Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
Naked Brand Group Inc. (the “Company”)
is a manufacturer and seller of direct and wholesale men’s and women’s undergarments and intimate apparel within North
America to consumers and retailers through its wholly owned subsidiary, Naked Inc. (“Naked”). The Company currently
operates out of New York, United States of America.
On May 25, 2017, the Company entered into
an Agreement and Plan of Reorganization (the “Merger Agreement”), by and among Bendon Limited, a New Zealand limited
company (“Bendon”), Bendon Group Holdings Limited, an Australia limited company (“Holdco”), Naked Merger
Sub Inc., a Nevada corporation and a wholly owned subsidiary of Holdco (“Merger Sub”), and, solely for the purposes
of Sections 2.28 and 5.18(b) of the Merger Agreement, Bendon Investments Ltd., a New Zealand company and the owner of a majority
of the outstanding shares of Bendon (the “Principal Shareholder”), pursuant to which Merger Sub will be merged with
and into Naked (the “Merger”) with Naked as the surviving corporation.
On July, 26, 2017, Naked entered into Amendment
No. 1 (the “Amendment”) to the Merger Agreement. The Amendment provides that, among other things, the date on
which Holdco will use best efforts to file the registration statement on Form F-4 in connection with the Merger has been extended
to August 25, 2017, and Bendon has agreed to pay certain public company operating expenses of Naked not to exceed $130,000 per
month for the months of September and October 2017.
Immediately prior to the consummation of
the Merger, Bendon and Holdco will consummate a reorganization (the “Reorganization”), pursuant to which all of the
shareholders of Bendon will exchange all the outstanding ordinary shares of Bendon (the “Bendon Ordinary Shares”) for
146,311,063 ordinary shares of Holdco (“Holdco Ordinary Shares”), subject to certain potential adjustments pursuant
to the Merger Agreement. As a result of the Reorganization and Merger, Bendon and Naked, respectively, will become wholly owned
subsidiaries of Holdco and the shareholders of Bendon and the stockholders of Naked, respectively, will become the shareholders
of Holdco.
Upon completion of the Merger, each issued
and outstanding share of Naked common stock (“Naked Common Stock”) will be converted into the right to receive one
Holdco Ordinary Share, resulting in Naked stockholders owning approximately seven percent (7%) of Holdco.
The completion of the Merger is subject
to the satisfaction or waiver of certain customary conditions, including, among others: (i) the accuracy of the other party’s
representations and warranties; (ii) performance in all material respects by the other party of its obligations under the Merger
Agreement; (iii) the listing of Holdco Ordinary Shares on the Nasdaq Capital Market or the New York Stock Exchange (“NYSE”),
subject to official notice of issuance; (iv) the declaration of effectiveness by the SEC of the registration statement on Form
F-4 filed by Holdco in connection with the transactions (the “Registration Statement”); (v) Naked stockholder’s
approving the Merger Agreement and the transactions contemplated thereby at a meeting called for such purposes (the “Stockholder
Meeting”); and (vi) other conditions as further described in the Merger Agreement.
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
1.
|
Nature of Business
– Continued
|
The Merger Agreement also contains specified
termination rights, including the right to terminate the Merger Agreement (i) by mutual agreement of the parties to terminate;
(ii) by either party if (1) the Merger has not been consummated by December 31, 2017 (the “Outside Date”), except if
the primary reason the Merger has not been consummated is because of the continued review of the Registration Statement by the
SEC or the Holdco Ordinary Shares have not been approved for listing on the Nasdaq Capital Market or the NYSE, in which case the
Outside Date shall be fifteen (15) days after the later of the completion of the Special Meeting and approval of all regulatory
bodies and Nasdaq or the NYSE, (2) any law or order permanently prohibits consummation of the Merger, or (3) Naked stockholder
approval is not obtained by the Outside Date; (iii) by either party if the other party has breached or failed to perform in any
material respect any of its representations and warranties or covenants under the Merger Agreement such that a closing condition
is not satisfied (subject to notice and cure and other customary exceptions); and (iv) by Naked if (1) Bendon substantially changes
its business as conducted as of the date of the Merger Agreement, or (2) Naked accepts a Superior Proposal (as defined in the Merger
Agreement).
|
2.
|
Ability to Continue as a Going Concern
|
These interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
on a going concern basis, which assumes that the Company will continue to realize its assets and discharge its obligations and
commitments in the normal course of operations. Realization values may be substantially different from carrying values as shown
and these interim condensed consolidated financial statements do not give effect to adjustments that would be necessary to the
carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.
