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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedJanuary 31, 2014
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________to __________
Commission file number000-52381
NAKED BRAND GROUP INC.
(Name of registrant as specified in its charter)
Nevada | N/A |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
#2 34346 Manufacturers Way, Abbotsford, British Columbia, Canada V2S 7M1
(Address of principal executive offices)(zip code)
604.855.4767
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Nil | Nil |
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value $0.001
(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 [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes [ ] No [X]
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 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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 [X] 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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:$23,177,418 based on a price of $0.80 per share multiplied by 28,971,773 common shares held by non-affiliates.
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date:35,983,674 shares of common stock as of May 15, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).N/A
TABLE OF CONTENTS
ITEM 1. BUSINESS | 4 |
ITEM 1A. RISK FACTORS | 8 |
ITEM 1B. UNRESOLVED STAFF COMMENTS | 15 |
ITEM 2. PROPERTIES | 15 |
ITEM 3. LEGAL PROCEEDINGS | 15 |
ITEM 4. MINE SAFETY DISCLOSURES | 15 |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 15 |
ITEM 6. SELECTED FINANCIAL DATA | 17 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATION | 17 |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | 29 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. | 29 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE | 30 |
ITEM 9A. CONTROLS AND PROCEDURES | 30 |
ITEM 9B. OTHER INFORMATION | 31 |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | 32 |
ITEM 11. EXECUTIVE COMPENSATION. | 38 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS | 40 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE | 41 |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES | 42 |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. | 43 |
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PART I
ITEM 1. BUSINESS
Forward Looking Statements
This annual report contains forward-looking statements. 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: (1) our product line; (2) our business plan, including our plan to launch a complimentary line of women's innerwear, lounge and sleepwear products within the next 12 months and in the future extend the Naked brand to active wear, swim as well as bed and bath products; (3) our expectation that by the end of fiscal 2015, all of our primary production will be made outside of Canada; (4) the enforceability of our intellectual property rights; (5) projections of market prices and costs; (6) supply and demand for our products; (7) future capital expenditures; and (8) our need for, and our ability to raise, capital. The material assumptions supporting these forward-looking statements include, among other things: (1) our ability to obtain any necessary financing on acceptable terms; (2) timing and amount of capital expenditures; (3) the enforcement of our intellectual property rights; (4) our ability to launch new product lines; (5) retention of skilled personnel; (6) continuation of current tax and regulatory regimes; (7) current exchange rate and interest rates; and (8) general economic and financial market conditions. These statements are only predictions and involve known and unknown risks, including the risks in the section entitled “Risk Factors” commencing on page 5, uncertainties and other factors, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. These risks and uncertainties include: (1) a continued downturn in international economic conditions; (2) any adverse occurrence with respect to the development or marketing of our apparel products; (3) any adverse occurrence with respect to any of our licensing agreements; (4) our ability to successfully bring apparel products to market; (5) product development or other initiatives by our competitors; (6) fluctuations in the availability and cost of materials required to produce our products; (7) any adverse occurrence with respect to distribution of our products; (8) potential negative financial impact from claims, lawsuits and other legal proceedings or challenges; (9) our ability to enforce our intellectual property rights; (10) our ability to hire and retain senior management and key employees; (11) other factors beyond our control.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States and Canada, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are stated in United States Dollars (US$) unless otherwise stated and are prepared in accordance with accounting principles generally accepted in the United States of America.
In this annual report, unless otherwise specified, all references to “common shares” refer to the common shares in our capital stock.
As used in this annual report on Form 10-K, the terms “we”, “us” and “our” mean our company, Naked Brand Group Inc., and our wholly-owned subsidiary Naked Inc., as applicable.
Corporate Information
We were incorporated in the State of Nevada on May 17, 2005 under the name of Search By Headlines.com Corp. Effective August 29, 2012, we completed a merger with a newly-formed subsidiary, Naked Brand Group Inc., a Nevada corporation, which was incorporated solely to effect a change of our corporate name. As a result, effective August 29, 2012, we changed our name from “Search By Headlines.com Corp.” to “Naked Brand Group Inc.” (“Naked Brand Group”).
Our wholly owned subsidiary is Naked Inc. (“Naked”). Naked was incorporated under the federal laws of Canada on May 21, 2009 as “In Search of Solutions Inc.”, changed its corporate name to “Naked Boxer Brief Clothing Inc.” on May 17, 2010 and to “Naked Inc.” on February 20, 2013. Naked continued 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 shares of the Nevada corporation.
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Our principal executive offices are located at #2 34346 Manufacturers Way, Abbotsford, British Columbia, Canada V2S 7M1. Our telephone number is 604.855.4767.
General Development
On July 30, 2012, we closed an Acquisition Agreement with Naked, whereby whereby Joel Primus and Alex McAulay became our only directors and Chief Executive Officer and Chief Financial Officer, respectively, of our company and Naked stockholders exchanged their shares for a total of 13.5 million shares of our company, representing 50% of the company (the “Acquisition”).
Naked is a manufacturer and seller of direct and wholesale men’s undergarments and intimate apparel products in Canada and the United States to consumers and retailers.
As a result of the Acquisition, Naked became a wholly-owned subsidiary of our company and our business became the manufacturer and sale of direct and wholesale men’s undergarments and intimate apparel products in Canada and the United States to consumers and retailers. We operate out of Abbotsford, British Columbia, Canada.
The Company has entered into Agency and Interlender Agreements (the “Agency Agreements”) with Kalamalka Partners Ltd. (“Kalamalka”) and certain lenders (the “Lenders”) whereby we have issued convertible promissory notes (the “Notes”) in the aggregate principal amount of $775,000 under revolving loan arrangements. The Notes are secured by a general security agreement over the present and future assets of our company and were bearing interest at 12% per annum, calculated and payable monthly. The principal amount outstanding under the Notes, and all accrued and unpaid interest therein, is convertible into common shares of our company at any time at the option of the Lenders. The conversion price of the Notes was $0.50 as to principal balances totaling $500,000 and $0.25 as to principal balances totaling $275,000.
Funds advanced under the Notes were restricted for inventory and accounts receivable whereby we could fund up to 90% of our accounts receivable and inventory. “Inventory” included raw materials in transit and in our possession, materials in the course of production, work in progress and unsold finished goods, all valued at cost. Receivables were marginable until 60 days from the invoice date, after which time such receivables had no value for margining purposes, except that up to $10,000 of receivables were marginable if such receivables were more than 60 days old but less than 90 days old.
This significant development allowed our company to fund inventory levels beyond initial purchase orders so Naked could have sufficient inventory on hand in order to fulfill orders on a timely basis. It also allowed for Naked to finance its accounts receivable in an efficient and economical way.
Our Current Business
We are Naked Brand Group, Inc. and our mission is to build a global lifestyle brand business offering innovative apparel, home and personal products We currently design, manufacture and sell men's innerwear and lounge apparel products under the "Naked" brand to consumers and retailers. We plan to launch a complimentary line of women's innerwear, lounge and sleepwear products within the next 12 months and in the future extend the Naked brand to active wear, swim as well as bed and bath products. Our core brand philosophy for Naked is to provide products that make people feel sexy and confident while being as comfortable as wearing nothing at all. Our goal is to create a new standard for how apparel products worn close to skin fit, feel and function. Our products are sold at a premium fashion stores in North America, primarily in Canada and on the West Coast of the United States including Holt & Renfrew, Hudson Bay Company and Nordstrom.
Current Principal Products
We currently offer a variety of male innerwear products including trunks, briefs, boxer briefs, undershirts, t-shirts, and lounge pants under the Naked brand as well as a sub-brand called “NKD”. Men’s Health has reviewed our innerwear as “perfect under any suit…” (February 8, 2013) and Esquire has said “Naked keeps everything well in order (down there) without cutting off circulation.” (December 14, 2012)
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Our products are produced in a variety of styles using a range of the highest quality fabric: MicroModal, Microfiber, Tencel, Silver, Cotton Modal, and Pima Cotton. Our complete underwear line is available in MicroModal and Microfiber, and we sell limited styles of underwear in Tencel and Silver. We also produce t-shirts and lounge pants in both Cotton Modal and MicroModal. All of these fabrics are readily available in many countries.
MicroModal and Microfiber are smooth, lightweight Italian made fabrics engineered for supreme softness and comfort. The only material difference between the MicroModal and the Microfiber lines is the underlying composition of the fabric: MicroModal is wood-based and Microfiber is nylon-based. We have been producing our full line of underwear using these fabrics since our inception. Our cotton line is primarily made of organic high-gauge pima cotton material for a light, comfortable fit.
We introduced two new fabric lines in the fiscal year ended January 31, 2014. Our Silver collection consists of a boxer brief and V-neck t-shirt and is created with X-Static®, a high-performance fabric, which helps regulate body temperature and provides anti-odor and antimicrobial protection. X-Static® 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.
Our Tencel collection uses an innovative and premium fabric that is incredibly soft, breathable and easy to care for. Our Tencel collection is available in brief and boxer brief and features a stylish monogrammed waistband.
Production
We utilize manufacturing partners outside of the United States to produce our products. Our products are made in Canada, Turkey, and China, with primary production currently completed in Vancouver, Canada. We expect that by the end of fiscal 2015, all of our primary production will be made outside of Canada.
We have developed good relationships with a number of our vendors and take great care to ensure that they share our commitment to quality and ethics. We do not, however, have any long-term agreements requiring us to use any manufacturer, and no manufacturer is required to produce our products. We currently also work with an international agency to review the quality of our product both during and after production in advance of shipment.
Distribution
Our products are currently targeted at men who are fashion conscious and care about innovation and contemporary design, but also care about comfort, quality and fit when purchasing undergarments. We aim to provide an affordable luxury product for the affluent and aspirational customer that enjoys the qualities of a premium undergarment at a price they feel delivers excellent value.
We sell our products through wholesale relationships and through direct to consumer channels. The wholesale channel is currently our largest channel and consists of boutique apparel stores, undergarment stores and department stores. In addition to selling in key department stores in North America Naked also sells through premier online stores such as Amazon.com, hackberry.com, hisroom.com and freshpair.com.
Our direct-to-consumer channel consists of our online e-commerce store, thenakedshop.com. Thenakedshop.com provides our customers with a premium experience and access to our entire product line, including our NKD sub-line. We expect direct to consumer to become an increasingly significant part of our business 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.
Having already worked with TJ MAX’s European sister store, TJ X, we plan to expand to international markets by establishing distributor relationships in key European countries.
We have contracted with a third party logistics provider to outsource our inventory receiving, warehousing and product distribution and shipping needs. We do not currently have any long term contracts relating to the distribution of our products.
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Sources and Availability of Raw Materials
Raw materials, which include fabric and accessories, are sourced from all over the world, with the majority of our fabrics currently being imported from Italy, Turkey and China. We currently order from a small number of principal suppliers of fabric but we have multiple sources that could produce the exact same quality fabric.
Key Customers
In 2014 sales were heavily concentrated with Nordstrom, which accounted for 37.0% of our sales, and Holt Renfrew which accounted for 12.0% of our sales. In fiscal 2013, Nordstrom accounted for 55.3% of our sales and Holt Renfrew accounted for 22.8%. Nordstrom is currently of key importance to our business and our results of operations would be materially adversely affected if this relationship ceased. Although we continue to receive increasing sales orders from these customers, neither Nordstrom nor Holt Renfrew have any ongoing purchase commitment agreement with us therefore we cannot guarantee that the volume of sales will remain consistent going forward.
We have entered into sales agreements with Nordstrom, Holt Renfrew and the Hudson Bay Company which covers the material terms and conditions of purchase orders such as shipping terms, pricing policies, payment terms and cancellation policies
Marketing
We expect to significantly increase our marketing expenses in the current fiscal year, particularly in connection with some of our major sales contracts, described above under the heading “Key Customers”.
We have engaged consultants, where necessary, to provide marketing consulting services to our company, including assistance with brand management, celebrity alignment, strategic retail placement, manufacturing strategy, strategic and creative development, and financing assistance. We have also engaged in online marketing, including a new PR campaign, Exposed, which features up and coming celebrities featured in a photo shoot, video interview and testimonial, aimed at increasing brand awareness.
We intend to continue to invest in additional brand building activities, including internet and media marketing to consumers and retailers, attendance at apparel trade shows and exploration of other opportunities.
Competition
Underwear is a very competitive market with several high profile undergarment manufacturers such as Calvin Klein, 2(x)ist, Hugo Boss, Tommy John, Giorgio Armani and others. We believe there are currently 70 to 80 competitors in our market sector for men’s undergarments. The market includes increasing competition from established companies who are expanding their production and marketing of undergarments, as well as frequent new entrants to the market. 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. To date, we believe that Naked has performed well against competition as a result of our branding strategy and the quality of our products. The products we have introduced to market and the products we plan to introduce come in at a high value point, which means retailing a high quality product at a lower price than our competitors’ comparable products, which has allowed us to penetrate the market successfully. Our high value point is established by using high quality fabrics and retailing the products at prices lower than our competitors’ comparable products. We base this determination on the gauge of the machines producing the fabrics, which we believe is a strong indicator of the quality of fabrics. We have also developed a sub-line, which allows us to also penetrate a broader range of the undergarment market.
Our competitive advantages include promoting that our products are comfortable as wearing nothing at all, which leverages our registered brand name, and retailing high quality products at a lower price than competitors’ comparable products. 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.
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Intellectual Property
We believe that our intellectual property is a critical component of our business success. We currently own four trademarks in Canada and one trademark in the United States. We expect to incur significant expenses for intellectual property applications in key international markets in the 2015 fiscal year.
Employees
We currently employ six full-time and seven total employees, all of which are 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.
Seasonality of Business
We operate in the apparel industry which is subject to seasonality of buying which can affect revenue and cash flows. There are generally two distinct buying seasons in the apparel industry which apply to us, 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. In our current year, the largest revenues were reported in quarters two and four for our fiscal year, arising from the release of new products, seasonal products and sales, and some extraordinary circumstances which are discussed in more detail below. As a result of significant growth and changes to our business with the introductions of t-shirts, new fabric lines, the natural seasonality of our business could potentially have 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.
ITEM 1A. RISK FACTORS
Much of the information included in this annual report includes or is based upon estimates, projections or other “forward-looking statements”. Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Such estimates, projections or other “forward-looking statements” involve various risks and uncertainties as outlined below. We caution readers of this annual report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other “forward-looking statements”. In evaluating us, our business and any investment in our business, readers should carefully consider the following factors.
Risks Related To Our Business
We have a limited operating history which makes it difficult to evaluate our company or future operations.
Naked commenced operations in 2010. Since beginning operations, we have generated limited total revenues. For the year ended January 31, 2014, our revenues were $639,107 (2013: $566,508). 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. 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. Potential 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.
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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 undergarments 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 auditors’ opinion on our January 31, 2014 consolidated financial statements includes an explanatory paragraph regarding there being substantial doubt about our ability to continue as a going concern.
For the year ended January 31, 2014, we incurred a net loss of $4,238,490. 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 highlighted by our auditors with respect to the consolidated financial statements for the year ended January 31, 2014. 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.
Our future operating capital depends on our revenues and ability to raise capital through equity investments. Future equity investments will be dilutive to existing shareholders and the terms of securities issued may be more favorable for new investors. Further, in obtaining further equity investments, we may incur substantial costs including investment banking fees, legal fees and accounting fees. Our business operations may fail if our actual cash requirements exceed our estimates and we are not able to obtain further financing. If we cannot continue as a viable entity, our shareholders may lose some or all of their investment in our company.
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.
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 Canada and 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.
We have a concentration of sales to two key customers and any substantial reduction in sales to these customers would have a material adverse effect on our business.
In 2014 sales were heavily concentrated with Nordstrom, which accounted for 37.0% of our sales, and Holt Renfrew which accounted for 12.0% of our sales. In fiscal 2013, Nordstrom accounted for 55.3% of our sales and Holt Renfrew accounted for 22.8% .. Nordstrom is currently of key importance to our business and our results of operations would be materially adversely affected if this relationship ceased. Although we continue to receive increasing sales orders from these customers, neither Nordstrom nor Holt Renfrew 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 one or more of these two customers, whether due to actions by our competitors, industry factors or otherwise, could have an adverse effect on our business.
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 new products may not be accepted by our customers, or our competitors may introduce similar products in a more timely fashion. Failure to anticipate and respond in a timely manner to changing consumer preferences could lead to, among other things, lower sales and excess inventory levels. Even if we are successful in anticipating consumer preferences, our ability to adequately react to and address those preferences will in part depend upon our continued ability to develop and introduce innovative, high-quality products. Our failure to effectively introduce new products that are accepted by consumers could have a material adverse effect on our financial condition.
Our 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 guests. 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.
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.
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We rely on third-party suppliers 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. 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. Additionally, if defects in the manufacture of our products are not discovered until after such products are purchased by our guests, our guests could lose confidence in the technical attributes of our products and our results of operations could suffer and our business could be harmed.
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 undergarments 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 undergarments, including large, diversified companies with substantial market share and strong worldwide brand recognition, such as Calvin Klein and Armani. 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. In contrast to our “grassroots” marketing approach, 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 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.
Any material disruption of our information systems could disrupt our business and reduce our sales.
We are increasingly dependent 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 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.
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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 or Canada, and it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in these countries. If we fail to protect and maintain our intellectual property rights, the value of our brand could be diminished and our competitive position may suffer.
Our future success is substantially dependent on the continued service of our senior management.
Our future success is substantially dependent on the continued service of our senior management and other key employees. 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 significant portion of our sales and operating expenses are generated in Canada, 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 and incur a significant portion of our operating costs in Canada, and changes in exchange rates between the Canadian dollar 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 Canadian dollar. The exchange rate of the Canadian dollar against the US dollar has been relatively consistent in the last twelve months and our results of operations have benefited from the strength in the Canadian dollar. If the Canadian dollar were to weaken significantly relative to the US dollar, our net loss could be adversely affected. 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 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.
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Risk Related to our Stock and Public Reporting Requirements
While we believe we have taken the steps necessary to improve the effectiveness of our internal control over financial reporting, if we are unable to successfully address or prevent material weaknesses in our internal control over financial reporting, our ability to report our financial results on a timely and accurate basis and to comply with disclosure and other requirements may be adversely affected.
Our management identified material weaknesses in internal control over financial reporting as of January 31, 2014 related to the (i) inadequate segregation of duties and effective risk assessment, and (ii) insufficient staffing resources as a result of the loss of our Chief Financial Officer, resulting in inadequate review procedures, (iii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and Securities and Exchange Commission guidelines (iv) inadequate security and restricted access to computer systems, including insufficient disaster recovery plans and (v) lack of a written whistle-blower policy (see “Item 9A. Controls and Procedures”). As a result of these material weaknesses, our management concluded that, as of January 31, 2014, we did not maintain effective disclosure controls and procedures or internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We can give no assurances that the measures we take to remediate material weaknesses that we identified will be successful, or that any additional 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.
Because we can issue additional shares of common stock, purchasers of our common stock may incur immediate dilution and may experience further dilution.
We are authorized to issue up to 100,000,000 shares of common stock, of which 35,983,674 shares are issued and outstanding as of May 15, 2014. Our board of directors has the authority to cause us to issue additional shares of common stock, and to determine the rights, preferences and privileges of such shares, without consent of any of our shareholders. Consequently, our shareholders may experience more dilution in their ownership of our stock in the future.
Trading on the OTCQB may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our shareholders to resell their shares.
Our common stock is quoted on the OTCQB quotation system. Trading in stock quoted on the OTCQB Bulletin Board is often 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. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTCQB is not a stock exchange, and trading of securities on the OTCQB is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like the NYSE. Accordingly, shareholders may have difficulty reselling any of their shares.
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 shareholders 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 shareholders will not be able to receive a return on their shares unless they sell them.
The exercise of outstanding options and warrants, as well as the conversion of convertible debt instruments, may have a dilutive effect on the price of our common stock.
To the extent that outstanding stock options and warrants are exercised and convertible debt instruments are converted into shares of our common stock, dilution to our shareholders will occur. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of the outstanding options, warrants and convertible debt instruments can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise terms provided by the outstanding options, warrants or convertible debt instruments. At May 15, 2014, the total dilutive securities outstanding, including options, warrants and shares issuable upon conversion of convertible debt instruments was 16,312,658 shares.
Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a shareholder’s ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules promulgated by the Securities and Exchange Commission, the Financial Industry Regulatory Authority (“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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We maintain offices, having an area of 1,950 square feet, at #2 – 34346 Manufacturers Way in Abbotsford, British Columbia Canada, which we lease for CAD$15,000 per year. The lease is on a month to month basis. We believe our offices are suitable and adequate to operate our business from at this time as they hold our inventory and provide us with sufficient space to conduct our operations. We fully utilize our current premises.
The description of our intellectual property rights is under the section entitled “Business – Intellectual Property”.
ITEM 3. LEGAL PROCEEDINGS
We know of no material, existing or pending legal proceedings to which our company or our subsidiary is a party or of which any of their property is subject. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder holding more than 5% of our shares, is an adverse party or has a material interest adverse to our or our subsidiary’s interest.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Securities
Our common stock is not traded on any exchange. Our common stock is quoted on the OTCQB under the trading symbol “NAKD”. Trading in stocks quoted on the OTCQB is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects.
