UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2014

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to ____________

Commission file number 000-52381

NAKED BRAND GROUP INC.
(Exact name of registrant as specified in its charter)

10th Floor - 95 Madison Avenue, New York, New York 10016
(Address of principal executive offices) (zip code)

(212) 851-8050
(Registrant’s telephone number, including area code)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  [  ]   No  [ X ]

2

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 36,373,884 common shares issued and outstanding as of September 15, 2014.

3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Our interim condensed consolidated financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.

These condensed consolidated interim financial statements have been prepared by our management and are unaudited pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with such Securities and Exchange Commission rules and regulations. In the opinion of management, the accompanying statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the results of the interim periods presented. The results for these interim periods are not necessarily indicative of the results for the entire year. It is suggested that these interim condensed consolidated financial statements be read in conjunction with our annual audited consolidated financial statements for the year ended January 31, 2014.

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

F-2

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

F-3

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

F-4

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

F-5

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

F-6

Description 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. On July 30, 2012, the Company closed an Acquisition Agreement with Naked 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 New York, New York and Abbotsford, British Columbia, Canada.

Going Concern

These unaudited condensed consolidated interim 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 condensed consolidated interim 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 July 31, 2014, the Company had not yet achieved profitable operations and expects to incur significant further losses in the development of its business, which casts substantial doubt about the Company’s ability to continue as a going concern. To remain a going concern, the Company may be required to obtain the necessary financing to pursue its plan of operation. Management plans to fund operations over the next twelve months using current working capital on hand. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Changes or Adoptions in Significant Accounting Policies

Accounting for Derivatives Liabilities

The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for under the relevant sections ofASC815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity (“ASC 815”). The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative financial instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative financial instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification underASC815 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

Certain of the Company’s embedded conversion features on debt and outstanding warrants are treated as derivative liabilities for accounting purposes under ASC 815 due to insufficient authorized shares to settle these outstanding contracts, or due to other rights connected with these contracts. In this case, the Company utilizes the latest inception date sequencing method to reclassify outstanding contracts as derivative instruments. These contracts are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived or the authorized share capital has been amended to accommodate settlement of these contracts. These common stock purchase warrants do not trade in an active securities market. The Company estimates the fair value of these warrants and embedded conversion features and derivative liabilities due to insufficient authorized shares to settle outstanding contracts using the binomial option pricing model (see Note 9).

F-7

Interim Financial Statements

The accompanying unaudited condensed consolidated interim financial statements have been prepared by management, without audit, in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the disclosures are adequate to make the information presented not misleading and the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for fair presentation of statement of financial position, results of operations and cash flows for the interim periods presented. Operating results for the six months ended July 31, 2014 are not necessarily indicative of the results that may be expected for the year ended January 31, 2015.

The consolidated balance sheet at January 31, 2014 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for annual financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with the most recent audited financial statements of the Company included in its annual report on Form 10-K for the year ended January 31, 2014.

Loss per share

Net loss per share was determined as follows:

F-8

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 July 31, 2014 and 2013, there is only a single reportable operating segment.

The Company operates in one industry, the manufacture and sale of direct and wholesale undergarments. Revenues from external customers are all derived from customers located within North America as follows:

At July 31, 2014, the net book value of long-lived assets were located within North America as follows:

At January 31, 2014 substantially all of the Company’s long-lived assets were located in Canada.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”), which are adopted by the Company as of the specified date. Unless otherwise discussed, management believes the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

F-9

On May 28, 2014, the FASB and the International Accounting Standards Board (IASB) issued a converged standard on revenue recognition from contracts with customers, ASU 2014-09 (Topic 606 and IFRS 15). This standard will supersede nearly all existing revenue recognition guidance. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

Inventory of the Company consisted of the following:

Balances at July 31, 2014 and January 31, 2014 are recorded at historical cost, less amounts for potential declines in value. At July 31, 2014, management has recorded an allowance for obsolescence of $290,000 (2014: $Nil) to reduce inventory to its estimated net realizable value.

F-10

Property and equipment of the Company consisted of the following at July 31, 2014 and January 31, 2014:

Depreciation expense for the three and six months ended July 31, 2014 was $1,291 and $2,024, respectively (2013: $412 and $559, respectively).

Intangible assets of the Company consisted of the following at July 31, 2014 and January 31, 2014:

Amortization expense for each of the three and six months ended July 31, 2014was $5,564 and$11,129, respectively (2013: $5,070 and $10,165, respectively).

F-11

Related Party Balances

At July 31, 2014, included in advances receivable is an amount of $Nil (January 31, 2014: $50,000) 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 July 31, 2014, included in accounts payable and accrued liabilities is $2,348 (January 31, 2014: $24,682) owing to directors and officers of the Company for reimbursable expenses. These amounts are unsecured, non-interest bearing with no specific terms of repayment.

At July 31, 2014, an amount of $986,870 (January 31, 2014: $Nil) in convertible notes payable, including principal and accrued interest, was owing to directors and officers of the Company (Note 8(i)). Included in convertible notes payable at July 31, 2014 is an amount of $7,629 (January 31, 2014: $Nil) in respect of these amounts owing, after applicable unamortized debt discounts.

At July 31, 2014, included in deferred compensation is $37,037 related to the amortization of salaries payable to a director and officer of the Company over the term of the director and officer’s related CEO employment contract, as described below.

Related party transactions

During the three and six months ended July 31, 2014, included in general and administrative expenses is $120,024 and $165,465, respectively (2013: $132,100 and $162,541, respectively) in respect of directors fees, investor relations fees, marketing fees and share based compensation expense for the vesting of stock options granted in prior periods to directors and officers of the Company, and to a marketing firm of which a direct family member of a director and officer of the Company is a principal.

Pursuant to a board agreement dated September 24, 2013, 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 three and six months ended July 31, 2014, the Company recorded directors fees of $9,900 and $24,900, respectively (2013: $Nil and $Nil, respectively) in respect of the third and fourth tranche of 75,000 common shares that have been earned under this agreement. These amounts, along with $7,500 related to the second tranche of 75,000 common shares earned under this agreement, are included in common stock to be issued at July 31, 2014. The fair values per share were determined with reference to the quoted market price of the Company’s shares on the date these shares were committed to be issued.

Effective June 10, 2014, the Company entered into an employment agreement with the Chief Executive Officer and Director (the “CEO”) of the Company for a term of three years whereby (a) the CEO shall be entitled to a base salary of $400,000 per year, provided the CEO will forgo the first twelve months of the base salary and only receive minimum wage during that period; (b) the CEO received a sign-on stock option grant to purchase 57,150,000 shares of common stock of the Company (the “CEO Options”), with each option exercisable at $0.128 per share and vesting in equal monthly instalments over a period of three years from the date of grant; and (c) the CEO will be eligible to receive an annual cash bonus for each whole or partial year during the employment term payable based on the achievement of one or more performance goals established annually by the Company’s board of directors. In connection with this employment agreement, the Company has agreed to issue 100,000 common shares to a consultant of the Company. An amount of $15,000 is included in common stock to be issued at July 31, 2014. The fair value of $0.15 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.At July 31, 2014, 1,587,500 of the CEO Options had vested however no amount of stock based compensation had been recorded due to the factors discussed below. At July 31, 2014, an amount of $37,037 (January 31, 2014: $Nil) in deferred compensation related to the amortization of total base salary compensation due under this employment agreement, which is being amortized on a straight line basis over the term of the employment agreement.