As of July 31, 2017, the Company had not
yet achieved profitable operations, had incurred a net loss of $4,813,735 and had an accumulated deficit of $61,993,318 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.
In addition, the terms of the Merger Agreement with Bendon may restrict us from pursuing any of these alternatives without first
obtaining consents, which we may not be able to obtain on acceptable terms, or at all. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Interim Financial Statements
The accompanying unaudited condensed consolidated
interim financial statements have been prepared by management, without audit, in accordance with the rules and regulations of the
Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally
included in the annual consolidated financial statements in accordance with GAAP have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the disclosures are adequate to make the information presented not misleading
and the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary
for fair presentation of statement of financial position, results of operations and cash flows for the interim periods presented.
Operating results for the six months ended July 31, 2017 are not necessarily indicative of the results that may be expected for
the year ending January 31, 2018.
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
The interim condensed consolidated balance
sheet at January 31, 2017 has been derived from the audited consolidated financial statements at that date but does not include
all of the information and footnotes required by GAAP.
|
3.
|
Basis of Presentation
(continued)
|
These unaudited condensed consolidated
interim financial statements should be read in conjunction with the most recent audited financial statements of the Company included
in its Annual Report on Form 10-K for the year ended January 31, 2017.
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. The Company has determined that as of July 31, 2017,
there is only a single reportable operating segment.
The Company operates in one industry, the manufacture and sale
of direct and wholesale undergarments.
At July 31, 2017 and January 31, 2017,
the net book value of substantially all long-lived assets were located in the United States.
Loss per share
Net loss per share was determined as follows:
|
|
Three months ended July 31,
|
|
|
Six months ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,625,683
|
)
|
|
$
|
(3,301,780
|
)
|
|
$
|
(4,813,735
|
)
|
|
$
|
(5,841,875
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding
|
|
|
10,342,191
|
|
|
|
6,072,482
|
|
|
|
9,800,363
|
|
|
|
6,072,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities not included in diluted loss per share relating to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding
|
|
|
1,627,010
|
|
|
|
1,645,198
|
|
|
|
1,627,010
|
|
|
|
1,645,198
|
|
Options outstanding
|
|
|
3,487,399
|
|
|
|
2,129,899
|
|
|
|
3,487,399
|
|
|
|
2,129,899
|
|
|
|
|
5,114,409
|
|
|
|
3,775,097
|
|
|
|
5,114,409
|
|
|
|
3,775,097
|
|
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
3.
|
Basis of Presentation
(continued)
|
Recently Adopted Accounting Pronouncements
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 was effective for public entities in fiscal years beginning after December 15, 2016, and for interim periods within
those fiscal years. The standard became effective for the Company on February 1, 2017. The adoption of this standard did not have
any effect on its financial condition, results of operations and cash flows.
In August 2015, the FASB issued ASU No.
2015-15,
Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern
(“ASU 2015-15”). Currently, there is no guidance in GAAP about management’s
responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or
to provide related footnote disclosures. The amendments in this update provide that guidance. The amendments are intended to reduce
diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability
to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards.
Specifically, the amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every
reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management’s
plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s
plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment
for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in
this update were effective for annual periods ending after December 15, 2016, with early adoption permitted. The standard became
effective for the Company on February 1, 2017. The adoption of this standard did not have any effect on its financial condition,
results of operations and cash flows.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
(“ASU 2015-11”) which requires a company to change the measurement
principal for inventory measured using the FIFO or average cost method from the lower of cost or market to the lower of cost and
net realizable value. Treatment of inventory valued under the last-in, first-out (“LIFO”) method is unchanged by this
guidance. The new guidance must be applied prospectively and was effective for fiscal years beginning after December 15, 2016,
and interim periods within those years. The standard became effective for the Company on February 1, 2017. The adoption of this
standard did not have any effect on its financial condition, results of operations and cash flows.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s
simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in
this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax
benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to
cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash
flows. ASU 2016-09 was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years,
with early adoption permitted.
