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EXCEL - IDEA: XBRL DOCUMENT - NAKED BRAND GROUP INC.Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - NAKED BRAND GROUP INC.exhibit31-2.htm
EX-32.1 - EXHIBIT 32.1 - NAKED BRAND GROUP INC.exhibit32-1.htm
EX-32.2 - EXHIBIT 32.2 - NAKED BRAND GROUP INC.exhibit32-2.htm
EX-31.1 - EXHIBIT 31.1 - NAKED BRAND GROUP INC.exhibit31-1.htm

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 October 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)

Nevada 99-0369814
(State or other jurisdiction of incorporation or (IRS Employer Identification No.)
organization)  

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):

Large accelerated filer [   ] Accelerated filer [   ]
Non-accelerated filer [   ]
(Do not check if a smaller reporting company)
Smaller reporting company [X]

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: 38,194,185 common shares issued and outstanding as of December 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.


 

 

Naked Brand Group Inc.
Interim Condensed Consolidated Financial Statements
For the Quarterly Period Ended October 31, 2014 and 2013
(Unaudited)

 

 

 



Naked Brand Group Inc.
Interim Condensed Consolidated Balance Sheets
(Expressed in US Dollars)
(Unaudited)

    October 31,     January 31,  
    2014     2014  
             
ASSETS            
 Current assets            
     Cash $  3,332,510   $  67,478  
     Accounts receivable, net of allowances   115,592     68,859  
     Advances receivable, net of allowances   -     50,000  
     Inventory   260,981     604,046  
     Prepaid expenses and deposits   79,991     70,666  
 Total current assets   3,789,074     861,049  
             
 Equipment, net   22,011     6,300  
 Intangible assets, net   47,410     39,877  
 Deferred financing fees   50,335     65,539  
             
TOTAL ASSETS $  3,908,830   $  972,765  
             
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)            
 Current liabilities            
     Accounts payable and accrued liabilities $  355,537   $  639,099  
     Interest payable   172,438     -  
     Promissory notes payable   3,450     397,422  
     Current portion of convertible promissory notes   -     1,022,294  
     Derivative financial instruments   -     241,618  
Total current liabilities   531,425     2,300,433  
     Deferred compensation   103,703     -  
     Convertible promissory notes   602,205     1,670  
     Derivative financial instruments   17,527,500     -  
             
TOTAL LIABILITIES   18,764,833     2,302,103  
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)            

 Common stock 
     Authorized 
               450,000,000 common shares, par value $0.001 per share 
     Issued and outstanding 
               36,598,884 common shares (January 31, 2014: 34,728,139)

  36,599     34,728  
 Common stock to be issued   15,000     7,500  
 Accumulated paid-in capital   14,377,669     4,874,095  
 Accumulated deficit   (29,279,026 )   (6,239,416 )
 Accumulated other comprehensive income (loss)   (6,245 )   (6,245 )
             
Total stockholders' equity (capital deficit)   (14,856,003 )   (1,329,338 )
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $  3,908,830   $  972,765  

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

F-2



Naked Brand Group Inc.
Interim Condensed Consolidated Statements of Operations
(Expressed in US Dollars)
(Unaudited)

    Three months ended October 31,     Nine months ended October 31,  
    2014     2013     2014     2013  
                         
Net sales $  145,790   $  117,521   $  430,590   $  414,872  
                         
Cost of sales   132,447     121,895     668,253     367,490  
                         
Gross profit (loss)   13,343     (4,374 )   (237,663 )   47,382  
                         
Operating Expenses                        
 General and administrative expenses   2,928,788     547,736     4,379,802     2,167,565  
 Foreign exchange   6,790     9,091     18,764     30,899  
                         
Total operating expenses   2,935,578     556,827     4,398,566     2,198,464  
                         
Operating loss   (2,922,235 )   (561,201 )   (4,636,229 )   (2,151,082 )
                         
Other income (expense)                        
 Interest expense   (116,760 )   (19,986 )   (218,118 )   (50,060 )
 Accretion of debt discounts and finance charges   19,863     (240,613 )   (2,263,122 )   (362,374 )
 Derivative expense   -     -     (12,028,383 )   (115,000 )
 Gain (Loss) on extinguishment of debt   15,555     -     (810,765 )   (485,704 )
 Debt conversion expense   -     -     (309,011 )   -  
 Fair value mark-to-market adjustments   10,231,200     425,400     (2,773,982 )   87,100  
                         
Total other income (expense)   10,149,858     164,801     (18,403,381 )   (926,038 )
                         
Net comprehensive income (loss) for the period $  7,227,623   $  (396,400 ) $  (23,039,610 ) $  (3,077,120 )
                         
Net income (loss) per share                        
 Basic $  0.20   $  (0.01 ) $  (0.65 ) $  (0.11 )
 Diluted $  (0.02 ) $  (0.01 ) $  (0.65 ) $  (0.11 )
                         
Weighted average shares outstanding                        
 Basic   36,403,554     32,032,462     35,530,595     30,699,038  
 Diluted   196,063,987     32,032,462     35,530,595     30,699,038  

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

F-3



Naked Brand Group Inc.
Interim Condensed Consolidated Statement of Changes in Stockholders’ Equity (Capital Deficit)
(Expressed in US Dollars)
(Unaudited)

