TMCnet News

BANJO & MATILDA, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 14, 2014]

BANJO & MATILDA, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our financial condition and results of operations should be read in conjunction with the audited and unaudited financial statements and the notes to those statements included elsewhere in this Report. This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this Report that could cause actual results to differ materially from those anticipated in these forward-looking statements.



Company background Founded in 2008 by Sydney designer Belynda Macpherson and her husband, Brendan Macpherson, Banjo & Matilda designs, manufactures, sells and distributes premium contemporary knitwear.

Because of the brand's fresh designs, premium quality and irreverent Australian brand heritage, it has gained a loyal following by customers, the media, celebrities and retail partners alike.


Since 2008 the Company's products have been sold through its e-commerce retail store into 16 countries and growing, and a physical retail store location in Sydney, Australia as well as temporary "pop up" concept stores. In addition, products are distributed through wholesale to key retail accounts in Australia, North America, Canada, United Kingdom, the Middle East and Europe.

The brand has experienced strong and consistent year-on-year revenue growth.

Growth opportunity The brand currently exclusively targets the premium contemporary knitwear category. Knitwear represents a significant share of total global apparel sales and more importantly is a staple item in our target customer's wardrobe. There are very few contemporary knitwear only brands. By focusing on this market exclusively, at least initially, we achieved a large global sales opportunity.

However, the broader opportunity to create an Australian origin aspirational lifestyle brand based on the Australian "relaxed luxury" ethos with a full offering of apparel and lifestyle accessories, represents a significant value creation opportunity. As an example according to JP Morgan's December 17 2013 research report on Vince (VNCE), it generated nearly $300M in sales in fiscal 2013. Sweater sales account for over 85% of Banjo & Matilda's sales and only 26% of Vince sales. Lifestyle apparel brands that have started similarly to Banjo & Matilda such a Vince (NYSE VNCE - which has over 2,100 retail outlet "doors"), Zadig & Voltaire, James Perse, Ralph Lauren and many others have market values (private and public) in many cases greater than $1B. There is a well-worn path to growing a successful and valuable fashion & lifestyle brand and Banjo & Matilda exhibits the core elements to achieving this. The combination of retailer adoption and wholesale outlet growth (currently at 203 doors), increasing product lines, supported by a strong e-commerce strategy and careful retail expansion program are key elements of each of the aforementioned companies and are inline with Banjo & Matilda's current growth plan.

Wholesale sales The company commenced a wholesale sales program in 2012 and is expanding its international wholesale program in the Northern Hemisphere, particularly the North American market. Through these efforts we achieved significant traction and retailer adoption. The brand is now stocked in the world's leading retailers including: Neiman Marcus, Net-a-porter, Intermix, ShopBop, Piperline, Anthropologie, Harvey Nichols and many more. We are now stocked in over 203 retail outlets "doors" as at September 2014, up from 18 doors as at December 2013. We consider this growth in doors an excellent result, one reserved for brands that have a point of difference in the market. Further, comparable brands in terms of growth paths are now in many thousands of doors (Vince 2,000+, Ralph Lauren 10,000+). The company recently appointed a leading US sales agent to assist in bringing in more accounts which will help us secure and manage the leading independent retailer wholesale accounts which account for roughly 40% of the US market as well as additional major retail chains.

The company sees expansion of its wholesale account base of premium retail partners as an effective way to build its brand and ultimately also build sales through its higher margin / value online e-commerce retail channels.

Online/ e-commerce retail In line with the increased brand exposure gained by wholesale account expansion, it is expected the Company's online retail sales will continue to increase. Further, additional resources are being allocated to online marketing and e-commerce development to drive meaningful growth through this channel. Banjo & Matilda sold its products exclusively through its own web site from 2008 to 2011 prior to opening its first retail store and commencing a wholesale sales program. For several reasons, Banjo & Matilda's products are uniquely suited to online retail including: less issues with "fit" being predominantly knitwear & sweaters, and as a result experiences lower return rates which improves overall e-commerce economics, average price point is in the e-commerce "sweet spot" of $200-$400 unit, and, sweaters are less seasonal and more of an investment staple item which lowers barriers to purchase.

