its products for one year. The standard warranty requires the Company to replace any product or portion thereof that is deemed a manufacturer’s defect. The Company records warranty expense as incurred and records the expense in cost of sales. Based on historical evidence and future estimates, warranty expense is considered to be immaterial to the consolidated financial statements and therefore no accrual was recorded as of December 31, 2014 and December 31, 2013.
Research and Development
The Company expenses research and development costs as incurred.
Shipping and Handling
The Company records shipping and handling costs charged to customers as revenue and other shipping and handling costs to cost of sales as incurred.
Foreign Currency
The functional currencies of the Company’s subsidiaries, SPY North America and SPY Europe are their respective local currency. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currencies. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive loss.
Loss Per Share
Basic loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share is calculated by including the additional shares of common stock issuable upon exercise of outstanding options and warrants, vesting of restricted stock and the conversion of convertible debt, using the treasury stock method. The following table lists the potentially dilutive equity instruments, each convertible into one share of common stock, used in the calculation of diluted earnings per share for the periods presented:
The following potentially dilutive instruments were not included in the diluted per share calculation for periods presented as their inclusion would have been antidilutive:
Income Taxes
In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical operating results and the uncertainty of the economic conditions, the Company recorded a full valuation allowance for SPY North America and SPY EUROPE at December 31, 2014 and 2013.
The Company may have had one or more ownership changes, as defined by Section 382 of the Internal Revenue Code (“IRC Section 382”) in previous years, and, as such, the use of its net operating losses may be limited in future years. The Company has not completed a formal IRC Section 382 study and analysis to determine the annual limitation on the use of the net operating losses; however, the limitations could be substantial.
Royalties
The Company has several royalty agreements with third parties, including agreements with several athletes to use them in endorsing or advertising several of its products. Royalty expense during the years ended December 31, 2014 and 2013 was approximately $0.3 million and $0.5 million, respectively.
Comprehensive Income
Comprehensive income (loss) represents the results of operations adjusted to reflect all items recognized under accounting standards as components of comprehensive income (loss). Total comprehensive loss for the years ended December 31, 2014 and 2013 was approximately $2.0 million and $2.8 million, respectively.
The components of accumulated other comprehensive income, net of tax, are as follows:
Share-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Stock options generally vest annually over a three year period and the corresponding expense is ratably recognized over the same time period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments.
Debt Modifications
From time to time, the Company has modified and also anticipates modifying certain debt agreements. The Company has accounted for and expects to account for future changes in debt agreements as debt modifications and extinguishment of debt, where applicable, based on the relevant authoritative accounting guidance after considering the specific terms of any future debt modifications.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the Company’s contracts with customers. ASU 2014-09 will be effective beginning the first quarter of the Company’s fiscal year 2017 and early application is not permitted. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. Management is currently evaluating the effect ASU 2014-09 will have on the Company’s Consolidated Financial Statements and disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not intend to early adopt this standard. The adoption of this standard will not have an impact on the financial condition of the Company.
2. Accounts Receivable
Accounts receivable consisted of the following:
3. Inventories
Inventories consisted of the following:
The Company’s balances are net of an allowance for excess and obsolete inventories of approximately $0.2 million and $0.2 million at December 31, 2014 and 2013, respectively.
4. Property and Equipment
Property and equipment consisted of the following:
There were no impairment charges during the year ended December 31, 2014 and 2013.
Depreciation expense was approximately $0.2 million and $0.2 million for the years ended December 31, 2014 and 2013, respectively.
5. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
6. Short-Term Debt
SPY North America has a Loan and Security Agreement with BFI, originally dated February 26, 2007 and most recently modified on September 10, 2014 (the “BFI Line of Credit”). The BFI Line of Credit has a maximum borrowing limit of $8.0 million at December 31, 2014, which was increased to $9.0 million when the BFI Line of Credit was renewed in February 2015. The maximum availability under the BFI Line of Credit was $8.0 million and $5.1 million at December 31, 2014 and 2013, respectively, of which SPY North America had borrowed $6.8 million and $4.0 million, respectively, as of those dates. The BFI Line of Credit renews annually in February for one additional year unless otherwise terminated by either SPY North America or BFI. The Company had $1.2 million and $1.1 million in unused availability as of December 31, 2014 and 2013, respectively.