The standard became effective for the Company on February 1, 2017. 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 the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
3.
|
Basis of Presentation
(continued)
|
New Accounting Pronouncements
Unless otherwise discussed, management
believes the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated
financial statements upon adoption.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”). The new revenue recognition standard provides a five-step
analysis of transactions to determine when and how revenue is recognized. The premise of the guidance is that a company should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 can be adopted by the Company either
retrospectively or as a cumulative-effect adjustment as of the date of adoption. On April 1, 2015, the FASB decided to defer the
effective date of the new revenue standard by one year. As a result, public entities would apply the new revenue standard to annual
reporting periods beginning after December 15, 2017. This standard will be effective for the Company on February 1, 2018. The Company
is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”). ASU 2016-01 provides
guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This
guidance will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual
periods. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations
and cash flows.
In February 2016, FASB issued ASU No. 2016-02,
Leases
(“ASU 2016-02”). The guidance would require lessees to recognize most leases on their balance sheets as lease liabilities
with corresponding right–of-use assets. The guidance is effective for annual and interim reporting periods beginning on or
after December 15, 2018. The Company does not expect the impact of this guidance to have any material effect on the periods
presented.
Inventory of the Company consisted of the following at July
31, 2017 and January 31, 2017:
|
|
July 31, 2017
|
|
|
January 31, 2017
|
|
Finished goods
|
|
$
|
2,654,093
|
|
|
$
|
2,604,597
|
|
Less: allowance for obsolete inventory
|
|
|
(375,784
|
)
|
|
|
(375,784
|
)
|
Total inventory
|
|
$
|
2,278,309
|
|
|
$
|
2,228,813
|
|
Balances at July 31, 2017 and January 31, 2017 are recorded
at historical cost, less amounts for potential declines in value. At July 31, 2017, management has recorded an allowance for obsolescence
of $375,784 (January 31, 2017: $375,784) to reduce inventory to its estimated net realizable value.
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
Intangible assets of the Company consisted of the following
at July 31, 2017 and January 31, 2017:
|
|
July 31,
2017
|
|
|
January 31,
2017
|
|
|
Useful life
(Years)
|
Trade Names/Trademarks
|
|
$
|
80,875
|
|
|
$
|
80,875
|
|
|
Indefinite
|
Website
|
|
|
49,512
|
|
|
|
49,512
|
|
|
2
|
|
|
|
130,387
|
|
|
|
130,387
|
|
|
|
Less: accumulated amortization
|
|
|
(49,512
|
)
|
|
|
(49,512
|
)
|
|
|
|
|
$
|
80,875
|
|
|
$
|
80,875
|
|
|
|
The Company did not record any amortization
expense during the three and six months ended July 31, 2017 and 2016.
|
6.
|
Related Party Transactions and Balances
|
Related Party Balances
At July 31, 2017, included in advances
receivable is $149,768 (January 31, 2017: $Nil) owing from Bendon for expenses incurred by the Company on behalf of the Bendon.
The amount due from Bendon is unsecured, non-interest bearing and has no specific repayment terms.
At January 31, 2017, included in accounts
payable and accrued liabilities is $75,686 owing to directors and officers of the Company for reimbursable expenses and $53,500
owing to Bendon for expenses incurred on behalf of the Company. These amounts were unsecured, non-interest bearing and had no specific
terms of repayment.
Related Party Transactions
During the three and six months ended July
31, 2017, included in general and administrative expenses is $23,000 and $61,969, respectively (2016: $68,904 and $131,117, respectively),
in respect of marketing fees, of which $nil and $169, respectively (2016: $20,797 and $29,910, respectively) was related to third
party pass through costs, paid to a firm of which a direct family member of a director and officer of the Company is a principal.
Effective June 10, 2014, the Company entered
into an employment agreement with the Chief Executive Officer and director (the “CEO”) of the Company for a term of
three years whereby the CEO was entitled to a base salary of $400,000 per year, provided the CEO would forgo the first twelve months
of the base salary and only receive minimum wage during that period. The total base salary compensation due under this employment
agreement was amortized on a straight-line basis over the term of the employment agreement to June 10, 2017.
