Attached files
| file | filename |
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| EX-32.2 - EXHIBIT 32.2 - NAKED BRAND GROUP INC. | v464761_ex32-2.htm |
| EX-32.1 - EXHIBIT 32.1 - NAKED BRAND GROUP INC. | v464761_ex32-1.htm |
| EX-31.2 - EXHIBIT 31.2 - NAKED BRAND GROUP INC. | v464761_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - NAKED BRAND GROUP INC. | v464761_ex31-1.htm |
| EX-23.1 - EXHIBIT 23.1 - NAKED BRAND GROUP INC. | v464761_ex23-1.htm |
| EX-21.1 - EXHIBIT 21.1 - NAKED BRAND GROUP INC. | v464761_ex21-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
__________________________
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2017
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-37662
__________________________
NAKED BRAND GROUP INC.
(Exact name of registrant as specified in its charter)
__________________________
| Nevada | 99-0369814 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
10th Floor – 95 Madison Avenue, New York, New York 10016
(Address of principal executive offices and Zip Code)
(212) 851-8050
(Registrant’s telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, $0.001 par value | The NASDAQ Capital Market |
| (Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ |
Emerging growth company |
☐ |
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.
NAKED BRAND GROUP INC.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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.
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CERTAIN TERMS USED IN THIS FORM 10-K
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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:
| – | costs related to the Merger, such as legal and accounting fees, must be paid even if the Merger is not completed; |
| – | if the Merger Agreement is terminated under certain circumstances, we may be required to issue to Bendon 2.5 million shares of common stock; |
| – | 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; |
| – | 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; |
| – | the price of our stock may decline and remain volatile; and |
| – | we may be subject to litigation related to the Merger or any failure to complete the Merger. |
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.
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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.
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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.
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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:
| – | investors react negatively to the prospects of the combined company’s business and prospects from the Merger; |
| – | the effects of the Merger on the combined company’s business and prospects are not consistent with the expectations of financial or industry analysts; |
| – | 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 |
| – | 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. |
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.
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Item 1B. Unresolved Staff Comments
Not applicable.
We currently maintain offices at 10th Floor – 95 Madison Avenue, New York, New York, USA, which we lease for approximately $18,000 per month. The lease is on a month-to-month basis. We believe our New York offices are suitable and adequate premises from which to operate our business at this time as they provide us with sufficient space to conduct our operations.
We do not own any real property.
We know of no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which our company or our subsidiary is a party or of which any of their property is subject. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder holding more than 5% of our shares, is an adverse party or has a material interest adverse to our or our subsidiary’s interest.
Item 4. Mine Safety Disclosures
Not Applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock has been listed on the NASDAQ Capital Market under the symbol “NAKD” since December 18, 2015. Prior to that time, our common stock was quoted on the OTCQB marketplace operated by the OTC Markets Group, Inc. The following table sets forth the high and low sales prices per share for our common stock for the periods indicated. Information for the period from December 18, 2015 through January 31, 2017 is the high and low closing sales prices of our common stock on the NASDAQ Capital Market. Information for all periods prior thereto is the high and low bid quotations for our common stock on the OTCQB based upon information provided by the OTC Markets Group, Inc. Quotations reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent actual transactions.
| Period | High ($) | Low ($) | ||||||
| Year ended January 31, 2016 | ||||||||
| First Quarter | 5.60 | 3.60 | ||||||
| Second Quarter | 5.20 | 3.30 | ||||||
| Third Quarter | 6.00 | 3.50 | ||||||
| Fourth Quarter | 4.00 | 2.54 | ||||||
| Year ended January 31, 2017 | ||||||||
| First Quarter | 2.95 | 1.49 | ||||||
| Second Quarter | 2.07 | 1.35 | ||||||
| Third Quarter | 2.95 | 1.03 | ||||||
| Fourth Quarter | 3.68 | 0.82 | ||||||
Holders of Record
As of April 26, 2017, we had approximately 208 common stockholders of record. This figure does not include beneficial owners who hold shares of common stock in nominee name. The closing price per share of our common stock on April 24, 2017 was $2.03, as reported on the NASDAQ Capital Market.
Dividends
We have not declared any dividends since incorporation and do not anticipate that we will do so in the foreseeable future. Subject to compliance with applicable corporate laws, our directors will determine if and when dividends should be declared and paid in the future based on our financial position at the relevant time. All shares of our common stock are entitled to an equal share of any dividends declared and paid.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Recent Sale of Unregistered Securities and Use of Proceeds
None.
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Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for the 2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended January 31, 2017.
Item 6. Selected Financial Data
Not Applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-K, particularly in Part I, Item 1A, “Risk Factors.”
Overview
We are an apparel and lifestyle brand company that is currently focused on innerwear products for women and men. Under our flagship brand name and registered trademark “Naked®”, we design, manufacture and sell men’s and women’s underwear, intimate apparel, loungewear and sleepwear through retail partners and direct to consumer through our online retail store www.wearnaked.com. We have a growing retail footprint for our men’s innerwear products in premium department and specialty stores and internet retailers in North America, including accounts such as Nordstrom, Dillard’s, Bloomingdale’s, Amazon.com, Soma.com, Saksfifthavenue.com, barenecessities.com and others.
Our net sales grew to $1,842,065 in fiscal 2017 from $1,389,414 in fiscal 2016. Net sales increased primarily as a result increases in sales from our ecommerce and third party ecommerce sites, as well as increases in sales to specialty and retail accounts, as described below.
During the year ended January 31, 2017, sales to department stores accounted for approximately 38.7% of total net sales, as compared to 49.2% during fiscal 2016. The reason for the decrease in proportion of department store sales to total sales is as a result of the growth in our other sales channels. Increases in sales to new department store accounts, such as Bloomingdales, Dillards, Saks Fifth Avenue, Lord & Taylor and Chicos of $445,076 during fiscal 2017, were offset by a decrease of $414,454 in sales to Nordstrom and HBC. The reduction in sales to Nordstrom during fiscal 2017 is as a result of a reduction by Nordstrom in replenishment orders due to the elimination of in-store inventory.
Net sales through our ecommerce store (www.wearnaked.com) increased to approximately $382,900 for fiscal 2017 compared to $333,200 in fiscal 2016, an increase of 14.9%. Sales through our ecommerce store accounted for approximately 20.8% of total net sales in fiscal 2017 as compared to 24.0% of total net sales in fiscal 2016. The decrease in ecommerce sales as a percentage of total net sales is attributable to a larger increase in total department and retail store sales in fiscal 2017 compared to the prior year, because of the addition of new department store accounts, as described above.
Net sales through third party ecommerce sites increased to approximately $125,900 for fiscal 2017 compared to $52,500 in fiscal 2016, an increase of 139.9%. Sales through these channels accounted for approximately 6.8% of total net sales in fiscal 2017 as compared to 3.8% of total net sales for fiscal 2016. This increase is attributable to new third party ecommerce accounts added in fiscal 2017.
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Sales to retail and specialty store accounts constituted approximately $368,785, or 20.0% of total net sales in fiscal 2017, as compared to $257,871, or 18.6% of total net sales in fiscal 2016. Total sales to retail and specialty store sales increased by approximately 43.0% over the comparative year, due to the addition of accounts.
During fiscal 2017, we sold approximately $242,700 in out of season and overstock inventory through off price sales channels. Sales to these customers accounted for approximately 13.2% of total net sales in fiscal 2017, as compared to 4.0% of total net sales in fiscal 2016.