OTCQB securities are not listed or traded on the floor of an organized national or regional stock exchange. Instead, OTCQB securities transactions are conducted through a telephone and computer network connecting dealers in stocks. OTCQB issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
Set forth below are the range of high and low bid quotations for our common stock from the OTCQB for each fiscal quarter during the fiscal years ended January 31, 2014 and 2013. The market quotations were obtained from the OTCQB, and reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions:
OTCQB | ||
(US Dollars) | ||
Quarter Ended | High(1) | Low(1) |
April 30, 2012 | N/A(2) | N/A(2) |
July 31, 2012 | N/A(2) | N/A(2) |
October 31, 2012 | 1.30 | 1.05 |
January 31, 2013 | 1.30 | 0.90 |
April 30, 2013 | 1.18 | 0.00 |
July 31, 2013 | 1.32 | 0.41 |
October 31, 2013 | 0.66 | 0.22 |
January 31, 2014 | 0.267 | 0.0525 |
(1) | Such quotes reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. |
(2) | There were no published quotes. |
On May 15, 2014, the closing price for our common stock as reported by the OTCQB was $<>.
Transfer Agent
Our shares of common stock are issued in registered form. The transfer agent and registrar for our common stock is Standard Registrar and Transfer Company, Inc. Its address is 12528 South 1840 East Draper, UT 84020.
Holders of Common Stock
On May 14, 2014, the closing price for our common stock as reported by the OTCQB was $0.14.
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.
Securities authorized for issuance under equity compensation plans
In connection with the closing of the acquisition agreement with Naked, we adopted the 2012 Stock Option Plan (the “Plan”), pursuant to which up to 5,400,000 shares of our common stock are reserved for issuance.
The Plan provides for the grant of incentive stock options to purchase shares of our common stock to our directors, officers, employees and consultants. The Plan is administered by our board of directors, except that it may, in its discretion, delegate such responsibility to a committee comprised of at least two directors. A maximum of 5,400,000 shares are reserved and set aside for issuance under the Plan. Each option, upon its exercise, entitles the optionee to acquire one share of our common stock, upon payment of the applicable exercise price. The exercise price will be determined by the board of directors at the time of grant. Stock options may be granted under the 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 Plan.
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plan |
Equity compensation plans approved by security holders | N/A | N/A | N/A |
Equity compensation plans not approved by security holders | 3,005,000 | $0.34 | 2,395,000 |
Total | 3,005,000 | $0.34 | 2,395,000 |
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Recent Sales of Unregistered Securities
Other than as set forth below, since the beginning of our fiscal year ended January 31, 2014, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in an annual report on Form 10-K, in a quarterly report on Form 10-Q or in a current report on Form 8-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This Management’s Discussion and Analysis should be read in conjunction with our audited consolidated financial statements and the related notes for year the ended January 31, 2014 included in this annual report beginning at page 24 below and the factors that could affect our future financial condition and results of operations. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial state date and reported amounts of revenue and expenses during the reporting period. On an on-going basis, we review our estimates and assumptions. The estimates were based on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions. Historical results may not be indicative of future performance.
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 such differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly in the section entitled “Risk Factors” beginning on page 8 of this annual report and “Forward-Looking Statements” beginning on page 1 above.
Our audited financial statements are stated in United States Dollars and are prepared in accordance with Accounting Principles Generally Accepted in the United States of America.
Overview of business operations
We are a manufacturer and seller of direct and wholesale men’s undergarments to consumers and retailers.
Our primary operations are conducted through our wholly-owned subsidiary, Naked. We will continue to produce men’s undergarments, t-shirts and loungewear. We are also developing a line of women’s underwear and intimate apparel.
Recent Corporate Developments
Since the commencement of our fourth quarter ended January 31, 2014, we have experienced the following significant corporate developments, not discussed elsewhere:
On November 14, 2013, we entered into an Agency and Interlender Agreement with Kalamalka Partners Ltd. ("Kalamalka"), and two lenders whereby we agreed to borrow up to $300,000. In connection with the Agency Agreement, we have issued convertible promissory notes to four lenders in the aggregate principal amount of $200,000 and an aggregate of 125,000 share purchase warrants to the lenders and 125,000 share purchase warrants to Kalamalka.
On November 26, 2013, we closed a second tranche of convertible promissory notes under the Agency and Interlender Agreement with Kalamalka. In connection with the closing of the second tranche, we issued: (i) three convertible promissory notes in the aggregate principal amount of $100,000 and (ii) an aggregate of 125,000 share purchase warrants to the Lenders and 125,000 share purchase warrants to Kalamalka.
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- We announced the release of Naked Silver, an innovative new collection of performance products consisting of a boxer brief and v-neck t-shirt that is a high-performance fabric which helps regulate body temperature and provide anti-odor and antimicrobial protection.
- We announced a second installment in our celebrity PR campaign,Exposed, featuring Pretty Little Liars and Ravenswood actor Tyler Blackburn. Blackburn'sExposedprofile followed on the heels of the campaign's successful first installment featuring Dallas' Josh Henderson.
- On December 24, 2013, we closed a third tranche of convertible promissory notes under the Agency and Interlender Agreement with Kalamalka. In connection with the closing of the second tranche, we issued: (i) one convertible promissory note in the aggregate principal amount of $75,000 and (ii) an aggregate of 115,000 share purchase warrants to lenders and 112,500 share purchase warrants to Kalamalka.
- We implemented a strategic focus to online accounts and added some top underwear accounts in the United States including, Amazon.com, and have experienced significant growth both in traffic and conversions on our ecommerce sitethenakedshop.com.
- We entered into a vendor agreement with Hudsons Bay Company and have shipped an initial order of units for their Vancouver, British Columbia store for delivery on May 16, 2014. Our products will also be available on their online store.
- On April 7, 2014 we entered into a Securities Purchase Agreement (the “SPA”) with purchasers (the “Purchasers”), whereby the Purchasers agreed to purchase 6% senior secured convertible promissory notes (the “SPA Notes”). Repayment of the SPA Notes is secured against all the tangible and intangible assets of our company (the “SPA Security Agreement”). In connection with the closing of the SPA, we issued SPA Notes in the aggregate principal amount of $1,033,796. As consideration, we (i) received cash proceeds equal to $828,704; (ii) exchanged a promissory note with an outstanding amount of $76,388, being the principal and accrued interest due under a convertible promissory note dated December 24, 2013 for the issuance of a SPA Note in the same amount; and (iii) exchanged a promissory note with an outstanding amount of $128,704, being the remaining principal amount due under a convertible promissory note dated October 2, 2013 for the issuance of a SPA Note in the same amount.
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Outlook
The Company will continue to operate in the underwear market and has no current plans to significantly change operations.
RESULTS OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 2014
The following discussion of our financial condition and results of operations should be read together with the audited consolidated statements and the notes to the audited consolidated financial statements included in the annual report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.
Revenue
During the year ended January 31, 2014, we generated net sales of $639,107 compared to $566,508 for the same period in 2013, an increase of $72,599 or 12.8% . Net sales increased as a result of new customers, increased orders from existing key customers, and increased online orders both through the addition of key online accounts as well as increased revenues from our ecommerce sitewww.thenakedshop.com. We also saw an increase in revenues through the addition of two discount department store accounts which are channels for our subline of products and seasonal offsales. An increased volume of sales was partially offset by approximately $47,000 in vendor funded mark downs granted to our largest customer, Nordstrom, to compensate for decreased gross margins on some of our slower moving cotton product lines.
The year over year growth in sales in the current year is overshadowed by an initial bulk up order with the addition of a key account, Nordstrom, in the fourth quarter of fiscal 2013, which significantly boosted revenues in that quarter. We shipped to 172 stores during fiscal 2014, as opposed to 163 stores during fiscal 2013.
We had a 72% increase in cost of sales in the current year, due to the higher volume of sales, as well as the factors listed below. Our gross margin was 8% for the year ended January 31, 2014, compared to 40% for the year ended January 31, 2013. The significantly lower than average profit margin this year were due to a combination of several significant factors, most notably:
i) | the retailer credits granted to Nordstrom, as described above, resulted in a 6% decrease in our reported gross margin; |
ii) | we incurred expenses related to a change in packaging, the direct costs of which resulted in a 1% decrease in gross margins. In addition, the change in packaging resulted in significant lost sales in our fourth quarter as a result of depleted stock levels during the changeover; |
iii) | we incurred expenses related to the re-boxing of product due to a packaging error by one of our manufacturers, which resulted in a 2% decrease in our reported gross margin; |
iv) | we recorded inventory write-downs related to a change in waistband and product that did not meet manufacturing specifications, which resulted in a reduction in our total gross margins of 3%; |
v) | our margins were negatively impacted by 2% as a result of shipments of inventory lost in transit; |
vi) | we incurred higher shipping costs on a large shipment of inventory to reduce travel time in order to fill a large order on a timely basis; |
vii) | we sold inventory at a lower margin to one of our key wholesale customers as a result of a delay in our ability to fulfill orders from this customer due to low inventory levels in the first quarter |
viii) | we wrote down leftover fabric to its net realizable value, resulting in a 7% decrease in our gross margins. |
Lost margins relating to manufacturer error is anticipated to be reduced because of the addition of our full-time sourcing and production manager. In addition we have contracted an international agency to do onsite inspections ahead of shipments, which will prevent these types of errors going forward.
Our higher margins on our Microfiber and MicroModal undergarments were offset by lower than expected profit margins on our cotton lines and NKD lines as a result of sell offs for out of season collections.
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Operating Expenses
Year ended January 31, | Change | |||||||||||
General and administrative | 2014 | 2013 | $ | % | ||||||||
Bad debts | $ | (3,726 | ) | $ | 3,443 | (7,169 | ) | (208.2 | )% | |||
Bank charges and interest | 30,433 | 6,289 | 24,144 | 383.9% | ||||||||
Consulting | 447,810 | 283,936 | 163,874 | 57.7% | ||||||||
Depreciation | 22,748 | 11,685 | 11,063 | 94.7% | ||||||||
Director compensation | 255,776 | 3,509 | 252,267 | 7189.1% | ||||||||
Insurance | 59,281 | 15,330 | 43,951 | 286.7% | ||||||||
Investor relations | 208,610 | 6,553 | 202,057 | 3083.4% | ||||||||
Marketing | 285,733 | 225,071 | 60,662 | 27.0% | ||||||||
Occupancy and rent | 31,468 | 27,230 | 4,238 | 15.6% | ||||||||
Office and miscellaneous | 104,464 | 113,482 | (9,018 | ) | (7.9 | )% | ||||||
Product development | 194,266 | 78,758 | 115,508 | 146.7% | ||||||||
Professional fees | 281,833 | 262,839 | 18,994 | 7.2% | ||||||||
Salaries and benefits | 661,575 | 245,669 | 415,906 | 169.3% | ||||||||
Transfer agent and filing fees | 28,394 | 19,583 | 8,811 | 45.0% | ||||||||
Travel | 117,416 | 91,426 | 25,990 | 28.4% | ||||||||
Warehouse management | 104,580 | 45,452 | 59,128 | 130.1% | ||||||||
Total | $ | 2,830,661 | $ | 1,440,255 |
There was an increase in general and administrative expenses to $2,830,661 for the year ended January 31, 2014, compared to $1,440,255 for the year ended January 31, 2013, an increase of $1,390,406, or 96.5% . Of the total operating expenses, $902,403 was related to items not involving cash for the year ended January 31, 2014, as compared to $229,953 for the year ended January 31, 2013.
Included in operating expenses for the year is share based compensation of $731,615 relating to stock options issued to management, employees, directors and consultants of the company as part of incentive based compensation packages. The fair value of stock option compensation is calculated using the Black Scholes option pricing model. See the notes to our consolidated financial statements for more information.
We incurred higher consulting charges this year as compared to the prior year. Included in consulting fees in the current year is an amount of $338,179 (2013: $154,992) related to share based compensation expense as a result of stock options issued to consultants engaged for key person, product and sales alignment and event promotion. Included in consulting fees in the current year was $35,500 in monthly retainers under our brand management contract with Shark Branding and Daymond John, $15,250 in marketing consulting, $12,500 in fees associated with a customer account representative engaged during the period, and $10,825 paid for merchandising consulting in respect to our women’s collection. We also incurred $10,000 in costs related to the launch of a temporary shop at the Hudson Bay Company in Vancouver, British Columbia, to sell product, which brought us exposure resulting buyer’s meetings for Lord and Taylor and the Hudson Bay Company.
We incurred investor relations expenses of $208,610 during the year ended January 31, 2014. We engaged a couple of firms to assist in our raising capital effort by making introductions for us, which involved expenses of approximately $66,700, of which approximately $8,000 were for non-cash charges that were paid in shares of our common stock. Also included in investor relations expense is a non-cash charge of $89,250 related to shares issued to an investment company who was engaged to assist with communications with respect to the institutional and retail investment community, and charges of $56,250 related to a one year advertising campaign directed at increasing our exposure to the investment community.
Our marketing expenses increased due to the design and development of new marketing materials, and from promotional events we attended, which also resulted in higher travel expenses during the period. We spent approximately $12,500 on a celebrity “Exposed” campaign, which brought us online exposure, including an article on the homepage of WWD. We spent approximately $12,000 on new promotional materials, including new packaging, catalogues, trend books and posters and approximately $14,500 for presentation materials related to our women’s collection, which is currently under development. Marketing expenses this period also included approximately $10,000 in costs related to our appearance on The View and approximately $71,000 in sample giveaways to new and existing customers from our newer product lines, including t-shirts and our Tencel and Silver collections.
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During the current period, we incurred additional expenses as compared to the comparative period to maintain our listing on the public market, including transfer agent and filing fees, increased insurance expense related to director and officer liability insurance, and professional fees associated with financing activities and new contracts with advisors and consultants. In the comparative period, we incurred significant professional fees in connection with the Acquisition and the closing of a long-term revolving loan facility.
During the current year we incurred a total of $116,750 in consulting and product development costs related to the planning, design and development of our women’s line. We engaged a women’s line design consultant at a cost of CAD$7,500 per month and in addition incurred costs of approximately $39,800 in the design and development of samples and in fabric and patterns. Product development this year also included approximately $75,000 in design consulting, patterns and samples related to a new silver men’s line product, our Spring t-shirt collection and MicroModal, Microfiber and cotton loungewear collection, and packaging designs for existing products. In the prior year, many of these new product lines was not under development and our product development costs were related to new fabric samples on existing product lines.
Salaries and benefits increased significantly due to increased corporate and operational activities which has necessitated the hiring of additional staff members to support marketing, product sourcing, finance and operations. Our number of staff increased significantly during the current fiscal year and included the addition of finance support staff, a production manager, warehouse shipper/receiver, an account manager, and a technical supervisor. This resulted in increased salary expense of approximately $188,000 in the current year. The remaining salary increases were mostly attributable to non-cash stock based compensation charges of $250,361 (2013: $63,276) related to stock options issued to employees of our company in connection with incentive based compensation packages.
Director compensation increased significantly as a result of the appointment of two new independent directors in the current year. Of the $255,776 in charges in the current year, an amount of $199,776 is related to non-cash compensation to these directors, including the issuance of shares of our common stock in accordance with the terms of their appointment as directors.
We also incurred significant costs for travel. The CEO and former CFO made several trips to meet with investment banks in conjunction with potential financings. Travel expenses also included CEO and staff trips to the United States and Canada for tradeshows, customer relations trips and product knowledge sessions.
We incurred significant expenses for warehouse management this year because we have outsourced our shipping to US customers and warehouse storage to a third party logistics company. Warehouse management costs were approximately $10,000 higher this year than anticipated as a result of additional handling expenses incurred in connection with a packaging error on product received from a vendor in the second fiscal quarter. We also incurred significant handling costs associated with a packaging changeover completed in the third and fourth fiscal quarters. We anticipate warehouse management costs will be lower in future periods, but will increase proportionately as our sales increase.
Other income and expenses
We incurred interest expenses of $77,381 for the year ended January 31, 2014, as compared to $34,853 for the same period in fiscal 2013, an increase of $42,528. Financing and accretion charges increased to $737,595 for the year ended January 31, 2014, as compared to $57,985 for the year ended January 31, 2013. These increases are attributable to the large number of short term financings entered into during the current year, which have been arranged to bridge operations until a more significant, long-term financing could be arranged. As well, we recorded an additional write off of deferred financing fees of $56,555 in connection with the Amendment Agreement that we entered into on July 22, 2013 with Kalamalka Partners, which reduced the credit available under the Notes, therefore requiring a proportionate write off of the financing fees incurred in connection with the original issuance of the Notes.
We had a derivative expense of $170,500 during the current year due to a non-cash charges associated with the issuance of convertible promissory notes, the terms of which resulted in derivative financial instruments being recorded in our financial statements. The derivative financial instruments arose in connection with full ratchet provisions included in the notes, which provide the lender with the right to obtain amended terms under the note agreements equal to any more favourable terms provided to other lenders while the notes were outstanding.
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In addition, other income and expenses for the year ended January 31, 2014 includes a $485,704 loss associated with the amendment to the Notes that had entered into default in a previous reporting period. This loss is the result of providing concessions to the Lenders as compensation for defaulting on the covenants under these Notes. These concessions included a reduced conversion price for the Notes and modified terms associated with warrants issued in connection with the Notes. This loss did not represent any cash outlay for our company.
There were no such financing charges, derivative fair value adjustments or other gain or losses during the comparative period in fiscal 2013.
Net loss and comprehensive loss
Our net loss for the year ended January 31, 2014 was $4,238,490, or $0.14 per share, as compared to a net loss of $1,332,996, or $0.07 per share, for the year ended January 31, 2013, as a result of the increased general and administrative expenses and financing expenses, as described above. Of the total net loss of $4,238,490, $2,100,962 is related to operating and non-operating charges that do not involve cash. These charges include $731,615 in share based compensation charges for shares of common stock and stock purchase options granted to employees and consultants and non-cash finance related charges of $344,073 for the amortization of non-cash financing fees and the accretion of debt discounts resulting from equity based fees attached to certain loan arrangements.
Our other comprehensive income for the year ended January 31, 2014 was $Nil, as compared to a comprehensive loss of $3,227 for the year ended January 31, 2013. Other comprehensive loss in the comparative period was a result of the translation of financial statements of foreign operations. In the current period, we did not have any translation of financial statements of foreign operations due to a change in functional currency effective during the fourth quarter of fiscal 2013.
Liquidity and Capital Resources
Agency Agreement with Kalamalka Partners
We entered into two Agency Agreement with Kalamalka Partners and certain lenders (the “Lenders”) as set out in the Agency Agreements whereby we have borrowed $775,000 from the Lenders under a revolving loan arrangement by the issuance of Notes from time to time as the funds were required by us. The Notes are secured by a general security agreement over the present and future assets of the Company and were bearing interest at 12% per annum, calculated and payable monthly. The principal amount outstanding under any Note and all accrued and unpaid interest therein, were convertible into common shares at any time at the option of the Lender at a price of $0.50 per share as to $500,000 and $0.25 per share as to $275,000.
This financing has allowed us to fund inventory levels beyond initial purchase orders so we could have sufficient inventory on hand. It also allowed us to finance accounts receivable in an efficient and economical way.
Under the terms of this loan arrangement, we were required to maintain a borrowing base equivalent to a discount factor of 0.90 multiplied by the value of the sum of the value of our inventory plus accounts receivable (the “Borrowing Margin Requirements”) “Inventory” included raw materials in transit to and in possession of the Company, materials in the course of production, work in progress and unsold finished goods, all valued at cost. Receivables were marginable until 60 days from the invoice date, after which time such receivables had no value for margining purposes, except that up to $10,000 of receivables were marginable if such receivables were more than 60 days old but less than 90 days old.
Subsequent to January 31, 2014, we entered into Amendment Agreements with Kalamalka and the Lenders. In connection with the Amendment Agreements, we amended several convertible promissory notes in the aggregate principal amount of $600,000 as follows: (i) we extended the due date of the Notes to October 1, 2016; (ii) we reduced the interest rate accruing under the Notes to 6% per annum, calculated and payable quarterly, in cash or in kind; (iv) we removed the Borrowing Margin Requirements; (iii) we reduced the conversion price on Notes in the aggregate principal amount of $400,000 from $0.50 per share to $0.25 per share. As consideration for entering into these amendments, 500,000 share purchase warrants exercisable at a price of $0.50 until August 10, 2018 held by Kalamalka were exchanged for 600,000 warrants exercisable at a price of $0.15 for a period of 5 years from the date of issuance (“New Warrants”) and we issued an additional 1,800,000 New Warrants.
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JMJ Financial
On November 13, 2013, we issued a promissory in the principal amount of up to $500,000 plus accrued and unpaid interest and any other fees and; on November 13, 2013, we received $100,000 pursuant to this new promissory note, after a 10% original issue discount.
The maturity date for the promissory note is November 13, 2015 and the principal sum, plus any accrued but unpaid interest thereon, of the promissory note was convertible, at any time by the lender, into shares of our common stock at the lesser of $0.265 or 60% of the lowest trade price in the 25 trading days prior to the conversion.
The terms of the promissory note permit repayment at any time on or before 90 days from November 13, 2013 with no interest being applied; otherwise a one-time interest charge of 12% will be applied to the principal sum. As we did not repay this note within 90 days of its issuance, a 12% one-time interest charge was applied subsequent to January 31, 2014.
Trend Time Development Limited
During the year ended January 31, 2014, we received $75,000 in respect of a promissory note dated August 1, 2013 in the principal amount of $75,000. The promissory note matured on February 1, 2014 and bears interest at a rate of 10% per annum payable at maturity.
Subsequent to January 31, 2014, we entered into a debt settlement agreement with this lender, pursuant to which we agreed to issue 796,850 common shares of our Company in full and final settlement of this note, along with accrued interest of $4,850.
Alan Aaron
On September 4, 2013 we issued a promissory note in the principal amount of $150,000 plus accrued and unpaid interest and any other fees (the “September 4 Note”). The promissory note was due on January 4, 2014, repayable in equal semi-monthly installments of $21,562 over the term of the note. The note incurred a one-time interest charge of 15% or $22,500.