F-12

Effective June 9, 2014, the Company entered into an employment agreement with the Chief Financial Officer (the “CFO”) of the Company for a term of four years whereby (a) the CFO shall be entitled to a base salary of $200,000 per year; and (b) the CFO received a sign-on stock option grant to purchase 2,800,000 shares of common stock of the Company (the “CFO Options”), with each option exercisable at $0.128 per share and vesting annually over a period of four years from the date of grant.

On June 6, 2014, the Company’s board of directors granted options to purchase an aggregate of 4,320,000 of our common shares to two directors of the Company (the “Director Options”). The options are exercisable at $0.128 per share and are vesting annually over a period of four years from the date of grant, commencing on the first anniversary of the grant date.

Effective June 23, 2014, the Company entered into an employment agreement with an officer (the “Officer”) of the Company for a term of four years whereby (a) the Officer shall be entitled to a base salary of $175,000 per year; and (b) the Officer received a sign-on stock option grant to purchase 3,700,000 shares of common stock of the Company (the “Officer Options”), with each option exercisable at $0.128 per share and vesting annually over a period of four years from the date of grant.

At July 31, 2014, no amount of stock based compensation had been recorded in connection with the CEO Options, the CFO Options, the Director Options and the Officer Options due to the fact that these options were granted under the 2014 Plan (Note 11), which was subject to ratification by the Company’s shareholders at July 31, 2014. Under the guidance of ASC 718 Compensation -Stock Compensation, these options are not granted for accounting purposes until all authorization for their grant has been obtained. As discussed in Note 11, the shareholders of the Company ratified and approved the 2014 Plan through written consent of the Company’s stockholders subsequent to July 31, 2014 and therefore the Company will begin recording amortization in connection with these options beginning on the date the 2014 Plan was approved by the shareholders.

F-13

F-14

F-15

F-16

F-17

F-18

On June 10, 2014 and July 8, 2014, the Company entered into Subscription Agreements (collectively, the “Subscription Agreements”) with several investors (collectively, the “Purchasers”) in connection with a private placement offering (the “Offering”) for aggregate gross proceeds of $7,309,832 through the sale of 292 units (the “Units”) at a price of $25,000 per Unit. Each Unit consisted of (i) a 6% convertible senior secured debenture in the principal amount of $25,000 (each, a “Debenture”) and (ii) warrants to purchase 166,667 of our common shares at an exercise price of $0.15 per share, subject to certain adjustment as set out in the warrant agreements (the “Warrants”).

In connection with the close of the Offering, the Company issued Debentures in the aggregate principal amount of $7,309,832. As consideration, the Company (i) received gross cash proceeds equal to $6,094,100, before deducting agent fees and other transaction-related expenses; and (ii) exchanged 6% senior secured convertible notes in the aggregate amount of $1,094,159 (Note 7(i)), being the principal and accrued interest due under such notes, for the issuance of Debentures in the aggregate principal amount of $1,215,732, at an exchange rate equal to 90% of the purchase price paid in the Offering.

The aggregate principal amount of $7,309,832 matures on June 10, 2017 and bears interest at the rate of 6% per annum, payable quarterly, in cash or in kind, at the option of the Company, valued at the then conversion price of the Debentures. The Debentures, along with any accrued and unpaid interest thereon, may be converted at any time, at the option of the holder, into common shares of the Company at a conversion price of $0.075 per share, subject to adjustment under the terms of the Debentures.

Repayment of the Debentures are collateralized against all the assets of the Company and its subsidiary, pursuant to a security agreement between the Company and an agent for the Purchasers.

The Company issued an aggregate of 48,732,310 Warrants to the Purchasers to purchase, for a period of five years from the date of issuance, up to 48,732,310 shares of common stock at an initial exercise price of $0.15 per share, subject to adjustment. The Company has the right to call the Warrants if the volume weighted average closing price of its common shares exceeds $0.40 per share for more than 20 consecutive trading days at any time after June 10, 2016. In that event, the Warrants will expire 30 days following the date the Company delivers notice in writing to the Warrant holders announcing the call of the Warrants.

The Company also agreed to grant piggyback registration rights whereby the Company is required to include the shares of common stock issuable pursuant to exercise of the Agent Warrants in the Registration Statement.

At the date of issuance of the Debentures and Warrants, the Company was authorized to issue 100,000,000 shares of common stock, which was insufficient to settle the conversion of the Debentures and exercise of the Warrants. Consequently, under the guidance of ASC 815, management recorded a derivative financial instrument in the Company’s condensed consolidated financial statements (Note 9).

In connection with the Subscription Agreements, the Company also entered into a Registration Rights Agreement with each Purchaser (the “Registration Rights Agreement”), pursuant to which the Company has agreed to file with the Securities and Exchange Commission (the “SEC”) a registration statement to register for resale the shares that have been or may be issued to the Purchasers upon conversion of the Debentures and upon exercise of the Warrants (the “Registration Statement”). The terms of the Registration Rights Agreement also trigger the requirement to account for the related embedded conversion option and investor warrants as derivative financial instruments pursuant to the guidance of ASC 815.

F-19

The Company allocated the proceeds from the issuance of the Debentures first to the derivative financial instruments, at their fair values, with the remainder being allocated to the Debentures. The fair value of the derivative financial instruments of $19,338,215 at issuance resulted in a debt discount at issuance of $7,309,832, the entire aggregate principal balance of the Debentures. The remaining derivative financial instruments value over the proceeds of the debt at issuance of $12,028,383 was immediately expensed on the consolidated statement of comprehensive loss as derivative expense, during the three and six months ended July 31, 2014. This discount was being amortized using the effective interest method over the term of the Debentures.

During the three and six months ended July 31, 2014, the Company recorded accretion expense of $521 and $521, respectively (2013: $Nil and $Nil, respectively) in accretion of this discount.

In connection with the Offering, the Company incurred finance fees of $2,106,405 as follows:

⁽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.

F-20

The finance fees were allocated to the Debentures and related derivative financial instruments in the same proportion as the allocation of proceeds to each instrument at the issuance date and, consequently, since the derivative financial instruments were allocated 100% of the proceeds, these finance charges were allocated to the derivative financial instrument at issuance and, as a result of these instruments being carried at fair value, were recorded as an immediate finance expense on the condensed  consolidated statement of operations during the three and six months ended July 31, 2014.