During fiscal 2017, men’s products constituted 50.9% of total sales and women’s products constituted 49.1% of total sales. Going forward, we expect the majority of our growth to be driven by our women’s collections, as we anticipate that our women’s products will become more widely distributed. In addition, the women’s market is substantially larger than the men’s market. However, we also expect to continue to see stable growth in our men’s products through our sales and marketing initiatives.
During the third quarter of fiscal 2017, we launched our first collections of Wade X Naked. The Company started shipping these orders in September 2016 and sales of these collections during fiscal 2017 were $59,900. The Wade X Naked collection is of key importance in the growth of our men’s business.
During fiscal 2017, gross margins increased to 20.5%. The increase in gross margins in was due to increased production efficiencies and increased sales from our women’s products, which generate higher margins. In addition, in fiscal 2016, our net margins were reduced significantly as a result of the write down of certain inventory, to reduce inventory to estimated net realizable values, which arose as a result of seasonality and product line changes.
Our products are sold in North America; however, we believe our products appeal to men and women worldwide. We continue to explore international distribution relationships for our Naked and Wade X Naked products.
In the future, we intend to expand the Naked brand on our own and through licensing partnerships into other apparel and product categories.
We operate in the apparel industry that is subject to seasonality of buying which can affect revenue and cash flows. We focus on two main buying seasons in the apparel industry: Fall/Winter season, which falls into the third to fourth quarters of our fiscal year and Spring/Summer season, which falls into the first to second quarters of our fiscal year, with some potential shipments at the last quarter. During fiscal 2017, the largest revenues were generated in our third and fourth fiscal quarters, which quarters generated 29.9% and 29.9%, respectively, of the aggregate annual revenues. These fluctuations arose from seasonal sales and promotions, and the introduction of new collections. However, the largest impact on quarterly fluctuations was a result of a decrease in sales to one of our key customers, Nordstrom, in the second quarter of fiscal 2017 as a result of a reduction by Nordstrom in replenishment orders due to the elimination of in-store stock, and a large return of merchandise from store closures. In the following two quarters, growth in our new customers offset the decrease in replenishment orders from Nordstrom. As a result of this growth and changes to our business with the introductions of new product offerings, the natural seasonality of our business has historically had a reduced effect.
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 believe there is an increasing demand from our target customers to provide a luxury product at an affordable price that delivers excellent value. Our expansion into the women’s sleepwear and intimate apparel market is a key part of our growth strategy given that market data estimates the women’s market represent over 77% of the overall innerwear market. Daywear products that address consumer demand for versatile “athleisure” apparel – similar to several styles in our Fall 2015 women’s collection – have been the fastest growing segment of the women’s market. Our ability to attract women customers for the Naked brand is also important to our effort to penetrate the men’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.
Although we believe these trends will facilitate our growth, we also face potential challenges that could limit our ability to take advantage of these opportunities, including, among others, the risk of general economic or market conditions that could affect consumer spending and the financial health of our retail customers. In addition, we may not be able to effectively manage our growth and a more complex global business. We may not consistently be able to anticipate consumer preferences and develop new and innovative products that meet changing preferences in a timely manner. Furthermore, our industry is very competitive, and competition pressures could cause us to reduce the prices of our products or otherwise affect our profitability. We also rely on third-party suppliers and manufacturers outside the U.S. to provide fabrics and to produce our products, and disruptions to our supply chain could harm our business. For a more complete discussion of the risks facing our business, refer to the “Risk Factors” section included in Item 1A.
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Results of Operations
Revenue
During fiscal 2017, we generated net sales of $1,842,062 compared to $1,389,414 in fiscal 2016, an increase of 32.6%. Net sales increased primarily as a result of increases in sales from our ecommerce and third party ecommerce sites, as well as increases in sales to specialty and retail accounts. We also saw increased sales to new department store accounts, including Bloomingdales, Dillards, Chicos, and Saks Fifth Avenue, added during late fiscal 2016 and fiscal 2017, but these were offset by lower sales to Nordstroms. We launched our women’s sleepwear and loungewear collection in the third quarter of fiscal 2016 in our direct to consumer channels and launched these collections, as well as additional women’s intimate apparel collections, to department store and specialty store accounts in the first quarter of fiscal 2017, which also contributed to our overall increase in net sales through all sales channels.
Gross Margins
During fiscal 2017, gross margins increased to 20.5%, compared to 7.1% during fiscal 2016. Our positive growth in gross margins in fiscal 2017 the result of increasing production efficiencies and increased sales from our women’s products, which generate higher margins. During fiscal 2017, men’s products constituted 50.9% of total sales and women’s products constituted 49.1% of total sales, compared to approximately 93.2% and 6.8%, respectively in fiscal 2016.
In addition, in fiscal 2016, our net margins were reduced significantly as a result of the write down of certain inventory, to reduce inventory to estimated net realizable values, which arose as a result of seasonality and product line changes.
Operating Expenses
| Year ended January 31 | Change | |||||||||||||||
| General and administrative | 2017 | 2016 | $ | % | ||||||||||||
| Bad debts | (3,027 | ) | 30,657 | (33,684 | ) | (109.9 | ) | |||||||||
| Bank charges and interest | 20,378 | 17,048 | 3,330 | 19.5 | ||||||||||||
| Consulting | 140,360 | 311,003 | (170,643 | ) | (54.9 | ) | ||||||||||
| Depreciation | 13,215 | 17,420 | (4,205 | ) | (24.1 | ) | ||||||||||
| Directors fees | 481,511 | 433,850 | 47,661 | 11.0 | ||||||||||||
| Insurance | 83,235 | 151,859 | (68,624 | ) | (45.2 | ) | ||||||||||
| Investor relations | 185,597 | 73,805 | 111,792 | 151.5 | ||||||||||||
| Marketing | 1,139,471 | 1,156,473 | (17,002 | ) | (1.5 | ) | ||||||||||
| Occupancy and rent | 196,588 | 134,068 | 62,520 | 46.6 | ||||||||||||
| Office and misc | 204,280 | 215,846 | (11,566 | ) | (5.4 | ) | ||||||||||
| Product development | 440,867 | 747,644 | (306,777 | ) | (41.0 | ) | ||||||||||
| Professional fees | 736,849 | 957,025 | (220,176 | ) | (23.0 | ) | ||||||||||
| Salaries and benefits | 6,950,518 | 6,780,037 | 170,481 | 2.5 | ||||||||||||
| Transfer agent and filing fees | 70,001 | 121,868 | (51,867 | ) | (42.6 | ) | ||||||||||
| Travel | 95,425 | 174,294 | (78,869 | ) | (45.3 | ) | ||||||||||
| Warehouse management | 321,083 | 404,092 | (83,009 | ) | (20.5 | ) | ||||||||||
| Total | 11,076,351 | 11,726,989 | (650,638 | ) | (5.5 | ) | ||||||||||
(1) Included in director compensation is an amount of $481,511 (fiscal 2016: $433,850) for non-cash stock option compensation and stock compensation charges.
(2) Included in salaries and benefits is an amount of $4,918,228 (fiscal 2016: $4,936,118) for non-cash stock option compensation charges.
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General and administrative expenses decreased in fiscal 2017 to $11,076,351, compared to $11,726,989 in fiscal 2016, a decrease of $650,638, or 5.5%.
Of the total general and administrative expenses, $5,348,647 was related to non-cash stock option compensation charges for fiscal 2017, as compared to $5,632,267 for fiscal 2016. These amounts are included in salaries and benefits, director fees, investor relations, product development and consulting components of general and administrative expenses above. These non-cash stock option compensation charges relate mostly to stock options issued to our management team, directors, and other strategic partners, as part of certain incentive based compensation packages. The fair value of non-cash stock option compensation is calculated using the Black Scholes option pricing model and is charged to operating expenses over the vesting term of the related option awards. See Note 10 to our consolidated financial statements included in this Form 10-K for more detailed information regarding these charges.