                                        Accumulated     Total  
                Accumulated                       Other     Stockholders'  
    Common Stock     Paid-in     Common stock     Subscriptions     Accumulated     Comprehensive     Equity  
    Shares     Amount     Capital     to be issued     Receivable     Deficit     Income (Loss)     (Deficiency)  
Balance - February 1, 2013   28,522,000   $  28,522   $  2,158,151   $  3,750   $  -   $  (2,000,926 ) $  (6,245 ) $  183,252  
Shares issued pursuant to private placement repricing   214,000     214     239,466     -     -     -     -     239,680  
Shareholder dividend   -     -     (239,680 )   -     -     -     -     (239,680 )
Private placements   3,333,000     3,333     829,917     -     (150,000 )   -     -     683,250  
Offering costs   -     -     (26,610 )   -     -     -     -     (26,610 )
Shares issued/to be issued in exchange for services rendered   75,000     75     89,175     18,000     -     -     -     107,250  
Modification of convertible debt terms and warrants   -     -     485,704     -     -     -     -     485,704  
Shares issued in connection with promissory notes   310,000     310     114,090     -     -     -     -     114,400  
Warrants issued in connection with promissory notes   -     -     24,600     -     -     -     -     24,600  
Shares issued under equity line with Lincoln Park   1,519,500     1,520     298,480     -     -     -     -     300,000  
Less: issuance costs   -     -     (57,262 )   -     -     -     -     (57,262 )
Derivative liability reclassification   -     -     177,900     -     -     -     -     177,900  
Stock based compensation   -     -     606,561     -     -     -     -     606,561  
Net loss for the period   -     -     -     -     -     (3,077,120 )   -     (3,077,120 )
Balance, October 31, 2013   33,973,500   $  33,974   $  4,700,492   $  21,750   $  (150,000 ) $   (5,078,046 ) $  (6,245 ) $  (478,075 )
                                                 
Balance, February 1, 2014   34,728,139   $  34,728   $  4,874,095   $  7,500   $  -   $  (6,239,416 ) $  (6,245 ) $  (1,329,338 )
Shares issued in connection with promissory notes   40,000     40     2,710     -     -     -     -     2,750  
Modification of convertible debt terms and warrants   -     -     697,400     -     -     -     -     697,400  
Return to treasury pursuant to private placement escrow agreement   (600,000 )   (600 )   600     -     -     -     -     -  
Shares issued in settlement of debt   2,205,745     2,206     537,103     -     -     -     -     539,309  
Shares issued/to be issued in exchange for services rendered   225,000     225     32,175     7,500     -     -     -     39,900  
Derivative liability reclassification   -     -     6,139,000     -     -     -     -     6,139,000  
Stock based compensation   -     -     2,094,586     -     -     -     -     2,094,586  
Net loss for the period   -     -     -     -     -     (23,039,610 )   -     (23,039,610 )
Balance, October 31, 2014   36,598,884   $  36,599   $  14,377,669   $  15,000   $  -   $  (29,279,026 ) $  (6,245 ) $  (14,856,003 )

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

F-4



Naked Brand Group Inc.
Interim Condensed Consolidated Statements of Cash Flows
(Expressed in US Dollars)
(Unaudited)

for the nine months ended October 31,   2014     2013  
             
Cash flows from operating activities            
 Net loss $  (23,039,610 ) $  (3,077,120 )
 Adjustments to reconcile net loss to net cash            
     used in operating activities:            
     Provision for doubtful accounts   (3,612 )   4,017  
     Provision for obsolete inventory   290,000     -  
     Depreciation and amortization   19,181     16,445  
     Other items not involving cash (Schedule 1)   19,854,719     1,583,194  
     Unrealized foreign exchange   2,760     -  
 Increase (decrease) in cash resulting from change in:            
     Accounts receivable   (43,121 )   296,106  
     Advances receivable   50,000     -  
     Prepaid expenses and deposits   (9,325 )   (103,027 )
     Inventory   53,065     (321,776 )
     Accounts payable   (256,854 )   273,630  
     Interest payable   172,438     -  
     Deferred compensation   103,703     -  
Finance fees paid in connection with long term debt offering   525,113     (28,574 )
Finance fees paid in connection with debt extinguishment   (38,008 )   -  
Net cash used in operating activities   (2,319,551 )   (1,357,105 )
             
Cash flows from investing activities            
 Acquisition of intangible assets   (22,535 )   (3,862 )
 Purchase of equipment   (19,888 )   (3,651 )
Net cash used in investing activities   (42,423 )   (7,513 )
             
Cash flows from financing activities            
 Proceeds from share issuances   -     983,250  
 Share issuance offering costs   -     (83,872 )
 Proceeds from the issuance of promissory notes   927,168     225,000  
 Repayments of promissory notes   (413,385 )   (64,688 )
 Proceeds from convertible promissory notes   6,094,100     450,000  
 Repayments of convertible promissory notes   (364,640 )   (166,667 )
 Debt offering costs   (616,237 )   -  
 Repayments of related party payables   -     (13,916 )
Net cash provided by financing activities   5,627,006     1,329,107  
             
Net increase in cash   3,265,032     (35,511 )
Cash at beginning of the period   67,478     43,780  
Cash at end of the period $  3,332,510   $  8,269  

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

F-5



Naked Brand Group Inc.
Interim Condensed Consolidated Statements of Cash Flows
(Expressed in US Dollars)
(Unaudited)

Supplemental Cash Flow Information            
             
for the nine months ended October 31,   2014     2013  
             
Cash paid during the period for:            
 Interest $  30,127   $  44,493  
 Taxes   -     -  
Non-cash financing activities:            
 Extinguishment of accounts payable with equity $  11,158   $  -  
 Settlement of notes through the issuance of shares   299,444     -  
 Repayment of promissory note through issuance of new promissory note   205,083     -  
             
Schedule 1 to the Statements of Cash Flows            
             
Profit and loss items not involving cash consists of:            
     Shares issued for services $  24,900   $  89,250  
     Shares to be issued in exchange for services   15,000     18,000  
     Loss on extinguishment of debt   810,765     485,704  
     Stock based compensation   2,094,586     606,561  
     Derivative expense   12,028,383     115,000  
     Change in fair value of derivative financial instruments   2,773,982     (87,100 )
     Debt issuance costs paid in warrants   1,552,700     -  
     Debt conversion expense   309,011     -  
     Amortization of deferred financing fees   142,043     142,695  
     Interest capitalized to convertible debt   10,372     -  
     Shares issued as penalty under debt agreements   1,250     -  
     Accretion of debt discount   91,727     213,084  
             
  $  19,854,719   $  1,583,194  

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

F-6



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

1.