Actual borrowing availability under the BFI Line of Credit is based on eligible trade receivable and inventory levels of SPY North America. Prior to the modification on September 10, 2014 (the “Modification”), actual borrowings were subject to the following limitations: (i) up to 80% of eligible United States accounts receivable, (ii) 80% of eligible Canadian receivables, (iii) 65% of eligible United States inventory, provided, however, such amount does not exceed 65% of eligible United States and Canadian accounts receivable and does not exceed the maximum inventory borrowing amount of $3.5 million, and (iv) advances against eligible foreign accounts receivable (excluding Canadian accounts receivable) up to $0.4 million. In connection with the Modification, actual borrowings are subject to the following limitations until February 26, 2015: (i) up to 80% of eligible United States accounts receivable, (ii) 80% of eligible Canadian receivables, (iii) 65% of eligible United States inventory, provided, however, such amount does not exceed 100% of eligible United States and Canadian accounts receivable and does not exceed the maximum inventory borrowing amount of $3.5 million, and (iv) advances against eligible foreign accounts receivable (excluding Canadian accounts receivable) up to $0.4 million. In February 2015, the Company renewed the BFI Line of Credit that resulted in the following changes: (i) increased its inventory borrowings to the lessor of $3.5 million, 100% of United States and Canadian eligible accounts receivable or 65% of eligible United States inventory, (ii) increased borrowing on eligible dating programs to 80%, and (iii) increased maximum borrowing limit of $9.0 million.
Borrowings under the BFI Line of Credit accrue interest at a rate per annum equal to the prime rate, as reported in the Western Edition of The Wall Street Journal, plus 1.75%, with a minimum monthly interest charge of $2,000. The interest rate was 5.0% per annum at December 31, 2014. The Company and SPY North America granted BFI a security interest in substantially all of SPY North America’s assets, and substantially all of the Company’s accounts receivable and inventories to secure BFI’s position under the BFI Line of Credit. Additionally, the obligations under the BFI Line of Credit are guaranteed by SPY Inc.
The BFI Line of Credit imposes certain covenants on SPY North America, including, but not limited to, covenants requiring SPY North America to provide certain periodic reports to BFI, to inform BFI of certain changes in the business, to refrain from incurring additional debt in excess of $100,000 and to refrain from paying dividends. The BFI Line of Credit also contains cross default provisions. BFI may declare SPY North America in default if SPY North America experiences a material adverse change in its business, financial condition, or in its ability to perform the obligations owed under the BFI Line of Credit. BFI’s prior consent, which BFI will not unreasonably withhold, is required in the event that SPY North America seeks additional debt financing, including debt financing subordinate to BFI. SPY North America has also established bank accounts in BFI’s name in the United States and Canada into which collections on accounts receivable and other collateral are deposited (the “Collateral Accounts”). Pursuant to the deposit control account agreements between BFI and SPY North America, BFI is entitled to sweep all amounts deposited into the Collateral Accounts and apply the funds to outstanding obligations under the BFI Line of Credit; provided that BFI is required to distribute to SPY North America any amounts remaining after payment of all amounts due under the BFI Line of Credit. SPY North America was in compliance with all covenants under the BFI Line of Credit at December 31, 2014.
7. Long-Term Debt
Costa Brava Term Note
SPY North America issued a promissory note to Costa Brava in the principal amount of $7.0 million (“Costa Brava Term Note”), which amount was outstanding at each of December 31, 2014 (excluding unpaid interest related to Costa Brava Term Note, which was added to the principal balance rather than paid in cash (“Accrued PIK Interest”) of $2.1 million and unamortized debt premium of $0.1 million) and December 31, 2013 (excluding Accrued PIK Interest of $2.1 million). During the year ended December 31, 2014, approximately $0.9 million of accrued interest was paid in cash. In April 2014, the Costa Brava Term Note was amended to: (i) extend the maturity date from April 1, 2015 to December 31, 2016, (ii) increase the amount Costa Brava may convert from $2,250,000 to $6,000,000 and reduce the conversion price from $2.25 to $2.00, (iii) reduce the interest rate from 12% to 7%, and (iv) eliminate the facility fee, effective July 1, 2014. Effective with this amendment, the Company no longer adds Accrued PIK Interest to the outstanding principal balance, and is now required to make quarterly cash interest payments (See Note 11 “Related Party Transactions”). The Company paid a final facility fee of approximately $35,000, in June 2014, which was a pro-rata portion of the annual facility fee. This amendment was accounted for as an extinguishment of debt, in accordance with authoritative guidance. In accordance with the accounting treatment of extinguishment of debt, the Company recorded expense of approximately $155,000, which represents an increase in the fair value of the Costa Brava Term Note compared to the carrying value of the Costa Brava Term Note prior to the modification. The expense associated with the modification is reported in other income and expense and the debt premium will be amortized to interest expense over the revised term of the Costa Brava Term Note. The Company also expensed approximately $16,000 in capitalized debt fees related to the previous debt agreement during 2014. The Costa Brava Term Note is subordinate to the BFI Line of Credit, pursuant to the terms of a debt subordination agreement between Costa Brava and BFI.