16 -- Product diversification At present the Company is exclusively focused on woman's premium contemporary knitwear. Over time the company plans to develop a more rounded lifestyle product offering including ready to wear knitted/cashmere and supplementary styles, blouses, tops, outerwear, accessories, men's, and eventually children's.

This will expand the brands product line which will: · Increase the floor space the Company's retail partners will commit to the brand, which in turn will increase the "buy" from each retail partner.

· Increase the brand's appeal to a wider audience, acquiring additional customers to the brand both through the Company's wholesale and retail channels.

· Increase the opportunity for existing customers to spend more with the Company.

Retail stores Once the Company has firmly established the brand in approximately 400 or more retail outlets, rounded its product offering and secured suitable funding, we expect to initiate a strategic retail store roll out program.

Other initiatives Brand development We will continue to enhance and sharpen our brand positioning and offerings. We are forming a creative & branding advisory panel with several leading industry veterans to assist us to continue building a highly differentiated and aspirational brand and product offering. We currently employ publicists in key markets, as well as invest in social media, online advertising and marketing and publicity events such as project "The Sweater Exchange", which all drive reach and improve definition of the brand.

Margin expansion We will continue to focus on increasing margins by driving manufacturing savings, developing products with higher margins, and increasing sales volume through the higher margin retail online sales channel.

Operations & Logistics To support the past growth and predicted future growth we have implemented and plan to continue to implement key operational programs. In 2014 we established an international distribution center "DC" in Hong Kong, established a dedicated office in Hong Kong with its own personnel to manage our production, implemented key trading terms with its factories including significant penalties for late or incorrect deliveries and hired additional operations personnel, as well as secured a comprehensive trade finance facility to help meet our production funding demands. Through the remainder of 2014 and 2015 we will establish a North American DC to support logistics in the USA, implement an ERP (Enterprise Resource Planning) system to streamline the supply chain from design, sales, production, distribution and finance. We are also seeking to hire a CFO/COO, and hire additional operations personnel based in North America including a dedicated logistics management team.

Financial Results The following discussion of the results of operations constitutes management's review of the factors that affected our financial and operating performance for the fiscal years ended June 30, 2014 and June 30, 2013. This discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report. We have a June 30 fiscal year end.

The accounts of Banjo & Matilda are maintained, and its consolidated financial statements are expressed, in Australian dollars. Such financial statements were translated into United States Dollars with the Australian Dollar as the functional currency to prepare the consolidated financial statements included in this Report. All assets and liabilities were translated at the exchange rate at the balance sheet date, stockholder's equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations. The resulting translation adjustments are reported under other comprehensive income as a component of shareholders' equity.

17 -- Annual Dollar Percentage Increase Increase June 30, 2014 June 30, 2013 (Decrease) (Decrease) Revenue $ 2,264,264 $ 1,724,181 $ 540,083 31 % Cost of sales 1,364,370 977,086 387,284 40 % Gross profit 899,894 747,095 152,799 20 % Payroll and employee related expenses 526,376 240,450 285,926 119 % Operating expense 107,136 41,655 65,481 157 % Marketing expense 304,802 88,826 215,976 243 % Occupancy expenses 54,375 47,518 6,857 14 % Corporate and public company 256,568 153,767 102,801 67 % Depreciation and amortization expense 13,014 8,821 4,193 48 % 1,262,271 581,037 681,234 117 % (Loss) income from operations (362,377 ) 166,058 (528,435 ) -318 % Other Income (Expense) Other income - 52,586 (52,586 ) -100 % Finance costs (264,365 ) (196,892 ) (67,473 ) 34 % Total Other Expense (264,365 ) (144,306 ) (120,059 ) 83 % Net (loss) income $ (626,742 ) $ 21,752 $ (648,494 ) -2,981 % 2014 Highlights · Retail Outlets ("Doors") increased 617% to 129 as of June 30, 2014 from 18 at the end of the December 2013 quarter as key premium department and specialty retailers adopted the brand. As at September 30 the number of Doors increased further to 203.

· Total Revenue increased 31% to $2,264,264.

· Both Online and Store retail sales grew sharply recording a 61% growth in online sales and 65% growth in retail sales.

· Gross Margin remained stable at 41%.