Organization and Nature of Business

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, United States of America 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 of October 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 of ASC 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity (“ASC 815”). The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative financial instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative financial instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC 815 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

F-7



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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, such as registration rights. In the case of insufficient authorized share capital available to fully settle outstanding contracts, 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, the related rights have been waived and/or the authorized share capital has been amended to accommodate settlement of these contracts. These instruments do not trade in an active securities market. The Company estimates the fair value of these instruments using the binomial option pricing model.

2.

Basis of Presentation

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 nine months ended October 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.

F-8



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

Net Income (Loss) per share

Net income (loss) per share was determined as follows:

    Three months ended October 31,     Nine months ended October 31,  
    2014     2013     2014     2013  
Numerator                        
       Net income (loss) $ 7,227,623   $  (396,400 ) $ (23,039,610 ) $  (3,077,120 )
       Less: Shareholder dividend   -     -     -     (239,680 )
       Less: Adjustment to income   (10,103,774 )   -     -     -  
  $ (2,876,151 ) $  (396,400 ) $ (23,039,610 ) $  (3,316,800 )
Denominator                        
Weighted average common                        
shares outstanding   36,403,554     32,032,462     35,530,595     30,699,038  
Effect of dilutive securities                        
   Warrants   59,796,006     -     -     -  

   Convertible debt

  99,864,427     -     -     -  
Diluted weighted average                        
common shares outstanding   196,063,987     32,032,462     35,530,595     30,699,038  
                         
Basic net income (loss) per share $  0.20   $  (0.01 ) $  (0.65 ) $  (0.11 )
Diluted loss per share $  (0.02 ) $  (0.01 ) $  (0.65 ) $  (0.11 )
Anti-dilutive securities not included in diluted loss per share relating to:
Warrants and options   78,074,940     6,482,946     137,870,946     6,482,946  
Convertible debt   -     2,247,352     99,864,427     2,247,352  
    78,074,940     8,730,298     237,735,373     8,730,298  

F-9



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

Segment Reporting

The Company used several factors in identifying and analyzing reportable segments, including the basis of organization, such as differences in products and services, and geographical areas. The Company’s chief operating decision makers review financial information presented on a consolidated basis for the purposes of making operating decisions and assessing financing performance. Accordingly, the Company has determined that as of October 31, 2014, there is only one 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:

    Three months ended     Nine months ended  
          October 31,           October 31,  
    2014     2013     2014     2013  
                         
United States $ 78,840   $ 64,908   $ 270,003   $ 258,143  
Canada   66,950     52,613     160,587     156,729  
                         
  $ 145,790   $ 117,521   $ 430,590   $ 414,872  

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

    Equipment     Intangible assets  
United States $ 12,852   $ 12,569  
Canada   9,159     34,841  
  $ 22,011   $ 47,410  

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.

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.

F-10



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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.

3.

Inventory

Inventory of the Company consisted of the following:

    October 31,     January 31,  
    2014     2014  
             
Finished goods $  503,073   $  528,461  
Raw materials   47,908     75,585  
    550,981     604,046  
Less: allowance for obsolete inventory   (290,000 )   -  
             
Total inventory $  260,981   $  604,046  

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

F-11



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

4.

Equipment

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

    October 31,     January 31,  
    2014     2014  
             
Furniture & equipment $  11,630   $  6,630  
Computer equipment   19,424     4,534  
             
    31,054     11,164  
Less: Accumulated depreciation   (9,043 )   (4,864 )
             
  $  22,011   $  6,300  

Depreciation expense for the three and nine months ended October 31, 2014 was $2,155 and $4,179, respectively (2013: $500 and $1,059, respectively).

5.

Intangible Assets

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

    October 31,     January 31,     Useful life  
    2014     2014     (Years)  
                   
Trade Names/Trademarks $  42,410   $  24,874     Indefinite  
Website   49,512     44,512     2  
                   
    91,922     69,386        
Less: accumulated amortization   (44,512 )   (29,509 )      
                   
  $  47,410   $  39,877        

Amortization expense for each of the three and nine months ended October 31, 2014 was $3,874 and $15,002, respectively (2013: $5,222 and $15,386, respectively).

F-12



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

6.

Related Party Transactions and Balances

Related Party Balances

At October 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 October 31, 2014, included in accounts payable and accrued liabilities is $1,170 (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 October 31, 2014, an amount of $978,779 (January 31, 2014: $Nil) in convertible notes payable and $22,893 in accrued interest payable, was owing to directors and officers of the Company. Included in convertible notes payable at October 31, 2014 is an amount of $295 (January 31, 2014: $Nil) in respect of these amounts owing, after applicable unamortized debt discounts.

