Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting
and non-voting stock held by non-affiliates of the registrant as of July 31, 2016, the last business day of the registrant’s
most recently completed second fiscal quarter, was $8,340,691 based upon the closing price reported for such date.
On April
26, 2017, the registrant had 10,342,191 shares of common stock outstanding.
This Annual Report
on Form 10-K (the “Form 10-K”) contains forward-looking statements within the meaning of the Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange act of 1934, as amended. Forward-looking statements are projections
in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by
terminology such as “may,” “should,” “intend,” “expect,” “plan,” “anticipate,”
“believe,” “estimate,” “predict,” “potential” or “continue” or the
negative of these terms or other comparable terminology and include statements regarding: our product line; our business plan;
the enforceability of our intellectual property rights; projections of market prices and costs; supply and demand for our products;
future capital expenditures; and our collaboration with Dwyane Wade; relationships with retailers, wholesalers and other business
partners; ability to add new customer accounts; and future borrowings under the Joint Factoring Agreement with Wells Fargo, statements
relating to the structure, timing and completion of the proposed business combination (the “Merger”) with Bendon Limited
(“Bendon”) and a to-be-formed Australian holding company (“NewCo”); our continued listing on the NASDAQ
Capital Market until closing of the proposed Merger; our continued compliance with the minimum shareholders’ equity requirements
at the time of our next periodic report; NewCo’s anticipated listing of its ordinary shares on the NASDAQ Capital Market
in connection with the closing of the proposed Merger; expectations regarding the capitalization, resources and ownership structure
of the combined company under NewCo; the adequacy of the combined company’s capital to support its future operations; our
and Bendon’s plans, objectives, expectations and intentions; the nature, strategy and focus of the combined company; the
executive and board structure of the combined company; and expectations regarding voting by our stockholders. Naked and/or Bendon
may not actually achieve the plans, carry out the intentions or meet the expectations disclosed in the forward-looking statements
and you should not place undue reliance on these forward-looking statements. Such statements are based on management’s current
expectations and involve risks and uncertainties. Actual results and performance could differ materially from those projected in
the forward-looking statements as a result of many factors, including, without limitation, risks and uncertainties associated with
stockholder approval of and the ability to consummate the proposed Merger through the process being conducted by NewCo, Bendon
and us, the ability of NewCo, Bendon and us to enter into a definitive agreement and consummate the proposed Merger, the risk that
one or more of the conditions to closing of the proposed Merger may not be satisfied, including, without limitation, the effectiveness
of the registration statement to be filed by NewCo with the Securities and Exchange Commission or the listing of NewCo’s
ordinary shares on the NASDAQ Capital Market, the lack of a public market for ordinary shares of NewCo and the possibility that
a market for such shares may not develop, the ability to project future cash utilization and reserves needed for contingent future
liabilities and business operations, the availability of sufficient resources of the combined company to meet its business objectives
and operational requirements, the ability to realize the expected synergies or savings from the proposed Merger in the amounts
or in the timeframe anticipated, the risk that competing offers or acquisition proposals will be made, the ability to integrate
our business with Bendon’s businesses in a timely and cost-efficient manner, the inherent uncertainty associated with financial
projections, and the potential impact of the announcement or closing of the proposed Merger on customer, supplier, employee and
other relationships. The material assumptions supporting these forward-looking statements include, among other things: our ability
to obtain any necessary financing on acceptable terms; timing and amount of capital expenditures; the enforcement of our intellectual
property rights; our ability to launch new product lines; retention of skilled personnel; continuation of current tax and regulatory
regimes; current exchange rates and interest rates; and general economic and financial market conditions. Management believes that
these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance
on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise,
except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from our historical experience and our present expectations or projections. These risks and
uncertainties include, but are not limited to, those described under “Risk Factors” and elsewhere in this report and
those described from time to time in our future reports filed with the Securities and Exchange Commission.
Unless expressly indicated
or the context requires otherwise, the terms “Naked,” the “Company,” “we,” “us,”
and “our” in this document refer to Naked Brand Group Inc., a Nevada corporation, and, where appropriate, its wholly
owned subsidiary.
Our fiscal year ends
on January 31. References to “fiscal 2017” and “fiscal 2016” represent the fiscal years ended January 31,
2017 and 2016, respectively. References to “fiscal 2018” represent the fiscal year ending January 31, 2018. References
to “2018” and “2017” represent the calendar years ending December 31, 2018 and 2017, respectively, and
references to “2016” represent the calendar year ended December 31, 2016.
PART I
Item 1. Business
Our Business
We are an apparel and
lifestyle brand company that is currently focused on innerwear products for women and men. Under our flagship brand name and registered
trademark “Naked
®
”, we design, manufacture and sell men’s and women’s underwear, intimate
apparel, loungewear and sleepwear through retail partners and direct to consumer through our online retail store www.wearnaked.com.
We have a growing retail footprint for our innerwear products in premium department and specialty stores and internet retailers
in North America, including accounts such as Nordstrom, Dillard’s, Bloomingdale’s, Amazon.com, Soma.com, SaksFifthAvenue.com,
barenecessities.com and others.
The Naked brand was
founded on one basic desire: to create a new standard for how products worn close to the skin fit, feel and function. Our core
brand philosophy for Naked is “the freedom to be you” and we endeavor to provide products that help people feel confident,
attractive and empowered while being as comfortable as wearing nothing at all. The Naked brand was founded in Vancouver, Canada
in 2010, as a men’s underwear manufacturer. In 2014 we relocated our headquarters to New York City, expanded our men’s
collections and developed women’s intimate apparel, sleepwear and loungewear collections. Our first women’s sleep and
loungewear collections became available for retail sale online at www.wearnaked.com in September 2015 and at retail locations and
other online retailers in February 2016. Also in February 2016, we launched our women’s intimate apparel products. In September
2016, we launched our first collections of Wade X Naked, a signature collection of men’s innerwear developed in collaboration
with NBA Champion Dwyane Wade. In the future, we intend to expand the Naked brand through existing channels and through licensing
partnerships into other apparel and product categories that exemplify the mission of our brand, such as athleisure apparel, swimwear,
sportswear, hosiery, bedding and home products and others.
Our expansion into
the women’s sleepwear and intimate apparel in fiscal 2017 is a key part of our growth strategy given that these market segments
represent $17.8 billion, or over 77% of the overall innerwear market according to data from the NPD Group. Daywear products that
address consumer demand for versatile “athleisure” apparel have been the fastest growing segment of the women’s
market. Our ability to attract women customers for the Naked brand is also very important to our effort to penetrate the men’s
$4.3 billion U.S. innerwear market since a number of consumer research reports show that women purchase as much as 50% of men’s
underwear for their husbands, boyfriends or sons.
We have a collaboration
and endorsement agreement with NBA Champion Dwyane Wade, whereby Mr. Wade has agreed to act as a spokesperson for our brand. Mr.
Wade also sits on our corporate Advisory Board. Further, he acts as Creative Director for our Wade X Naked signature collection
of men’s innerwear, which became available for retail purchase in the third quarter of fiscal 2017. This collection encompasses
primarily underwear as well as undershirts and loungewear for men.
Our products currently
target men and women who are fashion and performance conscious, care about innovation and contemporary design, and desire comfort,
quality and fit in their innerwear and apparel. We aim to provide an affordable luxury product for the successful and aspirational
customer that enjoys the qualities of a premium garment at a price they feel delivers value. With growing awareness of our brand
among these consumers and a broadening array of products, we expect to continue to expand our retail distribution through department
stores, boutiques, online retail channels, hotels, spas, and other retailing channels over the next two years and beyond. We plan
to also grow our direct to consumer business primarily through our online retail store, www.wearnaked.com, through which we will
continue to commercially introduce new products as well as feature certain products, collections and styles exclusively.
Potential Business Combination with
Bendon Limited
On December 19, 2016,
we entered into a letter of intent (the “LOI”), with Bendon Limited an intimate apparel company based in New Zealand
(“Bendon”), for a proposed business combination of the companies. The LOI became binding on us on January 12, 2017
upon entry into a Securities Purchase Agreement, dated January 12, 2017, by and among us and certain investors. The business combination
is subject to the parties entering into a definitive agreement governing such transaction and the satisfaction of various closing
conditions that will be contained therein. There is no assurance that the parties will enter into the definitive agreement or that
the transaction will be consummated.
On February 9, 2017,
we entered into Amendment No. 1 (the “First Amendment”) to the LOI with Bendon. The First Amendment (i) extended the
date, from February 10, 2017 to March 10, 2017, by which the parties shall have entered a definitive agreement regarding the business
combination before certain penalties may be incurred; (ii) adjusted the Net Asset Amount (as defined in the Amendment) to $1.359
million, which amount would be adjusted as a result of any additional capital transactions as agreed to between us and Bendon,
and is used to determine, in part, the extent to which the number of shares of our common stock proposed to be issued to Bendon
in the business combination would be adjusted; and (iii) amended certain other terms and conditions of the LOI.
On March 9, 2017, we
entered into Amendment No. 2 (the “Second Amendment”) to the LOI with Bendon. The Second Amendment, among other things,
revised the proposed structure of the business combination with Bendon. As contemplated by the Second Amendment, we will now merge
with and into a subsidiary of a newly formed Australian holding company (“NewCo”) which will be the ultimate parent
company of Bendon and us (the “Merger”). The Second Amendment contemplates that, upon consummation of the Merger, NewCo
would issue to the current holders of the outstanding capital stock of Bendon an aggregate of 118,812,163 ordinary shares of NewCo
(the “Bendon Shares”) and issue to us a number of ordinary shares of NewCo equal to the number of shares of outstanding
common stock of Naked (the “Naked Shares”) immediately prior to the Merger, and as of the effective time of the Merger,
no other shares of NewCo will be outstanding. Shares issued to Bendon would be subject to adjustment based on us having Net Assets
(as defined in the Amendment) of $786,246, which amount will be adjusted as a result of any subsequent capital transactions agreed
to by us and Bendon. In connection with the closing of the Merger, NewCo’s shares must be approved for listing on the NASDAQ
Capital Market.
Further, in connection
with the LOI and the Second Amendment, we (i) appointed two new directors to our board of directors, Mr. Edward Hanson and Mr.
Justin Davis-Rice; (ii) we agreed to adhere to a no-shop provision until the earlier of the date the Merger Agreement (as defined
below) is executed or the LOI is terminated, and (iii) agreed to issue 2.5 million shares of common stock to Bendon in the event
the Merger Agreement is not executed by April 10, 2017, as such date may be extended, or the Merger is not consummated within six
months thereafter (each a “Merger Milestone”); provided, however, that we shall not be required to issue Bendon such
shares if Bendon’s action(s) or lack thereof has been the principal cause of or resulted in the failure of the parties to
achieve a Merger Milestone.
On April 10, 2017,
we entered into Amendment No. 3 (the “Third Amendment”) to the LOI with Bendon. The Third Amendment (i) extends the
date by which the parties shall have entered into the Merger Agreement from April 10, 2017 to May 26, 2017; (ii) revises the Net
Asset Amount to $5.8 million, which amount will be adjusted as a result of any subsequent capital transactions agreed upon between
the parties; and (iii) amends certain other terms of the LOI, including increasing the number of shares of NewCo to be issued to
the holders of the outstanding capital stock of Bendon to 146,311,063.
Except as amended by
the First Amendment, Second Amendment, and Third Amendment, all other material terms of the LOI remain in full force and effect.
Completion of the Merger
remains subject to the negotiation of a definitive merger agreement (the “Merger Agreement”), satisfaction of the conditions
negotiated therein and approval of the Merger by the Company’s stockholders. Accordingly, there can be no assurance that
a Merger Agreement will be entered into or that the proposed Merger will be consummated. Those portions of the LOI, as amended,
that describe the proposed Merger, including the consideration to be issued therein, are non-binding.
Principal Products
Historically, we were
strictly a men’s innerwear manufacturer and retailer and our men’s collections represents substantially all of our
revenues until the third quarter of fiscal 2016. Our Fall 2015 women’s sleep and loungewear collection became available for
retail sale online at www.wearnaked.com in September 2015 and at retail locations and other online retailers in February 2016.
Also in February 2016, we launched our women’s intimate apparel products online and at select retailers. Our women’s
collections have seen strong growth and represents approximately half of our revenues for fiscal 2017.
Men’s Collections
We currently offer
a variety of innerwear products for men including boxer briefs, trunks, briefs, undershirts, t-shirts, lounge pants, lounge shorts
and robes. Our three primary men’s collections are: Luxury, Active and Essential. Our men’s Luxury collection utilizes
MicroModal fabric, which is a lightweight, highly soft fabric that has breathable moisture-wicking qualities and made using a carbon-neutral,
eco-friendly process. Our Active collection is based on a high-performance Microfiber fabric, a nylon-based textile that is smooth
and resilient while providing moisture-wicking properties. We have been producing our full line of men’s underwear using
these fabrics since the inception of our business. Our Essential collection is made of Cotton Stretch fabric for a light, comfortable
everyday fit. Underwear and undershirts in this collection are sold in 2-packs to access a broader customer base.
We also offer men’s
products in other fabrics including Microfiber with X-Static® Silver, French Terry, Modal Cotton and Tencel. All of the fabrics
we use are readily available in many countries. Additionally, we produce boxer briefs and V-neck t-shirts with microfiber using
X-Static® Silver, a high-performance fabric, which helps regulate body temperature and provides anti-odor and antimicrobial
protection. X-Static® Silver fabric contains 99.9% pure silver woven into the garment’s nylon threads, which naturally
deters odor-causing bacteria, wicks away moisture, is anti-chaffing and naturally cooling.
During fiscal 2017,
we expanded our Essentials collection to include loungewear in Peruvian Pima Cotton, a superior cotton that is prized for its softness
and breathability. We also introduced a new product called the Naked Shield™ which incorporates special fabric featuring
Circuitex technology that provides wireless shielding and antimicrobial/anti-odor properties.
In addition to our
existing men’s collections, we also produce the Wade X Naked collection for men which includes two groups of underwear, undershirts,
lounge pants and shorts, and robes. Like our core men’s collection, these groups utilize high performance fabrics and innovative
design and construction to create exceptional product look, feel and comfort.
Women’s Collections
Our women’s loungewear
and sleepwear collections are based on two of the same fabrics used in our collections for men: Luxury Micromodal and Essential
Cotton Stretch. Our three primary women’s collections are: Luxury, Everyday and Essential. These women’s collections
include a range of products such as boyshorts, hipsters, lounge pants, camisoles, tank tops, pajamas, chemises and sleepshirts.
We also make French terry robes, Alpaca throws, as well as Double Gauze woven cotton sleepwear. True to our brand mission, we believe
these designs deliver superior fit, feel and function with timeless looks and at premium affordable prices that make them appealing
to a broad consumer market.
Our Everyday collection
consists of three core groups of daily essentials including wire-free bralettes and thong, modern brief and hipster style panties
meant for everyday use for a range of different occasions. Everyday Naked, is constructed from Peruvian Pima cotton stretch fabric
that is designed to be ultra-light, soft and breathable. Naked Luxury intimates, is made from soft MicroModal fabric with 360-degree
stretch that is designed to naturally wick away moisture and be cool to the touch. We have designed our intimate apparel collection
according to our mission to deliver the highest standard of fit, feel, function and look for the modern active woman.
Our Essential collection
consists of pajamas, sleepshirts, robes, loungewear, yogawear and chemises made from Peruvian Pima Cotton for everyday comfort
and style.
Distribution
We sell our products
through wholesale relationships and through direct to consumer channels. The wholesale channel is currently our largest channel
and consists of department stores as well as boutique apparel stores and undergarment stores. Our two largest distribution partners
are Nordstrom, which carries our products in select stores in North America and its online store, Nordstrom.com, and Bloomingdales,
which carries our product at select stores in the U.S. We also sell our products through Dillard’s, Soma.com, SaksFifthAvenue.com
and a growing number of boutiques and specialty stores. We are targeting additional key retail store partners in the U.S. in 2017
for our men’s and women’s products. In addition to selling in key department stores in North America, Naked also sells
through online stores such as Amazon.com, barenecessities.com, hackberry.com, hisroom.com and freshpair.com.
We also sell all of
our products direct-to-consumer through our internet retail store, www.wearnaked.com. Our internet retail store is optimized for
use on all online platforms and provides our customers with a premium online shopping experience and access to our entire product
line. Our direct-to-consumer channel has become an increasingly significant part of our business and we expect it will continue
to do so as our brand awareness increases in North America and internationally. We believe that the availability of online sales
is convenient for our customers and enhances the image of our brand, making our brand and products more accessible in more markets
than in brick and mortar stores alone. We plan to commercially introduce new products at www.wearnaked.com as well as feature certain
products, collections and styles exclusively.
Production
We utilize manufacturing
partners outside of the United States to produce our products. Currently, our primary production is in China although we have limited
production in India and Peru and may expand into other territories in 2017.
We believe we have
developed good relationships with a number of our vendors and we seek to ensure that they share our commitment to quality and ethics.
We do not have any long-term agreements requiring us to use any manufacturer. Our primary production partner during fiscal 2017
has been TMS Fashion, a wholly owned subsidiary of LuenThai Holdings Limited, a Hong Kong Stock Exchange-listed company. We began
working with TMS and LuenThai in 2014 in an effort to streamline and scale up our production capabilities by leveraging a large,
established manufacturing resource. We believe this partnership allows us access to “best-in-class” fabrics, materials
and manufacturing techniques while reducing our need for fixed overhead. Further, we sublet our principal office location in New
York City from Tellas, Inc., another wholly-owned subsidiary of LuenThai operating in the U.S. We have additional manufacturing
relationships for our women’s intimate apparel collections and expect to work with additional manufacturers as we expand
our product offering.
Sources and Availability of Raw Materials
Raw materials, which
include fabric and accessories, are sourced from all over the world, including Italy, Turkey, China, Peru, India and Bangladesh.
We believe these fabrics and raw materials are readily available from multiple sources. Currently, we work closely with TMS Fashion
and LuenThai, who are responsible for all of the sourcing of our raw materials for our men’s and women’s collections.
We have additional sourcing relationships for our women’s intimate apparel collections and we expect to work with additional
sourcing partners as we expand our product offering.
Key Customers
In fiscal 2017, sales
were concentrated with Bloomingdales and Nordstrom, which accounted for 14% and 12%, respectively of our net sales. During fiscal
2016, Nordstrom accounted for 41% of our net sales. The decline in percentage of sales to Nordstrom during fiscal 2017 is partly
due to a reduction by Nordstrom in replenishment orders due to the elimination by them of in-store inventory, but more significantly
is due to the addition of other key departments store and specialty store accounts, and the corresponding increase in overall net
sales. Nordstrom and Bloomingdales are currently of key importance to our business and our results of operations, which would be
materially adversely affected if these relationships ceased to exist or are significantly reduced. These customers do not have
ongoing purchase commitments with us nor do any of our other customers. Therefore, we cannot guarantee that the volume of sales
will remain consistent going forward. We typically enter into agreements with department store and larger retail customers which
cover the material terms and conditions of purchase orders such as shipping terms, pricing policies, payment terms and cancellation
policies. We are targeting additional department store and retail customers to become additional key accounts of our business in
fiscal 2018 and beyond.
Marketing
Our marketing strategy
is primarily focused on digital and social media marketing aimed at increasing brand awareness and helping drive sales growth cost-efficiently.
We have engaged consultants, where necessary, to provide marketing advisory and execution services to our company, including assistance
with brand management, public relations, celebrity alignment, strategic retail placement, manufacturing strategy, and strategic
and creative development and assistance. We intend to continue to grow our investment in marketing and brand awareness-building
activities, including internet and media marketing to consumers and retailers, attendance at apparel trade shows and exploration
of other strategic marketing opportunities.
Competition
Men’s and women’s
innerwear is a very competitive market with many high profile undergarment manufacturers such as, Calvin Klein, Polo Ralph Lauren,
2(x)ist, Hugo Boss, Tommy John, Saxx Giorgio Armani, Tommy Hilfiger, Michael Kors, DKNY, Natori, Free People, Hanky Panky, Commando,
Cosabella, MeUndies, Bread&Boxers, Frigo and others. We believe there are currently over 100 potential competitors in our market
sector for men’s and women’s undergarments, lounge and sleepwear, and intimate apparel. The market includes increasing
competition from established companies who are expanding their production and marketing of undergarments, as well as frequent new
entrants. We are in direct competition with such companies. Competition is principally on the basis of brand image and recognition,
as well as product quality, innovation, style, distribution and price. We believe that we have the potential to perform well against
competition as a result of the quality, fit and performance of our products, our brand and brand strategy and positioning, our
planned marketing and consumer engagement initiatives, and through brand endorsement and strategic collaboration agreements, such
as our partnership with Wade. The products we have introduced to market and the products we plan to introduce are targeted at a
premium consumer value point, which means retailing a high quality product at a competitive price to comparable products, which
we believe gives us the opportunity to penetrate the market successfully.