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 was accrued but not
paid through February 28, 2017. The CEO had agreed to allow the Company to defer payment of her salary provided such amounts accrued
interest at a rate of 3% per annum. On March 13, 2017, the CEO surrendered accrued base salary compensation plus interest accrued
to February 28, 2017 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 was recorded as a contribution to equity during the six months ended July 31, 2017.
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
6.
|
Related Party Transactions and Balances
(Continued)
|
Related Party Transactions
(Continued)
In connection with a Joint Factoring Agreement
(Note 7), 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 7)). 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. Effective June 28, 2017, the Company had repaid all advances received under the terms of the Joint Factoring Agreement
and the Company entered into an Amendment to the Joint Factoring Agreement pursuant to which the personal guarantee of the CEO
was terminated.
|
7.
|
Factoring Line of Credit
|
Under the terms of the Joint Factoring
Agreement dated June 14, 2016, 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”).
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 would receive minimum commissions equal to $24,000, $36,000 and $50,000 during the first, second and third year, respectively
(the “Minimum Commissions”).
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 would 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”), were payable on demand and may be charged by Wells Fargo to the Company’s
account at any time.
The Company accounted for invoices sold
to the Wells Fargo under the Joint Factoring Agreement as a sale of financial assets.
Effective June 28, 2017, the Company had
repaid all loans and advances received under the Joint Factoring Agreement. The Company and Wells Fargo entered into an Amendment
to the Joint Factoring Agreement pursuant to which the Parties agreed to amend certain terms of the agreement as follows: (i) no
further advances would be available under the Joint Factoring Agreement; (ii) Wells Fargo would not be entitled to the Minimum
Commissions; (iii) the Company may terminate the Joint Factoring Agreement upon seven days’ written notice to Wells Fargo
and Wells Fargo may terminate the Joint Factoring Agreement upon thirty days’ written notice to the Company; (iv) the Guaranty
(Note 6) was terminated in its entirety.
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
7.
|
Factoring Line of Credit
(Continued)
|
Under the terms of the Joint Factoring
Agreement, as amended, the Company bears the financial risk associated with the factored receivables. Consequently, the Company
no longer accounts for invoices assigned to Wells Fargo for collections as a sale of financial assets.
Factor expenses and interest charged to
operations during the three and six months ended July 31, 2017 were $19,254 and $36,963 (2016: $5,907 and $11,736). At July 31,
2017, an amount of $109,577 was due from the factor to the Company for collection of accounts receivable under the terms of the
Joint Factoring Agreement, as amended. At January 31, 2017, $302,776 was owed to the factor for advances made to the Company, net
of repayments of such advances through the sale of factored receivables.
|
8.
|
Promissory Notes Payable
|
|
|
July 31, 2017
|
|
|
January 31, 2017
|
|
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
|
|
|
|
|
3,450
|
|
|
|
256,450
|
|
Less: current portion
|
|
|
(3,450
|
)
|
|
|
(256,450
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(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).
|
During the six months ended July 31, 2017, these
promissory notes were repaid in full.
|
(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 July 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 the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
Authorized
2,000,000 shares of blank check preferred stock, no par value.
18,000,000 shares of common stock, par value $0.001.
Equity Transactions
On February 10, 2017, the Company entered
into an At The Market Offering Agreement (the “Agreement”) with Maxim Group LLC (“Maxim”), as amended on
March 30, 2017, pursuant to which the Company could sell from time to time, up to an aggregate of $5,500,000 of shares of the Company’s
common stock (the “Shares”), through Maxim, as sales agent.
Under the terms of the Agreement, Maxim
was entitled to a commission at a fixed rate of 3.5% of the gross sales price of Shares sold under the Agreement. The Company also
reimbursed 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.
During the six months ended July 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 $5,307,233 after deducting commissions.
Stock Options
2014 Stock Option Plan
On June 6, 2014, the Company’s board
of directors approved a 2014 Long-Term Incentive Plan (the “2014 Plan”), which provides for the grant of stock options,
restricted shares, restricted share units and performance stock and units to directors, officers, employees and consultants of
the Company. Stockholder approval of the plan was obtained on August 21, 2014.
