SPY Inc. Reports Financial Results for the Quarter Ended March 31, 2013

CARLSBAD, CA--(Marketwired - May 14, 2013) - SPY Inc. (OTCBB: XSPY) today announced financial results for the three months ended March 31, 2013.

First quarter sales of SPY^® brand products were $9.0 million in 2013, an increase of 14% or $1.1 million greater than the first quarter of 2012. Total Company net sales increased by 11% or $0.9 million, to $9.0 million in the first quarter of 2013, compared to $8.1 million in the first quarter of 2012. The difference between our SPY^® brand sales and total Company sales in 2012 was due to our discontinued licensed brand products, which will have no sales in the future. Discontinued licensed brand sales were less than $50,000 in the first quarter of 2013, compared with sales of $0.3 million in the first quarter of 2012.

"We are especially happy to have achieved our 8th consecutive quarter of year over year growth of SPY^® brand products with our strong SPY^® brand sales growth of 14% for the first quarter of 2013 over the first quarter of 2012," said Michael Marckx, President and CEO. "This is very encouraging for our efforts during the remainder of 2013, as our most important product, the SPY^® Happy Lens™, which is the most innovative product SPY^® has ever launched, was a significant part of our first quarter success. Moving forward, our Happy Lens Collection is expanding to include a growing list of new styles and will be featured in our Rx and Performance Collections, which will further leverage this innovation in new ways. On top of our successful Happy Lens launch, we are even more enthralled with the combination of things we accomplished this quarter: solid sales growth, improved gross margins, lower operating expenses, positive cash flow from operations and a break even income from operations. We believe this solid first quarter of the year helps to position us well for the balance of 2013."

Income from operations improved by $2.2 million to $29,000 in the first quarter of 2013, compared to a loss from operations of $2.2 million in the first quarter of 2012. The $2.2 million improvement was partially due to the increase in sales combined with a 450 basis point improvement in gross profit as a percent of sales, which generated $0.8 million in additional gross profit contribution. Additionally, total operating expenses in the first quarter of 2013 were lower by $1.4 million, compared to the first quarter of 2012, primarily a result of the restructure actions taken in the third quarter of 2012. Cash flow generated by operating activities was $1.5 million in the first quarter of 2013, compared to negative $0.4 million in the first quarter of 2012, or an improvement of more than $1.9 million.

The net loss improved by $1.9 million to $0.7 million in the first quarter of 2013, compared to a net loss of $2.6 million in the first quarter of 2012, primarily due to the reduction in our loss from operations to become breakeven, partially offset by higher interest expense due to the increased level of indebtedness. Interest expense included in the net losses is primarily "paid in kind" by being added to the outstanding principal balance rather than being paid in cash.

In May 2013, we amended our subordinated long-term debt arrangements, which in aggregate totaled $19.6 million at March 31, 2013. These long-term debt arrangements are due to Costa Brava III, LLP ($18.0 million) and Harlingwood (Alpha) LLC ($1.6 million), entities that as of March 31, 2013 owned approximately 48.3% and 5.4% of our common stock, respectively. The fundamental amendments were: (i) to extend the maturity date of each of these debt arrangements from April 1, 2014 to April 1, 2015, and (ii) the line of credit commitment (excluding paid in kind interest being added to the principal rather than paid in cash) from Costa Brava was reduced from $10.0 million to $9.0 million.

The results of our operations for the quarters ended March 31, 2013 and 2012 are more fully discussed in our Form 10-Q for the quarter ended March 31, 2013, filed with the Securities and Exchange Commission on May 14, 2013.

SPY Inc.:

We have a HAPPY disrespect for the usual way of looking (at life). This mindset helps drive us to design, market and distribute premium products for people who "live" to be outdoors, doing intense action sports, motorsports, snow sports, cycling and multi-sports -- the things that make them HAPPY. We actively support the lifestyle subcultures that surround these pursuits, and as a result our products serve the broader fashion, music and entertainment markets of the youth culture. Our reason for being is to create the unusual, and this is what helps us deliver distinctive products to people who are active, fun and a bit irreverent, like us. It's what makes us HAPPY, and our customers, too. Our principal products -- sunglasses, goggles and prescription frames -- are happily marketed with fun and creativity under the SPY^® brand. More information about SPY may be obtained from: www.spyoptic.com, www.facebook.com/spyoptic, Twitter @spyoptic and Instagram @spyoptic.