On January 13, 2014, we issued a promissory note in the principal amount of $309,062 to this same lender, which was comprised of: (i) $250,000 consideration received; (ii) a one-time interest charge of $37,500, being 15% of the proceeds received (the “OID”); and (iii) an amount of $21,562, being the remaining principal balance due on the September 4 Note.
The promissory note is repayable in five monthly instalments of $41,667 over the term of the note plus one final balloon payment of $63,229 at its maturity on July 13, 2014. We may repay the promissory note at any time before maturity without notice, bonus or penalty.
The OID is convertible, at the option of the lender, at maturity of the note into shares of our common stock at a price of $0.10 per share.
Canfund Ventures Corporation
On October 4, 2013, we issued a convertible promissory note to one lender in the principal amount of $300,000 plus accrued and unpaid interest and any other fees. The note matured on February 9, 2014, incurred a one-time interest charge of 15% and was repayable in equal semi-monthly installments over the term of the note. The note entitles the lender, at its election, at any time on or prior to maturity, to convert all or any portion of the principal amount and any interest outstanding thereon into shares of our common stock at the price of $0.25 per share.
Subsequent to January 31, 2014, we entered into a debt settlement agreement with this lender pursuant to which we agreed to issue 1,716,062 shares of our common stock to the lender in full and final settlement of amounts outstanding under this note.
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Future Financing
Provided below is a financing table showing gross cash proceeds from share issuances over the operating life of Naked:
2011 Fiscal Year | $ | 217,171 | |
2012 Fiscal Year | $ | 144,929 | |
2013 Fiscal Year(1) | $ | 993,299 | |
2014 Fiscal Year | $ | 983,250 | |
Total cash proceeds to date | $ | 2,338,649 |
(1) Includes net working capital amounts acquired in connection with the Acquisition
In the long term, to remedy the deficiency in financing for proposed future operations, we intend to raise funds from equity and debt financings. We will need a further $3.8 million to fund our business objectives and working capital for the next twelve months.
Working Capital
January 31, | ||||||
2014 | 2013 | |||||
Current Assets | $ | 861,049 | $ | 731,791 | ||
Current Liabilities | $ | 2,300,433 | $ | 804,333 | ||
Working Capital (Deficit) | $ | (1,439,384 | ) | $ | (72,542 | ) |
Our decrease in working capital is primarily attributable to short term promissory note issued during the year. The funds raised through the issuance of these short term promissory notes were used to fund operations, production and the procurement of inventory.
We also had a decrease in accounts receivable as compared to January 31, 2013. This is attributable to a decrease in accounts receivable from our largest customer, Nordstrom, as a result of a large initial order in the fourth quarter of fiscal 2013, for which payment was received in the current fiscal year.
We had higher levels of inventory on hand at January 31, 2014 as compared to January 31, 2013 as a result of t-shirt inventory, NKD, Tencel and Silver product lines, which were still under development at January 31, 2013.
We had an increase in accounts payable balance at January 31, 2014 as compared to January 31, 2013 due to the delay in payment of vendor accounts as we worked to secure financing.
At January 31, 2014, we were in default with respect to the Borrowing Margin Requirements under the Agency Agreement with Kalamalka Partners. Subsequent to January 31, 2014, we entered into Amendment Agreements, debt settlement agreements and conversion agreements which cured these defaults and increased our working capital position as follows;
(i) | we settled short term obligations totaling $181,553 through the issuance of 1,815,535 shares of our common stock; | |
(ii) | we extended the maturity date and certain other terms of other current obligations in the aggregate amount of $803,705, thus improving our working capital position; and | |
(iii) | we received cash proceeds of $828,704 in connection with the issuance of 6% senior secured convertible promissory notes |
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Cash Flows
January 31, | ||||||
2014 | 2013 | |||||
Cash Flows Used In Operating Activities | $ | (1,751,618 | ) | $ | (1,466,584 | ) |
Cash Flows Provided By (Used In) Investing Activities | (11,747 | ) | 343,818 | |||
Cash Flows Provided By Financing Activities | 1,787,063 | 1,112,379 | ||||
Effect of Foreign Exchange on Cash | - | 3,811 | ||||
Net change in Cash During Period | $ | 23,698 | $ | (6,576 | ) |
Operating Activities
Cash flows used in our operating activities was $1,751,618 for the year ended January 31, 2014. The cash used in operations during the year was largely used to pay for inventory to fulfill increased sales orders and cash used to fund the general and administrative expenses.
We were partly able to manage cash flow through a decrease in accounts receivable of $339,101 and an increase in accounts payable of $356,974.
Cash used in operating activity outflows was financed through funds raised in private placement offerings and the issuance of short term promissory notes, as described below.
During the year ended January 31, 2013, cash used in operations was primarily a result of cash used to pay for inventory for the addition of Nordstrom as a customer, which accounted for large increases in inventory and accounts receivable.
Investing Activities
Investing activities used cash of $11,747 during the year ended January 31, 2014, compared to cash provided by investing activities of $343,818 for the year ended January 31, 2013. Investing activities in the current period included cash outlays for a new trademark application, and the acquisition of some retail displays. We expect to incur additional costs related to patent and trademark acquisitions, maintenance and protection as we develop new products and as funding is available.
For the year ended January 31, 2013, cash provided by investing activities was primarily a result of cash acquired from Search By Headlines.com of $386,790, which was partially offset by costs incurred to develop and launch a new website.
Financing Activities
Financing activities provided cash of $1,787,063 for the year ended January 31, 2014, compared to $1,112,379 for the year ended January 31, 2013. We received proceeds of $983,250 related to private placements. We also received cash of $571,122 in connection with the issuance of short term promissory notes and $958,500 in connection with the issuance of convertible promissory notes during the year.
Cash flows from financing activities during the year ended January 31, 2013 included proceeds of $500,000 from the issuance of the Notes under the revolving loan agreement with Kalamalka, the proceeds of which were used for inventory and accounts receivable financing. In addition, loans of $325,000 were advanced to Naked Inc. during the year, which together with additional loans of $50,000 advanced during the year ended January 31, 2012, were received as part of the consideration pursuant to the Acquisition.
Effect of Foreign Exchange on Cash
The change in our foreign currency exchange is the result of the Canadian dollar’s change in value against the United States dollar during each period.
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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
As at January 31, 2014 we had a working capital deficiency, had not yet achieved profitable operations, were in default with respect to certain loan covenants 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 or debt. 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 through private placements, and/or bank financing or other loans necessary to support our working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing 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.
These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern.
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, 2014 and 2013, 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:
2014 | 2013 | |||||
United States | $ | 394,867 | $ | 410,012 | ||
Canada | 244,240 | 156,496 | ||||
$ | 639,107 | $ | 566,508 |
At January 31, 2014 and 2013 substantially all of our long-lived assets were located in Canada.
Off-balance sheet arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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.
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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. There have been no material changes to these estimates for the periods presented in this annual report.
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. 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. 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 and consider 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 inventory carrying amount to reflect this.
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.
Impairment of Long-Lived Asset
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, or on an annual basis, where appropriate. 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.
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Assumptions and estimates about future values and remaining useful lives of our intangible and other long–lived assets are complex and subjective. These estimates and assumptions may include revenue growth rates and operating margins used to calculate projected future cash flows and risk adjusted discounted rates and future economic and market conditions. If applicable, our long–term financial forecast represent the best estimate that our management has at this time and we believe that its underlying assumptions are reasonable. Management has determined that no impairment indicators currently exists.
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, and stock-based compensation expense.
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 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. 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. As the Company has had limited trading history, we estimated the fair value of our common shares with reference to the subscription price of the most recent share offerings, for which the funds raised were being used to provide financing to the Company. 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.
Foreign Exchange
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. Foreign currency gains and losses on transactions or settlements are recognized in the consolidated statement of operations.
The functional currency of Naked changed from Canadian dollars to US dollars on November 1, 2012, triggered by a shift in cash flows from operations and an accumulation of other factors. Balances denominated in foreign currencies were re-measured at the date of change using the exchange rate in effect on that date. Revenue and expense items were translated at average rates for the period up to the date of change and translation adjustments accumulated in other comprehensive income up to the date of change were retained in that account.
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These financial statements have been presented in U.S dollar, which is the Company’s reporting currency. Prior to the change in functional currency, financial statements of foreign operations for which the functional currency is the local currency are translated into US dollars with assets and liabilities translated at the current rate on the balance sheet date and revenue and expense items translated at the average rates for the period. Translation adjustments are recorded as accumulated other comprehensive income (loss) in stockholders’ equity.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements are stated in United States Dollars (US$) and are prepared in conformity with generally accepted accounting principles of the United States of America.
Report of BDO Canada LLP |
Consolidated Balance Sheets as at January 31, 2014 and January 31, 2013 |
Consolidated Statements of Comprehensive Loss for the years ended January 31, 2014 and 2013 |
Consolidated Statement of Stockholders’ Equity (Capital Deficit) for the years ended January 31, 2014 and 2013 |
Consolidated Statement of Cash Flows for the years ended January 31, 2014 and 2013 |
Notes to the Consolidated Financial Statements |
Naked Brand Group Inc.
Consolidated Financial Statements
As of and for the Years Ended
January 31, 2014 and 2013
Naked Brand Group Inc. |
Consolidated Financial Statements |
As of and for the Years Ended January 31, 2014 and 2013 |
Naked Brand Group Inc. |
Contents |
Independent Auditors’ Report | 3 |
Consolidated Financial Statements (Expressed in US Dollars) | |
Consolidated Balance Sheets as of January 31, 2014 and 2013 | 5 |
Consolidated Statements of Loss and Comprehensive Loss for the Years Ended January 31, 2014 and 2013 | 6 |
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit) for the Years Ended January 31, 2014 and 2013 | 7 |
Consolidated Statements of Cash Flows for the Years Ended January 31, 2014 and 2013 | 8-9 |
Notes to Consolidated Financial Statements | 10-47 |
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![]() | Tel: 604 688 5421 Fax: 604 688 5132 www.bdo.ca | BDO Canada LLP 600 Cathedral Place 925 West Georgia Street Vancouver BC V6C 3L2 Canada |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Naked Brand Group Inc.
We have audited the accompanying consolidated balance sheets of Naked Brand Group Inc. as of January 31, 2014 and 2013 and the related consolidated statements of loss and comprehensive loss, stockholders’ equity (capital deficit), and cash flows for the years ended January 31, 2014 and 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 audit 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, 2014 and 2013 and the results of its operations and its cash flows for the years ended January 31, 2014 and 2013, 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 discussed in Note 2 to the consolidated financial statements, the Company had a working capital deficiency, is in default with respect to certain loan agreements and expects to incur further losses in the development of its business. These conditions raise 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 CANADA LLP
Chartered Accountants
Vancouver, Canada
May 14, 2014
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
3
Consolidated Financial Statements |
4
Naked Brand Group Inc. |
Consolidated Balance Sheets |
(Expressed in US Dollars) |
As of January 31, | 2014 | 2013 | ||||
ASSETS | ||||||
Current assets | ||||||
Cash | $ | 67,478 | $ | 43,780 | ||
Accounts receivable, net of allowance for doubtful accounts of $1,652 and $4,899, respectively | 68,859 | 404,713 | ||||
Advances receivable (Note 9) | 50,000 | - | ||||
Inventory (Note 6) | 604,046 | 236,150 | ||||
Prepaid expenses | 70,666 | 47,148 | ||||
| ||||||
Total current assets | 861,049 | 731,791 | ||||
| ||||||
Equipment, net (Note 7) | 6,300 | 1,842 | ||||
Intangible assets, net (Note 8) | 39,877 | 55,414 | ||||
Deferred financing fees (Note 11) | 65,539 | 198,538 | ||||
| ||||||
TOTAL ASSETS | $ | 972,765 | $ | 987,585 | ||
| ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) | ||||||
| ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities (Note 9) | $ | 639,099 | $ | 306,467 | ||
Related party payables (Note 9) | - | 13,916 | ||||
Promissory notes payable (Note 10) | 397,422 | - | ||||
Current portion of convertible promissory notes (Note 11) | 1,022,294 | 483,950 | ||||
Derivative financial instruments (Note 12) | 241,618 | - | ||||
Total current liabilities | 2,300,433 | 804,333 | ||||
Convertible promissory notes (Note 11) | 1,670 | - | ||||
| ||||||
TOTAL LIABILITIES | 2,302,103 | 804,333 | ||||
| ||||||
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) | ||||||
Common stock (Note 14) | ||||||
Authorized | 34,728 | 28,522 | ||||
Common stock to be issued (Note 14) | 7,500 | 3,750 | ||||
Accumulated paid-in capital | 4,874,095 | 2,158,151 | ||||
Accumulated deficit | (6,239,416 | ) | (2,000,926 | ) | ||
Accumulated other comprehensive income (loss) | (6,245 | ) | (6,245 | ) | ||
| ||||||
Total stockholders' equity (capital deficit) | (1,329,338 | ) | 183,252 | |||
| ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 972,765 | $ | 987,585 |
The accompanying notes are an integral part of these consolidated financial statements.
5
Naked Brand Group Inc.
Consolidated Statements of Comprehensive Loss
(Expressed in US Dollars)
for the year ended January 31, | 2014 | 2013 | ||||
Net sales (Note 16) | $ | 639,107 | $ | 566,508 | ||
Cost of sales | 587,639 | 342,659 | ||||
Gross profit | 51,468 | 223,849 | ||||
Operating Expenses | ||||||
General and administrative expenses | 2,830,661 | 1,440,255 | ||||
Foreign exchange | 14,426 | 23,752 | ||||
Total operating expenses | 2,845,087 | 1,464,007 | ||||
Operating loss | (2,793,619 | ) | (1,240,158 | ) | ||
| ||||||
Other income (expense) | ||||||
Interest | (77,381 | ) | (34,853 | ) | ||
Accretion of debt discounts and finance charges (Notes 10 and 11) | (737,595 | ) | (57,985 | ) | ||
Derivative expense (Note 12) | (170,500 | ) | - | |||
Loss on extinguishment of debt (Note 11 (i)) | (468,753 | ) | - | |||
Change in fair value of derivative financial instruments (Note 12) | 9,358 | - | ||||
Total other income (expense) | (1,444,871 | ) | (92,838 | ) | ||
Net loss for the period | $ | (4,238,490 | ) | $ | (1,332,996 | ) |
| ||||||
Other comprehensive income (expense) | ||||||
Foreign currency translation adjustments, net of tax | - | 3,227 | ||||
| ||||||
Comprehensive loss | $ | (4,238,490 | ) | $ | (1,329,769 | ) |
| ||||||
Basic and diluted net loss per share (Note 3) | $ | (0.14 | ) | $ | (0.07 | ) |
| ||||||
Weighted average shares used in computingbasic and diluted net loss per share | 31,418,517 | 20,363,483 |
The accompanying notes are an integral part of these consolidated financial statements.
6
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 | Income (Loss) | (Deficiency) | |||||||||||||||
Balance - January 31, 2012 | 6,069,251 | $ | 638,972 | $ | - | $ | - | $ | (667,930 | ) | $ | (9,472 | ) $ | (38,430 | ) | ||||||
Issuance of common stock for services, Class E, net | 161,068 | 42,206 | - | - | - | - | 42,206 | ||||||||||||||
Issuance of common stock for extinguishment of debt, Class E, net | 63,321 | 15,486 | 15,486 | ||||||||||||||||||
Exchange of shares | 7,206,360 | (683,164 | ) | 683,164 | - | - | - | - | |||||||||||||
Acquisition of Search by Headlines.com Corp. | 13,508,000 | 13,508 | 602,783 | - | - | - | 616,291 | ||||||||||||||
Modification of share purchase warrants | - | - | 20,000 | - | - | - | 20,000 | ||||||||||||||
Finders fee | - | - | (34,951 | ) | - | - | - | (34,951 | ) | ||||||||||||
Private placement - at $0.50 (Note 14 (i) and (ii)) | 214,000 | 214 | 106,786 | - | - | - | 107,000 | ||||||||||||||
Private placement - at $0.25 (Note 14 (iii), (iv), (v) and (vi)) | 1,300,000 | 1,300 | 324,716 | - | - | - | 326,016 | ||||||||||||||
Offering costs | - | - | (21,055 | ) | - | - | - | (21,055 | ) | ||||||||||||
Issuance of detachable warrants (Note 11 (i)) | - | - | 20,940 | - | - | - | 20,940 | ||||||||||||||
Agent's warrants - convertible promissory notes (Note 11 (i)) | - | - | 237,500 | - | - | - | 237,500 | ||||||||||||||
Stock based compensation (Note 14) | - | - | 218,268 | 3,750 | - | - | 222,018 | ||||||||||||||
Changes in foreign currency translation gains and losses | - | - | - | - | - | 3,227 | 3,227 | ||||||||||||||
Net loss | - | - | - | - | (1,332,996 | ) | - | (1,332,996 | ) | ||||||||||||
Balance - January 31, 2013 | 28,522,000 | $ | 28,522 | $ | 2,158,151 | $ | 3,750 | $ | (2,000,926 | ) | $ | (6,245 | ) $ | 183,252 | |||||||
Shares issued pursuant to private placement repricing (Note 14 (i)) | 214,000 | 214 | 239,466 | - | - | - | 239,680 | ||||||||||||||
Shareholder dividend (Note 14 (i)) | - | - | (239,680 | ) | - | - | - | (239,680 | ) | ||||||||||||
Private placements (Notes 14 (ii), (iii) and (v)) | 3,333,000 | 3,333 | 679,917 | - | - | - | 683,250 | ||||||||||||||
Offering costs (Note 14 (ii)) | - | - | (26,610 | ) | - | - | - | (26,610 | ) | ||||||||||||
Shares issued/to be issued in exchange for services rendered (Note 14 (iv), (vi), (ix), (xii) and (xiii)) | 644,843 | 645 | 143,644 | 3,750 | - | - | 148,039 | ||||||||||||||
Modification of convertible debt terms and warrants (Note 11 (i)) | - | - | 485,704 | - | - | - | 485,704 | ||||||||||||||
Shares issued/to be issued in connection with promissory notes (Notes 10 (ii), (iv), (v), 11 (ii), and 14 (vii)) | 402,000 | 402 | 132,118 | - | - | - | 132,520 | ||||||||||||||
Warrants issued in connection with promissory notes (Note 11 (ii)) | 18,400 | 18,400 | |||||||||||||||||||
Shares issued under equity line with Lincoln Park (Note 13) | 1,519,500 | 1,520 | 298,480 | - | - | - | 300,000 | ||||||||||||||
Less: issuance costs (Note 13) | - | - | (58,656 | ) | - | - | - | (58,656 | ) | ||||||||||||
Shares issued in settlement of debt (Notes 14 (vi), (x) and (xi)) | 92,796 | 92 | 7,221 | 7,313 | |||||||||||||||||
Issuance of detachable warrants (Note 11 (i)) | - | - | 41,225 | - | - | - | 41,225 | ||||||||||||||
Beneficial conversion feature (Note 11 (i)) | - | - | 17,600 | - | - | - | 17,600 | ||||||||||||||
Agent's warrants - convertible promissory notes (Note 11 (i)) | - | - | 67,600 | - | - | - | 67,600 | ||||||||||||||
Derivative financial instrument reclassification (Note 12) | - | - | 177,900 | - | - | - | 177,900 | ||||||||||||||
Stock based compensation (Note 14) | - | - | 731,615 | - | - | - | 731,615 | ||||||||||||||
Net loss for the period | - | - | - | - | (4,238,490 | ) | - | (4,238,490 | ) | ||||||||||||
Balance, January 31, 2014 | 34,728,139 | $ | 34,728 | $ | 4,874,095 | $ | 7,500 | $ | (6,239,416 | ) | $ | (6,245 | ) | $ | (1,329,338 | ) |
Theaccompanying notes are anintegral part of theseconsolidatedfinancialstatements.
7
Naked Brand Group Inc. |
Consolidated Statements of Cash Flows |
(Expressed in US Dollars) |
For the year ended January 31, | 2014 | 2013 | ||||
Cash flows from operating activities | ||||||
Net loss | $ | (4,238,490 | ) | $ | (1,332,996 | ) |
Adjustments to reconcile net loss to net cash | ||||||
used in operating activities: | ||||||
Provision for doubtful accounts | (3,247 | ) | 3,443 | |||
Depreciation and amortization | 22,748 | 11,685 | ||||
Other items not involving cash (Schedule 1) | 2,218,214 | 336,209 | ||||
Unrealized foreign exchange | (2,984 | ) | - | |||
Increase (decrease) in cash resulting from change in: | ||||||
Accounts receivable | 339,101 | (335,933 | ) | |||
Advances receivable | (50,000 | ) | - | |||
Prepaid expenses | (23,518 | ) | (42,837 | ) | ||
Inventory | (367,896 | ) | (166,456 | ) | ||
Accounts payable | 356,974 | 60,301 | ||||
Finance fees paid in connection with debt extinguishment | (2,520 | ) | - | |||
Net cash used in operating activities | (1,751,618 | ) | (1,466,584 | ) | ||
| ||||||
Cash flows from investing activities | ||||||
Acquisition of intangible assets | (5,517 | ) | (40,004 | ) | ||
Purchase of equipment | (6,230 | ) | (2,968 | ) | ||
Cash acquired from Search By Headlines.com Corp. | - | 386,790 | ||||
Net cash provided by (used in) investing activities | (11,747 | ) | 343,818 | |||
| ||||||
Cash flows from financing activities | ||||||
Proceeds from share issuances | 983,250 | 433,016 | ||||
Less: Offering costs | (85,266 | ) | (21,055 | ) | ||
Advances from Search by Headlines.com Corp prior to the merger | - | 325,000 | ||||
Acquisition costs | - | (34,951 | ) | |||
Proceeds from the issuance of promissory notes | 571,122 | - | ||||
Repayments of promissory notes | (199,897 | ) | (9,193 | ) | ||
Proceeds from convertible promissory notes | 958,500 | 500,000 | ||||
Repayments of convertible promissory notes | (381,177 | ) | - | |||
Less: Debt offering costs | (45,553 | ) | - | |||
Repayments on debt factoring arrangements | - | (31,555 | ) | |||
Repayments of related party payables | (13,916 | ) | (48,883 | ) | ||
Net cash provided by financing activities | 1,787,063 | 1,112,379 | ||||
| ||||||
Effect of exchange rate changes on cash | - | 3,811 | ||||
| ||||||
Net increase (decrease) in cash | 23,698 | (6,576 | ) | |||
Cash at beginning of the period | 43,780 | 50,356 | ||||
Cash at end of the period | $ | 67,478 | $ | 43,780 |
The accompanying notes are an integral part of these consolidated financial statements.