Costa Brava Line of Credit
SPY North America has an additional $9.0 million line of credit from Costa Brava (“Costa Brava Line of Credit”) of which $8.5 million was outstanding at December 31, 2014 and 2013 (excluding Accrued PIK Interest of $2.1 million during the respective periods). During the year ended December 31, 2014, approximately $1.0 million of accrued interest was paid in cash. In April of 2014, the Costa Brava Line of Credit was amended to: (i) extend the maturity date from April 1, 2015 to December 31, 2016, (ii) reduce the interest rate from 12% to 7%, and (iii) eliminate the facility fee, effective July 1, 2014. Effective with this amendment, the Company no longer adds Accrued PIK Interest to the outstanding principal, and is now required to make quarterly cash interest payments. This amendment was accounted for as a modification of debt in accordance with authoritative guidance. The Costa Brava Line of Credit is subordinate to BFI Line of Credit, pursuant to the terms of a debt subordination agreement between Costa Brava and BFI.
In addition, the Costa Brava Line of Credit, as amended, required SPY North America to pay a final facility fee in June, 2014 calculated as the lesser of (i) 1% of the average daily outstanding principal amount owed under the note (excluding Accrued PIK Interest) for the 365 day period ending on such payment date or (ii) $90,000. The Company has no accrued expenses and other liabilities related to facility fee as of December 31, 2014 and paid $85,000 for the required facility fee in June 2014.
Costa Brava Loans
As of December 31, 2014 and 2013, the Company has outstanding borrowings of $19.8 million (including $4.2 million Accrued PIK Interest and $0.1 million unamortized debt premium) and $19.7 million (including $4.2 million Accrued PIK Interest), respectively with Costa Brava. The Costa Brava Term loan and Costa Brava Line of Credit are pari passu with respect to the rights and preferences of the Harlingwood Notes (defined below).
Harlingwood Convertible Debt
In 2012, SPY North America entered into convertible note purchase agreements with Harlingwood under which SPY North America issued two promissory notes to Harlingwood in the principal amounts of $1.0 million and $0.5 million (“Harlingwood Notes”). Total outstanding borrowings under the Harlingwood Notes at December 31, 2014 and 2013 were $1.5 million (excluding Accrued PIK Interest of $0.2 million during the respective periods). During the year ended December 31, 2014, approximately $0.2 million of accrued interest was paid in cash. The Harlingwood Notes were amended in April 2014 to extend the maturity date from April 1, 2015 to December 31, 2016. This amendment was accounted for as a modification of debt in accordance with authoritative guidance. The Harlingwood Notes are subordinate to the amounts owed by SPY North America under the BFI Line of Credit, pursuant to the terms of a debt subordination agreement between Harlingwood and BFI. The Harlingwood Notes accrue interest at the rate of 12% per annum.
The $1.0 million promissory note requires a facility fee equal to the lesser of $10,000 or 1% of the average daily outstanding principal amount due under the Harlingwood Notes (without giving effect to the Accrued PIK Interest). Facility fees are due in advance on the respective anniversary date of the $1.0 million promissory note until maturity. The $0.5 million promissory note has a facility fee of $10,000. The Company paid $10,000 to Harlingwood in September 2014 and January 2014, respectively, related to facility fees on the Harlingwood Notes.