We believe our competitive
advantages include promoting that our products are as comfortable as wearing nothing at all, which leverages our brand name, and
retailing high quality products at a competitive price with superior fit, feel, function and look. We also believe our brand name
and brand mission and philosophy will be an important competitive differentiator as we expand our marketing and brand awareness
initiatives. However, 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.
Seasonality of Business
The apparel industry
is generally subject to seasonality of buying which can affect revenue and cash flows. For men, there are generally two distinct
buying seasons in the apparel industry: Fall/Winter season, which occurs in the third to fourth quarters of our fiscal year and
Spring/Summer season, which occurs in the first to second quarters of our fiscal year, with some potential shipments at the last
quarter. The women’s apparel buying markets are more frequent than men’s, although we may elect to focus only on two
main buying markets as we do for men’s products in order to optimize design and production cycles. In fiscal 2017, the largest
revenues were reported in our third and fourth fiscal quarters, arising from seasonal products and sales, and the launch of new
collections (as described in this Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations”). As a result of growth and changes to our business with the introduction of new product lines
during the fiscal year, the natural seasonality of our business had a reduced effect. Furthermore, with limited operating history
it is difficult to anticipate the effects of seasonality moving forward. Thus, historical quarterly operating trends may not be
indicative of future performance because of new product launches and continued early stage sales growth.
Intellectual Property
The “Naked”
trademark is a critical component of the value of our business and we rely on the strength of our brand to differentiate ourselves
in the marketing and sale of our products. To protect the Naked brand, we have secured trademark registrations in the United States,
the European Union and Canada. We also own applications and registrations in the United States, Canada and other jurisdictions
for additional Naked-related trademarks. We take steps to enforce and police our Naked trademark and expect to continue to incur
expenses for enforcement-related work and for the filing of trademark and other types of intellectual property applications in
the U.S. and key international markets in fiscal 2018.
Dwyane Wade Licensing & Endorsement
Agreement
In June 2015, we entered
into a collaboration and endorsement agreement with NBA champion Dwyane Wade through his commercial entity Wade Enterprises, LLC,
which is wholly-owned and controlled by him. Under the agreement with Wade, we will pay Wade royalties in a range of up to ten
percent of net wholesale sales of Wade products, subject to certain minimum royalty payments. We also granted Wade and his designee
warrants to purchase up to an aggregate of 365,688 shares of common stock (the “Wade Grant”) and granted to Wade an
additional warrant to purchase up to 36,569 shares of our common stock (the “Protection Warrant”). Both the Wade Grant
and Protection Warrant are exercisable for a period of seven years at an exercise price of $4.80 per share. The Wade Grant will
vest and become exercisable in three annual installments and will vest in full upon a change of control of our company. The Protection
Warrant will become exercisable in the event that, as a result of certain subsequent issuances of our securities, the shares of
common stock underlying the Wade Grant represent less than 2% of our fully-diluted equity. The number of shares of common stock
for which the Protection Warrant will become exercisable will be equal to the number of shares necessary to ensure that both the
Wade Grant and Protection Warrant represent, together, at least 2% of our fully-diluted equity. Further, in the event that we propose
to issue any capital stock or securities convertible into or exchangeable for capital stock, then, subject to certain exceptions,
Wade will have the right to purchase such securities on the same terms and conditions in order to maintain his ownership percentage
in our company.
Employees
We currently employ fourteen full-time employees,
of which are thirteen are employed in the United States and one is employed in Canada. None of our employees are currently covered
by a collective bargaining agreement. We have had no labor-related work stoppages and we believe our relations with our employees
are excellent.
Corporate Information
We were incorporated
in the State of Nevada on May 17, 2005 under the name of Search By Headlines.com Corp. Immediately prior to the transaction with
Naked Inc. described below, we were a public reporting “shell company,” as defined in Rule 12b-2 under the Exchange
Act.
On July 30, 2012, we
completed a reverse acquisition of Naked Inc., whereby we acquired all of the issued and outstanding common shares of Naked Inc.
in exchange for the issuance of 337,500 shares of common stock in the capital of our company to the Naked Inc. stockholders on
a pro-rata basis, representing 50% of the capital stock of our company at the time. As a result of this reverse acquisition transaction,
Naked Inc. became a wholly-owned subsidiary of our company and our business became the manufacture and sale of direct and wholesale
men’s innerwear and intimate apparel products in Canada and the United States to consumers and retailers.
Effective August 29,
2012, we changed our name from “Search By Headlines.com Corp.” to “Naked Brand Group Inc.” This change
in our corporate name was effectuated by merging a wholly owned subsidiary of our company, which was formed solely to effect the
name change, with and into our company.
Naked Inc., our wholly
owned subsidiary, was originally incorporated under the federal laws of Canada on May 21, 2009 as “In Search of Solutions
Inc.” Naked changed its corporate name to “Naked Boxer Brief Clothing Inc.” on May 17, 2010 and to “Naked
Inc.” on February 20, 2013. Naked Inc. converted from the federal jurisdiction of Canada to the jurisdiction of the State
of Nevada on July 27, 2012. As part of the continuation, all classes of shares of Naked, including Class C, D, E and F common shares,
were converted into one class of common stock of the continuing corporation.
Our principal executive
offices are located at 95 Madison Avenue, 10th Floor, New York, New York, USA 10016. Our telephone number is (212) 851-8050.
Available Information
Our corporate website
address is www.nakedbrands.com and our online store is www.wearnaked.com. Our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended (“Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the
“SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements,
and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of
charge on our website at ir.nakedbrands.com when such reports are available on the SEC’s website.
The public may read
and copy any materials filed by Naked with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington,
DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC at www.sec.gov.
The contents of the
websites referred to above are not incorporated into this filing. Further, our references to the URLs for these websites are intended
to be inactive textual references only.
Item 1A. Risk Factors
Certain factors
may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully
the risks and uncertainties described below, in addition to other information contained in this Form 10-K, including our consolidated
financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks
and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that
adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations,
and future prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline,
and you could lose part or all of your investment.
Risks Related to Our Business
We have a limited operating history,
which makes it difficult to evaluate our company or future operations.
We are still in the
initial stages of our business plan. As a result, we have no way to evaluate the likelihood that we will be able to operate the
business successfully. For the years ended January 31, 2017 and 2016, our net revenues were $1,842,065 and $1,389,414, respectively.
Naked commenced operations in 2010 and, since beginning operations, we have generated limited total revenues. As a relatively new
company, we are subject to many risks associated with the initial organization, financing, expenditures and impediments inherent
in a new business and there is limited history upon which to base any assumption as to the likelihood that we will prove successful.
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 common stock, which could cause our
stock price to decline and adversely affect our ability to raise additional capital. Investors should evaluate an investment in
our company in light of the obstacles that may be encountered by a start-up company in a competitive market.
If we are unable to obtain additional
financing on acceptable terms, we may have to curtail our growth or cease our development plans and operations.
The operation of our
business and our growth efforts will require significant cash outlays. We are largely dependent on outside capital to implement
our business plan and support our operations. We anticipate for the foreseeable future that cash on hand and cash generated from
operations will not be sufficient to meet our cash requirements, and that we will need to raise additional capital through investments
to fund our operations and growth. We cannot assure you that we will be able to raise additional working capital as needed on terms
acceptable to us, if at all. If we are unable to raise capital as needed, we may be required to reduce the scope of our growth
efforts, which could harm our business plans, financial condition and operating results, or cease our operations entirely, in which
case, you may lose all your investment. Financings, including future equity investments, if obtained, may be on terms that are
dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than
the price at which you purchase your shares. 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.
Our auditors’ report on our
January 31, 2017 consolidated financial statements included an explanatory paragraph regarding there being substantial doubt about
our ability to continue as a going concern.
For the year ended
January 31, 2017, we incurred a net loss of $10,798,503. We anticipate generating losses for at least the next 12 months. Therefore,
there is substantial doubt about our ability to continue operations in the future as a going concern, as noted by our auditors
with respect to the consolidated financial statements for the year ended January 31, 2017. Although our consolidated financial
statements raise substantial doubt about our ability to continue as a going concern, they do not reflect any adjustments that might
result if we are unable to continue our business. If we cannot continue as a viable entity, our stockholders may lose some or all
of their investment in our company.
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 year ended
January 31, 2017, sales were concentrated with Bloomingdales and Nordstrom, which accounted for 14% and 12%, respectively, of our
net sales. In fiscal 2016, Nordstrom accounted for 41% of our net sales. The decline in percentage of sales to Nordstrom during
fiscal 2017 is partly due to a reduction by Nordstrom in replenishment due to the elimination of in-store inventory, but more significantly
is due to the addition of other key departments store and specialty store accounts, and the corresponding increase in overall net
sales. Nordstrom and Bloomingdales are currently of key importance to our business and 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.
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 innerwear
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 innerwear products, including large, diversified companies with substantial market share and
strong worldwide brand recognition, such as Calvin Klein, Polo Ralph Lauren, 2(x)ist, Hugo Boss, Tommy John, Saxx Giorgio Armani,
Tommy Hilfiger, Michael Kors, DKNY, Natori, Free People, Hanky Panky, Commando, Cosabella, MeUndies, Bread&Boxers, Frigo 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.
If we are unable to obtain or maintain
our endorsements by professional athletes and celebrities, our ability to market and sell our products may be harmed.
An important element
of our marketing strategy is to obtain endorsements from prominent athletes and celebrities, which may contribute to the image
of our brands. To date, we have entered into one celebrity endorsement agreement with Dwyane Wade, an NBA basketball player. We
believe that this strategy is and will continue to be an effective means of gaining brand exposure worldwide and creating broad
appeal for our products. We cannot assure you that we will be able to maintain our existing relationships with Dwyane Wade and
other individuals in the future or that we will be able to attract new athletes and celebrities to endorse our products. We also
are subject to risks related to the selection of athletes and celebrities whom we choose to endorse our products. We may select
athletes who are unable to perform at expected levels or who are not sufficiently marketable. In addition, negative publicity concerning
any of our athletes and celebrities could harm our brand and adversely impact our business. If we are unable in the future to secure
prominent athletes and celebrities and arrange endorsements of our products on terms we deem to be reasonable, we may be required
to modify our marketing platform and to rely more heavily on other forms of marketing and promotion, which may not prove to be
effective. In any event, our inability to obtain endorsements from professional athletes and celebrities could adversely affect
our ability to market and sell our products, resulting in loss of revenues and a loss of profitability.
An economic downturn or economic
uncertainty in our key markets may adversely affect consumer discretionary spending and demand for our products.
Many of our products
may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items
include general economic conditions, particularly those in the United States, and other factors such as consumer confidence in
future economic conditions, fears of recession, the availability of consumer credit, levels of unemployment, tax rates and the
cost of consumer credit. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer
discretionary spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the
future. The current volatility in the United States economy in particular has resulted in an overall slowing in growth in the retail
sector because of decreased consumer spending, which may remain depressed for the foreseeable future. These unfavorable economic
conditions may lead consumers to delay or reduce purchase of our products. Consumer demand for our products may not reach our sales
targets, or may decline, when there is an economic downturn or economic uncertainty in our key markets, particularly in North America.
Our sensitivity to economic cycles and any related fluctuation in consumer demand may have a material adverse effect on our financial
condition.
Our sales and profitability may decline
as a result of increasing product costs and decreasing selling prices.
Our business is subject
to significant pressure on pricing and costs caused by many factors, including intense competition, constrained sourcing capacity
and related inflationary pressure, pressure from consumers to reduce the prices we charge for our products and changes in consumer
demand. These factors may cause us to experience increased costs, reduce our sales prices to consumers or experience reduced sales
in response to increased prices, any of which could have a material adverse effect on our financial conditions, operating results
and cash flows.
Our results of operations could be
materially harmed if we are unable to accurately forecast customer demand for our products.
To ensure adequate
inventory supply, we must forecast inventory needs and place orders with our manufacturers based on our estimates of future demand
for particular products. Our ability to accurately forecast demand for our products could be affected by many factors, including
an increase or decrease in customer demand for our products or for products of our competitors, our failure to accurately forecast
customer acceptance of new products, product introductions by competitors, unanticipated changes in general market conditions,
and weakening of economic conditions or consumer confidence in future economic conditions. If we fail to accurately forecast customer
demand we may experience excess inventory levels or a shortage of products available for sale in our stores or for delivery to
customers. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess
inventory at discounted prices, which would adversely affect our results of operations and could impair the strength and exclusivity
of our brand. Conversely, if we underestimate customer demand for our products, our manufacturers may not be able to deliver products
to meet our requirements, and this could result in damage to our reputation and customer relationships.
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.
Our ability to source our merchandise
profitably or at all could be hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.
The United States and
the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties,
tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. Countries impose,
modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national
economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade
restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards and customs restrictions, could increase the
cost or reduce the supply of products available to us or may require us to modify our supply chain organization or other current
business.
Our operating results are subject
to seasonal and quarterly variations in our net revenue from operations, which could cause the price of our common stock to decline.
We have experienced,
and expect to continue to experience, significant seasonal variations in our net revenue from operations. Seasonal variations in
our net revenue are primarily related to increased sales of our products during our fiscal fourth quarter, reflecting our historical
strength in sales during the holiday season.
Our quarterly results
of operations may also fluctuate significantly as a result of a variety of other factors, including, among other things, net revenue
and profits contributed by new retailers; increases or decreases in comparable sales; changes in our product mix; and the timing
of new advertising and new product introductions.
As a result of these
seasonal and quarterly fluctuations, we believe that comparisons of our operating results between different quarters within a single
fiscal year are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance.
We began selling our
products in Canada in January 2010. Our limited operating history and nature as a developing company make it difficult to assess
the impact of seasonal factors on our business or whether or not our business is susceptible to cyclical fluctuations in the economy
in the markets in which we operate. Likewise, our growth may have obscured the effect of any seasonal or cyclical factors on our
business to date. Seasonal or cyclical variations in our business may become more pronounced over time and may harm our results
of operations in the future.
Any future seasonal
or quarterly fluctuations in our results of operations may not match the expectations of market analysts and investors. Disappointing
quarterly results could cause the price of our common stock to decline. Seasonal or quarterly factors in our business and results
of operations may also make it more difficult for market analysts and investors to assess the longer-term strength of our business
at any particular point, which could lead to increased volatility in our stock price. Increased volatility could cause our stock
price to suffer in comparison to less volatile investments.
If we are unable to adequately demonstrate
that our independent manufacturers use ethical business practices and comply with applicable laws and regulations, our brand image
could be harmed due to negative publicity.
Our core values, which
include developing the highest quality products while operating with integrity, are an important component of our brand image,
which makes our reputation particularly sensitive to allegations of unethical business practices. While our internal and vendor
operating guidelines promote ethical business practices such as environmental responsibility, fair wage practices, and compliance
with child labor laws, among others, and we, along with a third party that we retain for this purpose, monitor compliance with
those guidelines, we do not control our independent manufacturers or their business practices. Accordingly, we cannot guarantee
their compliance with our guidelines. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could
increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations. Violation
of labor or other laws by our independent manufacturers or the divergence of an independent manufacturer’s labor or other
practices from those generally accepted as ethical in the United States, Canada or other markets in which we do business could
also attract negative publicity for us and our brand. This could diminish the value of our brand image and reduce demand for our
merchandise if, as a result of such violation, we were to attract negative publicity. Other apparel manufacturers have encountered
significant problems in this regard, and these problems have resulted in organized boycotts of their products and significant adverse
publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm our brand image,
stock price and results of operations.
Our limited operating experience
and limited brand recognition in new international markets may limit our expansion strategy and cause our business and growth to
suffer.
Our future growth depends,
to an extent, on our international expansion efforts. We have limited experience with regulatory environments and market practices
internationally, and we may not be able to penetrate or successfully operate in any new market. We may also encounter difficulty
expanding into new international markets because of limited brand recognition leading to delayed acceptance of our products by
customers in these new international markets. Our failure to develop new international markets or disappointing growth outside
of existing markets will harm our business and results of operations.
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.
Our success depends on our ability
to maintain the value and reputation of our brand.
Our success depends
on the value and reputation of the Naked brand. The Naked name is integral to our business as well as to the implementation of
our strategies for expanding our business. Maintaining, promoting and positioning our brand will depend largely on the success
of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. We rely on
social media as one of our marketing strategies to have a positive impact on both our brand value and reputation. Our brand could
be adversely affected if we fail to achieve these objectives or if our public image or reputation were to be tarnished by negative
publicity. Negative publicity regarding the production methods of any of our suppliers or manufacturers could adversely affect
our reputation and sales and force us to locate alternative suppliers or manufacturing sources. Additionally, while we devote considerable
efforts and resources to protecting our intellectual property, if these efforts are not successful the value of our brand may be
harmed, which could have a material adverse effect on our financial condition.
Any material disruption of our information
systems could disrupt our business and reduce our sales.
We rely on information
systems to operate our e-commerce website, process transactions, respond to customer inquiries, manage inventory, purchase, sell
and ship goods on a timely basis and maintain cost-efficient operations. Any material disruption or slowdown of our systems, including
a disruption or slowdown caused by our failure to successfully upgrade our systems, system failures, viruses, cyber-attack or other
causes, could cause information, including data related to customer orders, to be lost or delayed which could result in delays
in the delivery of merchandise to our customers or lost sales, which could reduce demand for our merchandise and cause our sales
to decline. If changes in technology cause our information systems to become obsolete, or if our information systems are inadequate
to handle our growth, we could lose customers. If our systems are damaged, fail to function properly or become obsolete, we may
have to make monetary investments to repair or replace the systems, and we could endure delays in our operations.
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.
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.
Our future success is substantially
dependent on the continued service of our senior management.
Our future success
is substantially dependent on the continued service of our senior management and other key employees, particularly our Chief Executive
Officer and Chief Creative Officer, Carole Hochman. The loss of the services of our senior management or other key employees could
make it more difficult to successfully operate our business and achieve our business goals. We also may be unable to retain existing
personnel that are critical to our success, which could result in harm to our customer and employee relationships, loss of key
information, expertise or know-how and unanticipated recruitment and training costs.
Because a portion of our sales may
be generated in foreign countries, fluctuations in foreign currency exchange rates may negatively affect our results of operations.
The reporting currency
for our consolidated financial statements is the US dollar. In the future, we expect to continue to derive a significant portion
of our net revenue in foreign countries, and changes in exchange rates between the currencies for those countries and the US dollar
may have a significant, and potentially adverse, effect on our results of operations. Our primary risk of loss regarding foreign
currency exchange rate risk is caused by fluctuations in the exchange rates between the US dollar and the currencies for those
countries. We have not historically engaged in hedging transactions and do not currently contemplate engaging in hedging transactions
to mitigate foreign exchange risks. As we continue to recognize gains and losses in foreign currency transactions, depending upon
changes in future currency rates, such gains or losses could have a significant, and potentially adverse, effect on our results
of operations.
Our reported financial results may
be adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted
accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, the American
Institute of Certified Public Accountants, 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.
Risk Related to Our Common Stock and
Public Reporting Requirements
Although as of March 17, 2017 we
regained compliance with NASDAQ’s listing rules relating to minimum stockholders’ equity requirements, our common stock
may be delisted from the NASDAQ Capital Market if we cannot satisfy NASDAQ’s continued listing requirements in the future
.
On September 23, 2016,
we received written notice from the Listing Qualifications Staff of NASDAQ (the “Staff”) notifying us that we were
not at that time in compliance with NASDAQ Listing Rule 5550(b)(1) due to our failure to maintain a minimum of $2,500,000 in stockholders’
equity (the “Minimum Stockholders’ Equity Requirement”) or any alternatives to such requirement. On March 17,
2017, we received written notice from the Staff informing us that the Staff has determined that we have regained compliance with
the Minimum Stockholders’ Equity Requirement. As provided in the notice, if we fail to evidence compliance with the Minimum
Stockholders’ Equity Requirement upon filing of our periodic report for the quarter ending April 30, 2017, our common stock
may be subject to delisting from NASDAQ. If our common stock is delisted, trading in our common stock could be more difficult for
investors, potentially leading to declines in our share price and liquidity. Without a NASDAQ listing, stockholders may have a
difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more
difficult and the trading volume and liquidity of our stock could decline. Delisting from NASDAQ could also result in negative
publicity and could also make it more difficult for us to raise additional capital. Further, if we are delisted, we would also
incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely
limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market.
