Filed pursuant to Rule 424(b)(3)

Registration No. 333-226192

 

NAKED BRAND GROUP LIMITED

 

10,864,600 Ordinary Shares

 

This prospectus relates to the resale by the Selling Shareholders (as defined below in the section titled “Selling Shareholders”) of up to 9,570,708 ordinary shares, no par value, of Naked Brand Group Limited (“Ordinary Shares”) and the resale by three of the Selling Shareholders of up to 1,293,892 Ordinary Shares issuable upon exercise of outstanding warrants.

 

The securities offered for resale hereby were issued in connection with one or more private placements and placements that occurred outside the United States. We will not receive any proceeds from the sale of the securities by the Selling Shareholders under this prospectus. However, we could receive up to US$4,852,095 in gross proceeds if all of the warrants held by three of the Selling Shareholders are exercised for cash. Any amounts we receive from such exercises will be used for working capital and other general corporate purposes.

 

Information regarding the Selling Shareholders, the number of Ordinary Shares that may be sold by them, and the times and manner in which they may offer and sell the Ordinary Shares under this prospectus is provided under the sections titled “Selling Shareholders” and “Plan of Distribution,” respectively. We have not been informed by any of the Selling Shareholders that they intend to sell their securities covered by this prospectus and do not know when or in what amount the Selling Shareholders may offer the securities for sale. The Selling Shareholders may sell any, all, or none of the securities offered by this prospectus.

 

The Selling Shareholders and intermediaries through whom such securities are sold may be deemed “underwriters” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation. We have agreed to indemnify certain of the Selling Shareholders against certain liabilities, including liabilities under the Securities Act.

Our Ordinary Shares trade on the Nasdaq Capital Market (“Nasdaq”) under the symbol “NAKD”. The last sale price of our Ordinary Shares on March 14, 2019 was US$0.37 per share.

 

Investing in our securities involves risks. See “Risk Factors” beginning on page 7 to read about factors you should consider before buying our securities.

 

Neither the Securities and Exchange Commission nor any state or foreign securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Prospectus dated March 19, 2019

 

 
 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
THE OFFERING 6
RISK FACTORS 7
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 20
USE OF PROCEEDS 50
CAPITALIZATION 50
SELLING SHAREHOLDERS 50
PLAN OF DISTRIBUTION 54
DESCRIPTION OF SECURITIES 56
LEGAL MATTERS 58
EXPERTS 58
WHERE YOU CAN FIND ADDITIONAL INFORMATION 58

  

You should rely only on the information contained in this prospectus and the documents we incorporate by reference in this prospectus. We have not authorized anyone to provide you with different information. We do not take any responsibility for, and cannot provide any assurance as to the reliability of, any other information that others may give you. We are not making an offer to sell the securities in any jurisdiction where the offer or sale thereof is not permitted. The information contained in this prospectus and incorporated by reference in this prospectus is accurate only as of the respective date of such information, regardless of the time of delivery of this prospectus or of any sale or offer to sell hereunder.

 

To the extent this prospectus contains summaries of the documents referred to herein, you are directed to the actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will be filed, or will be incorporated by reference as exhibits to the Registration Statement of which this prospectus is a part, and you may obtain copies of such documents as described below in the section titled “Where You Can Find Additional Information.”

 

Unless otherwise stated in this prospectus, “we,” “us,” “our,” or “our company,” refers to Naked Brand Group Limited, our subsidiaries, and our predecessor operations.

 

This prospectus contains references to a number of trademarks which are registered or for which we have pending applications or common law rights. Our major trademarks include, among others, the “Naked” trademark, the Heidi Klum trademarks and other related trademarks. Solely for convenience, the trademarks, service marks and trade names referred to in this Registration Statement are listed without the ®, (sm) and (TM) symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

 

 
 

 

PROSPECTUS SUMMARY

 

This summary highlights key information contained elsewhere in this prospectus and in the documents incorporated in this prospectus by reference, and is qualified in its entirety by the more detailed information herein and therein. This summary may not contain all of the information that is important to you. You should read the entire prospectus and the documents incorporated by reference in this prospectus, including the information in “Risk Factors” and our financial statements and the related notes thereto, before making an investment decision.

 

History and Development

 

Naked Brand Group Limited, an Australian company, was formed on May 11, 2017 under the name “Bendon Group Holdings Limited.” We were formed to serve as a holding company for Naked Brand Group Inc., a Nevada corporation (“Naked”), and Bendon Limited, a New Zealand company (“Bendon”) after the consummation of the Transactions (described below).

 

The Merger and Reorganization

 

On June 19, 2018, we consummated the transactions contemplated by that certain Agreement and Plan of Reorganization, dated as of May 25, 2017 and amended on July 26, 2017, February 21, 2018, March 19, 2018 and April 23, 2018 (the “Merger Agreement”), by and among our company, Naked, Bendon, Naked Merger Sub Inc., a Nevada corporation and a wholly owned subsidiary of ours (“Merger Sub”), and Bendon Investments Ltd., a New Zealand company that at the time was the owner of a majority of the outstanding shares of Bendon (the “Principal Shareholder”).

 

Pursuant to the Merger Agreement, (i) we undertook a reorganization (the “Reorganization”) pursuant to which all of the shareholders of Bendon exchanged all of the outstanding ordinary shares of Bendon for our Ordinary Shares, and (ii) immediately thereafter, the parties effectuated a merger of Merger Sub and Naked, with Naked surviving as a wholly owned subsidiary of ours and the Naked stockholders receiving our Ordinary Shares in exchange for all of the outstanding shares of common stock of Naked (the “Merger” and together with the Reorganization, the “Transactions”).

 

As a result of the Transactions, Bendon and Naked became our wholly owned subsidiaries and the shareholders of Bendon and the stockholders of Naked became shareholders of ours. Effective on and from the closing of the Transactions, we changed our name from “Bendon Group Holdings Limited” to “Naked Brand Group Limited.”

 

Acquisition of FOH License with Authentic Brands Group from FOH Online Corp.

 

On November 15, 2018, we and our wholly-owned subsidiary, Bendon, entered into a Stock Purchase Agreement with the shareholders of FOH Online Corp. (“FOH”), including Cullen Investments Limited (“Cullen”), a significant shareholder of the Company. Pursuant to the agreement, on December 6, 2018, we purchased all of the issued and outstanding shares of FOH, in order to gain direct ownership of the Frederick’s of Hollywood license arrangement FOH had with Authentic Brands Group (“ABG”). We previously marketed merchandise under the Frederick’s of Hollywood brand through a sub-license arrangement with FOH. As a result of the acquisition of FOH, we now have a direct relationship with ABG in relation to the Frederick’s of Hollywood license. Under the terms of the agreement, we paid a purchase price of approximately US$18.2 million, as follows (i) Bendon forgave debt owed to it by FOH and Cullen, in the aggregate amount of approximately US$9.9 million, and (ii) we issued 3,765,087 of our Ordinary Shares to FOH’s shareholders, valued at a price per share of US$2.20. We also agreed to satisfy certain obligations with respect to certain claims involving the parties. A portion of the Ordinary Shares issued to FOH’s shareholders are held in trust and may be released to Cullen to the extent not applied in satisfaction of such claims. We are still evaluating the accounting and financial reporting treatment of this transaction.

 

Emerging Growth Company

 

We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). As an emerging growth company, we are eligible, and have elected, to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding executive compensation (to the extent applicable to a foreign private issuer).

 

We could remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of the consummation of the Transactions. However, if our annual gross revenue is US$1.07 billion or more, or our non-convertible debt issued within a three year period exceeds US$1 billion, or the market value of our Ordinary Shares that are held by non-affiliates exceeds US$700 million on the last day of the second fiscal quarter of any given fiscal year, we would cease to be an emerging growth company as of the last day of that fiscal year.

 

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Foreign Private Issuer

 

We are a “foreign private issuer” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act, and we are not required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors, and principal shareholders will be exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our Ordinary Shares.

 

The Nasdaq Listing Rules allow foreign private issuers, such as us, to follow home country corporate governance practices (in our case Australian) in lieu of the otherwise applicable Nasdaq corporate governance requirements. In accordance with this exception, we follow Australian corporate governance practices in lieu of certain of the Nasdaq corporate governance standards, as more fully described in our Annual Report on Form 20-F for the fiscal year ended January 31, 2018, as amended (the “Annual Report”), which is incorporated herein by reference. See “Where You Can Find Additional Information.”

 

Business Overview

 

Overview

 

We operate in the highly competitive specialty retail business. We are a designer, distributor, wholesaler, and retailer of women’s and men’s intimate apparel, as well as women’s swimwear. Our merchandise is sold through company-owned retail stores in Australia and New Zealand; through online channels; and through wholesale partners in Australia, New Zealand, the United States and Europe (collectively, “partners”).

 

We have seven reportable segments:

 

  Australia Retail:  This segment covers retail and outlet stores located in Australia.
     
  New Zealand Retail:  This segment covers retail and outlet stores located in New Zealand.
     
  Australia Wholesale:  This segment covers the wholesale of intimates apparel to customers based in Australia.
     
  New Zealand Wholesale:  This segment covers the wholesale of intimates apparel to customers based in New Zealand.
     
  U.S. Wholesale:  This segment covers the wholesale of intimates apparel to customers based in the United States.
     
  Europe Wholesale:  This segment covers the wholesale of intimates apparel to customers based in Europe.
     
  E-commerce:  This segment covers the group’s online retail activities. E-commerce revenue includes revenue from FOH.

 

In addition, we continually explore new ways to expand our business, including through the use of new technologies, such as blockchain technology. We are presently evaluating how these new technologies may be leveraged in the retail fashion industry. For instance, blockchain technology might be used in the future to create highly efficient end-to-end operations from suppliers to consumers and also to provide low cost trade finance for market participants through blockchain trading platforms. However, we have not yet established the feasibility of, or taken any steps to progress the use of, blockchain technology in our business.

 

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Bendon

 

Bendon is an intimate apparel and swimwear company that has sought to deliver innovative, premium quality products throughout its 70-year history. Bendon was founded in 1947 by two brothers, Ray and Des Hurley, who together revolutionized the lingerie industry. Rather than force women’s bodies into the restrictive corsetry of the time, they looked at the way women moved and pioneered lingerie that would “bend on” their bodies. Bendon has a portfolio of eight brands which it owns: Bendon, Bendon Man, Davenport, Evollove, Fayreform, Hickory, Lovable (in Australia and New Zealand) and Pleasure State; and two licensed brands: Heidi Klum Intimates and Swimwear and Frederick’s of Hollywood Intimates and Swimwear. Bendon’s license to use the Stella McCartney brand terminated effective June 30, 2018.

 

Heidi Klum

 

Heidi Klum is the face and Creative Director of our flagship brands, Heidi Klum Intimates, Heidi Klum Swim, Heidi Klum Man, and Heidi Klum Intimates Solutions. Our flagship brand, Heidi Klum Intimates collection, exudes femininity, elegance and sophistication, each piece designed with the modern woman in mind. We sell our Heidi Klum products at 59 Bendon stores in Australia, New Zealand and Ireland and online at www.bendonlingerie.com and www.heidiklumintimates.com. In July 2018, Bendon entered into an agreement with CVS Pharmacy, a leading pharmacy innovation company, pursuant to which the Heidi Klum Intimates Solutions line will be made available across 4,000 CVS locations across the United States. Additionally, Heidi Klum products are sold in approximately 6,000 other wholesale doors in 43 countries across regions in Australia, New Zealand, United States, Europe and United Kingdom under wholesale arrangements.

 

Frederick’s of Hollywood

 

Through FOH, we are the exclusive licensee of the Frederick’s of Hollywood global online license, which we use to develop and sell online intimates products, sleepwear and loungewear products, swimwear and swimwear accessories, and costumes products under the Frederick’s of Hollywood name.

 

Naked

 

Naked is an apparel and lifestyle brand company that is currently focused on innerwear products for women and men. Under its flagship brand name and registered trademark “Naked®”, Naked designs, manufactures and sells men’s and women’s underwear, intimate apparel, loungewear and sleepwear through retail partners and direct to consumer through its online retail store www.wearnaked.com. Naked has a growing retail footprint for its 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.com, SaksFifthAvenue.com, barenecessities.com and others.

 

Our Strengths

 

We believe the following competitive strengths contribute to our leading market position and differentiate us from our competition:

 

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Distinct, Well-Recognized Brands

 

Our iconic brands, including Heidi Klum Intimates and Swimwear and Frederick’s of Hollywood Intimates and Swimwear, have come to represent a unique lifestyle across our targeted customers. Our brands allow us to target markets across the economic spectrum, across demographics, and across the world. We believe our flagship brands and prominent, highly-recognized creative directors provide us with a competitive advantage.

 

In-Store Experience and Store Operations

 

We view our customers’ in-store experience as an important vehicle for communicating the image of each brand. We utilize visual presentation of merchandise, in-store marketing, music and our sales associates to reinforce the image represented by the brands. Our in-store marketing is designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are all carefully planned and coordinated to create a unique shopping experience. Every brand displays merchandise uniformly to ensure a consistent store experience, regardless of location. Store managers receive detailed plans designating fixture and merchandise placement to ensure coordinated execution of the company-wide merchandising strategy. Our sales associates and managers are a central element in creating the atmosphere of the stores by providing a high level of customer service.

 

Product Development, Sourcing and Logistics

 

We believe a large part of our success comes from frequent and innovative product launches, as well as launches of new collections from our existing brands. Our merchant, design and sourcing teams have a long history of bringing innovative products to our customers. Our key vendor partners are industry leaders in both innovation and social responsibility. We work closely together to form a world class supply chain that is dynamic and efficient.

 

Highly Experienced Leadership Team

 

Our management team is led by Justin Davis-Rice, Chief Executive Officer, who joined Bendon in 2011 and is responsible for leading our revenue growth. Prior to joining Bendon, Mr. Davis-Rice co-founded Pleasure State. The rest of our senior management team has a wealth of retail and business experience at Gazal, Specialty Fashion Group, and Pleasure State. We have developed a strong and collaborative culture aligned around our goals to create the most sensual, functional and comfortable lingerie and underwear for women and men all over the world.

 

Growth Strategy

 

Our growth strategy involves seeking to take advantage of the following opportunities across channels and brands:

 

Channels

 

  Opportunity for an additional 50+ retail stores across Australia under a new brand name
     
  Additional 25 Bendon outlet stores across Australia and New Zealand in the next 5 years
     
  Leveraging e-commerce to attract and educate new and existing customers
     
  Targeting e-commerce sales penetration of more than 10% over the average sales penetration
     
  Improving productivity in existing wholesale accounts by gaining additional floor space

 

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  Selectively adding new wholesale doors, with a focus on US & EU markets
     
  Enhancing margins by increasing the proportion of the business derived from direct-to-consumer channels

 

Brands

 

  Continuing to build our license portfolio and add new licenses in existing and tangential categories
     
   Expanding the brand and product offering via organic innovation and new license partnerships
     
   Expanding brand reach by leveraging our brand portfolio to extend globally, particularly in the US and EU

 

Risks Affecting Our Company

 

In evaluating an investment in our securities, you should carefully read this prospectus and especially consider the factors discussed in the section titled “Risk Factors” commencing on page 7.

 

Recent Developments

 

Private Placements

 

On October 25, 2018, we closed a private placement of ordinary shares and warrants for aggregate gross proceeds of approximately US$3.4 million with two accredited investors, including an affiliate of Mr. Davis-Rice, our Chief Executive Officer, and our largest institutional shareholder, Armistice Capital. The ordinary shares were sold at a per share price of US$1.55 pursuant to a subscription agreement with each investor. Each investor also received a warrant to purchase 100% of the number of ordinary shares for which it subscribed. The warrants have an exercise price of US$1.55 per share and expire three years from the date of issuance. The exercise price and number of shares covered by the warrants are subject to adjustment for stock splits, stock combinations and certain other transactions affecting the share capital as a whole. The company is still evaluating the financial reporting and accounting treatment of the issue. In addition, subsequent to July 31, 2018 and prior to the private placement on October 25, 2018, we issued 916,645 shares at an average price of US$3.90 per share to the value of US$3.57 million in private placements.

 

Credit Facility

 

As at the date of this prospectus, we are in negotiations with the lenders under our senior credit facility to reset the loan covenants and extend the facility to beyond the expiry of its current terms on June 30, 2019.