Subsequent to July 31, 2014, the Company filed an initial prospectus on Form S-1 with the Securities and Exchange Commission to register the sale of up to 41,569,071 shares issuable upon exercise of certain of the warrants issued in connection with the Offering.

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.

During the year ended January 31, 2013, the Company issued convertible promissory notes in the aggregate principal amount of $500,000 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.

The Notes were initially 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 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.

The Notes were collateralized by a first priority general security agreement over the present and future assets of the Company.

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 were being amortized using the effective interest method over the term of the Notes. During the three and six months ended July 31, 2014, the Company recorded accretion expense of $Nil and $5,587, respectively (2013: $2,629 and $5,154, respectively) in respect of the accretion of this discount and $Nil and $10,356, respectively (2013: $15,123 and $29,370, respectively), 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 was being amortized to income over the term of the Notes using the effective interest method.

F-21

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:

⁽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” 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.

First Amendments

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.

F-22

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:

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:

(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. On April 4, 2014, $400,000 of the $500,000 principal balance was further amended and included in the First Kalamalka Amended Agreement below.

F-23

Second Amendments

On April 4, 2014, the Company entered into another Amendment Agreement (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 strike price of $0.50 until August 10, 2017 held by Kalamalka and 100,000 share purchase warrants at a strike price of $0.50 until August 10, 2018 (the “Existing Warrants”) were exchanged for 600,000 New Warrants, as defined and described below (the “Exchanged Warrants”).

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 for a period of five years from the closing date of the Subsequent Financing (Note 8(i)). The Company has the right to call the New Warrants if the volume weighted average closing price of the Company’s shares exceeds $0.40 per share for more than 20 consecutive trading days at any time after twenty four months 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 8(i)).

The Company assessed the guidance under ASC 470-60 Troubled Debt Restructurings and determined that this guidance did not apply to the amendments. 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 $480,900 as the premium of the aggregate fair value of the amended notes and New Warrants and Exchanged Warrants of $857,300 over their carrying values of $376,400 immediately prior to the amendments. The Company calculated the fair value of the amended 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:

F-24

The fair value of the New Warrants of $256,400 was determined using the Black Scholes option pricing model with the following assumptions:

The fair value of the Exchanged Warrants of $23,300 was determined as the difference between the fair value of these warrants exchanged and the fair value of the New Warrants received. The fair values were determined using the Black Scholes option pricing model with the following weighted average assumptions:

(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 condensed consolidated interim statement of operations during the six months ended July 31, 2014, with a corresponding credit to additional paid in capital. In connection with the First Kalamalka Amendment Agreement and the Second Kalamalka Amendment Agreement (as defined and described below), the Company incurred $36,993 in deferred financing fees in connection with the amendments. These cost have been recorded as a deferred financing charge and are being amortized using the effective interest method over the term of the Notes. During the three months ended July 31, 2014, the Company recorded financing expense of $7,101 and $9,124, respectively (2013: $Nil and $Nil, respectively) in respect of the amortization of these charges.

F-25

On May 12, 2014, the remaining Note in the aggregate principal amount of $100,000 plus $1,868 in accrued interest therein was settled by the issuance of 1,018,685 common shares of the Company at a conversion price of $0.10 per share. The Company recorded debt conversion expense of $187,438, related to the fair value of the additional units issued as a result of converting at the lower conversion price than the contractual conversion rate. The fair value of the shares issued was determined with reference to their quoted market price on the date of issuance.

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 was bearing 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, were convertible 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 was 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 favor 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.

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 three and six months ended July 31, 2014, the Company recorded accretion expense of $Nil and $Nil, respectively (2013: $Nil and $Nil, respectively) in respect of the accretion of this discount and $Nil and $5,696, respectively (2013: $Nil and $Nil, respectively), in interest in respect of these Notes.

F-26

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:

⁽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. On April 4, 2014; the Company entered into an Amendment Agreement (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 the Security Agreements entered into with the Lenders in respect of the Offering (Note 8(i)).

The Company assessed the guidance under ASC 470-60 Troubled Debt Restructurings and determined that this guidance did not apply to the amendments. 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 $216,500 as the premium of the aggregate fair value of the amended notes and New Warrants of $416,500 over their carrying values of $200,000 immediately prior to the amendments. The Company calculated the fair value of the amended 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:

F-27

The fair value of the New Warrants of $127,700 was determined using the Black Scholes option pricing model with the following assumptions:

(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 condensed consolidated interim statement of operations during the six months ended July 31, 2014, with a corresponding credit to additional paid in capital.

In addition, during the six months ended July 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 7(i)). The Company assessed the guidance under ASC 470-60 Troubled Debt Restructurings and determined that this guidance did not apply to the exchange of debt instruments. Under the guidance of ASC 470-50, the exchange was considered a substantial change in the terms of the loan facility and, accordingly, the Company applied debt extinguishment accounting. The Company calculated the fair value of the amended Note by discounting future cash flows using a discount rate representative of current borrowing rates for debt instruments and valuing the discount included in the amended Note with respect to its conversion into a Subsequent Financing (Note 7(i)). There was a trivial gain on settlement which was not recorded in these condensed consolidated interim financial statements.

F-28

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 was being 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 three months ended July 31, 2014, the Company requested an extension on the sixth, seventh and eighth Regular Repayments and, consequently Company issued 15,000 common shares to the lender. The fair value of these shares of $1,250, 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 six months ended July 31, 2014.

During the three and six months ended July 31, 2014, the Company recorded accretion expense of $Nil and $7,754, respectively (2013: $Nil and $Nil, respectively) 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.

(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:

⁽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 were amortized to income over the term of the note using the effective interest method. During the three and six months ended July 31, 2014, the Company recorded financing expense of $Nil and $3,607 (2013: $Nil and $Nil) in respect of the amortization of these charges.

F-29

On April 7, 2014, the Company entered into a debt settlement agreement with this lender pursuant to which the Company agreed to exchange the remaining outstanding amount of $128,705 for the issuance of a new SPA note (Note 7(i)). The Company assessed the guidance under ASC 470-60 Troubled Debt Restructurings and determined that this guidance did not apply to the exchange of debt instruments. Under the guidance of ASC 470-50, the exchange was considered a substantial change in the terms of the loan facility and, accordingly, the Company applied debt extinguishment accounting. The Company calculated the fair value of the amended Note by discounting future cash flows using a discount rate representative of current borrowing rates for debt instruments and valuing the discount included in the amended Note with respect to its conversion into a Subsequent Financing (Note 7(i)). There was a trivial gain on settlement which was not recorded in these condensed consolidated interim financial statements.

F-30

F-31

F-32

During the six months ended July 31, 2014, the Company repaid the Note. The repayment of these Cash Notes resulted in a gain on extinguishment of debt of $27,958, being the cash consideration paid upon redemption less the carrying value of the Note and the related embedded conversion feature of $64,900, which was being accounted for as a derivative financial instrument.

