Interim Condensed Consolidated Statement
of Changes in Stockholders’ Equity
Notes to the Interim Condensed Consolidated Financial Statements
October 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.
On November 7, 2017, the Company and Bendon announced that Holdco confidentially
submitted its response to comments from the SEC regarding the confidentially filed draft registration statement on Form F-4 related
to the Merger. The parties continue to work towards completing the merger and finalizing the Form F-4 which is subject to SEC
approval.
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
October 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 October 31, 2017, the Company had not
yet achieved profitable operations, had incurred a net loss of $5,716,874 and had an accumulated deficit of $62,896,457 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 nine months ended October 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
October 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
3.
|
Basis of Presentation
(continued)
|
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.
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 October 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 October 31, 2017 and January 31, 2017, 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
October 31,
|
|
|
Nine months ended
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(903,139
|
)
|
|
$
|
(2,362,600
|
)
|
|
$
|
(5,716,874
|
)
|
|
$
|
(8,204,475
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding
|
|
|
10,342,191
|
|
|
|
6,072,482
|
|
|
|
9,982,957
|
|
|
|
6,072,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(1.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities not included in diluted loss per share relating to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding
|
|
|
1,614,559
|
|
|
|
1,645,198
|
|
|
|
1,614,559
|
|
|
|
1,645,198
|
|
Options outstanding
|
|
|
3,472,399
|
|
|
|
2,037,399
|
|
|
|
3,472,399
|
|
|
|
2,037,399
|
|
|
|
|
5,086,958
|
|
|
|
3,682,597
|
|
|
|
5,086,958
|
|
|
|
3,682,597
|
|
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
October 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
3.
|
Basis of Presentation
(continued)
|
Recently Adopted Accounting Pronouncements
In November 2015,
the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17
“
Income Taxes: Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”)
. ASU 2015-17 eliminates
the requirement to bifurcate deferred taxes between current and non-current on the balance sheet and requires that deferred tax
liabilities and assets be classified as noncurrent on the balance sheet. ASU 2015-17 was effective for public entities in fiscal
years beginning after December 15, 2016, and for interim periods within those fiscal years. ASU 2015-17 became effective
for the Company on February 1, 2017. The adoption of ASU 2015-17 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 ASU
No. 2015-11. ASU No. 2015-11 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 ASU
No. 2015-11 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 ASU 2016-09 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 which the Company did not elect
to adopt, 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. ASU 2016-09
became
effective for the Company on February 1, 2017. The adoption of
ASU 2016-09
did not
have any effect on its financial condition, results of operations and cash flows.
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”). ASU 2014-09 provides a five-step analysis of transactions
to determine when and how revenue is recognized. The premise of ASU 2014-09 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 ASU
2014-09 by one year. As a result, public entities would apply ASU 2014-09 to annual reporting periods beginning after December
15, 2017.
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
October 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
3.
|
Basis of Presentation
(continued)
|
New Accounting Pronouncements
The Company’s initial assessment
of the guidance in ASU 2014-09 has identified the majority of revenue streams will be impacted by ASU 2014-09 including transactions
such as wholesale customer support costs, e-commerce direct to consumer programs, and customer related returns. While the Company
has not finalized its evaluation of the impact of ASU 2014-09, it does not currently expect the adoption of ASU 2014-09 to have
a material effect on income from operations but will however change presentation within the consolidated financial statements.
ASU 2014-09 will also require expanded disclosures related to revenue streams, performance obligations and consideration and the
related judgements used in developing the necessary estimates. The Company will adopt ASU 2014-09 effective for fiscal year beginning
February 1, 2018, and will utilize the modified retrospective approach in applying ASU 2014-09.
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. ASU
2016-01 will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual
periods. ASU 2016-01 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 February 2016, FASB issued ASU No. 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 would require lessees to recognize most leases on their balance sheets as lease liabilities
with corresponding right–of-use assets. ASU 2016-02 is effective for annual and interim reporting periods beginning on or
after December 15, 2018. The Company does not expect the impact of ASU 2016-02 to have any material effect on the periods
presented.
Inventory of the Company consisted of the following at October 31,
2017 and January 31, 2017:
|
|
October 31, 2017
|
|
|
January 31, 2017
|
|
Finished goods
|
|
$
|
1,345,215
|
|
|
$
|
2,604,597
|
|
Inventory consigned to related party
(1)
|
|
|
1,189,072
|
|
|
|
-
|
|
Less: allowance for obsolete inventory
|
|
|
(375,784
|
)
|
|
|
(375,784
|
)
|
Total inventory
|
|
$
|
2,158,503
|
|
|
$
|
2,228,813
|
|
|
(1)
|
See note 6 for details regarding inventory on consignment
to a related party
|
Balances at October 31, 2017 and January 31, 2017 are recorded at
historical cost, less amounts for potential declines in value. At October 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
October 31, 2017
(Expressed in United States Dollars)
(Unaudited)
Intangible assets of the Company consisted of the following at October
31, 2017 and January 31, 2017:
|
|
October 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 nine months ended October 31, 2017 and 2016.
|
6.
|
Related Party Transactions and Balances
|
Related Party Balances
At October 31, 2017, included in advances receivable
is $156,600 (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. Included in accounts payable is $11,985
owing to a firm of which a direct family member of a director and officer of the Company is a principal.
