UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2016

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-37662

 

 

 

NAKED BRAND GROUP INC. 

(Exact name of registrant as specified in its charter)

 

Nevada   99-0369814

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     
10th Floor – 95 Madison Avenue, New York, New   10016
York  
(Address of principal executive offices)   (Zip code)

 

(212) 851-8050

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. YES x NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer ¨ Accelerated Filer ¨
Non-accelerated Filer ¨ Smaller Reporting Company x
(Do not check if smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

 

As of December 14, 2016, there were 6,069,982 shares of the registrant’s common stock outstanding.

 

 

 

  

TABLE OF CONTENTS

 

  Page
Cautionary Note Regarding Forward-Looking Statements 3
   
PART I — FINANCIAL INFORMATION 4
   
Item 1. — Financial Statements 4
   
Interim Condensed Consolidated Balance Sheets at October 31, 2016 and January 31, 2016 5
   
Interim Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2016 and 2015 6
   
Interim Condensed Consolidated Statement of Changes in Stockholders’ Equity (Capital Deficit) as of October 31, 2016 7
   
Interim Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2016 and 2015 8
   
Notes to the Interim Condensed Consolidated Financial Statements 10
   
Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
   
Item 3. — Quantitative and Qualitative Disclosures About Market Risk 33
   
Item 4. — Controls and Procedures 33
   
PART II — OTHER INFORMATION 35
   
Item 1. — Legal Proceedings 35
   
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds 36
   
Item 3. — Defaults Upon Senior Securities 36
   
Item 4. — Mine Safety Disclosures 36
   
Item 5. — Other Information 36
   
Item 6. — Exhibits 36
   
SIGNATURES 37
   
EXHIBIT INDEX 38

 

 2 

 

  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “would,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other comparable terminology and include, but are not limited to, statements regarding: our product line; our business plan; the enforceability of our intellectual property rights; projections of market prices and costs; supply and demand for our products; future capital expenditures; our collaboration with Dwyane Wade, relationships with retailers, wholesalers and other business partners; ability to add new customer accounts; and future borrowings under the Joint Factoring Agreement with Wells Fargo. The material assumptions supporting these forward-looking statements include, among other things: our ability to obtain any necessary financing on acceptable terms; timing and amount of capital expenditures; the enforcement of our intellectual property rights; our ability to launch new product lines; retention of skilled personnel; continuation of current tax and regulatory regimes; current exchange rates and interest rates; and general economic and financial market conditions. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described under “Risk Factors” and elsewhere in this Form 10-Q and those described from time to time in our future reports filed with the Securities and Exchange Commission (“SEC”).

 

CERTAIN TERMS USED IN THIS FORM 10-Q

 

Unless expressly indicated or the context requires otherwise, the terms “Naked,” the “Company,” “we,” “us,” and “our” in this document refer to Naked Brand Group Inc., a Nevada corporation, and, where appropriate, its wholly owned subsidiary.

 

Our fiscal year ends on January 31. References to “fiscal 2017,” “fiscal 2016” and “fiscal 2015” represent the fiscal years ended January 31, 2017, 2016 and 2015, respectively. References to “2017” and “2016” represent the calendar years ending December 31, 2017 and 2016, respectively, and references to “2015” represent the calendar year ended December 31, 2015.

 

 3 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Naked Brand Group Inc.

Interim Condensed Consolidated Financial Statements

For the Quarterly Period Ended October 31, 2016

 

 4 

 

  

Naked Brand Group Inc.

Interim Condensed Consolidated Balance Sheets

 (Expressed in US Dollars)

 

 

   October 31, 2016   Janaury 31, 2016 
   (unaudited)     
ASSETS          
Current assets          
Cash  $44,365   $4,780,994 
Accounts receivable, net of allowances of $32,327
(January 31, 2016: $34,398)
   -    127,422 
Inventory, net of allowances of $503,000
(January 31, 2016: $390,000)
   1,997,865    921,449 
Prepaid expenses and deposits   341,089    956,807 
Total current assets   2,383,319    6,786,672 
           
Equipment, net   5,228    13,215 
Intangible assets, net   80,874    73,095 
           
TOTAL ASSETS  $2,469,421   $6,872,982 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable and accrued liabilities  $1,455,985   $993,399 
Interest payable   3,244    6,025 
Factored line of credit   403,431    527,711 
Promissory note payable   3,450    3,450 
Convertible promissory notes   112,000    584,942 
Total current liabilities   1,978,110    2,115,527 
Deferred compensation   70,370    170,369 
           
TOTAL LIABILITIES   2,048,480    2,285,896 
           
STOCKHOLDERS' EQUITY          
Common stock          
Authorized          
2,000,000 shares of blank check preferred stock, no par value 18,000,000 shares of common stock, par value $0.001 per share (11,250,000 common shares, par value $0.001 per share)          
Issued and outstanding          
6,069,982 shares of common stock (January 31, 2016: 6,069,982)   6,070    6,070 
Common stock to be issued   15,000    15,000 
Accumulated paid-in capital   54,991,671    50,953,341 
Accumulated deficit   (54,585,555)   (46,381,080)
Accumulated other comprehensive loss   (6,245)   (6,245)
           
Total stockholders' equity   420,941    4,587,086 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $2,469,421   $6,872,982 

 

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

 

 5 

 

  

Naked Brand Group Inc.

Interim Condensed Consolidated Statements of Operations

(Expressed in US Dollars)

(Unaudited)

 

 

   Three months ended October 31,   Nine months ended October 31, 
   2016   2015   2016   2015 
                 
Net sales  $551,494   $317,748   $1,292,132   $938,157 
                     
Cost of sales        388,144    249,274    1,185,796    664,081 
                     
Gross profit        163,350    68,474    106,336    274,076 
                     
Operating Expenses                    
General and administrative expenses   2,503,869    3,371,705    8,236,408    8,670,296 
Foreign exchange      1,545    1,778    2,007    729 
                     
Total operating expenses      2,505,414    3,373,483    8,238,415    8,671,025 
                     
Operating loss      (2,342,064)   (3,305,009)   (8,132,079)   (8,396,949)
                     
Other income (expense)                    
Interest expense   (19,731)   (133,432)   (56,200)   (494,788)
Accretion of debt discounts and finance charges   (805)   (94,980)   (16,196)   (300,252)
Fair value mark-to-market adjustments    -    -    -    708,900 
                     
Total other income (expense)    (20,536)   (228,412)   (72,396)   (86,140)
                     
Net loss for the period     $(2,362,600)  $(3,533,421)  $(8,204,475)  $(8,483,089)
                     
Net loss per share                    
Basic  $(0.39)  $(2.08)  $(1.35)  $(6.51)
Diluted       $(0.39)  $(2.08)  $(1.35)  $(6.51)
                     
Weighted average shares outstanding                    
Basic   6,072,482    1,695,437    6,072,482    1,302,714 
Diluted        6,072,482    1,695,437    6,072,482    1,302,714 

 

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

 

 6 

 

  

Naked Brand Group Inc.

Interim Condensed Consolidated Statement of Changes in Stockholders’ Equity (Capital Deficit)

(Expressed in US Dollars)

(Unaudited)

 

 

   Common Stock   Accumulated
 Paid-in
   Common stock   Accumulated   Accumulated
Other
Comprehensive
   Total
 Stockholders'
Equity
 
   Shares   Amount   Capital   to be issued   Deficit   Loss   (Capital Deficit) 
Balance, February 1, 2015   1,010,391   $1,011   $25,083,735   $15,000   $(27,317,681)  $(6,245)  $(2,224,180)
Shares issued pursuant to the conversion of debt   79,025    79    236,985    -    -    -    237,064 
Shares issued in exchange for services rendered   2,500    2    11,998    -    -    -    12,000 
Shares issued as payment for interest owing under convertible debt arrangements   183,205    183    774,964    -    -    -    775,147 
Shares issued pursuant to the exercise of amended warrants   585,705    586    2,342,243    -    -    -    2,342,829 
Less: commissions paid   -    -    (91,422)   -    -    -    (91,422)
Shares issued in a public offering   1,875,000    1,875    7,498,125    -    -    -    7,500,000 
Less: share issue costs   -    -    (623,720)   -    -    -    (623,720)
Shares issued upon automatic conversion of debentures   2,312,150    2,312    6,934,138    -    -    -    6,936,450 
Rounding shares issued in connection with reverse stock split   22,006    22    (22)   -    -    -    - 
Derivative liability reclassifications   -    -    3,091,050    -    -    -    3,091,050 
Stock based compensation   -    -    5,632,267    -    -    -    5,632,267 
Modification of warrants   -    -    63,000    -    -    -    63,000 
Net loss for the year   -    -    -    -    (19,063,399)   -    (19,063,399)
Balance, January 31, 2016   6,069,982   $6,070   $50,953,341   $15,000   $(46,381,080)  $(6,245)  $4,587,086 
Stock based compensation   -    -    4,038,330    -    -    -    4,038,330 
Net loss for the period   -    -    -    -    (8,204,475)   -    (8,204,475)
Balance, October 31, 2016   6,069,982   $6,070   $54,991,671   $15,000   $(54,585,555)  $(6,245)  $420,941 

 

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

 

 7 

 

  

Naked Brand Group Inc.