8
Naked Brand Group Inc. |
Consolidated Statements of Cash Flows |
(Expressed in US Dollars) |
Supplemental Cash Flow Information | ||||||
| ||||||
Cash paid during the period for: | ||||||
Interest | $ | 65,148 | $ | 24,517 | ||
Taxes | - | - | ||||
Non-cash financing activities: | ||||||
Extinguishment of accounts payable with equity | $ | 39,820 | $ | 15,486 | ||
Conversion of related party payable to equity | - | 375,000 | ||||
Accounts payable - Search By Headlines.com Corp | - | 153,632 | ||||
Discount on debt financing | 127,220 | 20,940 | ||||
Deferred financing costs | 88,400 | 237,500 | ||||
Repayment of promissory note through issuance of new promissory note | 21,562 | - | ||||
| ||||||
Schedule 1 to the Statements of Cash Flows |
Year ended January 31, | 2014 | 2013 | ||||
| ||||||
Profit and loss items not involving cash consists of: | ||||||
Shares issued for services | $ | 140,539 | $ | - | ||
Shares to be issued in exchange for services | 7,500 | 45,956 | ||||
Loss on extinguishment of debt | 468,753 | - | ||||
Stock based compensation | 731,615 | 238,268 | ||||
Derivative expense | 170,500 | - | ||||
Change in fair value of derivative | (9,358 | ) | - | |||
Amortization of deferred financing fees | 269,472 | 38,962 | ||||
Interest capitalized to convertible debt | 1,365 | - | ||||
Shares issued as penalty under debt agreements | 2,900 | - | ||||
Interest on Search by Headlines.com Corp loan forgiven | - | 8,133 | ||||
Accretion of debt discount | 434,928 | 4,890 | ||||
$ | 2,218,214 | $ | 336,209 |
The accompanying notes are an integral part of these consolidated financial statements.
9
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
1. Organization and Nature of Business
Naked Brand Group Inc. (the “Company”) was incorporated in the State of Nevada on May 17, 2005, as Search By Headlines.com Corp. with 100,000,000 authorized common shares with a par value of $0.001 per share. During the year ended July 31, 2010, the Company ceased operations as a specialized internet search engine that featured news in a format that allowed users to search or submit news by headline. On July 30, 2012, the Company closed an Acquisition Agreement with Naked Inc. (formerly Naked Boxer Brief Clothing Inc.) (“Naked”) whereby Naked’s owners became the sole directors of the Company and Naked stockholders exchanged their shares for a total of 13.5 million shares of the Company, representing 50% of the Company (the “Acquisition”). On the same date, the entire management of Naked became the entire management of the Company. Effective August 29, 2012, the Company completed a merger with a subsidiary, Naked Brand Group Inc., a Nevada corporation, which was incorporated solely to effect a change of name. As a result, the Company changed its name from “Search By Headlines.com Corp.” to “Naked Brand Group Inc.”.
Naked was incorporated under the federal laws of Canada on May 21, 2009 as In Search of Solutions Inc. and changed its corporate name on May 17, 2010 to Naked Boxer Brief Clothing Inc. On February 20, 2013, Naked changed its name to Naked Inc. Naked commenced business operations on February 1, 2010 as a manufacturer and seller of direct and wholesale undergarments in Canada to consumers and retailers and has been realizing revenues from its operations since September, 2010.
As a result of the Acquisition, Naked became a wholly-owned subsidiary of the Company and the Company’s business became the manufacture and sales of direct and wholesale undergarments in Canada and the United States to consumers and retailers. The Company operates out of Abbotsford, British Columbia, Canada.
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 at January 31, 2014, the Company had not yet achieved profitable operations, had a working capital deficiency, was in default with respect to certain loan agreements (Note 11 (i)) and expects to incur 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 meet its obligations and repay its liabilities arising from normal business operations as they come due. Management plans to obtain the necessary financing through the issuance of equity or debt to existing shareholders. 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.
10
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 were 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. Foreign currency gains and losses on transactions or settlements are recognized in the consolidated statement of operations.
The functional currency of Naked changed from Canadian dollars to US dollars on November 1, 2012, triggered by a shift in cash flows from operations and an accumulation of other factors. Balances denominated in foreign currencies were re-measured at the date of change using the exchange rate in effect on that date. Revenue and expense items were translated at average rates for the period up to the date of change and translation adjustments accumulated in other comprehensive income up to the date of change were retained in that account.
These financial statements have been presented in US dollars, which is the Company’s reporting currency. Prior to the change in functional currency during the year ended January 31, 2013, financial statements of foreign operations for which the functional currency is the local currency are translated into US dollars with assets and liabilities translated at the current rate on the balance sheet date and revenue and expense items translated at the average rates for the period. Translation adjustments are recorded as accumulated other comprehensive income (loss) in stockholders’ equity.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with GAAP.
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. 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, the Company has determined that as of January 31, 2014 and 2013, there is only a single reportable operating segment.
11
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
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:
2014 | 2013 | |||||
United States | $ | 394,867 | $ | 410,012 | ||
Canada | 244,240 | 156,496 | ||||
$ | 639,107 | $ | 566,508 |
At January 31, 2014 and 2013 substantially all of the Company’s long-lived assets were located in Canada.
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 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. 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 inventory carrying amount to reflect this.
Equipment
E 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 | 4 | ||
Computer equipment | 2 |
12
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
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.
Website Costs
The Company recognizes the costs associated with developing a website in accordance with ASC Topic 350–40. Relating to website development costs, the Company follows the guidance pursuant to ASC Topic 350–50.
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 currently exists.
Shipping and Handling Costs
Costs associated with the Company’s third-party shipping, warehousing and handling activities are included within operating expenses on the income statement.
(i) | Shipping costs associated with marketing related promotions are included as a component of general and administrative expenses as office and miscellaneous expense. These shipping costs were $41,696 for the year ended January 31, 2014 ($36,142 for the year ended January 31, 2013). |
13
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
(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 $104,580 for the year ended January 31, 2014 ($45,452 for the year ended January 31, 2013). |
Advertising Expense
The Company expenses advertising costs to operations during the year in which they were incurred. The Company expensed $60,011 and $68,122 related to advertising for the years ended January 31, 2014 and 2013, 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, 2014 and 2013, 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 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;
14
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
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;
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.
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, related party payables 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 notes payable outstanding at January 31, 2014, based on Level 2 inputs in the fair value hierarch, 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:
2014 | 2013 | ||
Risk-free interest rate | 0.05% | 0.21% | |
Expected life (years) | 0.36 | 1.54 | |
Expected volatility(1) | 212.64% | 219.86% | |
Stock price | $0.08 | $0.25 | |
Dividend yields | 0.00% | 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.
The Company determined that the fair value of the convertible promissory notes at January 31, 2014 was $1,209,300 (2013: $596,000) based on a market interest rate of 18%.
Derivative Financial Instruments
The Company evaluates its convertible debt and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815 Derivatives and Hedging. These derivatives may be included in these contracts to provide favourable terms to induce investment into the Company while preserving cash flows. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market at each balance sheet date and recorded as a liability and the change in fair value is recorded in the consolidated statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
15
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
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 uses the binomial option pricing model to value derivative liabilities. This model uses Level 3 inputs in the fair value hierarchy established by ASC 820 Fair Value Measurement
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, and product returns.
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 common shares 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 shares 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 Notes 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, 2014 and 2013, diluted EPS was calculated by including interest expense related to the convertible debt and excluding the shares underlying the convertible debt.
16
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
Net loss per share was determined as follows:
2013 | 2012 | |||||
Numerator | ||||||
Net loss | $ | (4,238,490 | ) | $ | (1,332,996 | ) |
Less: Shareholder dividend – Note 14(i) | (239,680 | ) | - | |||
$ | (4,478,170 | ) | $ | (1,332,996 | ) | |
Denominator | ||||||
Weighted average common shares outstanding | 31,418,517 | 20,363,483 | ||||
Basic and diluted net loss per share | $ | (0.14 | ) | $ | (0.07 | ) |
Anti-dilutive securities not included in diluted | ||||||
loss per share relating to: | ||||||
Warrants and options outstanding | 6,775,446 | 4,047,506 | ||||
Convertible debt | 9,651,379 | 666,667 | ||||
16,426,825 | 4,714,173 |
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.
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. The fair value of equity based awards is estimated using the most recent share offering of the same or similar share classes (approximate market value). Compensation costs for stock-based payments to employees with graded vesting are recognized on a straight-line basis.
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
There are no new accounting pronouncements that the Company recently adopted or are pending the Company’s adoption that are expected to have a material impact on the Company’s results of operations, financial position or cash flows.
17
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
4. Reverse Acquisition
On July 30, 2012, the Company closed the Acquisition pursuant to an Acquisition Agreement with Naked and SBH Acquisition Corp., the Company’s former subsidiary, whereby the Company acquired 100% of the issued and outstanding shares of Naked in exchange for 13,500,000 shares of common stock of the Company. Concurrent with the closing, 100,000 share purchase warrants outstanding, exercisable into 100,000 shares of common stock of Naked at $0.75 per share, were converted into warrants entitling the holders to purchase 214,506 shares of the Company’s common stock at an exercise price of $0.75 per share until July 30, 2014. The Company recorded an incremental value of $20,000 to general and administrative expenses as a result of this modification.
To facilitate the Acquisition, Naked agreed to: (i) continue from the federal jurisdiction of Canada to the jurisdiction of the State of Nevada and (ii) merge with the Company’s subsidiary, SBH Acquisition Corp., with Naked remaining as the surviving corporation. The continuation of Naked from Canada to the State of Nevada was completed on July 27, 2012 and the merger of Naked and SBH Acquisition Corp., with Naked as the surviving corporation, was completed on July 30, 2012. As a result of the foregoing, Naked became a wholly-owned subsidiary of the Company.
As the former stockholders of Naked now control 50% of the issued and voting shares of the Company and former management of Naked comprise more than 50% of the Board of Directors of the Company, the transaction was accounted for as a reverse acquisition and recapitalization of Naked. As Naked is deemed to be the acquirer for accounting purposes, its assets and liabilities are included in the consolidated balance sheet for the continuing entity at their historical carrying values and these consolidated financial statements are presented as a continuation of Naked.
The Company’s assets, liabilities and results of operations have been included in these consolidated financial statements from July 30, 2012, the date of the Acquisition.
For accounting purposes, the transaction is reflected as a recapitalization of Naked and consideration for the Acquisition was deemed to be the book value of the net assets of the Company acquired on July 30, 2012, which approximates their fair values. The net identifiable assets of the Company at the date of the Acquisition were as follows:
Cash & receivable | $ | 386,790 | |
Accounts payable and advances payable | (108,789 | ) | |
Due to a related party | (44,843 | ) | |
Net assets acquired | $ | 233,158 |
The carrying value of the net assets acquired was credited to the share capital of the combined entity. $375,000 in advances made to Naked in conjunction with the Acquisition, plus $8,133 in accrued interest, was debited against net assets as this was included in the portion of proceeds. In addition, acquisition costs of $34,951 paid were recorded as a charge against the equity of Naked balance sheets for the continuing entity at their historical carrying values and these consolidated financial statements are presented as a continuation of Naked.
18
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
5. Accounts Receivable
On October 6 2011, the Company entered into a factoring agreement with Liquid Capital Exchange Corp (“the factor”) whereby it sells select accounts receivable with recourse. The factor purchases eligible accounts receivable at a discount of 3.75% and is further discounted by 1/8 of 1% if the number of days elapsed from the date of purchase of the receivable exceeds 28 days. The Company bears the risk of credit loss on the receivables at all times. These receivables are accounted for as a secured borrowing arrangement and not as a sale of financial assets.
Under the terms of the agreement, the factor may make advances to the Company of amounts representing up to 80% of the net amount of eligible accounts receivable. The factor facility was collateralized by a general security agreement over all the Company’s personal property and interests.
On July 26, 2012, the Company terminated the factoring agreement and bought back all amounts outstanding under the factoring agreement. An amount of $31,555 has been presented as a financing activity in the consolidated statement of cash flow during the year ended January 31, 2013. Also, during the year ended January 31, 2013, the Company recorded $6,395 in finance charges related to factor expense under the terms of this agreement. Pursuant to the termination of the factoring agreement, the Company was released from the corresponding general security agreement.
As of January 31, 2014 and 2013, the amount of the factored receivables was $Nil,.
6. Inventory
Inventory of the Company consisted of the following at January 31, 2014 and 2013:
January 31, | 2014 | 2013 | ||||
Finished goods - Underwear | $ | 528,461 | $ | 115,709 | ||
Raw materials | 75,585 | 120,441 | ||||
Total inventory | $ | 604,046 | $ | 236,150 |
Balances at January 31, 2014 and 2013 are recorded at historical cost, less amounts for potential declines in value. During the year ended January 31, 2014, management recorded write-downs of $18,322 (2013: $Nil) to reduce inventory to its net realizable value.
19
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
7. Equipment
Property and equipment of the Company consisted of the following at January 31, 2014 and 2013:
January 31, | 2014 | 2013 | ||||
Furniture & equipment | $ | 6,630 | $ | 1,380 | ||
Computer equipment | 4,534 | 3,554 | ||||
Less: Accumulated depreciation | (4,864 | ) | (3,092 | ) | ||
$ | 6,300 | $ | 1,842 |
Depreciation expense for the years ended January 31, 2014 and 2013 was $1,694 and $1,962, respectively.
8. Intangible Assets
Intangible assets of the Company consisted of the following at January 31, 2014 and 2013:
Useful life | |||||||||
2014 | 2013 | (Years) | |||||||
Trade Names/Trademarks | $ | 24,874 | $ | 23,212 | Indefinite | ||||
Website | 44,512 | 40,657 | 2 | ||||||
69,386 | 63,869 | ||||||||
Less: accumulated amortization | (29,509 | ) | (8,455 | ) | |||||
$ | 39,877 | $ | 55,414 |
Amortization expense for each of the years ended January 31, 2014 and 2013 was $21,054 and $9,723, respectively.
9. Related Party Payables
At January 31, 2013, the Company had advances from shareholders in the amount of $13,916. All shareholder advances were unsecured and payable on demand. At January 31, 2014, all advances from shareholders had been repaid. The table below summarizes the balance and interest rate of each advance at January 31, 2014 and 2013:
January 31, | 2014 | 2013 | ||||
Advance, bearing interest at 19.50% per annum | $ | - | $ | 9,603 | ||
Advance, non-interest bearing | - | 4,313 | ||||
- | 13,916 | |||||
Less: current portion | - | (13,916 | ) | |||
$ | - | $ | - |
During the years ended January 31, 2014 and 2013, the Company incurred interest expense on the shareholder advances of $Nil and $1,309, respectively.
20
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
At January 31, 2014, included in advances receivable is an amount of $50,000 (2013:$Nil) paid to a director of the Company as an advance for expenses to be incurred on behalf of the Company in the January, 2015 fiscal year. At January 31, 2014, included in accounts payable and accrued liabilities is $24,682 (2013: $Nil) owing to directors and officers of the Company for reimbursable expenses and for unpaid directors fees. These amounts are unsecured, non-interest bearing with no specific terms of repayment.
10. Promissory Notes Payable
2014 | 2013 | |||||
Promissory note bearing interest at 10% per annum payable at maturity, unsecured, maturing on February 1, 2014(i) | $ | 75,000 | $ | - | ||
| ||||||
Promissory note in the principal amount of $309,062, non- interest bearing, unsecured, repayable in five equal semi- monthly instalments of $41,667 plus one final balloon payment of $63,229 at its maturity on July 13, 2014. The one-time interest charge of 15%, or $37,500 is convertible at maturity, at the option of the holder, into shares of common stock of the Company at a price of $0.10 per share (iii) | 309,062 | |||||
| - | |||||
Promissory note in the principal amount of CDN$16,250, non-interest bearing, repayable in equal instalments of CDN$3,125 over the remaining term of the note, unsecured. The note may be repaid at any time before maturity without notice, bonus or penalty. The final CDN$3,750, representing a 15% original issue discount (“OID”) is repayable upon the company reporting net income from operations in a single month (iv) | 14,668 | - | ||||
| ||||||
Promissory note in the principal amount of CDN$47,917, non-interest bearing, repayable in equal instalments of CDN$9,583 over the remaining term of the note, unsecured. The note may be repaid at any time before maturity without notice, bonus or penalty (v) | 43,250 | - | ||||
Less: debt discounts | (44,558 | ) | - | |||
| 397,422 | - | ||||
Less: current portion | (397,422 | ) | - | |||
$ | - | $ | - |
(i) | During the year ended January 31, 2014, the Company received $75,000 in respect of a promissory note in the principal amount of $75,000. The promissory note matures on February 1, 2014 and bears interest at a rate of 10% per annum payable at maturity. During the year ended January 31, 2014, the Company recorded $3,750 (2013: $Nil) in respect of interest on this note. |
21
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
Subsequent to January 31, 2014, the Company entered into a debt settlement agreement with this lender, pursuant to which the Company agreed to issue 796,850 common shares of the Company in full and final settlement of this note, along with accrued interest of $4,850. | ||
(ii) | On September 4, 2013, the Company issued a promissory note in the amount of $172,500 (the “September 4 Note”). The purchase price for this note was $150,000. The note matured on January 6, 2014 and was repayable in eight equal instalments of $21,563 over the term of the note (each a “Regular Repayment”). | |
As additional consideration for entering into the note, the Company issued 100,000 common shares to the lender. The fair value at issuance of these shares of $64,000, determined with reference to the quoted market price of these shares at the date of issuance, together with an original issue discount (“OID”) of $22,500 resulted in a debt discount at issuance of $86,500, was amortized using the effective interest method over the term of the note. | ||
In addition, the lender was entitled to 5,000 common shares in the event the Company did not make a Regular Repayment when due and payable under the terms of the note. During the year ended January 31, 2014, the Company requested an extension on the seventh Regular Repayment and, consequently the lender was issued 5,000 common shares. The fair value of these shares of $800, which was determined with reference to the quoted market price of the Company’s stock on the commitment date, was recorded as a charge to general and administrative expense in the consolidated statement of operations for the year ended January 31, 2014. | ||
During the year ended January 31, 2014, the Company recorded accretion expense of $86,500 (2013: $Nil) in respect of the accretion of the discount on this note. | ||
On January 13, 2014, the eighth and final Regular Repayment due under the terms of this note was repaid through the issuance of a new promissory note to the same lender. | ||
(iii) | On January 13, 2014, the Company issued a promissory note in the principal amount of $309,062, which was comprised of: (i) $250,000 consideration received; (ii) a one-time interest charge of $37,500, being 15% of the proceeds received (the “OID”); and (iii) an amount of $21,562, being the remaining principal balance due on the September 4 Note. | |
The promissory note is repayable in five monthly instalments of $41,667 over the term of the note plus one final balloon payment of $63,229 at its maturity on July 13, 2014. The Company may repay the promissory note at any time before maturity without notice, bonus or penalty. | ||
The OID is convertible, at the option of the lender, at maturity of the note into shares of common stock of the Company at a price of $0.10 per share. | ||
The issuance of this promissory note as consideration of the remaining balance due and payable under the September 4 Note was recorded at the redemption amount pursuant to the applicable guidance under ASC 470-20. | ||
(iv) | 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 note matures eight months from the date of issuance and is repayable in eight equal monthly instalments over the term of the note. The OID is repayable upon the Company recognizing net income from operations in any given month during the term of the note. |
22
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
As additional consideration for entering into the loan, the Company issued 22,000 common shares of the Company to the lender. The fair value at issuance of these shares of $5,720, determined with reference to the quoted market price of these shares at the date of issuance, together with the OID of $3,670 resulted in a debt discount at issuance of $9,390, which is being amortized using the effective interest method over the term of the note. | ||
During the year ended January 31, 2014, the Company recorded accretion expense of $6,110 (2013: $Nil) in respect of the accretion of the discount on this note. | ||
(v) | On December 20, 2013, the Company issued a promissory note in the principal amount of CDN$57,500. The Company received $47,660 (CDN$50,000) in respect of this note, after an original issue discount (“OID”) of 15%, or $7,149 (CDN$7,500). The note matures six months from the date of issuance and is repayable in six equal monthly instalments over the term of the note. | |
As additional consideration for entering into the loan, the Company issued 25,000 common shares of the Company to the lender. The fair value at issuance of these shares of $3,000, determined with reference to the quoted market price of these shares at the date of issuance, together with the OID of $7,149 resulted in a debt discount at issuance of $10,149, which is being amortized using the effective interest method over the term of the note. | ||
During the year ended January 31, 2014, the Company recorded accretion expense of $2,164 (2013: $Nil) in respect of the accretion of the discount on this note. |
23
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
11. Convertible Promissory Notes Payable
2014 | 2013 | |||||
Revolving Credit Facility, bearing interest at 12% per annum, due August 16, 2014(i) | $ | 500,000 | $ | 500,000 | ||
| ||||||
Revolving Credit Facility, bearing interest at 12% per annum, due January 31, 2014(i) | 275,000 | - | ||||
| ||||||
Convertible promissory note payable, non-interest bearing, due February 9, 2014(ii) | 128,704 | - | ||||
| ||||||
Convertible promissory note payable, non-interest bearing, due November 13, 2014(iv) (Note 12) | 124,444 | - | ||||
| ||||||
Convertible promissory notes, bearing interest at 8% per annum, due September 23, 2014 (v) | 91,688 | - | ||||
| ||||||
Convertible promissory notes, bearing interest at 8% per annum, due September 17, 2014 (vi) | 84,085 | - | ||||
| ||||||
Less: debt discounts | (179,957 | ) | (16,050 | ) | ||
1,023,964 | 483,950 | |||||
Less: current portion | (1,022,294 | ) | (483,950 | ) | ||
$ | 1,670 | $ | - |
(i) | Revolving Credit Facilities with Kalamalka Partners |
August, 2012 Credit Facility | |
On August 10, 2012, the Company and its wholly owned subsidiary, Naked, entered into the Agency Agreement with Kalamalka and certain lenders (the “Lenders”) as set out in the Agency Agreement whereby the Company agreed to borrow up to $800,000 from the Lenders under a revolving loan arrangement by the issuance of convertible promissory notes (the “Notes”) from time to time as such funds are required by the Company. | |
In connection with the closing of the Agency Agreement, the Company issued four convertible promissory notes in the aggregate principal amount of $400,000 (the “Closing Notes”) and an aggregate of 100,000 share purchase warrants to the Lenders (the “Lender Warrants”) exercisable into one common share of the Company as follows: 25,000 Lender Warrants exercisable at $0.25 until August 10, 2015, 25,000 Lender Warrants exercisable at $0.50 until August 10, 2015 and 50,000 Lender Warrants exercisable at $0.25 until August 10, 2014. | |
On December 21, 2012, the Company issued additional Notes in the principal amounts totaling $100,000. No additional lender warrants were issued in connection with this subsequent funding. | |
The Notes bear interest at 12% per annum, calculated and payable monthly. The principal amount outstanding under any Note and all accrued and unpaid interest therein, were initially convertible into common shares of the Company at $0.75 per share at any time at the option of the Lender. These terms were later amended, as set forth below. |
24
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
The Notes are collateralized by a first priority general security agreement over the present and future assets of the Company.