On October 4, 2017, the Company entered into
a consignment agreement with Bendon to consign 155,624 units of finished goods inventory, in the value of $1,189,072, for the purpose
of facilitating a sale of the consigned goods by the consignee, per note 4. The agreement is effective as of October 4
th
and will continue for a period of twelve months with the ability to extend the term for an additional twelve months upon mutual
acceptance. Payment is due by the consignee to the Company based on units sold every 90 days commencing on January 31, 2018. The
title to and property of the consigned goods shall remain with the Company until such time as they are purchased.
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. The amounts owing at January 31, 2017 were all settled during the nine months ending October 31, 2017.
Related Party Transactions
During the three and nine months ended October
31, 2017, included in general and administrative expenses is $71,301 and $133,270, respectively (2016: $51,542 and $182,659, respectively),
in respect of marketing fees, of which $13,801 and $13,970, respectively (2016: $873 and $30,783, 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.
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
October 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
6.
|
Related Party Transactions and Balances
(Continued)
|
Related Party Transactions
(Continued)
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 options were fair valued based on a Black-Scholes model upon the date of issuance. The excess of fair value
of the options was expensed as stock based compensation during the nine months ended October 31, 2017.
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.
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
October 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
7.
|
Factoring Line of Credit (Continued)
|
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.
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 nine months ended October 31, 2017 were $3,476 and $40,439 (2016: $15,589 and $27,595). At October 31, 2017,
an amount of $7,842 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
|
|
|
October 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 nine months ended October 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 October 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
October 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 nine months ended October 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 October 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
October 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 October 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
|
|
Expired
|
|
|
(15,000
|
)
|
|
$
|
10.00
|
|
|
|
|
|
Outstanding at October 31, 2017
|
|
|
3,472,399
|
|
|
$
|
3.85
|
|
|
$
|
4.85
|
|
Exercisable at October 31, 2017
|
|
|
3,237,423
|
|
|
$
|
3.94
|
|
|
|
|
|
At October 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
|
|
|
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
|
|
|
262,423
|
|
|
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
|
|
|
3,472,399
|
|
|
|
|
|
|
|
|
|
3,237,423
|
|
*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
October 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
October 31, 2017
(Expressed in United States Dollars)
(Unaudited)
|
9.
|
Stockholders’ Equity
(Continued)
|
Stock Based Compensation
(Continued)
During the three and nine months ended October
31, 2017, the Company recognized a total fair value of $134,177 and $2,329,942 (2016: $1,224,826 and $4,246,239, respectively)
of stock based compensation expense relating to the issuance of stock options in exchange for services. An amount of $332,600 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 October 31, 2017, the Company had 1,614,559 share purchase warrants
outstanding as follows:
Number
|
|
|
Exercise Price
|
|
|
Expiry Date
|
|
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
|
(2)
|
|
$
|
4.80
|
|
|
June 15, 2022
|
|
36,569
|
(1)
(2)
|
|
$
|
4.80
|
|
|
June 15, 2022
|
|
15,000
|
|
|
$
|
4.80
|
|
|
July 6, 2022
|
|
62,500
|
|
|
$
|
5.11
|
|
|
September 1, 2022
|
|
|
|
|
|
|
|
|
|
|
1,614,559
|
|
|
|
|
|
|
|
|
(1)
|
These warrants may vest and become exercisable only under
certain anti-dilution performance conditions contained in the warrant agreement
|
|
(2)
|
These warrants
were repurchased subsequent to the quarter ending October 31, 2017 per a termination
agreement, see Note 11.
|
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
October 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 $6,076
and $46,882 during the three and nine months ended October 31, 2017 (2016: $(2,149) and $(207,551)) 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
|
|
|
1,627,010
|
|
|
$
|
5.29
|
|
Expired
|
|
|
(12,451
|
)
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2017
|
|
|
1,614,559
|
|
|
$
|
5.25
|
|
|
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 nine months ended October
31, 2017, the Company had concentrations of sales with three customers equal to 26.4% and 32.8% of the Company’s net sales,
respectively (2016: sales with two customers equal to 33% and 32%, respectively). As at October 31, 2017, the accounts receivable
balances for these customers was $123,523 (January 31, 2017: $0).
Naked Brand Group Inc.
Notes to the Interim Condensed Consolidated Financial Statements
October 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 October 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 October
31, 2017, the Company has not been provided a notice of default by the other party to the agreement.
Subsequent to the quarter ending October
31, 2017, the Company signed a termination agreement to settle the above agreement. The Company agreed to pay $200,000 cash which
includes a one-time royalty payment of $150,000 and $50,000 to re-purchase 365,688 warrants and 36,569 anti-dilution warrants
held by the other party.
On December 7, 2017, the Company paid
$200,000 to settle the terms of this agreement.
|
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.
|