Safe Harbor Statement:

This press release contains forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. These statements relate to future events or future financial performance and are subject to inherent risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "feel," "estimate," "predict," "hope," the negative of such terms, expressions of optimism or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Factors that could cause actual results to differ from those contained in our forward-looking statements include, but are not limited to: (i) lack of continuity of our management team, (ii) our ability to generate sufficient incremental sales of our core SPY^® brand and new SPY^® brand products to recoup our significant investments in sales, marketing and product development, (iii) our ability to continue to manage and operate our business at lower expense levels or otherwise reduce our breakeven point on an operating basis or to continue to generate income from operations, (iv) our ability to improve or maintain the levels of working capital necessary to operate the business, (v) our ability to maintain the availability of our existing credit facilities, satisfy our obligations when they become due, and otherwise finance our strategic objectives, and (vi) the other risks identified from time to time in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and other reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.

SPY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands, except number of shares and per share amounts)
					March 31,				December 31,
					2013				2012
					(Unaudited)
Assets
Current assets
	Cash				$	1,421			$	818
	Accounts receivable, net					5,007				5,611
	Inventories, net					5,906				6,274
	Prepaid expenses and other current assets					847				770
	Income taxes receivable					15				16
		Total current assets				13,196				13,489
Property and equipment, net						529				446
Intangible assets, net of accumulated amortization of $741 and $727 at March 31, 2013 and December 31, 2012, respectively						114				127
Other long-term assets						41				85
		Total assets			$	13,880			$	14,147
Liabilities and Stockholders' Deficit
Current liabilities
	Lines of credit				$	3,718			$	4,591
	Current portion of capital leases					79				49
	Current portion of notes payable					15				15
	Accounts payable					1,874				1,459
	Accrued expenses and other liabilities					2,696				2,604
		Total current liabilities				8,382				8,718
Capital leases, noncurrent						151				102
Notes payable, less current portion						28				32
Notes payable to stockholders						19,648				19,078
	Total liabilities					28,209				27,930
Stockholders' deficit
	Preferred stock: par value $0.0001; 5,000,000 authorized; none issued					-				-
	Common stock: par value $0.0001; 100,000,000 shares authorized; 13,115,540 and 13,098,374 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively					1				1
	Additional paid-in capital					44,595				44,403
	Accumulated other comprehensive income					476				494
	Accumulated deficit					(59,401	)			(58,681	)
			Total stockholders' deficit			(14,329	)			(13,783	)
			Total liabilities and stockholders' deficit		$	13,880			$	14,147

SPY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Thousands, except per share amounts)
				Three Months Ended March 31,
				2013				2012
				(Unaudited)
Net sales				$	9,008			$	8,145
Cost of sales					4,407				4,354
	Gross profit				4,601				3,791
Operating expenses:
	Sales and marketing				2,854				3,629
	General and administrative				1,447				1,996
	Shipping and warehousing				169				188
	Research and development				102				137
		Total operating expenses			4,572				5,950
	Income (Loss) from operations				29				(2,159	)
Other income (expense):
	Interest expense				(732	)			(505	)
	Foreign currency transaction gain (loss)				(18	)			56
		Total other expense			(750	)			(449	)
	Loss before provision for income taxes				(721	)			(2,608	)
Income tax provision					-				-
Net loss				$	(721	)		$	(2,608	)
Net loss per share of Common Stock
		Basic		$	(0.05	)		$	(0.20	)
		Diluted		$	(0.05	)		$	(0.20	)
Shares used in computing net loss per share of Common Stock
		Basic			13,115				13,007
		Diluted			13,115				13,007
Other comprehensive income (loss)
	Foreign currency translation adjustment			$	177			$	(164	)
	Unrealized gain on foreign currency exposure of net investment in foreign operations				(194	)			194
		Total other comprehensive income (loss)			(17	)			30
Comprehensive loss				$	(738	)		$	(2,578	)