At October 31, 2014, included in deferred compensation is $103,703 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 nine months ended October 31, 2014, included in general and administrative expenses is $43,500 and $157,300, respectively (2013: $Nil and $Nil, respectively) in respect of directors fees and investor relations fees, $1,872,467 and $1,975,515, respectively (2013: $56,025 and $218,566, respectively) in respect of share based compensation expense for the vesting of stock options granted in prior periods to directors and officers of the Company, and $43,500 and $89,000, respectively (2013: $Nil and $Nil, respectively) in respect of marketing fees paid to a 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 nine months ended October 31, 2014, the Company recorded directors fees of $Nil 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. 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, equal to 20% of the issued and outstanding shares of common stock of the Company on a fully-diluted basis, (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 October 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 October 31, 2014, an amount of $103,703 (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-13



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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.

F-14



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

7.

Promissory Notes Payable


  October 31, 2014     January 31, 2014  

           

Promissory note bearing interest at 10% per annum payable at maturity, unsecured, matured on February 1, 2014(ii)

$ - 75,000

           

Promissory note in the principal amount of $309,062, non- interest bearing, unsecured, repayable in five equal semi- monthly instalments of $41,667 plus one final balloon payment of $63,229 at its maturity on July 13, 2014. The one-time interest charge of 15%, or $37,500 is convertible at maturity, at the option of the holder, into shares of common stock of the Company at a price of $0.10 per share (iii)

- 309,062

           

           

Promissory note in the principal amount of CDN$28,750, non- interest bearing, repayable in equal instalments of CDN$3,125 over the remaining term of the note, unsecured. The note may be repaid at any time before maturity without notice, bonus or penalty. The final CDN$3,750, representing a 15% original issue discount (“OID”) is repayable upon the company reporting net income from operations in a single month (iv)

3,450 14,668

           

Promissory note in the principal amount of CDN$57,500, non- interest bearing, repayable in equal instalments of CDN$9,583 over the remaining term of the note, unsecured. The note may be repaid at any time before maturity without notice, bonus or penalty (v)

- 43,250
             

Less: debt discounts

  -     (44,558 )

  3,450     397,422  

Less: current portion

  (3,450 )   (397,422 )

$  -   $  -  

F-15



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

(i)

On April 7, 2014, the Company entered into a Securities Purchase Agreement with certain purchasers pursuant to which the Company 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”); (ii) exchanged a promissory note with an outstanding amount of $76,388 (Note 8(i)), 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 (Note 8(ii)), 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.

Repayment of the SPA Notes was collateralized against all the tangible and intangible assets of the Company. The principal amount of $1,083,797 were to mature on April 7, 2015 (the “Maturity Date”) and was bearing interest at the rate of 6% per annum, payable on the Maturity Date. On June 10, 2014, these notes, along with accrued interest of $10,362 were exchanged for securities in a subsequent offering (Note 8(i)), at an exchange rate equal to 90% of the price paid by investors in that offering. The Company recorded debt conversion expense of $121,573, related to this purchase price discount upon these Notes being converted for units in the subsequent offering.

The Company incurred $89,849 in issuance costs in respect of the SPA Notes.

During the three and nine months ended October 31, 2014, the Company recorded $Nil and $10,372, respectively (2013: $Nil and $Nil, respectively) in respect of interest on this note and $Nil and $89,849, respectively (2013: $Nil and Nil, respectively) in respect of the accretion of deferred financing fees.

(ii)

During the year ended January 31, 2014, the Company received $75,000 in respect of a promissory note in the principal amount of $75,000. The promissory note matured on February 1, 2014 and was bearing interest at a rate of 10% per annum payable at maturity.

During the nine months ended October 31, 2014, the Company issued 796,850 common shares of the Company in full and final settlement of this note, along with accrued interest of $4,685. This resulted in a loss on extinguishment of debt of $119,528. The fair value of $0.25 per share was determined with reference to the quoted market price of the Company’s stock on the date of issuance.

During the three and nine months ended October 31, 2014, the Company recorded $Nil and $935, respectively (2013: $Nil and $Nil, respectively) in respect of interest on this note, up to the date of settlement of this note.

(iii)

On January 13, 2014, the Company issued a promissory note in the principal amount of $309,062, which was comprised of: (i) $250,000 consideration received; (ii) a one-time interest charge of $37,500, being 15% of the proceeds received (the “OID”); and (iii) an amount of $21,562, being the remaining principal balance due under a separate note agreement with the same lender.

The promissory note was repayable in five monthly instalments of $41,667 over the term of the note plus one final balloon payment of $63,229 at its maturity on July 13, 2014. The Company repaid this promissory note during the nine months ended October 31, 2014.

F-16



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

The issuance of this promissory note as consideration of the remaining balance due and payable under the September 4 Note was recorded at the redemption amount pursuant to the applicable guidance under ASC 470-20.

During the three and nine months ended October 31, 2014, the Company recorded accretion expense of $Nil and $33,972, respectively (2013: $Nil and $Nil, respectively) in respect of the accretion of the discount on this note.

(iv)

On November 7, 2013, the Company issued a promissory note in the principal amount of CDN$28,750. The Company received $24,467 (CDN$25,000) in respect of this note, after an original issue discount (“OID”) of 15%, or $3,670 (CDN$3,750). The principal amount, net of the OID, matured and was repaid during the nine months ended October 31, 2014. The OID is repayable upon the Company recognizing net income from operations in any given month during the term of the note.

   

As additional consideration for entering into the loan, the Company issued 22,000 common shares of the Company to the lender. The fair value at issuance of these shares of $5,720, determined with reference to the quoted market price of these shares at the date of issuance, together with the OID of $3,670 resulted in a debt discount at issuance of $9,390, which was amortized using the effective interest method over the term of the note.

   

During the three and nine months ended October 31, 2014, the Company recorded accretion expense of $Nil and $3,280, respectively (2013: $Nil and $Nil, respectively) in respect of the accretion of the discount on this note.