Interim Condensed Consolidated Statements of Cash Flows

(Expressed in US Dollars)

(Unaudited)

 

 

for the nine months ended October 31,  2016   2015 
         
Cash flows from operating activities          
Net loss for the period  $(8,204,475)  $(8,483,089)
Adjustments to reconcile net loss to net cash  used in operating activities:          
Provision for doubtful accounts   (4,181)   20,226 
Provision for obsolete inventory   113,000    - 
Depreciation and amortization   7,987    13,526 
Other non cash items (Schedule 1)   4,053,388    3,982,628 
Changes in operating assets and liabilities:          
Accounts receivable   131,603    (86,127)
Prepaid expenses and deposits   585,718    352,703 
Inventory   (1,189,416)   (1,158,161)
Accounts payable   492,586    556,874 
Interest payable   (2,781)   397,702 
Deferred costs   -    (50,000)
Deferred compensation      (99,999)   33,333 
Net cash used in operating activities        (4,116,570)   (4,420,385)
           
Cash flows from investing activities          
Acquisition of intangible assets   (7,779)   (32,155)
Purchase of equipment      -    (4,439)
Net cash used in investing activities    (7,779)   (36,594)
           
Cash flows from financing activities          
Proceeds from share issuances   -    2,342,996 
Share issuance offering costs   -    (91,422)
Proceeds from convertible promissory notes   112,000    - 
Repayments of convertible promissory notes   (600,000)   - 
Repayments under factoring arrangements   (924,280)   (429,593)
Advances under factoring arrangements    800,000    1,010,000 
Net cash provided by (used in) financing activities   (612,280)   2,831,981 
           
Net decrease in cash   (4,736,629)   (1,624,998)
           
Cash at beginning of the period    4,780,994    1,943,235 
Cash at end of the period   $44,365   $318,237 

 

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

 

 8 

 

  

Naked Brand Group Inc.

Interim Condensed Consolidated Statements of Cash Flows

(Expressed in US Dollars)

(Unaudited)

 

 

Supplemental Cash Flow Information        
         
for the nine months ended October 31,  2016   2015 
         
Cash paid during the period for:          
Interest  $20,909   $70,923 
Income Taxes   -    - 
           
Non-cash financing activities:          
Extinguishment of accounts payable with equity  $-   $12,000 
Reclassification of derivative liability to additional paid in capital   -    3,091,050 
Conversion of convertible debt to shares   -    233,382 
Interest paid in shares   -    283,913 
           
Schedule 1 to the Statements of Cash Flows          
           
Profit and loss items not involving cash consists of:          
Stock based compensation  $4,038,330   $4,391,276 
Change in fair value of derivative financial instruments   -    (708,900)
Amortization of deferred financing fees   15,058    21,356 
Accretion of debt discount   -    278,896 
   $4,053,388   $3,982,628 

 

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

 

 9 

 

   

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

1.Nature of Business

 

Naked Brand Group Inc. (the “Company”) is a manufacturer and seller of direct and wholesale men’s and women’s undergarments and intimate apparel in the United States and Canada to consumers and retailers through its wholly owned subsidiary, Naked Inc. (“Naked”). The Company currently operates out of New York, United States of America.

 

Effective August 10, 2015, the Company effected a reverse stock split of its common stock on the basis of 1:40. As such, the Company’s authorized capital was decreased from 450,000,000 shares of common stock to 11,250,000 shares of common stock and an aggregate of 53,278,818 shares of common stock issued and outstanding were decreased to 1,331,977 shares of common stock. These interim condensed consolidated financial statements give retroactive effect to such reverse stock split and all share and per share amounts have been adjusted accordingly.

 

Effective August 11, 2016, the Company amended its articles of incorporation to increase the number of authorized shares of common stock from 11,250,000 to 18,000,000 and to provide authority to issue up to 2,000,000 shares of blank check preferred stock.

 

NASDAQ Status

 

The Company's common stock is listed on The NASDAQ Capital Market under the symbol NAKD. On September 23, 2016, the Company received written notice from the Listing Qualifications Staff of The NASDAQ Stock Market LLC (“NASDAQ”) notifying the Company that it no longer complies with NASDAQ Listing Rule 5550(b)(1) due to the Company’s failure to maintain a minimum of $2,500,000 in stockholders’ equity (the “Minimum Stockholders’ Equity Requirement”) or any alternatives to such requirement as of July 31, 2016 and as of September 22, 2016. In response, the Company submitted a compliance plan to NASDAQ.  The Company is working with NASDAQ to finalize such plan and undertake steps to regain compliance. If NASDAQ accepts the Company’s plan, NASDAQ may grant an extension of up to 180 calendar days from the date of the notice, or until March 22, 2017, to evidence compliance with the Minimum Stockholders’ Equity Requirement. If NASDAQ does not accept the Company’s plan, the Company will have the right to appeal such decision to a NASDAQ hearings panel. The stockholders’ equity reported in these financial statements is $420,941.

 

2.Ability to Continue as a Going Concern

 

These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) on a going concern basis, which assumes that the Company will continue to realize its assets and discharge its obligations and commitments in the normal course of operations. Realization values may be substantially different from carrying values as shown and these interim condensed consolidated financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.

 

As of October 31, 2016, the Company had not yet achieved profitable operations, had incurred a net loss of $8,204,475 and had an accumulated deficit of $54,585,555 and expects to incur significant further losses in the development of its business, which casts substantial doubt about the Company’s ability to continue as a going concern. To remain a going concern, the Company will be required to obtain the necessary financing to pursue its plan of operation. Management plans to obtain the necessary financing through the issuance of equity and/or debt. Should the Company not be able to obtain this financing, it may need to substantially scale back operations or cease business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 10 

 

    

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

  

3.Basis of Presentation

 

Interim Financial Statements

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared by management, without audit, in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the disclosures are adequate to make the information presented not misleading and the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for fair presentation of statement of financial position, results of operations and cash flows for the interim periods presented. Operating results for the nine months ended October 31, 2016 are not necessarily indicative of the results that may be expected for the year ending January 31, 2017.

 

The interim condensed consolidated balance sheet at January 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP.

 

These unaudited condensed consolidated interim financial statements should be read in conjunction with the most recent audited financial statements of the Company included in its Annual Report on Form 10-K for the year ended January 31, 2016.

 

Segment Reporting

 

The Company used several factors in identifying and analyzing reportable segments, including the basis of organization, such as differences in products and services, and geographical areas. The Company’s chief operating decision makers review financial information presented on a consolidated basis for the purposes of making operating decisions and assessing financing performance. Accordingly, the Company has determined that as of October 31, 2016 and 2015, there is only a single reportable operating segment.

 

The Company operates in one industry, the manufacture and sale of direct and wholesale undergarments. Revenues from external customers are all derived from customers located within North America as follows:

 

   Three months ended
October 31,
   Nine months ended
October 31,
 
   2016   2015   2016   2015 
United States  $551,475   $267,448   $1,287,991   $722,039 
Canada   19    50,300    4,141    216,118 
   $551,494   $317,748   $1,292,132   $938,157 

 

At October 31, 2016, the net book value of long-lived assets all located within North America were as follows:

 

   October 31, 2016   January 31, 2016 
   Equipment   Intangible assets   Equipment   Intangible assets 
United States  $642   $61,517   $7,091   $53,738 
Canada   4,586    19,357    6,124    19,357 
   $5,228   $80,874   $13,215   $73,095 

 

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Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

3.Basis of Presentation (continued)

 

Loss per share

 

Net loss per share was determined as follows:

   Three months ended Oct 31,   Nine months ended Oct 31, 
   2016   2015   2016   2015 
Numerator                    
 Net loss  $(2,362,600)  $(3,533,421)  $(8,204,475)  $(8,483,089)
Denominator                    
 Weighted average common stock outstanding   6,072,482    1,695,437    6,072,482    1,302,714 
                     
 Basic and diluted net loss per share  $(0.39)  $(2.08)  $(1.35)  $(6.51)
                     
Anti-dilutive securities not included in diluted loss per share relating to:                    
Warrants and options outstanding   3,682,597    3,712,167    3,682,597    3,712,167 
Convertible debt   -    2,372,150    -    2,372,150 
    3,682,597    6,084,317    3,682,597    6,084,317 

 

Recently Adopted Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The Company adopted this standard on February 1, 2016. The adoption of this standard did not have any effect on its financial condition, results of operations and cash flows.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. In addition, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements: Amendments to SEC Paragraph Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (“ASU 2015-15”), which permits entities to defer and present debt issuance costs related to line-of-credit arrangements as assets, and was adopted concurrently with ASU No. 2015-03. The Company adopted these standards on a retroactive basis on February 1, 2016. Adoption of these standards resulted in the reclassification of $15,058 in deferred financing costs at January 31, 2016 from assets to a deduction from the related debt liability.