If our common stock is delisted by NASDAQ, our common stock may be eligible to trade on an over-the-counter quotation system, such
as the OTCQB market, where an investor may find it more difficult to sell our stock or obtain accurate quotations as to the market
value of our common stock. We cannot assure you that our common stock, if delisted from NASDAQ, will be listed on another national
securities exchange or quoted on an over-the counter quotation system.
Investors should be
aware that the value of an investment in our company may go down as well as up. In addition, there can be no certainty that the
market value of an investment in our company will fully reflect its underlying value.
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 not 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.
Because we can issue additional shares
of common stock, holders of our common stock may experience dilution in the future.
We are authorized to
issue up to 18,000,000 shares of common stock, of which 10,342,191 shares are issued and outstanding as of April 26, 2017. Our
board of directors has the authority to cause us to issue additional shares of common stock without consent of any of our stockholders.
Consequently, our stockholders may experience more dilution in their ownership of our stock in the future.
The stock price of our common stock
may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders
to resell their shares.
Our common stock is
currently listed on the NASDAQ Capital Market. Historically trading in our stock has been thin and characterized by wide fluctuations
in trading prices, due to many factors that may have little to do with our operations or business prospects. Although we believe
that the listing of our common stock on the NASDAQ Capital Market has improved the liquidity of our common stock, our stock has
been historically characterized by large volatility. Accordingly, stockholders may have difficulty reselling shares of our common
stock.
A decline in the price of our common
stock could affect our ability to raise further working capital, may adversely impact our ability to continue operations and we
may go out of business.
A prolonged decline
in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability
to raise capital. Because we may attempt to acquire a significant portion of the funds we need in order to conduct our planned
operations through the sale of equity securities, a decline in the price of our common stock could be detrimental to our liquidity
and our operations because the decline may cause investors to not choose to invest in our stock. If we are unable to raise the
funds we require for all our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a
significant negative effect on our business plan and operations, including our ability to develop new products and continue our
current operations. As a result, our business may suffer, and not be successful and we may go out of business. We also might not
be able to meet our financial obligations if we cannot raise enough funds through the sale of our common stock and we may be forced
to go out of business.
Because we do not intend to pay any
cash dividends on our shares of common stock in the near future, our stockholders will not be able to receive a return on their
shares unless they sell them.
We intend to retain
any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on
our common stock in the near future. The declaration, payment and amount of any future dividends will be made at the discretion
of the board of directors, and will depend upon, among other things, the results of operations, cash flows and financial condition,
operating and capital requirements, and such other factors as the board of directors considers relevant. There is no assurance
that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.
Future sales of shares by existing
stockholders could cause our stock price to decline and investors in this offering may experience dilution by exercises of outstanding
options and warrants.
Sales of a substantial
number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market
that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common
stock.
As of January 31, 2017,
we had outstanding options to purchase an aggregate of 2,287,399 shares of our common stock at a weighted average exercise price
of $4.78 per share and warrants to purchase an aggregate of 1,627,010 shares of our common stock at a weighted average exercise
price of $5.29 per share. The exercise of such outstanding options and warrants will result in further dilution of your investment.
If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that
such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship
between such sales and the performance of our business.
The Financial Industry Regulatory
Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our common
stock.
FINRA has adopted rules
that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that
the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status,
investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability
that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult
for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.
We are a former “shell company”
and as such are subject to certain limitations not applicable to other public companies generally.
Prior to our acquisition
of Naked Inc. in June 2012, we were a public reporting “shell company,” as defined in Rule 12b-2 under the Exchange
Act. Although we are no longer a “shell company,” we are subject to certain restrictions under the Securities Act of
1933, as amended, for the resale of securities issued by issuers that have been at any time previously a shell company. Specifically,
the Rule 144 safe harbor available for the resale of our restricted securities is only available to our stockholders if we have
filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable, during the
preceding twelve months, other than current reports on Form 8-K, at the time of the proposed sale, regardless of whether the restricted
securities were initially issued at the time we were a shell company or subsequent to termination of such status. Accordingly,
holders of our “restricted securities” within the meaning of Rule 144 will be subject to the conditions set forth in
Rule 144 with respect to our company. Other reporting companies that are not former shell companies and have been reporting for
more than twelve months are not subject to this same reporting threshold for non-affiliate reliance on Rule 144.
Accordingly, any restricted
securities we have sold or sell in the future or issue to consultants or employees, in consideration for services rendered or for
any other purpose, may not be resold unless such securities are registered with the SEC or the requirements of Rule 144 have been
satisfied. As a result, it may be harder for us to fund our operations and pay our employees and consultants with our securities
instead of cash. Furthermore, it may be harder for us to raise funding through the sale of debt or equity securities unless we
agree to register such securities with the SEC, which could cause us to expend additional resources in the future. Our prior status
as a “shell company” could prevent us in the future from raising additional funds, engaging employees and consultants,
and using our securities to pay for any acquisitions, which could cause the value of our securities, if any, to decline in value
or become worthless.
Further, as current
and former shell companies and reverse acquisition transactions have been, and remain to some degree, subject to additional scrutiny
by the SEC, FINRA and the national securities exchanges, our prior shell company status and the reverse acquisition transaction
that terminated it may result in delays in the completion of any offering and our attempt to qualify for and list on a national
securities exchange. Specifically, as a former shell company and subject of a reverse acquisition transaction, we may need to demonstrate
the ability to maintain a threshold per share market price for an extended trading period in order to qualify for listing on a
national securities exchange.
If we are unable to obtain additional
financing on acceptable terms, we may have to curtail our growth or cease our development plans and operations.
The operation of our
business and our growth efforts will require significant cash outlays. We are largely dependent on outside capital to implement
our business plan and support our operations. We anticipate for the foreseeable future that cash on hand and cash generated from
operations will not be sufficient to meet our cash requirements, and that we will need to raise additional capital through investments
to fund our operations and growth. We cannot assure you that we will be able to raise additional working capital as needed on terms
acceptable to us, if at all. If we are unable to raise capital as needed, we may be required to reduce the scope of our growth
efforts, which could harm our business plans, financial condition and operating results, or cease our operations entirely, in which
case, you may lose all your investment. Financings, including future equity investments, if obtained, may be on terms that are
dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than
the price at which you purchase your shares.
As of January 31, 2017,
the Company had cash totaling $879,014. Subsequent to January 31, 2017, the Company raised gross proceeds of $5,499,722 through
the issuance of stock pursuant to an At The Market Offering Agreement as previously disclosed in our Current Report on Form 8-K
filed with the SEC on February 10, 2017 and March 30, 2017. However, the Company believes that it does not have sufficient capital
to fund its operations through the year ending January 31, 2018.
If securities or industry analysts
do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could
decline.
The trading market
for our common stock will depend in part upon the research and reports that securities or industry analysts publish about us or
our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities
or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If
we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes
inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts
ceases coverage or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our common
stock price and trading volume to decline.
Risks Related to the Proposed Merger
and the Combined Company
Currently, there is no public market
for NewCo’s ordinary shares. Our stockholders cannot be sure that an active trading market will develop for or of the market
price of the shares of NewCo ordinary shares they will receive or that the combined company will successfully obtain authorization
for listing on the NASDAQ Capital Market or a national securities exchange
.
Under the LOI,
as amended, it is contemplated that, each share of our common stock will be converted into the right to receive the same
number of shares of NewCo ordinary shares. NewCo will be a newly formed company and prior to this transaction it has not
issued any securities in the U.S. markets or elsewhere nor has there been extensive information about it, its businesses or
operations publicly available. Bendon and NewCo have agreed to use its commercially reasonable efforts to cause the shares of
NewCo ordinary shares to be issued in the Merger to be approved for listing on the NASDAQ Capital Market prior to the
effective time of the Merger and the approval of the listing on the NASDAQ Capital Market of the NewCo ordinary shares to be
issued in the Merger is a condition to the closing of the Merger. However, the listing of shares on the NASDAQ Capital Market
does not assure that a market for the NewCo ordinary shares will develop or the price at which the shares will trade. No
assurance can be provided as to the demand for or trading price of NewCo ordinary shares following the closing of the Merger
and the NewCo shares may trade at a price less than the current market price of our ordinary shares.
Even if the combined
company is successful in developing a public market, there may not be enough liquidity in such market to enable stockholders to
sell their shares of ordinary shares. If a public market for the combined company’s ordinary shares does not develop, investors
may not be able to re-sell the shares of their ordinary shares, rendering their shares illiquid and possibly resulting in a complete
loss of their investment. NewCo cannot predict the extent to which investor interest in the combined company will lead to the development
of an active, liquid trading market. The trading price of and demand for NewCo ordinary shares following completion of the Merger
and the development and continued existence of a market and favorable price for the NewCo ordinary shares will depend on a number
of conditions, including the development of a market following, including by analysts and other investment professionals, the businesses,
operations, results and prospects of NewCo, general market and economic conditions, governmental actions, regulatory considerations,
legal proceedings and developments or other factors. These and other factors may impair the development of a liquid market and
the ability of investors to sell shares at an attractive price. These factors also could cause the market price and demand for
NewCo ordinary shares to fluctuate substantially, which may limit or prevent investors from readily selling their shares and may
otherwise affect negatively the price and liquidity of NewCo ordinary shares. Many of these factors and conditions are beyond the
control of NewCo or NewCo stockholders.
Failure to complete the proposed
Merger could harm our future business and operations
.
If the proposed Merger
is not completed, we are subject to the following risks, among others:
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costs related to the Merger, such as legal and accounting fees, must be paid even if the Merger
is not completed;
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if the Merger Agreement is terminated under certain circumstances, we may be required to issue
to Bendon 2.5 million shares of common stock;
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the attention of our management may have been diverted to the Merger rather than to the company’s
operations and the pursuit of other opportunities that could have been beneficial to it;
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the potential loss of key personnel during the pendency of the Merger as employees may experience
uncertainty about their future roles with the combined company;
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the price of our stock may decline and remain volatile; and
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we may be subject to litigation related to the Merger or any failure to complete the Merger.
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The pendency of the Merger could
materially adversely affect our business and operations or result in a loss of its employees, which, consequently, could materially
adversely affect the business and operations of the combined company.
Uncertainty about the
effect of the Merger on employees, customers and suppliers may have an adverse effect on our business and, consequently, on the
combined company. These uncertainties may impair our ability to attract, retain and motivate employees until the completion of
the Merger, which may have a material adverse effect on us if the Merger is not completed. If employees depart because of issues
concerning employment security and difficulty of integration or a desire not to remain with the combined company, NewCo’s
future business could be adversely affected. Similarly, uncertainties about the effect of the Merger could cause customers, suppliers
and others who deal with us to change their existing business relationships, which could negatively affect our revenues, earnings
and cash flows, as well as the market price of our common stock, regardless of whether the Merger is completed. The realization
of any of these risks may materially adversely affect the business and financial results of the combined company.
Current stockholders will have a
reduced ownership and voting interest in the combined company after the Merger.
As a result of the
Merger, current Bendon stockholders along with Bendon’s affiliates are expected to hold in excess of 90% of the combined
company’s outstanding ordinary shares immediately following completion of the Merger. Our stockholders currently have the
right to vote for their respective directors and on other matters affecting the applicable company. When the Merger occurs, each
our stockholders that receives shares of the combined company’s ordinary shares will hold a percentage ownership of the combined
company that will be significantly smaller than the stockholder’s current percentage ownership of company. The combined company
will be controlled by Bendon and its affiliates, which are expected to hold in excess of 90% of all shares of the combined company
on a fully diluted basis. As further discussed below, Bendon and its affiliates will be able to exercise significant influence
over the combined company’s business policies and affairs due to its large ownership percentage. As a result of their reduced
ownership percentages, our former stockholders will have less voting power in the combined company than they now have with respect
to us.
Bendon and its affiliates will exercise
significant influence over the combined company, and their interests in the combined company may be different than yours.
Following the completion
of the Merger, Bendon and its affiliates are expected to beneficially own in excess of 90% of the outstanding ordinary shares of
the combined company. Accordingly, Bendon and its affiliates will be able to exercise significant influence over the combined company’s
business policies and affairs, including the composition of the combined company’s board of directors and any action requiring
the approval of the combined company’s stockholders, including the adoption of amendments to the articles of incorporation
and the approval of a merger or sale of substantially all of the combined company’s assets. The interests of Bendon and its
affiliates may conflict with your interests. For example, these stockholders may support certain long-term strategies or objectives
for the combined company which may not be accretive to stockholders in the short term. The concentration of ownership may also
delay, defer or even prevent a change in control of the combined company, even if such a change in control would benefit our other
stockholders, and may make some transactions more difficult or impossible without the support of these parties. This significant
concentration of share ownership may adversely affect the trading price for the combined company’s ordinary shares because
investors often perceive disadvantages in owning stock in companies with stockholders who own significant percentages of a company’s
outstanding stock.
We will incur substantial transaction
fees and costs in connection with the Merger.
We expect to
incur material non-recurring expenses in connection with the Merger and consummation of the transactions contemplated by the
LOI, as amended. Additional unanticipated costs may be incurred in the course of the integration of the businesses of
NewCo, Bendon and Naked. We cannot be certain that the elimination of duplicative costs or the realization of other
efficiencies related to the integration of the businesses will offset the transaction and integration costs in the near term,
or at all.
The LOI, as amended, limits
our ability to pursue alternatives to the Merger, which could discourage a potential acquirer from making an alternative
transaction proposal and, in certain circumstances, could require us to pay to NewCo a significant termination
fee.
Under the LOI, we are
restricted, subject to limited exceptions, from pursuing or entering into alternative transactions in lieu of the Merger. In general,
unless and until the LOI is terminated, we are restricted from, among other things, soliciting, initiating or knowingly taking
any action to facilitate or encourage a competing acquisition proposal. Termination of the LOI or failure to enter into a merger
agreement may result in the issuance of 2.5 million shares of our common stock to Bendon.
Litigation may be instituted against
us, members of our board of directors, Bendon and members of the Bendon board of directors challenging the Merger, and adverse
judgments in these lawsuits may prevent the Merger from becoming effective within the expected timeframe or at all
.
We, members of our
board of directors, Bendon and members of the Bendon board of directors may be named as defendants in class action lawsuits or
other proceedings that may be brought by our stockholders challenging the Merger. If the plaintiffs in any actions that may be
brought are successful, these adverse judgments may prevent the parties from completing the Merger in the expected timeframe,
if at all. Even if the plaintiffs in these potential actions are not successful, the costs of defending against such claims could
adversely affect our financial condition or that of Bendon and such actions could adversely affect the reputations of the parties
and members of their respective boards of directors or management.
The financial performance, and price
of the ordinary shares, of the combined company may be affected by factors different from those that historically have affected
Naked.
Upon completion of
the Merger, holders of our common stock will become holders of ordinary shares of the combined company. The business and target
markets of NewCo differ from ours, and accordingly the results of operations and the price of the ordinary shares of the combined
company will be affected by some factors that are different from those currently affecting the results of our operations and stock
price.
The NewCo ordinary shares to be
received by our stockholders as a result of the Merger will have different rights from the shares of our common stock
.
Upon completion of
the Merger, our stockholders will become stockholders of the combined company and their rights as stockholders will be governed
by NewCo’s certificate of registration and constitution (bylaws). The combined company will be a Australian corporation
and certain of the rights associated with the ordinary shares of the combined company will be materially different from the rights
associated with our common stock.
The combined company may not experience
the anticipated strategic benefits of the Merger.
Our management believes
that the Merger would provide certain strategic benefits that may not be realized by each of the companies operating as standalones.
Specifically, we believe the Merger would provide certain strategic benefits which would enable each of Naked and Bendon to accelerate
their respective business plans through an increased access to capital in the public equity markets, increased management strength
and management expertise, access to a larger customer base for the combined sales organization and distribution capabilities of
the combined company. There can be no assurance that these anticipated benefits of the Merger will materialize or that if they
materialize will result in increased stockholder value or revenue stream to the combined company.
Naked and Bendon may be unable to
successfully integrate their operations following the Merger.
It is possible that
the integration process could take longer than anticipated and could result in the loss of valuable employees, the disruption of
each company’s ongoing businesses, processes and systems or inconsistencies in standards, controls, procedures, practices,
policies and compensation arrangements, any of which could adversely affect the combined company’s ability to achieve the
anticipated benefits of the Merger. The combined company’s results of operations could also be adversely affected by any
issues attributable to either company’s operations that arise or are based on events or actions that occur prior to the closing
of the Merger. The companies may have difficulty addressing possible differences in corporate cultures and management philosophies.
The integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits will
be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased
costs or decreases in the amount of expected revenues and could adversely affect the combined company’s future business,
financial condition, operating results and prospects.
Delays in completing the Merger
may substantially reduce the expected benefits of the Merger.
Satisfying the conditions
to, and completion of, the Merger may take longer than, and could cost more than we expect. Any delay in completing or any additional
conditions imposed in order to complete the Merger may materially adversely affect the benefits that we expect to achieve from
the Merger and the integration of their respective businesses.
It is a condition
to the consummation of the Merger that the ordinary shares of NewCo be listed on the NASDAQ Capital Market following the Merger.
The listing qualification standards for new issuers are stringent and, although the combined company may explore various actions
to meet the minimum listing requirements, there is no guarantee that any such actions will be successful in bringing it into compliance
with the requirements of the NASDAQ Capital Market or other national securities exchange. Even if the stock of the combined company
is listed on the NASDAQ Capital Market, no assurance can be given that the combined company will comply with the requirements
for continued listing set by the NASDAQ Capital Market at all times in the future. If the combined company fails to comply with
the requirements for continued listing set by the NASDAQ Capital Market, the combined company could be delisted from the NASDAQ
Capital Market, which could have a material adverse effect on its business and financial condition. If the combined company fails
to achieve listing of its ordinary shares on the NASDAQ Capital Market or a national securities exchange, the Merger may not close.
If it closes, the
combined company’s ordinary shares may be traded on the OTC Bulletin Board or other over-the-counter markets in the United
States, although there can be no assurance that its ordinary shares will be eligible for trading on any such alternative markets
or exchanges in the United States. In the event that the Merger closes but the combined company is not able to obtain a listing
on a national securities exchange or quotation on the OTC Bulletin Board or other quotation service for its common shares, it
may be extremely difficult or impossible for stockholders to sell their common shares in the United States. Moreover, if the ordinary
shares of the combined company is quoted on the OTC Bulletin Board or other over-the-counter market, the liquidity will likely
be less, and therefore the price will be more volatile, than if its ordinary shares were listed on a national securities exchange.
Stockholders may not be able to sell their common shares in the quantities, at the times, or at the prices that could potentially
be available on a more liquid trading market. As a result of these factors, if the combined company’s common shares fail
to achieve listing on a national securities exchange, the price of its ordinary shares is likely to decline. In addition, a decline
in the price of the combined company’s ordinary shares could impair its ability to achieve a national securities exchange
listing or to obtain financing in the future.
The combined company’s stock
price is expected to be volatile, and the market price of the combined company ordinary shares may drop following the Merger.
The market price of
NewCo’s ordinary shares could be subject to significant fluctuations following the Merger. Moreover, stock markets generally
have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. Such
market fluctuations may also adversely affect the trading price of the combined company’s ordinary shares. Declines in the
combined company’s stock price after the Merger may result for a number of reasons including if:
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investors react negatively to the prospects of the combined company’s business and prospects
from the Merger;
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the effects of the Merger on the combined company’s business and prospects are not consistent
with the expectations of financial or industry analysts;
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the combined company does not achieve the perceived benefits of the Merger as rapidly or to the
extent anticipated by financial or industry analysts; or
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other factors beyond the combined company’s control, including but not limited to fluctuations
in the valuation of companies perceived by investors to be comparable to the combined company.
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Furthermore, the stock
markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities
of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies.
These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions,
interest rate changes or international currency fluctuations, have and may continue to negatively affect the market price of our
common stock.
NewCo, the surviving corporation
in the Merger, has never previously been a US reporting company.
NewCo, which will be
the surviving corporation in the Merger, will be a newly formed company that has never previously been a reporting company in the
United States subject to U.S. federal and state securities laws, including the reporting obligations of the Exchange Act and other
requirements of the Sarbanes-Oxley Act. The combined company will be required to increase its compliance efforts and incur significant
costs in connection with complying with public company requirements under U.S. federal and state securities laws. The attention
of management may be diverted on a frequent basis in order to carry out public company reporting and related obligations, rather
than directing their full time and attention to the operation and growth of the business. Employees and some members of the management
team have had limited experience working for a US reporting company, increasing the risk of non-compliance. The combined company’s
disclosure controls and procedures may not prevent or detect all errors or acts of fraud or misconduct by persons inside or outside
the combined company. Similarly, if the combined company fails to maintain an effective system of internal control over financial
reporting, the combined company may not be able to accurately report its financial condition, results of operations or cash flows.