· Losses from operations increased primarily because personnel and marketing expenses grew faster than sales as we hired personnel necessary for future growth, we invested in increased marketing of the brand and e-commerce channel, and the added expenses of being a public company.

Revenue: Revenue continued to increase significantly during the year ending June 30, 2014 ("Fiscal 2014") as new wholesale accounts were added and previously secured wholesale accounts impacted revenue. Online and retail sales increased as brand awareness, web site(s) visitors and repeat customer transactions grew.

Revenue increased 31% from $1,724,181 in the year ending June 30, 2013 ("Fiscal 2013") to $2,264,264 in Fiscal 2014.

Wholesale sales increased 16% over the prior year in-line with the increased number of retailers stocking our products. Wholesale retail outlets "Doors" increased from 18 at the end of June 2013 to 126 at the end of June 2014. Most of the growth occurred in the fourth quarter of Fiscal 2014 as the impact of new retail accounts came online during the quarter. We expect to see this trend continue as retail outlet doors increased to 203 at the end of September 2014. Wholesale sales equaled 59% of total sales compared to 66% on the prior year, a decrease of 7%. This percentage decrease is due to our focus on expanding e-commerce online and retail sales.

Retail sales increased 65% over the prior year predominantly as a result of significant same store sale growth of the existing flagship Sydney, Australia store. This is in part due to higher stock levels and availability, more styles and products and continuing growth in brand awareness and repeat customers.

Retail sales were 12% of total sales compared to 9% in the prior year.

Online sales through our e-commerce websites increased 61%, in line with the growth of the brand and the availability and awareness of the brand through additional retail outlets. This has contributed to website visitors increasing 107% in Fiscal 2014 compared with Fiscal 2013, with significant growth of 160% over the same period prior year occurring in the final two quarters. While online sales increased throughout the year, in line with wholesale retail outlet growth occurring mostly in the final two quarters, e-commerce sales growth also dramatically increased in the final two quarters. Online sales equaled 30% of total sales in Fiscal 2014 compared to 24% in Fiscal 2013.

18 -- See chart of last 12 months revenue build up (LTM) from 2011 by country for wholesale, and by online e-commerce and retail sales channels.

[[Image Removed]] Cost of Goods Sold, Gross Profit & Gross Margin: Gross Profit increased 20% to $899,894 for the year ending June 30, 2014 from $747,095 the year ended June 30, 2013. The increase in gross profit primarily reflects the increase in revenues.

Gross Margins declined to 40% for the year compared to 43% for the prior year.

Our (i) wholesale margins increased to 39% from 35%, (ii) online margins declined from 64% to 45% compared to the same period in fiscal 2013 as a result of sales clearance of aged inventory with low average retail prices and gross margins; and (iii) retail store margins increased to 65%, however overall retail margins declined from 59% to 40% due to clearance of aged inventory and samples at low average retail prices and gross margins.

Cost of Goods Sold (Cost of Sales) as a percentage of revenues increased slightly to approximately 59% compared to 56% for the comparable period in Fiscal 2013. While input prices of raw materials such as cashmere yarn increased as a result of a sharply increased demand for the yarn, the increase in our volume of purchases from factories enabled us to continue to lower manufacturing costs and streamline supply chain expenses on a per unit basis to offset higher input costs.

Operating Expenses: Operating expenses consisting of payroll, selling & marketing, administrative and occupancy increased 116% over the prior year as the company added resources to support the current and projected growth of the business.

Payroll and related expenses have increased by $285,926, or 119% over the prior year, as corporate salaries were accrued for our Chief Executive Officer and Chief Creative Officer and the Company hired additional sales and operational personal to support the existing and projected growth of the business.

Selling & Marketing expenses increased by $215,976, or 243%, as we invested in expanding our wholesale sales program particularly in the North American and European markets, as well as marketing and promotions to increase the awareness of our brand in these markets and grow our e-commerce business.

Corporate, public company and depreciation: As a public company we have incurred increased costs for legal, accounting and filing fees of approximately $96,948 over the prior year, an increase of 63%.

Financing costs: Financing costs of $264,365 for Fiscal 2014 primarily relate to expenses, including interest and fees, associated with our use of trade financing. As a percentage of sales our financing costs stayed relatively the same at 12%.