 

Acquisition of FOH

 

On November 15, 2018, we and our wholly-owned subsidiary, Bendon, entered into a Stock Purchase Agreement with the shareholders of FOH, including Cullen, a significant shareholder of the Company. Pursuant to the agreement, on December 6, 2018, we purchased all of the issued and outstanding shares of FOH, in order to gain direct ownership of the Frederick’s of Hollywood license arrangement FOH had with ABG. We previously marketed merchandise under the Frederick’s of Hollywood brand through a sub-license arrangement with FOH. As a result of the acquisition of FOH, we now have a direct relationship with ABG in relation to the Frederick’s of Hollywood license. Under the terms of the agreement, we paid a purchase price of approximately US$18.2 million, as follows (i) Bendon forgave debt owed to it by FOH and Cullen, in the aggregate amount of approximately US$9.9 million, and (ii) we issued 3,765,087 of our Ordinary Shares to FOH’s shareholders, valued at a price per share of US$2.20. We also agreed to satisfy certain obligations with respect to certain claims involving the parties. A portion of the Ordinary Shares issued to FOH’s shareholders are held in trust and may be released to Cullen to the extent not applied in satisfaction of such claims. We are still evaluating the accounting and financial reporting treatment of this transaction.

 

Funding Failure

 

Pursuant to our financing plan prior to the consummation of the Transactions, we entered into securities purchase agreements with certain investors for the purchase and sale of ordinary shares and warrants to purchase additional ordinary shares in a private placement, for an aggregate anticipated proceeds of approximately US$17,000,000 (the “PIPE Transaction”). Of such amount, investors failed to fund approximately US$7,700,000. Accordingly, as management believes it has exhausted all other appropriate remedies available to it, we intend to cancel 1,582,243 ordinary shares and 277,473 warrants issued to such investors in accordance with applicable legal requirements.

 

Background of the Offering

 

We agreed to register for resale 1,600,000 of the Ordinary Shares sold in the PIPE Transaction, as well as 800,000 of the Ordinary Shares underlying the warrants sold in the PIPE Transaction. We are also registering for resale certain additional shares issued in the PIPE Transaction and underlying warrants issued in the PIPE Transaction, as well as other additional shares held by our shareholders. As a result, after accounting for shares known by us to already have been sold by the Selling Shareholders, an aggregate of 9,570,708 Ordinary Shares and an aggregate of an additional 1,293,892 Ordinary Shares issuable upon exercise of outstanding warrants are being offered pursuant to this prospectus.

 

Corporate Information

 

Our principal and registered office is located at Building 7C, Huntley Street, Alexandria, NSW 2015, Australia, and our telephone number is +61 2 9384 2400. Our agent for service of process in the United States is Graubard Miller, our U.S. counsel, located at The Chrysler Building, 405 Lexington Avenue, New York, New York 10174. Our corporate website is located at http://www.nakedbrands.com. The information on our website shall not be deemed part of this registration statement.

 

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THE OFFERING

 

Ordinary Shares being offered by certain existing shareholders   9,570,708 shares
     
Ordinary Shares underlying warrants held by certain existing shareholders   1,293,892 shares
     
Securities Outstanding   29,640,965 Ordinary Shares as of February 28, 2019, which does not include an aggregate of 6,236,741 Ordinary Shares underlying outstanding warrants and options as of such date.
     
Listing of Securities and trading symbols   Our Ordinary Shares trade on the Nasdaq Capital Market under the symbol “NAKD”. There is no public market for our warrants.
     
Plan of distribution   The Ordinary Shares (and the Ordinary Shares issuable upon exercise of the warrants) covered by this prospectus may be sold by the Selling Shareholders in the manner described under the section entitled “Plan of Distribution.”
     
Use of proceeds   We will not receive any proceeds from the sale of the securities by the Selling Shareholders under this prospectus. However, we could receive up to US$4,852,095 in gross proceeds if all of the warrants held by three of the Selling Shareholders are exercised for cash. Any amounts we receive from such exercises will be used for working capital and other general corporate purposes. See the section titled “Use of Proceeds” for further information on our use of proceeds from this offering.
     
Risk factors   See the section titled “Risk Factors” and the other information included in this prospectus for a discussion of risk factors you should carefully consider before deciding to invest in our securities.

 

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RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should carefully consider the risk factors described below, together with the other information included this prospectus and incorporated by reference herein from our SEC filings. If any of the following risks or uncertainties occurs, our business, financial condition, and operating results could be materially and adversely affected. As a result, the trading price of our Ordinary Shares could decline and you could lose all or a part of your investment. You should carefully consider all of the risks described below regarding the Company and its subsidiaries. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially and adversely affect our business operations.

 

Risks Related to Our Business and Operations

 

We have a history of operating losses that may continue into the foreseeable future.

 

We have a history of operating losses and negative cash flow that may continue into the foreseeable future. If we fail to execute our strategy to achieve and maintain profitability in the future, investors could lose confidence in the value of our Ordinary Shares, which could cause our share price to decline and adversely affect our ability to raise additional capital. Investors should evaluate an investment in our company in light of this.

 

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 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. Furthermore, the terms of securities issued in a financing, if obtained, may be more favorable for new investors.

 

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.

 

We have a concentration of sales to key customers and any substantial reduction in sales to these customers would have a material adverse effect on our business.

 

During the twelve month period ended January 31, 2018, sales were concentrated with Myer, Farmers and Woolworths accounting for 7%, 6% and 2% respectively. During the twelve month period ended January 31, 2017 sales were concentrated with Myer, Farmers, Macy’s and Woolworths accounting for 10%, 7%, 5% and 2%, respectively, of our sales.

 

Our results of operations would be materially adversely affected if these relationships ceased. Although we have diversified our customers and continue to receive increasing sales orders from existing customers, these customers do not have any ongoing purchase commitment agreement with us; therefore, we cannot guarantee that the volume of sales will remain consistent going forward. Any substantial change in purchasing decisions by these customers, whether due to actions by our competitors, industry factors or otherwise, could have a material adverse effect on our business and our financial condition.

 

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Our customers generally purchase our products on credit, and as a result, our results of operations and financial condition may be adversely affected if our customers experience financial difficulties.

 

During the past several years, various retailers, including some of our largest customers, have experienced significant difficulties, including restructurings, bankruptcies and liquidations. This could adversely affect us because our customers generally pay us after goods are delivered. Adverse changes in our customers’ financial position could cause us to limit or discontinue business with that customer, require us to assume more credit risk relating to that customer’s future purchases or limit our ability to collect accounts receivable relating to previous purchases by that customer, all of which could have a material adverse effect on our business, results of operations and financial condition.

 

We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of our market share and a decrease in our net revenue and profitability.

 

The market for intimate apparel products is highly competitive. Competition may result in pricing pressures, reduced profit margins or lost market share or a failure to grow our market share, any of which could substantially harm our business and results of operations. We compete directly against wholesalers and direct retailers of intimate apparel products, including large, diversified companies with substantial market share and strong worldwide brand recognition, such as L Brands Inc., Hanesbrands Inc. and PVH Corp., whose brands include Victoria’s Secrets, Calvin Klein, Maidenform, Bonds and others. Many of our competitors have significant competitive advantages, including longer operating histories, larger and broader customer bases, more established relationships with a broader set of suppliers, greater brand recognition and greater financial, research and development, marketing, distribution and other resources than we do. Our competitors may be able to achieve and maintain brand awareness and market share more quickly and effectively than we can. Many of our competitors promote their brands through traditional forms of advertising, such as print media and television commercials, and through celebrity endorsements, and have greater and substantial resources to devote to such efforts. Our competitors may also create and maintain brand awareness using traditional forms of advertising more quickly than we can. Our competitors may also be able to increase sales in their new and existing markets faster than we can by emphasizing different distribution channels than we do, such as catalog sales or an extensive franchise network, as opposed to distribution through retail stores, wholesale or internet, and many of our competitors have substantial resources to devote toward increasing sales in such ways.

 

If we are unable to anticipate consumer preferences and successfully develop and introduce new, innovative and updated products, we may not be able to maintain or increase our sales and profitability.

 

Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. We may be unable to introduce new products in a timely manner. Our customers may not accept our new products including our recently launched women’s products, or our competitors may introduce similar products in a more timely fashion. Failure to anticipate and respond in a timely manner to changing consumer preferences could lead to, among other things, lower sales and excess inventory levels. Even if we are successful in anticipating consumer preferences, our ability to adequately react to and address those preferences will in part depend upon our continued ability to develop and introduce innovative, high-quality products. Our failure to effectively introduce new products that are accepted by consumers could have a material adverse effect on our financial condition.

 

Our net sales, profit results and cash flows are sensitive to, and may be affected by, general economic conditions, consumer confidence, spending patterns, weather or other market disruptions.

 

Our net sales, profit, cash flows and future growth may be affected by negative local, regional, national or international political or economic trends or developments that reduce the consumers’ ability or willingness to spend, including the effects of national and international security concerns such as war, terrorism or the threat thereof. In addition, market disruptions due to severe weather conditions, natural disasters, health hazards or other major events or the prospect of these events could also impact consumer spending and confidence levels. Purchases of women’s intimate and other apparel, beauty and personal care products and accessories often decline during periods when economic or market conditions are unsettled or weak. In such circumstances, we may increase the number of promotional sales, which could have a material adverse effect on our results of operations, financial condition and cash flows.

 

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The decision by the United Kingdom to leave the European Union (“Brexit”) has increased the uncertainty in the economic and political environment in Europe. In particular, our business in the United Kingdom may be adversely impacted by fluctuations in currency exchange rates, changes in trade policies, or changes in labor, immigration, tax or other laws.

 

Extreme weather conditions in the areas in which our stores are located, particularly in markets where we have multiple stores, could adversely affect our business. For example, heavy snowfall, rainfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability.

 

Our net sales, operating income, cash and inventory levels fluctuate on a seasonal basis.

 

We experience major seasonal fluctuations in our net sales and operating income, with a significant portion of our operating income typically realized during the fourth quarter holiday season. Any decrease in sales or margins during this period could have a material adverse effect on our results of operations, financial condition and cash flows.

 

Seasonal fluctuations also affect our cash and inventory levels, since we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, especially before the holiday season selling period. If we are not successful in selling inventory, we may have to sell the inventory at significantly reduced prices or may not be able to sell the inventory at all, which could have a material adverse effect on our results of operations, financial condition and cash flows.

 

We are subject to risks associated with leasing retail space, are generally subject to long-term non-cancelable leases and are required to make substantial lease payments under our operating leases. Any failure to make these lease payments when due may lead to the landlord terminating the lease, which would harm our business, profitability and results of operations.

 

We do not own any of our stores, but instead lease all of our retail stores under operating leases. Our leases generally have initial terms of 5 years. All of our leases require a fixed annual rent, and some of them require the payment of additional rent if store sales exceed a negotiated amount. Most of our leases are “net” leases, which require us to pay all of the cost of insurance, taxes, maintenance and utilities, and we generally cannot cancel these leases at our option.

 

Our net sales depend on a volume of traffic to our stores and the availability of suitable lease space.

 

Most of our stores are located in retail shopping areas including malls and other types of retail centers. Sales at these stores are derived, in part, from the volume of traffic in those retail areas. Our stores benefit from the ability of the retail center and other attractions in an area, including “destination” retail stores, to generate consumer traffic in the vicinity of our stores. Sales volume and retail traffic may be adversely affected by factors that we cannot control, such as economic downturns or changes in consumer demographics in a particular area, competition from internet and other retailers and other retail areas where we do not have stores, the closing or decline in popularity of other stores in the shopping areas where our stores are located and the deterioration in the financial condition of the operators of the shopping areas or developers in which our stores are located.

 

Our ability to grow depends in part on new store openings and existing store remodels and expansions.

 

Our continued growth and success will depend in part on our ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. Accomplishing our new and existing store expansion goals will depend upon a number of factors, including the ability to partner with developers and landlords to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel and the integration of new stores into existing operations. There can be no assurance we will be able to achieve our store expansion goals, manage our growth effectively, successfully integrate the planned new stores into our operations or operate our new, remodeled and expanded stores profitably. These risks could have a material adverse effect on our ability to grow and results of operations, financial condition and cash flows.

 

9
 

 

Our planned international expansion may adversely impact our results and reputation.

 

We intend to further expand into international markets through partner arrangements and/or company-owned stores. The risks associated with our expansion into international markets include difficulties in attracting customers due to a lack of customer familiarity with our brands, our lack of familiarity with local customer preferences and seasonal differences in the market. Such expansions will also have upfront investment costs. If the expansion is not accompanied by sufficient revenues to achieve typical or expected operational and financial performance, it may have a material adverse effect on our results of operations and our business reputation.

 

We may not select suitable business partners for our international expansion, which could have a materially adverse effect on our results of operations.

 

In expanding into international markets through partner arrangements, we may be exposed to risks if we fail to identify suitable business partners. For example, these third parties may be unable to meet their projections regarding store openings and sales or they may fail to maintain compliance with federal and local law. Because these parties likely will be independent contractors, certain aspects of these arrangements will be outside of our direct control. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.

 

Our operations in international markets are subject to additional political, economic, and other risks and uncertainties that could adversely affect our business, and our exposure to such risks will increase as we expand into additional international markets.

 

Our operations in international markets are subject to a number of risks inherent in any business operating in multiple countries.

 

As we continue our international expansion, our operations will continue to encounter the following risks, among others:

 

  Competition with new competitors or with existing competitors with an established market presence.

  General economic conditions in specific countries or markets.

  Volatility in the geopolitical landscape.

  Restrictions on the repatriation of funds held internationally

  Disruptions or delays in shipments.

  Changes in diplomatic and trade relationships.

  Political instability.

  Foreign governmental regulation.

 

If any of these or other similar events should occur, it could have a material adverse effect on our results of operations, financial condition and cash flows.

 

Our performance may be affected by general economic conditions and financial difficulties.

 

Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending. Some of the factors that have, or have had, an impact on discretionary consumer spending include general economic conditions, employment, consumer debt, changes in personal net worth based on changes in securities market price levels, residential real estate and mortgage markets, taxation, healthcare costs, fuel and energy prices, interest rates, credit availability, consumer confidence and other macroeconomic factors.

 

10
 

 

The worldwide apparel industry is heavily influenced by general economic cycles. Apparel retailing is a cyclical industry that is heavily dependent upon the overall level of consumer spending. Purchases of specialty apparel and related goods tend to be highly correlated with the cycles of the levels of disposable income of consumers. As a result, any substantial deterioration in general economic conditions could materially and adversely affect our net sales and results of operations. Downturns, or the expectation of a downturn, in general economic conditions could materially and adversely affect consumer spending patterns, our sales and our results of operations.

 

Consumer purchases of discretionary items generally decline during recessionary periods and other periods where disposable income is adversely affected. Any downturn in the economy may affect consumer purchases of our merchandise and have an adverse impact on our sales, results of operations and cash flow. Because apparel generally is a discretionary purchase, declines in consumer spending may have a more negative effect on apparel retailers than on other retailers. A decline in consumer spending may negatively affect our profitability.

 

Future increases in interest rates or other tightening of the credit markets, or future turmoil in the financial markets, could make it more difficult for us to access funds, to refinance our indebtedness (if necessary), to enter into agreements for new indebtedness, or to obtain funding through the issuance of our securities. Any such adverse changes in the credit or financial markets could also impact the ability of our suppliers to access liquidity, or could result in the insolvency of suppliers, which in turn could lead to their failure to deliver our merchandise. Worsening economic conditions could also result in difficulties for financial institutions (including bank failures) and other parties that we may do business with, which could potentially impair our ability to access financing under existing arrangements or to otherwise recover amounts as they become due under our other contractual arrangements. Additionally, either as a result of, or independent of, any financial difficulties and economic weakness in the United States, material fluctuations in currency exchange rates could have a negative impact on our business.

 

We may be impacted by our ability to service or refinance our debt.

 

We currently have substantial indebtedness. Some of our debt agreements contain covenants which require maintenance of certain financial ratios and also, under certain conditions, restrict our ability to pay dividends, repurchase common shares and make other restricted payments as defined in those agreements. Our cash flow from operations provides the primary source of funds for our debt service payments. If our cash flow from operations declines, we may be unable to service or refinance our current debt.

 

If we do not comply with the terms of our existing debt agreements, and such debt agreements cannot be amended or replaced with new indebtedness, we may be in default of our obligations under such debt agreements.

 

Our existing debt agreements (including our credit facility and our term loan agreement) contain a number of affirmative and negative covenants and representations and warranties. We have, in the past, been required to seek waivers of compliance with, or amendments of, certain of the financial covenants in the debt agreements, and we may be required to seek such waivers or amendments in the future. Our ability to meet these financial covenants may be affected by events beyond our control, and there can be no assurance that the lenders will grant any required waivers under, or amendments to, the debt agreements if for any reason we are unable to meet the requirements of such covenants.

 

If we fail to comply with covenants, representations or warranties under our debt agreements and do not either receive a waiver or amendment from our lenders or refinance the indebtedness subject to such agreements, such failure could trigger a default under our debt agreements. If we default, the lenders under those debt agreements could declare all borrowings owed to them, including accrued interest and other fees, to be due and payable, which declaration could have an adverse impact on our business and results of operations and may adversely impact our ability to consummate the Transactions.

 

11
 

 

Our business is exposed to foreign currency exchange rate fluctuations and control regulations.