The decrease in general and administrative expenses is mostly attributable to decreases in consulting, product development, professional fees, insurance, travel, and warehouse management as further explained below.
Consulting fee expenses decreased as a result of a recovery of stock option compensation charges recognized in fiscal 2017 for stock options issued to non-employees, which are being re-measured at each reporting period in accordance with ASC 505-50, Equity Based Payments to Non-Employees, the value of which decreased during the year. This was offset by an increase in consulting fees for fees paid to a consulting firm which were previously included in salaries and wages.
Product development costs have decreased in the current period because we incurred higher product development costs in the comparative period in connection with the launch of our women’s collections. This decrease also relates to a recovery for product development consultant stock based compensation due to a reduction in share price during fiscal 2017.
Professional fees decreased in the current period as a result of new contracts and financing activities in fiscal 2016, as well as a decrease in legal fees.
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Insurance expenses decreased mostly due to a change in the way insurance was being expensed. In the comparative period, insurance was expensed when paid and included the initial down payment on our professional liability policy in June 2015. In the current period, the policy was set up as a prepaid and the financing payments are being applied against the payable.
Transfer agent and filing fees have decreased as a result of the up listing of our common stock to NASDAQ from the OTC markets in the comparative period, and one-time costs associated therein.
Decreases to travel expenses in fiscal 2017 are as a result of a decrease in discretionary spending due to cash shortages as well as a decrease in financing related travel.
Warehouse management expenses decreased in fiscal 2017 as compared to fiscal 2016, as a result of the engagement of a new third party warehouse at a lower cost.
The decrease in general and administrative expenses described above were partially offset by an increase in salaries and benefits, investor relations, and rent.
The increase in salaries and benefits during fiscal 2017 is due to increases in staffing in both the accounting/finance and sales departments as well as an increase in severance charges as a result of staff turnover.
The increase in investor relations expense in fiscal 2017 is due to strategic investor and media relations consultants engaged in connection with a proposed business combination with Bendon.
Rent expense increased in fiscal 2017 as a result of an expanded team, which warranted increased occupancy.
Other income and expenses
We incurred interest expenses during fiscal 2017 of $81,796 and financing and accretion charges of $15,975 as compared to interest expenses of $878,933 and financing and accretion charges of $7,255,346 in fiscal 2016. These decreases in interest expense are attributable to the automatic conversion of our 6% senior secured convertible debentures in December 2015. The automatic conversion of these debentures in December 2015 also gave rise to the increase in accretion charges in fiscal 2016, as a result of the accelerated accretion of the debt discount associated with the debentures on the conversion date.
Net loss and comprehensive loss
Our net loss for fiscal 2017 was $(10,798,503), or $(1.77) per share, as compared to a net loss of $(19,063,399), or $(10.13) per share, for fiscal 2016. The decrease in net loss in the current period is primarily due to the decrease in accretion charges associated with the automatic conversion of debt in fiscal 2016.
The decrease in net loss per share is primarily due to the increased number of shares outstanding compared to the comparative period, as a result of the public offering of common stock and conversion of debt to common stock in December 2015.
Liquidity and Financial Condition
Liquidity
Our cash requirements have been principally to fund working capital needs, the development of new product lines and the procurement of inventory to support our growth.
As of January 31, 2017, we had cash totaling $879,014, which amount was insufficient to fund our operations through fiscal 2018.
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Subsequent to January 31, 2017, we commenced an “at-the-market” offering pursuant to which we sold an aggregate of 2,189,052 shares of our common stock for gross proceeds of $5,499,723 through Maxim Group LLC as sales agent.
In accordance with the collaboration and endorsement agreement with Dwayne Wade, we are required to make quarterly payments for royalty fees based on the greater of a pre-determined percentage of certain sales, or a minimum annual amount. During the year ended January 31, 2017, we did not make all minimum royalty payments as they became due under the terms of the agreement, and consequently we have not fulfilled our obligations under the agreement. Accordingly, the other party to the agreement has the right to cause the agreement to enter into default. If the other party provides such notice of default, this could affect our ability to sell certain portions of our Wade X Naked inventory on hand and on order at January 31, 2017. As at January 31, 2017, we have not been provided a notice of default by the other party to the agreement, and we are currently negotiating settlement of amounts currently due under the agreement. No provision for any losses that might be incurred in the event of a notice of default has been provided in the financial statements included in this Annual Report.
Our common stock is listed on the NASDAQ Capital Market under the symbol NAKD. In September, 2016, we received a letter from NASDAQ informing us that, at that time, we were not in compliance with NASDAQ rules requiring us to maintain a minimum of $2,500,000 in stockholders’ equity. In November 2016, we submitted a plan to regain compliance with this requirement and we were granted an extension until March 22, 2017, to evidence compliance therewith. In March 2017, we received a letter from NASDAQ informing us that, at the time, we regained compliance with this requirement. However, if we fail to evidence compliance with this requirement upon filing our next periodic report for the fiscal quarter ended April 30, 2017, our common stock may be subject to delisting from the NASDAQ Capital Market.
Management intends to continue to raise funds from equity and debt financings to fund our operations and objectives. However, we cannot be certain that financing will be available on acceptable terms or available at all. To the extent that we raise additional funds by issuing debt or equity securities or through bank financing, our existing stockholders may experience significant dilution. If we are unable to raise funds when required or on acceptable terms, we may have to significantly scale back, or discontinue, our operations.
Factoring Arrangement with Wells Fargo
On June 14, 2016, we entered into a Joint Factoring Agreement (the “Joint Factoring Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Factoring Agreement with Wells Fargo replaced a factoring agreement with Capital Business Credit LLC, which was terminated effective on the same date.
Under the terms of the Joint Factoring Agreement, we may assign eligible accounts receivable (the “Accounts”) to Wells Fargo in exchange for loans and advances (each such loan or advance, an “Advance”) up to an aggregate amount (the “Borrowing Base”) not to exceed the lesser of (i) $6,000,000 or (ii) the sum of up to 80% of trade receivables deemed eligible by Wells Fargo plus (A) the lesser of up to (x) 50% of the value, calculated at the lower of cost or market, of finished goods, warehoused inventory deemed eligible by Wells Fargo or (y) $500,000, plus (B) the lesser of (x) up to 75% of marketable securities held in a blocked security account, subject to an account control agreement in favor of Wells Fargo (the “Securities Account”); provided, however, that at any time when the market value of the securities held in such Securities Account is below $1,067,000, then the value of such securities for purposes of calculating the Borrowing Base will be $0 or (y) $200,000, less any reserves that Wells Fargo may establish from time to time.
In connection with Wells Fargo’s services under the Joint Factoring Agreement, Wells Fargo receives a commission equal to the Factoring Commission Percentage (as defined in the Joint Factoring Agreement) multiplied by the gross invoice amount of each Account purchased, which is charged to the Company’s account on the date a related Advance is made. During the initial term of the Joint Factoring Agreement, Wells Fargo will receive minimum commissions equal to $24,000, $36,000 and $50,000 during the first, second and third year, respectively.
We bear the risk of credit loss on the Accounts, except where Wells Fargo provides credit approval in writing on such Account. The Advances bear interest on the daily net balance of any moneys owed at a rate of LIBOR plus 3%. All obligations under the Joint Factoring Agreement, including the Advances (collectively, the “Obligations”), are payable on demand and may be charged by Wells Fargo to the Company’s account at any time.
