BAGR.L Regulatory News (BAGR)

26 September 2019

Bagir Group Ltd.

("Bagir", the "Group" or the "Company")

Interim Results

for the six months ended 30 June 2019

Bagir (AIM: BAGR), a designer, creator and provider of innovative tailoring is pleased to announce its results for the six months ended 30 June 2019.

H1 Trading Highlights

·; Steady trading period reflected in a 32% increase in revenues to $32.8m (H1 2018 $24.8m) driven by increased sale orders from existing customers and sales to 19 September 2019 were $46.0m with an order backlog of $20.1m

·; Improvement in adjusted EBITDA* to $1.0m (H1 2018: loss of $1.7m) and gross margin of 11.9% (2018: H1 6.7%)

·; General and administrative expenses decreased to $1.1m in H1 2019 (H1 2018: $1.5m)

·; Reduced loss before tax of $1.05m (H1 2018: loss before tax of $3.6m)

·; Cash and cash equivalents of $1.6m as at 30 June 2019

·; On 19 June 2019, a new unconditional completion date, of 31 March 2020, was announced for Shandong Ruyi to make the remaining cash payment of $13.2m and complete the proposed transaction

·; Appointment of Micha Ronen as CEO, well known to the business having previously held the roles of CFO and Deputy CEO of the Group

·; Operational focus on providing innovative products to major apparel clients in the US and the UK alongside expanding the Group's uniform division

* The adjusted 'EBITDA' is a non-IFRS measure that the Company uses to measure its performance. It is defined as Earnings Before Interest, Taxation, Depreciation and Amortisation and non-cash share-based compensation and excluding company share is losses\gains of affiliated companies. In June 2019 the Adjusted EBITDA figure, excluding $0.01m other expenses (in June 2018 the Adjusted EBITDA figure, excludes $0.2M other expenses attributed to restructuring activities, and $1m one-off capital gain attributable to the acquisition in Ethiopia, net of other expenses).

Outlook

·; In addition to the cost reductions achieved in 2018, targeting further cost savings from the operational base during H2 2019 of approximately $0.8 m per annum

·; Commenced trial in Vietnam for a large Shandong Ruyi retail client with the potential to result in a significant suit order for 2020 and beyond

·; Company on track to generate revenues in 2019 of around $59m (2018: $56.4m)

Micha Ronen, CEO of Bagir, said:

"Despite the challenging retail and political backdrop, Bagir has succeeded in delivering improvements in all operational parameters. We expect the market to continue to be challenging and we are in the process of taking all necessary steps to adjust our organization to the market conditions and to better leverage our advantages in the market.

We have agreed a new date for completion of the transaction with Shandong Ruyi and we are collaborating together to support potentially one of their clients with a large production order from Vietnam. At the same time we are focused on developing the Group on a standalone basis, operationally we see greater opportunities to exploit our innovative product ranges and to expand further into the tailored uniform market alongside the Group's core business of manufacturing tailored garments to major apparel clients in the US and UK."

For further information, please contact:

For more information about Bagir, please visit the Company's website: http://www.bagir.com

Chairman's statement

Introduction

I am pleased to report a steady trading performance for the first six months of the year. Demand for the Group's tailored products increased significantly, reflected in the 32% rise in revenues for the period. This, together with an improvement in gross margin to 11.9%, led to the Group recording a positive adjusted EBITDA performance of $1.0m. There were, however, operational delays and increased production costs which held the business back and are key areas of focus for our management team under new CEO Micha Ronen who is also setting out a new strategy for taking the business forward.

Micha Ronen is well known to the Company and has already been instrumental in invigorating the marketing team and re-focusing the business on specific market opportunities.

On 19 June 2019, a new unconditional completion date, of 31 March 2020, was announced for Shandong Ruyi to make the remaining cash payment of $13.2m and complete the proposed transaction.

The Company has made use of the opportunity offered by Shandong Ruyi to acquire 335,000 meters of wool and wool blend fabrics worth $3.0m with payment not due until 30 March 2020 thereby creating an excellent commercial opportunity.

In the announcement made on 19 June 2019, the Company confirmed that Shandong Ruyi had committed to deliver the manufacturing equipment to the Company's Ethiopian manufacturing site by the end of September 2019. As at the date of this report, the manufacturing equipment has not yet been shipped to the Company's Ethiopian manufacturing site, and there is real concern that the manufacturing equipment will not be delivered by the above stated date. The Company continues to have conversations with senior management at Shandong Ruyi, however a new date for the delivery of the machinery has not been agreed. The Company will provide further updates on the discussions as and when there is more clarity on a delivery date.

Financial review

Revenue for the six months ended 30 June 2019 increased to $32.8m (H1 2018: $24.8m) and sales continued strongly post period end with revenue to 19 September 2019 of $46.0m supported by an order backlog of $20.1m and with another month during which the Company can secure orders for completion in the current year.