 

Our business has substantial international components that expose us to significant foreign exchange risk. Changes in exchange rates can impact our financial results in two ways: a translation impact and a transaction impact. The translation impact refers to the impact that changes in exchange rates can have on our financial results, as our operating results in local foreign currencies are translated into New Zealand dollars using an average exchange rate over the representative period. Accordingly, during times of a strengthening New Zealand dollar, particularly against the Australian dollar, the Euro, the British pound sterling and the U.S. dollar, our results of operations will be negatively impacted, and during times of a weakening New Zealand dollar, our results of operations will be favorably impacted.

 

The transaction impact on financial results is common for apparel companies operating outside the United States that purchase goods in U.S. dollars, as is the case with most of our foreign operations. During times of a strengthening U.S. dollar, our results of operations will be negatively impacted from these transactions as the increased local currency value of inventory results in higher cost of goods sold in local currency when the goods are sold, and during times of a weakening U.S. dollar, our results of operations will be favorably impacted. We also have exposure to changes in foreign currency exchange rates related to certain intercompany transactions and, to a lesser extent, SG&A expenses that are denominated in currencies other than the functional currency of a particular entity. We currently use and plan to continue to use foreign currency forward exchange contracts or other derivative instruments to mitigate the cash flow or market value risks associated with these inventory and intercompany transactions, but we are unable to entirely eliminate these risks.

 

We are also exposed to market risk for changes in exchange rates for the U.S. dollar in connection with our business as a licensee. Most of our license agreements require us to pay in Unites States dollars based on the exchange rate as of the last day of the contractual selling period but the sales are reported in the relevant territories’ local currencies. Thus we are exposed to exchange rate changes during and up to the last day of the selling period. In addition, we are exposed to exchange rate changes up to the date we make payment in U.S. dollars. As a result, during times of a strengthening U.S. dollar, our royalty fees will be positively impacted, and during times of a weakening U.S. dollar, our royalty fees will be negatively impacted.

 

We conduct business, directly or through licensees and other partners, in countries that are or have been subject to exchange rate control regulations and have, as a result, experienced difficulties in receiving payments owed to us when due, with amounts left unpaid for extended periods of time. Although the amounts to date have been immaterial to our results, as our international businesses grow and if controls are enacted or enforced in additional countries, there can be no assurance that such controls would not have a material and adverse effect on our business, financial condition or results of operations.

 

Our reported financial results may be adversely affected by changes in accounting principles

 

Generally accepted accounting principles are subject to interpretation by the SEC and the Public Company Accounting Oversight Board and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

 

While we believe we have taken the steps necessary to improve the effectiveness of our internal control over financial reporting, we can give no assurance that any material weaknesses will arise in the future

 

Any material weakness or other deficiencies in our disclosure controls and procedures and internal control over financial reporting may affect our ability to report our financial results on a timely and accurate basis and to comply with disclosure obligations or cause our consolidated financial statements to contain material misstatements, which could negatively affect the market price and trading liquidity of our common stock or cause investors to lose confidence in our reported financial information. Investors relying upon our consolidated financial statements may make a misinformed investment decision.

 

12
 

 

Acquisitions may not be successful in achieving intended benefits, cost savings and synergies.

 

One component of our growth strategy has been to make acquisitions. Prior to completing any acquisition, our management team identifies expected synergies, cost savings and growth opportunities but, due to legal and business limitations, we may not have access to all necessary information. The integration process may be complex, costly and time-consuming. The potential difficulties of integrating the operations of an acquired business and realizing our expectations for an acquisition, including the benefits that may be realized, include, among other things:

 

  failure to implement our business plan for the combined business;

  delays or difficulties in completing the integration of acquired companies or assets;

  higher than expected costs, lower than expected cost savings or a need to allocate resources to manage unexpected operating difficulties;

  unanticipated issues in integrating manufacturing, logistics, information, communications and other systems;

  unanticipated changes in applicable laws and regulations affecting the acquired business;

  unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust regulators;

  retaining key customers, suppliers and employees;

  retaining and obtaining required regulatory approvals, licenses and permits;

  operating risks inherent in the acquired business;

  diversion of the attention and resources of management;

  consumers’ failure to accept product offerings by us or our licensees;

  assumption of liabilities not identified in due diligence;

  the impact on our or an acquired business’ internal controls and compliance with the requirements under the Sarbanes-Oxley Act of 2002; and

  other unanticipated issues, expenses and liabilities.

 

We have completed acquisitions that have not performed as well as initially expected and cannot assure you that any acquisition will not have a material adverse impact on our financial condition and results of operations.

 

The loss of the services of Justin Davis-Rice, members of our executive management team, or other key personnel could have a material adverse effect on our business.

 

Justin Davis-Rice’s leadership in the design and marketing areas of our business has been a critical element of our success since our inception. The death or disability of Mr. Davis-Rice or other extended or permanent loss of his services, or any negative market or industry perception with respect to him or arising from his loss, could have a material adverse effect on our business, results of operations, and financial condition.

 

We also depend on the service and management experience of other key executive officers and other members of senior management who have substantial experience and expertise in our industry and our business and have made significant contributions to our growth and success. The loss of the services of any of our key executive officers or other members of senior management, or one or more of our other key personnel, or the concurrent loss of several of these individuals or any negative public perception with respect to these individuals, could also have a material adverse effect on our business, results of operations, and financial condition.

 

We are not protected by a material amount of key-man or similar life insurance covering our executive officers, including Mr. Davis-Rice, or other members of senior management. We have entered into employment agreements with certain of our executive officers, but competition for experienced executives in our industry is intense and the non-compete period with respect to certain of our executive officers could, in some circumstances in the event of their termination of employment with our company, end prior to the employment term set forth in their employment agreements.

 

13
 

 

We rely on third-party suppliers and manufacturers to provide fabrics for and to produce our products, and we have limited control over them and may not be able to obtain quality products on a timely basis or in sufficient quantity.

 

We do not manufacture our products or the raw materials for them and rely instead on third-party suppliers and manufacturers. Many of the specialty fabrics used in our products are technically advanced textile products developed and manufactured by third parties and may be available, in the short-term, from only one or a very limited number of sources. We may experience a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all. In addition, if we experience significant increased demand, or if we need to replace an existing supplier manufacturer, we may be unable to locate additional suppliers of fabrics or raw materials or additional manufacturing capacity on terms that are acceptable to us, or at all, or we may be unable to locate any supplier or manufacturer with sufficient capacity to meet our requirements or to fill our orders in a timely manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with their quality control, responsiveness and service, financial stability and labor and other ethical practices. Even if we are able to expand existing or find new manufacturing or fabric sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards. Delays related to supplier changes could also arise due to an increase in shipping times if new suppliers are located farther away from other participants in our supply chain. Any delays, interruption or increased costs in the supply of fabric or manufacture of our products could have an adverse effect on our ability to meet customer demand for our products and result in lower net revenue and income from operations both in the short and long term. We have occasionally received, and may in the future continue to receive, shipments of products that fail to comply with our technical specifications or that fail to conform to our quality control standards. In that event, unless we are able to obtain replacement products in a timely manner, we risk the loss of net revenue resulting from the inability to sell those products and related increased administrative and shipping costs. If defects in the manufacture of our products are not discovered until after our customers purchase such products, our customers could lose confidence in the technical attributes of our products and our results of operations could suffer and our business could be harmed.

 

The fluctuating cost of raw materials could increase our cost of goods sold and cause our results of operations and financial condition to suffer.

 

The fabrics used by our suppliers and manufacturers include synthetic fabrics whose raw materials include petroleum-based products. Our products also include natural fibers, including cotton. Our costs for raw materials are affected by, among other things, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and other factors that are generally unpredictable and beyond our control. Increases in the cost of raw materials could have a material adverse effect on our cost of goods sold, results of operations, financial condition and cash flows.

 

If we are unable to safeguard against security breaches with respect to our information systems our business may be adversely affected.

 

In the course of our business, we gather, transmit and retain confidential information, including personal information about our customers, and process payment transactions through our information systems. Although we endeavor to protect confidential information and payment information through the implementation of security technologies, processes and procedures, it is possible that an individual or group could defeat security measures and access sensitive information about our customers, employees and other third parties. Any misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information gathered, stored or used by us could have a material impact on the operation of our business, including damaging our reputation with our customers, employees, third parties and investors. We could also incur significant costs implementing additional security measures to comply with applicable federal, state or international laws and regulations governing the unauthorized disclosure of confidential or personally identifiable information as well as increased costs such as organizational changes, implementing additional protection technologies, training employees or engaging consultants. In addition, we could incur lost revenues and face increased litigation as a result of any potential cyber-security breach. We are not aware of that we have experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cyber-security breach or other act, however, a cyber-security breach or other act and/or disruption to our information technology systems could have a material adverse effect on our business, prospects, financial condition or results of operations.

 

14
 

 

Our fabrics and manufacturing technology are not patented and can be imitated by our competitors.

 

The intellectual property rights in the technology, fabrics and processes used to manufacture our products are owned or controlled by our suppliers and are generally not unique to us. Our ability to obtain intellectual property protection for our products is therefore limited and we currently own no patents or exclusive intellectual property rights in the technology, fabrics or processes underlying our products. As a result, our current and future competitors are able to manufacture and sell products with performance characteristics, fabrics and styling similar to our products. Because many of our competitors have significantly greater financial, distribution, marketing and other resources than we do, they may be able to manufacture and sell products based on our fabrics and manufacturing technology at lower prices than we can. If our competitors do sell similar products to ours at lower prices, our net revenue and profitability could suffer.

 

Our failure or inability to protect our intellectual property rights could diminish the value of our brand and weaken our competitive position.

 

We currently rely on trademarks, as well as confidentiality procedures, to establish and protect our intellectual property rights. We cannot assure you that the steps taken by us to protect our intellectual property rights will be adequate to prevent infringement of such rights by others, including imitation of our products and misappropriation of our brand. In addition, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States, Canada or the European Union, and it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in these countries. If we fail to protect and maintain our intellectual property rights, the value of our brand could be diminished and our competitive position may suffer.

 

We may be impacted by changes in taxation, trade and other regulatory requirements.

 

We are subject to income tax in local, national and international jurisdictions. In addition, our products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. We are also subject to the examination of our tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of these examinations. Fluctuations in tax rates and duties, changes in tax legislation or regulation or adverse outcomes of these examinations could have a material adverse effect on our results of operations, financial condition and cash flows.

 

We have significant tax losses arising on historical trading losses. The availability to utilize these tax losses to offset future taxable profit is dependent on future performance and trade of the business. There can be no assurance as to the availability of these losses for utilization.

 

There is increased uncertainty with respect to tax policy and trade relations between the U.S. and other countries. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our results of operations, financial condition and cash flows.

 

Our current operations in international markets and our efforts to expand into additional international markets, and any earnings in those markets, may be affected by legal and regulatory risks.

 

We are subject to the U.S. Foreign Corrupt Practices Act, in addition to the anti-corruption laws of the foreign countries in which we operate and manufacture our products. Although we implement policies and procedures designed to promote compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results.

 

15
 

 

We may be subject to loss and theft.

 

Our merchandise is subject to loss, including those caused by illegal or unethical conduct by associates, customers, vendors or unaffiliated third parties. We have experienced events such as inventory shrinkage in the past, and we cannot assure that incidences of loss and theft will decrease in the future or that the measures we are taking will effectively reduce these losses. Higher rates of loss or increased security costs to combat theft could have a material adverse effect on our results of operations, financial condition and cash flows.

 

We could have failures in our system of internal controls causing us to inaccurately report our financial results or to fail to prevent fraud.

 

We have had control deficiencies in the past, and cannot assure you that there will not be any control deficiencies in the future. Should we become aware of any significant deficiencies or material weaknesses, we would report them to the Audit Committee and recommend prompt remediation. We cannot be certain that these measures will ensure that our controls are adequate in the future or that adequate controls will be effective in preventing fraud. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. Any failures in the effectiveness of our internal controls could have a material adverse effect on our financial condition or operating results or cause us to fail to meet reporting obligations.

 

A portion of our revenue is dependent on royalties and licensing.

 

License arrangements exist for Heidi Klum and Fredericks of Hollywood, and previously existed for Stella McCartney through June 30, 2018. The license arrangements for Heidi Klum, Stella McCartney and Fredericks of Hollywood contributed revenue of 25%, 11% and 21% of group sales, respectively, in the twelve month period to January 31, 2018. The gross margin contribution during this period was 19%, 12%, and 30%, respectively, of total group gross margin. The license arrangements for Heidi Klum, Stella McCartney and Fredericks of Hollywood contributed revenue of 32%, 9% and 11% of group sales, respectively, in the twelve month period to January 31, 2017. The gross margin contribution during this period was 29%, 8%, and 16%, respectively, of total group gross margin.

 

The operating profit associated with our royalty, advertising and other revenue is significant because the operating expenses directly associated with administering and monitoring an individual licensing or similar agreement are minimal. Therefore, the loss of a significant licensing partner, whether due to the termination or expiration of the relationship, the cessation of the licensing partner’s operations or otherwise (including as a result of financial difficulties of the partner), without an equivalent replacement, could materially impact our profitability. For example, Bendon Limited’s license to use the Stella McCartney brand terminated effective June 30, 2018.

 

While we generally have significant control over our licensing partners’ products and advertising, we rely on our licensing partners for, among other things, operational and financial controls over their businesses. Our licensing partners’ failure to successfully market licensed products or our inability to replace our existing licensing partners could materially and adversely affect our revenue both directly from reduced royalty and advertising and other revenue received and indirectly from reduced sales of our other products. Risks are also associated with our licensing partners’ ability to obtain capital, execute their business plans, timely deliver quality products, manage their labor relations, maintain relationships with their suppliers, manage their credit risk effectively and maintain relationships with their customers.

 

A significant shift in the relative sources of our earnings, adverse decisions of tax authorities or changes in tax treaties, laws, rules or interpretations could have a material adverse effect on our results of operations and cash flow.

 

We have direct operations in many countries and the applicable tax rates vary by jurisdiction. As a result, our overall effective tax rate could be materially affected by the relative level of earnings in the various taxing jurisdictions to which our earnings are subject. In addition, the tax laws and regulations in the countries where we operate may be subject to change and there may be changes in interpretation and enforcement of tax law. As a result, we may pay additional taxes if tax rates increase or if tax laws, regulations or treaties in the jurisdictions where we operate are modified by the competent authorities in an adverse manner.

 

In addition, various national and local taxing authorities periodically examine us and our subsidiaries. The resolution of an examination or audit may result in us paying more than the amount that we may have reserved for a particular tax matter, which could have a material adverse effect on our cash flows, business, financial condition and results of operations for any affected reporting period.

 

16
 

 

We and our subsidiaries are engaged in a number of intercompany transactions. Although we believe that these transactions reflect arm’s length terms and that proper transfer pricing documentation is in place, which should be respected for tax purposes, the transfer prices and conditions may be scrutinized by local tax authorities, which could result in additional tax liabilities.

 

We have identified material weaknesses in our internal controls over financial reporting.

 

We have identified material weaknesses that existed as of January 31, 2018, January 31, 2017, June 30, 2016 and June 30, 2015. A material weakness is a deficiency, or a combination of deficiencies in internal controls over financial reporting, such that if there is a material misstatement in our financial statements, they will not necessarily be prevented or detected on a timely basis.

 

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were:

 

  1) Lack of a functioning audit committee;

 

  2) Lack of independent directors on our board of directors that are financial experts, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures;

 

  3) Lack of skilled resources and lack of expertise with complex GAAP and SEC reporting matters;

 

  4) Lack of adequate processes, procedures and internal controls over the collation and review of contracts executed by our company; and

 

  5) No formally implemented system of internal control over financial reporting and no associated written documentation of our internal control policies and procedures

 

We believe that these material weaknesses primarily related to our lack of board oversight and appropriately skilled resources. While these material weaknesses have not resulted in errors that were material to our financial statements in the current year, it impacted our company’s ability to close financial reporting on a timely basis and resulted in numerous late amendments to draft financial statements.

 

The introduction of a properly constituted Board with diverse skills and talent will manage the risks across the business. We delayed implementing the appointment of an appropriately qualified personnel on the basis we are preparing to merge with Naked which has on its Board a newly appointed Independent Non Executive Director and we will also provide appropriate support for our CFO.

 

We plan to take a number of actions to correct these material weaknesses upon going public including, but not limited to, appointing independent directors, establishing an independent Audit Committee, adding experienced accounting and financial personnel and retaining third party consultants to review our internal controls and recommend improvements.

 

Our efforts to remediate these material weaknesses may not be effective. If our efforts to remediate these material weaknesses are not successful, the remediated material weaknesses may reoccur, or other material weaknesses could occur in the future.

 

As a result of these material weaknesses, we may be unable to report our financial results accurately on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence and could cause the stock price to decline.