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At January 31, 2017, there was approximately $217,628 available for advance under the Joint Factoring Agreement.
The Obligations are secured by a continuing security interest in all assets, properties, and rights of the Company, wherever located, whether owned as of the date of the Joint Factoring Agreement or subsequent thereto.
The term of the Joint Factoring Agreement is for three years and will automatically renew, unless terminated at any time by Wells Fargo with thirty days’ written notice, or by us prior to such renewal, with sixty days’ prior written notice.
| Working Capital (Consolidated) | 2017 | 2016 | ||||||
| Current Assets | $ | 3,604,548 | $ | 6,786,672 | ||||
| Current Liabilities | $ | 2,327,872 | $ | 2,115,527 | ||||
| Working Capital | $ | 1,276,676 | $ | 4,671,145 | ||||
Subsequent to January 31, 2017, the Company issued an aggregate of 2,189,052 shares of common stock for gross proceeds of $5,499,723 pursuant to an At The Market Offering Agreement.
| Cash Flows | ||||||||
| Year ended January 31, | ||||||||
| 2017 | 2016 | |||||||
| Cash Used in Operating Activities | $ | (5,501,268 | ) | $ | (6,779,206 | ) | ||
| Cash Used in Investing Activities | (7,780 | ) | (38,433 | ) | ||||
| Cash Provided by Financing Activities | 1,607,068 | 9,655,398 | ||||||
| Net change in Cash During Period | $ | (3,901,980 | ) | $ | 2,837,759 | |||
Operating Activities
Cash used in our operating activities was $5,501,268 for fiscal 2017, compared to $6,779,206 for fiscal 2016. The cash used in operations during fiscal 2017 was largely the result of the net loss for the period, offset by net non-cash charges of $5,348,647, mostly related to stock-based compensation charges.
The cash used in operations during fiscal 2016 was largely the result of a net loss for the period, offset by net non-cash charges of $12,178,713, related to derivative liability accounting and stock-based compensation charges.
Investing Activities
Investing activities used cash of $7,780 during fiscal 2017, compared to $38,433 for fiscal 2016. Investing activities in fiscal 2017 and 2016 consist mostly of cash outlays for patent and trademark acquisitions.
Financing Activities
In fiscal 2017, financing activities provided cash of $1,607,068 for fiscal 2017, compared to $9,655,398 for fiscal 2016. We received cash of $1,955,003 in connection with the issuance of shares pursuant to a registered public offering. These proceeds were partially offset by the repayment of convertible debentures which came due during fiscal 2017, in the amount of $600,000. We also received an aggregate of $477,000 from the issuance of promissory notes during fiscal 2017, which proceeds were used to fund operations. During fiscal 2017, we received advances under factoring arrangements of $1,050,000, which is offset by repayments under these facilities of $1,274,935, for net repayments of $224,935 during fiscal 2017.
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In fiscal 2016, we received cash of $9,842,829 in connection with the issuance of shares pursuant to the exercise of outstanding warrants and pursuant to the Public Offering. These proceeds were partially offset by offering costs totaling $715,142. We also received factoring proceeds of $1,260,000 which were partially offset by repayments totaling $732,289.
Commitments and Capital Expenditures
We do not anticipate that we will expend any significant amount on capital expenditures like equipment over the next twelve months or enter into any other material commitments.
Going Concern
At January 31, 2017, we did not have sufficient working capital to implement our proposed business plan over the next 12 months, had not yet achieved profitable operations and expect to continue to incur significant losses from operations in the immediate future. These factors cast substantial doubt about our ability to continue as a going concern. To remain a going concern, we will be required to obtain the necessary financing to meet our obligations and repay our substantial existing liabilities as well as further liabilities arising from normal business operations as they come due. Management plans to obtain the necessary financing through the issuance of equity to new investors and existing stockholders. Should we be unable to obtain this financing, we may need to substantially scale back operations or cease business. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances that we will be able to obtain additional financing necessary to support our working capital requirements. To the extent that funds generated from operations are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to us.
Segment Reporting
We used several factors in identifying and analyzing reportable segments, including the basis of organization, such as differences in products and services, and geographical areas. Our chief operating decision makers review financial information presented on a consolidated basis for the purposes of making operating decisions and assessing financing performance. Accordingly, we have determined that as of January 31, 2017, and 2016, there is only a single reportable operating segment.
We operate 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 | 29,945 | 299,390 | |||||
| $ | 1,842,065 | $ | 1,389,414 | ||||
At January 31, 2017, 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 | ||||||||
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Disclosure of Outstanding Share Data
As of April 26, 2017, there were 10,342,191 shares of our common stock issued and outstanding. In addition, at April 26, 2017, the total dilutive securities outstanding, including options, warrants and shares issuable upon conversion of convertible debt instruments was approximately 3,914,409 shares.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Application of Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financial statements.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 3 to our annual financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, the following policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations
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. Significant management judgments and estimates must be made in connection with determination of revenue to be recognized in any accounting period in respect of the timing of when the applicable revenue recognition criteria have been met. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized could result.
Accounts receivables consist of amounts due from customers and are recorded upon the shipment of product to customers. Credit terms are extended to customers in the normal course of business and no collateral is required. We estimate an allowance for doubtful accounts based on historical losses, existing economic conditions and the financial stability of its customers. Accounts receivable are written off when deemed uncollectible. Significant management judgment is involved in making the determination with respect to uncollectible amounts.
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 to consider sell-through prospects based on our 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 inventory carrying amount to reflect this.
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Assumptions and estimates about the recoverability of certain inventory may be subject to significant judgment. A variety of factors must be incorporated into these estimates and assumptions such as industry and economic trends and internal factors such as changes in our business and forecasts.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 we made are those relating to uncollectible receivables, inventory valuation and obsolescence, stock-based compensation expense, and derivative valuations.
Accounting for Stock-Based Compensation
ASC Topic 718, Compensation – Stock Compensation, 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.
Stock–based compensation represents the cost related to stock–based awards granted to employees and non–employee consultants. We measure stock–based compensation cost at measurement date, based on the estimated fair value of the award, and generally recognize the cost as expense on a straight–line basis (net of estimated forfeitures) over the employee requisite service period or the period during which the related services are provided by the non–employee consultants and the options are earned. We estimate the fair value of stock options using a Black–Scholes option valuation model, which utilizes various assumptions and estimates that are subject to management judgment.
As we have insufficient historical data on which to estimate expected future share price volatility, we have estimated expected share price volatility based on the historical share price volatility of comparable entities. The expected life of options granted has been determined utilizing the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin (“SAB”) No. 110 Share–Based Payment. The risk–free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, ASC 718 requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. We applied an estimated forfeiture rate of 0% in determining the expense recorded in our consolidated statement of operations given our limited forfeiture experience history.
Derivative Financial Instruments
From time to time, we may issue warrants and convertible instruments with embedded conversion options which, dependent on their specific contractual terms, may be required to be accounted for as separate derivative liabilities. These liabilities are required to be measured at fair value. These instruments are then adjusted to reflect fair value at each period end. Any increase or decrease in the fair value is recorded in results of operations as change in fair value of derivative liabilities. In determining the appropriate fair value, we use the binomial pricing model because these instruments are not quoted on an active market.
Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in assumptions can materially affect the fair value estimate and therefore the binomial model does not necessarily provide a reliable single measure of the fair value of these instruments.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In June 2014, the FASB issued 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 amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. 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.