The gross margin for the six months ended 30 June 2019 was 11.8%, compared with 6.7% for the first half of 2018. Largely as a result of the cost reduction program the Company completed in 2018. The Company made an operating gain of $0.2m (H1 2018: loss of $2.7m) and had positive cash flows from operating activities of $0.3m (H1 2018: negative cash flow of $6.7m).

As a result of the corresponding improvement in revenues and lower costs detailed above, adjusted EBITDA for the first half of 2019 was $1.0m profit compared with a $1.7m loss in H1 2018.

General and administrative expenses have decreased to $1.1m in H1 2019 (H1 2018: $1.5m), reflecting the lower operating cost base following the cost reduction plan implemented in 2018.

In addition, the Company is targeting further fixed cost savings of $0.8m per annum which have already started and are planned to be completed by the end of 2019.

Cash and cash equivalents at 30 June 2019 amounted to $1.6m, (31 December 2018 $3.1m).

Trade payables include $1.5m for fabric purchased from Shandong Ruyi which is payable on 31 March 2020 (as at 25 September $3.0m).

Strategic Vision

Under Micha Ronen the Company is evolving its strategic vision for 2020 and beyond and we look forward to providing more detail in the Group's full year results announcement.

Our objective is to deliver consistently high quality, innovatively tailored apparel, efficiently and cost effectively to our global customer base. Since the outset the Company has built its reputation on innovation across all areas of tailored garment development and this continues to be true today. Reflecting the activities of modern life, garments created by Bagir incorporate fresh new styles and fabrics which transform the feel, weight and look of clothes. The Company's core customer focus is on the tailored garment market with a growing business in manufacturing uniforms for large corporates, an area which it believes there is significant potential to expand. While the retail market continues to be competitive and challenging, there is undoubted demand for our range of innovative apparel.

Over the last three years the Group has worked effectively to focus on three core manufacturing geographies in Vietnam, Egypt and Ethiopia. These three manufacturing facilities, in particular Ethiopia, over the medium-longer term, give the Group a competitive advantage in the production of textiles for export to the EU and US. This competitive advantage is centered on the facilities benefiting from duty free status for sales into the EU and US (except from Vietnam), highly competitive production costs and local government support for the textile industry.

The current geopolitical environment has meant garment manufacturing in China is looking to move production outside the domestic market in order to avoid potential US sanctions. As a result, there has been a significant rise in interest from China in our Vietnamese based production creating an opportunity for Bagir and the Company is progressing a range of potential manufacturing contracts from China.

Currently the Company is collaborating with Shandong Ruyi over a potential production contract out of Vietnam for one of their retail clients.

Operational Review

Operationally, the Group continues to focus on reducing costs where practical and is planning to make further reductions to the operational cost base during H2 2019. Our Ethiopian manufacturing site is producing 3,500 trousers per day and is on track to increase output to 4,000 trousers per day by the end of 2019. The Company has increased its focus on its wholly owned manufacturing site in Egypt as well as increasing production capacity in Vietnam.

On 19 June 2019, the Company announced that it had agreed to a further extension of the unconditional completion date, for Shandong Ruyi's proposed $16.5 million investment to acquire a 53.7% shareholding in Bagir, to 31 March 2020. The Company has no reason to believe that this intention has changed.

Outlook

The management team has a renewed focus under incoming CEO Micha Ronen and has a good pipeline of customer opportunities to further improve the Group's operational performance in 2020.

Tessa Laws

Chairman

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND

OTHER COMPREHENSIVE INCOME

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

*) Less than $1 thousands.

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATMENTS

NOTE 1:- GENERAL

a. Company description:

Bagir Group Ltd. ("the Company") is registered in Israel. The Company and its subsidiaries ("the Group") specialize in the manufacturing and marketing of men's and women's tailored fashion. The Company's Headquarter is located in Kiryat Gat, Israel. The Group's products are manufactured by subsidiaries in Egypt and Ethiopia and subcontractors. The Group's products are marketed in U.S, Europe (mainly in the UK) and in other countries. As for additional details, see Note 3.

b. The interim condensed consolidated financial statements for the six months ended 30 June 2019 were approved for issue in accordance with a resolution of the Board of Directors on 25 September 2019.  

c. Micha Ronen was appointed the new CEO of the Company as of 26 June 2019.

d. In the six months ended 30 June 2019, the Group continued to incur losses and recorded a net loss of $ 1.1 million. In order to address the above circumstances, the Group has undertaken a rationalization of its operations, focussing on fewer production sites and a reduction in the Group's operational cost base.