 

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Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

3.Basis of Presentation (continued)

 

New Accounting Pronouncements

 

Unless otherwise discussed, management believes the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The premise of the guidance is that a company should 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. ASU 2014-09 can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On April 1, 2015, the FASB decided to defer the effective date of the new revenue standard by one year. As a result, public entities would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”) which requires a company to change the measurement principal for inventory measured using the FIFO or average cost method from the lower of cost or market to the lower of cost and net realizable value. Treatment of inventory valued under the last-in, first-out (“LIFO”) method is unchanged by this guidance. The new guidance will be applied prospectively and will be effective for fiscal years beginning after December 15, 2016, and interim periods within those years. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

 

In August 2015, the FASB issued ASU No. 2015-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2015-15”). Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this update provide that guidance. The amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for annual periods ending after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition

 

 13 

 

  

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

3.Basis of Presentation (continued)

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 eliminates the requirement to bifurcate deferred taxes between current and non-current on the balance sheet and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for public entities in fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The amendments for ASU-2015-17 can be applied retrospectively or prospectively and early adoption is permitted. The adoption of this standard is not expected to have a material impact for any period presented.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 provides guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

 

In February 2016, FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). The guidance would require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right–of-use assets. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2018. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.

 

4.Inventory

 

Inventory of the Company consisted of the following at October 31, 2016 and January 31, 2016:

 

   October 31,
2016
   January 31,
2016
 
Finished goods  $2,500,865   $1,308,442 
Raw materials   -    3,007 
    2,500,865    1,311,449 
Less: allowance for obsolete inventory   (503,000)   (390,000)
Total inventory  $1,997,865   $921,449 

 

Balances at October 31, 2016 and January 31, 2016 are recorded at historical cost, less amounts for potential declines in value. At October 31, 2016, management has recorded an allowance for obsolescence of $503,000 (January 31, 2016: $390,000) to reduce inventory to its estimated net realizable value.

 

 14 

 

  

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

  

5.Equipment

 

Equipment of the Company consisted of the following at October 31, 2016 and January 31, 2016:

 

  

October 31,
2016

   January 31,
2016
 
Furniture & equipment  $10,250   $10,250 
Computer equipment   26,082    26,082 
    36,332    36,332 
Less: Accumulated depreciation   (31,104)   (23,117)
   $5,228   $13,215 

 

Depreciation expense for the three and nine month periods ended October 31, 2016 was $2,182 and $7,987, respectively (2015: $2,943 and $13,524, respectively).

 

6.Intangible Assets

 

Intangible assets of the Company consisted of the following at October 31, 2016 and January 31, 2016:

 

  

October 31,
2016

   January 31,
2016
   Useful life
(Years)
 
Trade Names/Trademarks  $80,874   $73,095    Indefinite 
Website   49,512    49,512    2 
    130,386    122,607      
Less: accumulated amortization   (49,512)   (49,512)     
   $80,874   $73,095      

 

Amortization expense for the three and nine months ended October 31, 2016 was $Nil and $Nil, respectively (2015: $Nil and $4,375, respectively).

 

7.Related Party Transactions and Balances

 

Related Party Balances

 

At October 31, 2016, included in accounts payable and accrued liabilities is $8,724 (January 31, 2016: $7,599) owing to directors and officers of the Company for reimbursable expenses and $35,033 (January 31, 2016: $35,490) owing to a firm of which a direct family member of a director and officer of the Company is a principal, in respect of unpaid marketing fees. These amounts are unsecured, non-interest bearing and have no specific terms of repayment.

 

At October 31, 2016, an amount of $112,000 ([January 31, 2016: $Nil) in principal amounts of convertible notes payable and $276 in accrued interest payable ([January 31, 2016: $Nil), was owing to a directors and officer of the Company.

 

 15 

 

 

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

  

7.Related Party Transactions and Balances (continued)

 

Related Party Transactions

 

During the three and nine months ended October 31, 2016, included in general and administrative expenses is $51,542 and $182,659, respectively (2015: $71,646 and $230,728, respectively), in respect of marketing fees, of which $873 and $30,783, respectively (2015: $18,546 and $57,482, respectively), was related to third party pass through costs, paid to a firm of which a direct family member of a director and officer of the Company is a principal.

 

Effective June 10, 2014, the Company entered into an employment agreement with the Chief Executive Officer and director (the “CEO”) of the Company for a term of three years whereby the CEO was entitled to a base salary of $400,000 per year, provided the CEO would forgo the first twelve months of the base salary and only receive minimum wage during that period. At October 31, 2016, an amount of $70,370 (January 31, 2016: $170,369) is included in deferred compensation relating to the amortization of the total base salary compensation due under this employment agreement, which is being amortized on a straight line basis over the term of the employment agreement.

 

On June 10, 2015, the CEO became eligible to receive her full base salary pursuant to the terms of her employment agreement, however, such base salary has not yet been paid in full as of October 31, 2016. The Company has accrued her base salary compensation payable and at October 31, 2016, an amount of $528,653 (January 31, 2016: $266,664) is included in accounts payable and accrued liabilities in respect of such base salary payable, including interest on such amounts owing. The CEO has agreed to allow the Company to defer payment of her salary provided such amounts accrue interest at a rate of 3% per annum.

 

In connection with a Joint Factoring Agreement (Note 8 ii), the CEO executed a guaranty (the “Guaranty”) to personally guarantee performance of the Obligations and also agreed to provide her own brokerage account as security for the Obligations (as defined in Note 8ii)). Accordingly, in connection with her brokerage account the CEO entered into a brokerage account pledge and security agreement (the “Pledge and Security Agreement”) and securities account control agreement (the “Account Control Agreement”) in favor of Wells Fargo Bank, National Association (“Wells Fargo”). Pursuant to the Pledge and Security Agreement, the CEO agreed to pledge, sell, assign, grant a security interest in and transfer to Wells Fargo all of her rights, title and interest in and to her brokerage account.

 

 16 

 

 

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

8.Factoring Line of Credit

 

i)Capital Business Credit

 

On June 11, 2015, the Company entered into a factoring agreement (the “CBC Factoring Agreement”) with Capital Business Credit LLC (“CBC”) whereby the Company could borrow the lesser of (i) $750,000 or (ii) the sum of up to 80% of trade receivables, 60% of finished goods inventory and 100% of any accepted side collateral, under the terms and conditions as outlined in the CBC Factoring Agreement. A director and officer of the Company provided side collateral of $500,000 to support a portion of the borrowings and guaranteed repayment of the Company’s indebtedness and performance of its obligations under the CBC Factoring Agreement. The facility was secured by a general security interest over all of the Company assets and interests. The term of the agreement was for a period of one year and would automatically renew for additional one year terms, unless terminated at any time by CBC or by the Company prior to such renewal, with thirty days’ prior written notice. During the nine months ended October 31, 2016 the Company did not renew the CBC Factoring Agreement with CBC.

 

On June 14, 2016, the Company entered into a Joint Factoring Agreement (the “Joint Factoring Agreement”) with Wells Fargo. The Joint Factoring Agreement with Wells Fargo replaces the CBC Factoring Agreement, which was terminated effective on the same date.

 

ii)Wells Fargo

 

Under the terms of the Joint Factoring Agreement, the Company may assign eligible accounts receivable (the “Accounts”) to Wells Fargo in exchange for loans and advances (each such loan or advance, an “Advance”) up to an aggregate amount (the “Borrowing Base”) not to exceed the lesser of (i) $6,000,000 or (ii) the sum of up to 80% of trade receivables deemed eligible by Wells Fargo plus (A) the lesser of up to (x) 50% of the value, calculated at the lower of cost or market, of finished goods, warehoused inventory deemed eligible by Wells Fargo or (y) $500,000, plus (B) the lesser of (x) up to 75% of marketable securities held in a blocked security account, subject to an account control agreement in favor of Wells Fargo (the “Securities Account”); provided, however, that at any time when the market value of the securities held in such Securities Account is below $1,067,000, then the value of such securities for purposes of calculating the Borrowing Base will be $0 or (y) $200,000, less any reserves that Wells Fargo may establish from time to time.

 

In connection with Wells Fargo’s services under the Joint Factoring Agreement, Wells Fargo receives a commission equal to the Factoring Commission Percentage (as defined in the Joint Factoring Agreement) multiplied by the gross invoice amount of each Account purchased, which is charged to the Company’s account on the date a related Advance is made. During the initial term of the Joint Factoring Agreement, Wells Fargo will receive minimum commissions equal to $24,000, $36,000 and $50,000 during the first, second and third year, respectively.

 

 17 

 

 

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

8.Factoring Line of Credit – (continued)

 

ii)Wells Fargo – (continued)

 

The Company bears the risk of credit loss on the Accounts, except where Wells Fargo provides credit approval in writing on such Account. The Advances will bear interest on the daily net balance of any moneys owed at a rate of LIBOR plus 3%. All obligations under the Joint Factoring Agreement, including the Advances (collectively, the “Obligations”), are payable on demand and may be charged by Wells Fargo to the Company’s account at any time.

 

The Obligations are secured by a continuing security interest in all assets, properties, and rights of the Company, wherever located, whether owned as of the date of the Joint Factoring Agreement or subsequent thereto. The term of the Joint Factoring Agreement is for three years and will automatically renew, unless terminated at any time by Wells Fargo with thirty days’ written notice, or by the Company prior to such renewal, with sixty days’ prior written notice.