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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 Financial Accounting Standards Board (FASB), issued the Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, that 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. For public business entities, the final guidance will be effective for fiscal years beginning after 15 December 2015, however, early adoption (including in interim periods) is permitted. Upon adoption, an entity must apply the new guidance retrospectively to all prior periods presented in the financial statements. An entity is also required in the year of adoption to provide certain disclosures about the change in accounting principle, including the nature of and reason for the change, the transition method, a description of the prior-period information that has been retrospectively adjusted and the effect of the change on the financial statement line items (that is, debt issuance cost asset and the debt liability). This standard was effective for and adopted by the Company in fiscal 2017. 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 Standards Not Yet Effective
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. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
In November 2015, the Financial Accounting Standards Board (“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.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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Item 8. Financial Statements and Supplementary Data
See pages F-1 through F-32 following the Exhibit Index of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
N/A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.
Based on that evaluation, our principal executive officer and our principal financial officer concluded that as of the end of the period covered by this Form 10-K, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, our management, with the participation of our principal executive officer and our principal financial officer has conducted an assessment, including testing, using the criteria in Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our management believes that because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in COSO, our management concluded that our internal controls over financial reporting were effective as of January 31, 2017.
Changes in Internal Control Over Financial Reporting
There were no other changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Form 10-K that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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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 | 72 | Chief Executive Officer, Chief Creative Officer, Director and Chairwoman of the Board | 2014 | |||
| Joel Primus | 30 | President, Secretary and Director | 2012 | |||
| Kai-Hsiang Lin | 53 | Vice President of Finance | - | |||
| David Hochman | 42 | Director, Vice Chairman of the Board | 2014 | |||
| Andrew Kaplan | 50 | Director | 2013 | |||
| Paul Hayes | 51 | Director | 2015 | |||
| Martha Olson | 61 | Director | 2015 | |||
| Jesse Cole | 44 | Director | 2015 | |||
| Edward Hanson | 41 | Director | 2017 | |||
| Justin Davis-Rice | 46 | 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.
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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.
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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.
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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, 10th 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.
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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.
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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.
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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. |
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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.
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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 | |||||||||||||||||||||||||||||||||||
| Joel Primus | 199,935 | (2) | 99,964 | (2) | - | $4.40 | 8/18/2025 | - | - | - | - | ||||||||||||||||||||||||
| President, Secretary, Treasurer and Director | 7,500 | - | - | $10.00 | 7/30/2022 | - | - | - | - | ||||||||||||||||||||||||||
| Michael Flanagan | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Former CFO, COO | |||||||||||||||||||||||||||||||||||
| Carlos Serra | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Former VP Sales & Merchandising | |||||||||||||||||||||||||||||||||||
| Kai-Hsiang Lin | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
| VP Finance | |||||||||||||||||||||||||||||||||||
| (1) | 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. |
| (2) | 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 ($) |
Total ($) |
|
| David Hochman | - | - | 14,100 | - | - | - | 14,100 | |
| Andrew Kaplan | - | - | - | - | - | - | - | |
| Paul Hayes | - | - | - | - | - | - | - | |
| Martha Olson | - | - | - | - | - | - | - | |
| Jesse Cole | - | - | - | - | - | - | - | |
| Edward Hanson | - | - | - | - | - | - | - | |
| Justin Davis-Rice | - | - | - | - | - | - | - |
| (1) | 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. |
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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. |
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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 | (b) Weighted-average | (c) Number of Securities | |||||||||
| 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.
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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.
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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.
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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.
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Item 15. Exhibits, Financial Statement Schedules.
| Exhibit | ||
| Number | Description of Exhibit | |
| 2.1 | Acquisition Agreement dated February 28, 2012 among our company, Naked Boxer Brief Clothing Inc. and SBH Acquisition Corp. (incorporated by reference from Exhibit 10.1 of our current report on Form 8-K, as filed with the SEC on March 1, 2012) | |
| 3.1 | Articles of Incorporation (incorporated by reference from our registration statement on Form SB-2, as filed with the SEC on December 8, 2006) | |
| 3.2 | Articles of Merger (incorporated by reference from Exhibit 10.1 of our current report on Form 8-K, as filed with the SEC on August 30, 2012) | |
| 3.3 | Certificate of Amendment to Articles of Incorporation (incorporated by reference from Exhibit 3.3 of our quarterly report on Form 10-Q, as filed with the SEC on September 15, 2014) | |
| 3.4 | Certificate of Change effective as of August 10, 2015 (incorporated by reference from Exhibit 3.1 to our current report on Form 8-K, as filed with the SEC on August 7, 2015) | |
| 3.5 | Amended Bylaws (incorporated by reference from Exhibit 3.1 to our current report on Form 8-K, as filed with the SEC on January 28, 2013) | |
| 3.6 | Amendment to Articles of Incorporation as of August 11, 2016 (incorporated by reference from Exhibit 3.1 to our current report on Form 8-K, as filed with the SEC on August 12, 2016) | |
| 4.0 | Specimen stock certificate for common stock (incorporated by reference from Exhibit 4.1 to our registration statement on Form S-1, as filed with the SEC on September 24, 2015) | |
| 10.1± | 2012 Stock Option Plan (incorporated by reference from Exhibit 10.14 to our current report on Form 8-K, as filed with the SEC on July 31, 2012) | |
| 10.2± | Form of Stock Option Agreement (incorporated by reference from Exhibit 10.15 to our current report on Form 8-K, as filed with the SEC on July 31, 2012) | |
| 10.3 | Form of Stock Option Agreement with Shark Investments, LLC dated October 9, 2012 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the SEC on October 15, 2012) | |
| 10.4 | Amendment Agreement dated July 22, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the SEC on July 29, 2013) | |
| 10.5 | Form of Amended and Restated Promissory Note (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the SEC on July 29, 2013) | |
| 10.6 | Form of Amendment to Warrant Certificate (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the SEC on July 29, 2013) | |
| 10.7 | Agency and Interlender Agreement dated November 14, 2013 (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the SEC on November 19, 2013) | |
| 10.8 | Amended and Restated Security Agreement dated November 14, 2013 (incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the SEC on November 19, 2013) | |
| 10.9 | Form of Subscription Agreement for Convertible Notes and Warrants (incorporated by reference from Exhibit 10.5 to our current report on Form 8-K, as filed with the SEC on November 19, 2013) | |
| 10.10 | Form of Warrant Issuance Agreement (incorporated by reference from Exhibit 10.6 to our current report on Form 8-K, as filed with the SEC on November 19, 2013) | |