The Board of Directors has considered the principal risks and uncertainties of the business, the trading forecasts prepared by management (including the projected effects of the remedial actions described above) covering a twelve-month period following the approval of the interim consolidated financial statements and the resources available to meet the Group's obligations for the aforementioned period. After taking all of the above factors into consideration, the Group believes it has sufficient liquidity based on the cash and cash equivalents as of 30 June 2019, and the expected cash to be generated from operations to meet its financial obligations as they fall due for at least the twelve months following the date of approval of the interim consolidated financial statements. Accordingly, the Board of Directors has concluded that it is appropriate to apply the going concern basis of accounting in preparing the interim consolidated financial statements.

e. In November 2017, the Company signed a strategic Share Purchase Agreement with a global textile manufacturer, Shandong Ruyi Technology Group Co,Ltd (the Investor). According to the agreement, the Investor has committed to make an investment of $16.5 million in the Company in consideration for the issuance by the Company of 359,560,310 Ordinary shares that will represent 54% (fully diluted- 51%) of the Company's enlarged issued share capital. The price per Ordinary share is approximately 3.5 pence per share.

The transaction was subject to, among others, the approval of the Company's shareholders and to the completion of various Chinese foreign exchange and other regulatory requirements by the date of closing.

Pursuant to the agreement, in January 2018 the Company received from the Investor a down payment of $1.65 million, which according to the purchase agreement is non-refundable in the event that the Investor fails to secure Chinese regulatory consent. In July 2018 the Company received an additional down payment of $1.65 million which Group management has determined based, among others, on the opinion of its attorneys, that this down payment is also non-refundable in the event that the Investor fails to secure regulatory consent. The down payments in the aggregate amount of $ 3.3 million have been recorded in equity (net of expenses of $ 0.2 million) as receipts on account of shares.

NOTE 1:- GENERAL (Cont.)

On 3 September 2018, after receiving the required information from the Investor for publication of a circular to the Company's shareholders and to convene an Extraordinary General Meeting for the approval of the transaction, the Company published the circular to its shareholders. An Extraordinary General Meeting was held on 9 October 2018 in which the shareholders approved the transaction.

The Investor informed the Company that additional time is necessary to receive Chinese Government approval for the investment in the Company. As a consequence, the Company agreed a new unconditional completion date for the transaction of 30 May 2019 by which time the Investor was required to pay the remaining cash balance of $ 13.2 million. All other conditions relating to the transaction had been completed by the Company.

During the reporting period, the Company has agreed to a further extension of the unconditional completion date to 31 March 2020.

Following discussions with senior management from both companies, the Board of the Company has been persuaded of the Investor's intention to complete the transaction and commitment to provide valuable operational support to the Company on the run up to the extended completion date and as previously agreed.

The Investor committed to provide suit jacket manufacturing equipment, with an estimated market value of approximately $1.3 million, for exclusive and indefinite use in Bagir's Ethiopian manufacturing facility, free of landed costs, for nil consideration. The Investor has reconfirmed its commitment to deliver this manufacturing equipment to the Company's Ethiopian manufacturing site by the end of September 2019.

The Investor also granted an extension of its usual credit payment terms on the acquisition of up to 500,000 meters of wool and wool blend fabrics at market value, of which the Company has purchased 335,066 meters with a value of $3.0 million as of the date of the approval of the interim consolidated financial statements (as of 30 June 2019 in the amount of $1.5 million which is included in the trade payable balance). The extension of the credit payment terms was previously until 30 June 2019, which the Investor has now extended until the new completion date of 31 March 2020. This will enable the Company to acquire the remaining 165,000 meters of wool and wool blend fabrics on advantageous credit terms.

The extension of the unconditional completion date to 31 March 2020 is conditional on the Investor providing to the Company all fabrics and the manufacturing equipment by the end of September 2019.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation of the interim consolidated financial statements:

The interim condensed consolidated financial statements for the six months ended 30 June 2019 have been prepared in accordance with IAS 34, Interim Financial Reporting, as adopted by the European Union. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual consolidated financial statements as at 31 December 2018.

The accounting policies applied in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's consolidated annual financial statements for the year ended 31 December 2018.

NOTE 3:- ADDITIONAL INFORMATION ON OPERATIONS

Revenues by geographical area:

NOTE 4:- EVENTS IN THE REPORTING PERIOD

In the reporting period a legal dispute has arisen between the local authorities and a subsidiary in Ethiopia over 21,126 square meters of the 48,584 square meters of the land that is designated for the development of additional manufacturing at the subsidiary's manufacturing site. The local authorities argue that 21,126 square meters of the land has not been used for development as expected. The carrying amount of the land in the property, plant and equipment account is $1.6 million and related deferred taxes liability in the amount of $ 0.2. The subsidiary is conducting discussions with the local authorities and, although the final outcome cannot be predicted with certainty, it is presently believed that the dispute can be resolved favorably.

NOTE 5:- OTHER INFORMATION

As of 30 June 2019, the Company performed an indicative update of the fair value of the Group cash generating unit (CGU) conducted on 31 December 2018 (see Note 14c in the annual consolidated financial statements). The valuation implemented Market approach and Income approach methods. The valuation reflects assumptions that market participants would consider when assessing fair value including the assumptions about the various financing options available to the Company and related risks. The updated recoverable amount calculated exceeds the CGU carrying amount as of 30 June 2019. The calculation is subject to a high degree of sensitivity to changes in assumptions as to financing risks.

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