Noncompliance with U.S. federal and state securities laws and other regulatory requirements could result in administrative or other
penalties or civil or criminal judgments against the combined company or harm to the combined company’s reputation. These
consequences could affect investor confidence in the combined company and cause the price of the stock to decline, result in the
delisting of the combined company’s shares from the NASDAQ Capital Market, require the payment of fines or other amounts,
distract management’s time and attention to the business or result in the loss of customer or supplier relationships, thus
reducing the value of the combined company’s ordinary shares.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We currently maintain
offices at 10th Floor – 95 Madison Avenue, New York, New York, USA, which we lease for approximately $18,000 per month. The
lease is on a month-to-month basis. We believe our New York offices are suitable and adequate premises from which to operate our
business at this time as they provide us with sufficient space to conduct our operations.
We do not own any real
property.
Item 3. Legal Proceedings
We know of no material
pending legal proceedings, other than ordinary routine litigation incidental to our business, to which our company or our subsidiary
is a party or of which any of their property is subject. There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial stockholder holding more than 5% of our shares, is an adverse party or has a material interest
adverse to our or our subsidiary’s interest.
Item 4. Mine Safety Disclosures
Not Applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate
Governance
Directors and Executive Officers
The following table provides information
regarding our executive officers and directors as of April 26, 2017:
Name
|
Age
|
|
Position
|
Year
First Appointed
|
|
|
|
|
|
Carole Hochman
|
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72
|
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Chief Executive Officer, Chief Creative Officer, Director and Chairwoman of the Board
|
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2014
|
Joel Primus
|
|
30
|
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President, Secretary and Director
|
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2012
|
Kai-Hsiang Lin
|
|
53
|
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Vice President of Finance
|
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-
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David Hochman
|
|
42
|
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Director, Vice Chairman of the Board
|
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2014
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Andrew Kaplan
|
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50
|
|
Director
|
|
2013
|
Paul Hayes
|
|
51
|
|
Director
|
|
2015
|
Martha Olson
|
|
61
|
|
Director
|
|
2015
|
Jesse Cole
|
|
44
|
|
Director
|
|
2015
|
Edward Hanson
|
|
41
|
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Director
|
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2017
|
Justin Davis-Rice
|
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46
|
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Director
|
|
2017
|
Carole Hochman
has served as our Chief Executive Officer and Chief Creative Officer and as a member of our board of directors since June 2014.
Ms. Hochman is a renowned designer and sleepwear pioneer. She is considered one of the single most influential women in the intimate
apparel and sleepwear business in the United States. She has been creating intimate apparel for more than 30 years and was the
driving force behind the Carole Hochman Design Group for which she served as Chief Creative Officer until her departure in November,
2013 and for which she was previously CEO from September, 1992 until its acquisition by Komar in 2010. Under Ms. Hochman’s
leadership, Carole Hochman Design Group manufactured Carole Hochman brand of sleepwear, loungewear and daywear and numerous sleepwear
collections including Christian Dior, Oscar de la Renta, Ralph Lauren, Jockey, Donna Karan, Tommy Bahama and Betsey Johnson. Ms.
Hochman excels in translating brand identity into intimate apparel and has an innate ability to identify opportunities and trends
and forecast successful endeavors that the rest of the industry quickly follows. She was one of the first designers to embrace
the concept of QVC, recognizing the power of the home shopper, a customer who has proved loyal to her from the start. Ms. Hochman
graduated from Drexel University.
We believe Ms. Hochman
is qualified to serve on our board of directors because of her extensive business experience as described above.
Joel Primus
has served as President and as a member of our board of directors since July 2012. Mr. Primus is the founder of our wholly-owned
subsidiary, Naked Inc. and previously served as the President, CEO and a director of our subsidiary since its inception in 2010.
Mr. Primus also served as our Chief Executive Officer until Ms. Hochman’s appointment to such office in June 2014 and as
interim Chief Financial Officer until June 2014. Mr. Primus preceded his business activities with a successful athletic career.
During his amateur running career, Mr. Primus was selected for three national teams and represented Canada at the World Youth Championships.
Mr. Primus was also an Athlete Liaison to Canadian Sport Centre Pacific in addition to sitting on the board with Volunteer Abbotsford.
He was awarded a full scholarship to High Point University in North Carolina where he made the Dean’s list and won the student
athlete award. When an injury ended Mr. Primus’ running career, international travel in Central and South America inspired
Mr. Primus to form the Project World Citizen Society, a non-profit society that aims to assist communities in the developing world
that are struggling with social injustices. The organization currently works out of Ghana and Mr. Primus sits as the Co-Chair on
its board of directors. Mr. Primus’ travels in South America inspired him to found Naked. In promotion of Naked, Mr. Primus
has appeared on CBC’s Dragons Den three times in addition to Entertainment Tonight Canada, E Talk Daily Canada, Urban Rush,
Shaw’s The Express and The Fanny Kiefer Show. During the start-up phase for Naked, which started in September 2008, Mr. Primus
worked as an advertising consultant for the Black Press Group Ltd. (the Abbotsford News), a Canadian privately owned publisher
of newspapers, from November 2009 to April 2010. From April 2010 to June 2010, Mr. Primus was employed at Altitude Search Marketing
where he handled business development. From September 2008 to October 2009, Mr. Primus operated the Sapera magazine.
We believe Mr. Primus
is qualified to serve on our board of directors due to the perspective and experience he brings as our founder and President.
Kai-Hsiang Lin
has served as the Vice President of Finance since March 2016. Mr. Lin became an employee of the Company in February 2016.
From March 2014 to February 2016, Mr. Lin was Corporate Controller for HVS Global Hospitality Services, a leading consulting and
services organization focused on the hotel, mixed-use, share ownership, gaming and leisure industries. From June, 1991 to February,
2014, Mr. Lin was Corporate Controller for The Good Stuff Company, LLC, a distributor and manufacturer of licensed toys and novelties,
and a nationwide toy crane service operator with more than 200 employees nationwide. Mr. Lin holds a BBA in Accounting from the
Fu-Jen Catholic University in Taipei, Taiwan, and an MBA in Computer Information Systems from Baruch College, CUNY, New York.
David Hochman
has served as a member of our board of directors since June 2014. He was appointed Vice Chairman of our company in May 2015. He
is currently Managing Partner of Orchestra Medical Ventures, an investment firm that employs an innovative strategy to create,
build and invest in medical technology companies intended to generate substantial clinical value and superior investor returns.
Mr. Hochman is the Chairman of Vital Access Corp. and Motus GI Medical Technologies, and is a board director of Caliber Therapeutics,
BackBeat Medical, Inc., FreeHold Surgical, Maternity Neighborhood, Inc. and Corbus Pharmaceuticals (NASDAQ: CRBP). Prior to joining
Orchestra, Mr. Hochman was Chief Executive Officer of Spencer Trask Edison Partners, LLC, a principal investment partnership focused
on early stage healthcare companies. He was also Managing Director of Spencer Trask Ventures, Inc. during which time he was responsible
for directing the firm’s venture banking group and led financing transactions for over 20 early-stage companies, securing
over $420 million in equity capital. Mr. Hochman was a board advisor of Health Dialog Services Corporation, a world leader in collaborative
care management that was acquired in 2008 by the British United Provident Association for $750 million. He was also a co-founder
and director of PROLOR Biotech, Inc., a biopharmaceutical company developing longer-lasting versions of approved therapeutic proteins,
which was purchased by Opko Health, Inc. (NYSE: OPK) in 2013 for over $600 million. Mr. Hochman also currently serves as a board
member of two non-profit organizations, the Citizens Committee for New York City and the Mollie Parnis Livingston Foundation. He
graduated with honors from the University of Michigan.
We believe Mr. Hochman
is qualified to serve on our board of directors because of his 18 years of venture capital, entrepreneurial and investment banking
experience as described above.
Andrew Kaplan
has served as a member of our board of directors since July 2013. Mr. Kaplan is a Vice President of Barry Kaplan Associates, a
25-year-old investor relations firm that works with small and medium sized public and private companies. He has been with the firm
since 1995. Prior to this, Mr. Kaplan had been with major investment firms and a boutique investment bank specializing in the financing
of companies going public through IPOs or reverse mergers. Mr. Kaplan received his BS/BA in Finance and Insurance from the University
of Hartford in 1989. Mr. Kaplan has been a director of Coral Gold Resources Ltd. since July 2012.
We believe Mr. Kaplan
is qualified to serve on our board of directors because of his extensive business experience in the area of finance as described
above.
Paul Hayes
has served as a member of our board of directors since February 2015. Mr. Hayes, a certified public accountant, has been the Vice
President Finance for Parfums de Coeur Ltd, a beauty and wellness products concern, since September 2014. From October 2013 to
August 2014 he was an independent consultant providing advice to a range of companies in the areas of financial reporting, systems
implementation, risk management, and compliance. Through September 2013 and for more than five years previous he was with The Warnaco
Group, Inc. in several roles of financial leadership. He has extensive global experience managing and driving growth in a wide
range of industries, particularly in the intimate apparel and sleepwear categories through his tenure at Calvin Klein. Mr. Hayes
is a Certified Public Accountant and led the commercial finance and accounting team for the $500 million Calvin Klein brand business
in Europe in his capacity as Chief Financial Officer for the Europe region of The Warnaco Group. Previously, he held senior positions
at Nokia Corporation and Deloitte & Touche LLP. Mr. Hayes received a BBA from Iona College and an MBA from New York University
Leonard N. Stern School of Business.
We believe Mr. Hayes
is qualified to serve on our board of directors because of his extensive business experiences in the apparel merchandising industries,
as described above.
Martha Olson
has served as a member of our board of directors since February 2015. Ms. Olson has a proven track record over her 30-year career
of growing global, iconic brands such as Calvin Klein Underwear and Ralph Lauren Intimates while delivering superior stockholder
returns. As a Warnaco Corporate Officer from 2004 through 2013 and the Group President of Calvin Klein Underwear Global and the
Heritage Brands (Speedo, Chaps and Core Intimates Divisions) from 2010 through 2013, the businesses she had responsibility for
grew to $1.4 billion and contributed 70% of Warnaco’s Operating Income. Calvin Klein Underwear revenue grew at an annualized
compound rate of 8%. She has strong global expertise in general management, operations, commercial execution and marketing across
a wide range of industries. She worked at Sara Lee Corp from 1992 to 2001. Her career with Sara Lee began as the Vice President
of Marketing for the Playtex Intimate Apparel brand and progressed to several general management positions, both in Canada as President
of Isotoner; President of Sara Lee Hosiery and in the U.S. as President of Specialty Intimates and President of Ralph Lauren Intimates.
Ms. Olson began her career in Brand Management; leading growth, category expansion and turnaround for several iconic brands at
General Mills (Cheerios, Betty Crocker, Bisquick) and Nestle (Toll House). She served as a Division Manager of Edison Schools,
Inc. and worked for it from 2002 to 2004. She held several leadership positions within Branded Apparel (now Hanes Brands Inc.).
She holds a BA degree from Lawrence University and an MBA from Northwestern University’s Kellogg School of Management.
We believe Ms. Olson
is qualified to serve on our board of directors because of her extensive business experiences in the apparel merchandising industries,
as described above.
Jesse Cole
has served as a member of our board of directors since August 2015. Mr. Cole is an accomplished financier and is President and
Chief Executive Officer of Design & Industry, a boutique talent agency focusing on staffing, licensing and media for fashion
brands and celebrities. Mr. Cole was CEO of Haute Hippie, a popular women’s contemporary apparel brand, until its acquisition
by Hilco in September 2015. Prior to joining Haute Hippie as CEO in 2012, Mr. Cole was founder and Chief Operator of Schonfeld
IBS, a financial services company, from 2005 to 2009. Schonfeld IBS grew into a multi-million dollar business. Mr. Cole then joined
Merlin Institutional from 2009 to September, 2012 where he developed the institutional research sales and trading division as a
senior partner. Mr. Cole also serves as a member of the board of directors for Goodlife Clothing, Inc. and for the Ronald McDonald
House. Mr. Cole received a BS degree in Sociology from Cornell University and received an MS in business from Columbia University.
We believe Mr. Cole
is qualified to serve on our board of directors because of his extensive business experiences in the apparel merchandising industries,
as described above.
Edward Hanson
has served as a member of our board of directors since January 2017.
Mr. Hanson has been
involved in corporate finance and private equity for the last 20 years. He has been a principal of Global Partners Fund since
2009 and prior to this he served as a senior executive and director in the London office of Babcock & Brown Group from 1997
to 2009. He is also a director of London based investment companies Corviglia Capital Limited and Haka Capital Limited. He has
been a Director of Long Island Iced Tea Corp. since May 27, 2015. Mr. Hanson holds a B.Com (Hons) from the University of Auckland
in New Zealand.
We believe Mr. Hanson
is qualified to serve on our board of directors because of his extensive business experience in corporate finance and private equity,
as described above.
Justin Davis-Rice
has served as a member of our board of directors since January 2017
. Mr. Davis-Rice is
currently Executive Chairman of Bendon Limited, a global leader in intimate apparel and swimwear renowned for best in category
technology and design throughout its 70 year history. Bendon Limited has a portfolio of 10 brands distributed through 4,000
doors across 34 countries. Bendon Limited’s brands include owned brands Bendon, Bendon Man, Davenport, Evollove, Fayreform,
Hickory, Lovable (in Australia and New Zealand) and Pleasure State, as well as licensed brands Heidi Klum Intimates and Swimwear
and Stella McCartney Lingerie and Swimwear. Prior to becoming Executive Chairman, Mr. Davis-Rice served as Chief
Executive Officer of Bendon Limited for six years during which he transformed the company through an operational restructuring
and a re-engineering of key functional and operational aspects of the business including, supply chain, human resources, design
and development, sourcing, wholesale and retail sales. Prior to joining Bendon Limited, Mr. Davis-Rice co-founded Pleasure
State, an intimate apparel company which he merged with Bendon Limited in May 2010. Mr. Davis-Rice helped turn
Pleasure State into a business with multimillion dollar earnings.
We believe Mr. Davis-Rice
is qualified to serve on our board of directors because of his extensive business experiences in the apparel merchandising industries,
as described above.
Executive Officers
Our executive officers
are designated by, and serve at the discretion of, our board of directors. Other than Carole Hochman and her son, David Hochman,
there are no family relationships among any of our directors or executive officers.
Nomination of Directors
We do not have a standing
nominating committee nor has our board of directors adopted a formal written charter relating to the director nomination process.
However, our board of directors has adopted certain procedures related to director nominations whereby all discussions regarding
director nominations are first discussed among all of the members of our board of directors and then, following such discussion,
the members of our board of directors that are independent under NASDAQ rules vote separately as to whether any such candidates
for nomination will be nominated to our board of directors. Our board of directors has not established minimum qualifications and
standards for director nominees.
Our board of directors
will consider candidates for nomination to the board that are put forward by holders of our voting securities on a timely basis,
which nominees we will bring to the attention of our board of directors within a reasonable time after we receive notice of such
proposed nominee(s). Any such security holder nominees will be put through the same process for consideration by our board of directors
as all other nominees for the board.
Stockholders may recommend
individuals to our board of directors for consideration as potential director candidates by submitting the names of the recommended
individuals, together with appropriate biographical information and background materials, to the board of directors, c/o Secretary,
95 Madison Avenue, 10
th
Floor, New York, New York 10016.
Board Leadership Structure and Risk
Oversight
The positions of our
chairperson of the board of directors and principal executive officer are served by Carole Hochman. Our board of directors has
no formal policy on whether the role of the chairperson of the board of directors and principal executive officer should be held
by separate persons. We believe it is important to maintain flexibility to have either combined offices or a separate chairperson
and principal executive officer structure as circumstances dictate and to make that determination based on the strategic and operational
position and direction of the company and the character of the membership of our board of directors.
Our board of directors
believes that our current management structure, in which Ms. Hochman serves in a combined chairperson and principal executive officer
role, is appropriate for us at this time. Ms. Hochman possesses an understanding of the operational issues, opportunities, risks
and challenges facing the Company and its business on a day-to-day and long-term basis. Given Ms. Hochman’s particular skills
and knowledge, as well as our size and stage of development, we believe Ms. Hochman is best positioned to identify key risks and
developments facing the Company to be brought to our board’s attention and to lead discussion and execution of strategy.
We have not designated an independent lead director.
Both the full board
of directors and its committees oversee the various risks faced by the Company. Management is responsible for the day-to-day management
of the Company’s risks and provides periodic reports to the board of directors and its committees relating to those risks
and risk-mitigation efforts. Our board of directors’ oversight of risk is conducted primarily through the standing committees
of the board of directors, the members of which are all independent directors, with the Audit Committee taking a lead role on oversight
of financial risks and in interfacing with management on significant risks or exposures and assessing the steps management has
taken to minimize such risks. The Audit Committee also is charged with, among other tasks, oversight of management on the Company’s
guidelines and policies to govern the process by which the Company’s exposure to risk is handled. Members of the Company’s
management, including our principal financial officer, periodically report to the Audit Committee regarding risks overseen by the
Audit Committee, including quarterly with respect to the Company’s internal control over financial reporting. The Compensation
Committee, in consultation with management, has reviewed the design and operation of the Company’s compensation arrangements
and evaluated the relationship between the Company’s risk management policies and practices and these arrangements. As a
result of this review, the Compensation Committee has determined that the Company’s compensation policies and practices are
not reasonably likely to have a material adverse effect on the Company. Our board of directors does not believe that its role in
the oversight of our risks affects the board’s leadership structure.
Committees of the Board of Directors
Our board of directors
has established two standing committees: the Audit Committee and the Compensation Committee.
Audit
Committee
|
|
Compensation Committee
|
|
|
|
Mr. Hayes(C)(FE)*
|
|
Ms. Olson(C)*
|
Mr. Kaplan*
|
|
Mr. Kaplan*
|
Mr. Cole *
|
|
Mr. Hayes*
|
(C)
Chair of the committee.
(FE)
Qualifies as a financial expert.
*
Independent director under the applicable listing standards of NASDAQ and the SEC rules.
Audit Committee
Our board of directors
has determined that Mr. Hayes qualifies as an Audit Committee financial expert within the meaning of SEC regulations based
on his formal education and the nature and scope of his previous experience. Our board of directors has determined that all current
Audit Committee members meet the heightened independence criteria of Rule 10A-3 of the Exchange Act applicable to Audit Committee
members. Our Audit Committee oversees and reports to our board of directors on various auditing and accounting-related matters,
including, among other things, the maintenance of the integrity of our financial statements, reporting process and internal controls;
the selection, evaluation, compensation and retention of our independent registered public accounting firm; legal and regulatory
compliance, including our disclosure controls and procedures; and oversight over our risk management policies and procedures.
The Audit Committee
operates under a charter that was adopted by our board of directors. A copy of the Audit Committee charter is available at http://ir.nakedbrands.com/governance-docs.
During fiscal 2017,
the Audit Committee met in person or by telephone, or acted by unanimous written consent, four times.
Compensation Committee
All of the members
of the Compensation Committee are independent directors, including after giving consideration to the factors specified in the
NASDAQ listing rules for Compensation Committee independence. Our Compensation Committee assists our board of directors in the
discharge of its responsibilities relating to the compensation of our executive officers. Our Compensation Committee assists our
board of directors in discharging its responsibilities relating to compensation of our directors and executive officers. Its responsibilities
include, among other things, reviewing, approving and recommending compensation programs and arrangements applicable to our officers;
determining the objectives of our executive officer compensation programs; overseeing the evaluation of our senior executives;
administering our incentive compensation plans and equity-based plans, including reviewing and granting equity awards to our executive
officers; and reviewing and approving director compensation and benefits. The Compensation Committee can delegate to other members
of our board of directors, or an officer or officers of the Company, the authority to review and grant stock-based compensation
for employees who are not executive officers.
The Compensation Committee
has the responsibilities and authority designated by NASDAQ rules. Specifically, the Compensation Committee has the sole discretion
to select and receive advice from a compensation consultant, legal counsel or other adviser and is directly responsible for oversight
of their work. The Compensation Committee is also and must determine reasonable compensation to be paid to such advisors by us.
Prior to the formation
of our Compensation Committee, our board of directors performed the functions that would have been handled by the Compensation
Committee.
The Compensation Committee
operates under a charter that was adopted by our board of directors. A copy of the Compensation Committee charter is available
at http://ir.nakedbrands.com/governance-docs.