 

As a result of such failures, we could also become subject to investigation by the stock exchange on which our shares are listed, the SEC, or other regulatory authorities, and become subject to litigation from investors, which would harm our reputation, business, financial condition and results or operations, and divert financial and management recoveries from our core business.

 

17
 

 

The material weaknesses will require management to devote significant time and incur significant expenses to remediate the material weaknesses and they might not be able to remediate the weaknesses in a timely manner.

 

If we fail to implement and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

 

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. We previously have identified deficiencies in our internal controls that are deemed to be material weaknesses. In addition, any future testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm, if and when required, may reveal additional deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. If we are unable to remedy the existing material weaknesses in our internal control over financial reporting, if in the future we identify additional material weaknesses in our internal control over financial reporting, including at some of our acquired companies, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm  required to and is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are then listed, the SEC, or other regulatory authorities, which could require additional financial and management resources. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

 

We incurred substantial transaction fees and costs in connection with the Merger.

 

We incurred material non-recurring expenses in connection with the Merger Agreement and consummation of the Transactions contemplated by the Merger Agreement. Additional unanticipated costs may be incurred in the course of the integration of the businesses of Bendon Limited and Naked. We cannot be certain that the elimination of duplicative costs or the realization of other efficiencies related to the integration of the two businesses will offset the transaction and integration costs in the near term, or at all.

 

Risks Related to the Offering

 

Sales by the Selling Shareholders of the Ordinary Shares covered by this prospectus could adversely affect the trading price of our Ordinary Shares.

 

We are registering for resale up to 9,570,708 Ordinary Shares and up to 1,293,892 Ordinary Shares issuable upon exercise of outstanding warrants, which together represent approximately 34.9% of our outstanding Ordinary Shares, on a fully-diluted basis. The resale of all or a substantial portion of the Ordinary Shares registered hereby in the public market, or the perception that these sales might occur, could cause the market price of our Ordinary Shares to decrease and may make it more difficult for us to sell Ordinary Shares in the future at a time and upon terms that we deem appropriate.

 

The financial information related to the consummation of the Transactions included and incorporated by reference in this prospectus may not be an indication of our financial condition or results of operations.

 

The financial information related to the consummation of the Transactions included and incorporated by reference in this prospectus is based on various adjustments and assumptions and may not be an accurate indication of our financial condition or results of operations. Our actual financial condition and results of operations may not be consistent with, or evident from, such financial information. In addition, the assumptions used in preparing the financial information and estimates may not prove to be accurate, and other factors may affect our financial condition or results of operations following consummation of the Transactions.

 

18
 

 

We do not intend to pay any dividends on our Ordinary Shares at this time.

 

We have not paid any cash dividends on our Ordinary Shares to date. The payment of cash dividends on our Ordinary Shares in the future will be dependent upon our revenue and earnings, if any, capital requirements, and general financial condition, as well as the limitations on dividends and distributions that exist under the laws and regulations of Australia, and will be within the discretion of our board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board of directors does not anticipate declaring any dividends on our Ordinary Shares in the foreseeable future. As a result, any gain you will realize on our Ordinary Shares (including shares of common stock obtained upon exercise of our warrants) will result solely from the appreciation of such shares.

 

We may issue additional securities in the future, which may result in dilution to our shareholders.

 

As of February 28, 2018, we had 6,236,741 Ordinary Shares subject to outstanding options and warrants, including the 1,293,892 Ordinary Shares underlying warrants registered hereby. In addition, we are not restricted from issuing additional Ordinary Shares or securities convertible into or exchangeable for Ordinary Shares. Because we may need to raise additional capital in the future to operate and/or expand our business, we may conduct additional equity offerings. To the extent our outstanding options and warrants are exercised or we conduct additional equity offerings, additional Ordinary Shares will be issued, which may result in dilution to our shareholders. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our Ordinary Shares.

 

Nasdaq may delist our Ordinary Shares from quotation on its exchange, which could limit investors’ ability to sell and purchase our securities and subject us to additional trading restrictions.

 

Our Ordinary Shares are currently listed on the Nasdaq Capital Market under the trading symbol “NAKD”. However, on February 5, 2019, we received a notice from the Listing Qualifications Department of Nasdaq stating that, for the last 30 consecutive business days, the closing bid price for our Ordinary Shares had been below the minimum of US$1.00 per share required for continued inclusion on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). We will be afforded 180 calendar days (until August 5, 2019) to regain compliance with the minimum bid price requirement. In order to regain compliance, the bid price for shares of the Company’s common stock must close at US$1.00 per share or more for a minimum of ten consecutive business days. The notification letter also states that in the event we do not regain compliance within the 180 day period, we will be eligible for additional time if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and notify Nasdaq of our intention to cure the deficiency during such second compliance period, including by effecting a reverse stock split, if necessary. There can be no assurance that we will regain compliance with the minimum bid price requirement within the allotted period, or that we will be able to maintain compliance with the other continued listing requirements under the Nasdaq Listing Rules.

 

If our Ordinary Shares are not listed on Nasdaq at any time after this offering, we could face significant material adverse consequences, including:

 

  a limited availability of market quotations for our securities;

 

  reduced liquidity;

 

  a determination that our common stock is “penny stock” which will require brokers trading in our shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;

 

  a limited amount of news and analyst coverage for our company; and

 

  a decreased ability to issue additional securities or obtain additional financing in the future.

 

As a foreign private issuer, we are permitted and expect to follow certain home country corporate governance practices (in our case Australian) in lieu of certain Nasdaq requirements applicable to domestic issuers and we are permitted to file less information with the Securities and Exchange Commission than a company that is not a foreign private issuer. This may afford less protection to holders of our securities.

 

As a foreign private issuer under the Exchange Act, Nasdaq allows us to follow home country governance practices (in our case Australian) in lieu of the otherwise applicable Nasdaq corporate governance requirements. In accordance with this exception, we follow Australian corporate governance practices in lieu of certain of the Nasdaq corporate governance standards, as more fully described in our Annual Report on Form 20-F for the fiscal year ended January 31, 2018, as amended, which is incorporated herein by reference. See “Where You Can Find Additional Information.” In particular, we will follow Australian law and corporate governance practices with respect to the composition of our board and quorum requirements applicable to shareholder meetings. These differences may result in a board that is more difficult to remove as well as less shareholder approvals required generally. We will also follow Australian law instead of the Nasdaq requirement to obtain shareholder approval prior to the issuance of securities in connection with a change of control, certain acquisitions, private placements of securities, or the establishment or amendment of certain stock option, purchase, or other equity compensation plans or arrangements. These differences may result in less shareholder oversight and requisite approvals for certain acquisition or financing related decisions or for certain company compensation related decisions. The Australian home country practices described above may afford less protection to holders of our securities than that provided under the Nasdaq Listing Rules.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The statements contained in this prospectus that are not purely historical are forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding expectations, hopes, beliefs, intentions, or strategies regarding the future. In addition, any statements that refer to projections, forecasts, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predicts,” “project,” “should,” “would,” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this prospectus may include, for example, statements about our:

 

  limited operating history and ability to maintain or increase profitability;
     
  expectations regarding industry trends and the size and growth rates of addressable markets;
     
  reliance on third parties for production and distribution;
     
  our business plan and our growth strategies, including plans for expansion to new markets and new products;
     
  expectations for seasonal trends;
     
  results of operations;
     
  ability to manage growth;
     
  ability to complete strategic acquisitions;
     
  ability to minimize our production and distribution costs by utilizing funding sources provided by others;
     
  regulatory or operational risks;
     
  success in retaining or recruiting, or changes required in, our officers, key employees, or directors;
     
  capital structure;
     
  ability to obtain additional financing when and if needed;
     
  liquidity and trading of our securities; and
     
  status as an emerging growth company under the JOBS Act.

 

The forward-looking statements contained in this prospectus are based on current expectations, assumptions, and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments will be those that have been assumed or anticipated. These forward-looking statements are subject to a number of risks and uncertainties (some of which are beyond our control) that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis for is for the year end for Naked Brand Group Limited (formerly Bendon Limited) and it provides information concerning our financial condition and results of operations for the year ended January 31, 2018 and 2017 and should be read in conjunction with our audited consolidation financial statements and the related notes included herein. Our selected financial information are reported for the fiscal years ended January 31, 2018, June 30, 2016 and June 30, 2015 and for the seven month period ended January 31, 2017. In order to provide additional meaningful information to investors, we have included unaudited consolidated information for the 12 month period ended January 31, 2017, and for the seven month period ended January 31, 2016. These unaudited information are presented for comparative purposes to the corresponding fiscal year ended January 31, 2018 and for the seven month period ended January 31, 2017, derived from accounting records.

 

The following also includes discussion and analysis for the Naked Brand Group Limited for the six months ended July 31, 2018 and July 31, 2017 and should be read in conjunction with the unaudited consolidated and related notes included herein.

 

The following discussion contains forward-looking statements that reflect our future plans, estimates, belief, and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed elsewhere in this prospectus under “Risk Factors” and “Forward-looking Statements.” In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.

 

Basis of Presentation

 

The Audited Annual Consolidated Financial Statements of the Company have been prepared in accordance with IFRS as issued by the IASB, and are presented in thousands of New Zealand dollars, except where otherwise indicated. However, certain financial measures contained in this MD&A are non-IFRS measures and are discussed further under “Non-IFRS Measures” below. All references to “$” and “dollars” refer to New Zealand dollars, unless otherwise indicated. Certain totals, subtotals and percentages throughout this MD&A may not reconcile due to rounding. The unaudited interim consolidated financial statements of the company have been prepared in accordance IAS 34 Interim Financial Reporting.

 

Introduction

 

We are a designer, distributor, wholesaler and retailer of women’s and men’s intimates apparel and swimwear. Our merchandise is sold through retail and outlet stores located in New Zealand and Australia, wholesale operations in New Zealand, Australia, the United States of America and Europe, and through online channels. We operate licensed brands including Heidi Klum, Stella McCartney, and Fredericks of Hollywood, and owned brands including Pleasure State, Davenport, Lovable, Bendon, Fayreform, VaVoom, Evollove, and Hickory. Bendon Limited’s license to use the Stella McCartney brand terminates effective June 30, 2018. Key customers include Farmers, Myer, David Jones and Woolworths.

 

All dollar values discussed below are presented in New Zealand dollars.

 

In keeping with customary practice in New Zealand, prior to the Transactions, our fiscal years ended on June 30. Subsequent to the Transactions, Bendon Limited changed its fiscal year end to January 31 to align with Naked’s fiscal year end.

 

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Overview

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017 (unaudited)

 

During the 6-month period ended July 31, 2018 the net sales decreased by $3m or 5.1% when compared with $59.8m in the 6-month period ended January 31, 2017. While sales were up $1m in the New Zealand market and $1.4m in the Australian market when comparing the two 6-month periods, the reduction in revenue in our European market of $4.3m and our US market sales of $1.1m negatively impacted our group trading result overall for the period. Our sales continued to be impacted by the lack of current season stock supply due to significant cashflow restraints.

 

During the 6-month period ended July 31, 2018 and the 6-month period ended July 31, 2017, the gross margins were 31.2% and 32.7%, respectively. The reduction in gross margin was caused by both the increase in promotional activity discounts provided to customers as well as the lack of available current season stock due to cash flow restraints.

 

   Jul. 31, 2018 NZ$000 6 months   Jul. 31, 2017 NZ$000 6 months   % movement 
Brand management   (25,399)   (25,873)   1.8%
Administrative expenses   (1,851)   (1,891)   2.1%
Corporate expenses   (7,901)   (7,028)   -12.4%
Finance expense   (2,454)   (5,027)   51.2%
Brand transition, restructure and transaction expenses   (5,157)   (1,112)   -363.8%
Impairment expense   (4,181)   0    -100.0%
Other foreign currency gains/(losses)   3,535    (934)   478.5%
Fair value gain/(loss) on convertible notes derivative   (775)   3,246    -123.9%

 

Brand management expenses decreased by $0.5m, or 1.8%, from $25.9m to $25.4m, in the 6-month period to July 31, 2018 compared with the 6-month period to July 31, 2017. We are continuing to implement cost saving initiatives in the business, and this is reflected in the reduction in brand management expenses.

 

Administrative expenses are consistent period to period with a slight $40k reduction, which we consider immaterial.

 

Corporate expenses are up $0.9m in the 6-month period to July 31, 2018 compared with the 6-month period to July 31, 2017, as this now includes expenses incurred by the Company and Naked Inc.

 

Finance expenses decreased by $2.5m, or 51.2% from $5.0m to $2.5m in the 6-month period ended July 31, 2018 as compared with the 6-month period ended July 31, 2017, due to a reduction in interest on external borrowing.

 

Year ended January 31, 2018 and 12-month period ended January 31, 2017 (unaudited)

 

Net sales in the 12-month period ended January 31, 2018 decreased by $20.75m, or 13.6%, to $131.4m when compared with $152.1m in the 12-month period ended January 31, 2017. The sales in the 12-month period ending January 31, 2018 were negatively impacted by a stock supply issue because of liquidity issues.

 

During the 12-month period ended January 31, 2018 and the 12-month period ended January 31, 2017, the gross margin was 33.4% and 44.6% respectively. The reduction in gross margin was caused by increased discounts provided to customers and sub-optimal stock mix because of the stock supply issue.

 

Finance expenses decreased by $2.4mm, or 21.6% from $11.2m to $8.8m in the 12-month period ended January 31, 2018 as compared with the 12-month period ended January 31, 2017, due to a reduction in interest on the shareholder loan due to the principal amount of such loans being reduced, the majority of which was converted to equity in September 2016.

 

Brand transition, restructure and transaction expenses increased by $0.8m, or 34.7%, from $2.4m to $3.2m in the 12-month period ended January 31, 2018 as compared with the 12-month period ended January 31, 2017, this was driven by costs incurred in respect of the US listing process.

 

Other foreign currency gains/(losses) reduced from a loss of $14.3m in 12-month period ended January 31, 2017 to a gain of $0.7m in the 12-month period ended Jan 31, 2018, due to gains on foreign exchange contracts.

 

7-month period ended January 31, 2017, 7-month period ended January 31, 2016 (unaudited), the 12 month period ended June 30, 2016 and the 12 month period ended June 30, 2015

 

Net sales in the 12 month period ended June 30, 2016 increased by $12.2m, or 8.8%, to $151.0m when compared with $138.8m in the 12 month period ended June 30, 2015. This was driven by extension of the business into providing advisory and management services to other intimates apparel businesses, favorable foreign exchange rate fluctuations between the New Zealand dollar and United States Dollar, growth in U.S. wholesale distribution through a new contract with Macy’s, growth in the online business and introduction of 8 new stores across Australia.

 

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Net sales in the 7-month period ended January 31, 2017 increased by $1.6m, or 1.7%, to $96.2m when compared with $94.7m in the 7-month period ended January 31, 2016. Sales were negatively impacted by a stock supply issue, and less favorable foreign exchange rate fluctuations between the New Zealand dollar and U.S. Dollar, which was offset by the beneficial impact of a new licensing agreement with Fredericks of Hollywood.

 

During the 7-month period ended January 31, 2017, the 7-month period ended January 31, 2016, the 12 month period ended June 30, 2016 and the 12 month period ended June 30, 2015, the gross margin was 40.7%, 45.1%, 44.7%, and 43.1%, respectively. The movement in gross margin has remained fairly consistent, but has improved due to changes in the sales mix including additional online revenue, as well as positive foreign exchange rate fluctuations.

 

Brand management expenses increased by $6.2m, or 14.6%, from $42.2m to $48.4m between the 12 month period ended June 30, 2015 and the 12 month period ended June 30, 2016. This was largely driven by growth in business and associated employee costs, as well as additional marketing expenditures to support the introduction of new swimwear ranges. The increase of $4.4m, or 15.9%, from $27.6m to $32.0m in the 7-month period to January 31, 2017 as compared with the 7-month period to January 31, 2016, was also driven by additional marketing expenditures.

 

Finance expenses increased by $4.5m, or 77.3%, between the 12 month period ended June 30, 2015 and the 12 month period ended June 30, 2016 from $5.9m to $10.4m, due to additional interest expense associated with an increase in debt. The finance expense in the 7-month period to January 31, 2016 and January 31, 2017 increased slightly due to additional interest on convertible loan notes being partially offset by a reduction in interest on the shareholder loan due to the principal amount of such loans being reduced, the majority of which was converted to equity in September 2016.

 

Brand transition, restructure and transaction expenses of $1.3m, $2.2m and $12.2m were incurred in the 7-month period ended January 31, 2017, the 12 month period ended June 30, 2016 and the 12 month period ended June 30, 2015, respectively. The biggest driver for this decrease was a reduction in brand transition expenses incurred in relation to the transition from the Elle MacPherson to Heidi Klum brand which decreased over time given the Elle MacPherson license was terminated in the fiscal year 2015.

 

An impairment expense of $2.2m was recognized in the 12 month period ended June 30, 2016 and 7-month period to January 31, 2016 in relation to a goodwill write-off. An impairment expense of $0.3m was recognized in 7-month period to January 31, 2017.