The following table presents the components of the Company’s derivative financial instruments associated with convertible promissory notes (Notes 8 (i), (iv) and (vi)), which have no observable market data and are derived using an option pricing model measured at fair value on a recurring basis, using Level 3 inputs to the fair value hierarchy, at July 31, 2014 and January 31, 2014:

These derivative financial instruments arise as a result of applying ASC 815 Derivative and Hedging (“ASC 815”),which requires the Company to make a determination whether an equity-linked financial instrument, or embedded feature, is indexed to the entity’s own stock. This guidance applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own stock.

From time to time, the Company has issued notes with embedded conversion features which contain price-protection features that result in these instruments being treated as derivatives. In addition, during the six months ended July 31, 2014, the Company issued notes with embedded conversion features and warrants to purchase common stock and the Company did not, at the date of issuance of these instruments, have a sufficient number of authorized and available shares of common stock to settle the outstanding contracts (Note 8(i)). Further, these embedded conversion features and warrants issued during the six months ended July 31, 2014 were subject to a registration rights agreement which, pursuant to the terms of this agreement, triggered the requirement to account for these instruments as derivative financial instruments. As a result, the Company was required to account for these instruments as derivative financial instruments.

As a result of the application of ASC 815, the Company has recorded these derivative financial instruments for the six months ended July 31, 2014 and for the year ended January 31, 2014 at their fair value as follows:

F-33

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 any remaining derivative value as a derivative expense. During the three and six months ended July 31, 2014, the Company recorded $12,028,383 and $12,028,383, respectively (2013: $115,000 and $115,000, respectively) in derivative expense.

During the three and six months ended July 31, 2014, the Company recorded other expenses of $12,978,200 and $13,005,182, respectively (2013: $338,300 and $338,300 respectively) related to the change in fair value of the warrants and embedded conversion features, which is presented  in the change in fair value of derivative financial instruments in the accompanying consolidated statements of comprehensive loss.

The embedded conversion features and warrants accounted for as derivative financial instruments have no observable market and the Company estimated their fair values at July 31, 2014 and January 31, 2014 using the binomial option pricing model based on the following weighted average management assumptions:

⁽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 six months ended July 31, 2014 and during the year ended January 31, 2014, the Company repaid certain promissory notes which contained derivative financial instruments and the corresponding derivative financial instrument were extinguished upon extinguishment of the related host contract.

On September 10, 2013, the Company entered into an $8,300,000securities 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.

F-34

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 330,000shares 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.

Authorized

On June 6, 2014, the Company’s board of directors approved, subject to shareholder approval, an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 100,000,000 to 450,000,000. The shareholders of the Company ratified and approved this amendment through written consent of the Company’s stockholders subsequent to July 31, 2014.

Six months ended July 31, 2014

F-35

Six months ended July 31, 2013

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.

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.

On April 7, 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.

2014 Stock Option Plan

On June 6, 2014, the Company’s board of directors approved, subject to shareholder approval, a 2014 Long-Term Incentive Plan (the “2014 Plan”), which provides for the grant of stock options, restricted shares, restricted share units and performance stock and units to directors, officers, employees and consultants of the Company.

The maximum number of our common shares reserved for issue under the plan is 110,000,000 shares subject to adjustment in the event of a change of the Company’s capitalization (as described in the 2014 Plan).

Stockholder approval of the plan was obtained on August 21, 2014. As a result, the 2014 Plan became effective immediately and no further option awards will be granted under the 2012 Stock Option Plan. Stock option awards previously granted under the 2012 Stock Option Plan prior remain outstanding in accordance with their terms. The 2014 Plan will be administered by the board of directors, except that it may, in its discretion, delegate such responsibility to a committee of such board.

F-36

On June 6, 2014, the board of directors of the Company granted an aggregate of 67,970,000 stock options exercisable into shares of common stock of the Company at $0.128 per share and, on June 10, 2014, the board of directors of the Company granted an additional 1,000,000 stock options exercisable into shares of common stock of the Company at $0.15 per share. These options were granted to employees and consultants of the Company under the 2014 Plan, which was subject to ratification by the Company’s shareholders. The shareholders of the Company ratified and approved the 2014 Plan through written consent of the Company’s stockholders subsequent to July 31, 2014.

2012 Stock Option Plan

The Company has adopted the 2012 Stock Option Plan (the “2012 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 2012 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 2012 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 2012 Plan.

Subsequent to July 31, 2014, the stockholders of the Company approved the 2014 Plan, therefore no further option awards will be granted under the 2012 Plan.

Stock Based Compensation

A summary of the status of the Company’s outstanding stock options for the periods ended July 31, 2014 and January 31, 2014 is presented below:

F-37

*Under the provisions of ASC 718 Compensation – Stock Compensation, awards granted under an arrangement subject to shareholder approval are not deemed granted until the approval is obtained, thus the number granted does not include stock options granted under the 2014 Plan.

At July 31, 2014, the following stock options were outstanding, entitling the holder thereof to purchase common shares of the Company as follows:

The aggregate intrinsic value of stock options outstanding is calculated as the difference between the exercise price of the underlying awards and the fair value of the Company’s common stock. At July 31, 2014, the aggregate intrinsic value of stock options outstanding is $Nil and exercisable is $Nil (January 31, 2014: $Nil and $Nil, respectively).

During the three months and six ended July 31, 2014, the Company recognized a total fair value of $52,888 and $120,711, respectively (2013: $406,122 and $479,473, respectively) of stock based compensation expense relating to the issuance of stock options under the 2012 Plan in exchange for services. There has been no stock based compensation recognized in the financial statements for the three and six months ended July 31, 2014 (2013: $Nil and $Nil, respectively) for options that have been granted under the 2014 Plan, which was still subject to approval by the Company’s shareholders at July 31, 2014, pursuant to the guidance under ASC 718. Compensation relating to these stock options will be recognized beginning in the period in which such shareholder approval is obtained, which occurred subsequent to July 31, 2014.

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:

F-38

⁽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.

Share Purchase Warrants

At July 31, 2014, the Company had 65,127,946 share purchase warrants outstanding as follows:

During the six months ended July 31, 2014, 24,000 share purchase warrants exercisable at $0.25 per share and 214,506 share purchase warrants exercisable at $0.75 per share expired unexercised.

A summary of the Company’s share purchase warrants outstanding is presented below:

F-39

The Company has concentrations in the volumes of business transacted with particular customers. The loss of these customers could have a material adverse effect on the Company’s business.

For the three and six months ended July 31, 2014, the Company had concentrations of sales with a customer equal to 34% and 36%, respectively (2013: 37% and 39%, respectively) of the Company’s net sales. As at July 31, 2014 the accounts receivable balance for this customer was $43,647 (January 31, 2014: $15,462).