| 10.11 | Form of Warrant Certificate (incorporated by reference from Exhibit 10.7 to our current report on Form 8-K, as filed with the SEC on November 19, 2013) | |
| 10.12 | Form of Securities Purchase Agreement dated April 7, 2014 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the SEC on April 10, 2014) | |
| 10.13 | Form of 6% Convertible Note (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the SEC on April 10, 2014) | |
| 10.14 | Form of Security Agreement dated April 7, 2014 (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the SEC on April 10, 2014) | |
| 10.15 | Amendment to Security Agreements dated April 4, 2014 (incorporated by reference from Exhibit 10.7 to our current report on Form 8-K, as filed with the SEC on April 10, 2014) |
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| 10.16 | Amendment to Amended and Restated Promissory Note dated April 4, 2014 (incorporated by reference from Exhibit 10.8 to our current report on Form 8-K, as filed with the SEC on April 10, 2014) | |
| 10.17 | Amendment to Promissory Note dated April 4, 2014 (incorporated by reference from Exhibit 10.9 to our current report on Form 8-K, as filed with the SEC on April 10, 2014) | |
| 10.18 | Inter-lender Agreement dated April 4, 2014 (incorporated by reference from Exhibit 10.10 to our current report on Form 8-K, as filed with the SEC on April 10, 2014) | |
| 10.19 | Warrant Agreement with Kalamalka Partners Ltd. Dated April 4, 2014 (incorporated by reference from Exhibit 10.12 to our current report on Form 8-K, as filed with the SEC on April 10, 2014) | |
| 10.20 | Form of Subscription Agreement by and among the company and the purchasers signatory thereto (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the SEC on June 11, 2014) | |
| 10.21 | Form of 6% Senior Secured Convertible Debenture (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the SEC on June 11, 2014) | |
| 10.22 | Form of Security Agreement (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the SEC on June 11, 2014) | |
| 10.23 | Form of Warrant (incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the SEC on June 11, 2014) | |
| 10.24 | Form of Registration Rights Agreement (incorporated by reference from Exhibit 10.5 to our current report on Form 8-K, as filed with the SEC on June 11, 2014) | |
| 10.25 ± | 2014 Long Term Incentive Plan (incorporated by reference from Exhibit 10.6 to our current report on Form 8-K, as filed with the SEC on June 11, 2014) | |
| 10.26 | Note Termination Agreement between the company and JMJ Financial dated June 5, 2014 (incorporated by reference from Exhibit 10.7 to our current report on Form 8-K, as filed with the SEC on June 11, 2014) | |
| 10.27± | Form of Option Award Agreement (incorporated by reference from Exhibit 10.8 to our current report on Form 8-K, as filed with the SEC on June 11, 2014) | |
| 10.28± | Employment Agreement between the company and Carole Hochman dated June 6, 2014 (incorporated by reference from Exhibit 10.9 to our current report on Form 8-K, as filed with the SEC on June 11, 2014) | |
| 10.29± | Amended and Restated Stock Option Award Agreement with Carole Hochman (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the SEC on August 26, 2014) | |
| 10.30 | Form of Amendment to Warrant to Purchase Common Stock (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the SEC on July 7, 2015) | |
| 10.31 | Collaboration & Endorsement Agreement with Wade Enterprises LLC, effective June 15, 2015 (incorporated by reference from Exhibit 10.58 to our Post-Effective Amendment No. 2 to our registration statement on Form S-1, as filed with the SEC on November 5, 2015) (1) | |
| 10.32 | Form of Amendment No. 1 to 6% Senior Secured Convertible Debenture (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the SEC on August 6, 2015) | |
| 10.33 | Form of Amendment to Warrant to Purchase Common Stock (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the SEC on August 6, 2015) | |
| 10.34± | Employment Agreement between the Company and Mr. Joel Primus (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the SEC on August 24, 2015) | |
| 10.35± | Guaranty by Carole Hochman in favor of Capital Business Credit LLC dated June 11, 2015 (incorporated by reference from Exhibit 10.62 to our registration statement on Form S-1, as filed with the SEC on September 24, 2015) | |
| 10.36± | Offer Letter between the Company and Mr. Carlos Serra (incorporated by reference from Exhibit 10.63 to our registration statement on Form S-1, as filed with the SEC on September 24, 2015) | |
| 10.37± | Offer Letter between the Company and Mr. Michael Flanagan (incorporated by reference from Exhibit 10.64 to our registration statement on Form S-1, as filed with the SEC on September 24, 2015) | |
| 10.38± | Description of Deferred Compensation Arrangement with Carole Hochman (incorporated by reference from Exhibit 10.565 to our Post-Effective Amendment No. 2 to our registration statement on Form S-1, as filed with the SEC on November 5, 2015) |
| 54 |
| 10.39 | Form of Underwriters’ Warrant (incorporated by reference from Exhibit 10.66 to our registration statement on Form S-1 filed with the SEC on December 16, 2015) | |
| 10.40 | Compensation Arrangement between the Company and Mr. Kai-Hsiang Lin (incorporated by reference to Exhibit 10.40 to our Form 10-K, as filed with the SEC on April 28, 2016) | |
| 10.41 | Form of 9% Convertible Promissory Note (incorporated by reference to Exhibit 4.1 of our current report on Form 8-K, as filed with the SEC on October 27, 2016) | |
| 10.42 | Form of 10% Promissory Note (incorporated by reference to Exhibit 4.2 of our current report on Form 8-K, as filed with the SEC on November 9, 2016) | |
| 10.43 | Securities Purchase Agreement dated January 12, 2017, between Naked Brand Group Inc. and certain investors (incorporated by reference to Exhibit 10.1 of our current report on Form 8-K, as filed with the SEC on January 18, 2017) | |
| 10.44 | Form of Voting Agreement (incorporated by reference to Exhibit 10.2 of our current report on Form 8-K, as filed with the SEC on January 18, 2017) | |
| 10.45 | Letter of Intent, dated December 9, 2016 (incorporated by reference to Exhibit 10.3 of our current report on Form 8-K, as filed with the SEC on January 18, 2017) | |
| 10.46 | Amended Letter of Intent, dated February 9, 2017 (incorporated by reference to Exhibit 10.1 of our current report on Form 8-K, as filed with the SEC on February 10, 2017) | |
| 10.47 | At The Market Agreement dated February 10, 2017 between Naked Brand Group Inc. and Maxim Group LLC (incorporated by reference to Exhibit 10.1 of our current report on Form 8-K, as filed with the SEC on February 10, 2017) | |
| 10.48 | Amendment No. 2 to Letter of Intent, dated March 9, 2017 (incorporated by reference to Exhibit 10.1 of our current report on Form 8-K, as filed with the SEC on March 10, 2017) | |
| 10.49 | Amendment No. 3 to Letter of Intent, dated April 10, 2017 (incorporated by reference to Exhibit 10.1 of our current report on Form 8-K, as filed with the SEC on April 11, 2017) | |
| 21.1* | List of Subsidiaries | |
| 23.1* | Consent of BDO USA, LLP | |
| 24.1* | Powers of Attorney (incorporated by reference to the signature page hereto). | |
| 31.1* | Section 302 Certification of Principal Executive Officer | |
| 31.2* | Section 302 Certification of Principal Financial Officer and Principal Accounting Officer | |
| 32.1* | Section 906 Certification of Principal Executive Officer | |
| 32.2* | Section 906 Certification of Principal Financial Officer and Principal Accounting Officer | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
* Filed herewith.
± Indicates a management contract or compensatory plan.
(1) Portions of this exhibit containing confidential information have been omitted pursuant to an order for confidential treatment granted by the SEC pursuant to Rule 406 under the Securities Act. Confidential information has been omitted from the exhibit in places marked “[***]”and has been filed separately with the SEC.
| 55 |
None.
| 56 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on this 26th day of April 2017.
| NAKED BRAND GROUP INC. | |||
| Date: | April 26, 2017 | /S/ Kai-Hsiang Lin | |
| Kai-Hsiang Lin | |||
| Vice President of Finance |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joel Primus and Kai-Hsiang Lin, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| /s/ Carole Hochman | April 26, 2017 |
| Carole Hochman | |
| Chief Executive Officer, Chief Creative Officer and Chairwoman of the Board | |
| (Principal Executive Officer) | |
| /s/ Kai-Hsiang Lin | April 26, 2017 |
| Kai-Hsiang Lin | |
| Vice President of Finance | |
| (Principal Financial Officer and Principal Accounting Officer) | |
| /s/ Joel Primus | April 26, 2017 |
| Joel Primus | |
| President, Secretary and Director | |
| /s/ Andrew Kaplan | April 26, 2017 |
| Andrew Kaplan | |
| Director | |
| /s/ David Hochman | April 26, 2017 |
| David Hochman | |
| Director | |
| /s/ Paul Hayes | April 26, 2017 |
| Paul Hayes | |
| Director | |
| /s/ Martha Olson | April 26, 2017 |
| Martha Olson | |
| Director | |
| /s/ Jesse Cole | April 26, 2017 |
| Jesse Cole | |
| Director |
| /s/ Edward Hanson | April 26, 2017 |
| Edward Hanson | |
| Director |
| /s/ Justin Davis-Rice | April 26, 2017 |
| Justin Davis-Rice | |
| Director |
| 57 |
Naked Brand Group Inc.