During fiscal
2017, the Compensation Committee met in person or by telephone, or acted by unanimous written consent, approximately four
times.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the
Exchange Act and the rules of the SEC require our directors, executive officers and persons who own more than 10% of our common
stock to file reports of their ownership and changes in ownership of our common stock with the SEC. Based solely on our review
of the reports filed during fiscal 2017 and questionnaires from our directors and executive officers, we determined that no director,
executive officer, or beneficial owner of more than 10% of our common stock failed to file a report on a timely basis during fiscal
2017
Code of Ethics and Business Conduct
We have adopted a Code
of Ethics and Business Conduct that applies to members of our board of directors, our executive officers, employees, contractors,
consultants and others working on our behalf. The Code of Ethics and Business Conduct is available on our website at
http://ir.nakedbrands.com/governance-docs
.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision
of our Code of Ethics and Business Conduct by posting such information on our website at the address specified above.
Item 11. Executive Compensation
Named Executive Officers
Our named executive officers for fiscal
2017 set forth in this Form 10-K (the “Named Executive Officers”) are:
|
•
|
|
Carole Hochman, Chief Executive Officer and Chief Creative Officer;
|
|
•
|
|
Joel Primus, President, Secretary and Treasurer;
|
|
•
|
|
Kai-Hsiang Lin, Vice President of Finance;
|
|
•
|
|
Michael Flanagan, Former Chief Financial Officer and Former Chief Operating Officer; and
|
|
•
|
|
Carlos Serra, Former Vice President of Sales and Merchandising.
|
Summary Compensation Table
The following table summarizes the compensation
of our Named Executive Officers during fiscal 2017 and fiscal 2016.
Name
and Principal Position
|
Fiscal
Year
|
Salary
($)
(2)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
(1)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|
|
|
|
|
Carole Hochman
CEO, CCO and Director
|
2017
2016
|
400,000
261,562
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
-
18,796
|
400,000
280,358
|
|
|
Joel Primus
(2)
President, Secretary, Treasurer
and Director and former CEO
|
2017
2016
|
129,223
164,000
|
-
-
|
-
-
|
-
1,257,700
|
-
-
|
-
-
|
-
-
|
129,223
1,421,700
|
|
|
|
Michael Flanagan
(3)
Former CFO and Former COO
|
2017
2016
|
128,846
200,000
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
128,846
200,000
|
|
|
Carlos Serra
(4)
Former VP Sales & Merchandising
|
2017
2016
|
181,731
175,000
|
-
25,000
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
181,731
200,000
|
|
|
Kai-Hsian Lin
(5)
Vice President of Finance
|
2017
2016
|
136,288
-
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
136,288
-
|
|
(1)
|
For a description of the methodology and assumptions used in valuing the option awards granted to our Named Executive Officers during the fiscal years 2017 and 2016, please review Notes 3 and 10 to the consolidated financial statements included in this Form 10-K. Option awards shown here represent the aggregate grant date fair value of all options granted.
|
(2)
|
Compensation paid in Canadian dollars during fiscal 2017 is stated in United States dollars based on an exchange rate of 0.76 US dollars for each Canadian dollar.
|
(3)
|
Mr. Flanagan retired effective March 17, 2016.
|
(4)
|
Mr. Serra resigned effective July 31, 2016.
|
(5)
|
Mr. Lin was appointed Vice President of Finance in March 2016.
|
Employment Arrangements
Carole Hochman
In connection with
the appointment of Carole Hochman as Chief Executive Officer and Chief Creative Officer, we entered into an employment agreement
for a term of three years whereby (a) we will pay Ms. Hochman a base salary of $400,000 per year, provided Ms. Hochman waived
the first twelve months of the base salary and received only minimum wage for that period; (b) Ms. Hochman received a sign-on
stock option grant to purchase 1,428,750 shares of our common stock, equal to 20% of our issued shares of common stock on a fully-diluted
basis following the final closing of the private placement in July 2014, with each option exercisable at $5.12 per share and vesting
in equal monthly installments over a period of three years from the date of grant; (c) Ms. Hochman is eligible to receive an annual
cash bonus for each whole or partial year during the employment term payable based on the achievement of one or more performance
goals established annually by our board of directors; (d) Ms. Hochman is entitled to participate in our company’s employee
benefit plans; and (e) Ms. Hochman is entitled to an annual expense allowance.
Ms. Hochman’s
employment agreement further provides that if Ms. Hochman’s employment is terminated for any reason she will be entitled
to all earned but unpaid base salary and bonus, accrued vacation, vested benefits or compensation, indemnification rights she
would otherwise be entitled to and any incurred but unreimbursed expenses. In addition, if Ms. Hochman’s employment is terminated
by our company without cause, or by Ms. Hochman for good reason (each as defined in Ms. Hochman’s employment agreement),
she will also be entitled to (a) a pro-rata portion of her target bonus for the year in which the termination of employment occurs
and (b) continued payments of base salary paid in cash in equal monthly installments for a period of 12 months following the termination
date. In the event that Ms. Hochman’s employment is terminated due to death or disability, she will be entitled to receive
benefits in accordance with our company’s then established plans, programs and practices and her outstanding equity awards
will be treated in accordance with their terms.
On June 10, 2015,
Ms. Hochman became eligible to receive her full base salary pursuant to the terms of her employment agreement, however, such base
salary remained unpaid. We were accruing such base salary compensation payable, and Ms. Hochman had agreed to allow the Company
to defer payment of such amounts provided such amounts accrued interest at a rate of 3% per annum. On March 13, 2017, Ms. Hochman
surrendered accrued base salary compensation in the amount of $654,637. On the same day, the Company granted to Ms. Hochman 1,200,000
options to purchase shares of the Company’s common stock with an exercise price of $2.14, the price of the Company’s
common stock as of March 13, 2017.
Joel Primus
Mr. Primus received
compensation of $164,000 per year from June 2014 through August 2015, acting as President of our Company.
On August 18, 2015,
we entered into an employment agreement with Mr. Primus pursuant to which he continued to serve as our President. The employment
agreement provided for an initial term of one year, which could be extended for additional one-year periods upon the expiration
of the then-current term with the mutual agreement in writing of us and Mr. Primus. As compensation for his services, the employment
agreement provides that we shall pay Mr. Primus a base salary of $164,000 per year. In addition, Mr. Primus was eligible to receive
an annual cash bonus for each whole or partial year during the term of his employment, payable based on the achievement of one
or more performance goals established annually by our board of directors in consultation with Mr. Primus or as otherwise determined
by our board of directors in its discretion. The annual bonus, if any, would be paid in a lump sum cash payment as soon as reasonably
practicable following the end of the calendar year to which the bonus relates, but no later than March 15 of the following year.
On August 18, 2015, Mr. Primus was also granted stock options to purchase 299,899 shares of our common stock, with each option
exercisable at $4.40 per share and vesting as to 25% immediately on the date of grant and the remaining 75% in equal monthly installments
over a period of three years from the date of grant.
The employment agreement
has expired and Mr. Primus currently receives a salary of CDN$116,000 per year.
Michael Flanagan
We appointed Mr. Flanagan
as our Chief Financial Officer and Chief Operating Officer in June 2014. In connection with the appointment of Mr. Flanagan, we
entered into an offer letter pursuant to which (a) we agreed to pay Mr. Flanagan a base salary of $200,000 per year; (b) Mr. Flanagan
received a sign-on stock option grant to purchase 70,000 shares of our common stock, with each option exercisable at $5.12 per
share and vesting annually over a period of four years from the date of grant; and (c) Mr. Flanagan was entitled to participate
in our company’s employee benefit plans. Effective March 17, 2016, Mr. Flanagan retired and as such, his employment agreement
was terminated. In connection with his retirement, the Company entered into a separation agreement pursuant to which Mr. Flanagan
will receive (i) a severance payment equal to one hundred thousand dollars ($100,000), which is the equivalent of six (6) months
of severance pay, payable in equal monthly installments and (ii) a payment equal to accrued and unused vacation time through the
date of his retirement. Additionally, his unvested options were immediately forfeited on the date of his retirement and any vested
options were exercisable until ninety (90) days after the date of his retirement, at which time the vested options expired.
Carlos Serra
We appointed Mr. Serra
as our Vice President Sales and Merchandising in June 2014. In connection with the appointment of Mr. Serra, we entered into an
offer letter pursuant to which pursuant to which (a) we agreed to pay Mr. Serra a base salary of $175,000; (b) Mr. Serra was entitled
to receive an annual bonus based on mutually agreeable net sales targets, with “low”, “moderate” and “high”
thresholds with the bonus amount equal to 15% of base salary with respect to the low threshold, 25% of base salary with respect
to the moderate threshold and 35% of base salary with respect to the high threshold; (c) Mr. Serra was entitled to receive a sign-on
stock option grant to purchase 92,500 shares of our common stock, exercisable at $5.12 per share, with 46,250 of such shares underlying
the option vesting annually over a period of three years from the date of grant and 46,250 of such shares underlying the option
vesting based upon the achievement of certain milestones, provided, that, notwithstanding the foregoing, Mr. Serra subsequently
agreed that all 92,500 options would vest annually over a four year period; and (c) Mr. Serra was entitled to participate in our
company’s employee benefit plans. Effective July 31, 2016, Mr. Serra resigned and as such, his employment agreement was terminated.
In connection with his resignation, the Company paid Mr. Serra six (6) months of severance pay. Additionally, his unvested options
immediately vested on the date of his resignation and were exercisable until ninety (90) days after the date of his resignation,
at which time all outstanding options held by Mr. Serra expired.
Kai-Hsiang Lin
In connection with
the retirement of Mr. Flanagan, we appointed Mr. Lin as our Vice President of Finance, effective March 22, 2016. We have agreed
to pay Mr. Lin a base salary of $140,000 per year. Mr. Lin will also be entitled to participate in our employee benefit plans.
Outstanding Equity Awards at Fiscal Year-End
The following table
sets forth for each named executive officer certain information concerning the outstanding equity awards as of January 31, 2017:
|
|
|
|
|
Option
awards
|
|
|
|
|
|
|
|
|
|
|
|
Stock
awards
|
|
|
|
Name
and
Principal
Position
|
|
Number
of
Securities
Underlying
Unexercised
Options
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
Unexercisable
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
|
|
|
Option
Exercise
Price
|
|
|
Option
Expiration
Date
|
|
|
Number
of
Shares
or
Units
of
Stock
that
Have
Not
Vested
|
|
|
Market
Value
of
Shares
or
Units
of
Stock
that
Have
Not
Vested
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
that
Have
Not
Vested
|
|
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
that
Have
Not
Vested
|
Carole Hochman
|
|
|
1,349,358
|
(1)
|
|
|
79,392
|
(1)
|
|
|
-
|
|
|
|
$
5.12
|
|
|
|
6/6/2024
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
CEO, CCO and Director
|
|
|
|
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Joel Primus
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199,935
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(2)
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99,964
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(2)
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-
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$
4.40
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8/18/2025
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-
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-
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-
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-
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President, Secretary,
Treasurer and Director
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7,500
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-
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-
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$10.00
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7/30/2022
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-
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-
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-
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Michael Flanagan
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-
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-
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-
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-
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-
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-
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-
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-
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-
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Former CFO, COO
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Carlos Serra
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-
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-
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-
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Former VP Sales &
Merchandising
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Kai-Hsiang Lin
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-
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-
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-
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VP Finance
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(1)
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Of the total, 1,275,578 options exercisable and 75,047 options unexercisable are held through Carole S. Hochman Trust, of which Carole’s son, David Hochman is a trustee. These option are vesting monthly over a term of 36 months, commencing on June 10, 2014.
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(2)
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The options vest as to 25% immediately upon grant and the remaining 75% in equal monthly instalments over a term of three years from August 18, 2015.
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Retirement or Similar Benefit Plans
We do not currently
have any plans in place that provide for the payment of retirement benefits, or benefits that will be paid primarily following
retirement, including but not limited to tax-qualified defined benefit plans, supplemental executive retirement plans, tax-qualified
defined contribution plans and nonqualified defined contribution plans.
Resignation, Retirement, Other Termination,
or Change in Control Agreements
For a description
of the material terms of each contract, agreement, plan or arrangement, whether written or unwritten, that provides for payment(s)
to a named executive officer at, following, or in connection with the resignation, retirement or other termination of a named
executive officer, or a change in control of the company or a change in the named executive officer’s responsibilities following
a change in control, see above under the heading “Employment Arrangements.”
Fiscal 2017 Director Compensation
The following table
presents the total compensation for each person who served as a member of our board of directors during fiscal 2017. Other
than as set forth in the table and described more fully below, in fiscal 2017 we did not pay any fees to, make any equity
awards to, or pay any other compensation to the members of our board of directors who served as members during fiscal 2017.
Ms. Hochman and Mr. Primus do not receive compensation for their service as directors. Total compensation for Ms. Hochman and Mr.
Primus for services as employees is presented in “Executive Compensation—Summary Compensation Table” above.
Name
|
Fees
Earned or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
(1)
|
Non-equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
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Total
($)
|
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David Hochman
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-
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-
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14,100
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-
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-
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-
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14,100
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Andrew Kaplan
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-
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-
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-
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-
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-
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-
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-
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Paul Hayes
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-
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-
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-
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-
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-
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-
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-
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Martha Olson
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-
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-
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-
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-
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-
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-
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-
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Jesse Cole
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-
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-
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-
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-
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-
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-
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-
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Edward Hanson
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-
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-
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-
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-
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-
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-
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-
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Justin Davis-Rice
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-
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-
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-
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-
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-
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-
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-
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(1)
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For a description of the
methodology and assumptions used in valuing the option awards granted to our named executive officers and directors during fiscal
2017 and fiscal 2016, please review Notes 3 and 10 to the consolidated financial statements included in the Original Filing. Option
awards shown here represent the aggregate grant date fair value of all options granted.
|
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table
sets forth, as of April 26, 2017, certain information with respect to the beneficial ownership of our common stock by each stockholder
known by us to be the beneficial owner of more than 5% of our common stock, and by each of our current directors and NEOs. Each
person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.
Except as otherwise
noted, the address of each person or entity in the following table is c/o Naked Brand Group Inc., 10th Floor - 95 Madison Avenue,
New York, New York 10016.
|
Shares of Common Stock Beneficially Owned
(1)
|
Name of Beneficial Owner
|
Amount and Nature of
Beneficial Ownership
|
Percent of Class
(2)
|
Carole Hochman
|
2,040,077
(3)
|
17.6%
|
Joel Primus
|
333,923
(4)
|
3.2%
|
Kai-Hsiang Lin
|
-
|
*
|
David Hochman
|
1,547,156
(5)
|
13.1%
|
Andrew Kaplan
|
208,288
(6)
|
2.0%
|
Paul Hayes
|
28,000
(7)
|
*
|
Martha Olson
|
25,000
(8)
|
*
|
Jesse Cole
|
12,500
(9)
|
*
|
Edward Hanson
|
-
|
*
|
Justin Davis-Rice
|
-
|
*
|
Directors and Officers as a group
(10 individuals)
|
4,194,944
|
31.4%
|
(1)
|
Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
|
(2)
|
Based on 10,342,191 shares of our common stock issued and outstanding as of April 26, 2017.
|
(3)
|
Includes 78,125 options to acquire shares of our common stock at a price of $5.12 per share, and 1,200,000 options to acquire shares of our common stock at a price of $2.14 per share which are exercisable within 60 days.
|
(4)
|
Includes 7,500 options to acquire shares of our common stock at a price of $10.00 per share, which are currently exercisable and 212,431 options to acquire shares of our common stock at a price of $4.40 which are exercisable within 60 days. Excludes options to acquire 87,468 shares of our common stock at a price of $4.40 per share which are not currently exercisable within 60 days.
|
(5)
|
Includes options to acquire 1,350,625 shares of our common stock at a price of $5.12 held by Carole S. Hochman Trust, of which Mr. Hochman is a trustee, options to acquire 72,000 shares of our common stock at a price of $5.12 per share and options to acquire 10,000 shares of our common stock at $2.50 per share which are exercisable within 60 days.
|
(6)
|
Includes options to acquire 36,000 shares of our common stock at a price of $5.12 per share which are exercisable within 60 days.
|
(7)
|
Includes options to acquire 25,000 shares of our common stock at a price of $5.12 per share, which are exercisable within 60 days. Excludes options to acquire 12,500 shares of our common stock which are not exercisable within 60 days.
|
(8)
|
Includes options to acquire 25,000 shares of our common stock at a price of $4.48 per share, which are currently exercisable. Excludes options to acquire 12,500 shares of our common stock at a price of $4.48 per share which are not currently exercisable within 60 days.
|
(9)
|
Includes options to acquire 12,500 shares of our common stock at a price of $4.40 per share, which are currently exercisable. Excludes options to acquire 25,000 shares of our common stock at a price of $4.40 per share which are not currently exercisable within 60 days.
|
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table summarizes compensation
plans under which our equity securities are authorized for issuance as of January 31, 2017.
Plan Category
|
|
(a)
Number of
Securities to be Issued
Upon Exercise of
Outstanding
Options, Warrants
and Rights
|
|
|
(b)
Weighted-average
Exercise Price Of
Outstanding Options,
Warrants and
Rights($)
|
|
|
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
|
|
Equity compensation plans approved by security holders
(1)
|
|
|
2,240,399
|
|
|
|
$4.67
|
|
|
|
509,601
|
|
Equity compensation plans not approved by security holders
(2)
|
|
|
47,000
|
|
|
|
$10.00
|
|
|
|
-
|
|
(1) Reflects our 2014 Long-Term Incentive Plan.
(2) Reflects our 2012 Stock Option Plan.
Item 13. Certain Relationship and Related Transactions,
and Director Independence
Other than as set
forth below, since February 1, 2015, there has been no transaction, or currently proposed transaction, in which our company was
or is to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets
at year end for the last two completed fiscal years and in which any of the following persons had or will have a direct or indirect
material interest:
|
•
|
any of our directors or officers;
|
|
•
|
any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our outstanding shares of common stock;
|
|
•
|
any person who acquired control of our company when it was a shell company or any person that is part of a group, consisting of two or more persons that agreed to act together for the purpose of acquiring, holding, voting or disposing of our common stock, that acquired control of Naked Brand Group Inc. when it was a shell company; and
|
|
•
|
any member of the immediate family (including spouse, parents, children, siblings and in-laws) of any of the foregoing persons.
|
In connection with
a Joint Factoring Agreement, the Carole Hochman executed a guaranty (the “Guaranty”) to personally guarantee performance
of the obligations and also agreed to provide her own brokerage account as security for the obligations under the Joint Factoring
Agreement. Accordingly, in connection with her brokerage account Ms. Hochman entered into a brokerage account pledge and security
agreement (the “Pledge and Security Agreement”) and securities account control agreement (the “Account Control
Agreement”) in favor of Wells Fargo Bank, National Association (“Wells Fargo”). Pursuant to the Pledge and Security
Agreement, Ms. Hochman has agreed to pledge, sell, assign, grant a security interest in and transfer to Wells Fargo all of her
rights, title and interest in and to her brokerage account.
On July 3, 2015, we
entered into agreements to amend certain warrants to purchase shares of our common stock held by Carole Hochman, David Hochman
and Nico Pronk, President and CEO of Noble Financial Capital Markets Inc. The warrants were initially issued in conjunction with
the closing of our private placement offering on June 10, 2014. Pursuant to these amendments, the original warrants held by Ms.
and Mr. Hochman and Mr. Pronk were amended to (i) reduce the exercise price to $4.00 per share of common stock in cash, (ii) shorten
the exercise period, (iii) restrict the ability of the holders of shares issuable upon exercise of such warrants to sell, make
any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any of such shares without our prior written
consent for a period of one hundred and twenty (120) days, and (iv) provide that a holder, acting alone or with others, will not
affect any purchases or sales of any of our securities in any “short sales” or any type of direct and indirect stock
pledges, forward sale contracts, options, puts, calls, short sales, swaps, “put equivalent positions” or similar arrangements,
or sales or other transactions through non-U.S. broker dealers or foreign regulated brokers through the expiration of the above-mentioned
one hundred and twenty day period. On July 3, 2015, in connection with the amendments to the warrants described above, Ms. Hochman
exercised 117,616 amended warrants, pursuant to which we issued an aggregate of 117,616 shares of our common stock for aggregate
gross proceeds of approximately $470,464, Mr. Hochman, on behalf of himself and an entity controlled by him, exercised 22,633 amended
warrants, pursuant to which we issued an aggregate of 22,633 shares of our common stock for aggregate gross proceeds of approximately
$90,532 and Nico Pronk exercised 64,999 amended warrants, pursuant to which we issued an aggregate of 64,999 shares of our common
stock for aggregate gross proceeds of approximately $260,004.
On December 23, 2015,
Carole Hochman, our Chief Executive Officer, Chief Creative Officer and a director of our company, purchased 287,500 shares of
our common stock at a price of $4 per share in connection with the close of an underwritten public offering.
On December 23, 2015,
David Hochman, a director of our company, purchased 17,500 shares of our common stock at a price of $4 per share in connection
with the close of an underwritten public offering.