The Notes may be prepaid at any time at the option of the Company with 60 days’ written notice to Kalamalka (the “Agent”) under the Agency Agreement. Prepayments must be accompanied by a 1% prepayment fee and the prepaid amount will form a pool of stand-by funds that will continue to accrue interest at a rate of 4% per annum, calculated and payable monthly.
Pursuant to the guidance of ASC 470-20 Debt with Conversion and Other Options, the Company allocated the proceeds from the issuance of the Closing Notes between the Closing Notes and the detachable Lender warrants using the relative fair value method. The fair value of the Lender Warrants of $22,100 at issuance resulted in a debt discount at issuance of $20,940, which is being amortized using the effective interest method over the term of the Notes. During the year ended January 31, 2014, the Company recorded accretion expense of $10,462 (2013: $4,890) in respect of the accretion of this discount and $59,618 (2013: $23,208), in interest in respect of these Notes.
In consideration for the convertible debt issued, the Company issued an aggregate of 1,148,000 share purchase warrants to non-lenders as follows: (i) 948,000 share purchase warrants to the Agent as consideration for facilitating the loan (the “Agent’s Warrants”), of which 448,000 were exercisable into common shares of the Company at $0.25 per share for a period of two years and 500,000 were exercisable into common shares of the Company at $0.50 per share for a period of two years; and (ii) 200,000 share purchase warrants to certain non-lenders as consideration for a $200,000 bridge loan provided to the Company prior to the closing of the Agency Agreement (the “Bridge Loan Warrants”), of which 125,000 Bridge Loan Warrants were exercisable into common shares of the Company at $0.25 per share for a period of three years and 75,000 Bridge Loan Warrants were exercisable into common shares of the Company at $0.50 per share for a period of three years. The fair value of the Agent’s Warrants and the Bridge Loan Warrants of $237,500 was recorded as a deferred financing charge and is being amortized to income over the term of the Notes using the effective interest method. During the year ended January 31, 2014, the Company had recorded financing expense of $99,694 (2013: $38,962) in respect of the amortization of these charges. Accumulated amortization as at January 31, 2014 was $138,656 (2013: $38,962).
Of the total Agent’s Warrants, 900,000 warrants are transferrable by the Agent and may be transferred by the Agent to certain lenders in accordance with additional funds received under the Agreement. As the amounts transferred to lenders subsequent to the closing of the Agreement are at the sole discretion of the Agent, the Company has included these warrants as a deferred financing fee which is being amortized over the term of the Agreement, and not as a discount on additional convertible notes as they are issued.
The fair value of the Agents Warrants, the Lender Warrants and the Bridge Loan Warrants at issuance was determined using the Black Scholes option pricing model with the following weighted average assumptions:
25
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
Risk-free interest rate | 0.29% |
Expected life (years) | 2.20 |
Expected volatility(1) | 201.94% |
Estimated stock price at date of issuance(2) | $0.25 |
Dividend yields | 0.00% |
(1) As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.
(2) The estimated stock price of $0.25 per share was determined with reference to the subscription price of the most recent share offerings for which the funds raised were being used to provide financing to the Company. This was considered to be the most appropriate basis on which to estimate the fair value of the Company’s stock as, at the time of the transaction, the Company’s stock was not being traded on an active market.
Funds advanced under the loan were restricted for inventory and accounts receivable whereby we could fund up to 90% of the Company’s accounts receivable and inventory (the “Borrowing Margin Requirements”). “Inventory” includes raw materials in transit and in our possession, materials in the course of production, work in progress and unsold finished goods, all valued at cost. Receivables were marginable until 60 days from the invoice date, after which time such receivables had no value for margining purposes, except that up to $10,000 of receivables were marginable if such receivables were more than 60 days old but less than 90 days old.
During the year ended January 31, 2013, the Company’s borrowing exceeded the required margins and these Notes entered into default. As a result, on July 22, 2013, the Company entered into an Amendment Agreement with Kalamalka and the Lenders. Pursuant to the Amendment Agreement, the Company amended the Notes to reduce the conversion price from $0.75 to $0.50 per share and amended the terms of the Lender Warrants, Bridge Loan Warrants and Agent’s Warrants such that the expiry of all of the warrants was extended by three years. In addition, the Amendment Agreement reduced the total commitment of the revolving loan facility from $800,000 to the $500,000 already advanced.
The amendments were considered a substantial change in the terms of the loan facility and, accordingly, the Company applied debt extinguishment accounting and calculated a loss on extinguishment of debt of $485,704 as the premium of the aggregate fair value of the amended notes of $778,553 over their carrying values of $488,849 immediately prior to the amendments, plus the fair value of the modification of the Lender Warrants, Bridge Loan Warrants and Agent’s Warrants. The Company calculated the fair value of the amended convertible promissory 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 features, using the following assumptions:
Risk-free interest rate | 0.10% |
Expected life (years) | 1.07 |
Expected volatility(1) | 151.47% |
Stock price | $0.52 |
Dividend yields | 0.00% |
26
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
The fair value of the modification of the Lender Warrants, Bridge Loan Warrants and Agent’s Warrants of $196,000 was determined as the difference between the fair value of these warrants immediately prior to the amendments and the fair value of these warrants immediately after the amendment. The fair values were determined using the Black Scholes option pricing model with the following weighted average assumptions:
Risk-free interest rate | 1.03% |
Expected life (years) | 4.25 |
Expected volatility(1) | 249.92% |
Stock price at date of issuance | $0.52 |
Dividend yields | 0.00% |
(1) | As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities. |
The loss was recorded on the consolidated statement of operations during the year ended January 31, 2014, with a corresponding credit to additional paid in capital. In connection with the reduction in borrowing capacity, the Company wrote off $56,555 of unamortized deferred finance charges in proportion to the decrease in the borrowing capacity, and incurred $2,520 in deferred financing fees in connection with the amendments. This cost was recognized as finance charges on the consolidated statement of operations during the year ended January 31, 2014.
Subsequent to January 31, 2014, the Company entered into an Amendment Agreement dated April 4, 2014 (the “First Kalamalka Amendment Agreement”) with Kalamalka and certain of the Lenders as set out in the Amendment Agreement (collectively, the “First Tranche Lenders”) amending the Agency and Interlender Agreement dated August 10, 2012 (the “First Agency Agreement”). In connection with the First Agency Agreement, the Company amended several of the Notes in the aggregate principal amount of $400,000 (the “First Tranche Kalamalka Notes”) as follows; (i) the Company extended the due date of the First Tranche Kalamalka Notes to October 1, 2016; (ii) the Company reduced the interest rate accruing under the First Tranche Kalamalka Notes to 6% per annum, calculated and payable quarterly, in cash or in kind; (iv) the Company removed the Borrowing Margin Requirements; (iii) the Company amended the First Tranche Kalamalka Notes to reduce the conversion price from $0.50 per share to $0.25 per share; and (v) 500,000 share purchase warrants exercisable at a price of $0.50 until August 10, 2018 held by Kalamalka were exchanged for 600,000 New Warrants, as defined and described below.
As consideration for facilitating such amendments, the Company granted 1,200,000 share purchase warrants to the First Tranche Lenders and Kalamalka (the “New Warrants”).
Each New Warrant is exercisable into one common share at a price of $0.15 per share until April 4, 2019. The Company has the right to call the New Warrants if the volume weighted average closing price of the Company’s shares exceeds $0.30 per share for more than 20 consecutive trading days following the closing date. In that event, the New Warrants will expire 30 days following the date the Company delivers notice in writing to the warrant holders announcing the call of the New Warrants. In addition, the New Warrants contain piggyback registration rights on any subsequent registration statement filed with the Securities and Exchange Commission (the “SEC”), including, without limitation, any registration statement that may be required to be filed with the SEC in connection with the Subsequent Financing (Note 18).
27
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
Also in connection with the First Kalamalka Amendment Agreement, one First Tranche Lender was granted the right to exchange 100,000 share purchase warrants exercisable at a price of $0.50 until August 10, 2018 for 100,000 New Warrants.
Also subsequent to January 31, 2014, pursuant to a Conversion Agreement dated April 4, 2014, the remaining Notes in the aggregate principal amount of $100,000 plus $1,868 in accrued interest therein were settled by the issuance of 1,018,685 common shares of the Company at a conversion price of $0.10 per share.
November, 2013 Credit Facility
On November 14, 2013, the Company entered into an Agency and Interlender Agreement dated November 14, 2013 (the “Agency Agreement”) with Kalamalka, and certain lenders as set out in the Agency Agreement (the “Lenders”), whereby the Company agreed to borrow up to $300,000 from the Lenders from time to time (the “Loan”). In connection with the closing of the Agency Agreement, the Company issued: (i) two convertible promissory notes (collectively, the “Notes”) in the aggregate principal amount of $100,000 and (ii) an aggregate of 125,000 share purchase warrants (each, a “Lender Warrant”) to the Lenders. On November 26, 2013, the Company issued (i) additional Notes in the principal amounts totaling $100,000 and (ii) 125,000 additional Lender Warrants and on December 24, 2013 the Company issued (i) an additional Note in the principal amount of $75,000 and (ii) 115,000 additional Lender Warrants.
Each Lender Warrant is exercisable into one Share at a price of $0.10 per Share for a period of two years from the date of issuance.
Each Note was due on January 31, 2014 (the “Due Date”) and bears interest at the rate of 12% per annum, calculated daily and payable on the Due Date. The principal amount outstanding under any Note, and all accrued but unpaid interest thereon, may be converted into shares of common stock of the Company at a price of $0.25 per share at any time at the option of the respective Lender. Repayment of the Notes is secured by general security agreements dated November 14, 2013, as amended and restated, made by each of the Company and its wholly owned subsidiary in favour of Kalamalka, as agent for the Lenders.
As consideration for facilitating the Loans, the Company issued an aggregate of 362,500 warrants (the “Kalamalka Warrants”) to Kalamalka, each Kalamalka Warrant exercisable into Shares at a price of $0.10 per Share for two years from the date of issuance.
Pursuant to the guidance of ASC 470-20 Debt with Conversion and Other Options, the Company allocated the proceeds from the issuance of the Notes between the Notes and the detachable Lender warrants using the relative fair value method.
The Company recorded a beneficial conversion feature in the amount of $17,600 in respect of first tranche of $100,000 issued in connection with the closing of the Agency Agreement. The beneficial conversion feature was calculated based on a comparison of the proceeds of the Notes allocated to the Notes and the fair value of the common stock at the commitment date of the Notes.
28
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
The fair value of the Lender Warrants of $58,600 at issuance resulted in a debt discount of $41,225, and along with a beneficial conversion feature of $17,600, resulted in a total debt discount at issuance of $58,825, which was amortized using the effective interest method over the term of the Notes to January 31, 2014. During the year ended January 31, 2014, the Company recorded accretion expense of $58,825 (2013: $Nil) in respect of the accretion of this discount and $5,531 (2013: $Nil), in interest in respect of these Notes.
The fair value of the Agent’s Warrants of $67,600 was recorded as a deferred financing charge and was amortized to income over the term of the Notes to January 31, 2014 using the effective interest method.
The fair value of the Agents Warrants and the Lender Warrants at issuance was determined using the Black Scholes option pricing model with the following weighted average assumptions:
Risk-free interest rate | 0.63% |
Expected life (years) | 3.00 |
Expected volatility(1) | 144.71% |
Stock price at date of issuance | $0.20 |
Dividend yields | 0.00% |
(1) As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.
On January 31, 2014, the Company did not repay the Notes at maturity. Subsequent to January 31, 2014; the Company entered into an Amendment Agreement dated April 4, 2014 (the “Second Kalamalka Amendment Agreement”) with Kalamalka and certain lenders as set out in the Agreement (collectively, the “Second Tranche Lenders”) amending the Agency and Interlender Agreement dated November 14, 2013 (the “Second Agency Agreement”). In connection with the Second Agency Agreement, the Company amended certain convertible term promissory notes in the aggregate principal amount of $200,000 (the “Second Tranche Notes”) as follows; (i) the Company extended the due date of the Second Tranche Notes to October 1, 2016; (ii) the Company reduced the interest rate accruing under the Second Tranche Notes to 6% per annum, calculated and payable quarterly, in cash or in kind; and (iii) the Company removed the Borrowing Margin Requirements.
As consideration for facilitating such amendments, the Company granted 600,000 New Warrants to the Second Tranche Lenders and to Kalamalka.
Repayment of the First Tranche Notes and the Second Tranche Notes is collateralized by a general security agreement dated November 14, 2013, as amended on April 4, 2014 (the “Kalamalka Security Agreement”), made by the Company in favour of Kalamalka, as agent for the First Tranche Lenders and Second Tranche Lenders, which Kalamalka Security Agreement ranks pari passu with a Security Agreement entered into subsequent to January 31, 2014 (Note 18) as evidenced by an Interlender Agreement dated April 4, 2014 between CSD Holdings LLC, as Agent for the Purchasers (see Note 18), Kalamalka, First Tranche Lenders, Second Tranche Lenders, and the Company.
29
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
In addition, subsequent to January 31, 2014, the Company exchanged a Note with an outstanding amount of $76,388, including accrued interest of $1,388, for the issuance of a SPA Note in the same amount (Note 18). | |
(ii) | On October 4, 2013, the Company issued an OID (Original Issue Discount) convertible promissory note in the amount of $343,212. The purchase price for this note was $300,000. The note was to mature on February 9, 2014, and was repayable in eight equal instalments of $42,902 over the term of the note (each a “Regular Repayment”). |
The note entitles the holder, at its election, at any time on or prior to maturity, to convert all or any portion of the principal amount and any interest outstanding thereon into shares of common stock of the Company at the price of $0.25 per share. | |
The amounts due under the note are collateralized by a personal guarantee of a director and officer of the Company, who also pledged 4,859,613 shares of his common stock to the lender as collateral. | |
As additional consideration for entering into the note, the Company issued 200,000 common shares to the lender (the “Fee Shares”). The fair value at issuance of the Fee Shares of $48,000, determined with reference to the quoted market price of these shares at the date of issuance, was recorded as a debt discount at issuance, which is being amortized using the effective interest method over the term of the note. | |
In addition, the lender is entitled to 5,000 common shares in the event the Company does not make a Regular Repayment when due and payable under the terms of the note. During the year ended January 31, 2014, the Company requested an extension on the third, fourth and fifth Regular Repayments and, consequently Company issued 15,000 common shares to the lender. The fair value of these shares of $2,100, which was determined with reference to the quoted market price of the Company’s stock on the commitment date, was recorded as a charge to general and administrative expense in the consolidated statement of operations for the year ended January 31, 2014. | |
The Company granted piggyback registration rights to the lender in respect of the Fee Shares pursuant to which the Company agreed to include such Fee Shares with the next registration statement to be filed with the Securities and Exchange Commission (the “SEC”). During the year ended January 31, 2014, the Company included these Fee Shares in a registration statement filed with the SEC pursuant to a registration rights agreement (Note 13). | |
During the year ended January 31, 2014, the Company recorded accretion expense of $83,458 (2013: $Nil) in respect of the accretion of this discount on this note. | |
In connection with the issuance of this note, the Company incurred deferred finance fees of $53,054 as follows: |
(a) | The Company paid $2,500 and issued 10,000 common shares as a structuring fee, and paid $12,125 in legal fees and expenses incurred by the lender. The fair value of the common shares issued of $2,400, was determined with reference to the quoted market price of these shares on the commitment date of the convertible promissory note. |
30
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
(b) | In addition, the Company paid a finder’s fee of $11,429 and 120,000 share purchase warrants. The share purchase warrants are exercisable into common shares of the Company at $0.2799 per share for a period of two years from the date of issuance. The fair value of the finder’s warrants of $18,400 was determined using an option pricing model under the following assumptions: |
Risk-free interest rate | 0.33% |
Expected life (years) | 2.00 |
Expected volatility(1) | 211.16% |
Stock price at issuance | $0.24 |
Dividend yields | 0.00% |
(1) As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.