 

Other foreign currency gains/(losses) reduced from a gain of $4.7m the 12 month period ended June 30, 2015 to a loss of $2.4m in the 12 month period ended June 30, 2016 due to weakening of the New Zealand dollar and the impact of unfavorable hedge contracts entered into. Other foreign currency gains/(losses) reduced from a gain of $5.7m in the 7-month period to January 31, 2016 to a loss of $3.3m in the 7-month period to January 31, 2017 as a result of the same foreign exchange drivers.

 

Application of Critical Accounting Policies, Estimates, and Judgements

 

Our accounting policies form the basis for preparation of our financial statements and our financial statements in tum are an essential factor in understanding our operations. Our accounting policies are in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and are fully described in the notes to our audited financial statements as of and for the year ended January 31, 2018, 7-month period ended January 31, 2017 and the two years ended June 30, 2016 and June 30, 2015 and also in our unaudited interim condensed consolidated financial statements for the half years ended 31 July 2018 and 31 July 2017. The preparation of our financial statements required management to make judgments, estimates, assumptions and judgments that affect the reported amounts of revenue, assets, liabilities and expenses. Our management re-evaluates estimates on an on-going basis and such estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Unless otherwise stated, all dollar amounts stated in our financial statements are expressed in the currency of the Commonwealth of Australia.

 

Critical accounting policies

 

Critical accounting policies that reflect our industry and activity specific accounting treatments used in preparing our financial statements as of the 12 month period ended January 31, 2018, the 7- month period ended January 31, 2017, the 12 month period ended June 30, 2016, the 12 month period ended June 30, 2015 the 6 months ended 31 July 2018 and the 6 months ended 31 July 2017, or that have significant potential to result in a material adjustment to the carrying amounts of assets and liabilities during each of the years are as follows:

 

(a)Going Concern

 

The financial statements have been prepared on the basis of going concern which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business.

 

For the financial year ended 31 January 2018 the Group experienced a loss after income tax from continuing operations of NZ$37.593 million and operating cash outflows of NZ$4.116 million. As at 31 January 2018, the business is in a net current liability position of NZ$20.752 million and has negative net assets of $5.710 million.

 

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For the half year ended 31 July 2018 the Group experienced a loss after income tax from continuing operations of NZ$26.094 million and operating cash outflows of NZ$5.427 million. As at 31 July 2018, the business is in a net current liability position of NZ$2.944 million and has net assets of $16.232 million.

 

The business continued to experience losses in the 31 January 2018 financial year as a result of reduced revenue from wholesale customers, increased rebates and discounts, and the plateauing of sales in retail outlets. The business is experiencing challenging trading conditions which have been impacted by the cancellation of the Stella McCartney licence held by the Company which expired on 30 June 2018, the lack of working capital to purchase sufficient levels of inventory required for trading, reduced customer foot traffic in retail stores and outlets, and a reduction of revenue from wholesale customers. The business has continued to accumulated trade creditors that are trading beyond their original credit terms and has also breached its Bank debt loan covenants during and since the half year period, and has yet to finalise a revised banking facility agreement to provide the company with sufficient funding to continue as a going concern.

 

In response management has taken steps to raise further capital to fund new inventory that will restock stores and supply wholesale customers and to bring creditors back into term. This capital raising/recapitalisation is continuing at the time of this prospectus. Management has also engaged in restructuring the businesses operations including reducing costs across distribution channels, renegotiating supplier contracts, resetting customer supply commitments, updating leadership roles including appointing a new CEO for the operating business, and managing the opening of new stores. The impact from the proposed capital raising and the restructure will take time generate positive cash flows from operations. The Group expects the business will trend to be cash flow positive by November 2019.

 

Since the end of the period, the Group has raised further equity which has been used to support the working capital requirements of the Group, reduce the cost of finance, fund the losses and reduce outstanding amounts to aged creditors.

 

In addition to attempting to raise new capital, the Group has been negotiating a new Bank borrowing facility agreement to replace the facilities last reported as at 31 July 2018.The new facility is expected to be subject to covenants and is likely to be a rolling 12 month facility subject to review at the end of each year. The Group is expecting a term sheet by the end of February 2019.

 

The Bank facilities last reported as at 31 July 2018 are presented on the Balance Sheet as a current liability due to the facilities having breached covenants. The amount outstanding as at that date amounted to $20m.

 

The directors have also considered the Loan Agreement from its previous major shareholder Cullen Investments Limited (“Cullen”) and has been advised by Cullen that due to some changes with Cullen’s financial circumstances Cullen is not likely to be a reliable source of funding and as a result the directors have decided to pursue new capital raising activities and not rely on Cullen.

 

Despite the ongoing losses and the other negative financial conditions, the Directors are confident that the Company will continue as a going concern. However, while the Directors are confident of continuing as a going concern and meeting its debt obligation to its Bank and creditor commitments as they fall due, the going concern is dependent upon the Directors and Company being successful in:

 

Raising further capital of at least NZ$36 million and collecting it between March 2019 and July 2019;
Reducing overheads, increasing revenue and gross profit margin that leads to a reduction in the current cash outflow being incurred each month to reach a cash flow positive position by November 2019;
Renegotiating the current bank facilities of $20 million to a facility that is at least a 12 month facility, reviewed annually, and is subject to amortisation of $2.5 million per quarter commencing April 2019; and

Continue to receive support form creditors to delay payment until the company has adequate facilities to commence a repayment arrangement.

 

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As a result the viability of the Group is dependent on the above matters, and there is a substantial doubt about the Company’s ability to continue as a going concern. However, the Directors’ believe that the Group will be successful in the above matters and, accordingly, have prepared the report on a going concern basis.

 

  (b) Revenue recognition

 

Revenue is recognized when the amount of the revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to Bendon Limited and specific criteria relating to the type of revenue as noted below, has been satisfied.

 

Revenue is measured at the fair value of the consideration received or receivable and is presented net of returns, discounts and rebates. Bendon Limited assess the expected customer returns and rebates according to the specific information in its possession and its past experience in similar cases.

 

Sale of goods

 

Sales of goods through retail stores, e-commerce and wholesale channels are recognized when there has been a transfer of risk and rewards to the customer. Risks and rewards transfer at point of sale for retail stores sales. For wholesale and e-commerce sales, risks and rewards are transferred when goods are delivered to customers, and therefore reflects an estimate of shipments that have not been received at year end based on shipping terms and historical delivery times. Bendon Limited also provides a reserve for projected merchandise returns based on prior experience.

 

Bendon Limited sells gift cards to customers. Bendon Limited recognizes revenue from gift cards when they are redeemed by the customers. In addition, Bendon Limited recognizes revenue on unredeemed gift cards after one year when the gift cards have expired.

 

Significant Accounting Judgments, Estimates, and Assumptions

 

Significant accounting judgments, estimates, and assumptions that have been used in the preparation of our financial statements are set out below. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.

 

We make estimates and assumptions concerning the future in determining accounting treatments and quantifying amounts for transactions and balances in certain circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

 

Key estimates — inventory

 

Each item on inventory is reviewed on an annual basis to determine whether it is being carried at higher than its net realizable value. During the period, management have written down inventory based on best estimate of the net realizable value, although until the time that inventory is sold this is an estimate.

 

Key estimates — impairment of goodwill

 

In accordance with IAS 36 Impairment of Assets, Bendon Limited is required to estimate the recoverable amount of goodwill at each reporting period.

 

Impairment testing is an area involving management judgement, requiring assessment as to whether the carrying value of assets can be supported by the net present value of future cash flows derived from such assets using cash flow projections which have been discounted at an appropriate rate and using a terminal value to incorporate expectations of growth thereafter.

 

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In calculating the net present value of the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters including management’s expectations of:

 

  growth in future cash flow forecasts;

 

  timing and quantum of future capital expenditure;

 

  long-term growth rates; and

 

  the selection of discount rates to reflect the risks involved.

 

Changing the assumptions selected by management, in particular the discount rate and growth rate assumptions used in the cash flow projections, could significantly affect Bendon Limited’s impairment evaluation and hence results.

 

Bendon Limited’s review includes the key assumptions related to sensitivity in the cash flow projections. Further details are provided in note 12 to the consolidated financial statements.

 

Key estimates — fair value of financial instruments

 

Bendon Limited has certain financial assets and liabilities which are measured at fair value. Where fair value has not been able to be determined based on quoted price, a valuation model has been used. The inputs to these models are observable, where possible, however these techniques involve significant estimates and therefore fair value of the instruments could be affected by changes in these assumptions and inputs.

 

Key estimates — impairment of brands

 

In accordance with IAS 36 Impairment of Assets, Bendon Limited is required to estimate the recoverable amount of indefinite-lived brand assets at each reporting period.

 

Impairment testing is an area involving management judgement, requiring assessment as to whether the carrying value of assets can be supported by their value in use or fair value less cost to sell.

 

In calculating the fair value less costs to sell, certain assumptions are required to be made in respect of highly uncertain matters including management’s expectations of:

 

  growth in brand revenues

 

  market royalty rate

 

  the selection of discount rates to reflect the risks involved, and

 

  long-term growth rates

 

Changing the assumptions selected by management, in particular the growth rate, discount rate and market royalty rate assumption used, could significantly affect Bendon Limited’s impairment evaluation and hence results.

 

Bendon Limited’s review includes the key assumptions related to sensitivity in the model. Further details are provided in note 12 to the consolidated financial statements.

 

Key estimates — taxes

 

Determining income tax provisions and the recognition of deferred tax assets including carried forward income tax involves judgment on the tax treatment of certain transactions. Deferred tax is recognized on tax losses not yet used and on temporary differences where it is probable that there will be taxable revenue against which these can be offset. Management has made judgments as to the probability of future taxable income being generated against which tax losses will be available for offset based on budgets, current and future expected economic conditions.

 

26
 

 

Recent Accounting Pronouncements

 

New Accounting Standards and Interpretations

 

As discussed in note 3(x) to the unaudited interim condensed consolidated financial statements for the half year period ended 31 July 2018 the company adopted IFRS 9 Financial Instruments and IRFS 15 Revenue from Contracts with Customers. The changes were given effect 1 February 2018 but there was no material impact.

 

Certain new accounting standards and interpretations have been published that are not mandatory for 31 July 2018 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below.

 

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Title of Standard  Nature of change  Impact 

Mandatory application date/Date of adoption by

Group

IFRS 16
Leases
  In February 2016 the IASB issued a new standard for leases. This AASB 16 replaces IAS 17.
 
The main impact on lessees is that almost all leases go on balance sheet. This is because the balance sheet distinction between operating and finance leases is removed for lessees. Instead, under the new standard an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exemptions are short-term and low-value leases.
  This standard will affect the accounting for the Group’s operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments of $29.9m. However, the Group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group’s profit and classification of cash flows.  Management is currently assessing the impact of the new rules and believes the adoption of the provisions of this update will have a material impact on the Company’s consolidated financial statements.
 
Mandatory for financial years commencing on or after 1 January
2019.
 
Expected date of adoption by the Group: 1 February
2019.
          
IFRC 23
Uncertainty over Income Tax Treatments (IFRIC 23)
  On June 7, 2017, the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments (“IFRIC 23”). IFRIC 23 clarifies the application of recognition and measurement requirements in IAS 12, Income Taxes, when there is uncertainty over income tax treatments. The IFRIC 23 interpretation specifically addresses whether an entity considers uncertain tax treatments separately; the assumptions an entity makes about the examination of tax treatments by taxation authorities; how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and how an entity considers changes in facts and circumstances.  The Company is currently evaluating the impact of adopting this standard on the consolidated financial statements.  IFRIC 23 is
effective for annual periods beginning on or after January 1, 2019, with earlier application permitted.

 

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There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

 

Recent Developments

 

Subsequent to the end of the financial period, the Company issued 3,116,645 shares at an average price of $2.24 per share to the value of US$6.98 million. These proceeds were used as working capital in the business.

 

As at the date of this prospectus, Company is in negotiations with its Bankers to reset the loan covenants and extend the Loan to beyond the expiry of its current terms on 30 June 2019.

 

On 15th August 2018, the Company filed this registration statement relating to the resale of up to 12,752,951 ordinary shares, no par value, of Naked Brand Group Limited and up to 1,293,892 Ordinary Shares issuable upon exercise of outstanding warrants. The securities were issued in connection with one or more private placements and placements that occurred outside the United States and the Company will not receive any proceeds from the sale of the securities under this prospectus. However, the Company could receive up to US$4,852,095 in gross proceeds if all of the warrants held by three of the Selling Shareholders are exercised for cash. We are still evaluating the accounting and financial reporting treatment of this transaction.

 

On November 15, 2018, we and our wholly-owned subsidiary, Bendon, entered into a Stock Purchase Agreement with the shareholders of FOH, including, a significant shareholder of the Company. Pursuant to the agreement, on December 6, 2018, we purchased all of the issued and outstanding shares of FOH, in order to gain direct ownership of the Frederick’s of Hollywood license arrangement FOH had with ABG. We previously marketed merchandise under the Frederick’s of Hollywood brand through a sub-license arrangement with FOH. As a result of the acquisition of FOH, we now have a direct relationship with ABG in relation to the Frederick’s of Hollywood license. Under the terms of the agreement, we paid a purchase price of approximately US$18.2 million, as follows (i) Bendon forgave debt owed to it by FOH and Cullen, in the aggregate amount of approximately US$9.9 million, and (ii) we issued 3,765,087 of our Ordinary Shares to FOH’s shareholders, valued at a price per share of US$2.20. We also agreed to satisfy certain obligations with respect to certain claims involving the parties. A portion of the Ordinary Shares issued to FOH’s shareholders are held in trust and may be released to Cullen to the extent not applied in satisfaction of such claims. We are still evaluating the accounting and financial reporting treatment of this transaction.

 

Pursuant to our financing plan prior to the consummation of the Transactions, we entered into securities purchase agreements with certain investors for the purchase and sale of ordinary shares and warrants to purchase additional ordinary shares in a private placement, for an aggregate anticipated proceeds of approximately $17,000,000. Of such amount, investors failed to fund approximately $7,700,000. Accordingly, as management believes it has exhausted all other appropriate remedies available to it, we intend cancel 1,582,243 ordinary shares and 277,473 warrants issued to such investors in accordance with applicable legal requirements.

 

Results of Operations

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017

 

The following table sets forth certain selected operating results and other financial information for each of the 6-month periods ended July 31, 2018 and 2017:

 

   

Jul. 31, 2018

NZ$000
6 months

   

Jul. 31, 2017

NZ$000
6 months

    % movement  
Revenue     56,750       59,787       -5.1 %
Cost of goods sold     (39,072 )     (40,207 )     2.8 %
Gross profit     17,678       19,580       -9.7 %
Brand management     (25,399 )     (25,873 )     1.8 %
Administrative expenses     (1,851 )     (1,891 )     2.1 %
Corporate expenses     (7,901 )     (7,028 )     -12.4 %
Finance expense     (2,454 )     (5,027 )     51.2 %
Brand transition, restructure and transaction expenses     (5,157 )     (1,112 )     -363.8 %
Impairment expense     (4,181 )     0       -100.0 %
Other foreign currency gains/(losses)     3,535       (934 )     478.5 %
Fair value gain/(loss) on convertible notes derivative     (775 )     3,246       -123.9 %
Loss before income tax     (26,505 )     (19,039 )     -39.2 %
Income tax benefit/(expense)     411       (174 )     336.2 %
Loss for the period     (26,094 )     (19,213 )     -35.8 %
Other comprehensive loss                        
Exchange differences on translation of foreign operations     (420 )     757       -155.5 %
Total comprehensive loss for the period     (26,514 )     (18,456 )     43.7 %

 

29
 

 

Revenue

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017

 

During the 6-month period ended July 31, 2018 the net sales decreased by $3m or 5.1% when compared with $59.8m in the 6-month period ended January 31, 2017. While sales were up $1m in the New Zealand market and $1.4m in the Australian market when comparing the two 6-month periods, the reduction in revenue in our European market of $4.3m and our US market sales of $1.1m negatively impacted our group trading result overall for the period. Our sales continued to be impacted by the lack of current season stock supply due to significant cashflow restraints.

 

Gross margins

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017

 

During the 6-month period ended July 31, 2018 and the 6-month period ended July 31, 2017, the gross margins were 31.2% and 32.7%, respectively. The reduction in gross margin was caused by both the increase in promotional activity discounts provided to customers as well as the lack of available current season stock due to cash flow restraints.