 

The Joint Factoring Agreement contains covenants that are customary for agreements of this type. The failure to satisfy covenants under the Joint Factoring Agreement or the occurrence of other specified events that constitute an event of default could result in the termination of the Joint Factoring Agreement and/or the acceleration of the repayment obligations of the Company. The Joint Factoring Agreement contains provisions relating to events of default that are customary for agreements of this type.

 

The Company has accounted for invoices sold to the Wells Fargo under the Joint Factoring Agreement as a sale of financial assets.

 

Factor expenses and interest charged to operations during the three and nine months ended October 31, 2016 were $15,859 and $27,595, respectively (2015: $14,147 and $24,500, respectively). At October 31, 2016, an amount of $403,431 (January 31, 2016: $527,711) was owing under the terms of the Joint Factoring Agreement, for advances made to the Company, net of repayments of such advances through the sale of factored receivables.

 

9.Promissory Note Payable

 

On November 7, 2013, the Company issued a promissory note in the principal amount of CDN$28,750. The Company received $24,467 (CDN$25,000) in respect of this note, after an original issue discount (“OID”) of 15%, or $3,670 (CDN$3,750). The principal amount, net of the OID, matured and was repaid during the year ended January 31, 2015. At October 31, 2016, an amount of $3,450 (CDN$3,750) (2015: $3,450 (CDN$3,750)) was outstanding relating to the OID, which is repayable upon the Company reporting net income from operations in any single month.

 

 18 

 

 

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

10.Convertible Promissory Notes Payable

 

   October 31, 2016   January 31, 2016 
First and Second Kalamalka Amendment Agreement, bearing interest at 6% per annum, collateralized by a priority general security agreement over all of the present and future assets of the company ranked pari passu to Senior Secured Convertible Debentures due October 1, 2016 (see (i))   -    600,000 
Convertible Promissory Note, due December 31, 2017, ranked pari-passu with the other Notes in right of payment, bearing interest at 9% per annum (see (ii))   112,000    - 
Less: deferred finance fees   -    (15,058)
    112,000    584,942 
Less: current portion   -    (584,942)
   $112,000   $- 

 

(i) Senior Secured Convertible Note Agreements with Kalamalka Partners

 

The Company borrowed $600,000 by the issuance of convertible promissory notes (the “Notes”), pursuant to certain Agency Agreements with Kalamalka Partners (“Kalamalka”) and certain lenders (the “Lenders”) as set out in the Agency Agreements dated August 10, 2012 and November 14, 2013, as amended. The Notes were secured by a general security interest in the present and future assets of the Company. The principal amounts outstanding were accruing interest at a rate of 6% per annum, calculated and payable quarterly and were due on October 1, 2016. The principal amounts, and any accrued and unpaid interest thereon, were convertible into common stock at any time at the option of the Lenders at a conversion price of $10.00 per share.

 

During the nine months ended October 31, 2016, the Company repaid all principal and accrued and unpaid interest amounts due under the Notes in their entirety and as such, these Notes are no longer outstanding.

 

During the three and nine months ended October 31, 2016, the Company recorded $Nil and $15,058, respectively (2015: $7,102 and $21,356, respectively), in financing charges in respect of the amortization of fees incurred in connection with the issuance and modification of these Notes.

 

(ii) 9% Convertible Debentures

 

On October 21, 2016, the Company entered into a subscription agreement with a director and officer of the Company, pursuant to which the Company issued a convertible promissory note in the principal amount of $112,000. The note is bearing interest at a rate of 9% per annum payable upon the earliest of (i) the liquidation and dissolution of the Company pursuant to a plan of complete liquidation or (ii) December 31, 2017, unless earlier converted, redeemed or repurchased.

 

In the event the Company consummates an equity financing resulting in gross proceeds to the Company of at least $1,000,000, excluding the proceeds to the Company from the purchase of the note (a “Qualified Financing”), the entire unpaid principal amount of the note and all accrued unpaid interest thereon (the “Outstanding Balance”) will automatically convert, at the initial closing of such financing, into equity securities issued at the price per security (the “Conversion Price”) issued in such Qualified Financing (the “Qualified Financing Securities”) and on the same terms and conditions that apply to the Qualified Financing Securities.

 

 19 

 

 

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

10.Convertible Promissory Notes Payable (continued)

 

In the event the Company consummates an equity financing that is not a Qualified Financing (a “Subsequent Financing”), then the holder of the note may, in its sole discretion, convert the Outstanding Balance at the initial closing of such Subsequent Financing into the equity securities issued at the Conversion Price and on the same terms and conditions that apply to the securities issued in such Subsequent Financing.

 

The note was recorded as stock settled debt in accordance with Accounting Standards Codification (“ASC”) 480, which requires such liabilities be carried at fair value. The Company recorded the note at its fair value of $112,000, equal to its face value at the date of issuance.

During the three and nine months ended October 31, 2016, the Company recorded interest expense of $276 and $276, respectively (2015: Nil and Nil, respectively).

 

11.Stockholders’ Equity

 

Effective August 10, 2015, the Company effected a reverse stock split of the basis of 1:40. As such, the Company’s authorized capital was decreased from 450,000,000 shares of common stock to 11,250,000 shares of common stock and an aggregate of 53,278,818 shares of common stock issued and outstanding were decreased to 1,331,977 shares of common stock. These financial statements give retroactive effect to such reverse stock split and all share and per share amounts have been adjusted accordingly.

 

Effective August 11, 2016, the Company amended its articles of incorporation to increase the number of authorized shares of common stock from 11,250,000 to 18,000,000 and to provide authority to issue up to 2,000,000 shares of blank check preferred stock.

 

On December 23, 2015, the Company completed an underwritten public offering of 1,875,000 shares of its common stock at $4 per share for gross proceeds of $7,500,000. In connection with the offering, the Company incurred share issuance costs of $623,720 consisting of (i) a cash commissions equal to 8% of the gross proceeds from certain participants, equal to $548,720; (ii) warrants to purchase that number of shares of common stock equal to 8% of the shares sold in the offering, equal to 137,180 share purchase warrants and (iii) underwriter legal fees equal to $75,000. The warrants were issued during the six months ended July 31, 2016.

 

2014 Stock Option Plan

 

On June 6, 2014, the Company’s board of directors approved a 2014 Long-Term Incentive Plan (the “2014 Plan”), which provides for the grant of stock options, restricted shares, restricted share units and performance stock and units to directors, officers, employees and consultants of the Company. Stockholder approval of the plan was obtained on August 21, 2014.

 

The maximum number of shares of common stock reserved for issue under the plan is 2,750,000 shares subject to adjustment in the event of a change of the Company’s capitalization (as described in the 2014 Plan). As a result of the adoption of the 2014 Plan, no further option awards will be granted under any previously existing stock option plan. Stock option awards previously granted under previously existing stock option plans remain outstanding in accordance with their terms.

 

The 2014 Plan is administered by the board of directors, except that it may, in its discretion, delegate such responsibility to a committee of such board. The exercise price will be determined by the board of directors at the time of grant. Stock options may be granted under the 2014 Plan for an exercise period of up to ten years from the date of grant of the option or such lesser periods as may be determined by the board, subject to earlier termination in accordance with the terms of the 2014 Plan. At October 31, 2016, 759,601 (January 31, 2016: 607,101) options remained available for issuance under the 2014 Plan.

 

 20 

 

 

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

11.Stockholders’ Equity (continued)

 

Stock Based Compensation

 

A summary of the status of the Company’s outstanding stock options for the periods ended October 31, 2016 and January 31, 2016 is presented below:

   Number   Weighted
Average
   Weighted Average
Grant Date
 
   of Options   Exercise Price   Fair Value 
Outstanding at February 1, 2015   1,794,875   $5.48   $8.40 
Expired   (22,250)  $22.81      
Forfeited   (3,750)  $4.48      
Granted   422,399   $4.48   $4.15 
                
Outstanding at January 31, 2016   2,191,274   $5.12   $7.86 
Expired   (93,875)  $5.19      
Forfeited   (70,000)  $5.12      
Granted   10,000   $2.50   $1.41 
Outstanding at October 31, 2016   2,037,399   $5.10      
Exercisable at October 31, 2016   1,431,758   $5.18      

 

At October 31, 2016, the following stock options were outstanding, entitling the holder thereof to purchase shares of common stock of the Company as follows:

 

Number   Exercise
Price
   Expiry
Date
  Number
Vested
 
 15,000    10.00   October 9, 2017   15,000 
 1,250    10.00   February 1, 2018   1,250 
 3,750    10.00   May 1, 2018   3,750 
 2,000    10.00   April 1, 2019   2,000 
 25,000    10.00   July 30, 2022   25,000 
 1,536,750    5.12   June 6, 2024   1,143,563 
 25,000    6.00   June 10, 2024   25,000 
 37,500    5.12   February 3, 2025   12,500 
 37,500    4.48   February 25, 2025   12,500 
 6,250    4.80   July 6, 2025   6,250 
 337,399    4.40   August 18, 2026   174,946 
 10,000    2.50   February 25, 2026   10,000 
 2,037,399            1,431,758 

 

The aggregate intrinsic value of stock options outstanding is calculated as the difference between the exercise price of the underlying awards and the fair value of the Company’s common stock. At October 31, 2016, the aggregate intrinsic value of stock options outstanding was $Nil and exercisable was $Nil (January 31, 2016: $Nil and $Nil, respectively).