For the three and six months ended July 31, 2014, the Company had concentrations of sales with another customer equal to 3% and 4%, respectively (2013: 8% and 14%, respectively) of the Company’s net sales. As at July 31, 2014 the accounts receivable balance from this customer was $2,113 (January 31, 2014: $3,215).

Pursuant to a service agreement dated May 15, 2014, the Company has agreed to paya retainer fee of $14,500 per month to a consultant of the Company, in exchange for marketing, sales and design services to be rendered over the term of the agreement to May 15, 2015. The consultant is a firm of which a direct family member of a director and officer of the Company is a principal.

F-40

4

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “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, 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; and (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.

Cautionary Note Regarding Management’s Discussion and Analysis

This Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes. The discussion and analysis of our financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 statement 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. The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and the related notes that appear elsewhere in this quarterly report.

Our unaudited condensed consolidated interim financial statements are stated in United States dollars (US$) and are prepared in accordance with accounting principles generally accepted in the United States of America.

5

As used in this quarterly report on Form 10-Q, the terms “we”, “us”, “our” and “Company” mean our company, Naked Brand Group Inc., and our wholly-owned subsidiary Naked Inc., as applicable.

In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to “common shares” refer to the common shares in our capital stock.

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.

Our principal executive offices are located at 95 Madison Avenue, New York, New York, 10016, and our telephone number is (212) 851-8050.

General Development

On July 30, 2012, we closed an Acquisition Agreement with Naked whereby Naked’s owners became the sole directors and management 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 manufacture and sales of direct and wholesale undergarments in Canada and the United States to consumers and retailers. We operate out of New York, New York and Abbotsford, British Columbia, Canada.

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, 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’s Bay Company and Nordstrom.

Recent Corporate Developments

Since the commencement of our second quarter ended July 31, 2014, we have experienced the following significant corporate developments:

6

Outlook

We will continue to operate in the men’s undergarment market and have no current plans to significantly change operations. However, we do plan to make significant changes to our current collections of men’s undergarments, launch a complimentary line of women’s innerwear, loungewear and sleepwear products and in the future extend the Naked brand to other products.

During the fiscal quarter ended July 31, 2014, we were able to secure financing which will enable management to actively pursue planned business objectives and growth strategies. In conjunction with this financing, we installed a new core management team led by fashion visionary and intimate apparel icon Carole Hochman as CEO and Chief Creative Officer.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2014

Revenues

During the three months ended July 31, 2014, our net sales decreased by $38,799, or 19% over the comparative three month period ended July 31, 2013. Net sales decreased as a result of the sell-off of out of season products to discount retailers in the comparative period, as well as the introduction of new products, t-shirts and our NKD subline during the comparative period, which resulted in increased sales in that period from initial orders of these new styles. We sold to 64 boutique stores, 5 department stores, and two online retailers during the three months ended July 31, 2014, as compared to 72 boutique stores and 3 department stores during the comparative three month period.

7

We expect our sales will increase gradually in subsequent quarters in the current fiscal year as a result of seasonal fluctuations, marketing and promotional activities and the addition of new customers, as management works to implement its more long-term business strategies.

Gross Margins

In the current quarter we wrote down inventory in the amount of $327,600 to reduce inventory to its estimated net realizable value. These write downs are a result of a new core management team and manufacturing partnership which has triggered a period of transition involving product design and production changes. We expect to continue to sell existing inventory over the remaining periods in the current fiscal year as we make this transformation, after which point we plan to launch new collections in the coming fiscal year.

Operating Expenses

There was an overall increase in general and administrative expenses for the three months ended July 31, 2014, from the three months ended July 31, 2013. This increase is mostly attributable to an increase in marketing, professional fees, and salaries, as further explained below.

Our marketing expenses increased in the current quarter as a result of a new contract with a marketing, sales and design consultant engaged to provide marketing, creative and strategic direction, including the design and development of new logos, packaging, marketing materials and point of purchase displays.

Professional fees increased year over year, as a result of higher legal fees associated with new employment contracts, a new incentive stock option plan and the related written consent solicitation from our stockholders, and from the preparation of a registration statement in connection with the Offering.

Salaries and benefits increased due to increased staffing levels related to a new core management team and related employment contracts.

Our consulting fees decreased as a result of higher than normal consulting fees incurred in the comparative period, including non-cash share based compensation expense of $244,296 associated with stock options granted to a consultant during that period, and contracts with a branding company, merchandising consulting, and other consultants engaged in special projects in that period.

Directors’ fees in the current period are related to the issuance of stock to a board member appointed in the third quarter of the prior fiscal year. In the comparative period, directors fees were related to stock options granted in that period in connection with the appointment of a new director.

8

Other income and expenses

We incurred interest expenses of $76,929 for the three months ended July 31, 2014 as compared to $12,831 for the same period in 2013. This increase in interest is attributable to long term financings entered into during the current period, in connection with the Offering. Long-term debt is accruing interest at 6% per annum, payable in cash or in kind at the option of the company.

Financing and accretion charges increased to $2,181,894 for the three months ended July 31, 2014 from $96,912 for the three months ended July 31, 2013. This is the result of the immediate recognition of all commissions and direct financing related expenses associated with the $7.2 Million Offering. Accounting rules required the immediate recognition of all transaction related expenses associated with the Offering as a result of the classification and treatment of the related host contract as a derivative financial instrument, as outlined below.

During the three months ended July 31, 2014, in connection with the Offering, we issued convertible debentures and warrants, each of which were convertible or exercisable into shares of our common stock and we did not, at the date we issued these securities, have a sufficient number of authorized and unissued shares of common stock available to satisfy the conversion and exercise of all of these securities. As a result, we were required to account for these securities as derivative liabilities. In connection with the issuance of these securities in connection with the Offering, we recorded a derivative expense of $12,028,383 related to the fair value of these outstanding contracts at the contract inception date. Further, we recorded a mark to market derivative expense of $12,978,200 as a result of the application of related accounting rules, which require these derivative financial instruments to be carried at fair value which resulted in significant mark to market adjustments in correlation with fluctuations in the price of our common stock. These are non-cash income and expense items of our company

Subsequent to July 31, 2014, we obtained the written consent of our stockholders to approve the increase in authorized shares of common stock sufficient to satisfy the securities underlying the Offering. However, the terms of an underlying registration rights agreement will continue to trigger derivative liability classification for the foreseeable future.

We had debt conversion expense of $309,011 and net losses on extinguishment of debt of $128,920 during the three months ended July 31, 2014. These charges arose in connection with the settlement of various short term financing arrangements that had been entered into to bridge operations until the larger Offering was completed. Subsequent to and concurrent with the Offering we settled these short term obligations through a combination of cash and stock issuances, as described in detail in our financial statements filed herein.

For the three months ended July 31, 2013 other expenses included a $485,704 loss associated with the amendment to the Kalamalka 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.