On December 23, 2015,
Paul Hayes, a director of our company, purchased 3,000 shares of our common stock at a price of $4 per share in connection with
the close of an underwritten public offering.
On October 21, 2016
and November 3, 2016, the Company entered into subscription agreements with Carole Hochman, David Hochman and Andrew Kaplan, pursuant
to which the Company issued a convertible promissory note in the principal amount of $112,000, $12,000 and $100,000, respectively.
The convertible promissory notes bear interest at a rate of 9% per annum and were repayable upon the earliest of (i) the liquidation
and dissolution of the Company pursuant to a plan of complete liquidation or (ii) December 31, 2017, unless earlier converted,
redeemed or repurchased. On January 12, 2017, entered into a securities purchase agreement with certain investors providing for
the issuance and sale by the Company of 1,879,811 shares of the Company’s common stock. In connection therewith, the notes
held by Ms. Hochman, Mr. Hochman and Mr. Kaplan were automatically converted. Ms. Hochman converted an outstanding balance of $114,320
into 92,943 shares based on a conversion price per share of $1.23 and Mr. Hochman and Mr. Kaplan converted an outstanding balance
of $12,210 and $101,751, respectively, into 11,740 shares and 97,837 shares based on a conversion price per share of $1.04.
On December 14, 2016,
the Company entered into a promissory note agreement with Carole Hochman, pursuant to which the Company issued a promissory note
in the principal amount of $153,000. The promissory note bears interest at 10% per annum and is repayable upon the earlier to
occur of (i) May 7, 2017 or (ii) the date of the closing date of an Equity Financing (as defined in the promissory note). In the
event the Company fails to pay the principal amount plus accrued but unpaid interest on the maturity date and does not cure such
failure to pay within ten business days, then the interest rate shall automatically increase to 13%.
We incur ongoing marketing
fees with a marketing agency of which Ms. Hochman’s daughter, and Mr. Hochman’s sister, is a principal. Since February
1, 2015 through January 31, 2017, we have paid approximately $514,313 in marketing fees to the company pursuant to the consulting
agreement, which includes $231,176 during fiscal 2017 and $282,277 in fiscal 2016, of which $33,520 in fiscal 2017 and $90,777
in fiscal 2016 were in connection with third-party pass through costs.
Board Independence
Except as may otherwise
be permitted by the applicable listing standards of NASDAQ, a majority of the members of our board of directors shall be independent
directors. Our board of directors has determined that Andrew Kaplan, Paul Hayes, Martha Olson, Jesse Cole and Edward Hanson qualify
as independent directors under the applicable listing standards of NASDAQ. Our board of directors has also determined that each
director who currently serves on the Audit Committee is independent under the applicable listing standards of NASDAQ and Rule
10A-3 under the Exchange Act, and that each director who currently serves on the Compensation Committee meets NASDAQ’s heightened
standard of independence applicable to Compensation Committee members. Ms. Hochman and Mr. Primus are not independent for purposes
of the rule because each of them is an executive officer of our company. Mr. Hochman is not independent for purposes of the rule
because he is Ms. Hochman’s son. Mr. Davis-Rice is not independent because he is an officer of Bendon Limited.
Item 14. Principal Accounting Fees and Services
The following table presents aggregate
fees billed to us for services rendered by BDO USA, LLP during the fiscal years 2017 and 2016.
|
|
Fiscal year ended
January 31, 2017
|
|
|
Fiscal year ended
January 31, 2016
|
|
Audit Fees
|
|
$
|
161,669
|
|
|
$
|
258,800
|
|
Audit-Related Fees
|
|
|
—
|
|
|
|
—
|
|
Tax Fees
|
|
|
13,016
|
|
|
|
25,400
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
174,685
|
|
|
$
|
284,200
|
|
Audit Fees
Audit Fees are the aggregate fees billed by our independent
auditor for the audit of our consolidated annual financial statements and attestation services that are provided in connection
with statutory and regulatory filings or engagements.
Audit-Related Fees
Audit-Related Fees are fees charged by our independent auditor
for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements
and are not reported under "Audit Fees."
Tax Fees
Tax Fees are the aggregate fees billed by our independent auditor
for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
All Other Fees are the aggregate fees by our independent auditor
for products and services other than those described in the categories above.
Preapproval Policies and Procedures
Our Audit Committee has established a policy
governing our use of the services of our independent registered public accounting firm. Under this policy, our Audit Committee
is required to pre-approve all audit and non-audit services performed by our independent registered public accounting firm in order
to ensure that the provision of such services does not impair the public accountants’ independence. All services provided
by BDO USA, LLP for our fiscal years 2017 and 2016 were pre-approved by our Audit Committee in accordance with this policy.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
Naked Brand Group Inc. (the “Company”)
is a manufacturer and seller of direct and wholesale men’s and women’s undergarments and intimate apparel in the United
States and Canada to consumers and retailers through its wholly owned subsidiary, Naked Inc. (“Naked”). The Company
currently operates out of New York, United States of America.
Effective August 10, 2015, the Company effected
a reverse stock split of its common stock on the basis of 1:40. As such, the Company’s authorized capital was decreased from
450,000,000 shares of common stock to 11,250,000 shares of common stock and an aggregate of 53,278,818 shares of common stock issued
and outstanding were decreased to 1,331,977 shares of common stock. These financial statements give retroactive effect to such
reverse stock split and all share and per share amounts have been adjusted accordingly.
On December 19, 2016, the Company entered into
a letter of intent with Bendon Limited (the “LOI”), an intimate apparel company based in New Zealand (“Bendon”),
as amended on February 9, 2017, March 9, 2017 and April 10, 2017, for a proposed merger of the companies, whereby a newly formed
Australian holding company (“NewCo”) will be formed which will be the ultimate parent company of Bendon and the Company
(the “Merger”). The LOI became binding on the Company on January 12, 2017 upon entry into certain purchase agreements.
Upon consummation of the proposed Merger, NewCo will issue to the current holders of the outstanding capital stock of Bendon an
aggregate of 146,311,063 ordinary shares of NewCo (the “Bendon Shares”) and issue to the Company a number of ordinary
shares of NewCo equal to the number of shares of outstanding common stock of the Company (the “Naked Shares”) immediately
prior to the Merger, and as of the effective time of the Merger, no other shares of NewCo will be outstanding. In connection with
the closing of the Merger, NewCo’s shares must be approved for listing on the NASDAQ Capital Market. Completion of the proposed
Merger is further subject to the negotiation of a definitive merger agreement (the “Merger Agreement”), satisfaction
of the conditions negotiated therein and approval of the proposed Merger by the Company’s stockholders.
|
2.
|
Ability to Continue as a Going Concern
|
These consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
on a going concern basis, which assumes that the Company will continue to realize its assets and discharge its obligations and
commitments in the normal course of operations. Realization values may be substantially different from carrying values as shown
and these consolidated financial statements do not give effect to adjustments that would be necessary to the carrying values and
classification of assets and liabilities should the Company be unable to continue as a going concern.
As of January 31, 2017, the Company had not yet
achieved profitable operations, incurred a net loss of $10,798,503 during the year ended January 31, 2017, had an accumulated deficit
of $57,179,583 and expects to incur significant further losses in the development of its business, which casts substantial doubt
about the Company’s ability to continue as a going concern. To remain a going concern, the Company will be required to obtain
the necessary financing to pursue its plan of operation. Management plans to obtain the necessary financing through the issuance
of equity and/or debt. Should the Company not be able to obtain this financing, it may need to substantially scale back operations
or cease business. The consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant
Accounting Policies
|
Principles of Consolidation and Basis
of Accounting
These consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Naked. All inter-company transactions and balances have been eliminated.
Reporting Currency and Foreign Currency
The functional currency of the Company is the
US dollar. Transaction amounts denominated in foreign currencies are translated into their US dollar equivalents at exchange rates
prevailing at the transaction dates. Financial instruments denominated in foreign currencies are revalued each period at exchange
rates prevailing at each balance sheet date until settled. Foreign currency gains and losses on transactions or settlements are
recognized in the consolidated statement of operations.
These consolidated financial statements have
been presented in US dollars, which is the Company’s reporting currency.
Basis of Presentation
The accompanying consolidated financial statements
have been prepared on the accrual basis of accounting in accordance with GAAP in the United States of America.
Segment Reporting
The Company used several factors in identifying
and analyzing reportable segments, including the basis of organization, such as differences in products and services, and geographical
areas. The Company’s chief operating decision makers review financial information presented on a consolidated basis for the
purposes of making operating decisions and assessing financing performance. Accordingly, the Company has determined that as of
January 31, 2017 and 2016, there is only a single reportable operating segment.
The Company operates in one industry, the manufacture
and sale of direct and wholesale undergarments. Revenues from external customers are all derived from customers located within
North America as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,812,120
|
|
|
$
|
1,090,024
|
|
Canada and other
|
|
|
29,945
|
|
|
|
299,390
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,842,065
|
|
|
$
|
1,389,414
|
|
At January 31, 2016, the net book value of long-lived
assets all located within North America were as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
Equipment
|
|
|
|
Intangible assets
|
|
|
|
Equipment
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
-
|
|
|
$
|
61,518
|
|
|
$
|
7,091
|
|
|
$
|
53,738
|
|
Canada
|
|
|
-
|
|
|
|
19,357
|
|
|
|
6,124
|
|
|
|
19,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
80,875
|
|
|
$
|
13,215
|
|
|
$
|
73,095
|
|
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant Accounting
Policies
(Continued)
|
Revenue Recognition, Accounts Receivable
and Allowance for Doubtful Accounts
Sales are recorded when title and risk of loss
has passed to the customer, when persuasive evidence of a sales arrangement exists, the selling price is fixed and determinable
and collectability is reasonable assured.
Accounts receivable consist of amounts due
from customers and are recorded upon the sale of product to customers. Credit terms are extended to customers in the normal course
of business and no collateral is required. The Company estimates an allowance for doubtful accounts based on historical losses,
the existing economic conditions and the financial stability of its customers. Accounts receivable are written off when deemed
uncollectible. Recoveries of accounts receivable previously written off are recorded when received.
Inventory
Inventory is stated at the lower of cost or
market value. Cost is determined using the weighted average method, which under the circumstances, management believes will provide
for the most practical basis for the measurement of periodic income. Management periodically reviews inventory for slow moving
or obsolete items and considers realizability based on the Company’s marketing strategies and sales forecasts to determine
if an allowance is necessary. If market value is below cost then an allowance is created to adjust the carrying amount of inventory.
Equipment
Equipment is recorded at cost. Equipment is depreciated
using the straight-line method over the estimated useful lives.
The estimated useful lives for each asset group
are as follows:
|
|
Years
|
|
|
|
|
|
|
Furniture and equipment
|
|
|
5
|
|
Computer equipment
|
|
|
2
|
|
At the time depreciable property is retired
or otherwise disposed of the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss
is reflected in the consolidated statement of operations.
Intangible Assets
Indefinite-life intangible assets, consisting
of costs to acquire trademarks with an indefinite life, are recorded at cost, net of impairment charges, if applicable. No amortization
has been taken on indefinite life intangible assets. Indefinite-life intangible assets are reviewed for impairment annually and
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant Accounting
Policies
(Continued)
|
Website Costs
The Company recognizes the costs associated
with developing a website in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 350–40,
Website development costs
(“ASC 350-40”).
Internal and external costs incurred during
the preliminary project stage are expensed as they are incurred. Internal and external costs incurred to develop internal–use
computer software during the application development stage are capitalized. Training costs are not internal–use software
development costs and, if incurred during this stage, are expensed as incurred.
These capitalized costs are amortized based
on their estimated useful life over two years.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the related carry amounts may not be recoverable. Such a review
involves assessing qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent)
that a long-lived asset is impaired.
If the Company assesses that there is a likelihood
of impairment, then the Company will perform a quantitative analysis comparing the carrying value of the assets with the estimated
future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should
the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at
that date for the amount by which the carrying amount of the asset exceeds its fair value. Management has determined that no impairment
has been identified in the years ended January 31, 2017 or 2016.
Shipping and Handling Costs
Costs associated with the Company’s third-party
shipping, warehousing and handling activities are included within operating expenses on the consolidated statements of operations.
|
(i)
|
Shipping costs associated with marketing related promotions
are included as a component of general and administrative expenses. These shipping costs were $14,430 for the year ended January
31, 2017 ($10,440 for the year ended January 31, 2016).
|
|
(ii)
|
Shipping costs billed to customers are recorded as revenues and related out-bound shipping costs
incurred by the Company are recorded as cost of sales.
|
|
(iii)
|
Warehousing and handling costs, and shipping costs associated with transfers of inventory to and
from third party warehouses to the Company’s warehouse are included in general and administrative expense as warehouse management.
These warehousing, shipping and handling costs were $319,830 for the year ended January 31, 2017 ($404,092 for the year ended January
31, 2016).
|
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant Accounting
Policies
(Continued)
|
Advertising Expense
The Company expenses advertising costs to operations
during the period in which they are incurred. The Company expensed $252,895 and $201,198 related to advertising for the years ended
January 31, 2017 and 2016, respectively.
Income Taxes
The current income tax represents the amount
of income taxes expected to be paid or the benefit expected to be received for the current year taxable income or loss. Deferred
income taxes are recognized for the future tax consequences of temporary differences arising between the carrying value of assets
and liabilities for financial statement and tax reporting purposes. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
In assessing the recoverability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
period in which those temporary differences become deductible. Management considers projected future taxable income and tax planning
strategies in making this assessment.
The Company recognizes the impact of a tax
position in the consolidated financial statements if the position is more likely than not to be sustained upon examination on the
technical merits of the position. The Company’s policy is to recognize interest accrued related to unrecognized tax benefits
and penalties as income tax expense. The Company has no uncertain tax positions as of January 31, 2017 and 2016, respectively;
consequently, no interest or penalties have been accrued by the Company.
Fair Value of Financial Instruments
The Company accounts for its financial assets
and liabilities in accordance with ASC Topic 820,
Fair Value Measurements and Disclosures
(“ASC 820”). ASC 820
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value
hierarchy contains three levels of inputs that may be used to measure fair value as follows:
Level 1 inputs utilize quoted prices (unadjusted)
in active markets for identical assets or liabilities;
Level 2 inputs are inputs other than quoted
prices included in Level 1 that are observable for the asset or liability, either directly or indirectly such as interest rates,
foreign exchange rates, and yield curves that are observable at commonly quoted intervals; and
Level 3 inputs are unobservable inputs for
the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market
activity.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant Accounting
Policies
(Continued)
|
In instances where the determination of the
fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement
in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its
entirety requires judgment and considers factors specific to the asset or liability.
The Company’s financial instruments consist
of cash, accounts receivable, accounts payable, notes payable, and convertible promissory notes. Other than convertible promissory
notes, the fair values of these financial instruments approximate their respective carrying values because of the short maturity
of these instruments. The Company determined that the aggregate fair value of promissory notes payable outstanding at January 31,
2017 and 2016, based on Level 2 inputs in the fair value hierarchy, was equal to their aggregate book value based on the short
maturities and current borrowing rates available to the Company.
The fair value of the Company’s convertible
promissory notes is based on Level 3 inputs in the fair value hierarchy. The Company calculated the fair value of these notes by
discounting future cash flows using rates representative of current borrowing rates for debt instruments without a conversion feature
and by using the Black Scholes option pricing model to determine the fair value of the conversion feature using the following assumptions:
|
|
|
2017
|
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
-
|
|
|
|
0.33
|
%
|
Expected life (years)
|
|
|
-
|
|
|
|
0.67
|
|
Expected volatility
(1)
|
|
|
-
|
|
|
|
91.47
|
%
|
Stock price
|
|
|
-
|
|
|
$
|
2.79
|
|
Dividend yields
|
|
|
-
|
|
|
|
0.00
|
%
|
(1)
Where the Company has insufficient
historical data on which to estimate expected future share price volatility, the Company has estimated expected share price volatility
based on the historical share price volatility of comparable entities.
There were no convertible promissory notes
outstanding at January 31, 2017. The Company determined that the fair value of the convertible promissory notes at January 31,
2016 was $567,776, based on a market interest rate of 18%.
Debt issuance costs
The Company incurs costs in connection with
debt issuances, such as commissions and professional fees. Debt issuance costs are initially recorded as a reduction of the related
debt on the consolidated balance sheets, and are amortized to financing expense over the term of the respective borrowings using
the effective interest method.
Any costs incurred or paid to the lender in connection
with the issuance of debt represent a reduction in the proceeds received by the Company. The resulting discount is amortized as
accretion expense over the term of the debt using the effective interest method.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant Accounting
Policies
(Continued)
|
Derivative Financial Instruments
The Company evaluates stock options, stock
warrants and other contracts to determine if those contracts or embedded components of those contracts qualify as derivative financial
instruments to be separately accounted for under the relevant sections of
ASC 815-40, Derivative Instruments and Hedging: Contracts
in Entity’s Own Equity (“ASC 815”).
The result of this accounting treatment could be that the fair value
of a financial instrument is classified as a derivative financial instrument and is marked-to-market at each balance sheet date
and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded
in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative financial instrument,
the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments
that are initially classified as equity that become subject to reclassification under ASC 815 are reclassified to a liability account
at the fair value of the instrument on the reclassification date.
The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting
period. Derivative instruments that become subject to reclassification are reclassified at the fair value of the instrument on
the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current
based on whether or not settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company estimates the fair value of these
instruments using the binomial option pricing model. This model uses Level 3 inputs in the fair value hierarchy established by
ASC 820
.
Use of Estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period.
Actual results could materially differ from
those estimates. The most significant estimates made by the Company are those relating to uncollectible receivables, inventory
valuation and obsolescence, product returns, and derivative valuations.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant Accounting
Policies
(Continued)
|
Loss per share
Earnings or loss per share (“EPS”)
is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted EPS is computed by dividing net income (loss) by the weighted-average of all potentially dilutive
shares of common stock that were outstanding during the periods presented.
The treasury stock method is used in calculating
diluted EPS for potentially dilutive stock options and share purchase warrants, which assumes that any proceeds received from the
exercise of in-the-money stock options and share purchase warrants, would be used to purchase common stock at the average market
price for the period.
EPS for convertible debt is calculated under
the “if-converted” method. Under the if converted method, EPS is calculated as the more dilutive of EPS (i) including
all interest (both cash interest and non-cash discount amortization) and excluding all shares underlying the convertible debt or;
(ii) excluding all interest and costs directly related to the convertible debt (both cash interest and non-cash discount amortization)
and including all shares underlying the convertible debt. For the years ended January 31, 2017 and 2016, diluted EPS was calculated
by including interest expense related to the convertible debt and excluding the shares underlying the convertible debt.
Net loss per share was determined as follows:
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,798,503
|
)
|
|
$
|
(19,063,399
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
Weighted average shares outstanding
|
|
|
6,092,688
|
|
|
|
1,881,901
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Warrants and options
|
|
|
-
|
|
|
|
-
|
|
Convertible debt
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average shares outstanding
|
|
|
6,092,688
|
|
|
|
1,881,901
|
|
Basic net loss per share
|
|
$
|
(1.77
|
)
|
|
$
|
(10.13
|
)
|
Diluted net loss per share
|
|
$
|
(1.77
|
)
|
|
$
|
(10.13
|
)
|
Anti-dilutive securities not included in diluted loss per share relating to:
|
|
|
|
|
|
|
|
|
Warrants and options outstanding
|
|
|
3,914,409
|
|
|
|
3,836,472
|
|
Convertible debt
|
|
|
-
|
|
|
|
60,000
|
|
|
|
|
3,914,409
|
|
|
|
3,896,472
|
|
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant Accounting
Policies
(Continued)
|
Accounting for Stock-Based Compensation
ASC Topic 718,
Compensation – Stock
Compensation
(“ASC 718”), requires that compensation expense for employee stock-based compensation be recognized
over the requisite service period based on the fair value of the award, at the date of grant.
The Company accounts for the granting of equity
based awards to employees using the fair value method whereby all awards to employees will be recorded at fair value on the date
of the grant. The fair value of all equity based awards is expensed over their vesting period with a corresponding increase to
additional paid in capital. Compensation costs for stock-based payments to employees with graded vesting are recognized on a straight-line
basis.
The amount of cumulated compensation expense recognized at
any date must at least equal the portion of the grant date value of the award that is vested at that date.
Based on guidance in ASC 505-50, stock-based
payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments
issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees
is periodically re-measured until the counterparty performance is complete, and any change therein is recognized over the vesting
period of the award. Compensation costs for stock-based payments with graded vesting are recognized on a straight-line basis. The
cost of the stock-based payments to non-employees that are fully vested and non-forfeitable as at the grant date are measured and
recognized at that date, unless there is a contractual term for services in which case such compensation would be amortized over
the contractual term.