   
(v)

On December 20, 2013, the Company issued a promissory note in the principal amount of CDN$57,500. The Company received $47,660 (CDN$50,000) in respect of this note, after an original issue discount (“OID”) of 15%, or $7,149 (CDN$7,500). The note matured and was repaid during the nine months ended October 31, 2014.

   

As additional consideration for entering into the loan, the Company issued 25,000 common shares of the Company to the lender. The fair value at issuance of these shares of $3,000, determined with reference to the quoted market price of these shares at the date of issuance, together with the OID of $7,149 resulted in a debt discount at issuance of $10,149, which was amortized using the effective interest method over the term of the note.

   

During the three and nine months ended October 31, 2014, the Company recorded accretion expense of $Nil and $7,985, respectively (2013: $Nil and $Nil, respectively) in respect of the accretion of the discount on this note.

F-17



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

(vi)

On February 12, 2014, the Company issued a promissory note in the principal amount of CDN$61,295. The Company received $48,463 (CDN$53,300) in respect of this note, after an original issue discount (“OID”) of 15%, or $7,270 (CDN$7,995). The note matured and was repaid during the nine months ended October 31, 2014.

   

As additional consideration for entering into the loan, the Company issued 25,000 common shares of the Company to the lender. The fair value at issuance of these shares of $1,500, determined with reference to the quoted market price of these shares at the date of issuance, together with the OID of $7,270 resulted in a debt discount at issuance of $8,770, which was amortized using the effective interest method over the term of the note.

   

During the three and nine months ended October 31, 2014, the Company recorded accretion expense of $Nil and $8,770, respectively (2013: $Nil and $Nil, respectively) in respect of the accretion of the discount on this note and financing fees of $Nil and $935, respectively (2013: $Nil and $Nil, respectively) in respect of a finder’s fee paid in connection with the issuance of this note.

F-18



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

8.

Convertible Promissory Notes Payable


    October 31, 2014     January 31, 2014  
             

Senior Secured Convertible Debentures, bearing interest at 6% per annum, collateralized by a priority general security agreement over all of the present and future assets of the company ranked pari passu to First and Second Kalamalka Amendment Agreement, due June 10, 2017 (i).

$ 7,309,832 $ -

           

Revolving Credit Facility, bearing interest at 12% per annum, due August 16, 2014 (ii)

- 500,000

           

Revolving Credit Facility, bearing interest at 12% per annum, due January 31, 2014 (ii)

- 275,000

 

           

First and Second Kalamalka Amendment Agreement, bearing interest at 6% per annum, collateralized by a priority general security agreement over all of the present and future assets of the company ranked pari passu to promissory notes (Note 7(i)), due October 1, 2016 (i)

600,000 -

           

Convertible promissory note payable, non-interest bearing due, February 9, 2014 (iii)

- 128,704

           

Convertible promissory note payable, non-interest bearing, due November 13, 2014 (iv)

- 124,444

           

Convertible promissory notes, bearing interest at 8% per annum, due September 23, 2014 (v)

- 91,688

           

Convertible promissory notes, bearing interest at 8% per annum, due September 17, 2014 (vi)

- 84,085

 

           

Less: debt discounts

  (7,307,627 )   (179,957 )

  602,205     1,023,964  

Less: current portion

  -     (1,022,294 )

$  602,205   $  1,670  

F-19



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

(i)

Senior Secured Convertible Debentures

   

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 provided certain equity conditions of the Debentures have been met, valued at the then conversion price of the Debentures. At October 31, 2014, such equity conditions had not been met and, consequently, the terms of the Debentures limit the ability of the Company to elect payment of interest accruing under the Debentures in shares of common stock (“in kind”) unless such condition is formally waived by each holder. Subsequent to October 31, 2014 and in connection with the first interest payment date, the Company received waivers from holders of $4,074,482 in outstanding principal amounts of the Debentures. Such holders received payment of interest in kind, resulting in the issuance of 1,595,301 shares of our common stock and 44,492 shares of our common stock to be issued as payment for $122,984 in interest due.

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.

F-20



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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.

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 operations as derivative expense, during the three and nine months ended October 31, 2014. This discount was being amortized using the effective interest method over the term of the Debentures.

During the three and nine months ended October 31, 2014, the Company recorded accretion expense of $1,684 and $2,205, respectively (2013: $Nil and $Nil, respectively) in accretion of this discount.

In connection with the Offering, the Company incurred finance fees of $2,021,213 as follows:

  (i)

The Company paid a cash commission of $468,513, or 8% of the gross proceeds raised from certain of the Purchasers;

     
  (ii)

The Company issued 11,063,696 warrants to acquire common shares equal to 8% of the aggregate number of shares issuable upon conversion of the Debentures and exercise of the Warrants with respect to certain of the Purchasers (the “Agent Warrants”), on the same terms as the Warrants, except that the Agent Warrants are (i) exercisable at 100% of the conversion or exercise price of the Debentures and Warrants issued to the Purchasers in the Offering and (ii) contain a cashless exercise provision.

The fair value of the finder’s warrants of $1,552,700 was determined using an option pricing model under the following assumptions:

      June 10, 2014     July 8, 2014  
  Risk-free interest rate   1.71%     1.70%  
  Expected life (years)   5.00     5.00  
  Expected volatility(1)   147.39%     147.39%  
  Stock price at issuance $ 0.15   $ 0.1624  
      0.00%     0.00%  

F-21



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

  (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 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 nine months ended October 31, 2014.

On September 8, 2014, the Company filed an initial prospectus on Form S-1 with the Securities and Exchange Commission (SEC) 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. On October 8, 2014, the SEC declared the registration statement effective.