Net loss and comprehensive loss

Our net loss for the three months ended July 31, 2014 was $29,033,373, or $0.81 per share, as compared to a net loss of $2,037,286, or $0.07 per share, for the three months ended July 31, 2013. The most significant factor for the increase in net loss in the current period is the non-cash loss associated with the derivative accounting in connection with the Offering, as described above.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 2014

Revenues

During the six months ended July 31, 2014, our net sales decreased by $12,551, or 4% over the comparative six month period ended July 31, 2013. Net sales decreased as a result of the sell-off of out of season products to discount retailers in the comparative period, as well as the introduction of new products, t-shirts and our NKD subline during the comparative period, which resulted in increased sales in that period from initial orders of these new styles. We sold to 90 boutique stores, 5 department stores, and two online retailers during the six months ended July 31, 2014, as compared to 86 boutique stores and 3 department stores during the comparative half year period.

9

We expect our sales will increase gradually in the second half of the current fiscal year as a result of seasonal fluctuations, marketing and promotional activities and the addition of new customers, as management works to implement its more long-term business strategies.

Gross Margins

During the six months ended July 31, 2014, we recorded net write downs of inventory in the amount of $314,600 to reduce inventory to its estimated net realizable value. These write downs are a result of a new core management team and manufacturing partnership which has triggered a period of transition to product design and production changes. We expect to continue to sell existing inventory over the remaining periods in the current fiscal year as we make this transformation, after which point we plan to launch new collections in the coming fiscal year.

Operating Expenses

There was an overall decrease in general and administrative expenses to $1,451,014 for the six months ended July 31, 2014, from $1,619,829 for the six months ended July 31, 2013. This decrease is mostly attributable to the decrease in consulting and directors fees from the comparative period.

Our consulting fees decreased as a result of higher than normal consulting fees incurred in the comparative period, including non-cash share based compensation expense of $251,339 mostly associated with stock options granted to a consultant during that period, and contracts with a branding company, merchandising consulting, and other consultants engaged in special projects in that period.

Directors’ fees in the current period are related to the issuance of stock to a board member appointed in the third quarter of the prior fiscal year. In the comparative period, directors fees were related to stock options granted in that period in connection with the appointment of a new director.

Our investor relations expenses was significantly reduced in the first half of the current fiscal year as a result of the termination of contractual relationships with investor relations firms who had been assisting in capital raising efforts through introductions to the institutional and retail investment community. These capital raising efforts were continued internally within the company and, as described above, are reflected in the successful securing of a significant financing during the six months ended July 31, 2014.

10

Professional fees increased year over year, as a result of higher legal fees associated with new employment contracts, a new incentive stock option plan and the related written consent solicitation from our stockholders, and from the preparation of a registration statement in connection with the Offering.

Salaries and benefits increased due to increased staffing levels related to a new core management team and related employment contracts.

Other income and expenses

We incurred interest expenses of $101,358 for the six months ended July 31, 2014 as compared to $30,074 for the same period in 2013. This increase in interest is attributable to long term financings entered into during current period, in connection with the Offering. Long-term debt is accruing interest at 6% per annum, payable in cash or in kind at the option of the company.

Financing and accretion charges increased to $2,282,985 for the six months ended July 31, 2014 from $96,912 for the six months ended July 31, 2013. This is the result of the immediate recognition of all commissions and direct financing related expenses associated with the $7.2 Million Offering. Accounting rules required the immediate recognition of all transaction related expenses associated with the Offering as a result of the classification and treatment of the related host contract as a derivative financial instrument, as outlined below.

From time to time, the Company has issued short term debt, which arrangements were entered into to bridge operations until longer term financing could be arranged. These short term debt arrangements contained embedded conversion features with price-protection features that result in these instruments being treated as derivatives. In addition, during the six months ended July 31, 2014, in connection with the Offering, we issued convertible debentures and warrants, each of which were convertible or exercisable into shares of our common stock and we did not, at the date we issued these securities, have a sufficient number of authorized and unissued shares of common stock available to satisfy the conversion and exercise of all of these securities. As a result, we were required to account for these securities as derivative liabilities. In connection with the issuance of these securities in connection with the Offering, we recorded a derivative expense of $12,028,383 related to the fair value of these outstanding contracts at the contract inception date. Further, we recorded a mark to market derivative expense of $13,005,182 as a result of the application of related accounting rules, which require derivative financial instruments to be carried at fair value which resulted in significant mark to market adjustments in correlation with fluctuations in the price of our common stock. These are non-cash income and expense items of our company.

Subsequent to July 31, 2014, we obtained the written consent of our stockholders to approve the increase in authorized shares of common stock sufficient to satisfy the securities underlying the Offering. However, the terms of an underlying registration rights agreement will continue to trigger derivative liability classification for the foreseeable future.

We had debt conversion expense of $309,011 and net losses on extinguishment of debt of $826,320 during the six months ended July 31, 2014. These charges arose in connection with the settlement of various short term financing arrangements that had been entered into to bridge operations until the larger Offering was completed. Subsequent to and concurrent with the Offering we settled these short term obligations through a combination of cash and stock issuances, as described in detail in our financial statements filed herein.

For the six months ended July 31, 2013 other expenses included a $485,704 loss associated with the amendment to the Kalamalka 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.

Net loss and comprehensive loss

Our net loss for the six months ended July 31, 2014 was $30,267,233, or $0.86 per share, as compared to a net loss of $2,680,720, or $0.10 per share, for the six months ended July 31, 2013. The most significant factor for the increase in net loss in the current period is the non-cash loss associated with the derivative accounting in connection with the Offering, as described above.

11

LIQUIDITY AND FINANCIAL CONDITION

Private Placement Offering (the “Offering”)

During the six months ended July 31, 2014, we entered into Subscription Agreements (collectively, the “Subscription Agreements”) with several investors (collectively, the “Purchasers”) in connection with a brokered private placement offering (the “Offering”) for aggregate gross proceeds of $7,309,482 through the sale of 292 units (the “Units”) at a price of $25,000 per Unit. Each Unit consisted of (i) a 6% convertible senior secured debenture in the principal amount of $25,000 (each, a “Debenture”) and (ii) warrants to purchase 166,667 of our common shares at an exercise price of $0.15 per share, subject to certain adjustment as set out in the warrant agreements (the “Warrants”).

In connection with the close of the Offering, we issued Debentures in the aggregate principal amount of $7,309,482. As consideration, we (i) received gross cash proceeds equal to $6,094,100, before deducting agent fees and other transaction-related expenses; and (ii) exchanged our 6% senior secured convertible notes in the aggregate amount of $1,094,159, being the principal and accrued interest due under such notes, for the issuance of Debentures in the aggregate principal amount of $1,215,732, at an exchange rate equal to ninety percent (90%) of the purchase price paid in the Offering.

The Debentures are secured against all the tangible and intangible assets of the Company.