The principal amount due under the Harlingwood Notes (including Accrued PIK Interest) is convertible into shares of the Company’s common stock at $1.40 per share, subject to adjustment for stock splits or stock dividends. The Harlingwood Notes contain standard representations, warranties and reporting requirements that are customary for financings of this type, and cross default provisions with respect to the Costa Brava indebtedness. SPY North America was in compliance with all covenants under the Harlingwood Notes at December 31, 2014. The Harlingwood Notes are pari passu with the respect to the rights and preferences of the Costa Brava Term Note and Costa Brava Line of Credit. (See Note 13 “Related Party Transactions”).
Notes payable at December 31, 2014 consist of the following:
The Costa Brava Term Note includes the $6,000,000 of principal that they may convert at their discretion, of the principal amount (excluding unpaid interest which has been added to principal) of the Costa Brava Term Note into shares of the Company’s common stock at a conversion price of $2.00 per share.
Future minimum payments under all long-term debt agreements are as follows:
8. Stockholders’ Equity (Deficit)
Common Stock
During 2014 and 2013, an aggregate of 68,189 and 76,502 shares of common stock, respectively, were issued to individuals upon vesting of restricted stock awards. During 2014 and 2013, approximately 139,000 and 10,000 shares of common stock, respectively, were issued to individuals upon exercise of stock options.
Shares Reserved
The Company had 100,000,000 authorized shares of common stock at December 31, 2014. The table below outlines common shares reserved for future issuance:
9. Fair Value of Financial Instruments
The current FASB guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical instruments (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
●
Level 1 inputs use quoted prices in active markets for identical instruments.
●
Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar instruments in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
●
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related instrument.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
The Company’s financial instruments include cash, accounts receivable and payable, short-term borrowings, accrued liabilities, other short-term liabilities, capital leases, notes payable and related party notes payable. The carrying amount of these instruments approximates fair value because of their short-term nature. The carrying value of the Company’s long-term related party notes payable approximates fair value as of December 31, 2014 and 2013.
10. Share-Based Compensation
In December 2004, the Board of Directors of the Company adopted, and the stockholders of the Company approved, the 2014 Stock Incentive Plan, formerly the 2004 Stock Incentive Plan (the “Plan”). The Plan provides for the grant of incentive stock options to employees only, and restricted stock, stock units, nonqualified options or SARS to employees, consultants and outside directors. The Plan is administered by the Compensation Committee who determines the vesting period, exercise price and other details for each award. Following the Company’s 2014 annual meeting of stockholders on June 4. 2014, the Plan was amended and restated in order to extend the expiration date from December 7, 2014 to December 7, 2024 and to change the name of the Plan to reflect the extended term. In April 2007, in connection with a determination by the Board of Directors to reduce the annual cash compensation paid to the non-employee directors of the Company, the Board of Directors approved an amendment and restatement of the Plan that: (1) increased the number of shares of the Company’s common stock underlying the non-qualified stock options that are automatically granted to the Company’s non-employee directors upon their appointment to the Board of Directors and on an annual basis thereafter and (2) modified the vesting schedule for the automatic option grants made to non-employee directors upon their initial appointment to the Board of Directors. The amendment and restatement of the Plan was approved by the Company’s stockholders at the annual meeting held on June 12, 2007.
Stock Option Activity
Information regarding stock options outstanding as of December 31, 2014 is as follows:
Intrinsic value is defined as the difference between the relevant current market value of the Company’s common stock and the grant price for options with exercise prices less than the market values on such dates. During the years ended December 31, 2014 and 2013, there were 139,000 and 10,000 stock options exercised. The Company received cash proceeds of $116,000 and $7,000 related to the stock options exercised during the years ended December 31, 2014 and 2013, respectively. The intrinsic value of stock options exercised was approximately $41,000 and $6,000 during the years ended December 31, 2014 and 2013, respectively.
During the year ended December 31, 2014, the Company modified 125,000 options in connection with the resignation of a board of director. The modifications, which resulted in an extension of the term that the board member is allowed to exercise stock options, resulted in approximately $42,000 of incremental share-based compensation expense during the year ended December 31, 2014.
During the year ended December 31, 2013, the Company modified 276,667 options in connection with the resignation of two members of the board of directors and one officer. The modifications, which resulted in an extension of the term that the board members and officer are allowed to exercise stock options, resulted in approximately $152,000 of incremental share-based compensation expense during the year ended December 31, 2013, which excludes an offset of approximately $30,000 related to forfeited officer stock options.