(ii)

Senior Secured Convertible Note Agreements with Kalamalka Partners

August, 2012 Credit Facility

On August 10, 2012, the Company and its wholly owned subsidiary, Naked, entered into the Agency Agreement with Kalamalka and certain lenders (the “Lenders”) as set out in the Agency Agreement whereby the Company agreed to borrow up to $800,000 from the Lenders under a revolving loan arrangement by the issuance of convertible promissory notes (the “Notes”) from time to time as such funds are required by the Company.

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 nine months ended October 31, 2014, the Company recorded accretion expense of $Nil and $5,587, respectively (2013: $2,645 and $7,800, respectively) in respect of the accretion of this discount and $Nil and $10,356, respectively (2013: $15,123 and $44,493, respectively), in interest in respect of these Notes.

F-22



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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.

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:

  Risk-free interest rate   0.29%  
  Expected life (years)   2.20  
  Expected volatility(1)   201.94%  
  Estimated stock price at date of issuance(2) $ 0.25  
  Dividend yields   0.00%  

(1) As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.

(2) The estimated stock price of $0.25 per share was determined with reference to the subscription price of the most recent share offerings for which the funds raised were being used to provide financing to the Company. This was considered to be the most appropriate basis on which to estimate the fair value of the Company’s stock as, at the time of the transaction, the Company’s stock was not being traded on an active market.

Funds advanced under the loan were restricted for inventory and accounts receivable whereby we could fund up to 90% of the Company’s accounts receivable and inventory (the “Borrowing Margin Requirements”). “Inventory” 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-23



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

The amendments were considered a substantial change in the terms of the loan facility and, accordingly, the Company applied debt extinguishment accounting and calculated a loss on extinguishment of debt of $485,704 as the premium of the aggregate fair value of the amended notes of $778,553 over their carrying values of $488,849 immediately prior to the amendments, plus the fair value of the modification of the Lender Warrants, Bridge Loan Warrants and Agent’s Warrants. The Company calculated the fair value of the amended convertible promissory notes by discounting future cash flows using rates representative of current borrowing rates for debt instruments without a conversion feature and by using the Black Scholes option pricing model to determine the fair value of the conversion features, using the following assumptions:

  Risk-free interest rate 0.10%
  Expected life (years) 1.07
  Expected volatility(1) 151.47%
  Stock price $0.52
  Dividend yields 0.00%

The fair value of the modification of the Lender Warrants, Bridge Loan Warrants and Agent’s Warrants of $196,000 was determined as the difference between the fair value of these warrants immediately prior to the amendments and the fair value of these warrants immediately after the amendment. The fair values were determined using the Black Scholes option pricing model with the following weighted average assumptions:

  Risk-free interest rate 1.03%
  Expected life (years) 4.25
  Expected volatility(1) 249.92%
  Stock price at date of issuance $0.52
  Dividend yields 0.00%

  (1)

As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.

The loss was recorded on the consolidated statement of operations during the nine months ended October 31, 2013, 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-24



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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 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-25



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

  Risk-free interest rate   0.66%  
  Expected life (years)   2.50  
  Expected volatility(1)   141.72%  
  Stock price $ 0.23  
  Dividend yields   0.00%  

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

  Risk-free interest rate   1.71%  
  Expected life (years)   5.00  
  Expected volatility(1)   149.76%  
  Stock price at date of issuance $ 0.23  
  Dividend yields   0.00%  

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:

      Existing     Exchanged  
      Warrants     Warrants  
  Risk-free interest rate   0.96%     1.71%  
  Expected life (years)   3.52     5.00  
  Expected volatility(1)   146.70%     149.76%  
  Stock price at date of issuance $ 0.23   $ 0.23  
  Dividend yields   0.00%     0.00%  

  (1)

As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.

The loss was recorded on the condensed consolidated interim statement of operations during the nine months ended October 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. These cost have been recorded as a deferred financing charge and are being amortized using the effective interest method over the term of the amended Notes. During the three and nine months ended October 31, 2014, the Company recorded financing expense of $7,006 and $16,130, respectively (2013: $Nil and $Nil, respectively) in respect of the amortization of these charges.

F-26



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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 nine months ended October 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-27



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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. During the three and nine months ended October 31, 2014, the Company recorded $Nil and $2,968, respectively (2013: $Nil and $Nil, respectively) in financing charges in respect of the amortization of these fees.

The fair value of the Agents Warrants and the Lender Warrants at issuance was determined using the Black Scholes option pricing model with the following weighted average assumptions:

  Risk-free interest rate   0.63%  
  Expected life (years)   3.00  
  Expected volatility(1)   144.71%  
  Stock price at date of issuance $ 0.20  
  Dividend yields   0.00%  

  (1)

As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.

On January 31, 2014, the Company did not repay the Notes at maturity. 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-28



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

 

  Risk-free interest rate   0.66%  
  Expected life (years)   2.50  
  Expected volatility(1)   141.72%  
  Stock price $ 0.23  
  Dividend yields   0.00%  

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

  Risk-free interest rate   1.71%  
  Expected life (years)   5.00  
  Expected volatility(1)   149.76%  
  Stock price at date of issuance $ 0.23  
  Dividend yields   0.00%  

  (1)

As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.

The loss was recorded on the condensed consolidated interim statement of operations during the nine months ended October 31, 2014, with a corresponding credit to additional paid in capital.

In addition, during the nine months ended October 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.

(iii)

On October 4, 2013, the Company issued an Original Issue Discount (OID) convertible promissory note in the amount of $343,212. The purchase price for this note was $300,000. The note was to mature on February 9, 2014, and was repayable in eight equal instalments of $42,902 over the term of the note (each a “Regular Repayment”).