The deferred finance fees were recorded as a deferred finance charge and are being amortized to income over the term of the note using the effective interest method. During the year ended January 31, 2014, the Company recorded financing expense of $48,916 (2013: $Nil) in respect of the amortization of these charges. Accumulated amortization as at January 31, 2014 was $48,916 (2013: $Nil). | |
Subsequent to January 31, 2014, the Company did not make the sixth, seventh and eights Regular Repayments as due and the Company was required to issue 15,000 common shares to the Lender. In addition, the Company entered into a debt settlement agreement with this lender pursuant to which the Company agreed to exchange the remaining outstanding amount of $128,704 for the issuance of a new SPA note (Note 18). | |
(iii) | On June 12, 2013, the Company issued a promissory note in the principal amount of up to $500,000 plus accrued and unpaid interest and any other fees. On June 13, 2013, the Company received $150,000, after a 10% OID, with the remaining balance of the promissory note payable by the lender in such amounts and at such dates as the lender may choose in its sole discretion. |
The maturity date for the promissory note was June 13, 2014. The principal sum, plus any accrued but unpaid interest thereon, of the promissory note was convertible, at any time by the lender, into shares of common stock of the Company at a price which was the lesser of $1.20 or 60% of the lowest trade price in the 25 trading days prior to the conversion (the “Conversion Price”). | |
The Company was permitted to repay the promissory note at any time on or before September 11, 2013 with no interest being applied. If the Company did not repay the promissory note by that date, then a one-time interest charge of 12% would be applied to the principal sum. | |
The Company repaid the promissory note in full before September 11, 2013, and no interest was applied. |
31
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
In connection with the issuance of this promissory note, the Company had agreed that the terms of the promissory note will be amended if any securities are issued, while the promissory note is outstanding, at terms more favourable to the terms contained in the promissory note, such that the more favourable terms would become part of the transaction documents of the Lender. This ratchet provision and conversion feature violated the fixed for fixed criteria resulting in the recording of a derivative financial instrument in the Company’s consolidated financial statements (Note 12). | |
The Company allocated the proceeds from the issuance of the promissory note first to the derivative financial instrument, at its fair value, with the remainder being allocated to the promissory note. The fair value of the derivative financial instrument of $265,000 at issuance resulted in a debt discount at issuance of $166,667, the entire principal balance of the promissory note. The remaining derivative financial instrument value over the proceeds of the debt at issuance of $115,000 was immediately expensed on the consolidated statement of comprehensive loss as derivative expense, for the year ended January 31, 2014. This discount was being amortized using the effective interest method over the term of the promissory note. | |
During the year ended January 31, 2014, the Company recorded accretion expense of $166,667 (2013: $Nil) in accretion of this discount. | |
(iv) | On November 13, 2013, the Company issued a promissory note in the principal amount of up to $500,000 plus accrued and unpaid interest and any other fees. On November 13, 2013, the Company received $100,000, after an OID of 10%, with the remaining balance of the note payable by the lender in such amounts and at such dates as the lender may choose in its sole discretion |
The maturity date for the note is November 13, 2015. The principal sum, plus any accrued but unpaid interest thereon, of the note may be converted, at any time by lender, into shares of common stock of the Company at a price which is the lesser of $0.265 or 60% of the lowest trade price in the 25 trading days prior to the conversion (the “Conversion Price”). | |
The Company was permitted to repay the promissory note at any time on or before 90 days from November 13, 2013 with 0% interest. If the Company did not repay the promissory note within the 90 days then a one-time interest charge of 12% will be applied to the principal sum. The Company did not repay the note subsequent to January 31, 2014 and consequently, a one-time interest charge of 12% was applied to the principal balance outstanding. This one- time interest charge of $13,333 was accrued in the financial statements for the year ended January 31, 2014. | |
The Company granted piggyback registration rights to the lender in connection with the next registration statement to be filed with the Securities and Exchange Commission. The Company also agreed that the terms of the note will be amended if the Company issues any securities with terms more favourable than the terms contained in the note. | |
In connection with the issuance of this promissory note, the Company had agreed that the terms of the promissory note will be amended if any securities are issued, while the promissory note is outstanding, at terms more favourable to the terms contained in the promissory note, such that the more favourable terms would become part of the transaction documents of the Lender. This ratchet provision and conversion feature violated the fixed for fixed criteria resulting in the recording of a derivative financial instrument in the Company’s consolidated financial statements (Note 12). |
32
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
The Company allocated the proceeds from the issuance of the promissory note first to the derivative financial instrument, at its fair value, with the remainder being allocated to the promissory note. The fair value of the derivative financial instrument of $155,500 at issuance resulted in a debt discount at issuance of $111,111, the entire principal balance of the promissory note. The remaining derivative financial instrument value over the proceeds of the debt at issuance of $55,500 was immediately expensed on the consolidated statement of comprehensive loss as derivative expense, for the year ended January 31, 2014. This discount was being amortized using the effective interest method over the term of the promissory note. | |
During the year ended January 31, 2014, the Company recorded accretion expense of $670 (2013: $Nil) in accretion of this discount. | |
(v) | On December 23, 2013, the Company entered into two securities purchase agreements (the “Securities Purchase Agreements”) dated December 23, 2013 with two lenders, whereby the Company issued six convertible notes, each in the aggregate principal amount of $25,000 (each, a “Note”). The first two of the Notes were paid for by the lenders in cash (the “Cash Notes”) and the third, fourth, fifth and sixth of the Notes (the “Back End Notes”) were initially be paid for by the issuance of four offsetting $25,000 secured notes receivable issued to the Company by the lenders (each, a “Offsetting Note”), provided that prior to conversion of the four Back End Notes as described below, the lenders must have paid off the applicable Offsetting Note in cash. |
The Cash Notes mature on September 23, 2014 and are accruing interest at the rate of 8% per annum. The principal sum and any accrued and unpaid interest of the Notes are convertible, at the option of the holder, at any time after 180 days after issuance, and after full cash payment for the shares convertible thereunder, at a price per share equal to 55% of the average of the two lowest closing bid prices as reported on the OTCQB for the ten prior trading days. | |
The Notes may be redeemed at any time on or before 180 after issuance, subject to redemption premiums of 20-40%. The notes may not be redeemed after 180 days. | |
The Cash Notes have been recorded as stock settled debt in accordance with ASC 480 whereby a put premium of $20,455 was recorded on each Cash Note and is being amortized using the effective interest method over the term of the respective Cash Note. | |
The Back End Notes have been presented net of their respecting Offsetting Note as these Notes have no substance until the applicable Offsetting Note has been paid for in cash by the Lender. | |
During the year ended January 31, 2014, the Company recorded accretion expense of $4,456 (2013: $Nil) in accretion of these discounts. |
33
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
In connection with the issuance of the Cash Notes, the Company incurred deferred finance fees of $8,000. The deferred finance fees were recorded as a deferred finance charge and are being amortized to income over the term of the Cash Notes using the effective interest method. During the year ended January 31, 2014, the Company recorded financing expense of $1,056 (2013: $Nil) in respect of the amortization of these charges. Accumulated amortization as at January 31, 2014 was $1,056 (2013: $Nil). | |
(vi) | The Company entered into a securities purchase agreement dated December 30, 2013 (the “SPA”) with a lender, whereby the Company issued a convertible note in the aggregate principal amount of $83,500.00 (the “Note”). |
The Note matures on September 17, 2014 and is accruing interest at a rate of 8% per annum. Any amount of principal or interest on the Note which is not paid when due will bear interest at the rate of 22% per annum from the due date until the same is paid. | |
The principal sum and any accrued and unpaid interest of the Note is convertible, at the option of the holder, at any time after 180 days after issuance, at a price for each share equal to 61% of the average of the three lowest closing bid prices as reported on the OTCQB for the ten prior trading days. | |
The Note may be redeemed at any time on or before 180 after issuance, subject to redemption premiums of 15-40%. The notes may not be redeemed after 180 days. | |
In connection with the issuance of this Note, the Company had agreed that the terms of the Note will be amended if any securities are issued, while the Note is outstanding, at terms more favourable to the terms contained in the Note, such that the more favourable terms would become part of the transaction documents of the Lender. This ratchet provision and conversion feature violated the fixed for fixed criteria resulting in the recording of a derivative financial instrument in the Company’s consolidated financial statements (Note 12). | |
The Company allocated the proceeds from the issuance of the Note first to the derivative financial instrument, at its fair value, with the remainder being allocated to the Note. The fair value of the derivative financial instrument of $8,376 at issuance resulted in a debt discount, which is being amortized using the effective interest method over the term of the Note. | |
During the year ended January 31, 2014, the Company recorded accretion expense of $989 (2013: $Nil) in accretion of this discount. | |
In connection with the issuance of the Note, the Company incurred deferred finance fees of $11,500. The deferred finance fees were recorded as a deferred finance charge and are being amortized to income over the term of the Note using the effective interest method. During the year ended January 31, 2014, the Company recorded financing expense of $1,320 (2013: $Nil) in respect of the amortization of these charges. Accumulated amortization as at January 31, 2014 was $1,320 (2013: $Nil). |
12. Derivative financial instruments
During the year ended January 31, 2014, the Company had derivative financial instruments associated with convertible promissory notes (Notes 11 (iii), (iv) and (vi)).
34
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
As a result of the application of ASC 815, the Company has recorded these derivative financial instruments at their fair value as follows:
Derivative financial instruments, January 31, 2013 | $ | - | ||
Fair values at commitment dates | 428,876 | |||
Fair value mark to market adjustments | (9,358 | ) | ||
Reclassification of fair value to additional paid-in capital upon extinguishment of host contract | (177,900 | ) | ||
Derivative financial instruments, January 31, 2014 | $ | 241,618 |
On the commitment date of the related convertible promissory notes, the Company recorded a debt discount to the extent of the gross proceeds of the promissory note, and immediately expensed the remaining derivative value as a derivative expense on the consolidated statement of comprehensive loss. During the year ended January 31, 2014, the Company recorded derivative expenses of $170,500 (2013: $Nil) in respect of the excess of the fair value of derivative financial instruments at the commitment date over consideration received under the corresponding host contracts.
The Company determined fair value of the derivative financial instruments at January 31, 2014 and as at the commitment dates, and the extinguishment date based on the following weighted average management assumptions:
January 31, | Extinguishment | Commitment | ||
2014 | date | date | ||
Risk-free interest rate | 0.34% | 0.08% | 0.27% | |
Expected life (years) | 1.78 | 0.76 | 1.73 | |
Expected volatility(1) | 132.09% | 137.74% | 157.41% | |
Stock price at date of issuance | $0.08 | $0.53 | $0.51 | |
Dividend yields | 0.00% | 0.00% | 0.00% |
(1) As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.
During the year ended January 31, 2014, the Company repaid a promissory note which contained a derivative financial instrument and this derivative financial instrument was extinguished. Upon extinguishment, the fair value of the derivative financial instrument of $177,900 was recorded as a credit to additional paid in capital.
13. Securities Purchase Agreement
On September 10, 2013, the Company entered into an $8,300,000 securities purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC, (“Lincoln Park”) an Illinois limited liability company (the “Financing”) pursuant to which the Company may sell and issue to Lincoln Park, and Lincoln Park is obligated to purchase, up to $8,300,000 in value of its shares of common stock from time to time over a 24 month period. In connection with the Financing, the Company also entered into a registration rights agreement with Lincoln Park whereby the Company agreed to file a registration statement with the Securities and Exchange Commission (the “SEC”) covering the shares of the Company’s common stock that may be issued to Lincoln Park under the Purchase Agreement.
35
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
The Company will determine, at its own discretion, the timing and amount of its sales of common stock, subject to certain conditions and limitations. The purchase price of the shares that may be sold to Lincoln Park under the Purchase Agreement will be based on the market price of the Company’s shares of common stock immediately preceding the time of sale without any fixed discount, provided that in no event will such shares be sold to Lincoln Park when the closing sale price is less than $0.35 per share. There are no upper limits on the per share price that Lincoln Park may pay to purchase such common stock. The purchase price will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split or similar transaction occurring during the business days used to compute such price.
Pursuant to the Purchase Agreement, Lincoln Park initially purchased 600,000 shares of the Company’s common stock for $300,000. In consideration for entering into the Purchase Agreement, the Company issued to Lincoln Park 919,500 shares of common stock as a commitment fee and shall issue up to 330,000 shares pro rata, when and if, Lincoln Park purchases at the Company’s discretion the remaining $8,000,000 aggregate commitment. The Purchase Agreement may be terminated by the Company at any time at its discretion without any cost to the Company.
On December 12, 2013, this registration statement was declared effective by the SEC.
The Company incurred $58,656 in direct expenses in connection with the Purchase Agreement and registration statement. These were recorded as share issuance costs as a charge against additional paid in capital during the year ended January 31, 2014. The shares of common stock issued a commitment fee are being recorded as a share issuance cost at par value with a corresponding charge against additional paid in capital in the period they are issued.
36
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
14. Stockholders’ Equity
Equity Transactions
Disclosure in respect of share issuances made before July 30, 2012 has not been retrospectively restated to reflect the exchange ratio of 2.14506 in relation to the reverse acquisition.
During the year ended January 31, 2014:
i) | On February 21, 2013, the Company reduced the price of 200,000 units and 14,000 common shares issued during the year ended January 31, 2013 from $0.50 to $0.25 per unit and share, respectively. Consequently, the Company issued 200,000 units and 14,000 common shares for no additional consideration. Each unit consisted of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one share of common stock at an exercise price of $0.75 per share for a period of two years from the date of the initial offering. The Company determined that the aggregate fair value on the grant date of these units and shares was $239,680 and recorded the entire amount as a shareholder dividend in the financial statements during the three months ended October 31, 2013. The fair value of $1.12 per share was determined by reference to the quoted market price of the Company’s stock on the date of issuance. |
ii) | On April 19, 2013, the Company issued 1,993,000 shares of common stock at a price of $0.25 per share and 100,000 units of the Company at $0.25 per unit for gross proceeds of $523,250. Each unit consisted of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one share of common stock at an exercise price of $0.25 per share for a period of two years. In connection with the foregoing private placement, the Company issued 104,440 warrants to four finders. Each warrant is exercisable into one share of common stock of the Company at an exercise price of $0.75 per share for a period of two years. The Company paid finder’s fees of $26,610 in connection with this private placement. |
iii) | On May 6, 2013, the Company issued 1,000,000 shares of common stock at a price of $0.25 per share for gross proceeds of $250,000 to be received in four tranches as follows: |
(i) | $50,000 payable on closing of the Financing (the “Closing”)(received); | |
(ii) | $50,000 payable on or before the date which is five months from the Closing (the “First Tranche”)(received); | |
(iii) | $50,000 payable on or before the date which is ten months from the Closing (the “Second Tranche”); and | |
| ||
(iv) | the remaining $100,000 payable on or before the date which is one year from the Closing (the “Final Tranche”) |
In connection with the 800,000 common shares issuable in connection with the First Tranche, the Second Tranche and the Final Tranche, the Company entered into an escrow agreement pursuant to which these shares were placed in escrow to be released when the Company received full payment for such shares.
37
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
The Company paid a finders’ fee of 20,000 warrants in connection with this private placement. These warrants are exercisable at $0.25 per share for a period of two years. | |
Subsequent to January 31, 2014, the Company did not receive payment for the Second Tranche and the remaining 600,000 common shares held in escrow were returned to the Company’s treasury for cancellation. | |
iv) | On June 3, 2013, the Company issued 75,000 common shares in exchange for services rendered pursuant to a consulting agreement dated April 11, 2013. The shares were recorded at a fair value of $89,250. The fair value of $1.19 per share was determined with reference to the quoted market price of the company’s common stock on the commitment date. |
v) | On October 7, 2013, the Company issued 240,000 units at a price of $0.25 per share for gross proceeds of $60,000. Each unit consisted of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one share of common stock at an exercise price of $0.25 per share for a period of eighteen months. |
vi) | On November 21, 2013, the Company issued 4,304 common shares pursuant to a debt settlement agreement dated July 8, 2013, as payment to a vendor of $4,820 owing. This resulted in a gain on extinguishment of debt of $3,701. The fair value of $0.26 per share was determined with reference to the quoted market price of the Company’s stock on the date of issuance. |
vii) | On November 21, 2013, the Company issued 25,000 common shares as additional consideration to a lender under a promissory note agreement in the principal amount of $23,992 (CDN$25,000). This loan was issued and repaid during the year ended January 31, 2014. The fair value at issuance of these shares of $6,500, determined with reference to the quoted market price of these shares at the date of issuance. In connection with the issuance of this loan, the Company incurred aggregate financing fees of $10,099, which included the fair value of the shares issued. |
viii) | On January 13, 2014, the Company issued 15,000 common shares in exchange for services rendered pursuant to an investor relations agreement dated December 6, 2012. The Company determined that the fair value on the grant date of these shares was $3,750 and recorded the entire amount as compensation expense in the financial statements for the year ended January 31, 2013. The fair value of $0.25 per share was determined by reference to the price at which common shares were being sold in private placement offerings at or around the transaction date. |
ix) | On January 13, 2014, the Company issued 29,843 common shares pursuant to a consulting agreement dated February 15, 2013 (the “Consulting Agreement”), whereby the Company agreed to issue shares in exchange for services to be rendered during the term of the Consulting Agreement, to September 30, 2013. The consultant was entitled to receive a monthly fee of $4,500 payable in shares, based on the average closing price of the Company’s shares for the first month of trading commencing on the date of the Consulting Agreement. As a result, the Company issued 3,979 shares per month for the term of the agreement. During the year ended January 31, 2014, the Company recorded $2,089 (2013: $nil) in fees paid in shares pursuant to this Consulting Agreement. |
38
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
x) | On January 13, 2014, the Company issued 25,000 common shares as payment to a vendor of $15,000 owing for consulting fees rendered, pursuant to a debt settlement agreement dated July 18, 2013. This resulted in a gain on extinguishment of debt of $13,250. The fair value of $0.07 per share was determined with reference to the quoted market price of the Company’s stock on the date of issuance. |
xi) | On January 13, 2014, the Company issued 63,492 common shares as payment to a vendor for consulting fees rendered, pursuant to a debt settlement agreement dated September 18, 2013 whereby the Company has agreed to settle an aggregate of $40,000 in amounts owing to the vendor, along with cash payments totaling $20,000. The Company recorded a reduction in amounts owing to the vendor of $4,444 in connection with the issuance of the shares. The fair value of $0.07 per share was determined with reference to the quoted market price of the Company’s stock on the date of issuance. |
xii) | On January 13, 2014, the Company issued 75,000 common shares pursuant to a board agreement dated September 24, 2013, whereby the Company has agreed to issue 75,000 shares of common stock every three months over the term of the one year contract in connection with the appointment of a director of the Company, for an aggregate of 300,000 common shares over the term. During the year ended January 31, 2014, the Company recorded directors fees of $18,000 (2013: $Nil) in respect of the first 75,000 common shares that have been earned under this agreement. The fair value of $0.24 per share was determined with reference to the quoted market price of the shares on the date of issuance. |
xiii) | On January 31, 2014, the Company issued 450,000 common shares in exchange for the cancellation of an aggregate of 450,000 stock options pursuant to an Amendment Agreement dated January 6, 2014 with a director of the Company, whereby the Company agreed to amend the terms of the directors’ compensation in connection with a board agreement dated July 19, 2013. During the year ended January 31, 2014, the Company recorded directors fees of $31,200 (2013: $Nil) in respect of the issuance of these shares. The fair value of the grant was determined as the difference between the quoted market price of the shares on the date of issuance of $45,000, less the fair value of the stock options cancelled of $13,800, as exchange for their issuance. The fair value of the stock options cancelled was determined based on the Black Scholes option pricing model using the following weighted average assumptions: Estimated volatility 138.17%, stock price $0.10, risk-free interest rate 0.40%, expected term 1.53 years, estimated dividends 0%. |
During the year ended January 31, 2013:
i) | On October 12, 2012, the Company issued 14,000 shares at $0.50 per share for gross proceeds of $7,000. Subsequent to January 31, 2013, the Company amended the subscription price for these shares to $0.25 per share and, consequently, the Company issued an additional 14,000 shares for no additional consideration. |
ii) | On September 24, 2012, the Company issued 200,000 units at $0.50 per unit for gross proceeds of $100,000. Each unit consisted of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one share of common stock at an exercise price of $0.75 per share for a period of two years. Subsequent to January 31, 2013, the Company amended the subscription price for these units to $0.25 per unit and, consequently, the Company issued an additional 200,000 units for no additional consideration. Each additional unit consisted of one common share of the Company and one share purchase warrant exercisable into one share of common stock at an exercise price of $0.75 per share for a period of two years. |
39
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
iii) | On November 26, 2012, the Company issued 400,000 units at CDN$0.25 per unit for gross proceeds of $100,686 (CDN$100,000). Each unit consisted of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one share of common stock at an exercise price of $0.50 per share for a period of two years. The Company paid share issuance costs of $8,055 and was required to issue 32,000 share purchase warrants as finder’s fees in connection with this issuance. The finder’s fee warrants will be exercisable into common shares of the Company at $0.75 per share for a period of two years from the date of closing. These warrants were issued subsequent to January 31, 2013. |
iv) | On November 24, 2012, the Company issued 400,000 common shares at CDN$0.25 per share for gross proceeds of $100,330 (CDN$100,000). |
v) | On December 10, 2012, the Company issued 100,000 units at $0.25 per unit for gross proceeds of $25,000. Each unit consisted of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one share of common stock at an exercise price of $0.50 per share for a period of two years. The Company paid share issuance costs of $2,000 and was required to issue 8,000 share purchase warrants as finder’s fees in connection with this issuance. The finder’s fee warrants will be exercisable into common shares of the Company at $0.75 per share for a period of two years from the date of closing. These warrants were issued subsequent to January 31, 2013. |
vi) | On January 8, 2013, the Company issued 400,000 shares at $0.25 per share for gross proceeds of $100,000. There was share issuance cost of $8,000 in connection with this issuance. |
vii) | As part of the acquisition agreement with Search By Headlines.com Corp., stockholders exchanged shares of Naked for shares of common stock in the capital of the Company at a ratio of 2.145060, where Naked stockholders received a total of 13.5 million common stock in the capital of the Company (Note 4). |
viii) | On July 25, 2012, Naked awarded 147,062 Class E common shares, prior to the Acquisition, to consultants for work performed. Naked determined that the fair value on the grant date of these shares was $38,766 and recorded the entire amount as general and administration expense in the consolidated financial statements for the year ended January 31, 2013. The fair value of $0.25 per share was determined with reference to the subscription price of the most recent share offerings, for which the funds raised were being used to provide financing to the Company. |
ix) | On July 16, 2012, Naked issued 63,321 shares of Class E common stock fair valued at $15,486, in addition to $8,238 cash, to extinguish debt of $21,372. This resulted in a loss of $2,352. The fair value of $0.25 per share was determined with reference to the subscription price of the most recent share offerings, for which the funds raised were being used to provide financing to the Company. |
x) | On May 23, 2012, Naked granted 14,006 Class E common shares, prior to the Acquisition, to a director of the Company for director fees earned. Naked determined that the fair value on the grant date of these shares was $3,440 and recorded the entire amount as compensation expense in the financial statements for the year ended January 31, 2013. The fair value of $0.25 per share was determined with reference to the subscription price of the most recent share offerings, for which the funds raised were being used to provide financing to the Company. |
40
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
Stock Option Plan
In connection with the closing of the Acquisition (Note 4), the Company adopted the 2012 Stock Option Plan (the “Plan”), pursuant to which the Company may grant stock options to directors, officers, employees and consultants. The maximum number of shares reserved for issue under the plan is 5,400,000 shares.
The Plan is administered by the Company’s board of directors, except that it may, in its discretion, delegate such responsibility to a committee comprised of at least two directors. Each option, upon its exercise, entitles the optionee to acquire one common share of the Company’s stock, upon payment of the applicable exercise price. The exercise price will be determined by the board of directors at the time of grant. Stock options may be granted under the 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 Plan.