The maximum number of shares of common
stock reserved for issue under the plan is 2,750,000 shares subject to adjustment in the event of a change of the Company’s
capitalization (as described in the 2014 Plan). As a result of the adoption of the 2014 Plan, no further option awards will be
granted under any previously existing stock option plan. Stock option awards previously granted under previously existing stock
option plans remain outstanding in accordance with their terms.
The 2014 Plan is administered by the board
of directors, except that it may, in its discretion, delegate such responsibility to a committee of such board. The exercise price
will be determined by the board of directors at the time of grant. Stock options may be granted under the 2014 Plan for an exercise
period of up to ten years from the date of grant of the option or such lesser periods as may be determined by the board, subject
to earlier termination in accordance with the terms of the 2014 Plan. At July 31, 2017, 509,601 options remained available for
issuance under the 2014 Plan (January 31, 2017: 509,601 options).
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
9.
|
Stockholders’ Equity
(Continued)
|
Stock Based Compensation
A summary of the status of the Company’s outstanding stock
options for the periods ended July 31, 2017 and January 31, 2017 is presented below:
|
|
Number
|
|
|
Weighted
Average
|
|
|
Weighted Average
Grant Date
|
|
|
|
of Options
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
Outstanding at February 1, 2016
|
|
|
2,191,274
|
|
|
$
|
5.12
|
|
|
$
|
7.86
|
|
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
|
|
|
|
|
|
Granted
|
|
|
1,200,000
|
|
|
$
|
2.14
|
|
|
$
|
0.89
|
|
Outstanding at July 31, 2017
|
|
|
3,487,399
|
|
|
$
|
3.87
|
|
|
|
|
|
Exercisable at July 31, 2017
|
|
|
3,206,179
|
|
|
$
|
3.94
|
|
|
|
|
|
At July 31, 2017, the following stock options
were outstanding, entitling the holder thereof to purchase shares of common stock of the Company as follows:
Number
|
|
Exercise
Price
|
|
|
Expiry
Date
|
|
Number
Vested
|
|
15,000
|
|
|
10.00
|
|
|
October 9, 2017
|
|
|
15,000
|
|
1,250
|
|
|
10.00
|
|
|
February 1, 2018
|
|
|
1,250
|
|
3,750
|
|
|
10.00
|
|
|
May 1, 2018
|
|
|
3,750
|
|
2,000
|
|
|
10.00
|
|
|
April 1, 2019
|
|
|
2,000
|
|
25,000
|
|
|
10.00
|
|
|
July 30, 2022
|
|
|
25,000
|
|
1,536,750
|
|
|
5.12
|
|
|
June 6, 2024
|
|
|
1,536,750
|
|
25,000
|
|
|
6.00
|
|
|
June 10, 2024
|
|
|
25,000
|
|
37,500
|
|
|
5.12
|
|
|
February 3, 2025
|
|
|
25,000
|
|
37,500
|
|
|
4.48
|
|
|
February 25, 2025
|
|
|
25,000
|
|
6,250
|
|
|
4.80
|
|
|
July 6, 2025
|
|
|
6,250
|
|
337,399
|
|
|
4.40
|
|
|
August 18, 2026
|
|
|
231,179
|
|
10,000
|
|
|
2.50
|
|
|
February 25, 2026
|
|
|
10,000
|
|
100,000
|
|
|
2.50
|
|
|
November 1, 2026
|
|
|
100,000
|
|
150,000
|
|
|
2.00
|
|
|
November 1, 2026
|
|
|
-
|
|
1,200,000
|
*
|
|
2.14
|
|
|
March 13, 2021
|
|
|
1,200,000
|
|
3,487,399
|
|
|
|
|
|
|
|
|
3,206,179
|
|
*These stock options were issued outside
of the 2014 Plan.
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 July 31, 2017, the aggregate intrinsic value of stock options outstanding was $Nil and exercisable
was $Nil (January 31, 2017: $Nil and $Nil, respectively).