 

 21 

 

  

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

  

11.Stockholders’ Equity (continued)

 

During the three and nine months ended October 31, 2016, the Company recognized a total fair value of $1,224,826 and $4,038,330, respectively (2015: $1,613,117 and $4,065,628, respectively) of stock based compensation expense relating to the issuance of stock options in exchange for services. An amount of $3,406,565 in stock based compensation expense is expected to be recognized over the remaining vesting term of these options to February 2019.

 

The fair value of each option award was estimated on the date of the grant using the Black-Scholes option pricing model based on the following weighted average assumptions:

 

   2016   2015 
Expected term of stock option (years) (1)   5.00    6.36 
Expected volatility (2)   67.70%   125.14%
Stock price at date of issuance  $2.50   $5.20 
Risk-free interest rate   1.16%   1.75%
Dividend yields   0.00%   0.00%

 

(1) As the Company has insufficient historical data on which to estimate the expected term of the options, the Company has elected to apply the short-cut method to determine the expected term under the guidance of Staff Accounting Bulletin No. 110.

 

(2) As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company has estimated expected share price volatility based on the historical share price volatility of comparable entities.

 

Share Purchase Warrants

 

At October 31, 2016, the Company had 1,645,198 share purchase warrants outstanding as follows:

 

Number  

Exercise

Price

  

Expiry

Date

 6,250   $4.00   November 14, 2016
 6,250   $4.00   November 26, 2016
 5,688   $4.00   December 24, 2016
 12,451   $10.00   August 10, 2017
 3,750   $10.00   August 10, 2018
 60,001   $6.00   April 4, 2019
 555,968   $6.00   June 10, 2019
 155,052   $3.00   June 10, 2019
 168,883   $6.00   July 8, 2019
 29,343   $3.00   July 8, 2019
 24,625   $8.00   October 23, 2019
 137,180   $4.80   December 23, 2020
 365,688   $4.80   June 15, 2022
 36,569(1)  $4.80   June 15, 2022
 15,000   $4.80   July 6, 2022
 62,500   $5.11   September 1, 2022
           
 1,645,198         

 

(1) These warrants may vest and become exercisable only under certain anti-dilution performance conditions contained in the warrant agreement

 

 22 

 

 

Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

 

11.Stockholders’ Equity (continued)

 

During the year ended January 31, 2016, the Company issued an aggregate of 479,757 warrants exercisable at a weighted average exercise price of $4.84 per share for a period of seven years from the date of issuance, pursuant to negotiated consulting and endorsement agreements. The weighted average grant date fair value of these warrants at issuance was $4.67 for an aggregate grant date fair value of $2,239,000, based on the Black-Scholes option pricing model using the following weighted average assumptions: expected term 7 years, expected volatility 158.04%, expected dividend yield 0.00%, risk free interest rate 2.09%. Stock based compensation is being recorded in the financial statements over the vesting term of three years from the date of grant. The Company recognized stock based compensation expense of $(2,149) and $(207,551) during the three and nine months ended October 31, 2016, respectively (2015: $165,849 and $325,648, respectively) in connection with warrants granted.

 

Certain of the warrants granted during the year ended January 31, 2016 become exercisable only under certain anti-dilution performance conditions contained in the warrant agreement. The fair value of these warrants at issuance was calculated to be $168,500 based on the Black-Scholes option pricing model using the following assumptions: expected term 7 years, expected volatility 153.00%, expected dividend yield 0.00%, risk free interest rate 2.11%. No stock-based compensation has been recorded in the financial statements as none of the performance conditions have been met.

 

A summary of the Company’s share purchase warrants outstanding is presented below:

 

   Number of   Weighted Average
 
   Warrants   Exercise Price 
Outstanding at February 1, 2015   1,628,581   $5.74 
Issued   616,937   $4.83 
Exercised   (585,709)  $6.00 
Expired   (14,611)  $9.82
Outstanding at January 31, 2016 and October 31, 2016   1,645,198   $5.27 

 

12.Customer Concentrations

 

The Company has concentrations in the volumes of business transacted with particular customers. The loss of these customers could have a material adverse effect on the Company’s business.

 

For the three and nine months ended October 31, 2016, the Company had concentrations of sales with two customers equal to 33% and 32%, respectively of the Company’s net sales (2015: one customer accounted for 40% and 43%, respectively of the Company’s net sales). As at October 31, 2016 the accounts receivable balances for these customers was $0 (January 31, 2016: $73,347).

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Naked Brand Group Inc.

Notes to the Interim Condensed Consolidated Financial Statements

October 31, 2016

(Expressed in US Dollars)

(Unaudited)

  

  

13.Commitments

 

i)In accordance with a negotiated agreement, the Company is required to pay royalty fees based on the greater of a pre-determined percentage of certain sales, not to exceed 10% of these net wholesale sales, as defined in such agreements, or a minimum annual amount. Minimum royalty payments are being amortized to operations over the period for which royalties accrue under the terms of the agreement. The Company may terminate the agreement in the event that the other party fails to perform any of the services required to be performed under the agreement or breaches any of its other covenants or agreements set forth in the agreement.

 

During the nine months ended October 31, 2016, the Company did not make all minimum royalty payments as they became due and payable under the terms of the agreement, however as at October 31, 2016, the Company has not been provided a notice of default by the other party to the agreement. If the other party provides such notice of default at a later date, this could affect the Company’s ability to sell certain portions of its inventory on hand at October 31, 2016 that are covered under the royalty agreement.

 

During the three and nine months ended October 31, 2016, $75,000 and $225,000, respectively (2015: $Nil and $Nil, respectively), in royalties were amortized to operations.

 

The Company is committed to future minimum royalty payments as follows:

 

Year ending January 31,  Amount 
2017  $137,500 
2018   350,000 
2019   350,000 
2020   262,500 
   $1,100,000 

 

ii)Pursuant to a Strategic Consulting and Collaboration Agreement, the Company is committed to pay a monthly cash retainer ranging from $10,000 to $20,000 over the three-year term of the agreement. The Company has negotiated a hold on the monthly cash retainer, effective March 1, 2016 and continuing indefinitely.

 

14.Subsequent Events

 

i)On November 3, 2016, the Company entered into a subscription agreement with two directors of the Company, pursuant to which the directors purchased, and the Company issued, convertible promissory notes in the aggregate principal amount of $112,000.

 

The notes will bear interest at a rate of 9% per annum payable upon the earliest of (i) the liquidation and dissolution of the Company pursuant to a plan of complete liquidation or (ii) December 31, 2017, unless earlier converted, redeemed or repurchased. The principal amounts, and any accrued and unpaid interest thereon, are automatically convertible into common stock upon the consummation of a Qualified Financing (Note 10(ii)), convertible into common stock at the option of the holder upon the occurrence of a Nonqualified Financing (Note 10(ii)).

 

ii)Pursuant to a consulting agreement effective November 1, 2016, the Company granted 100,000 options exercisable into common stock of the Company at $2.00 per share until November 1, 2026 and 150,000 options exercisable at $2.50 per share until November 1, 2026.

 

iii)On December 12, 2016, the Company received an advance of $116,000 from a director and officer of the Company. The advance is unsecured and other terms, including repayment terms, are to be determined.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

We are an apparel and lifestyle brand company that is currently focused on innerwear products for women and men. Under our flagship brand name and registered trademark “Naked®”, we design, manufacture and sell men’s and women’s underwear, intimate apparel, loungewear and sleepwear through retail partners and direct to consumer through our online retail store www.wearnaked.com. We have a growing retail footprint for our innerwear products in premium department and specialty stores and internet retailers in North America, including accounts such as Nordstrom, Dillard’s, Bloomingdale’s, Amazon.com, Soma, Saksfifthavenue.com, barenecessities.com and others.

 

During the three months ended October 31, 2016 our net sales increased by $233,746, or 73.6% over the same period in fiscal 2016. Net sales increased primarily as a result of new department store accounts, including Bloomingdales, Dillards, Chicos, and Saks Fifth Avenue, which was partially offset by lower sales from Nordstroms for the current period. During the three months ended October 31, 2016, sales to department stores accounted for approximately 48% of total sales, as compared to 42% during the same period in fiscal 2016. Sales of our women’s products at new accounts have been strong, however these sales were offset by a decrease in our men’s sales from Nordstrom in the current period, as a result of a reduction by Nordstrom in replenishment orders aimed at reducing overstocked inventory.

 

We sell all our collections through our ecommerce store (www.wearnaked.com), which sales channel saw an increase in net sales to approximately $99,586, or 18% of total net sales for the three-month period ended October 31, 2016, from $83,193, or 26% of total net sales for the same period in fiscal 2016, an overall increase of approximately 20%. Our ecommerce sales increased to $264,577 for the nine-month period ended October 31, 2016 from $175,256 for the same period in fiscal 2016, an increase of approximately 51%. The decrease in ecommerce sales as a percentage of total sales is attributable to a larger increase in total department and retail store sales in the third quarter ended October 31, 2016 compared to the comparative quarter, as a result of new department store accounts, as described above.