Stock Based Compensation
A summary of the status of the Company’s outstanding stock options for the years ended January 31, 2014 and 2013 is presented below:
Weighted | |||||||||
Weighted | Average Grant | ||||||||
Number | Average | Date | |||||||
of Options | Exercise Price | Fair Value | |||||||
Outstanding at January 31, 2012 | - | ||||||||
Granted | 1,885,000 | $ | 0.25 | $ | 0.24 | ||||
Outstanding at January 31, 2013 | 1,885,000 | $ | 0.25 | ||||||
Granted | 1,570,000 | $ | 0.50 | $ | 0.44 | ||||
Cancelled | (450,000 | ) | $ | 0.50 | |||||
Outstanding at January 31, 2014 | 3,005,000 | $ | 0.34 | ||||||
Exercisable at January 31, 2014 | 2,246,184 | $ | 0.38 | $ | 0.27 | ||||
Exercisable at January 31, 2013 | 668,728 | $ | 0.25 | $ | 0.24 |
41
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
At January 31, 2014, the following stock options were outstanding, entitling the holder thereof to purchase common shares of the Company as follows:
Exercise | Expiry | Remaining | |
Number | Price | Date | Contractual Life |
285,000 | $0.25 | July 30,2014 | 0.49 |
20,000 | $0.25 | February1,2015 | 1.00 |
90,000 | $0.25 | February 14,2015 | 1.04 |
15,000 | $0.25 | July 25,2015 | 1.48 |
250,000 | $0.75 | October1,2015 | 1.67 |
15,000 | $0.25 | December 19,2015 | 1.88 |
150,000 | $0.35 | January6,2016 | 1.93 |
150,000 | $0.55 | January6,2016 | 1.93 |
200,000 | $0.75 | January6,2016 | 1.93 |
30,000 | $0.25 | April1,2016 | 2.17 |
600,000 | $0.25 | October9,2017 | 3.69 |
50,000 | $0.25 | February1,2018 | 4.01 |
150,000 | $0.25 | May1,2018 | 4.25 |
1,000,000 | $0.25 | July 30,2022 | 8.50 |
3,005,000 |
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, 2014, the aggregate intrinsic value of stock options outstanding is $Nil and exercisable is $Nil (2013: $Nil and $Nil, respectively).
The following table summarizes information regarding non-vested stock options outstanding during the years ended January 31, 2014 and 2013
Number of | |||
Options | |||
Non-vested options at January 31, 2012 | - | ||
Granted | 1,885,000 | ||
Vested | (668,728 | ) | |
Non-vested options at January 31, 2013 | 1,216,272 | ||
Granted | 1,570,000 | ||
Vested | (1,802,456 | ) | |
Cancelled | (225,000 | ) | |
Non-vested options at January 31, 2014 | 758,816 |
During the year ended January 31, 2014, the Company recognized a total fair value of $715,915 (2013: $218,268) of stock based compensation expense relating to the issuance of stock options in exchange for services.
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:
42
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
2014 | 2013 | |
Expected term of stock option (years)(1) | 1.48 | 4.28 |
Expected volatility(2) | 184.40% | 260.50% |
Estimated stock price at date of issuance(3) | $0.71 | $0.25 |
Risk-free interest rate | 0.18% | 0.55% |
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.
(3) An estimated stock price of $0.25 per share was determined with reference to the subscription for which the funds raised during the year ended January 31, 2013, were being used to provide financing to the Company. This was considered to be the most appropriate basis on which to estimate the fair value of the Company’s stock for stock options granted prior to February 15, 2013 because, at the time of these transactions, the Company’s stock was not being traded on an active market.
During the year ended January 31, 2014, the Company amended the terms of 500,000 stock options issued to a consultant of the Company as follows:
(i) | 150,000 options were re-priced from $1.25 to $0.35; | |
(ii) | 150,000 options were re-priced from $1.75 to $0.55; | |
(iii) | 200,000 options were re-priced from $2.25 to $0.75; and | |
(iv) | The expiry of all 500,000 options was extended from June 18, 2015 to January 6, 2016. |
The Company recognized stock based compensation expense of $15,700 in connection with this modification. The fair value of the modification was determined using the Black Scholes option pricing model using the following weighted average assumptions: risk-free interest rate: 0.40%, expected life: 1.72 years, expected volatility: 141.53%, dividend rate: 0.00% .
43
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
Share Purchase Warrants
At January 31, 2014, the Company had 3,770,446 share purchase warrants outstanding as follows:
Exercise | Expiry | |
Number | Price | Date |
24,000* | $0.75 | April19,2014 |
214,506 | $0.75 | July30,2014 |
400,000 | $0.75 | September24,2014 |
400,000 | $0.50 | November26,2014 |
100,000 | $0.50 | December10,2014 |
72,000 | $0.75 | December31,2014 |
240,000 | $0.25 | April 7,2015 |
120,000 | $0.25 | April19,2015 |
104,440 | $0.75 | April19,2015 |
120,000 | $0.28 | October 4,2015 |
498,000 | $0.25 | August10,2017 |
500,000 | $0.50 | August10,2017 |
250,000 | $0.10 | November14,2016 |
250,000 | $0.10 | November26,2016 |
227,500 | $0.10 | December24,2016 |
150,000 | $0.25 | August10,2018 |
100,000 | $0.50 | August10,2018 |
3,770,446 |
*Subsequent to January 31, 2014, these warrants expired unexercised.
A summary of the Company’s share purchase warrants outstanding is presented below:
Weighted | |||||||||
Number of | Average | ||||||||
Warrants | Exercise Price | ||||||||
Outstanding at January 31, 2012 | 100,000 | CADS | 0.75 | ||||||
Cancelled | (100,000 | ) | CAD$ | 0.75 | |||||
Re-issued pursuant to the Acquisition (Note 4) | 214,506 | USD$ | 0.75 | ||||||
Issued | 1,948,000 | USD$ | 0.44 | ||||||
Outstanding at January 31, 2013 | 2,162,506 | USDS | 0.47 | ||||||
Issued | 1,609,940 | USD$ | 0.31 | ||||||
| |||||||||
Outstanding at January 31, 2014 | 3,770,446 | USD$ | 0.40 |
44
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
15. Income Taxes
The reconciliation of income tax provision computed at statutory rates to reported income tax provision is as follows:
January 31, | 2014 | 2013 | ||||
34% | 34% | |||||
Loss for the year | $ | (4,238,490 | ) | $ | (1,332,996 | ) |
| ||||||
Expected income tax recovery | (1,441,100 | ) | (453,200 | ) | ||
Effect of change in tax rates | - | (132,800 | ) | |||
Non-deductible expenses | 394,100 | 84,700 | ||||
Impact of reverse acquisition and emigration on tax assets | - | 300,200 | ||||
Effect of foreign exchange and other adjustments | (19,700 | ) | - | |||
Change in valuation allowance | 1,066,700 | 201,100 | ||||
| ||||||
Total income tax expense | $ | - | $ | - |
Significant components of the Company’s net deferred tax assets at January 31, 2014 and 2013:
January 31, | 2014 | 2013 | ||||
Temporary differences relating to: | ||||||
Net operating loss carry forwards | $ | 1,049,300 | $ | 309,800 | ||
Incorporation costs and Intangible assets | (7,600 | ) | (15,100 | ) | ||
Stock based compensation | 318,300 | - | ||||
1,360,500 | 294,700 | |||||
Valuation allowance | (1,360,500 | ) | (294,700 | ) | ||
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, 2014 and 2013 the total change in valuation allowance was $1,066,700 and $201,100, respectively.
45
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
At January 31, 2014, the Company had accumulated net operating losses in Canada totaling approximately $1,666,000 (2013: $528,000), which may be available to reduce taxable income in Canada in future taxation years. At January 31, 2014, the Company had accumulated net operating losses in USA totaling approximately $1,419,000 (2013: $385,000), 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.
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. The Company currently has no tax years under examination. The Company’s tax filings for the years 2010 to 2013 remain open to examination.
Based on management’s assessment of ASC Topic 740Income Taxes, the Company does not have an accrual for uncertain tax positions as of January 31, 2014 and 2013. The Company does not anticipate significant changes to its unrecognized tax benefits within the next twelve months.
16. 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, 2014, the Company had concentrations of sales with a customer equal to 37.0% (2013: 55.3%) of the Company’s net sales. As at January 31, 2013 the accounts receivable balance for this customer was $15,462 (2013: $325,530).
For the year ended January 31, 2014, the Company had concentrations of sales with another customer equal to 12.0% (2013: 22.8%) of the Company’s net sales. As at January 31, 2014 the accounts receivable balance from this customer was $3,821 (2013: Nil).
17. Related Party Transactions
During the year ended January 31, 2014, the Company recorded directors fees of $56,000 (2013: $Nil) for cash compensation paid to directors of the Company, $56,700 (2013: $Nil) in common stock compensation for shares of common stock issued to directors of the Company related to services provided as directors, and $267,918 (2013: $63,276) in stock option compensation expense related to the vesting of stock options issued the directors and officers of the Company. These amounts are included as a component of general and administrative expenses on the consolidated statement of comprehensive loss.
On January 6, 2014, the Company entered into an Amendment Agreement with a director of the Company whereby the Company amended the terms of the director’s compensation in connection with a board agreement dated July 19, 2013. Under the terms of the Amendment Agreement, the Company issued an aggregate of 450,000 shares of common stock to the director in exchange for the cancellation of an aggregate of 450,000 stock options issued to the director in connection with his appointment as a director. See note 14 (xiii).
46
Naked Brand Group Inc. |
Notes to Consolidated Financial Statements |
(Expressed in US Dollars) |
During the year ended January 31, 2014, the Company issued 75,000 common shares pursuant to a board agreement dated September 24, 2013, whereby the Company has agreed to issue 75,000 shares of common stock every three months over the term of the one year contract in connection with the appointment of a director of the Company, for an aggregate of 300,000 common shares over the term. During the year ended January 31, 2014, the Company recorded directors fees of $18,000 (2013: $Nil) in respect of the first 75,000 common shares that have been earned under this agreement. At January 31, 2014, an amount of $7,500 relating to an additional 75,000 common shares issuable under the terms of this agreement were included in common stock to be issued. The fair value of $0.10 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.
18. Subsequent Events
On April 7, 2014 the Company entered into a Securities Purchase Agreement (the “SPA”) with certain purchasers (the “Purchasers”), whereby the Purchasers agreed to purchase 6% senior secured convertible promissory notes (the “SPA Notes”). Repayment of the SPA Notes are secured against all the tangible and intangible assets of the Company (the “SPA Security Agreement”).
On April 7, 2014, in connection with the SPA, the Company issued seven SPA Notes to the Purchasers, including one director of the Company, in the aggregate principal amount of $1,033,796. As consideration, the Company (i) received cash proceeds equal to $828,704 (the “Cash Proceeds”); (ii) exchanged a promissory note with an outstanding amount of $76,388, being the principal and accrued interest due under a convertible promissory note dated December 24, 2013 for the issuance of a SPA Note in the same amount; and (iii) exchanged a promissory note with an outstanding amount of $128,704, being the remaining principal amount due under a convertible promissory note dated October 2, 2013 (Note 10) for the issuance of a SPA Note in the same amount.
The principal amount of $1,033,796 matures on April 7, 2015 (the “Maturity Date”) and bears interest at the rate of 6% per annum, payable on the Maturity Date. In addition, the principal amount of the SPA Notes and all acquired and unpaid interest thereon will be exchanged for any other securities issued by the Company in connection with any subsequent financing approved by the majority of the Purchasers which results in gross proceeds to the Company of at least $3,000,000 (the “Subsequent Financing”), at an exchange rate equal to ninety percent (90%) of the aggregate purchase price paid in the Subsequent Financing.
The SPA Notes are covered by an Agency and Interlender Agreement dated April 7, 2014 between the Purchasers and CSD Holdings LLC, as agent (the “Agent”) whereby the Purchasers have appointed the Agent to act on their behalf with respect to certain rights and obligations provided for in the SPA, SPA Notes and the SPA Security Agreement.
47
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, our principal executive officer and principal financial officer evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this annual report on Form 10-K. Based upon that evaluation, our chief executive officer, who is our principal executive officer and our principal financial officer, concluded that, as at January 31, 2014, our disclosure controls and procedures were not effective (1) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to us, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The conclusion reached by our chief executive officer was a result of the material weaknesses described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses:
(i) | inadequate segregation of duties and effective risk assessment; | |
(ii) | insufficient staffing resources as a result of the loss of our Chief Financial Officer, resulting in inadequate review procedures; | |
(iii) | insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and Securities and Exchange Commission guidelines; | |
(iv) | inadequate security and restricted access to computer systems, including insufficient disaster recovery plans; and | |
(v) | lack of a written whistle-blower policy. |
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Remediation of Material Weaknesses
We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies. We intend to consider the results of our remediation efforts and related testing as part of our year-end 2015 assessment of the effectiveness of our internal control over financial reporting.
Due to our size and nature, segregation of all conflicting duties has not always been possible and may not be economically feasible. However, we are in the process of implementing processes and procedures intended to mitigate any material weaknesses identified Subject to receipt of additional financing, we intend to undertake the below remediation measures to address the material weaknesses described in this Form 10-K. Such remediation activities include the following:
31
(i) | we intend to recruit and hire a qualified Chief Financial Officer; | |
(ii) | we intend to update the documentation of our internal control processes, including formal risk assessment of our financial reporting processes; and | |
(iii) | we intend to establish a formal whistlerblower policy. |
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. 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.
Management’s 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 principal financial officer has conducted an assessment, including testing, using the criteria in Internal Control — Integrated Framework (1992), 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Based on our evaluation under the framework in COSO, our management concluded that our internal controls over financial reporting were ineffective as of January 31, 2014 due to the above-noted material weaknesses. The weaknesses and their related risks are not uncommon in a company of our size because of the limitations in the size and number of staff. We believe we have taken initial steps to mitigate these risks by consulting outside advisors where necessary.
Our management believes that because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter covered by this annual report, Alexander McAulay, our former principal financial officer, resigned from this role. He remains as a director of our company. This change had a material effect on our internal controls over financial reporting
ITEM 9B. OTHER INFORMATION
None.
32
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers, Promoters and Control Persons
As at May 15, 2014, our directors and executive officers, their ages, positions held, and duration of such, are as follows:
Name | Position Held with our Company | Age | Date First Elected or Appointed |
Joel Primus | President, CEO, Interim CFO, Treasurer, Secretary and Director | 27 | July 30, 2012 |
Alexander McAulay | Director | 30 | July 30, 2012 |
Andrew Kaplan | Director | 46 | July 19, 2013 |
Christopher Heyn | Director | 54 | October 7, 2013 |
Our officers’ remain in their respective position until termination or resignation.
Business Experience
The following is a brief account of the education and business experience of each director and executive officer during at least the past five years, indicating each person’s business experience, principal occupation during the period, and the name and principal business of the organization by which they were employed.
Joel Primus
Joel Primus is the President, CEO and a director of our company and was previously the President, CEO, founder and a director of Naked. Mr. Primus is also currently serving as interim CFO, Treasurer and Secretary of our company. While only 26, 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 in 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 unfortunate accident 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. His travels in South America also inspired Mr. Primus to found Naked. 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. 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.
We believe Mr. Primus is qualified to serve on our board of directors because of his extensive knowledge of our company’s history and current operations, which he gained from working for our company as described above, in addition to his business experience as described above.
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Alexander McAulay, C.A.
Alexander McAulay is a director of our company and served asthe CFO, Treasury, Secretary of our company from 2010 until his resignation on November 29, 2013. Prior to this, Mr. McAulay worked at MNP LLP, a chartered accountancy firm, for approximately four years, two of which were summer internships (2006 and 2007). He worked at MNP LLP as an articled student prior to receiving his designation as a Chartered Accountant. Mr. McAulay became a registered Chartered Accountant with the British Columbia Institute of Chartered Accountants in 2011. He received his Bachelors of Business Administration from the University of the Fraser Valley in 2008. At MNP LLP, Mr. McAulay practiced in a wide variety of areas including advisory, tax, and assurance work.
Mr. McAulay has extensive governance experience. Mr. McAulay served as an elected official from 2002-2005 on the Chilliwack School Board, which in the last year of his term had an 84 million dollar budget. He also served on the Board of trustees of the University of the Fraser Valley which had an 84 million dollar budget in the last year of his term on the Board. For the past three years he has served on the Board of Directors for Chilliwack Community Services of which he served as President for a term. In 2012, Mr. McAulay was awarded Young Distinguished Alumni award from the University of the Fraser Valley.
We believe Mr. McAulay is qualified to serve on our board of directors because of his extensive knowledge of our company’s history and current operations, which he gained from working for our company as described above, in addition to his business experience as described above.
Andrew Kaplan
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 IPO’s or reverse mergers. Mr. Kaplan received his BSBA in Finance and Insurance from the University of Hartford in 1989.
Mr. Kaplan has been a director of Avino Silver and Gold Mines Ltd. since September, 2011 and 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 experiences in the area of finance as described above.
Christopher Heyn
Mr. Heyn is currently Chief Executive Officer and Chairman of Summit Golf Brands and has extensive experience in the apparel merchandizing industry, including experience as Chief Operating Officer and Managing Director of D.C. Management Group, President of Nautica Sportswear and Nautica Jeans Company and Nautical Apparel, Inc., and Senior Vice President of the National Basketball Association’s Global Merchandising Group.
We believe Mr. Heyn is qualified to serve on our board of directors because of his extensive business experiences in the apparel merchandising industries, as described above.
Committees of the Board
We do not have a separate audit committee at this time. Our entire board of directors acts as our audit committee.
Family Relationships
There are no family relationships among our directors or officers.
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Involvement in Certain Legal Proceedings
Our directors, executive officers and promoters have not been involved in any of the following events during the past ten years:
(1) a petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
(2) a conviction in a criminal proceeding or named in a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) being the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
(i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;
(4) being the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (3)(i) above, or to be associated with persons engaged in any such activity;
(5) being found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;
(6) being found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
(7) being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
(i) any Federal or State securities or commodities law or regulation; or
(ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
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(iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
(8) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Board Leadership Structure
The positions of our principal executive officer and the chairman of our board of directors are served by one individual: Joel Primus. We have determined that the leadership structure of our board of directors is appropriate, especially given the early stage of our development and the size of our company. Our board of directors provides direct oversight of our risk exposure regarding matters relating to financial, operational, legal and strategic risks and mitigation strategies for such risks.
Term of Office
Our directors cease to hold office immediately before their election at an annual general meeting or their appointment by the unanimous resolution of our shareholders, but are eligible for re-election or re-appointment. Notwithstanding the foregoing, our directors hold office until their successors are elected or appointed, or until their deaths, resignations or removals. Our officers hold office at the discretion of our board of directors, or until their deaths, resignations or removals.
Potential Conflicts of Interest
We are not aware of any conflicts of interest with our directors and officers.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended January 31, 2014, all filing requirements applicable to its officers, directors and greater than 10% percent beneficial owners were complied withAudit Committee Disclosure
Under Canadian National Instrument 52-110 – Audit Committees (“NI 52-110”) reporting issuers are required to provide disclosure with respect to its audit committee, which is our entire board of directors.
Audit Committee Charter
We have not adopted an audit committee charter.
Composition of Audit Committee
We do not have a standing audit committee at the present time. Our entire board of directors acts as our audit committee. Our board considers Alexander McAulay an “audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K. However, Mr. McAulay is not considered “independent” as the term is used by NASDAQ Marketplace Rule 5605(a)(2) because Mr. McAulay was employed by our company within the past three years. Joel Primus is not independent because Mr. Primus is our president and chief executive officer. We consider Andrew Kaplan and Christopher Heyn as independent directors. All of our directors are financially literate. An individual is financially literate if he has the ability to read and understand a set of financial statements that present a breadth of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by our financial statements.
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We believe that our board of directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The board of directors of our company does not believe that it is necessary to have an audit committee because management believes that the functions of an audit committee can be adequately performed by the board of directors.
Relevant Education and Experience
For a description of each directors’ relevant education and experience, please see the discussion under “Directors and Executive Officers, Promoters and Control Persons — Business Experience.”
Audit Committee Oversight
At no time since the commencement of our most recently completed financial year was a recommendation to nominate or compensate an external auditor not adopted by our board of directors.
Reliance on Certain Exemptions
At no time since the commencement of our most recently completed financial year have we relied on the exemption in Section 2.4 of NI 52-110 (De Minimis Non-audit Services), or an exemption from NI 52-110, in whole or in part, granted under Part 8 of NI 52-110.
Pre-Approval Policies and Procedures
Our board of directors reviews the performance of our external auditors and approve in advance provision of services other than auditing and considers the independence of the external auditors, including a review of the range of services provided in the context of all consulting services bought by us.
Exemption
We are relying on the exemption provided by section 6.1 of NI 52-110 which provides that we, as a venture issuer, are not required to comply with Part 3 (Composition of the Audit Committee) and Part 5 (Reporting Obligations) of NI 52-110.
Corporate Governance
General
Our board of directors believes that good corporate governance improves corporate performance and benefits all shareholders. Canadian National Policy 58-201Corporate Governance Guidelines provides non-prescriptive guidelines on corporate governance practices for reporting issuers such as the Company. In addition, Canadian National Instrument 58-101Disclosure of Corporate Governance Practicesprescribes certain disclosure by our company of its corporate governance practices. This disclosure is presented below.
Board of Directors
We currently act with four directors consisting of Joel Primus, Alexander McAulay, Andrew Kaplan and Christopher Heyn. Our common stock is quoted on the OTCQB operated by the OTC Markets Group, which does not impose any director independence requirements. Under NASDAQ Marketplace Rule 5605(a)(2), a director is not considered to be independent if he is also an executive officer or is, or at any time during the past three years was, employee of the company. Under this rule, Joel Primus and Alexander McAulay are not independent because Mr. Primus is our president and chief executive officer and Mr. McAulay was employed as our chief financial officer until November 29, 2013. Under this rule, Andrew Kaplan and Christopher Heyn are independent.
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Directorships
Mr. Kaplan has been a director of Avino Silver and Gold Mines Ltd. since September, 2011 and a director of Coral Gold Resources Ltd. since July, 2012.