   

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.

F-29



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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 nine months ended October 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 nine months ended October 31, 2014.

During the three and nine months ended October 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:

  Risk-free interest rate   0.33%  
  Expected life (years)   2.00  
  Expected volatility(1)   211.16%  
  Stock price at issuance $ 0.24  
  Dividend yields   0.00%  

  (1)

As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.

The deferred finance fees were recorded as a deferred finance charge and were amortized to income over the term of the note using the effective interest method. During the three and nine months ended October 31, 2014, the Company recorded financing expense of $Nil and $3,607 (2013: $10,359 and $10,359) in respect of the amortization of these charges.

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



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

 

(iv)

On November 13, 2013, the Company issued a promissory note in the principal amount of up to $500,000 plus accrued and unpaid interest and any other fees. On November 13, 2013, the Company received $100,000, after an OID of 10%, with the remaining balance of the note payable by the lender in such amounts and at such dates as the lender may choose in its sole discretion.

   

The maturity date for the note was November 13, 2015. The principal sum, plus any accrued but unpaid interest thereon, of the note may be converted, at any time by lender, into shares of common stock of the Company at a price which is the lesser of $0.265 or 60% of the lowest trade price in the 25 trading days prior to the conversion (the “Conversion Price”).

   

The Company was permitted to repay the promissory note at any time on or before 90 days from November 13, 2013 with 0% interest. If the Company did not repay the promissory note within the 90 days then a one-time interest charge of 12% will be applied to the principal sum. The Company did not repay the note on or before 90 days from November 13, 2013 and consequently, a one-time interest charge of 12%, of $13,333, was applied to the principal balance outstanding. This one-time interest charge of $13,333 was accrued in the financial statements for the year ended January 31, 2014.

   

In connection with the issuance of this promissory note, the Company had agreed that the terms of the promissory note will be amended if any securities are issued, while the promissory note is outstanding, at terms more favorable to the terms contained in the promissory note, such that the more favorable terms would become part of the transaction documents of the Lender. This ratchet provision and conversion feature violated the fixed for fixed criteria resulting in the recording of a derivative financial instrument in the Company’s consolidated financial statements (Note 9).

   

The Company allocated the proceeds from the issuance of the promissory note first to the derivative financial instrument, at its fair value, with the remainder being allocated to the promissory note. The fair value of the derivative financial instrument of $155,500 at issuance resulted in a debt discount at issuance of $111,111, the entire principal balance of the promissory note. The remaining derivative financial instrument value over the proceeds of the debt at issuance of $55,500 was immediately expensed on the consolidated statement of operations as derivative expense, during the year ended January 31, 2014. This discount was being amortized using the effective interest method over the term of the promissory note.

   

During the three and nine months ended October 31, 2014, the Company recorded accretion expense of $Nil and $2,065, respectively (2013: $Nil and $Nil, respectively) in accretion of this discount.

   

On June 5, 2014, the Company entered into a Note Termination Agreement pursuant to which the Company agreed to settle the full amount outstanding under the Note in exchange for (i) a one-time cash payment of $175,000 and (ii) 330,000 common shares of the Company. This resulted in a loss on extinguishment of debt of $38,405, being the fair value of aggregate consideration given of $217,240 less the book value of this Note of $3,735 (after a debt discount of $120,709) and a related embedded conversion feature being accounted for as a derivative liability of $175,100. The fair value of $0.128 per share related to the share consideration was determined with reference to the quoted market price of the Company’s stock on the date of issuance.

F-31



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

(v)

On December 23, 2013, the Company entered into two securities purchase agreements (the “Securities Purchase Agreements”) dated December 23, 2013 with two lenders, whereby the Company could issue six convertible notes, each in the aggregate principal amount of $25,000 (each, a “Note”). The first two of the Notes were paid for by the lenders in cash (the “Cash Notes”) and the third, fourth, fifth and sixth of the Notes (the “Back End Notes”) were initially paid for by the issuance of four offsetting $25,000 secured notes receivable issued to the Company by the lenders (each, a “Offsetting Note”), provided that prior to conversion of the four Back End Notes as described below, the lenders must have paid off the applicable Offsetting Note in cash.

   

The Cash Notes matured on September 23, 2014 and were accruing interest at the rate of 8% per annum. The principal sum and any accrued and unpaid interest of the Notes were convertible, at the option of the holder, at any time after 180 days after issuance, and after full cash payment for the shares convertible thereunder, at a price per share equal to 55% of the average of the two lowest closing bid prices as reported on the OTCQB for the ten prior trading days.

   

The Notes could be redeemed at any time on or before 180 days after issuance, subject to redemption premiums of 20-40%, after which time the notes could not be redeemed.

   

The Cash Notes were recorded as stock settled debt in accordance with ASC 480 whereby a put premium of $20,455 was recorded on each Cash Note and was being amortized using the effective interest method over the term of the respective Cash Note.

   

The Back End Notes were presented net of their respecting Offsetting Note as these Notes had no substance until the applicable Offsetting Note has been paid for in cash by the Lender.

   

During the three and nine months ended October 31, 2014, the Company recorded accretion expense of $Nil and $16,280, respectively (2013: $Nil and $Nil, respectively) in accretion of these discounts.

   

In connection with the issuance of the Cash Notes, the Company incurred deferred finance fees of $8,000. The deferred finance fees were recorded as a deferred finance charge and were being amortized to income over the term of the Cash Notes using the effective interest method. During the three and nine months ended October 31, 2014, the Company recorded financing expense of $Nil and $6,944, respectively (2013: $Nil and $Nil, respectively) in respect of the amortization of these charges.