Consolidated Financial Statements
For the Years Ended January 31, 2017 and 2016
| F-1 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Naked Brand Group Inc.
New York, NY
We have audited the accompanying consolidated balance sheets of Naked Brand Group Inc. as of January 31, 2017 and 2016 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended January 31, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Naked Brand Group Inc. at January 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended January 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company incurred a net loss of $10,798,503 for the year ended January 31, 2017 and the Company expects to incur further losses in the development of its business. This condition raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO USA, LLP
New York, NY
April 26, 2017
| F-2 |
Naked Brand Group Inc.
Consolidated Balance Sheets
(Expressed in US Dollars)
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 879,014 | $ | 4,780,994 | ||||
| Accounts receivable, net of allowances of $29,668 (January 31, 2016: $34,398) | - | 127,422 | ||||||
| Inventory, net of allowances of $375,784 (January 31, 2016: $390,000) | 2,228,813 | 921,449 | ||||||
| Prepaid expenses and deposits | 496,721 | 956,807 | ||||||
| Total current assets | 3,604,548 | 6,786,672 | ||||||
| Equipment, net | - | 13,215 | ||||||
| Intangible assets, net | 80,875 | 73,095 | ||||||
| TOTAL ASSETS | $ | 3,685,423 | $ | 6,872,982 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 1,761,367 | $ | 993,399 | ||||
| Interest payable | 7,279 | 6,025 | ||||||
| Factored line of credit | 302,776 | 527,711 | ||||||
| Promissory note payable | 256,450 | 3,450 | ||||||
| Convertible promissory notes | - | 584,942 | ||||||
| Total current liabilities | 2,327,872 | 2,115,527 | ||||||
| Deferred compensation | 37,037 | 170,369 | ||||||
| TOTAL LIABILITIES | 2,364,909 | 2,285,896 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Common stock Authorized 2,000,000 shares of blank check preferred stock, no par value 18,000,000 shares of common stock, par value $0.001 per share (2016: 11,250,000 common shares, par value $0.001 per share) Issued and outstanding 6,560,964 shares of common stock (2016: 6,069,982) | 6,561 | 6,070 | ||||||
| Common stock to be issued | 1,670,003 | 15,000 | ||||||
| Accumulated paid-in capital | 56,829,778 | 50,953,341 | ||||||
| Accumulated deficit | (57,179,583 | ) | (46,381,080 | ) | ||||
| Accumulated other comprehensive loss | (6,245 | ) | (6,245 | ) | ||||
| Total stockholders' equity | 1,320,514 | 4,587,086 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 3,685,423 | $ | 6,872,982 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
Naked Brand Group Inc.
Consolidated Statements of Operations
(Expressed in US Dollars)
| Years ended January 31, | 2017 | 2016 | ||||||
| Net sales | $ | 1,842,065 | $ | 1,389,414 | ||||
| Cost of sales | 1,464,654 | 1,291,219 | ||||||
| Gross profit | 377,411 | 98,195 | ||||||
| Operating Expenses | ||||||||
| General and administrative expenses | 11,076,351 | 11,726,989 | ||||||
| Foreign exchange | 1,792 | 9,225 | ||||||
| Total operating expenses | 11,078,143 | 11,736,214 | ||||||
| Operating loss | (10,700,732 | ) | (11,638,019 | ) | ||||
| Other income (expense) | ||||||||
| Interest expense | (81,796 | ) | (878,934 | ) | ||||
| Accretion of debt discounts and finance charges | (15,975 | ) | (7,255,346 | ) | ||||
| Fair value mark-to-market adjustments | - | 708,900 | ||||||
| Total other expense | (97,771 | ) | (7,425,380 | ) | ||||
| Net loss | $ | (10,798,503 | ) | $ | (19,063,399 | ) | ||
| Net loss per share | ||||||||
| Basic | $ | (1.77 | ) | $ | (10.13 | ) | ||
| Diluted | $ | (1.77 | ) | $ | (10.13 | ) | ||
| Weighted average shares outstanding | ||||||||
| Basic | 6,092,688 | 1,881,901 | ||||||
| Diluted | 6,092,688 | 1,881,901 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
Naked Brand Group Inc.
Consolidated Statement of Changes in Stockholders’ Equity (Capital Deficit)
(Expressed in US Dollars)
| Accumulated | Total | |||||||||||||||||||||||||||
| Accumulated | Other | Stockholders' | ||||||||||||||||||||||||||
| Common Stock | Paid-in | Common stock | Accumulated | Comprehensive | Equity | |||||||||||||||||||||||
| Shares | Amount | Capital | to be issued | Deficit | Loss | (Capital Deficit) | ||||||||||||||||||||||
| Balance, February 1, 2015 | 1,010,391 | $ | 1,011 | $ | 25,083,735 | $ | 15,000 | $ | (27,317,681 | ) | $ | (6,245 | ) | $ | (2,224,180 | ) | ||||||||||||
| Shares issued pursuant to the conversion of debt | 79,025 | 79 | 236,985 | - | - | - | 237,064 | |||||||||||||||||||||
| Shares issued in exchange for services rendered | 2,500 | 2 | 11,998 | - | - | - | 12,000 | |||||||||||||||||||||
| Shares issued as payment for interest owing under convertible debt arrangements | 183,205 | 183 | 774,964 | - | - | - | 775,147 | |||||||||||||||||||||
| Shares issued pursuant to the exercise of amended warrants | 585,705 | 586 | 2,342,243 | - | - | - | 2,342,829 | |||||||||||||||||||||
| Less: commissions paid | - | - | (91,422 | ) | - | - | - | (91,422 | ) | |||||||||||||||||||
| Shares issued in a public offering | 1,875,000 | 1,875 | 7,498,125 | - | - | - | 7,500,000 | |||||||||||||||||||||
| Less: share issue costs | - | - | (623,720 | ) | - | - | - | (623,720 | ) | |||||||||||||||||||
| Shares issued upon automatic conversion of debentures | 2,312,150 | 2,312 | 6,934,138 | - | - | - | 6,936,450 | |||||||||||||||||||||
| Rounding shares issued in connection with reverse stock split | 22,006 | 22 | (22 | ) | - | - | - | - | ||||||||||||||||||||
| Derivative liability reclassifications | - | - | 3,091,050 | - | - | - | 3,091,050 | |||||||||||||||||||||
| Stock based compensation | - | - | 5,632,267 | - | - | - | 5,632,267 | |||||||||||||||||||||
| Modification of warrants | - | - | 63,000 | - | - | - | 63,000 | |||||||||||||||||||||
| Net loss for the year | - | - | - | - | (19,063,399 | ) | - | (19,063,399 | ) | |||||||||||||||||||
| Balance, January 31, 2016 | 6,069,982 | $ | 6,070 | $ | 50,953,341 | $ | 15,000 | $ | (46,381,080 | ) | $ | (6,245 | ) | $ | 4,587,086 | |||||||||||||
| Shares issued pursuant to the conversion of debt | 202,520 | 203 | 228,078 | - | 228,281 | |||||||||||||||||||||||
| Shares issued in a public offering | 288,462 | 288 | 299,712 | 1,655,003 | 1,955,003 | |||||||||||||||||||||||
| Stock based compensation | - | - | 5,348,647 | - | - | - | 5,348,647 | |||||||||||||||||||||
| Net loss for the period | - | - | - | - | (10,798,503 | ) | - | (10,798,503 | ) | |||||||||||||||||||
| Balance, January 31, 2017 | 6,560,964 | $ | 6,561 | $ | 56,829,778 | $ | 1,670,003 | $ | (57,179,583 | ) | $ | (6,245 | ) | $ | 1,320,514 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
Naked Brand Group Inc.