 

Sales to retail and specialty store accounts constituted approximately 26% of sales in the current quarter, as compared to 16% in the comparative quarter. Total sales to retail and specialty store sales increased by approximately 184% over the comparative quarter, due to the addition of a new men’s account, on a test basis. Although the new retail account was not successful, we expect to add new retail and specialty store accounts as a result of the launch of our women’s collections and expect sales of women’s products to continue to increase throughout the year as a result of the addition of new customer accounts as well as marketing and promotional activities to support these channels, along with our direct ecommerce sales.

 

During the quarter ended October 31, 2016, we sold off approximately $25,000 in out of season and overstock inventory through off price sales channels. Sales to these customers accounted for approximately 5% of total net sales during the three months ended October 31, 2016 and 2015.

 

During the quarter ended October 31, 2016, men’s products constituted 51% of total sales and women’s products constituted 49% of total sales. Going forward, we expect the majority of our growth to be driven by our more recently launched women’s collections, as we anticipate that these products will become more widely distributed. In addition, the women’s market is substantially larger than the men’s market. However, we also expect to continue to see stable growth in our men’s products through our sales and marketing initiatives.

 

Our products are sold in North America; however, we believe our products appeal to men and women around the globe. We are currently exploring international distribution relationships for our Naked and Wade X Naked products and we anticipate that we will commence selling a limited number of products in markets such as Europe, Asia, and Central and South America starting in Calendar 2017.

 

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Our industry is subject to seasonality of buying, which can affect revenue and cash flows. For men, there are generally two distinct buying seasons in the apparel industry: Fall/Winter season, which falls into the third to fourth quarters of our fiscal year and Spring/Summer season, which falls into the first to second quarters of our fiscal year, with some potential shipments at the last quarter. The women’s apparel buying markets are more frequent than men’s although we may elect to focus only on two main buying markets as we do for men’s products in order to optimize design and production cycles. As a result of growth and changes to our business with the introductions of a new product lines, the natural seasonality of our business had a reduced effect. Thus, historical quarterly operating trends may not be indicative of future performance because of new product launches and continued early stage sales growth.

 

During the three months ended October 31, 2016, we launched our first collections of Wade X Naked, which became available for advance purchase during the quarter ended July 31, 2016. The Company started shipping these orders in September 2016 through its direct to consumer channels, and received an initial order from Nordstrom. During the quarter ended October 31, 2016, we shipped over 2,400 units for net sales of approximately $27,000 from the Wade X Naked collection.

 

In the future, we intend to expand the Naked brand on our own and through licensing partnerships into other apparel and product categories that can exemplify the mission of the brand, such as athleisure and activewear, swimwear, sportswear, hosiery, bedding and home products, and more.

 

Results of Operations

 

THREE Months Ended OCTOBER 31, 2016 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 2015

 

Revenues

 

During the three months ended October 31, 2016, our net sales increased by $233,746, or 73.6%, to $551,494 from $317,748 for the same period in fiscal 2016. Net sales increased as a result of approximately $176,000 in new department stores sales relating to the addition of Bloomingdales, Saks Fifth Avenue, Chico’s, and Dillard’s. This increase was partially offset by a decrease in Nordstrom sales for the three months ended October 31, 2016 of approximately $38,000 from the same period in fiscal 2016.

 

Gross Margins

 

For the nine-month period ended October 31, 2016, we realized a gross margin of 8.2%, compared to 29.2% in the same period in fiscal 2016. The decrease was primarily due to a large write down of overstocked men’s inventory during our second fiscal quarter, reflected in cost of sales.

 

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Operating Expenses

 

   Three months ended October 31   Change 
General and administrative  2016   2015   $   % 
Bad debts  $(2,110)  $-    (2,110)   - 
Bank charges and interest   4,912    1,756    3,156    179.7 
Consulting   25,645    139,591    (113,946)   (81.6)
Depreciation   2,182    2,942    (760)   (25.8)
Directors fees(1)   117,491    328,907    (211,416)   (64.3)
Insurance   33,498    31,041    2,457    7.9 
Investor relations   17,780    49,345    (31,565)   (64.0)
Marketing   292,473    356,224    (63,751)   (17.9)
Occupancy and rent   60,743    36,787    23,956    65.1 
Office and misc   41,528    57,427    (15,899)   (27.7)
Product development   97,805    205,992    (108,187)   (52.5)
Professional fees   91,082    328,826    (237,744)   (72.3)
Salaries and benefits(1)   1,647,556    1,672,719    (25,163)   (1.5)
Transfer agent and filing fees   16,803    14,333    2,470    17.2 
Travel   28,553    36,911    (8,358)   (22.6)
Warehouse management   27,928    108,904    (80,976)   (74.4)
Total  $2,503,869   $3,371,705    (867,836)   (25.7)

 

(1)Included in salaries and benefits for the three months ended October 31, 2016 is $1,109,484 (2015: $1,422,394) and included in directors’ fees is $117,491 (2015: $328,907) for non-cash stock option compensation charges. These stock based compensation charges relate to stock options issued to a new core management team and directors in June 2014 as part of certain incentive based compensation packages, and to new directors and advisors appointed in Fiscal 2016. The fair value of such awards is being recognized over their vesting terms.

 

There was an overall decrease in general and administrative expenses of 25.7% for the quarter ended October 31, 2016, compared to the same period in fiscal 2016. This decrease is mainly attributable the decrease in professional fees as a result of financing related activities in the comparative period, and the decrease in directors’ fees as a result of stock based compensation related to stock option awards issued in the comparative period.

 

There were also decreases in consulting, product development, warehouse management, travel, investor relations, and marketing as further explained below:

 

Consulting fee expenses decreased as a result of a recovery of stock option compensation charges recognized in the quarter ended October 31, 2016 for stock options issued to non-employees, which are being re-measured at each reporting period in accordance with ASC 505-50, Equity Based Payments to Non-Employees, the value of which decreased during the quarter ended October 31, 2016.

 

Our marketing expenses decreased for the quarter ended October 31, 2016 as a result of the negotiation of vendor terms with our social media partner and a decrease in marketing expenses for merchandising consulting, photoshoots, and promotional material from the comparative period in connection with the launch of new collections. These decreases were partially offset by an increase in marketing expense associated with our collaboration and endorsement agreement with Dwayne Wade, including advanced royalty charges.

 

Product development costs have decreased because the Company incurred higher product development costs in the comparative period, in connection with the anticipated launch of our women’s collections.

 

Warehouse management expenses decreased in the quarter ended October 31, 2016 as compared to the same period in fiscal 2016 as a result of the engagement of a new third party warehouse, at a lower cost.

 

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The decrease in general and administrative expenses described above were partially offset by an increase in rent expense.

 

Rent expense increased in the quarter ended October 31, 2016 as a result of an expanded team, compared to the same period in fiscal 2016, which warranted increased occupancy costs due to month-to-month rent based on the number of desks occupied.

 

Other income and expenses

 

We incurred interest expenses of $19,731 for the quarter ended October 31, 2016 as compared to $133,432 for the same period in fiscal 2016. This decrease in interest is attributable to the conversion of long term debt in December 2015, in connection with the public offering of our common stock.

 

Financing and accretion charges were $805 for the quarter ended October 31, 2016 compared to $94,980 for the same period in fiscal 2016. Financing and accretion expenses in the comparative period related mostly to the accretion of debt discounts associated with the long-term debt, which was converted to shares of common stock in December 2015.

 

Net loss and comprehensive loss

 

Our net loss for the quarter ended October 31, 2016 was $2,362,600, or $(0.39) per share, as compared to a net loss of $3,533,421, or $(2.08) per share, for the quarter ended October 31, 2015. The most significant factor for the decrease in net loss in the current period is a result of the decrease in general and administrative expenses, as described above. The most significant factor for the decrease in net loss per share is due to the increased number of shares outstanding compared to the comparative period, as a result of the public offering of common stock and conversion of debt to common stock in December 2015.

 

NINE Months Ended OCTOBER 31, 2016 COMPARED TO NINE MONTHS ENDED OCTOBER 31, 2015

 

Revenues

 

During the nine months ended October 31, 2016, our net sales increased by $353,975, or 38%, to $1,292,132 from $938,157 for the same period in fiscal 2016. Net sales increased significantly primarily as a result of our first shipments of women’s sleepwear, loungewear, and intimate apparel collections to select department store and specialty store accounts during the first quarter of fiscal 2017 as well as the addition of new department store accounts with Bloomingdales, Dillards, Chicos, and Saks Fifth Avenue during the nine months ended October 31, 2016. These increases were partially offset by reduced sales to one of our key customers, Nordstrom, as a result of a reduction by Nordstrom in replenishment orders aimed at reducing overstocked in-store inventory and a store closure which resulted in a large return of merchandise.

 

Gross Margins

 

For the nine-month period ended October 31, 2016, we realized a gross margin of 8.2%, compared to 29.2% in the same period in fiscal 2016. The decrease was primarily due to a large write down of overstocked men’s inventory during our second fiscal quarter, reflected in cost of sales.