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
9.
|
Stockholders’ Equity
(Continued)
|
Stock Based Compensation
(Continued)
During the three and six months ended July
31, 2017, the Company recognized a total fair value of $553,985 and $2,195,766 (2016: $1,645,549 and $2,925,910, respectively)
of stock based compensation expense relating to the issuance of stock options in exchange for services. An amount of $452,119 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)
|
|
|
2.00
|
|
|
|
5.00
|
|
Expected volatility
(2)
|
|
|
76.10
|
%
|
|
|
67.70
|
%
|
Stock price at date of issuance
|
|
$
|
2.14
|
|
|
$
|
2.50
|
|
Risk-free interest rate
|
|
|
1.40
|
%
|
|
|
1.16
|
%
|
Dividend yields
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
(1)
As the Company has insufficient historical data
on which to estimate the expected term of the options, the Company has elected to apply the short-cut method to determine the expected
term under the guidance of Staff Accounting Bulletin No. 110.
(2)
As the Company has insufficient historical data
on which to estimate expected future share price volatility, the Company has estimated expected share price volatility based on
the historical share price volatility of comparable entities.
Share Purchase Warrants
At July 31, 2017, the Company had 1,627,010 share purchase warrants
outstanding as follows:
Number
|
|
Exercise
Price
|
|
|
Expiry
Date
|
12,451
(1)
|
|
$
|
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
(2)
|
|
$
|
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 expired unexercised subsequent to July 31,
2017
(2) These warrants may vest and become exercisable only under
certain anti-dilution performance conditions contained in the warrant agreement
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
9.
|
Stockholders’ Equity
(Continued)
|
Share Purchase Warrants
(Continued)
During the fiscal year ended January 31,
2016, the Company issued an aggregate of 479,757 warrants exercisable at a weighted average exercise price of $4.84 per share for
a period of seven years from the date of issuance, pursuant to negotiated consulting and endorsement agreements. The weighted average
grant date fair value of these warrants at issuance was $4.67 for an aggregate grant date fair value of $2,239,000, based on the
Black-Scholes option pricing model using the following weighted average assumptions: expected term 7 years, expected volatility
158.04%, expected dividend yield 0.00%, risk free interest rate 2.09%. Stock based compensation is being recorded in the financial
statements over the vesting term of three years from the date of grant. The Company recognized stock based compensation expense
(recovery) of $(542) and $40,806 during the three and six months ended July 31, 2017 (2016: $15,717 and $(112,406)) in connection
with warrants granted.
Certain of the warrants granted during
the fiscal year ended January 31, 2016 become exercisable only under certain anti-dilution performance conditions contained in
the warrant agreement. The fair value of these warrants at issuance was calculated to be $168,500 based on the Black-Scholes option
pricing model using the following assumptions: expected term 7 years, expected volatility 153.00%, expected dividend yield 0.00%,
risk free interest rate 2.11%. No stock-based compensation has been recorded in the financial statements as none of the performance
conditions have been met.
A summary of the Company’s share purchase warrants outstanding
is presented below:
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Outstanding at February 1, 2016
|
|
|
1,645,198
|
|
|
$
|
5.27
|
|
Expired
|
|
|
(18,188
|
)
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2017 and July 31, 2017
|
|
|
1,627,010
|
|
|
$
|
5.29
|
|
|
10.
|
Customer Concentrations
|
The Company has concentrations in the volumes
of business transacted with particular customers. The loss of these customers could have a material adverse effect on the Company’s
business.
For the three and six months ended July
31, 2017, the Company had concentrations of sales with three customers equal to 31% and 29% of the Company’s net sales, respectively
(2016: sales with two customers equal to 28% and 31%, respectively). As at July 31, 2017, the accounts receivable balances for
these customers was $62,164 (January 31, 2017: $0).
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
July 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
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. 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.
|
At July 31, 2017, the Company
has not made all minimum royalty payments as they have become due and payable under the terms of the agreement, however as at July
31, 2017, the Company has not been provided a notice of default by the other party to the agreement and the Company has accrued
all amounts due and payable under the terms of 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 and on order at July 31, 2017 that
are covered under the royalty agreement. The Company is negotiating to settle the matter on terms that are agreeable to both parties.
No provision has been made in the accompanying financial statements for any loss that might be incurred if a negotiated settlement
is not able to be achieved.
The Company is committed to future minimum royalty
payments as follows:
Year ending January 31,
|
|
Amount
|
|
2018
|
|
$
|
175,000
|
|
2019
|
|
|
350,000
|
|
2020
|
|
|
262,500
|
|
|
|
$
|
787,500
|
|
|
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.
|