Consolidated Statements of Cash Flows
(Expressed in US Dollars)
| for the year ended January 31, | 2017 | 2016 | ||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (10,798,503 | ) | $ | (19,063,399 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Provision for doubtful accounts | (4,730 | ) | 26,877 | |||||
| Provision for obsolete inventory | (14,216 | ) | 211,000 | |||||
| Depreciation and amortization | 13,215 | 17,420 | ||||||
| Other non cash items (Schedule 1) | 5,348,647 | 12,178,713 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 132,152 | (55,154 | ) | |||||
| Prepaid expenses and deposits | 460,086 | (573,156 | ) | |||||
| Inventory | (1,293,148 | ) | (949,223 | ) | ||||
| Accounts payable | 767,968 | 705,485 | ||||||
| Interest payable | 5,535 | 722,231 | ||||||
| Deferred costs | 15,058 | - | ||||||
| Deferred compensation | (133,332 | ) | - | |||||
| Net cash used in operating activities | (5,501,268 | ) | (6,779,206 | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of intangible assets | (7,780 | ) | (33,314 | ) | ||||
| Purchase of equipment | - | (5,119 | ) | |||||
| Net cash used in investing activities | (7,780 | ) | (38,433 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from share issuances | 300,000 | 9,842,829 | ||||||
| Share issuance offering costs | - | (715,142 | ) | |||||
| Proceeds from share subscriptions received | 1,655,003 | - | ||||||
| Proceeds from the issuance of promissory notes | 253,000 | - | ||||||
| Proceeds from convertible promissory notes | 224,000 | - | ||||||
| Repayments of convertible promissory notes | (600,000 | ) | - | |||||
| Repayments under factoring arrangements | (1,274,935 | ) | (732,289 | ) | ||||
| Advances under factoring arrangements | 1,050,000 | 1,260,000 | ||||||
| Net cash provided by financing activities | 1,607,068 | 9,655,398 | ||||||
| Net increase (decrease) in cash | (3,901,980 | ) | 2,837,759 | |||||
| Cash at beginning of the period | 4,780,994 | 1,943,235 | ||||||
| Cash at end of the period | $ | 879,014 | $ | 4,780,994 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
Naked Brand Group Inc.
Consolidated Statements of Cash Flows
(Expressed in US Dollars)
| Supplemental Cash Flow Information | ||||||||
| for the year ended January 31, | 2017 | 2016 | ||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 20,909 | $ | 70,923 | ||||
| Income Taxes | - | - | ||||||
| Non-cash financing activities: | ||||||||
| Extinguishment of accounts payable with equity | $ | - | $ | 12,000 | ||||
| Reclassification of derivative liability to additional paid in capital | - | 3,091,050 | ||||||
| Conversion of convertible debt to shares | 224,000 | 7,169,809 | ||||||
| Interest paid in shares | 4,281 | 78,856 | ||||||
| Schedule 1 to the Statements of Cash Flows | ||||||||
| Profit and loss items not involving cash consists of: | ||||||||
| Stock based compensation | $ | 5,348,647 | $ | 5,632,267 | ||||
| Compensation charge in connection with amendment of warrants | - | 63,000 | ||||||
| Change in fair value of derivative financial instruments | - | (708,900 | ) | |||||
| Amortization of deferred financing fees | - | 28,364 | ||||||
| Accretion of debt discount | - | 7,163,982 | ||||||
| $ | 5,348,647 | $ | 12,178,713 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
| 1. | Nature of Business |
Naked Brand Group Inc. (the “Company”) is a manufacturer and seller of direct and wholesale men’s and women’s undergarments and intimate apparel in the United States and Canada to consumers and retailers through its wholly owned subsidiary, Naked Inc. (“Naked”). The Company currently operates out of New York, United States of America.
Effective August 10, 2015, the Company effected a reverse stock split of its common stock on the basis of 1:40. As such, the Company’s authorized capital was decreased from 450,000,000 shares of common stock to 11,250,000 shares of common stock and an aggregate of 53,278,818 shares of common stock issued and outstanding were decreased to 1,331,977 shares of common stock. These 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.
| F-8 |
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 | |||||||||
| F-9 |
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.
| F-10 |
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). |
| F-11 |
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.
| F-12 |
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.
| F-13 |
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.
| F-14 |
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 | |||||||
| F-15 |
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.
| F-16 |
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.
| F-17 |
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.
| 4. | Inventory |
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.
| 5. | Equipment |
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).
| F-18 |
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
| 5. | Equipment (Continued) |
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 | |||||
| F-19 |
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.
| F-20 |
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.
| ii) | Wells Fargo |
Under the terms of the Joint Factoring Agreement, the Company may assign eligible accounts receivable (the “Accounts”) to Wells Fargo in exchange for loans and advances (each such loan or advance, an “Advance”) up to an aggregate amount (the “Borrowing Base”) not to exceed the lesser of (i) $6,000,000 or (ii) the sum of up to 80% of trade receivables deemed eligible by Wells Fargo plus (A) the lesser of up to (x) 50% of the value, calculated at the lower of cost or market, of finished goods, warehoused inventory deemed eligible by Wells Fargo or (y) $500,000, plus (B) the lesser of (x) up to 75% of marketable securities held in a blocked security account, subject to an account control agreement in favor of Wells Fargo (the “Securities Account”); provided, however, that at any time when the market value of the securities held in such Securities Account is below $1,067,000, then the value of such securities for purposes of calculating the Borrowing Base will be $0 or (y) $200,000, less any reserves that Wells Fargo may establish from time to time.
| F-21 |
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.
| F-22 |
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. |
| F-23 |
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.
| F-24 |
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.
| 11. | Stockholders’ Equity |
Effective August 10, 2015, the Company effected a reverse stock split of the basis of 1:40. As such, the Company’s authorized capital was decreased from 450,000,000 shares of common stock to 11,250,000 shares of common stock and an aggregate of 53,278,818 shares of common stock issued and outstanding were decreased to 1,331,977 shares of common stock. These financial statements give retroactive effect to such reverse stock split and all share and per share amounts have been adjusted accordingly.
Effective August 11, 2016, the Company amended its articles of incorporation to increase the number of authorized shares of common stock from 11,250,000 to 18,000,000 and to provide authority to issue up to 2,000,000 shares of blank check preferred stock.
Authorized
2,000,000 shares of blank check preferred stock, no par value.
18,000,000 shares of common stock, par value $0.001.
| F-25 |
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%.
| F-26 |
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.
| F-27 |
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 | |||||||||
| F-28 |
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.
| F-29 |
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.
| F-30 |
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 | |||||
| 12. | Income Taxes |
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 | $ | - | $ | - | ||||
| F-31 |
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.
| F-32 |
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. |
| F-33 |
Naked Brand Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
| 15. | Subsequent Events |
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.
| F-34 |