The funds raised from the sale of the Units will be used for marketing and new product development and design, as well as general working capital requirements.

Bridge Financing

On April 7, 2014, we entered into a Securities Purchase Agreement with certain purchasers pursuant to which we agreed to issue 6% Senior Secured Convertible Promissory Notes (the “SPA Notes”) in the aggregate principal amount of $1,083,797. As consideration, the Company (i) received cash proceeds equal to $878,704 (the “Cash Proceeds”), of which $50,000 was received subsequent to July 31, 2014; (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 $128,705, 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.

The principal amount of $1,083,797 were to mature on April 7, 2015 (the “Maturity Date”) and were bearing interest at the rate of 6% per annum, payable on the Maturity Date. The principal amount of the SPA Notes and all acquired and unpaid interest thereon were contractually exchanged for securities issued by the Company in connection with the Offering, as defined and described above, at an exchange rate equal to ninety percent (90%) of the aggregate purchase price paid in the Offering.

Agency Agreement with Kalamalka Partners

On August 10, 2012, we entered into the Agency Agreement with Kalamalka Partners and certain lenders (the “Lenders”) as set out in the Agency Agreement whereby we agreed to borrow up to $800,000 from the Lenders under a revolving loan arrangement by the issuance of Notes from time to time as such funds are 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 $0.75 per share at any time at the option of the Lender. These terms were later amended, as described below.

12

During the year ended January 31, 2013, we issued Notes in the aggregate principal amount of $500,000 and an aggregate of 100,000 share purchase warrants to the Lenders. Each of the Lender Warrants were exercisable into one common share as follows: 25,000 Lender Warrants are exercisable at $0.25 until August 10, 2015, 25,000 Lender Warrants are exercisable at $0.50 until August 10, 2015 and 50,000 Lender Warrants are exercisable at $0.25 until August 10, 2014.

This financing 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.

Funds advanced under the loan were initially 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” 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.

During the year ended January 31, 2013, our borrowing exceeded the required margins and these Notes entered into default. As a result, on July 22, 2013, we entered into an Amendment Agreement with Kalamalka and the Lenders. Pursuant to the Amendment Agreement, we 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. As a result, we were unable to obtain further advances under this loan arrangement.

During the year ended January 31, 2014, we entered into another Agency and Interlender Agreement with Kalamalka, and certain lenders whereby we agreed to borrow up to an additional $300,000. On November 14, 2013, we made an initial drawdown of $100,000 under the loan and, on November 26, 2013, we drew down a second tranche of $100,000. In connection with these drawdowns, we issued an aggregate of 250,000 share purchase warrants to the lenders and an aggregate of 250,000 share purchase warrants to Kalamalka as consideration for facilitating the loans. Each warrant is exercisable into one common share of our stock at a price of $0.10 per share for a period of three years.

These notes were initially bearing interest at a rate of 12% per annum, calculated and payable at maturity on January 31, 2014. The principal amount outstanding under these notes may be converted into shares of our common stock at a price of $0.25 per share at any time at the option of the lenders. Repayment of the notes is secured by general security agreements in favour of Kalamalka, as agent for the lenders.

During the six months ended July 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; (iii) we removed the Borrowing Margin Requirements; (iv) 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.

Also during the six months ended July 31, 2014, we entered into a Conversion Agreement with an additional Lender, pursuant to which we issued an aggregate of 1,018,685 shares, at a conversion price of $0.10 per share, to settle a Note in the amount of $100,000 plus accrued and unpaid interest thereon of $1,868.

Further, during the six months ended July 31, 2014, the other remaining principal balance of $75,000 plus accrued interest was converted into a SPA Note, as defined and described above.

13

Future Financing

At July 31, 2014, we required further financing to implement our proposed business plan.

During the six months ended July 31, 2014, we increased our working capital position as follows;

During the three months ended July 31, 2014, in connection with a private placement offering, we raised aggregate gross proceeds, before debt settlements, of $7,309,832 through the issuance of units consisting of convertible debentures and share purchase warrants. Further, we settled short terms obligations totaling $221,554 through the issuance of 2,145,535 shares of our common stock. As a result of these significant events, management of the company believes we have sufficient working capital to implement our business plan over the next twelve months.

Cash Flows

Operating Activities

Cash flows used in our operating activities was $1,251,254 for the six months ended July 31, 2014. The cash used in operations during the period was largely the result of a net loss for the period, offset by non-cash charges of $28,180,533, mostly related to derivative liability accounting.

Investing Activities

Investing activities used cash of $19,581 during the six months ended July 31, 2014, compared to $2,635 for the comparative period. Investing activities in the current period included cash outlays for some retail display and for patent and trademark acquisitions, maintenance and protection being incurred as we develop new products.

Financing Activities

Financing activities provided cash of $5,592,757 for the six month period ended July 31, 2014, compared to $757,724 for the comparative period. We received cash of $6,094,100 in connection with the Offering, which were partially offset by repayments of short term promissory notes in the amount of $416,998 and convertible promissory notes in the amount of $364,640. We also incurred debt offering costs of $646,873 related to commissions and direct transaction related expenses related to the Offering.

14

Proceeds from financing activities during the six months ended July 31, 2013 mostly included funds received related to private placements.

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.

Disclosure of Outstanding Share Data

As of September 15, 2014, there were 36,373,884 shares of our common stock issued and outstanding. In addition, at September 15, 2014, the total dilutive securities outstanding, including options, warrants and shares issuable upon conversion of convertible debt instruments was approximately 236,800,000 shares.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note 3 to our annual financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, the following policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations

Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts

Sales are recorded when title and risk of loss has passed to the customer, when persuasive evidence of a sales arrangement exists, the selling price is fixed and determinable and collectability is reasonably 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.

15

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.

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 at certain times have estimated the fair value of our common shares with reference to the subscription price of the most recent share offerings. 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.

16

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. The result of applying ASC 815 to certain embedded components of these contracts is that the accounting treatment requires these financial instruments be carried at fair value and be marked-to-market at each balance sheet date. We estimate the fair value of these contracts and embedded components of these contracts using a binomial option valuation model, which utilizes various assumptions and estimates that are subject to management judgment. The assumptions and methods utilized in these models is similar to the assumptions and methods used in estimating stock based compensation awards as outlined above, with the exception that the expected life of these contracts is equal to their contractual life.

Certain of the Company’s embedded conversion features on debt and outstanding warrants are treated as derivative liabilities for accounting purposes under ASC 815 due to insufficient authorized shares to settle these outstanding contracts, or due to other rights connected with these contracts. These contracts are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived or the authorized share capital has been amended to accommodate settlement of these contracts. The Company utilizes the latest inception date sequencing method to reclassify outstanding contracts where the classification is pursuant to insufficient authorized share capital.