However as sales increase, the company expects this to decrease as a percentage due to the expected payout of higher interest facilities and loans, and the impact of the lower cost trade facilities with Sallyport Commercial Finance comes into effect.

19 -- Liquidity and Capital Resources We are highly leveraged and will continue to borrow to acquire inventory and fund sales. Our ability to expand our sales is limited by the amount we can borrow to acquire supplies and contract for the manufacture of our products. The Company has been able to obtain the funds necessary to increase its sales each year through both capital contributions and loans from its principal shareholders and third parties. The Company anticipates that it will continue to be able to access funds to grow its business. There can be no assurance, however, that the terms on which such funds will be made available will be favorable to the Company or its shareholders. The rates at which we can acquire funds will directly impact our ability to operate profitably and generate positive cash flow. In addition to relying upon debt, we will seek to raise equity to support our efforts to grow. There is no assurance that debt or equity financing will be available to us on acceptable terms, if at all, and, in all events, the sale of equity or instruments convertible into equity will dilute the interests of our current shareholders.

During Fiscal 2014 we raised approximately $590,000 through sales of our equity and the conversion of debt nto equity. These funds improved our balance sheet and provided capital to fund higher inventory supporting growth in retail and online sales, as well as funding new orders from wholesale customers.

On July 1, 2013, Banjo & Matilda entered into a Loan Facility Agreement pursuant to which Harboursafe Holdings made a loan of approximately $963,000 to Banjo & Matilda. The loan bears interest at 3% per annum and interest accrues daily. The loan was due on June 30, 2014. The loan is convertible into shares of Banjo & Matilda at any time prior to the due date. Interest on the loan is paid on the earlier of the (x) conversion of the loan into shares of Banjo & Matilda and (y) the due date of the loan. Harboursafe may require prepayment of $100,000 of the loan upon 60 days prior notice to Banjo & Matilda. To secure the loan, Banjo & Matilda granted Harboursafe Holdings a security interest in the intellectual property acquired by Banjo & Matilda under the Intellectual Property Sale Agreement pursuant to which Banjo & Matilda acquired numerous clothing designs from Harboursafe Holdings. Harboursafe Holdings is an Australian corporation controlled by our Chief Executive Officer, Brendan Macpherson. The parties intend to extend maturity date of the loan.

On November 3, 2013, Raymond Key, who owns 19% of the Registrant's common stock, made an unsecured loan of AU$100,000 to Banjo & Matilda which bore interest at the rate of 15% per annum (or 0.041% per day). The loan was due on or before December 4, 2013 was guaranteed by Brendan Macpherson, the Chief Executive Officer of Banjo & Matilda. On January 12, 2014, the Company issued to Raymond Key its Secured Convertible Note in the principal amount of $250,000 (the "Convertible Note") in consideration of the rollover of the November 13, 2013, Note and an additional $150,000. The Convertible Note bears interest at the rate of 9% per annum and is due on the first anniversary of the date of issuance, January 12, 2015. All or any portion of the principal amount of the Convertible Note and all accrued interest is convertible at the option of the holder into common stock of the Company at a conversion price of thirty cents ($0.30) per share, provided that if the Volume Weighted Average Price (VWAP) for the 30 days immediately preceding the receipt of a conversion notice is less than sixty cents ($.60) per share, the conversion price shall be reduced to twenty cents ($.20) per share.

The Company's obligation under the Convertible Note is secured by a lien on substantially all of its assets, including its inventory, receivables, trademarks and trade names. Further, the Company may not enter into any loan to be repaid prior to the due date of the Convertible Note or having a priority senior to the Convertible Note.

In December 2013 the Company entered into a loan agreement with an individual for $100,000. The note was due in 30 days at an interest rate of five percent per month.

On May 16, 2014 and July 18, 2014, respectively, we received $72,800 and $72,800 from KBM Worldwide, Inc. in consideration of convertible promissory notes in such amounts. The notes bear interest at 8% and are due February 6, 2015 and April 8, 2015, respectively. The notes are each convertible after 180 days at the option of the holder into common stock at a conversion price equal to 65% of the then market price of the stock, subject to anti-dilution protection in the event the Company issues common stock at a price below the conversion price; provided, however, that the notes may not be converted into common stock such that the beneficial ownership of KBM Worldwide and its affiliates would exceed 4.99%. Pursuant to the purchase agreements covering the notes, we issued KBM a six-month right of first refusal with respect to equity or hybrid financings in amounts less than $75,000.