 

Operating expenses

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017

 

    Jul. 31, 2018 NZ$000 6 months     Jul. 31, 2017 NZ$000 6 months     % movement  
Brand management     (25,399 )     (25,873 )     1.8 %
Administrative expenses     (1,851 )     (1,891 )     2.1 %
Corporate expenses     (7,901 )     (7,028 )     -12.4 %
Finance expense     (2,454 )     (5,027 )     51.2 %
Brand transition, restructure and transaction expenses     (5,157 )     (1,112 )     -363.8 %
Impairment expense     (4,181 )     0       -100.0 %
Other foreign currency gains/(losses)     3,535       (934 )     478.5 %
Fair value gain/(loss) on convertible notes derivative     (775 )     3,246       -123.9 %

 

Brand management expenses decreased by $0.5m, or 1.8%, from $25.9m to $25.4m, in the 6-month period to July 31, 2018 compared with the 6-month period to July 31, 2017. We are continuing to implement cost saving initiatives in the business, and this is reflected in the reduction in brand management expenses.

 

Administrative expenses are consistent period to period with a slight $40k reduction, which we consider immaterial.

 

Corporate expenses are up $0.9m in the 6-month period to July 31, 2018 compared with the 6-month period to July 31, 2017, as this now includes expenses incurred by the Company and Naked Inc.

 

Finance expenses decreased by $2.5m, or 51.2% from $5.0m to $2.5m in the 6-month period ended July 31, 2018 as compared with the 6-month period ended July 31, 2017, due to a reduction in interest on external borrowing.

 

30
 

 

Brand transition, restructure and transaction expenses increased by $4m, or 363.8%, from $1.1m to $5.1m in the 6-month period ended July 31, 2018 as compared with the 6-month period ended July 31, 2017, due to costs incurred in respect of the U.S. listing process.

 

Impairment costs during the 6-month period ended July 31, 2018 totaled $4.2m. This expense predominately relates to the impairment of goodwill relating to the acquisition of Naked.

 

Taxation

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017

 

The tax credit of $411k in the 6-month period ended July 31, 2018 increased by $585k when compared to the 6-month period ended July 31, 2017. The tax credit position for the 6-month period ended July 31, 2018 is driven by the FOH trading loss for the period. No other tax losses have been recognized during the period as there is uncertainty over whether the deferred tax asset could be utilized

 

Net loss and comprehensive loss

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017

 

The net loss in the 6-month period ended July 31, 2018 increased by $6.9m, or 35.8%, to ($26.1m) when compared with ($19.2m) in the 6-month period ended July 31, 2017. This increase in net loss was due to both the reduced gross profit and increased expenses. The decrease in gross profit of $1.9m in the 6-month period ended July 31, 2018 when compared with the 6-month period ended July 31, 2017 was due to a drop-in sales, while the increase in expenses for the period of $5.6m, or 14.4%, was due to both the costs incurred as part of our US listing and also the impairment of the Naked brand.

 

Segmented Reporting

 

Bendon has seven reportable segments; Australia retail, New Zealand retail, Australia wholesale, New Zealand wholesale, US wholesale, Europe wholesale and E-commerce.

 

  Australia retail. This segment covers retail and outlet stores located in Australia.
     
  New Zealand retail. This segment covers retail and outlet stores located in New Zealand.
     
  Australia wholesale. This segment covers the wholesale of intimates apparel to customers based in Australia.
     
  New Zealand wholesale. This segment covers the wholesale of intimates apparel to customers based in New Zealand.
     
  US wholesale. This segment covers the wholesale of intimates apparel to customers based in the United States of America.
     
  Europe wholesale. This segment covers the wholesale of intimates apparel to customers based in Europe.
     
  E-commerce. This segment covers the group’s online retail activities.

 

The following table provides our segment net sales, gross margin and EBITDA for the 6-month period to July 31, 2018, 6-month period to July 31, 2017, 6-month period to January 31, 2018, and the 6-month period to January 31, 2017.

 

31
 

 

6-month ending July 31, 2018

 

    NZ Retail
NZ$000’s
    AU Retail
NZ$000’s
    NZ Wholesale
NZ$000’s
    AU Wholesale
NZ$000’s
    US Wholesale
NZ$000’s
    EU Wholesale
NZ$000’s
    e-commerce
NZ$000’s
    Unallocated
NZ$000’s
    Total  
Revenue     15,571       8,758       4,556       6,757       3,047       3,813       14,248       -       56,750  
Gross margin     7,959       4,512       861       1,511       124       806       4,014       (2,109 )     17,678  
EBITDA     1,103       (1,132 )     189       (215 )     (1,063 )     (360 )     (1,361 )     (12,597 )     (15,436 )

 

6-month ending July 31, 2017

 

    NZ Retail
NZ$000’s
    AU Retail
NZ$000’s
    NZ Wholesale
NZ$000’s
    AU Wholesale
NZ$000’s
    US Wholesale
NZ$000’s
    EU Wholesale
NZ$000’s
    e-commerce
NZ$000’s
    Unallocated
NZ$000’s
    Total  
Revenue     15,072       8,030       4,092       6,497       4,803       8,154       13,139       -       59,787  
Gross margin     8,045       3,946       842       203       711       1,846       3,987       -       19,580  
EBITDA     1,583       (1,389 )     393       (1,794 )     (796 )     342       (1,420 )     (13,204 )     (16,285 )

 

New Zealand and Australia Retail

 

In the 6-month period ended July 31, 2018 New Zealand retail EBITDA was $1.1m compared with $1.6m in the 6-month period to July 31, 2017. Australian retail EBITDA for the 6-month period ended July 31, 2018 was a loss of $1.1m compared to a loss of $1.4m in the 6-month period to July 31, 2017. Both the New Zealand and Australian retail environment continue to be challenging, and this along with a lack of current season stock resulted in both the reduction of EBITDA in our New Zealand stores and the continued trading losses in our Australian stores.

 

New Zealand retail gross margin reduced by 2.3% between the 6-month period to July 31, 2018 and 6-month period to July 31, 2017, from 53.4% to 51.1%. Australian retail gross margin improved by 2.4%, from 49.1% to 51.5%, due to the re-branding of our 3 drawer No.1 stores to Bendon.

 

In the 12-month period ended January 31, 2018, New Zealand retail EBITDA was $4.3m compared with $7.7m in the 12-month period to January 31, 2017. Australian Retail EBITDA for the 12-month period ended January 31, 2018 was a loss of $2.5m compared with a profit of $0.3m in the 12-month period to January 31, 2017. A challenging retail environment, seasonal product mix and vendor supply issues were the key reasons for this reduced EBITDA across both the New Zealand and Australian retail markets.

 

New Zealand Retail Gross margin reduced 5.8% between the 12-month period to January 31, 2018 and 12- month period to January 31, 2017 from 57.7% to 51.9%. Australia Retail Gross margin reduced 8.4% between the 12-month period to January 31, 2018 and 12- month period to January 31, 2017 from 56.5% to 48.1%. The reduction in the gross margin in both markets was caused by increased discounts provided to customers and sub-optimal stock mix because of the stock supply issue.

 

In the 7-month period ended January 31, 2017, the 12-month period ended June 30 2016, the 12-month period ended June 30 2015, New Zealand retail EBITDA was $4.8m, $9.1m, and $8.9m, respectively, as a result of similar trading conditions and consistent store numbers.

 

The revenue and EBITDA in the 7-month period to January 31, 2017 showed a consistent trend as compared with the 12-month period ended June 30 2016. In the 12-month period ended June 30 2016, Australia retail recognized increased revenue and reduced EBITDA of $20.7m and $1.9m, respectively, as compared with $18.5m and $2.8m, respectively, in the 12-month period ended June 30 2015. The increase in revenue was due to the introduction of 8 new outlet stores, which due to early trading losses experienced reduced EBITDA.

 

32
 

 

NZ Wholesale, AU Wholesale, US Wholesale and EU wholesale

 

In the 6-month period ended July 31, 2018 EBITDA decreased in the NZ wholesale, US wholesale and EU Wholesale markets, and increased in the AU wholesale market when compared with the 6-month period ended July 31, 2017. New Zealand wholesale EBITDA was $0.2m in the 6-months ended July 31, 2018, compared with $0.4m in the 6-months ended July 31, 2017. US wholesale EBITDA was a loss of $1.1m in the 6-months ended July 31, 2018 compared with an EBITDA loss of $0.8m in the 6-months ended July 31, 2017. EU wholesale EBITDA was a loss of $0.4m in the 6-months ended January 31, 2018, compared with a profit of $0.3m in the 6-months ended July 31, 2017. Australian wholesale EBITDA was a loss of $0.2m in the 6-months ended July 31, 2018, compared with an EBITDA loss of $1.8m in the 6-months ended July 31, 2017.

 

In the 6-month period ended July 31, 2018 and 6-month period ended July 31, 2017 New Zealand wholesale revenue was $4.6m and $4.1m, US wholesale revenue was $3.1m and $4.8m and EU wholesale revenue was $3.8m and $8.1m respectively. A lack of order fulfillment due to vendor supply issues was the primary reason for this reduction in sales across the segments. Australian Wholesale sales increased to $6.8m in the 6-month period ended July 31, 2018 from $6.5m in the 6-month period ended 31 July 2017. This is due to a reduction in markdown discounts given to wholesale partners.

 

E-commerce

 

For the 6-months ended July 31, 2018 our e-commerce EBITDA was a loss of $1.36m compared with a loss of $1.42m for the 6-months ended July 31, 2017. The loss for this period is due to the continued focus on promotional activity and discounts offered to customers to promote sales. E-commerce Gross margin reduced 2.2% between the 6-month period to July 31, 2018 and 6-month period to July 31, 2017 from 30.3% to 28.2%. For the 12-months ended January 31, 2018 our e-commerce EBITDA was a loss of $0.3m compared with a profit of $4.5m for the 12-months ended January 31, 2017. The loss for this period is due to decrease in margin as a result of the new license fee under the license agreement with FOH and discounts offered to customers. E-commerce Gross margin reduced 11.5% between the 12-month period to January 31, 2018 and 12-month period to January 31, 2017 from 46.4% to 34.9%.

 

Non-IFRS Financial Measures

 

Reconciliations

 

EBITDA is defined as earnings before interest, taxes, depreciation, depletion, amortization and impairment and EBITDA from continuing operations is defined as earnings from continuing operations before interest, taxes, depreciation, depletion, amortization and impairment. Our management uses EBITDA as a measure of our operating results and considers it to be a meaningful supplement to net income as a performance measurement, primarily because we incur significant depreciation and depletion and the exclusion of impairment losses in EBITDA eliminates the non-cash impact.

 

A reconciliation of EBITDA to the consolidated statements of profit or loss and other comprehensive income for each segment follows:

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017

 

    6 months to     6 months to  
    31 July 2018     31 July 2017  
    NZ $000’s     NZ $000’s  
EBITDA     (15,436 )     (16,285 )
Brand transition, restructure and transaction expenses     (5,157 )     (1,112 )
Finance expense     (2,454 )     (4,776 )
Impairment expense     (4,182 )     -  
Depreciation and amortisation     (1,190 )     (1,821 )
Fair value (gain)/loss on foreign exchange contracts     2,306       (1,600 )
Unrealised foreign exchange gain     383       3,309  
Fair value gain/(loss) on Convertible Note derivative     (775 )     3,246  
Loss before income tax     (26,505 )     (19,039 )

 

33
 

 

Results of Operations

 

Year ended January 31, 2018 compared to 12-month period ended January 31, 2017 (unaudited)

 

The following table sets forth certain selected operating results and other financial information for each of the years ended January 31, 2018 and 2017:

 

       Unaudited     
   Jan. 31,   Jan. 31,     
   2018   2017     
   NZ$000   NZ$000   % 
   12 months   12 months   movement 
Revenue   131,388    152,144    -13.6%
Cost of goods sold   (87,459)   (84,358)   -3.7%
Gross profit   43,929    67,786    -35.2%
Brand management   (53,653)   (53,957)   0.6%
Administrative expenses   (4,131)   (3,712)   -11.3%
Corporate expenses   (12,851)   (12,920)   0.5%
Finance expense   (8,791)   (11,214)   21.6%
Brand transition, restructure and transaction expenses   (3,272)   (2,430)   -34.7%
Impairment expense   (1,914)   (2,865)   33.2%
Other foreign currency gains/(losses)   757    (14,327)   105.3%
Fair value gain/(loss) on convertible notes derivative   2,393    (592)   504.5%
Loss before income tax   (37,533)   (34,230)   -9.7%
Income tax benefit/(expense)   (60)   (6,123)   99.0%
Loss for the period   (37,593)   (40,352)   6.8%
Other comprehensive loss               
Exchange differences on translation of foreign operations   148    384    -61.5%
Total comprehensive loss for the period   (37,445)   (39,968)   -6.3%

 

7-month period ended January 31, 2017 compared to 7-month period ended January 31, 2016 and 12-month period ended June 30, 2016 compared to 12-month period ended June 30, 2015

 

The following table sets forth certain selected operating results and other financial information for each of the 7-month periods ended January 31, 2017 and 2016, and each of the years ended June 30, 2016 and 2015: * – Note that January 31, 2017 is not an annual period, rather it has been derived from accounting records, to provide a 12 month comparative to the January 31, 2018 annual period.

 

    Jan. 31,
2017
NZ$000
seven
months
    Unaudited
Jan. 31,
2016
NZ$000
seven
months
    %
movement
    Jun. 30,
2016
NZ$000
12 months
    Jun. 30,
2015
NZ000$
12 months
    %
movement
 
Revenue     96,284       94,667       1.7 %     151,000       138,838       8.8 %
Cost of goods Sold     (57,144 )     (51,998 )     9.9 %     (83,525 )     (79,031 )     5.7 %
Gross Profit     39,140       42,669       -8.3 %     67,475       59,807       12.8 %
Brand Management     (32,040 )     (27,647 )     15.9 %     (48,362 )     (42,203 )     14.6 %
Administrative expenses     (2,383 )     (2,109 )     13.0 %     (4,090 )     (4,691 )     -12.8 %
Corporate expenses     (8,082 )     (8,236 )     -1.9 %     (13,002 )     (13,940 )     -6.7 %
Finance expense     (6,238 )     (5,436 )     14.8 %     (10,409 )     (5,870 )     77.3 %
Brand transition, restructure and transaction expense     (1,321 )     (1,122 )     17.7 %     (2,232 )     (12,182 )     -81.7 %
Impairment expense     (292 )     (2,157 )     -86.5 %     (2,157 )     -       100.0 %
Other foreign currency gains/(losses)     (3,306 )     5,685       -158.2 %     (2,423 )     4,700       -151.6 %
Fair value gain/(loss) on convertible notes derivative     (592 )     -       100.0 %     -       -       0 %
Profit/(Loss) before income tax     (15,114 )     1,647       1017.7 %     (15,200 )     (14,379 )     5.7 %
Income tax benefit/(expense)     (865 )     (289 )     199.3 %     (5,546 )     1,274       -535.3 %
Profit/(Loss) for the period     (15,979 )     1,358       1276.7 %     (20,746 )     (13,105 )     58.3 %
Other comprehensive income                                                
Exchange differences on translation of foreign operations     (29 )     (379 )     92.3 %     31       (93 )     -133.3 %
Total comprehensive income/(loss) for the period     (16,008 )     979       -1735.2 %     (20,715 )     (13,198 )     57.0 %

 

34
 

 

Revenue

 

Year ended January 31, 2018 compared to 12-month period ended January 31, 2017 (unaudited)

 

During the 12-month period ended January 31, 2018 the net sales decreased by $20.75m or 13.6% when compared with $152.1m in the 12-month period ended January 31, 2017. The sales in the 12-month period ended January 31, 2018 were negatively impacted by a stock supply issue because of liquidity issues. Three new stores were opened in Australia, as well as two new stores in New Zealand to continue to expand our brand presence across the Australasian market.

 

7-month period ended January 31, 2017 compared to the 7-month period ended January 31, 2016 (unaudited) and 12-month period ended June 30, 2016 compared to the 12-month period ended June 30, 2015

 

Net sales in the 7-month period ended January 31, 2017 increased by $1.6m, or 1.7%, to $96.2m when compared with $94.7m in the 7-month period ended January 31, 2016. Sales were negatively impacted by a stock supply issue, and less favorable foreign exchange rate fluctuations between the New Zealand dollar and U.S. Dollar, which was offset by the beneficial impact of a new licensing agreement with Fredericks of Hollywood.

 

Net sales in the 12-month period ended June 30 2016 increased by $12.2m, or 8.8%, to $151.0m when compared with $138.8m in the 12-month period ended June 30 2015. This was driven by the extension of the business into providing advisory and management services to other intimate apparel businesses, favorable foreign exchange rate fluctuations between the New Zealand dollar and U.S. Dollar, growth in U.S. wholesale distribution through a new contract with Macy’s, growth in the online business and introduction of 8 new stores across Australia.

 

Gross margins

 

Year ended January 31, 2018 compared to 12-month period ended January 31, 2017 (unaudited)

 

During the 12-month period ended January 31, 2018 and the 12-month period ended January 31, 2017, the gross margin was 33.4% and 44.6% respectively. The reduction in gross margin was caused by increased discounts provided to customers and sub-optimal stock mix because of the stock supply issue.