 

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Operating Expenses

 

   Nine months ended October 31   Change 
General and administrative  2016   2015   $   % 
Bad debts  $(2,478)  $20,246    (22,724)   (112.2)
Bank charges and interest   12,984    10,034    2,950    29.4 
Consulting   6,560    314,183    (307,623)   (97.9)
Depreciation   7,987    13,524    (5,537)   (40.9)
Directors fees(1)   364,020    831,178    (467,158)   (56.2)
Insurance   48,443    115,804    (67,361)   (58.2)
Investor relations   57,898    87,724    (29,826)   (34.0)
Marketing   884,676    789,593    95,083    12.0 
Occupancy and rent   159,847    73,629    86,218    117.1 
Office and misc   150,714    183,685    (32,971)   (17.9)
Product development   369,583    570,458    (200,875)   (35.2)
Professional fees   360,017    648,309    (288,292)   (44.5)
Salaries and benefits(1)   5,452,686    4,545,427    907,259    20.0 
Transfer agent and filing fees   47,614    27,027    20,587    76.2 
Travel   74,015    138,257    (64,242)   (46.5)
Warehouse management   241,842    301,218    (59,376)   (19.7)
Total  $8,236,408   $8,670,296    (433,888)   (5.0)

 

(1)Included in salaries and benefits for the nine months ended October 31, 2016 is $3,808,565 (2015: $3,527,653) and included in directors’ fees is $364,020 (2015: $831,178) for non-cash stock option compensation charges. These stock based compensation charges relate to stock options issued to a new core management team and directors in June 2014 as part of certain incentive based compensation packages, and to new directors and advisors appointed in Fiscal 2016. The fair value of such awards is being recognized over their vesting terms.

 

There was an overall decrease in general and administrative expenses of 5% for the nine months ended October 31, 2016, compared to the same period in fiscal 2016. This decrease is mostly attributable to a decrease in directors fees consisting entirely of non-cash charges, which decreased in the current period as a result of the appointment of advisors in the comparative period, which resulted in greater associated initial stock based compensation charges during the period.

 

There were also decreases in consulting, product development, professional fees, insurance, travel, and warehouse management as further explained below.

 

Consulting fee expenses decreased as a result of a recovery of stock option compensation charges recognized in the period ended October 31, 2016 for stock options issued to non-employees, which are being re-measured at each reporting period in accordance with ASC 505-50, Equity Based Payments to Non-Employees, the value of which decreased during the period ended October 31, 2016. This was offset by an increase in consulting fees for fees paid to a consulting firm which were previously part of salaries and wages.

 

Product development costs have decreased in the current period because the Company incurred higher product development costs in the comparative period in connection with the launch of our women’s collections. This decrease also relates to a recovery for non-employee stock based compensation due to a reduction in share price during the current period.

 

Professional fees decreased in the current period as a result of significant new contracts and financing activities in the comparative period, as well as a decrease in legal fees as a result of negotiations to set a monthly fee with legal counsel.

 

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Insurance expenses decreased mostly due to a change in the way insurance was being expensed. In the comparative period, insurance expense was expensed when paid and included the initial down payment on our D&O policy in June 2015. In the current period, the policy was set up as a prepaid and the financing payments are being applied against the payable.

 

Decreases to travel expenses for the period ended October 31, 2016 are as a result of a decrease in discretionary spending due to cash shortages as well as a decrease in financing related travel.

 

Warehouse management expenses decreased in the nine months ended October 31, 2016 as compared to the same period in fiscal 2016 as a result of the engagement of a new third party warehouse, at a lower cost.

 

The decrease in general and administrative expenses described above were partially offset by an increase in salaries and benefits, marketing, transfer agent and filing fees, and rent.

 

The increase in salaries and benefits for the nine months ended October 31, 2016 due to increases in staffing in both the accounting/finance and sales departments as well as an increase in stock based compensation charges as a result of a layoff which triggered the immediate vesting of all unvested options.

 

Our marketing expenses increased significantly for the period ended October 31, 2016 as a result of the expenses associated with our collaboration and endorsement agreement with Dwayne Wade, including advanced royalty charges which commenced in the fourth quarter of 2016, photoshoots and promotional materials.

 

Filing fees have increased as a result of the up listing of our common stock to NASDAQ from the OTC markets, which exchange carries a higher annual fee, which amount is amortized over the related calendar year.

 

Rent expense increased in the period ended October 31, 2016 as a result of an expanded team which warranted increased occupancy, however office and miscellaneous charges decreased as a result of the implementation of a fully integrated ERP system in the same period in fiscal 2016.

 

Other income and expenses

 

We incurred interest expenses of $56,200 for the period ended October 31, 2016 as compared to $494,788 for the same period in fiscal 2016. This decrease in interest is attributable to the conversion of long term debt, in connection with the public offering of our common stock in December 2015.

 

Financing and accretion charges were $16,196 for the period ended October 31, 2016 compared to $300,252 for the same period in fiscal 2016. Financing and accretion expenses in the comparative period related mostly to the accretion of debt discounts associated with the long-term debt, which was converted to shares of common stock in December 2015 in connection with the public offering of our common stock.

 

During the fiscal year ended January 31, 2015, in connection with a private placement offering, we issued convertible debentures and warrants, each of which were convertible or exercisable into shares of our common stock. These embedded conversion features and warrants were subject to a registration rights agreement which, as a result of the terms of such agreement, triggered the requirement to account for these instruments as derivative financial instruments. As a result of the application of these accounting rules, which required these derivative financial instruments to be carried at fair value, we recorded a mark to market gain of $708,900 during the period ended October 31, 2015 in correlation with fluctuations in the price of our common stock. During the period ended October 31, 2015, we obtained a waiver from all of the holders of these instruments waiving certain registration obligations of our Company and, as such, these instruments are no longer required to be accounted for in this manner and no such charges exist in the period ended October 31, 2016.

 

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Net loss and comprehensive loss

 

Our net loss for the nine months ended October 31, 2016 was $8,204,475, or $(1.35) per share, as compared to a net loss of $8,483,089, or $(6.51) per share, for the nine months ended October 31, 2015. The most significant factor for the decrease in net loss in the current period is a result of the overall lower operating loss due to a 5% decrease in general and administrative expenses. The most significant factor for the decrease in net loss per share is due to the increased number of shares outstanding compared to the comparative period, as a result of the public offering of common stock and conversion of debt to common stock in December 2015.

 

Liquidity and FINANCIAL CONDITION

 

Liquidity

 

Our cash requirements have been principally to fund working capital needs, the development of new product lines and the procurement of inventory to support our growth.

 

As of October 31, 2016, the Company had cash totaling $44,365. The Company believes it does not have sufficient cash resources to fund its operations through the fourth quarter of fiscal 2017.

 

In accordance with the collaboration and endorsement agreement with Dwayne Wade, the Company is required to make quarterly payments for royalty fees based on the greater of a pre-determined percentage of certain sales, or a minimum annual amount. During the nine months ended October 31, 2016, the Company did not make all minimum royalty payments as they became due under the terms of the agreement, and consequently has not fulfilled its obligations under the agreement. Accordingly, the other party to the agreement has the right to cause the agreement to enter into default. If the other party provides such notice of default, this could affect the Company’s ability to sell certain portions of its Wade X Naked inventory on hand and on order at October 31, 2016. As at October 31, 2016, the Company has not been provided a notice of default by the other party to the agreement, and is currently negotiating settlement of amounts currently due under the agreement. No provision for any losses that might be incurred in the event of a notice of default has been provided in the accompanying financial statements.

 

The Company's common stock is listed on The NASDAQ Capital Market under the symbol NAKD. On September 23, 2016, the Company received written notice from the Listing Qualifications Staff of The NASDAQ Stock Market LLC (“NASDAQ”) notifying the Company that it no longer complies with NASDAQ Listing Rule 5550(b)(1) due to the Company’s failure to maintain a minimum of $2,500,000 in stockholders’ equity (the “Minimum Stockholders’ Equity Requirement”) or any alternatives to such requirement as of July 31, 2016, and as of September 22, 2016. In response, the Company submitted a compliance plan to NASDAQ.  The Company is working with NASDAQ to finalize such plan and undertake steps to regain compliance. If NASDAQ accepts the Company’s plan, NASDAQ may grant an extension of up to 180 calendar days from the date of the notice, or until March 22, 2017, to evidence compliance with the Minimum Stockholders’ Equity Requirement. If NASDAQ does not accept the Company’s plan, the Company will have the right to appeal such decision to a NASDAQ hearings panel. The stockholders’ equity reported in this Form 10-Q is $420,941.

 

Management intends to continue to raise funds from equity and debt financings to fund our operations and objectives. However, we cannot be certain that financing will be available on acceptable terms or available at all. To the extent that we raise additional funds by issuing debt or equity securities or through bank financing, our existing stockholders may experience significant dilution. If we are unable to raise funds when required or on acceptable terms, we may have to significantly scale back, or discontinue, our operations.

 

Factoring Arrangement with Wells Fargo

 

On June 14, 2016, we entered into a Joint Factoring Agreement (the “Joint Factoring Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Factoring Agreement with Wells Fargo replaces a factoring agreement with Capital Business Credit LLC, which was terminated effective on the same date.