Restricted Stock Award Activity
The Company periodically issues restricted stock awards to certain directors and key employees subject to certain vesting requirements based on future service. Fair value is calculated using the Black-Scholes option-pricing valuation model (single option approach). Although there was no restricted stock award activity during the year ended December 31, 2014, the Company did award and issue 68,189 fully vested, non-restricted shares at a $1.13 weighted-average grant date fair value, which resulted in approximately $77,000 of share-based compensation expense during year ended December 31, 2014. These shares were issued to certain members of the Company’s board of directors in lieu of cash payment for quarterly board fees. In addition, although there was no restricted stock award activity during the year ended December 31, 2013, the Company did award and issue 76,502 fully vested non-restricted shares at a $1.40 weighted-average grant date fair value, which resulted in approximately $107,000 of share-based compensation expense during year ended December 31, 2013.
Information regarding stock award activity is presented as follows:
The Company recognized the following share-based compensation expense during the years ended December 31, 2014 and 2013:
The Company does not expect to receive any tax benefit from the share-based compensation expense reflected above.
The following table summarizes the approximate unrecognized compensation cost for the share-based compensation awards and the weighted average remaining years over which the cost will be recognized:
Determining Fair Value of Stock Option Grants
Valuation and Amortization Method. The Company uses the Black-Scholes option-pricing valuation model (single option approach) to calculate the fair value of stock option grants. For options with graded vesting, the option grant is treated as a single award and compensation cost is recognized on a straight-line basis over the vesting period of the entire award.
Expected Term. The expected term of options granted represents the period of time that the option is expected to be outstanding. The Company estimates the expected term of the option grants based on historical exercise patterns that the Company believes to be representative of future behavior as well as other various factors.
Expected Volatility. The Company estimates its volatility using its historical share price performance over the expected life of the options, which management believes is materially indicative of expectations about expected future volatility.
Risk-Free Interest Rate. The Company uses risk-free interest rates in the Black-Scholes option valuation model that are based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options.
Dividend Rate. The Company has not paid dividends on its common stock and do not anticipate paying any cash dividends in the foreseeable future. Therefore, the Company uses an expected dividend yield of zero.
Forfeitures. FASB requires companies to estimate forfeitures at the time of grant and revise those estimates in subsequent reporting periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.
The weighted-average estimated fair value of employee stock options granted during the years ended December 31, 2014 and 2013 was $0.65 per share and $0.98 per share, respectively. The following weighted average assumptions were used to estimate the fair value of options granted to employees and directors during the years ended December 31, 2014 and 2013:
11. Income Taxes
Income tax expense attributed to income from operations consists of:
During 2013, the state income tax expense was recorded in general and administrative expense.
The components that comprise deferred tax assets and liabilities are as follows:
The reconciliation of computed “expected” income taxes to effective income tax expense by applying the federal statutory rate of 34% is as follows:
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical operating results and the uncertainty of the economic conditions, the Company has recorded a full valuation allowance of $23.9 million and $23.4 million for its worldwide operations at December 31, 2014 and 2013, respectively. The change in the valuation allowance for the years ended December 31, 2014 and 2013 was an increase of $0.5 million and $1.7 million, respectively. The Company has recorded a $21.7 million and $21.2 million valuation allowance for SPY North America at December 31, 2014 and 2013, respectively. The Company has recorded a $2.2 million and $2.2 million valuation allowance for SPY Europe at December 31, 2014 and 2013, respectively. For federal and California income tax purposes, capital losses may only offset capital gains, with any excess capital losses available for carry-back to the previous three tax years and carry-forward for a five year period. The company has not done an IRS section 382 study, and therefore its ability to utilize income tax loss carry forwards may be limited.
12. Employee Benefit Plans
In 1998, the Company adopted the Spy Optic Inc. 401(k) Plan (“401(k) Plan”). The 401(k) Plan covers all employees who meet the eligibility requirements of a minimum of 3 months of service and 18 years of age. The 401(k) Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. Under the provisions of the 401(k) Plan, eligible participants may contribute up to 15% of their annual compensation, not to exceed the maximum legal deferral. The Company is not required to contribute to the 401(k) Plan and made no contributions to the 401(k) Plan during the years ended December 31, 2014 or 2013.