 

7-month period ended January 31, 2017 compared to 7-month period ended January 31, 2016 and 12-month period ended June 30, 2016 compared to 12-month period ended June 30, 2015

 

During the 7-month period ended January 31, 2017, the 7-month period ended January 31, 2016, 12-month period ended June 30 2016 and 12-month period ended June 2015, the gross margin was 40.7%, 45.1%, 44.7%, and 43.1%, respectively. The movement in gross margin has remained fairly consistent, but has improved due to changes in the sales mix including additional online revenue, as well as positive foreign exchange rate fluctuations.

 

35
 

 

Operating expenses

 

Year ended January 31, 2018 compared to 12-month period ended January 31, 2017 (unaudited)

 

       Unaudited     
   Jan. 31,   Jan. 31,     
   2018   2017     
   NZ$000   NZ$000   % 
   12 months   12 months   movement 
Brand management   (53,653)   (53,957)   0.6%
Administrative expenses   (4,131)   (3,712)   -11.3%
Corporate expenses   (12,851)   (12,920)   0.5%
Finance expense   (8,791)   (11,214)   21.6%
Brand transition, restructure and transaction expenses   (3,272)   (2,430)   -34.7%
Impairment expense   (1,914)   (2,865)   33.2%
Other foreign currency gains/(losses)   757    (14,327)   105.3%
Fair value gain/(loss) on convertible notes derivative   2,393    (592)   504.5%

 

Brand management expenses decreased by $0.3m, or 0.6%, from $53.9m to $53.6m in the 12-month period to January 31, 2018 as compared with the 12-month period to January 31, 2017. This reduction was due to the increased focus on cost control in this area.

 

Administrative expenses increased by $0.4m or 11.3% from $3.7m to $4.1m in the 12-month period to January 21, 2018 as compared with the 12-month period to January 31, 2017. This increase was due to a higher spend on accounting and tax fees.

 

Corporate expenses are consistent with the prior 12-month period, the slight decrease of $69k, or 0.5% between the 12-month period ended to January 31, 2018 and 12- month period to January 31, 2017, from $12.92m to $12.85m is considered immaterial.

 

Finance expenses decreased by $2.4m, or 21.6% from $11.2m to $8.8m in the 12-month period ended January 31, 2018 as compared with the 12-month period ended January 31, 2017, due to a reduction in interest on the shareholder loan due to the principal amount of such loans being reduced, the majority of which was converted to equity in September 2016.

 

Brand transition, restructure and transaction expenses increased by $0.8m, or 34.7%, from $2.4m to $3.2m in the 12-month period ended January 31, 2018 as compared with the 12-month period ended January 31, 2017, this was driven by costs incurred in respect of the US listing process.

 

Impairment expense decreased by $0.95m or 33.2% from $2.8m to $1.9m in the 12-month period ended January 31, 2018 as compared with the 12-month period ended January 31, 2017. During the current financial year an impairment expense of $1.6m was incurred as management impaired the costs incurred on the ERP upgrade, as this software will need to be replaced and updated with a more advanced system. In the 12-month period ended January 31, 2017 an impairment expense of $2.2m was recognized in relation to a goodwill write-off.

 

Other foreign currency gains/(losses) reduced from a loss of $14.3m in 12-month period ended January 31, 2017 to a gain of $0.7m in the 12-month period ended Jan 31, 2018, due to gains on foreign exchange contracts.

 

Fair value gain/(loss) on convertible notes derivative was a gain of $2.4m in 12-month period ended January 31, 2018 compared to a loss of $0.6m the period ended January 31, 2017. This is because the derivative ended at conversion date.

 

36
 

 

7-month period ended January 31, 2017 compared to 7-month period ended January 31, 2016 and 12-month period ended June 30, 2016 compared to 12-month period ended June 30, 2015

 

    Jan. 31,
2017
NZ$000
seven
months
    Unaudited
Jan. 31,
2016
NZ$000
seven
months
    %
movement
    Jun. 30,
2016
NZ$000
12 months
    Jun. 30,
2015
NZ000$
12 months
    %
movement
 
Brand management     (32,040 )     (27,647 )     15.9 %     (48,362 )     (42,203 )     14.6 %
Administrative expenses     (2,383 )     (2,109 )     13.0 %     (4,090 )     (4,691 )     -12.8 %
Corporate expenses     (8,082 )     (8,236 )     -1.9 %     (13,002 )     (13,940 )     -6.7 %
Finance expense     (6,238 )     (5,436 )     14.8 %     (10,409 )     (5,870 )     77.3 %
Brand transition, restructure, and transaction expenses     (1,321 )     (1,122 )     17.7 %     (2,232 )     (12,182 )     -81.7 %
Impairment expense     (292 )     (2,157 )     -86.5 %     (2,157 )     -       100.0 %
Other foreign currency gains/(losses)     (3,306 )     5,685       -158.2 %     (2,423 )     4,700       -151.6 %
Fair value gain/(loss) on convertible notes derivative     (592 )     -       100.0 %     -       -       0 %

 

Brand management expenses increased by $6.2m, or 14.6%, from $42.2m to $48.4m between the 12-month period ended June 30 2015 and 12-month period ended June 30 2016. This was largely driven by growth in business and associated employee costs, as well as additional marketing expenditures to support the introduction of new swimwear ranges. The increase of $4.4m, or 15.9%, from $27.6m to $32.0m in the 7-month period to January 31, 2017 as compared with the 7- month period to January 31, 2016, was also driven by additional marketing expenditures.

 

Finance expenses increased by $4.5m, or 77.3%, between the 12-month period ended June 30 2015 and 12-month period ended June 30 2016, from $5.9m to $10.4m, due to additional interest expense associated with an increase in debt. The finance expense in the 7- month period to January 31, 2016 and January 31, 2017 remained consistent due to additional interest on convertible loan notes being partially offset by a reduction in interest on the shareholder loan due to the principal amount of such loans being reduced, the majority of which was converted to equity in September 2016.

 

Brand transition, restructure and transaction expenses decreased by $10.0m from $12.2m in fiscal year 2015 to $2.2m in fiscal year 2016. This was largely driven by a reduction in brand transition expenses incurred in relation the transition from the Elle MacPherson to Heidi Klum brand of $9.2m, given the licence arrangement terminated in fiscal year 2015 and therefore majority of the associated costs were recognized in the same period.

 

Brand transition, restructure and transaction expenses decreased by $0.9m from $2.2m in the 12-month period ended June 30 2016 to $1.3m in the 7-month period ended January 31, 2017, largely due to a $0.9m decrease in Heidi Klum brand transition costs due to any non-recurring costs associated with the transition having been incurred prior to the 7-months ended January 31, 2017.

 

An impairment expense of $2.2m was recognized in the 12-month period ended June 30 2016 and 7-month period to January 31, 2016 in relation to a goodwill write-off. An impairment expense of $0.3m was recognised in the 7- month period to January 31, 2017.

 

Other foreign currency gains/(losses) reduced a gain of $4.7m in the 12-month period ended June 30 2015 to a loss of $2.4m in the 12-month period ended June 30 2016, due to weakening of the New Zealand dollar and the impact of unfavorable hedge contracts.

 

Other foreign currency gains/(losses) reduced a gain of $5.7m in the 7-month period to January 31, 2016 to a loss of $3.3m in the 7-month period to January 31, 2017 as a result of the same foreign exchange drivers.

 

37
 

 

Taxation

 

Year ended January 31, 2018 compared to 12-month period ended January 31, 2017 (unaudited)

 

The tax expense of $60k in the 12month period ended January 31, 2018 decreased by $6.06m when compared to the 12-month period ended January 31, 2017. The variance was due to the write off of the carrying value of prior year tax losses and deferred tax in the due to the uncertainty over whether the deferred tax asset could be utilized.

 

7-month period ended January 31, 2017 compared to the 7-month period ended January 31, 2016 (unaudited) and 12-month period ended June 30, 2016 and the 12-month period ended June 30, 2015

 

The tax benefit of $1.3m in the 12-month period ended June 30 2015, increased by $6.8m, which resulted in a tax expense of $5.5m in the 12-month period ended June 30 2016. A tax expense of $0.9m was recognised in the 7- month period to January 31, 2017. The variances were caused by a write off of the carrying value of prior year tax losses and deferred tax temporary differences in the 12-month period ended June 30 2016 due to uncertainty over future profitability to ensure utilization of the deferred tax assets.

 

The effective tax rate for the 7-month period ended January 31, 2017, the 12-month period ended June 30 2016 and the 12-month period ended June 30 2015 was 5.7%, 36.5% and 8.9%, respectively. These effective tax rates can be explained by deferred tax credits not brought to accounts due to uncertainty over their availability for utilization.

 

Net loss and comprehensive loss

 

Year ended January 31, 2018 compared to 12-month period ended January 31, 2017 (unaudited)

 

The net loss in the 12-month period ended January 31, 2018 decreased by $2.5m, or 6.3%, to ($37.4m) when compared with ($39.9m) in the 12-month period ended January 31, 2017. The decrease in gross profit of $23.9m in the 12-month period ended January 31, 2018 when compared with the 12-month period ended January 31, 2017 was significantly offset by the reduction in expenses of $20.5m when comparing the same 12 month periods. Tax expense also decreased by $6.06m when compared to the 12-month period ended January 31, 2017 to $60k in the 12month period ended January 31, 2018. The variance was due to the write off of the carrying value of prior year tax losses and deferred tax in the due to the uncertainty over whether the deferred tax asset could be utilized.

 

7-month period ended January 31, 2017 compared to the 7-month period ended January 31, 2016 (unaudited) and 12-month period ended June 30, 2016 and the 12-month period ended June 30, 2015

 

For the seven months ended January 31, 2017 and fiscal years ended June 30, 2016 (fiscal year 2016) and June 30, 2015 (fiscal year 2015), we incurred a net comprehensive loss of ($16.0m), ($20.7m) and ($13.2m) respectively. Gross profit for the seven month period ended January 31, 2017, the seven month period ended January 31, 2016, fiscal year 2016 and fiscal year 2015 was 40.7%, 45.1%, 44.7%, and 43.1%, respectively. The movement in gross margin has remained fairly consistent, but improved due to changes in the sales mix including additional online revenue, as well as positive foreign exchange rate fluctuations. The tax benefit of $1.3m in fiscal year 2015, increased by $6.8m, which resulted in a tax expense of $5.5m in fiscal year 2016. A tax expense of $0.9m was recognised in the seven month period to January 31, 2017. The variances were caused by a write off of the carrying value of prior year tax losses and deferred tax temporary differences in fiscal year 2016 due to uncertainty over future profitability to ensure utilization of the deferred tax assets.

 

The net loss in the 6-month period ended July 31, 2017 increased by $4.8m, or 34.8%, to ($18.5m) when compared with ($13.7m) in the 12-month period ended July 31, 2016. This net loss was due to a reduction in gross profit, which decreased $13.6m in the 6-month period ended July 31, 2017 when compared with the 6-month period ended July 31, 2016, however this was partially offset by a reduction in expenses of $2.2m and a reduction in income tax expense of $5.9m for the 6-month period ended July 31, 2017 when compared with the 6-month period ended July 31, 2016.

 

38
 

 

Segmented Reporting

 

Bendon Limited has seven reportable segments: Australia retail, New Zealand retail, Australia wholesale, New Zealand wholesale, US wholesale, Europe wholesale and E-commerce.

 

  Australia retail. This segment covers retail and outlet stores located in Australia.

 

  New Zealand retail. This segment covers retail and outlet stores located in New Zealand.

 

  Australia wholesale. This segment covers the wholesale of intimates apparel to customers based in Australia.

 

  New Zealand wholesale. This segment covers the wholesale of intimates apparel to customers based in New Zealand.

 

  US wholesale. This segment covers the wholesale of intimates apparel to customers based in the United States of America.

 

  Europe wholesale. This segment covers the wholesale of intimates apparel to customers based in Europe.

 

  E-commerce. This segment covers the group’s online retail activities.

 

The following table provides our segment net sales, gross margin and EBITDA for the 12-month period to January 31, 2018, and the 12-month period to January 31, 2017.

 

Year ending January 31, 2018

 

                NZ     AU     US     EU                    
    NZ Retail     AU Retail     Wholesale     Wholesale     Wholesale     Wholesale     e-commerce     Unallocated        
    NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     Total  
Revenue     34,269       18,236       10,453       15,512       6,390       14,192       32,234       102       131,388  
Gross margin     17,781       8,779       2,240       2,967       (48 )     3,971       11,260       (3,021 )     43,929  
EBITDA     4,330       (2,550 )     1,172       (814 )     (3,349 )     1,067       (260 )     (23,649 )     (24,053 )

 

Year ending January 31, 2017 (Unaudited)

 

                NZ     AU     US     EU                    
    NZ Retail     AU Retail     Wholesale     Wholesale     Wholesale     Wholesale     e-commerce     Unallocated        
    NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     NZ$000’s     Total  
Revenue     35,968       19,395       13,636       27,174       15,695       15,148       23,424       1,702       152,143  
Gross margin     20,761       10,958       4,072       9,764       4,979       5,013       10,879       1,358       67,785  
EBITDA     7,683       310       1,157       5,623       907       925       4,551       (19,060 )     2,098  

 

For the 7-months ended January 31, 2017

 

    NZ Retail
NZ$000’s
    AU Retail
NZ$000’s
    NZ Wholesale
NZ$000’s
    AU Wholesale
NZ$000’s
    US Wholesale
NZ$000’s
    EU Wholesale
NZ$000’s
    e-commerce
NZ$000’s
    Unallocated
NZ$000’s
    Total  
Revenue     21,953       12,053       7,484       18,091       9,015       9,548       18,140       -       96,284  
Gross margin     12,246       6,461       2,523       6,660       2,081       3,271       6,238       (340 )     39,140  
EBITDA     4,766       265       2,048       4,571       16       1,258       2,584       (17,634 )     (2,126 )

 

39
 

 

Year to June 30, 2016

 

    NZ Retail
NZ$000’s
    AU Retail
NZ$000’s
    NZ
Wholesale
NZ$ 000’s
    AU
Wholesale
NZ$000’s
    US
Wholesale
NZ$000’s
    EU
Wholesale
NZ$000’s
    e-commerce
NZ$ 000’s
    Unallocated
NZ$000’s
    Total  
Revenue     37,389       20,680       15,071       28,021       18,876       16,531       6,722       7,710       151,000  
Gross margin     21,336       11,750       4,350       9,965       4,336       4,873       3,140       7,725       67,475  
EBITDA     9,073       1,915       3,641       6,445       1,519       1,669       1,101       (14,893 )     10,470  

 

Year to June 30, 2015

 

    NZ Retail
NZ$000’s
    AU Retail
NZ$000’s
    NZ
Wholesale
NZ$ 000’s
   

AU
Wholesale

NZ$000’s

    US
Wholesale
NZ$000’s
    EU
Wholesale
NZ$000’s
    e-commerce
NZ$ 000’s
    Unallocated
NZ$000’s
    Total  
Revenue     37,089       18,491       16,333       29,817       13,853       17,548       5,683       24       138,838  
Gross margin     20,819       10,425       5,355       11,356       2,924       6,290       2,611       27       59,807  
EBITDA     8,934       2,801       3,568       8,907       388       3,024       620       (24,822 )     3,420  

 

(1) Unallocated revenue, gross margin and EBITDA relates to revenue, gross margin and EBITDA that cannot be attributed directly to the other reportable segments above including various brand management and head office costs.

 

New Zealand and Australia Retail

 

In the 12-month period ended January 31, 2018 New Zealand retail EBITDA was $4.3m compared with $7.7m in the 12-month period to January 31, 2017. Australian Retail EBITDA for the 12-month period ended January 31, 2018 was a loss of $2.5m compared with a profit of $0.3m in the 12-month period to January 31, 2017. A challenging retail environment, seasonal product mix and vendor supply issues were the key reasons for this reduced EBITDA across both the New Zealand and Australian retail markets.

 

New Zealand Retail Gross margin reduced 5.8% between the 12-month period to January 31, 2018 and 12- month period to January 31, 2017 from 57.7% to 51.9%. Australia Retail Gross margin reduced 8.4% between the 12-month period to January 31, 2018 and 12- month period to January 31, 2017 from 56.5% to 48.1%. The reduction in the gross margin in both markets was caused by increased discounts provided to customers and sub-optimal stock mix because of the stock supply issue.

 

In the 7-month period ended January 31, 2017, the 12-month period ended June 30 2016, the 12-month period ended June 30 2015, New Zealand retail EBITDA was $4.8m, $9.1m, and $8.9m respectively, as a result of similar trading conditions and consistent store numbers.

 

In the 12-month period ended June 30 2016, Australia retail recognized increased revenue and reduced EBITDA of $20.7m and $1.9m, respectively, as compared with $18.5m and $2.8m, respectively, in the 12-month period ended June 30 2015. The increase in revenue was due to the introduction of 8 new outlet stores, which due to early trading losses experienced reduced EBITDA. The revenue and EBITDA in the 7-month period to January 31, 2017 showed a consistent trend as compared with the 12-month period ended June 30 2016.