Orientation and Continuing Education
We have an informal process to orient and educate new recruits to the board regarding their role on the board, our committees and our directors, as well as the nature and operations of our business. This process provides for an orientation with key members of the management staff, and further provides access to materials necessary to inform them of the information required to carry out their responsibilities as a board member. This information includes the most recent board approved budget, the most recent annual report, the audited financial statements and copies of the interim quarterly financial statements.
The board does not provide continuing education for its directors. Each director is responsible to maintain the skills and knowledge necessary to meet his obligations as director.
Ethical Business Conduct
Due to our limited number of executive officers and the fact that we have not commenced any material business operations we have not adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller or person performing similar functions. We anticipate that we will not adopt a code of ethics until we have commenced material business operations or have increased the number of our executive officers.
We have found that the fiduciary duties placed on individual directors by our governing corporate legislation and the common law and the restrictions placed by applicable corporate legislation on an individual director’s participation in decisions of the board of directors in which the director has an interest have been sufficient to ensure that the board of directors operates in the best interests of our company.
Nomination of Directors
As of May 15, 2014, we had not effected any material changes to the procedures by which our shareholders may recommend nominees to our board of directors. Our board of directors does not have a policy with regards to the consideration of any director candidates recommended by our shareholders. Our board of directors has determined that it is in the best position to evaluate our company’s requirements as well as the qualifications of each candidate when the board considers a nominee for a position on our board of directors. If shareholders wish to recommend candidates directly to our board, they may do so by sending communications to the president of our company at the address on the cover of this annual report.
Compensation
Our board of directors is responsible for determining compensation for the directors of our company to ensure it reflects the responsibilities and risks of being a director of a public company.
Other Board Committees
We have no committees.
Assessments
The board intends that individual director assessments be conducted by other directors, taking into account each director’s contributions at board meetings, service on committees, experience base, and their general ability to contribute to one or more of our company’s major needs. However, due to our stage of development and our need to deal with other urgent priorities, the board has not yet implemented such a process of assessment.
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ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation of our executive officers during the two years ended January 31, 2014 and January 31, 2013. No other officers or directors received annual compensation in excess of $100,000 during the last three fiscal years.
SUMMARY COMPENSATION TABLE | |||||||||
Name and Principal Position | Year | Salary ($)(2) | Bonus ($) | Stock Awards ($) | Option Awards ($)(1) | Non-Equity Incentive Plan Compensa- tion ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensa- tion ($) | Total ($) |
Joel Primus(3) President, CEO and Director | 2014 2013 | 62,660 50,163 | Nil Nil | Nil Nil | Nil 74,904 | Nil Nil | Nil Nil | 1,486 1,570 | 64,146 126,637 |
Alexander McAulay(3) Treasurer, CFO, Secretary and Director | 2014 2013 | 52,217 53,242 | 12,000 Nil | Nil Nil | Nil 174,779 | Nil Nil | Nil Nil | 794 Nil | 65,011 228,021 |
(1) | For a description of the methodology and assumptions used in valuing the option awards granted to our named executive officers and directors during the year ended January 31, 2014 and 2013, please review Note 14 to the consolidated financial statements included herein. Option awards shown here represent the aggregate grant date fair value of all options granted. |
(2) | All salaries are paid in Canadian dollars. |
(3) | Compensation paid in Canadian dollars is stated in United States dollars based on an exchange rate of 0.9640 (2013: 1.0022) US dollars for each Canadian dollar. |
Compensation Discussion and Analysis
In connection with the closing of the acquisition agreement, we entered into employment agreements with each of Joel Primus and Alexander McAulay.
Pursuant to the employment agreement with Mr. Primus, we have agreed to employ Mr. Primus as President and CEO of the company in consideration for compensation of CDN$65,000 per year, to be reviewed annually or upon completion of a subsequent financing by our company. We will reimburse Mr. Primus for expenses he incurs in connection with his employment with our company, including for fashion industry related expenses. Mr. Primus may be remunerated by equity awards, including stock option grants and will be eligible for a bonus annually based on criteria set out in the employment agreement. Mr. Primus will be entitled to participate in any benefit plans we may adopt, including those that provide medical and dental benefits, disability benefits and life insurance benefits, which benefits will terminate on the date Mr. Primus’ employment with our company ceases for any reason. As of the date of this Annual Report, we do not have any such benefit plans in place, however we have agreed to compensate Mr. Primus for the reasonable cost of any such plans he may obtain privately.
In the event of his death or disability, Mr. Primus or his estate, as applicable, will be entitled to payment of any unpaid salary, reimbursement of any unreimbursed expenses and proceeds from any insurance policies we may provide to Mr. Primus. If within 120 days of the occurrence of a change of control of our company, Mr. Primus resigns or we terminate Mr. Primus for any reason other than just cause, Mr. Primus will be entitled to receive severance in an amount equal to twelve months’ salary, and any stock options granted to Mr. Primus that have not vested will vest immediately and be immediately exercisable. If at any time we terminate Mr. Primus for any reason other than just cause, Mr. Primus will be entitled to receive the same severance he would be entitled to in connection with a change of control, as described above. Mr. Primus will not be entitled to receive any severance in the event he is terminated for just cause. Mr. Primus’ employment agreement shall continue indefinitely, subject to the termination provisions set out in the agreement.
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Pursuant to the employment agreement with Mr. McAulay, we have agreed to employ Mr. McAulay as CFO of the company in consideration for compensation of CDN$65,000 per year, to be reviewed annually. We agreed to reimburse Mr. McAulay for expenses he incurred in connection with his employment with our company, including for fashion industry related expenses and payment of annual fees necessary to maintain his Chartered Accountant designation. Mr. McAulay was entitled to remuneration by equity awards, including stock option grants and was eligible for a bonus annually based on criteria set out in the employment agreement. Mr. McAulay was entitled to participate in any benefit plans, including those that provide medical and dental benefits, disability benefits and life insurance benefits, which benefits would terminate on the date Mr. McAulay’s employment with our company ceased for any reason.
Effective November 29, 2013, Alex McAulay resigned as CFO of our company and this employment agreement was terminated.
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, 2014:
Option awards | Stock awards | ||||||||
Name and Principal Position | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable(1) | 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 |
Joel Primus President, CEO, Secretary, Treasurer and Director | 150,000 | 150,000 | Nil | $0.25 | July 30, 2022 | Nil | Nil | Nil | Nil |
(1) These stock options will vest on July 30, 2014.
Retirement or Similar Benefit Plans
We do not currently have any plans in place that provide for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including but not limited to tax-qualified defined benefit plans, supplemental executive retirement plans, tax-qualified defined contribution plans and nonqualified defined contribution plans.
Resignation, Retirement, Other Termination, or Change in Control Arrangements
For a description of the material terms of each contract, agreement, plan or arrangement, whether written or unwritten, that provides for payment(s) to a named executive officer at, following, or in connection with the resignation, retirement or other termination of a named executive officer, or a change in control of the company or a change in the named executive officer's responsibilities following a change in control, see above under the heading “Summary Compensation Table – Narrative Disclosure”.
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Directors Compensation
The following table provides information concerning the compensation of directors of our company for our last completed fiscal year, for whom information has not been disclosed above under the heading “Summary Compensation Table”:
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($)(6) | Non-equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) |
Andrew Kaplan(3) | 56,000 | 31,200(1) | 194,862(2) | Nil | Nil | Nil | 282,062 |
Christopher Heyn(4) | Nil | 25,500(7) | Nil | Nil | Nil | Nil | 25,500 |
Alexander McAulay(5) | Nil | Nil | Nil | Nil | Nil | Nil | Nil |
(1) | Mr. Kaplan was granted 450,000 shares of common stock of our company pursuant to an Amendment Agreement dated January 6, 2014 |
(2) | Mr. Kaplan was granted 450,000 stock options exercisable into shares of our common stock upon his appointment to our board of directors on July 19, 2013. Pursuant to an Amendment Agreement dated January 6, 2014, these stock options were cancelled in consideration of our company granting Mr. Kaplan 450,000 shares of our common stock, as described above. |
(3) | At January 31, 2014, Mr. Kaplan held 450,000 shares of common stock and had been granted Nil stock options |
(4) | At January 31, 2014, Mr. Heyn was the beneficial owner of 160,000 shares of common stock and had been granted Nil stock options |
(5) | At January 31, 2014, Mr. McAulay was the beneficial owner of 967,288 shares of common stock and had been granted 700,000 stock options exercisable at $0.25 per share until July 30, 2022. |
(6) | For a description of the methodology and assumptions used in valuing the option awards granted to our named executive officers and directors during the year ended January 31, 2014 and 2013, please review Note 14 to the consolidated financial statements included herein. Option awards shown here represent the aggregate grant date fair value of all options granted. |
(7) | Pursuant to a board agreement dated October 7, 2013, we agreed to issue Mr. Heyn 75,000 shares of common stock each quarter as compensation for serving as a member of our board of directors. During the year ended January 31, 2014, we issued Mr. Heyn 75,000 shares of common stock and recorded a further amount of 75,000 shares of common stock issuable at January 31, 2014. |
Golden Parachute Compensation
For a description of the terms of any agreement or understanding, whether written or unwritten, between our company and any officer or director concerning any type of compensation, whether present, deferred or contingent, that will be based on or otherwise will relate to an acquisition, merger, consolidation, sale or other type of disposition of all or substantially all assets of our company, see above under the heading “Compensation Discussion and Analysis”.
Outstanding Equity Awards at Fiscal Year-End of Directors
We had no unexercised options, stock that had not vested or equity incentive plan awards outstanding to our directors who are not executive officer as of the end of our last completed fiscal year.
Pension and Retirement Plans
Currently, we do not offer any annuity, pension or retirement benefits to be paid to any of our officers, directors or employees in the event of retirement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as at May 15, 2014, certain information with respect to the beneficial ownership of our common stock by each shareholder known by us to be the beneficial owner of more than five percent (5%) of our common stock, and by each of our current directors and executive officers. 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.
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Name and Address of Beneficial Owner | Title of Class | Amount and Nature of Beneficial Ownership(1) | Percentage of Class(2) |
Joel Primus President, CEO, Treasurer, Secretary, Interim CFO and Director #2 - 1315 W. 15th Ave Vancouver, BC V6H 1S2 Canada | Common Stock | 5,009,613(3) | 13.9 |
Alexander McAulay Former Treasurer, Former Secretary, Former CFO and Director 36412 Country Place Abbotsford, BC V3G 1M2 Canada | Common Stock | 1,317,288(4) | 3.6% |
Andrew Kaplan Director 8 Crenshaw Ct Marlboro, NJ 07746 USA | Common Stock | 450,000 | 1.3% |
Christopher Heyn Director 912 Hulls Farm Road Southport, CT 06490 USA | Common Stock | 235,000(5) | 0.7% |
Directors and Officers as a group (4 individuals) | Common Stock | 7,011,901(6) | 19.2% |
(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 Securities and Exchange Commission 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 35,983,674 shares of our common stock issued and outstanding as of May 15, 2014. |
(3) | Includes 150,000 options to acquire shares of our common stock at a price of $0.25 per share, which are currently exercisable. |
(4) | Includes 300,000 options to acquire shares of our common stock at a price of $0.25 per share, which are currently exercisable. |
(5) | Includes 150,000 shares of common stock that have not yet been issued as of the date of this report but are committed to be issued to Mr. Heyn in connection with his appointment as a director |
(6) | Includes an aggregate of 450,000 options to acquire shares of our common stock at a price of $0.25 per share, which are exercisable within 60 days of the date of this report. |
Cancellation of Shares, Cancelled Debt
None.
Future Changes in Control
We are unaware of any contract or other arrangement, the operation of which may, at a subsequent date, result in a change in control of our company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
None of the following parties has, since our date of incorporation, had any material interest, direct or indirect, in any transaction with us or in any presently proposed transaction that has or will materially affect us, other than as noted in this section:
(i) | Any of our directors or officers; | |
(ii) | Any person proposed as a nominee for election as a director; | |
(iii) | 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; |
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(iv) | Any of our promoters; and | |
(v) | Any member of the immediate family (including spouse, parents, children, siblings and in- laws) of any of the foregoing persons. |
There were no other transactions with related parties in which the registrant was or is to be a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest.
Director Independence
We currently act with four directors consisting of Joel Primus, Alexander McAulay, Andrew Kaplan and Christopher Heyn. Our common stock is quoted on the OTCQB operated by the OTC Markets Group, which does not impose any director independence requirements. Under NASDAQ Marketplace Rule 5605(a)(2), a director is not considered to be independent if he is also an executive officer or is, or at any time during the past three years was, employee of the company. Under this rule, Joel Primus and Alexander McAulay are not independent because Mr. Primus is our president and chief executive officer and Mr. McAulay was employed as our chief financial officer until November 29, 2013. Under this rule, Andrew Kaplan and Christopher Heyn are independent.
We did not enter into any transactions with independent directors of the Company, other than as disclosed under Item 11 of this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for the most recently completed fiscal year ended January 31, 2014 and for fiscal year ended January 31, 2013 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
BDO Canada LLP
Year Ended January 31, | ||
2014 | 2013 | |
Audit Fees | $122,760 | $69,226 |
Audit Related Fees | $24,900 | $Nil |
Tax Fees | $Nil | $Nil |
All Other Fees | $Nil | $Nil |
Total | $147,660 | $69,226 |
Policy on Pre-Approval by Audit Committee of Services Performed by Independent Auditors
The board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors either before or after the respective services were rendered.
The board of directors has considered the nature and amount of fees billed by BDO Canada LLP and believes that the provision of services for activities unrelated to the audit is compatible with maintaining BDO Canada LLP’s independence
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibit Number | Description |
3.1 | Articles of Incorporation (incorporated by reference from our Registration Statement on Form SB-2, filed on December 8, 2006) |
3.2 | Bylaws (incorporated by reference from our Registration Statement on Form SB-2, filed on December 8, 2006) |
10.1 | 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 Commission on March 1, 2012) |
10.2 | Loan Agreement dated January 16, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on January 17, 2012) |
10.3 | General Security Agreement dated January 16, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on January 17, 2012) |
10.4 | Addendum to Loan Agreement dated April 4, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on April 12, 2012) |
10.5 | Second Addendum to Loan Agreement dated April 11, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on April 12, 2012) |
10.6 | Third Addendum to Loan Agreement dated May 7, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8- K, as filed with the Commission on May 8, 2012) |
10.7 | Fourth Addendum to Loan Agreement dated June 13, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8- K, as filed with the Commission on June 14, 2012) |
10.8 | Fifth Addendum to Loan Agreement dated July 6, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8- K, as filed with the Commission on July 11, 2012 |
10.9 | Form of $0.05 Subscription Agreement (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012) |
10.10 | Form of $0.25 Subscription Agreement (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012) |
10.11 | Form of Pooling Agreement among our company and certain former shareholders of Naked Boxer Brief Clothing Inc., dated June 27, 2012 (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012) |
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10.12 | Employment Agreement with Joel Primus dated July 30, 2012 (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012) |
10.13 | Employment Agreement with Alex McAulay dated July 30, 2012 (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012) |
10.14 | 2012 Stock Option Plan (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012) |
10.15 | Form of Stock Option Agreement (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012) |
10.16 | Agency and Interlender Agreement dated August 10, 2012 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on August 22, 2012) |
10.17 | Security Agreement dated August 10, 2012 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on August 22, 2012) |
10.18 | Form of Subscription Agreement for Convertible Notes and Warrants (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on August 22, 2012) |
10.19 | Form of Warrant Subscription Agreement (incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the Commission on August 22, 2012) |
10.20 | Memorandum of Understanding dated October 1, 2012 with Shark Investments, LLC (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on October 15, 2012) |
10.21 | 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 Commission on October 15, 2012) |
10.22 | Consulting Agreement with George Creative Consultants Inc. dated February 1, 2012 |
10.23 | Consulting Agreement with Kosick Communications Ltd. dated February 1, 2012 (incorporated by reference from our current report on Form 8-K/A as filed with the Commission on November 5, 2012) |
10.24 | Form of Warrant Agreement (incorporated by reference from Exhibit 10.18 to our current report on Form 8-K/A, as filed with the Commission on November 30, 2012) |
10.25 | 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 Commission on July 26, 2013) |
10.26 | 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 Commission on July 26, 2013) |
10.27 | 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 Commission on July 26, 2013) |
10.28 | Promissory Note Dated August 1, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on August 7, 2013) |
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10.29 | Promissory Note dated September 3, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on September 11, 2013) |
10.30 | Guarantee dated September 3, 2013 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on September 11, 2013) |
10.31 | Purchase Agreement dated September 10, 2013 with Lincoln Park Capital Fund, LLC (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on September 16, 2013) |
10.32 | Registration Rights Agreement dated September 10, 2013 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on September 16, 2013) |
10.33 | Promissory Note dated October 4, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on October 10, 2013) |
10.34 | Guarantee dated October 4, 2013 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on October 10, 2013) |
10.35 | Pledge Agreement dated October 4, 2013 (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on October 10, 2013) |
10.36 | Promissory Note dated November 13, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on November 19, 2013) |
10.37 | Form of Promissory Note dated November 14, 2013 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on November 19, 2013) |
10.38 | 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 Commission on November 19, 2013) |
10.39 | 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 Commission on November 19, 2013) |
10.40 | 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 Commission on November 19, 2013) |
10.41 | Form of Subscription Agreement for Convertible Notes and Warrants (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on December 31, 2013) |
10.42 | Securities Purchase Agreement dated December 23, 2013 with LG Capital Funding, LLC (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on January 8, 2014) |
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10.43 | Securities Purchase Agreement dated December 23, 2013 with GEL Properties, LLC(incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on January 8, 2014) |
10.44 | Form of 8% Convertible Redeemable Note dated December 23, 2013 in the amount of $25,000.00(incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on January 8, 2014) |
10.45 | Form of 8% Convertible Redeemable Back End Note dated December 23, 2013 in the amount of $25,000.00(incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the Commission on January 8, 2014) |
10.46 | Form of Collateralized Secured Offsetting Note Dated December 23, 2013 in the amount of $25,000.00(incorporated by reference from Exhibit 10.5 to our current report on Form 8-K, as filed with the Commission on January 8, 2014) |
10.47 | Securities Purchase Agreement dated December 17, 2013 with Asher Enterprises, Inc. (incorporated by reference from Exhibit 10.6 to our current report on Form 8-K, as filed with the Commission on January 8, 2014) |
10.48 | Convertible Promissory Note dated December 13, 2013 in the amount of $83,500.00 with Asher Enterprises, Inc. (incorporated by reference from Exhibit 10.7 to our current report on Form 8-K, as filed with the Commission on January 8, 2014) |
10.49 | Amendment Agreement between our company and Mr. Andrew Kaplan dated January 6, 2014 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on January 8, 2014) |
10.50 | Promissory Note dated January 13, 2014 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on January 17, 2014) |
10.51 | Promissory Note dated February 11, 2014 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on February 18, 2014) |
10.52 | 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 Commission on April 10, 2014) |
10.53 | Form of 6% Convertible Note dated April 7, 2014 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on April 10, 2014) |
10.54 | 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 Commission on April 10, 2014) |
10.55 | Note Exchange Agreement with CSD Holdings LLC dated April 4, 2014 (incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the Commission on April 10, 2014) |
10.56 | Conversion Agreement with Bryce Stephens dated April 4, 2014 (incorporated by reference from Exhibit 10.5 to our current report on Form 8-K, as filed with the Commission on April 10, 2014) |
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10.57 | Debt Settlement Agreement with Canfund Ventures Corporation dated April 7, 2014 (incorporated by reference from Exhibit 10.6 to our current report on Form 8-K, as filed with the Commission on April 10, 2014) |
10.58 | 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 Commission on April 10, 2014) |
10.59 | 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 Commission on April 10, 2014) |
10.60 | 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 Commission on April 10, 2014) |
10.61 | 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 Commission on April 10, 2014) |
10.62 | Debt Settlement Agreement with Trend Time Development dated April 3, 2014 (incorporated by reference from Exhibit 10.11 to our current report on Form 8-K, as filed with the Commission on April 10, 2014) |
10.63 | Warrant Agreement with Kalamalka Partners Ltd. (incorporated by reference from Exhibit 10.12 to our current report on Form 8-K, as filed with the Commission on April 10, 2014) |
(16) | Letter re Change in Certifying Accountant |
16.1 | Letter from Madsen & Associates, CPA’s Inc. dated July 30, 2012 (incorporated by reference from Exhibit 16.1 to our current report on Form 8-K, as filed with the Commission on July 31, 2012) |
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16.2 | Letter from BDO USA LLP dated April 8, 2013 (incorporated by reference from Exhibit 16.2 to our current report on Form 8-K, as filed with the Commission on April 8, 2013) |
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(21) | Subsidiaries |
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21.1 | Subsidiaries of Naked Brand Group Inc. |
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Naked Inc. (incorporated under the federal laws of Canada) | |
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(31 and 32) | Certifications |
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31.1* | Section 302 Certification under Sarbanes-Oxley Act of 2002 of Joel Primus |
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32.1* | Section 906 Certification under Sarbanes-Oxley Act of 2002 of Joel Primus |
* Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NAKED BRAND GROUP INC.
By:
/s/Joel Primus
Joel Primus, President, Chief Executive Officer and Director and Interim Chief Financial Officer, Secretary and Treasurer
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
Dated: May 15, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ Joel Primus
Joel Primus, President, Chief Executive Officer and Director and Interim Chief Financial Officer, Secretary and Treasurer
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
Dated: May 15, 2014
/s/ Alexander McAulay
Alexander McAulay
Director
Dated: May 15, 2014
/s/ Andrew Kaplan
Andrew Kaplan
Director
Dated: May 15, 2014
/s/ Christopher Heyn
Christopher Heyn
Director
Dated: May 15, 2014