13. Related Party Transactions
Promissory Notes with Shareholder, Costa Brava
See Note 7 “Long-Term Debt” to the Consolidated Financial Statements regarding promissory notes held by Costa Brava, an entity that owned, at December 31, 2014, approximately 47.3%, or 57.0% on an as converted basis, of the Company’s common stock. The Chairman of the Company’s Board of Directors, Mr. Seth Hamot, is the President and sole member of Roark, Rearden & Hamot, LLC which is the sole general partner of Costa Brava. As of December 31, 2014, Mr. Hamot owns approximately 48.7% or 58.1% on a converted basis, of the Company’s common stock.
As of December 31, 2014 and 2013, the Company has outstanding borrowings of $19.8 million (including $4.2 million Accrued PIK Interest and $0.1 unamortized debt premium) and $19.7 million (including $4.2 million Accrued PIK Interest), respectively with Costa Brava.
Convertible Notes with Shareholder, Harlingwood
See Note 7 “Long-Term Debt” to the Consolidated Financial Statements regarding $1.5 million in total promissory notes held by Harlingwood, an entity that owned, at December 31, 2014 approximately 5.3%, or 13.3% on an as converted basis, of the Company’s common stock. Mr. Fir Geenen, a member of the Company’s Board of Directors, manages Harlingwood.
The total outstanding borrowings under all promissory notes issued by the Company to Harlingwood at December 31, 2014 and December 31, 2013 was $1.7 million (including $0.2 million Accrued PIK Interest), respectively.
14. Commitments and Contingencies
Operating Leases
The Company’s corporate headquarters totals 32,551 square feet and is located in Carlsbad, California. Effective November 2010, the Company entered into an amended lease for this facility with average monthly rent payments of approximately $29,000 per month. In April 2013, the Company amended its lease to (i) extend the expiration date to December 31, 2019, and (ii) give the Company the right to terminate the lease commencing on April 1, 2015 with nine months notice. The monthly rent payments after 2014 will increase by 3% per year. Effective August 2014, the Company entered into a five-year lease agreement to rent approximately 1,200 square feet of office and retail space in Encinitas, CA. Monthly base rent is $5,700, subject to annual 3% increases.
The Company also leased approximately 6,500 square feet of a facility in Varese, Italy with monthly lease payments effective March 2013 of €1,500 per month. On March 10, 2014, the Company elected to terminate its lease in Italy, effective September 10, 2014. In addition, the Company leases an office space totaling approximately 400 square feet in Vancouver, Canada at a monthly rate of CAD 1,295 (approximately $1,161). The Company also leases certain computer equipment and vehicles.
Total rent expense was approximately $436,000 and $413,000 for the years ended December 31, 2014 and 2013, respectively.
Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows:
Capital Leases
Future minimum lease payments under capital leases at December 31, 2014 are as follows:
The cost of equipment under a capital lease at December 31, 2014 and 2013 was approximately $267,000 and $231,000, respectively. The amount of accumulated depreciation related to equipment under capital lease at December 31, 2014 and 2013 was approximately $227,000 and $156,000, respectively. Amortization of assets held under capital leases is included in depreciation expense.
Athlete Contracts
At December 31, 2014, the Company has entered into endorsement contracts with athletes to actively wear and endorse the Company’s products. These contracts are based on minimum annual payments totaling approximately $453,000, $319,000, and $7,000, in 2015, 2016, and 2017, respectively, and may include additional performance-based incentives and/or product-specific sales incentives. At December 31, 2014, the Company also had in-process endorsement contracts with athletes to actively wear and endorse the Company’s products with minimum annual payments totaling approximately $145,000.
Litigation
From time to time the Company may be party to lawsuits in the ordinary course of business. The Company is not currently a party to any material legal proceedings which it believes will have a material adverse impact on its financial position.
15. Concentrations
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company grants unsecured credit to substantially all of its customers. Management does not believe that it is exposed to any extraordinary credit risk as a result of this policy.
The Company maintains cash balances at various financial institutions primarily located in San Diego and in Italy. Accounts at the U.S. institutions are secured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to any significant credit risk with respect to its cash.
Customer
For the year ended December 31, 2014, the Company had sales to one third party customer that accounted for 10% or more of total net sales and none during the year ended December 31, 2013.
