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SPY Inc. Reports Financial Results for 2012

SPY Brand Products Achieved Annual Growth of 13% in 2012 Over 2011; 7th Consecutive Quarter of Year Over Year Growth of SPY Brand Products; Total Company Net Sales Reported as $35.6 Million

CARLSBAD, CA (March 20, 2013) SPY Inc.(OTCBB: XSPY) today announced financial results for the three months and year ended December 31, 2012.

Annual sales of our SPY® brand products were $35.1 million in 2012, an increase of 13% or $4.0 million, compared to $31.1 million in 2011. SPY® brand annual sales included lower closeout sales of $2.6 millionin 2012, compared to $3.0 million in 2011. Sales from our discontinued licensed brand products, which are no longer a focus of the Company, were $0.5 million in 2012, compared with licensed brand product sales of $2.2 million in 2011. Total Company net sales increased by 7% or $2.2 million, to $35.6 million for the year ended December 31, 2012, compared to $33.4 million for the year ended December 31, 2011.

Fourth quarter sales of our SPY® brand products were $8.1 million in 2012, an increase of 1% or $0.1 million over the fourth quarter of 2011. The fourth quarter SPY® brand sales included substantially lower closeout sales of $0.6 million in the fourth quarter of 2012 compared to $1.8 million in the fourth quarter of 2011, or a $1.2 million decrease due to our inventory reduction efforts in the fourth quarter of 2011. Our discontinued licensed brand products, which are no longer a focus of the Company, were less than $0.1 million in the fourth quarter of 2012 compared with licensed product sales of $0.5 million in fourth quarter of 2011. Total Company net sales decreased by 4% or $0.4 million, to $8.1 million in the fourth quarter of 2012, compared to $8.5 million in the fourth quarter of 2011, as a result of lower sales of the discontinued licensed brands in 2012 compared to 2011, and higher sales of SPY® brand close outs in late 2011 in connection with inventory reduction efforts.

With continued strong SPY® brand sales, and an annual growth of 13% for 2012 over 2011, we are happy to have achieved our 7th consecutive quarter of year over year growth of SPY® brand products. This is very encouraging for our efforts in 2013, as we have major initiatives lined up, the most important of which is our SPY® Happy Lens™ — the most innovative product SPY® has ever launched. These results also again suggest the strength of our renewed brand positioning and strategies, as also evidenced by increased market share driven by our unique new product collections,” said Michael Marckx, President and CEO.

We are also pleased that our efforts have really paid off with improved gross margins compared to the fourth quarter and annual results of last year. Our top line results were achieved despite significantly lower operating expenses, which in the fourth quarter of 2012 were 29% lower than the fourth quarter of 2011 and sequentially 25% better than the third quarter of 2012. These factors together with our strong annual growth, nicely improved margins, and substantially lower spending, are the hallmarks of a strengthening brand.

Our annual loss from operations was $5.0 million in 2012 compared to $9.4 million in 2011, or a 47% improvement. Our loss from operations was $0.6 million in the fourth quarter of 2012 compared to $3.0 million in the fourth quarter of 2011, or an improvement of $2.4 million.

The improvement in our annual loss from operations in 2012 compared to 2011 was due to increased gross margins as a percent of sales on higher sales volumes and significantly reduced operating expenses. The significant improvement in the loss from operations in the fourth quarter of 2012 compared to the fourth quarter 2011 was due to increased gross margins as a percent of sales related to a reduction in lower margin closeout sales and reduced licensed brand sales due to being discontinued and selling a more favorable product mix in 2012, and substantially reduced operating expenses.

We incurred an annual net loss of $7.2 million in 2012 compared to a net loss of $10.9 million in 2011. We incurred a net loss of $1.2 million in the fourth quarter of 2012 compared to a net loss of $3.4 million in the fourth quarter of 2011. The primary difference between the net loss and loss from operations was due to interest expense on long-term debt due to Costa Brava Partnership III, LP, our largest shareholder, which beginning in 2012 is “paid in kind” by being added to the outstanding principal balance rather than being paid in cash.

In December 2012, we borrowed an additional $0.5 million of convertible debt from Harlingwood (Alpha), LLC. Harlingwood is a significant shareholder of the Company’s common stock.

The results of our operations for the years ended December 31, 2012 and 2011 are more fully discussed in our Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 20, 2013.

About SPY Inc.
We design, market and distribute premium products for people who are happy to be outside, especially youthful people who love action sports, motorsports, snow sports, cycling and multi-sports markets. Our products embrace their attendant lifestyle subcultures, crossing over into more mainstream fashion, music and entertainment markets. We believe a primary strength is our ability to create distinctive products for young-minded, active people with a very different and irreverent point of view. Our core products — sunglasses, goggles and prescription frames — are marketed under the SPY® brand.

During 2011 and 2010, we also designed, manufactured and sold eyewear under the O’Neill®, Melodies by MJB® and Margaritaville® brands and in 2011, we decided to cease any new purchase orders of additional inventory for these licensed eyewear brands, and subsequently discontinued these brands, and therefore will have no sales of these licensed brands in the future.