 

40
 

 

NZ Wholesale, AU Wholesale, US Wholesale and EU wholesale

 

In the 12-month period ended January 31, 2018 EBITDA increased in the NZ Wholesale and EU Wholesale markets and decreased in the AU Wholesale and US Wholesale markets when compared with the 12-month period ended January 31, 2017. New Zealand wholesale EBITDA was $1.17m in the 12-months ended January 31, 2018, compared with $1.15m in the 12-months ended January 31, 2017. AU wholesale EBITDA was a loss of $0.8m in the 12-months ended January 31, 2018, compared with an EBITDA profit of $5.6m in the 12-months ended January 31, 2017. US wholesale EBITDA was a loss of $3.3m in the 12-months ended January 31, 2018 compared with an EBITDA profit of $0.9m in the 12-months ended January 31, 2017. EU wholesale EBITDA was a profit of $1.06m in the 12-months ended January 31, 2018, compared with a profit of $0.9m in the 12-months ended January 31, 2017.

 

In the 12-month period ended January 31, 2018 and 12-month period ended January 31, 2017 New Zealand wholesale revenue was $10.4m and $13.6m, respectively. Cancellation of orders from our key account holders due to vendor supply issues were the key reasons for these reduced sales.

 

In the 12-month period ended January 31, 2018 and 12-month period ended January 31, 2017, Australia wholesale revenue was $15.5 and $27.1, respectively. In the 12-month period ended January 31, 2018 Australia Wholesale EBITDA was a loss of $0.8m compared with a profit of $5.6m in the 12-month period to January 31, 2017. The EBITDA loss for the Australian market was due to the cancellation of multiple orders as a result of delayed supply, due to vendor delays and discounts offered to customers for delayed ranges.

 

US wholesale revenue dropped from $15.7m for the 12-month period ended January 31, 2018 to $6.4m for the 12-month period ended January 31, 2017. The EBITDA Loss for the period ended January 31, 2018 was $3.3m compared to the EBITDA profit of $0.9m for the year ended January 31,2017. The EBITDA loss incurred for the US Wholesale market was primarily due to our relationship ending with Macy’s

 

In the 12-month period ended January 31, 2018, and the 12-month period ended January 31, 2017, EU wholesale revenue was $14.1m, and $15.1m respectively. EU Wholesale Gross margin decreased 5.1% between the 12-month period to January 31, 2018 and 12- month period to January 31, 2017 from 33.1% to 28%. These fluctuations were driven by changes in customer mix. EBITDA increased year on year, driven by a reduction in expenses.

 

In the 7-month period ended January 31, 2017, the 12-month period ended June 30 2016, and the 12-month period ended June 30 2015, New Zealand wholesale revenue was $7.5m, $15.1m, and $16.3m, respectively. In the 7-month period ended January 31, 2017, the 12-month period ended June 30 2016, and the 12-month period ended June 30 2015, Australia wholesale revenue was $18.1m, $28.0m and $29.8m, respectively. These fluctuations were driven by changes in customer mix and a general trend in the business to focus on its direct to consumer strategy. EBITDA for these respective segments was in line with sales movements.

 

US wholesale revenue grew from $13.9m in the 12-month period ended June 30 2015 to $18.9m in the 12-month period ended June 30 2016 as a result of a new Macy’s contract and favorable foreign exchange rate variances. U.S. wholesale revenue was $9.0m and EBITDA was $0.0m in the 7-month period to January 31, 2017 which was due to reduced business from Macy’s and less favorable foreign exchange movements than in the 12-month period ended June 30 2016. EBITDA for this segment was in line with sales movements.

 

In the 7-month period ended January 31, 2017, the 12-month period ended June 30 2016, and the 12-month period ended June 30 2015, EU wholesale revenue was $9.6m, $16.5m, and $17.5m respectively. These fluctuations were driven by changes in customer mix and general trend in the business to focus on its direct to consumer strategy. EBITDA for segments was in line with sales movements.

 

E-commerce

 

For the 12-months ended January 31, 2018 our e-commerce EBITDA was a loss of $0.3m compared with a profit of $4.5m for the 12-months ended January 31, 2017. The loss for this period is due to decrease in margin as a result of the new license fee under the license agreement with FOH and discounts offered to customers. E-commerce Gross margin reduced 11.5% between the 12-month period to January 31, 2018 and 12-month period to January 31, 2017 from 46.4% to 34.9%.

 

41
 

 

In the 12-month period ended June 30 2016, e-commerce Revenue grew to $6.7m from $5.7m in the 12-month period ended June 30 2015. This was as a result of changing consumer trends and a conscious shift in the business to focus on this revenue stream. EBIDA for this segment was in line with sales movements.

 

The e-commerce revenue and EBITDA increased significantly in the 7-month period to January 31, 2017, to $18.4m and $2.6m respectively. This was as a result of entering into a license agreement with Fredericks of Hollywood. The previous management service arrangement with Fredericks of Hollywood that existed in the 12-month period ended June 30 2016 was not allocated to this segment.

 

Non-IFRS Financial Measures

 

Reconciliations

 

Year ended January 31, 2018 compared to 12-month period ended January 31, 2017 (unaudited)

 

Reconciliation of segment EBITDA to the consolidated statements of profit or loss and other comprehensive income:

 

EBITDA is defined as earnings before interest, taxes, depreciation, depletion, amortization and impairment. Our management uses EBITDA as a measure of our operating results and considers it to be a meaningful supplement to net income as a performance measurement, primarily because we incur significant depreciation and depletion and the exclusion of impairment losses in EBITDA eliminates the non-cash impact.

 

          Unaudited  
    12 months     12 months  
    ended     ended  
    January 2018     January 2017  
    NZ$000     NZ$000  
Segment EBITDA     (24,053 )     2,098  
Income tax (expense)/benefit     (60 )     (6,123 )
Any other reconciling items     (13,480 )     (36,327 )
Total net loss after tax     (37,593 )     (40,352 )

 

7-month period ended January 31, 2017 compared to the 12-month period ended June 30, 2016 and the 12-month period ended June 30, 2015

 

    7 months
ended
January
2017
NZ$000’s
    12 months ended
June 2016
NZ$000’s
    12 months ended
June 2015
NZ$000’s
 
Segment EBITDA     (2,126 )     10,470       3,420  
Income tax (expense)/ benefit     (865 )     (5,546 )     1,274  
Other Revenue             7,710       24  
Any other reconciling items     (12,988 )     (33,380 )     (17,823 )
Total net loss after tax     (15,979 )     (20,746 )     (13,105 )

 

Other reconciling items consist of brand transition, restructure and transaction expenses, finance expense, impairment expense, depreciation and amortization, fair value (gain)/loss on foreign exchange contracts, and unrealized foreign exchange (gain)/loss.

42
 

 

A. Financial Condition, Liquidity, and Capital Resources

 

Liquidity

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017

 

Our cash requirements continue to be utilized to fund the working capital needs of the business.

 

As of July 31, 2018, and July 31, 2017 Bendon had cash totaling $4.2m and $3.5m respectively.

 

During the 6-months ended July 31, 2018 and the 6-months ended July 31, 2017, the continued lack of funding contributed heavily to the reduction of the current season stock buy.

 

Since the end of the 31 July 2018 half year the Group has raised further equity which is planned to support the working capital requirements of the Group which in turn is expected to reduce the cost of finance and provide further working capital for the purchase of inventory and reduction of aged creditors to free up supply of new season inventory which will assist the Group deliver its forecast.

 

As at the date of this prospectus and since the half year ended 31 July 2018 the Group had received NZ$10.1 million of equity and has started to reduce creditors.

 

The Group is in the process of resetting a new Bank borrowing facility agreement to replace the facilities as at 31 July 2018. The new facility is expected to be subject to covenants and the Company has requested a 3 year term.

 

Working capital

 

6-month period ended July 31, 2018 compared to year ended January 31, 2018

 

   

July 31, 2018

NZ$000

    January 31, 2018 NZ$000  
Current Assets     54,508       70,343  
Current Liabilities     (57,452 )     (91,095 )
Working Capital     (2,944 )     (20,752 )

 

Working capital for the 6-months to July 31, 2018 is negative $2.9m, compared with negative $20.7m as at 31 January 2018, a positive reduction of $17.8m. This positive change has been driven by the significant reduction in borrowings over the last 6 months.

 

Cash flows

 

6-month period ended July 31, 2018 compared to 6-month period ended July 31, 2017

 

   

6 months ended

July 31, 2018 NZ$000

   

6 months ended

July 31, 2017 NZ$000

 
Net cash outflow from operating activities     (5,427 )     (8,436 )
Net cash outflow from investing activities     413       (672 )
Net cash inflow from financing activities     (1,411 )     9,899  
Net increase/(decrease) in cash and cash equivalents held     (6,425 )     792  
Cash and cash equivalents at end of the half year     4,173       3,464  

 

Operating Activities

 

Net cash outflow from operating activities for the 6-month period to July 31, 2018 and, 6-month period to July 31, 2017 was $5.4m, and $8.4m, respectively. This was due to the net loss for both periods.

 

43
 

 

Investing Activities

 

Net cash inflow from investing activities for the 6-month period to July 31, 2018 was $0.4m, and, for the 6-month period to July 31, 2017 was an outflow of $0.7m,. The inflow for the -month period to July 31, 2018 was due to the net cash proceeds from the business combination, while the outflow for the 6-month period to July 31, 2017 was driven by the spend on both intangible assets and capital expenditure on property, plant and equipment for stores.

 

Financing Activities

 

Net cash inflow from financing activities for the 6-month period to July 31, 2018 and, 6-month period to July 31, 2017 was negative $1.4m, and positive $9.9m, respectively. During the 6-month period to July 31, 2018 the company raised $17.1m through the issue of shares. These funds were used to repay the bank $18.5m.

 

Indebtedness

 

Bank overdraft and bank loans

 

6-months ended July 31, 2018

 

On 13 June 2018, the Company entered into a Deed of Amendment with BNZ to reduce the facility to NZD$20,000,000 (31 January 2018: NZD$38,489,428). In addition the new facility takes over guarantees and financial instruments totaling NZD$1,345,000.

 

The term loan facility of NZD$20,000,000 is repayable on 14 June 2019. The current interest rate on this loan is 5.66% (31 January 2018: 5.55%) per annum. There has been a breach of covenant during the period.

 

Bank of New Zealand has the first ranking charge over all assets of Bendon Limited. Under the terms of the major borrowing facility, the new facility is subject to four undertakings being: Interest cover ratio of three times that is first tested as at 30 April 2019; gross EBITDA ratio measured to 3 months to September 2018 of $0, six months to 30 December 2018 is greater than $3 million; inventory and receivables ratio must be greater than 2 times being first measured as at 30 September 2018; and the actual sales and gross margin must not vary by more than 10% from the budget submitted to the Bank.

 

As at 30 September 2018, there was a breach in minimum Gross EBITDA ratio. The Bank has advised that they are currently taking the Breach under review.

 

Shareholder loan

 

6-months ended July 31, 2018

 

On 19 June 2018, Bendon Limited issued additional 24,221 Bendon shares to the shareholders as part of an agreement to convert debt to equity. The amount of debt converted on this date amounted to $12,244,208. After this conversion, the shareholder loan is fully converted to equity and the outstanding balance as at 31 July 2018 is $nil (31 January 2018: $10,951,295).

 

The interest rate on the shareholder loans up to the date of conversion was 30% (31 January 2018: 30%) and was increased at the end of 2014, and was capitalised quarterly. Total interest capitalised during the 6 months to 31 July 2018 is $1,061,588 (6 months to 31 July 2017: $1,291,962).

 

44
 

 

Convertible loan

 

6-months ended July 31, 2018

 

On 19th June 2018, the holders of USD$2.8m (NZ$4.2m) of convertible notes converted to 16,408 Bendon ordinary shares. The holder of US$1.0m (NZ$1.42m) of convertible notes elected for their convertible note to be repaid which is due on 31 January 2019. The amount owing has been classified as a current borrowing and amounted to $1.247million as at 31 July 2018.

 

Liquidity

 

12-month period ended January 31, 2018 compared to 12-month period ended January 31, 2017

 

Our cash requirements have been principally to fund working capital needs and to support the growth of the business. As of January 31, 2018, and January 31, 2017, Bendon Limited had cash totaling $10.7m and $2.6m respectively. During the 12-months ended January 31, 2018 and the 12-months ended January 31, 2017, insufficient cash liquidity contributed to a stock supply issue as described above.

 

Management intends to continue to raise funds from equity financing to fund our operations and future strategies. During the year ended January 31, 2018, Bendon Limited issued an aggregate amount of USD $2,600,000 (NZ$3,544,649) of convertible notes.

 

Our cash requirements have been principally to fund working capital needs and to support the growth of the business.

 

Management intends to continue to raise funds from equity financing to fund our operations and objectives. There is no assurance the additional funding will be achieved. If we are unable to achieve the additional funding, we may not be able to conduct our operations and pursue our objectives as presently contemplated, which may adversely affect our results of operations and financial condition.

 

Working capital

 

Year ended January 31, 2018 compared to 12-month period ended January 31, 2017 (unaudited)

 

    January 31,     January 31,  
    2018     2017  
    NZ$000     NZ$000  
Current Assets     70,343       81,588  
Current Liabilities     (91,095 )     (101,232 )
Working Capital     (20,752 )     (19,644 )

 

The negative working capital is primarily driven by the classification of bank debt and shareholder loan as current liabilities. As of January 31, 2018, current assets decreased due to both the reduction in inventory because of vendor supply issues and the reduced trade and other receivables as a result of cancelled orders from our wholesale accounts due to vendor supply issues

 

We have managed our working capital constraints through deferral of creditor settlement. We believe the overdue creditor relationships have been appropriately managed and we do not have serious concerns with regards to delayed settlement. We believe the agreements to bring creditor payments current have been appropriately arranged with suppliers and we believe the capital raises will help to reduce the overdue creditor position.

 

7-month period ended January 31, 2017 compared to 12-month period ended June 30, 2016 and 12-month period ended June 30, 2015

 

    January 31,
2017
NZ$000’s
    June 30,
2016
NZ$000’s
    June 30,
2015
NZ000’s
 
Current Assets     81,588       74,807       70,026  
Current Liabilities     (108,027 )     (94,794 )     (94,093 )
Working Capital     (26,439 )     (19,987 )     (24,067 )

 

45
 

 

The negative working capital is primarily driven by the classification of bank debt and shareholders loan as current liabilities.

 

We have managed our working capital constraints through deferral of creditor settlement. We believe the overdue creditor relationships have been appropriately managed and we do not have serious concerns with regards to delayed settlement. We believe the agreements to bring creditor payments current have been appropriately arranged with suppliers and we believe the capital raises anticipated to be completed should reduce the overdue creditor position

 

Cash flows

 

Year ended January 31, 2018 compared to 12-month period ended January 31, 2017 (unaudited)

 

    12 months     12 months  
    ended     ended  
    January 31,     January 31,  
    2018     2017  
    NZ$000     NZ$000  
Net cash outflow from operating activities     (4,116 )     (15,160 )
Net cash outflow from investing activities     (2,312 )     (2,933 )
Net cash inflow from financing activities     14,496       17,039  
Net increase/(decrease) in cash and cash equivalents held     8,068       (1,053 )
Cash and cash equivalents at end of the year     10,739       2,645  

 

Operating Activities

 

Net cash outflow from operating activities for the 12-month period to January 31, 2018 and, 12-month period to January 31, 2017 was $4.1m, and $15.1m, respectively. This was largely as a result of the net loss for the periods. Bendon Limited will continue to implement a restructure plan to create cost savings and manage the overhead structure, which will show as favorable impact in the cash flow going forward.

 

Investing Activities

 

Net cash outflow from investing activities for the 12-month period to January 31, 2018 and, 12-month period to January 31, 2017 was $2.3m, and $2.9m, respectively. This was largely driven by capital expenditure on property, plant and equipment in stores including enhancement of existing stores and introduction of new stores.

 

Financing Activities

 

Net cash inflow from financing activities for the 12-month period to January 31, 2018 and, 12-month period to January 31, 2017 was $14.5m, and $17m, respectively. During the 12-month period to January 31, 2018 the company raised $22m through the issue of shares and an additional $4.5m through convertible note issuance. These funds were used partly to fund interest charges of $3.4m during the period, and to also repay the bank $9.7m.

 

7-month period ended January 31, 2017 compared to 12-month period ended June 30, 2016 and 12-month period ended June 30 2015

 

    7 months
ended
January 31,
2017
NZ$000’s
    12 months
ended
June 30,
2016
NZ$000’s
    12 months
ended
June 30,
2015
NZ000’s
 
Net cash (outflow) from operating activities     (13,518