Supplier
During 2014 and 2013, the Company purchased the majority of its sunglass products from several manufacturers in China and one in Italy. During 2014 and 2013, the vast majority of the Company’s goggle products were manufactured by OGK in China. Additionally, the Company’s Happy Lens™ is currently supplied by two manufactures in France and China. The Company does not have long-term agreements with any of its manufacturers. The Company believes that other suppliers could provide plastic frames on comparable terms; however, a change in suppliers could result in a delay in manufacturing and a possible loss of sales, which would adversely affect operating results.
16. Operating Segments and Geographic Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance. The Company designs, produces and distributes sunglasses, snow and motocross goggles, prescription frames, along with branded apparel and accessories for the action sports, snow sports and lifestyle markets.
The Company markets its products in North America and internationally. Revenue is attributed to the location to which the product is shipped. Beginning on January 1, 2013, substantially all sales to international customers were made by SPY North America. During and prior to 2012, substantially all sales to international customers were made by SPY Europe. Identifiable assets are based on location of domicile:
17. Quarterly Financial Data (unaudited)
SPY Inc. and Subsidiaries
Schedule II-Valuation and Qualifying Accounts
For the Years Ended December 31, 2014 and 2013
Note: Additions to the allowance for doubtful accounts are charged to bad debt expense which is recorded in sales and marketing or general and administrative expense. Additions to the allowance for sales returns are charged against revenue. Additions to the allowance for inventory reserve are charged against cost of goods sold.
All other schedules have been omitted because they are either inapplicable or the required information has been provided in the Consolidated Financial Statements or the Notes thereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Control and Procedures
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2014, the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed is recorded, processed, summarized and reported within the time frames specified by the SEC’s rules and forms. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles, and that provide reasonable assurance that our receipts and expenditures are made in accordance with management authorization; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the controls will prevent or detect misstatements. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of December 31, 2014, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (or the “COSO” criteria). Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was effective as of December 31, 2014.
Changes In Internal Controls over Financial Reporting
No changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be set forth in our definitive proxy statement for our 2015 annual meeting of stockholders to be filed within 120 days after our fiscal year end and is incorporated in this report by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in our definitive proxy statement for our 2015 annual meeting of stockholders to be filed within 120 days after our fiscal year end and is incorporated in this report by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The information required by this item will be set forth in our definitive proxy statement for our 2015 annual meeting of stockholders to be filed within 120 days after our fiscal year end and is incorporated in this report by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in our definitive proxy statement for our 2015 annual meeting of stockholders to be filed within 120 days after our fiscal year end and is incorporated in this report by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in our definitive proxy statement for our 2015 annual meeting of stockholders to be filed within 120 days after our fiscal year end and is incorporated in this report by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report:
(1)
Financial Statements
Reference is made to the Index to Consolidated Financial Statements of SPY Inc., under Item 8 of Part II hereof.
(2)
Financial Statement Schedules
The following financial statement schedule of SPY Inc. is filed as part of this Form 10-K (under Item 8 of Part II hereof):
Schedule II - Valuation and Qualifying Accounts
All other financial statement schedules have been omitted because they are not applicable or not required or because the information is included elsewhere in the Consolidated Financial Statements or the Notes thereto.
(b) Exhibits
+
Management contract or compensatory plan or arrangement.
#
This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael Marckx and James McGinty, and each of them as his true and lawful attorney-in-fact, with full power of substitution, for each of them in any and all capacities, to sign any amendments to this annual report on Form 10-K and each amendment hereto and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Michael Marckx
Michael Marckx
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 5, 2015
/s/ James McGinty
James McGinty
Chief Financial Officer (Principal Financial and Accounting Officer)
March 5, 2015
/s/ Seth W. Hamot
Seth W. Hamot
Chairman of the Board of Directors
March 5, 2015
/s/ Gregory R. Andrews
Gregory R. Andrews
Director
March 5, 2015
/s/ J. David Chute
J. David Chute
Director
March 5, 2015
/s/ Fir Geenen
Fir Geenen
Director
March 5, 2015
/s/ David Mitchell
David Mitchell
Director
March 5, 2015
/s/ John Pound
John Pound
Director
March 5, 2015
/s/ Stephen Roseman
Stephen Roseman
Director
March 5, 2015
/s/ David Rane
David Rane
Director
March 5, 2015