In August 2014, we entered into a $1.5 million trade facility with Sallyport Commercial Finance, a factoring and asset-based lending company. We intend to use the facility, which has a term of one year and is automatically renewable annually, to finance future orders in our efforts to build the Banjo & Matilda brand.

YEAR ENDED June 30 2014 2013Net cash (used in) operating activities (1,165,503 ) (452,362 ) Net cash (used in) investing activities (32,578 ) (39,463 ) Net cash provided by financing activities 1,223,482 500,206 20 -- Cash (Used in) Operating Activities During Fiscal 2014, we used approximately $1,165,503 of net cash in our operating activities. This reflects our net loss from continuing operations and the use of cash to increase our trade receivables and inventory which grew by $314,016 and $282,868, respectively, from June 30, 2013 to June 30, 2014.

During Fiscal 2013, we used approximately $452,362 of net cash in our operating activities. This reflects our net income from continuing operations of $166,058 offset by increases in our inventory and trade receivables of $181,720 and $86,215, respectively, and a decrease in other receivables of $11,924.

Cash (Used) in Investing Activities During Fiscal 2014 we used $32,578 of net cash in investing activities primarily reflecting $5,160 in capitalized costs incurred and purchases of fixed assets of $8,358.

During Fiscal 2013, we used net cash of $39,463 in investing activities primarily reflecting intangibles of $38,446 associated with our financings.

Cash Provided by Financing Activities During the Fiscal 2014, net cash provided by financing activities of $1,223,482primarily reflects proceeds from issuance of common stock for $290,000, increases in loans of $413,474 and an increase in convertible loans of $525,640.

During Fiscal 2013, net cash provided by financing activities of $500,206 primarily reflects increases in convertible loans of $334,837 and increase proceeds of $170,725 from the sale of equity.

Commitments for Capital Expenditures We do not have substantial commitments for capital expenditures. All of our products are manufactured by third parties, enabling us to scale up operations without acquiring substantial production equipment. Although we will need to increase our design capabilities and augment our sales and administrative staff as we grow, the rate of growth of these expenses should be less than the rate of growth of our revenue. Further, we anticipate that as we expand our sales, the interest rates, fees and other expenses we pay to obtain credit, should be lower than those we incur presently. Of course, any substantial growth in our revenues will require additional equity which, if available, will dilute the interests of our current shareholders. We do anticipate a slight increase in the rate of growth of our operating expenses this year due to, among other factors, the fact that our historical financial statements do not include the expenses associated with being a public company.

Off Balance Sheet Items We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities" (SPEs).

Critical Accounting Policies Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the period covered by the financial statements. Actual results could differ from estimates.

Significant estimates include collectability of accounts receivable, valuation of inventory, sales returns and recoverability of long-term assets.

Revenue Recognition Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers to be remitted to governmental authorities.

Cost of Sales Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), shipping, importation duties and charges, third party royalties, and product samples.

21 -- Inventory Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories with the market value and allowance is made to write down inventories to market value, if lower.

Allowance for Doubtful Accounts The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.

Exchange Gain (Loss) To date, the Company's transactions were denominated in foreign currency and were recorded in Australian dollars (AUD) at the rates of exchange in effect when the transactions occurred. Exchange gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled.

Foreign Currency Translation and Comprehensive Income (Loss) The accounts of the Company were maintained, and its financial statements were expressed, in AUD. Such financial statements were translated into USD with the AUD as the functional currency. All assets and liabilities were translated at the exchange rate at the balance sheet date, stockholder's equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the statements of operations. The resulting translation adjustments are reported under other comprehensive income as a component of shareholders' equity.

Recently Issued Accounting Pronouncements There have been no new accounting pronouncements during the year ended June 30, 2014 that we believe would have a material impact on our financial position or results of operations

[ Back To TMCnet.com's Homepage ]