Recent Accounting Pronouncements

On May 28, 2014, the FASB and the International Accounting Standards Board (IASB) issued a converged standard on revenue recognition from contracts with customers, ASU 2014-09 (Topic 606 and IFRS 15). This standard will supersede nearly all existing revenue recognition guidance. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. We are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-12.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Earlier adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-15.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.

17

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.

Based on that evaluation, our management, with the participation of our principal executive officer and our principal financial officer, concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to the material weaknesses disclosed in our Annual Report on Form 10-K filed on May 15, 2014.

We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies. However, due to our size and nature, segregation of all conflicting duties has not always been possible and may not be economically feasible.

Changes in Internal Control over Financial Reporting

During the three months ended July 31, 2014:

These changes had a material effect on our internal control over financial reporting as they introduced new oversight roles in the process.

Other than the above changes, there were no changes in our internal control over financial reporting during the fiscal quarter ended July 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 1A. Risk Factors.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item. However, current and prospective investors are encouraged to review the risks set forth in Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission on May 15, 2014, along with the following risks:

Our future success is substantially dependent on the continued service of our senior management; changes in management or organizational structure could have a material adverse effect on our business.

18

Our future success is substantially dependent on the continued service of our senior management, particularly Joel Primus, our founder. The loss of the services of our senior management could make it more difficult to successfully operate our business and achieve our business goals.

We also may be unable to retain existing management, technical, sales and client support 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.

In the last year, we have had substantial changes in our management team, including the appointment of a new CEO and CFO. While we believe we now have a strong experienced leadership team, leadership changes can be inherently difficult to manage and may cause disruption to our business or further turnover in our management team. Changes in management, or inadequate management, could lead to an environment that lacks integrity, inspiration and/or a lack of commitment by our employees, which could in turn have a material adverse effect on our business.

We depend on third parties for manufacturing, inventory management and shipping

We use manufacturing partners outside 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 North America. We cannot control all of the various factors, which include inclement weather, natural disasters, political and financial instability, strikes, health concerns regarding infectious diseases, and acts of terrorism, that may affect a manufacturer’s ability to ship orders of our merchandise in a timely manner or to meet our quality standards. A manufactuer’s inability to ship orders in a timely manner or meet our quality standards could cause delays in complying with contractual commitments or meeting consumer demands and negatively affect consumer confidence in the quality and value of our brand or negatively impact our competitive position, any of which could have a material adverse effect on our financial condition, operating results and cash flows.

We have contracted with a third party logistics provider to outsource our inventory receiving, warehousing and product distribution and shipping needs. As a result, our operations are susceptible to factors, some of which are beyond our control, affecting the third party, including labor disruptions, system failures, accidents, weather conditions, natural disasters, economic disruptions as well as other unforseen events and circumstances. A disruption of our inventory management and shipping operations or a significant loss of inventory could have a material adverse effect on our financial condition, operating results and cash flows.

Our operating results are subject to seasonal and quarterly variations in our net revenue from operations, which could cause the price of our Common Stock to decline.

We have experienced, and expect to continue to experience, significant seasonal variations in our net revenue from operations. Seasonal variations in our net revenue are primarily related to increased sales of our products during our fiscal fourth quarter, reflecting our historical strength in sales during the holiday season.

Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including, among other things, the following:

As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our operating results between different quarters within a single fiscal year are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance.

19

We began selling our products in Canada in January 2010. Our limited operating history makes it difficult to assess the exact impact of seasonal factors on our business or whether or not our business is susceptible to cyclical fluctuations in the economy in the markets in which we operate. In addition, our rapid growth may have overshadowed whatever seasonal or cyclical factors might have influenced our business to date. Seasonal or cyclical variations in our business may become more pronounced over time and may harm our results of operations in the future.

Any future seasonal or quarterly fluctuations in our results of operations may not match the expectations of market analysts and investors. Disappointing quarterly results could cause the price of our Common Stock to decline. Seasonal or quarterly factors in our business and results of operations may also make it more difficult for market analysts and investors to assess the longer-term strength of our business at any particular point, which could lead to increased volatility in our stock price. Increased volatility could cause our stock price to suffer in comparison to less volatile investments.

If we are unable to execute a strategic manufacturing partnership with an apparel sourcing and manufacturing company, our ability to rapidly and efficiently grow our business could be impacted.

We are actively pursuing a strategic manufacturing partnership aimed at enabling us to more rapidly and cost efficiently grow our business globally, and offering us a means to significantly reduce our costs of goods and operational costs, improve our gross and net margins, and expend our access to the best in class fabrics and materials and manufacturing techniques. If we are unable to come to satisfactory terms with a qualified apparel sourcing and manufacturing company, we may not be able to meet demand for our product or rapidly and efficiently grow our business, any of which could harm our business, financial condition, stock price and results of operations.

If we are unable to adequately demonstrate that our independent manufacturers use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.

Our core values, which include developing the highest quality products while operating with integrity, are an important component of our brand image, which makes our reputation particularly sensitive to allegations of unethical business practices. While our internal and vendor operating guidelines promote ethical business practices such as environmental responsibility, fair wage practices, and compliance with child labor laws, among others, and we, along with a third party that we retain for this purpose, monitor compliance with those guidelines, we do not control our independent manufacturers or their business practices. Accordingly, we cannot guarantee their compliance with our guidelines. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations. Violation of labor or other laws by our independent manufacturers or the divergence of an independent manufacturer’s labor or other practices from those generally accepted as ethical in Canada, the United States or other markets in which we do business could also attract negative publicity for us and our brand. This could diminish the value of our brand image and reduce demand for our merchandise if, as a result of such violation, we were to attract negative publicity. Other apparel manufacturers have encountered significant problems in this regard, and these problems have resulted in organized boycotts of their products and significant adverse publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm our brand image, stock price and results of operations.

We are currently delinquent in filing our tax returns in certain jurisdictions and, as such we could face unexpected penalties

We are currently delinquent in filing our tax returns in certain jurisdictions in the United States for the fiscal periods ended January 31, 2012, 2013 and 2014. As such, the Company could be assessed penalties for failure to file in excess of the amounts accrued in its financial statements.

Because we can issue additional shares of common stock, purchasers of our common stock may incur immediate dilution and may experience further dilution.

20

We are authorized to issue up to 450,000,000 shares of common stock, of which 36,373,884 shares are issued and outstanding as of September 2, 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 stockholders. Consequently, our stockholders may experience more dilution in their ownership of our stock in the future.

Our directors, executive officers, and principal stockholders collectively beneficially own approximately 45% of our common stock.

Our directors, executive officers, and principal stockholders collectively beneficially own approximately 45% of our common stock. As a result, these stockholders, acting together, have substantial influence on the outcome of matters submitted to our stockholders for approving, including the election of directors and any merger, consolidation or sale of all or substantially all our assets. This concentration of ownership might harm the market price of our common stock by delaying, deferring or preventing a change in control, impeding a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None

Item 6. Exhibits.

21

22

23