New Accounting Pronouncements
From time to time, new accounting pronouncements
are issued by the FASB, which are adopted by the Company as of the specified date. Unless otherwise discussed, management believes
the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial
statements upon adoption.
Recently Adopted Accounting Pronouncements
In June 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”).
ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service
period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant
date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which
it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the
period(s) for which the requisite service has already been rendered. The Company adopted this standard on February 1, 2016. The
adoption of this standard did not have any effect on its financial condition, results of operations and cash flows.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant Accounting
Policies
(Continued)
|
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15
will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote
disclosure in certain circumstances. This standard
was effective for and adopted by the Company
in fiscal 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial position,
results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, Interest
- Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which
requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction
from the debt liability rather than as an asset. In addition, the FASB issued ASU No. 2015-15, Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements: Amendments to SEC Paragraph Pursuant to Staff Announcement
at June 18, 2015 EITF Meeting (“ASU 2015-15”), which permits entities to defer and present debt issuance costs
related to line-of-credit arrangements as assets, and was adopted concurrently with ASU No. 2015-03. The Company adopted these
standards on a retroactive basis on February 1, 2016. Adoption of this standard resulted in the reclassification of $15,058 in
deferred financing costs at January 31, 2016 from assets to a deduction from the related debt liability.
Accounting Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards
Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers".
The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized.
The premise of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. ASU 2014-09 can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date
of adoption. On April 1, 2015, the FASB decided to defer the effective date of the new revenue standard by one year. As a result,
public entities would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. The Company
is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.
In November 2015,
the FASB issued Accounting Standards Update No. 2015-17 “Income Taxes: Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”). ASU 2015-17 eliminates the requirement to bifurcate deferred taxes between current and non-current
on the balance sheet and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. ASU
2015-17 is effective for public entities in fiscal years beginning after December 15, 2016, and for interim periods within
those fiscal years. The amendments for ASU-2015-17 can be applied retrospectively or prospectively and early adoption is permitted.
The adoption of this standard is not expected to have a material impact for any period presented.
In February 2016,
FASB issued ASU 2016-02,
Leases
. The guidance would require lessees to recognize most leases on their balance sheets
as lease liabilities with corresponding right –of-use assets. The guidance is effective for annual and interim reporting
periods beginning on or after December 15, 2018. The Company is currently evaluating the impact of its pending adoption of
ASU 2016-02 on its consolidated financial statements.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
3.
|
Summary of Significant Accounting
Policies
(Continued)
|
In
March 2016, the FASB issued ASC 2016-09, “
Compensation – Stock Compensation (Topic 718) – Improvements to
Employee Share-Based Payment Accounting
” (“ASU 2016-09”). These amendments are intended to simplify several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. These amendments are effective for annual
and interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted. Entities have the option
to apply the amendments on either a prospective basis or a modified retrospective basis. The Company is currently evaluating
the impact this guidance will have on its financial condition, results of operations and cash flows.
Inventory of the Company consisted of the following
at January 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
2,604,597
|
|
|
$
|
1,308,442
|
|
Raw material
|
|
|
-
|
|
|
|
3,007
|
|
|
|
|
2,604,597
|
|
|
|
1,311,449
|
|
Less: allowance for obsolete inventory
|
|
|
(375,784
|
)
|
|
|
(390,000
|
)
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
2,228,813
|
|
|
$
|
921,449
|
|
Balances at January 31, 2017 and 2016 are recorded
at historical cost, less amounts for potential declines in value.
Equipment of the Company consisted of the following
at January 31, 2017 and January 31, 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Furniture & equipment
|
|
$
|
10,250
|
|
|
$
|
10,250
|
|
Computer equipment
|
|
|
26,082
|
|
|
|
26,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,332
|
|
|
|
36,332
|
|
Less: Accumulated depreciation
|
|
|
(36,332
|
)
|
|
|
(23,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
13,215
|
|
Depreciation expense for the year ended January
31, 2017 was $13,215 (2016: $13,047).
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
Intangible Assets
Intangible assets of the Company consisted
of the following at January 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
Useful life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names/Trademarks
|
|
$
|
80,875
|
|
|
$
|
73,095
|
|
|
Indefinite
|
Website
|
|
|
49,512
|
|
|
|
49,512
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,387
|
|
|
|
122,607
|
|
|
|
Less: accumulated amortization
|
|
|
(49,512
|
)
|
|
|
(49,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,875
|
|
|
$
|
73,095
|
|
|
|
Amortization expense for the year ended January
31, 2017 was $Nil (2016: $4,375).
|
6.
|
Accounts Payable and Accrued Liabilities
|
Accounts payable and accrued liabilities consisted
of the following at January 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
897,474
|
|
|
$
|
486,967
|
|
Accrued payroll
|
|
|
641,044
|
|
|
|
283,864
|
|
Accrued expenses
|
|
|
176,436
|
|
|
|
211,234
|
|
Sales taxes payable
|
|
|
5,468
|
|
|
|
5,215
|
|
Customer deposits and unearned revenue
|
|
|
9,922
|
|
|
|
6,119
|
|
Other payables
|
|
|
31,023
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,761,367
|
|
|
$
|
993,399
|
|
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
7.
|
Related Party Transactions and Balances
|
Related Party Balances
At January 31, 2017, included in accounts payable
and accrued liabilities is $129,186 (2016: $43,089) owing to directors and officers of the Company for reimbursable expenses and
unpaid fees, and $53,500 (2016: $Nil) owing to Bendon for expenses incurred on behalf of the Company. These amounts are unsecured, non-interest bearing with no specific terms of repayment.
At January 31, 2017, included in promissory
notes payable is an amount of $153,000 (2016: $Nil) owing to a director and officer of the Company. (Note 9(i)).
Related Party Transactions
During the year ended January 31, 2017, included
in general and administrative expenses is $481,511 (2016: $433,850) in respect of directors fees and investor relations fees, $4,907,285
(2016: $5,334,266) in respect of share based compensation expense for the vesting of stock options granted to directors and officers
of the Company, and $231,176 (2016: $282,277) in respect of marketing fees, of which $33,520 (2016: $90,777) was related to third
party pass through costs, paid to a firm of which a direct family member of a director and officer of the Company is a principal.
Effective June 10, 2014, the Company entered
into an employment agreement with the Chief Executive Officer and director (the “CEO”) of the Company for a term of
three years whereby the CEO was entitled to a base salary of $400,000 per year, provided the CEO would forgo the first twelve months
of the base salary and only receive minimum wage during that period. At January 31, 2017 an amount of $37,037 (2016: $170,369)
is included in deferred compensation relating to the amortization of the total base salary compensation due under this employment
agreement, which is being amortized on a straight-line basis over the term of the employment agreement.
On June 10, 2015, the CEO became eligible
to receive her full base salary pursuant to the terms of her employment agreement, however, such base salary has not yet been
paid in full as of January 31, 2017. The Company has accrued her base salary compensation payable and at January 31, 2017, an
amount of $622,708 (2016: $266,664) is included in accounts payable and accrued liabilities in respect of such base salary payable,
including interest owed on such amounts. The CEO agreed to allow the Company to defer payment of her salary provided such amounts
accrue interest at a rate of 3% per annum. Subsequent to January 31, 2017, the CEO surrendered accrued base salary compensation
plus interest in the amount of $654,637, including base salary compensation payable of $638,724 plus accrued interest on such
amounts of $15,913. On the same day, the Company granted to the CEO 1,200,000 options to purchase shares of the Company’s
common stock at an exercise price of $2.14 per a period of four years from the date of issuance. The surrendered accrued base
salary compensation will be recorded as a contribution to equity in the period in which it is surrendered.
In connection with a Joint Factoring Agreement
(Note 7 ii), the CEO executed a guaranty (the “Guaranty”) to personally guarantee performance of the Obligations and
also agreed to provide her own brokerage account as security for the Obligations (as defined in Note 9ii)). Accordingly, in connection
with her brokerage account the CEO entered into a brokerage account pledge and security agreement (the “Pledge and Security
Agreement”) and securities account control agreement (the “Account Control Agreement”) in favor of Wells Fargo
Bank, National Association (“Wells Fargo”). Pursuant to the Pledge and Security Agreement, the CEO agreed to pledge,
sell, assign, grant a security interest in and transfer to Wells Fargo all of her rights, title and interest in and to her brokerage
account.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
8.
|
Factoring Line of Credit
|
|
i)
|
Capital Business Credit
|
On June 11, 2015, the Company entered into
a factoring agreement (the “CBC Factoring Agreement”) with Capital Business Credit LLC (“CBC”) whereby
the Company could borrow the lesser of (i) $750,000 or (ii) the sum of up to 80% of trade receivables, 60% of finished goods inventory
and 100% of any accepted side collateral, under the terms and conditions as outlined in the CBC Factoring Agreement. A director
and officer of the Company provided side collateral of $500,000 to support a portion of the borrowings and guaranteed repayment
of the Company’s indebtedness and performance of its obligations under the CBC Factoring Agreement. The facility was secured
by a general security interest over all of the Company assets and interests. The term of the agreement was for a period of one
year and would automatically renew for additional one year terms, unless terminated at any time by CBC or by the Company prior
to such renewal, with thirty days’ prior written notice. During the year ended January 31, 2017 the Company did not renew
the CBC Factoring Agreement with CBC.
On June 14, 2016, the Company entered into
a Joint Factoring Agreement (the “Joint Factoring Agreement”) with Wells Fargo. The Joint Factoring Agreement with
Wells Fargo replaced the CBC Factoring Agreement, which was terminated effective on the same date.
Under the terms of the Joint Factoring Agreement,
the Company may assign eligible accounts receivable (the “Accounts”) to Wells Fargo in exchange for loans and advances
(each such loan or advance, an “Advance”) up to an aggregate amount (the “Borrowing Base”) not to exceed
the lesser of (i) $6,000,000 or (ii) the sum of up to 80% of trade receivables deemed eligible by Wells Fargo plus (A) the lesser
of up to (x) 50% of the value, calculated at the lower of cost or market, of finished goods, warehoused inventory deemed eligible
by Wells Fargo or (y) $500,000, plus (B) the lesser of (x) up to 75% of marketable securities held in a blocked security account,
subject to an account control agreement in favor of Wells Fargo (the “Securities Account”); provided, however, that
at any time when the market value of the securities held in such Securities Account is below $1,067,000, then the value of such
securities for purposes of calculating the Borrowing Base will be $0 or (y) $200,000, less any reserves that Wells Fargo may establish
from time to time.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
8.
|
Factoring Line of Credit
(Continued)
|
In connection with Wells Fargo’s services
under the Joint Factoring Agreement, Wells Fargo receives a commission equal to the Factoring Commission Percentage (as defined
in the Joint Factoring Agreement) multiplied by the gross invoice amount of each Account purchased, which is charged to the Company’s
account on the date a related Advance is made. During the initial term of the Joint Factoring Agreement, Wells Fargo will receive
minimum commissions equal to $24,000, $36,000 and $50,000 during the first, second and third year, respectively.
The Company bears the risk of credit loss on
the Accounts, except where Wells Fargo provides credit approval in writing on such Account. The Advances will bear interest on
the daily net balance of any moneys owed at a rate of LIBOR plus 3%. All obligations under the Joint Factoring Agreement, including
the Advances (collectively, the “Obligations”), are payable on demand and may be charged by Wells Fargo to the Company’s
account at any time.
The Obligations are secured by a continuing
security interest in all assets, properties, and rights of the Company, wherever located, whether owned as of the date of the Joint
Factoring Agreement or subsequent thereto. The term of the Joint Factoring Agreement is for three years and will automatically
renew, unless terminated at any time by Wells Fargo with thirty days’ written notice, or by the Company prior to such renewal,
with sixty days’ prior written notice.
The Joint Factoring Agreement contains covenants
that are customary for agreements of this type. The failure to satisfy covenants under the Joint Factoring Agreement or the occurrence
of other specified events that constitute an event of default could result in the termination of the Joint Factoring Agreement
and/or the acceleration of the repayment obligations of the Company. The Joint Factoring Agreement contains provisions relating
to events of default that are customary for agreements of this type.
Where the Joint Factoring Agreement results
in the transfer of the Company’s receivables, without recourse, to Wells Fargo, and the transaction meets the applicable
criteria under Accounting Standards Codification 860, the Company has accounted for such invoices sold as a sale of financial assets.
As such, the accounts receivable are excluded from the balance sheet upon receipt of consideration for such transfer to Wells Fargo.
Factor expenses and interest charged to operations
during the year ended January 31, 2017 were $41,304 (2016: $35,582). At January 31, 2017, an amount of $302,776 (2016: $527,711)
was owing under the terms of the Factoring Agreement, for advances made to the Company, net of repayments of such advances through
the collection of factored receivables.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
9.
|
Promissory Notes Payable
|
|
|
2017
|
|
|
2016
|
|
Unsecured promissory notes, accruing interest at a rate of 10% per annum maturing on the earlier of (i) May 7, 2017 or (ii) the date of closing of an equity financing (see (i))
|
|
$
|
253,000
|
|
|
$
|
-
|
|
Promissory notes, non-interest bearing, repayable upon the Company reporting net income from operations in a single month (see (ii))
|
|
|
3,450
|
|
|
|
3,450
|
|
|
|
|
256,450
|
|
|
|
3,450
|
|
Less: current portion
|
|
|
(256,450
|
)
|
|
|
(3,450
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(i)
|
During the year ended January 31, 2017, the Company issued promissory notes in the aggregate principal
amount of $253,000 in exchange for cash, including an amount of $153,000 to a director and officer of the Company. The promissory
notes accrue interest at the rate of ten percent per annum and mature on the earlier to occur of (i) May 7, 2017 or (ii) the date
of the closing date of an Equity Financing (as defined in the promissory note). In the event the Company fails to pay the principal
amount plus accrued but unpaid interest on the maturity date and does not cure such failure to pay within ten business days, then
the interest rate shall automatically increase to 13%.
|
|
(ii)
|
On November 7, 2013, the Company issued a promissory note in the principal amount of CDN$28,750.
The Company received $24,467 (CDN$25,000) in respect of this note, after an original issue discount (“OID”) of 15%,
or $3,670 (CDN$3,750). The principal amount, net of the OID, matured and was repaid during the year ended January 31, 2015. At
January 31, 2017, an amount of $3,450 (CDN$3,750) (2016: $3,450 (CDN$3,750)) is outstanding relating to the OID, which is repayable
upon the Company reporting net income from operations in any single month.
|
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
10.
|
Convertible Promissory Notes Payable
|
|
|
2017
|
|
|
2016
|
|
First and Second Kalamalka Amendment Agreement, bearing interest at 6% per annum, collateralized by a priority general security agreement over all of the present and future assets of the company ranked pari-passu to Senior Secured Convertible Debentures due October 1, 2016 (see (i))
|
|
$
|
-
|
|
|
$
|
600,000
|
|
Less: deferred finance fees
|
|
|
-
|
|
|
|
(15,058
|
)
|
|
|
|
-
|
|
|
|
584,942
|
|
Less: current portion
|
|
|
-
|
|
|
|
(584,942
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(i)
|
Senior Secured Convertible Note Agreements with Kalamalka Partners
|
The Company borrowed $600,000 by the issuance
of convertible promissory notes (the “Notes”), pursuant to certain Agency Agreements with Kalamalka Partners (“Kalamalka”)
and certain lenders (the “Lenders”) as set out in the Agency Agreements dated August 10, 2012 and November 14, 2013,
as amended. The Notes were secured by a general security interest in the present and future assets of the Company. The principal
amounts outstanding were accruing interest at a rate of 6% per annum, calculated and payable quarterly and were due on October
1, 2016. The principal amounts, and any accrued and unpaid interest thereon, were convertible into common stock at any time at
the option of the Lenders at a conversion price of $10.00 per share.
During the year ended January 31, 2017, the
Company repaid all principal and accrued and unpaid interest amounts due under the Notes in their entirety and as such, these Notes
are no longer outstanding.
During the year ended January 31, 2017, the
Company recorded $15,058 (2016: $28,364) in financing charges in respect of the amortization of fees incurred in connection with
the issuance and modification of these Notes.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
10.
|
Convertible Promissory Notes Payable
(Continued)
|
|
(ii)
|
9% Convertible Debentures
|
During the year ended January 31, 2017, the
Company entered into subscription agreements with directors and an officer of the Company, pursuant to which the Company issued
convertible promissory notes in the aggregate principal amount of $224,000 (the “Convertible Notes”). The Convertible
Notes were bearing interest at a rate of 9% per annum and were repayable upon the earliest of (i) the liquidation and dissolution
of the Company pursuant to a plan of complete liquidation or (ii) December 31, 2017, unless earlier converted, redeemed or repurchased.
Under the terms of the Convertible Notes, in
the event the Company consummated an equity financing resulting in gross proceeds to the Company of at least $1,000,000, excluding
the proceeds from the purchase of the Convertible Notes (a “Qualified Financing”), the entire unpaid principal amount
of the Convertible Notes and all accrued unpaid interest thereon (the “Outstanding Balance”) would automatically convert,
at the initial closing of such financing, into equity securities issued at the price per security (the “Conversion Price”)
issued in such Qualified Financing (the “Qualified Financing Securities”) and on the same terms and conditions that
apply to the Qualified Financing Securities, provided; however, that the Conversion Price could not be less than the greater of
book or market value of the common stock as of the date of issuance of the Convertible Notes, as calculated in accordance with
the Nasdaq Listing Rules.
The Convertible Notes were recorded as stock
settled debt in accordance with Accounting Standards Codification (“ASC”) 480, which requires such liabilities be carried
at fair value. The Company recorded the Convertible Notes at their fair value of $224,000, which was equal to the face values at
the date of issuance. During the year ended January 31, 2017, the Company accrued interest of $4,281 (2016: $Nil) under the terms
of the Convertible Notes.
On January 12, 2017, in connection with a Securities
Purchase Agreement with certain investors (Note 10) these Convertible Notes were automatically converted, along with accrued and
unpaid interest of $4,281, into 202,520 shares of common stock, pursuant to the automatic conversion terms. The principal amount
of $224,000, together with accrued interest of $4,281, was recorded as a credit to equity upon conversion, with no gain or loss
recorded upon settlement of the debt.
Effective August 10, 2015, the Company effected
a reverse stock split of the basis of 1:40. As such, the Company’s authorized capital was decreased from 450,000,000 shares
of common stock to 11,250,000 shares of common stock and an aggregate of 53,278,818 shares of common stock issued and outstanding
were decreased to 1,331,977 shares of common stock. These financial statements give retroactive effect to such reverse stock split
and all share and per share amounts have been adjusted accordingly.
Effective August 11, 2016, the Company amended
its articles of incorporation to increase the number of authorized shares of common stock from 11,250,000 to 18,000,000 and to
provide authority to issue up to 2,000,000 shares of blank check preferred stock.
Authorized
2,000,000 shares of blank check preferred stock,
no par value.
18,000,000 shares of common stock, par value $0.001.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
11.
|
Stockholders’ Equity
(Continued)
|
Year
ended January 31, 2017
|
i)
|
On January 12, 2017, the Company entered into a Securities Purchase Agreement with certain investors
providing for the issuance and sale by the Company of 1,879,811 shares of common stock in a registered direct offering (the “Offering”).