 

Under the terms of the Joint Factoring Agreement, we may assign eligible accounts receivable (the “Accounts”) to Wells Fargo in exchange for loans and advances (each such loan or advance, an “Advance”) up to an aggregate amount (the “Borrowing Base”) not to exceed the lesser of (i) $6,000,000 or (ii) the sum of up to 80% of trade receivables deemed eligible by Wells Fargo plus (A) the lesser of up to (x) 50% of the value, calculated at the lower of cost or market, of finished goods, warehoused inventory deemed eligible by Wells Fargo or (y) $500,000, plus (B) the lesser of (x) up to 75% of marketable securities held in a blocked security account, subject to an account control agreement in favor of Wells Fargo (the “Securities Account”); provided, however, that at any time when the market value of the securities held in such Securities Account is below $1,067,000, then the value of such securities for purposes of calculating the Borrowing Base will be $0 or (y) $200,000, less any reserves that Wells Fargo may establish from time to time.

 

In connection with Wells Fargo’s services under the Joint Factoring Agreement, Wells Fargo receives a commission equal to the Factoring Commission Percentage (as defined in the Joint Factoring Agreement) multiplied by the gross invoice amount of each Account purchased, which is charged to the Company’s account on the date a related Advance is made. During the initial term of the Joint Factoring Agreement, Wells Fargo will receive minimum commissions equal to $24,000, $36,000 and $50,000 during the first, second and third year, respectively.

 

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We bear the risk of credit loss on the Accounts, except where Wells Fargo provides credit approval in writing on such Account. The Advances bear interest on the daily net balance of any moneys owed at a rate of LIBOR plus 3%. All obligations under the Joint Factoring Agreement, including the Advances (collectively, the “Obligations”), are payable on demand and may be charged by Wells Fargo to the Company’s account at any time.

 

At October 31, 2016, there was approximately $314,535 available for advance under the Joint Factoring Agreement.

 

The Obligations are secured by a continuing security interest in all assets, properties, and rights of the Company, wherever located, whether owned as of the date of the Joint Factoring Agreement or subsequent thereto. The term of the Joint Factoring Agreement is for three years and will automatically renew, unless terminated at any time by Wells Fargo with thirty days’ written notice, or by us prior to such renewal, with sixty days’ prior written notice.

 

Working Capital (Consolidated)  October 31, 2016
(unaudited)
   January 31, 2016 
Current Assets  $2,383,319   $6,786,672 
Current Liabilities  $1,978,110   $2,115,527 
Working Capital  $405,209   $4,671,145 

 

Our decrease in working capital during the period is primarily attributable to cash losses from operations.

 

Cash Flows

 

   Nine months ended October 31, 
   2016   2015 
         
Cash Flows used in Operating Activities  $(4,116,570)  $(4,420,385)
Cash Flows used in Investing Activities   (7,779)   (36,594)
Cash Flows provided by (used in) Financing Activities   (612,280)   2,831,981 
Net change in Cash during Period  $(4,736,629)  $(1,624,998)

 

Operating Activities

 

Cash flows used in our operating activities was $4,116,570 for the nine months ended October 31, 2016, compared to $4,420,385 for the comparative period. The cash used in operations during the period was largely the result of a net loss for the period, offset by non-cash charges of $4,053,388, mostly related to share based compensation charges as described above.

 

Investing Activities

 

Investing activities used cash of $7,779 for the nine months ended October 31, 2016 and used cash of $36,594 for the nine months ended October 31, 2015. Investing activities included cash outlays for patent and trademark acquisitions in both periods.

 

Financing Activities

 

Cash used in financing activities during the nine months ended October 31, 2016 was $612,280, which included $600,000 for the repayment of long term debt and $124,280 in net repayments under factoring arrangements.

 

Proceeds from financing activities during the nine months ended October 31, 2015 included net advances of $580,407 made pursuant to the factoring arrangement and net proceeds of $2,251,574 received in connection with the issuance of shares.

 

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Commitments and capital expenditures

 

We do not anticipate that we will expend any significant amount on capital expenditures like equipment over the next twelve months or enter into any other material commitments.

 

Disclosure of Outstanding Share Data

 

As of December 14, 2016, there were 6,069,982 shares of our common stock issued and outstanding. In addition, at December 14, 2016, the total dilutive securities outstanding, including options, warrants and shares issuable upon conversion of convertible debt instruments was approximately 3,682,597 shares.

 

Critical Accounting Policies

 

Our interim condensed consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States (“GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financial statements.

 

There have been no significant changes in the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended January 31, 2016 as filed with the SEC on April 29, 2016.

 

New Accounting Pronouncements

 

For a description of new applicable accounting pronouncements, see Note 3, Basis of Presentation, of the Notes to the Interim Condensed Consolidated Financial Statements of this Form 10-Q.

 

Off Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are not required to provide the information under this item.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of October 31, 2016, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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Changes in Internal Control

 

There were no other changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us that may materially affect us.

 

Item 1A. Risk Factors.

 

In addition to the information set forth in this Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including without limitation the risk factors contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2016 that could materially and adversely affect our business, financial condition, and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. Except as provided below, there have been no material changes in the significant factors that may affect our business and operations as described in “Item 1A—Risk Factors” of the Annual Report on 10-K for the year ended January 31, 2016, as amended, which was subsequently updated by “Item 1A—Risk Factors” of the Quarterly Report on Form 10-Q for the quarter ended July 31, 2016.

 

If we are unable to obtain additional financing on acceptable terms, we may have to curtail our growth or cease our development plans and operations.

 

The operation of our business and our growth efforts will require significant cash outlays. We are largely dependent on outside capital to implement our business plan and support our operations. We anticipate for the foreseeable future that cash on hand and cash generated from operations will not be sufficient to meet our cash requirements, and that we will need to raise additional capital through investments to fund our operations and growth. We cannot assure you that we will be able to raise additional working capital as needed on terms acceptable to us, if at all. If we are unable to raise capital as needed, we may be required to reduce the scope of our growth efforts, which could harm our business plans, financial condition and operating results, or cease our operations entirely, in which case, you may lose all your investment. Financings, including future equity investments, if obtained, may be on terms that are dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the price at which you purchase your shares.

 

As of October 31, 2016, the Company had cash totaling $44,365. The Company believes that it does not have sufficient capital to fund its operations through the fourth quarter ending January 31, 2017.

 

Our Common Stock may be delisted from The NASDAQ Capital Market if we cannot satisfy NASDAQ’s continued listing requirements in the future.

 

On September 23, 2016, we received written notice from the Listing Qualifications Staff of NASDAQ notifying us that we no longer comply with NASDAQ Listing Rule 5550(b)(1) due to our failure to maintain a minimum of $2,500,000 in stockholders’ equity (the “Minimum Stockholders’ Equity Requirement”) or any alternatives to such requirement. In response, we submitted a compliance plan to NASDAQ and are working with NASDAQ to finalize such plan and undertake steps to regain compliance. If NASDAQ accepts our plan, NASDAQ may grant an extension of up to 180 calendar days from the date of the notice, or until March 22, 2017, to evidence compliance with the Minimum Stockholders’ Equity Requirement. If NASDAQ does not accept our plan, we will have the right to appeal such decision to a NASDAQ hearings panel. The Company reported stockholders’ equity of $420,941 in this Form 10-Q. 

 

If we are unable to comply with the Minimum Stockholders’ Equity Requirement and/or NASDAQ does not accept our compliance plan, our common stock may be delisted, which could make trading our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. Without a NASDAQ listing, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more difficult and the trading volume and liquidity of our stock could decline. Delisting from NASDAQ could also result in negative publicity and could also make it more difficult for us to raise additional capital. Further, if we are delisted, we would also incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market. If our common stock is delisted by NASDAQ, our common stock may be eligible to trade on an over-the-counter quotation system, such as the OTCQB market, where an investor may find it more difficult to sell our stock or obtain accurate quotations as to the market value of our common stock. We cannot assure you that our common stock, if delisted from NASDAQ, will be listed on another national securities exchange or quoted on an over-the counter quotation system.

 

Investors should be aware that the value of an investment in our company may go down as well as up. In addition, there can be no certainty that the market value of an investment in our company will fully reflect its underlying value.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits.

 

The documents listed in the Exhibit Index of this Form 10-Q are incorporated by reference or are filed with this Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

 

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SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: December 14, 2016 NAKED BRAND GROUP INC.
     
  By: /s/ Kai-Hsiang Ling
    Kai-Hsiang Lin, Vice President of Finance
    (Principal Financial Officer and Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit Number   Description
     
4.1   Form of 9% Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to our current report on Form 8-K, as filed with the SEC on October 27, 2016).
     
4.2   Form of 10% Promissory Note (incorporated by reference to Exhibit 4.2 to our current report on Form 8-K, as filed with the SEC on November 9, 2016).
     
10.1   Form of Subscription Agreement for 9% Convertible Promissory Note (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K, as filed with the SEC on October 27, 2016).
     
31.1*   Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Principal Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1**   Certification of Principal Executive Officer and Principal Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

 

** Furnished herewith.

 

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