The shares were sold at a price of $1.04 per share for gross proceeds of $1,955,003. Of the total, 288,462 shares were issued during
the year ended January 31, 2017 and the remaining 1,591,349 shares were issued subsequently and are included in common stock to
be issued at January 31, 2017.
|
|
ii)
|
On January 12, 2017, in connection with the Offering, the
Company issued 202,520 shares pursuant to the conversion of convertible promissory notes owed to directors and an officer of the
Company in the aggregate principal amount of $224,000, along with accrued and unpaid interest of $4,281.
|
Year
ended January 31, 2016
|
i)
|
In connection with a debt settlement agreement, the Company issued 2,500 shares of common stock
to a consultant of the Company in exchange for services rendered. The fair value of $4.80 per share was determined with reference
to the quoted market price of the Company’s shares on the date these shares were committed to be issued. There was no gain
or loss recorded in connection with issuance of these shares.
|
|
ii)
|
On July 3, 2015, the Company issued an aggregate 205,248 shares of common stock at $4 per share,
in connection with warrant amendment agreements (the “Warrant Amendments”) for gross proceeds of $821,000. Under the
terms of the Warrant Amendments, the holders of such warrants elected to reduce the exercise price of the warrants from $6 to $4,
subject to a shortened exercise period and subject to certain resale restrictions on the shares issuable upon exercise of such
warrants. Of the total, an aggregate of 140,249 of the shares issued were issued to the CEO and a director of the Company, for
an aggregate exercise price of $560,996.
|
The Company determined that the Warrant Amendments
must be accounted for using modification accounting pursuant to the guidance under Accounting Standards Codification 718 (“ASC
718”). Under this guidance, a short-term inducement offer shall be accounted for as a modification of the terms of equity
based awards, to the extent that the inducement is accepted by the equity holders. Modification accounting requires the incremental
fair value of the instrument arising from the modification to be recognized as an expense on the income statement, or a charge
directly to equity, depending on the nature of the offer. The Company determined that it was appropriate to record the incremental
fair value of the Warrant Amendments as an expense on the income statement and consequently the Company recorded the incremental
fair value as a component of general and administrative expenses on the consolidated statement of operations for the year ended
January 31, 2016. The Company determined that the incremental fair value of the instruments arising from the modification was $32,800,
based on the difference between the fair value of the warrants immediately prior to the amendment and the fair value of these instruments
immediately after the amendment. The fair values were determined using the Black Scholes option pricing model based on the following
assumptions: risk free interest rate 1.33%, expected life: 3.94 years, expected volatility: 139.54%, dividend yields: 0.00%.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
11.
|
Stockholders’ Equity
(Continued)
|
|
iii)
|
On August 3, 2015, the Company consummated a tender offer to amend and exercise certain warrants
to purchase common stock of the Company. Under the terms of the tender offer, the holders of such warrants elected to reduce the
exercise price of the warrants from $6 to $4, subject to a shortened exercise period and subject to certain resale restrictions
on the shares issuable upon exercise of such warrants. Pursuant to the tender offer, the holders of an aggregate of 380,461 warrants
agreed to amend their warrants and tendered and exercised such warrants for gross proceeds to the Company of $1,521,829.
|
In connection with the tender offer,
the Company incurred issuance costs of $91,422.
The Company determined that the
Warrant Amendments must be accounted for using modification accounting pursuant to the guidance under Accounting Standards Codification
718 (“ASC 718”). Under this guidance, a short-term inducement offer shall be accounted for as a modification of the
terms of equity based awards, to the extent that the inducement is accepted by the equity holders. Modification accounting requires
the incremental fair value of the instrument arising from the modification to be recognized as an expense on the income statement,
or a charge directly to equity, depending on the nature of the offer. The Company determined that it was appropriate to record
the incremental fair value of the Warrant Amendments as an expense on the income statement and consequently the Company recorded
the incremental fair value as a finance fee on the consolidated statement of operations for the year ended January 31, 2016. The
Company determined that the incremental fair value of the instruments arising from the modification was $63,000, based on the difference
between the fair value of the warrants immediately prior to the amendment and the fair value of these instruments immediately after
the amendment. The fair values were determined using the Black Scholes option pricing model based on the following assumptions:
risk free interest rate 1.26%, expected life: 3.86 years, expected volatility: 138.81%, dividend yields: 0.00%.
|
iv)
|
On December 23, 2015, the Company completed an underwritten public offering of 1,875,000 shares
of its common stock at $4 per share for gross proceeds of $7,500,000. In connection with the offering, the Company incurred share
issuance costs of $623,720 consisting of (i) a cash commissions equal to 8% of the gross proceeds from certain participants, equal
to $548,720; (ii) warrants to purchase that number of shares of common stock equal to 8% of the shares sold in the offering, equal
to 137,180 share purchase warrants and (iii) underwriter legal fees equal to $75,000.
|
2014 Stock Option Plan
On June 6, 2014, the Company’s board
of directors approved a 2014 Long-Term Incentive Plan (the “2014 Plan”), which provides for the grant of stock options,
restricted shares, restricted share units and performance stock and units to directors, officers, employees and consultants of
the Company. Stockholder approval of the plan was obtained on August 21, 2014.
The maximum number of our common stock reserved
for issue under the plan is 2,750,000 shares subject to adjustment in the event of a change of the Company’s capitalization
(as described in the 2014 Plan). As a result of the adoption of the 2014 Plan, no further option awards will be granted under
any previously existing
stock option plan. Stock option awards previously granted under previously
existing stock option plans remain outstanding in accordance with their terms.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
11.
|
Stockholders’ Equity
(Continued)
|
The 2014 Plan is administered by the board
of directors, except that it may, in its discretion, delegate such responsibility to a committee of such board. The exercise price
will be determined by the board of directors at the time of grant. Stock options may be granted under the 2014 Plan for an exercise
period of up to ten years from the date of grant of the option or such lesser periods as may be determined by the board, subject
to earlier termination in accordance with the terms of the 2014 Plan. At January 31, 2017, 759,601 (2016: 607,101) options remain
available for issuance under the 2014 Plan.
Stock Based Compensation
A summary of the status of the Company’s
outstanding stock options for the period ended January 31, 2017 is presented below:
|
|
Number
|
|
|
Weighted
Average
|
|
|
Weighted Average
Grant Date
|
|
|
|
of Options
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
Outstanding at January 31, 2015
|
|
|
1,794,875
|
|
|
$
|
5.48
|
|
|
$
|
8.40
|
|
Expired
|
|
|
(22,250
|
)
|
|
$
|
22.81
|
|
|
|
|
|
Forfeited
|
|
|
(3,750
|
)
|
|
$
|
4.48
|
|
|
|
|
|
Granted
|
|
|
422,399
|
|
|
$
|
4.48
|
|
|
$
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2016
|
|
|
2,191,274
|
|
|
$
|
5.12
|
|
|
|
|
|
Expired
|
|
|
(93,875
|
)
|
|
$
|
5.19
|
|
|
|
|
|
Forfeited
|
|
|
(70,000
|
)
|
|
$
|
5.12
|
|
|
|
|
|
Granted
|
|
|
260,000
|
|
|
$
|
2.21
|
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2017
|
|
|
2,287,399
|
|
|
$
|
4.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 31,
2017
|
|
|
1,709,238
|
|
|
$
|
5.26
|
|
|
|
|
|
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
11.
|
Stockholders’ Equity
(Continued)
|
At January 31, 2017, the following stock options
were outstanding, entitling the holder thereof to purchase common stock of the Company as follows:
Number
|
|
|
Exercise
Price
|
|
|
Expiry
Date
|
|
Number
Vested
|
|
|
15,000
|
|
|
$
|
10.00
|
|
|
October 9, 2017
|
|
|
15,000
|
|
|
1,250
|
|
|
$
|
10.00
|
|
|
February 1, 2018
|
|
|
1,250
|
|
|
3,750
|
|
|
$
|
10.00
|
|
|
May 1, 2018
|
|
|
3,750
|
|
|
2,000
|
|
|
$
|
10.00
|
|
|
April 1, 2019
|
|
|
2,000
|
|
|
25,000
|
|
|
$
|
10.00
|
|
|
July 30, 2022
|
|
|
25,000
|
|
|
1,536,750
|
|
|
$
|
5.12
|
|
|
June 6, 2024
|
|
|
1,302,297
|
|
|
25,000
|
|
|
$
|
6.00
|
|
|
June 10, 2024
|
|
|
25,000
|
|
|
37,500
|
|
|
$
|
4.48
|
|
|
February 3, 2025
|
|
|
12,500
|
|
|
37,500
|
|
|
$
|
4.48
|
|
|
February 25, 2025
|
|
|
12,500
|
|
|
6,250
|
|
|
$
|
4.80
|
|
|
July 6, 2025
|
|
|
6,250
|
|
|
337,399
|
|
|
$
|
4.40
|
|
|
August 18, 2025
|
|
|
193,691
|
|
|
10,000
|
|
|
$
|
2.50
|
|
|
February 2, 2026
|
|
|
10,000
|
|
|
100,000
|
|
|
$
|
2.50
|
|
|
November 1, 2026
|
|
|
100,000
|
|
|
150,000
|
|
|
$
|
2.00
|
|
|
November 1, 2026
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,287,399
|
|
|
|
|
|
|
|
|
|
1,709,238
|
|
The aggregate intrinsic value of stock options
outstanding is calculated as the difference between the exercise price of the underlying awards and the fair value of the Company’s
common stock. At January 31, 2017, the aggregate intrinsic value of stock options outstanding is $Nil and exercisable is $Nil (2016:
$Nil and $Nil, respectively).
During the year ended January 31, 2017, the
Company recognized $5,452,931 (2016: $5,374,465) of stock based compensation expense in general and administrative expenses, relating
to the issuance of stock options in exchange for services. An amount of approximately $2,179,590 in stock based compensation expense
is expected to be recognized over the remaining vesting term of these options to August, 2018.
The fair value of each option award was estimated
on the date of the grant using the Black-Scholes option pricing model based on the following weighted average assumptions:
|
|
2017
|
|
|
2016
|
|
Expected term of stock option (years)
(1)
|
|
|
9.71
|
|
|
|
6.43
|
|
Expected volatility
(2)
|
|
|
75.78
|
%
|
|
|
124.33
|
%
|
Stock price at date of issuance
|
|
$
|
0.99
|
|
|
$
|
4.71
|
|
Risk-free interest rate
|
|
|
2.29
|
%
|
|
|
1.81
|
%
|
Dividend yields
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
(1)
As
the Company has insufficient historical data on which to estimate the expected term of the options, the Company has elected to
apply the short-cut method to determine the expected term under the guidance of Staff Accounting Bulletin No. 110 (“SAB 110”).
(2)
As
the Company has insufficient historical data on which to estimate expected future share price volatility, the Company has estimated
expected share price volatility based on the historical share price volatility of comparable entities.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
11.
|
Stockholders’ Equity
(Continued)
|
Share Purchase Warrants
At January 31, 2017, the Company had 1,627,010
share purchase warrants outstanding as follows:
Number
|
|
|
Exercise
Price
|
|
|
Expiry
Date
|
|
12,451
|
|
|
$
|
10.00
|
|
|
August 10, 2017
|
|
3,750
|
|
|
$
|
10.00
|
|
|
August 10, 2018
|
|
60,001
|
|
|
$
|
6.00
|
|
|
April 4, 2019
|
|
555,968
|
|
|
$
|
6.00
|
|
|
June 10, 2019
|
|
155,052
|
|
|
$
|
3.00
|
|
|
June 10, 2019
|
|
168,883
|
|
|
$
|
6.00
|
|
|
July 8, 2019
|
|
29,343
|
|
|
$
|
3.00
|
|
|
July 8, 2019
|
|
24,625
|
|
|
$
|
8.00
|
|
|
October 23, 2019
|
|
137,180
|
|
|
$
|
4.80
|
|
|
December 23, 2020
|
|
365,688
|
|
|
$
|
4.80
|
|
|
June 15, 2022
|
|
36,569
|
(1)
|
|
$
|
4.80
|
|
|
June 15, 2022
|
|
15,000
|
|
|
$
|
4.80
|
|
|
July 6, 2022
|
|
62,500
|
|
|
$
|
5.11
|
|
|
September 1, 2022
|
|
|
|
|
|
|
|
|
|
|
1,627,010
|
|
|
|
|
|
|
|
|
(1)
|
These warrants may vest and become exercisable only under certain anti-dilution performance conditions
contained in the warrant
|
During the year ended January 31, 2016, the
Company issued an aggregate of 479,756 warrants exercisable at a weighted average exercise price of $4.84 per share for a period
of seven years from the date of issuance, pursuant to negotiated consulting and endorsement agreements. The weighted average grant
date fair value of these warrants at issuance was $4.67 for an aggregate grant date fair value of $2,239,000, based on the Black-Scholes
option pricing model using the following weighted average assumptions: expected term 7 years, expected volatility 158.04%, expected
dividend yield 0.00%, risk free interest rate 2.09%. Stock based compensation is being recorded in the financial statements over
the vesting term of three years from the date of grant. The Company recognized a recovery of stock based compensation expense of
$104,284 during the year ended January 31, 2017 (2016: stock based compensation expense of $257,802) in connection with warrants
granted.
Certain of the warrants granted during the
year ended January 31, 2017 become exercisable only under certain anti-dilution performance conditions contained in the warrant
agreement. The fair value of these warrants at issuance was calculated to be $168,500 based on the Black-Scholes option pricing
model using the following assumptions: expected term 7 years, expected volatility 153.00%, expected dividend yield 0.00%, risk
free interest rate 2.11%. No stock-based compensation has been recorded in the financial statements as none of the performance
conditions have yet been met.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
11.
|
Stockholders’ Equity
(Continued)
|
A summary of the Company’s share purchase
warrants outstanding is presented below:
|
|
Number of
|
|
|
Weighted
Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Outstanding at January 31, 2015
|
|
|
1,628,581
|
|
|
$
|
5.74
|
|
Issued
|
|
|
616,937
|
|
|
$
|
4.83
|
|
Exercised
|
|
|
(585,709
|
)
|
|
$
|
6.00
|
|
Expired
|
|
|
(14,611
|
)
|
|
$
|
9.82
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2016
|
|
|
1,645,198
|
|
|
$
|
5.27
|
|
Expired
|
|
|
(18,188
|
)
|
|
$
|
4.00
|
|
Outstanding at January 31, 2017
|
|
|
1,627,010
|
|
|
$
|
5.29
|
|
The reconciliation of income tax provision
computed at statutory rates to reported income tax provision is as follows:
January 31,
|
|
2017
|
|
|
2016
|
|
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
Loss for the year
|
|
$
|
(10,798,503
|
)
|
|
$
|
(19,063,399
|
)
|
|
|
|
|
|
|
|
|
|
Expected income tax recovery
|
|
|
(3,671,000
|
)
|
|
|
(6,482,000
|
)
|
Non-deductible other expenses
|
|
|
101,000
|
|
|
|
21,000
|
|
Non-deductible accretion and financing fees
|
|
|
5,000
|
|
|
|
2,467,000
|
|
Non-deductible derivative mark-to-market adjustments
|
|
|
-
|
|
|
|
(241,000
|
)
|
Effect of foreign exchange and other adjustments
|
|
|
-
|
|
|
|
(4,000
|
)
|
True up to prior years’ tax provision
|
|
|
12,000
|
|
|
|
(120,600
|
)
|
Change in valuation allowance
|
|
|
3,553,000
|
|
|
|
4,359,600
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
12.
|
Income Taxes
(Continued)
|
Significant components of the Company’s
net deferred tax assets at January 31, 2017 and 2016:
January 31,
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Temporary differences relating to:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
7,469,700
|
|
|
$
|
5,968,100
|
|
Equipment and intangible assets
|
|
|
30,700
|
|
|
|
25,700
|
|
Unpaid expenses
|
|
|
218,000
|
|
|
|
1,200
|
|
Stock based compensation
|
|
|
5,184,700
|
|
|
|
3,456,000
|
|
|
|
|
12,903,100
|
|
|
|
9,451,000
|
|
Valuation allowance
|
|
|
(12,903,100
|
)
|
|
|
(9,451,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets and liabilities are determined
based on temporary basis differences between assets and liabilities reported for financial reporting and tax reporting. The ultimate
realization of the net deferred tax asset is dependent upon the generation of future taxable income during the periods in which
those temporary differences become deductible. The Company considers projected future taxable income, recent financial performance
and tax planning strategies in making this assessment. The Company is required to record a valuation allowance to reduce its net
deferred tax asset to the amount that is more likely than not to be realized. Accounting guidance allows the Company to look to
future earnings to support the realizability of the net deferred assets. Since the Company has had cumulative net operating losses
since inception, the ability to use forecasted future earnings is diminished. As a result, the Company concluded a full valuation
allowance against the net deferred tax asset was appropriate. At January 31, 2017 and 2016 the total change in valuation allowance
for items affecting the current year was $3,553,000 and $4,359,600, respectively.
At January 31, 2017, the Company had accumulated
net operating losses in Canada totaling approximately $5,066,000 (2016: $5,066,000), which may be available to reduce taxable income
in Canada in future taxation years. At January 31, 2017, the Company had accumulated net operating losses in the United States
totaling approximately $22,063,000 (2016: $17,483,000), which may be available to reduce taxable income in the United States in
future taxation years. Unless previously utilized, these net operating losses will begin to expire in 2025.
Section 382 of the Internal Revenue Code (“Section 382”) imposes substantial restrictions
on the utilization of net operating losses in the event of an “ownership change” as defined in Section 382. As a result
of equity transactions during the year ended January 31, 2016, management believes the utilization of net operating losses may
be subject to this limitation. If an ownership change is deemed to have occurred as a result of these equity ownership changes
or offerings, the Company has estimated that the net operating losses would be limited to approximately $13,123,000 (2016: $8,635,000).
The Company files income tax returns in the
United States and Canada. All of the Company’s tax returns are subject to tax examinations until the respective statute of
limitations expires. The Company currently has no tax years under examination. The Company’s tax filings for the fiscal years
2012 to 2017 remain open to examination.
Based on management’s assessment of
ASC Topic 740
Income Taxes
, the Company does not have an accrual for uncertain tax positions as of January 31, 2017 and
2016. The Company does not anticipate significant changes to its unrecognized tax benefits within the next twelve months.
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
|
13.
|
Customer Concentrations
|
The Company has concentrations in the volumes
of business transacted with particular customers. The loss of these customers could have a material adverse effect on the Company’s
business.
For the year ended January 31, 2017, the
Company had concentrations of sales with two customers equal to 26% of the Company’s net sales (2016: sales with one customer
equal to 41% of the Company’s net sales). As at January 31, 2017, the accounts receivable balance for these customers was
$0 (2016: $73,347).
|
14.
|
Commitments and Contingencies
|
|
i)
|
In accordance with a negotiated agreement, the Company is required to pay royalty fees based on
the greater of a pre-determined percentage of certain sales, not to exceed 10% of these net wholesale sales, as defined in such
agreements, or a minimum annual amount. Minimum royalty payments are being amortized to operations over the period for which royalties
accrue under the terms of the agreement. The Company may terminate the agreement in the event that the other party fails to perform
any of the services required to be performed under the agreement or breaches any of its other covenants or agreements set forth
in the agreement.
|
During the year ended January 31,
2017, the Company did not make all minimum royalty payments as they became due and payable under the terms of the agreement, however
as at January 31, 2017, the Company had not been provided a notice of default by the other party to the agreement. If the other
party provides such notice of default at a later date, this could affect the Company’s ability to sell certain portions
of its inventory on hand at January 31, 2017 that are covered under the royalty agreement.
During the year ended January
31, 2017, $300,000 (2016: $75,000) in minimum royalties were expensed to operations. At January 31, 2017, an amount of $75,000
is included in accounts payable and accrued liabilities in connection with minimum royalty payments due and payable.
The Company is committed to future
minimum royalty payments as follows:
Year ending January 31,
|
|
|
Amount
|
|
2018
|
|
$
|
350,000
|
|
2019
|
|
|
350,000
|
|
2020
|
|
|
262,500
|
|
|
|
$
|
962,500
|
|
|
ii)
|
Pursuant to a Strategic Consulting and Collaboration Agreement, the Company is committed to pay
a monthly cash retainer ranging from $10,000 to $20,000 over the three-year term of the agreement. The Company has negotiated a
hold on the monthly cash retainer, effective March 1, 2016 and continuing indefinitely.
|
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed
in US Dollars)
On February 10, 2017, the Company entered into an At The Market Offering Agreement (the “Agreement”) with Maxim Group
LLC (“Maxim”) pursuant to which the Company may sell from time to time, up to an aggregate of $5,000,000 of shares
of the Company’s common stock (the “Shares”), through Maxim, as sales agent. On March 30, 2017, the Company
entered into Amendment No. 1 to the Agreement which increased the number of shares that could be sold under the Agreement to $5,500,000.
Subject to the terms and conditions of the
Agreement, Maxim will use its commercially reasonable efforts to sell the Shares from time to time, based on the Company's instructions.
Under the Agreement, Maxim may sell the Shares by any method permitted by law deemed to be an “at the market offering”,
including, without limitation, sales made directly on the Nasdaq Capital Market.
The Company is not obligated to make any sales
of Shares under the Agreement. The offering of the Shares of Common Stock pursuant to the Agreement will terminate upon the earlier
of (i) the sale of all Common Stock subject to the Agreement or (ii) termination of the Agreement in accordance with its terms.
Under the terms of the Agreement, Maxim will
be entitled to a commission at a fixed rate of 3.5% of the gross sales price of Shares sold under the Agreement. The Company will
also reimburse Maxim for certain expenses incurred in connection with the Agreement, and agreed to provide indemnification and
contribution to Maxim with respect to certain liabilities under the Securities Act and the Securities Exchange Act of 1934, as
amended.
Subsequent to January 31, 2017 pursuant to
and under the terms of the Agreement, as amended, the Company issued an aggregate of 2,189,052 shares of common stock for gross
proceeds of $5,499,723, net proceeds of $5,307,232 after deducting commissions.