   

During the nine months ended October 31, 2014, the Company repaid the Cash Notes. The repayment of these Cash Notes resulted in a total gain on extinguishment of debt of $5,000, being the carrying value of the Cash Notes less the total cash consideration paid upon redemption.

   

In accordance with the terms of the Securities Purchase Agreement, all Back End Notes and Offsetting Notes were cancelled upon repayment of the Cash Notes.

F-32



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

(vi)

The Company entered into a securities purchase agreement dated December 30, 2013 (the “SPA”) with a lender, whereby the Company issued a convertible note in the aggregate principal amount of $83,500 (the “Note”).

   

The Note matured on September 17, 2014 and was accruing interest at a rate of 8% per annum. The principal sum and any accrued and unpaid interest of the Note was convertible, at the option of the holder, at any time after 180 days after issuance, at a price for each share equal to 61% of the average of the three lowest closing bid prices as reported on the OTCQB for the ten prior trading days.

   

The Note could be redeemed at any time on or before 180 after issuance, subject to redemption premiums of 15-40%, after which time the notes could not be redeemed.

   

In connection with the issuance of this Note, the Company had agreed that the terms of the Note would be amended if any securities are issued, while the Note is outstanding, at terms more favorable to the terms contained in the Note, such that the more favorable terms would become part of the transaction documents of the Lender. This ratchet provision and conversion feature violated the fixed for fixed criteria resulting in the recording of a derivative financial instrument in the Company’s consolidated financial statements (Note 9).

   

The Company allocated the proceeds from the issuance of the Note first to the derivative financial instrument, at its fair value, with the remainder being allocated to the Note. The fair value of the derivative financial instrument of $8,376 at issuance resulted in a debt discount, which was being amortized using the effective interest method over the term of the Note.

   

During the three and nine months ended October 31, 2014, the Company recorded accretion expense of $Nil and $3,826, respectively (2013: $Nil and $Nil, respectively) in accretion of this discount.

   

In connection with the issuance of the Note, the Company incurred deferred finance fees of $11,500. The deferred finance fees were recorded as a deferred finance charge and were being amortized to income over the term of the Note using the effective interest method. During the three and nine months ended October 31, 2014, the Company recorded financing expense of $Nil and $10,180, respectively (2013: $Nil and $Nil, respectively) in respect of the amortization of these charges.

   

During the nine months ended October 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.

F-33



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

9.

Derivative financial instruments

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 October 31, 2014 and January 31, 2014:

      October 31,     January 31,  
      2014     2014  
  Embedded conversion features $ 14,217,000   $  241,618  
  Warrants   3,310,500     -  
               
  Derivative financial instruments $ 17,527,500   $  241,618  
  Less: Current Portion   -     (241,618 )
    $ 17,527,500     -  

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 nine months ended October 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 nine months ended October 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.

During the nine months ended October 31, 2014, the Company received stockholder approval through written shareholder consent to increase the authorized shares of common stock in the Company from 100,000,000 to 450,000,000, which amount is now sufficient to fully settle all the outstanding contracts. In addition, during the nine months ended October 31, 2014, the registration statement covering the resale of certain of the warrants covered under the registration rights agreement that were required to be accounted for as derivative liabilities, was filed with and was declared effective by the Securities and Exchange Commission. Consequently, certain of these warrants were no longer required to be accounted for as liabilities. Pursuant to the guidance of ASC 815, the Company reclassified the fair value of these instruments on the date of modification into equity, with the change in fair value up to the date of modification being recorded on the consolidated statements of operations as other income.

F-34



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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

      October 31,     January 31,  
      2014     2014  
  Derivative financial instruments, beginning of the period $  241,618   $  -  
  Fair value of warrants and embedded conversion features at commitment dates 20,890,900 428,876
  Fair value mark to market adjustments   2,773,982     (9,358 )
  Extinguishment of derivative liability upon extinguishment of host contract (240,000 ) (177,900 )
  Reclassification of derivative liability upon change in triggering events (6,139,000 ) -
  Derivative financial instruments, end of the period $  17,527,500   $  241,618  

On the commitment date of the related convertible promissory notes, the Company recorded a debt discount to the extent of the gross proceeds of the promissory note, and immediately expensed any remaining derivative value as a derivative expense. During the three and nine months ended October 31, 2014, the Company recorded $Nil and $12,028,383, respectively (2013: $Nil and $115,000, respectively) in derivative expense.

During the three and nine months ended October 31, 2014, the Company recorded other income (expenses) of $10,231,200 and $(2,773,982), respectively (2013: $425,400 and $87,100 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 operations.

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

      Reclassification     October 31,     January 31,  
      Date     2014     2014  
  Risk-free interest rate   1.57%     1.52%     0.34%  
  Expected life (years)   4.69     4.26     1.78  
  Expected volatility(1)   117.49%     139.14%     132.09%  
  Stock price $ 0.18   $ 0.19   $ 0.08  
  Dividend yields   0.00%     0.00%     0.00%  

(1) As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.

During the nine months ended October 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.

F-35



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

10.

Securities Purchase Agreement

On September 10, 2013, the Company entered into an $8,300,000 securities purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC, (“Lincoln Park”) an Illinois limited liability company (the “Financing”) pursuant to which the Company may sell and issue to Lincoln Park, and Lincoln Park is obligated to purchase, up to $8,300,000 in value of its shares of common stock from time to time over a 24 month period. In connection with the Financing, the Company also entered into a registration rights agreement with Lincoln Park whereby the Company agreed to file a registration statement with the Securities and Exchange Commission (the “SEC”) covering the shares of the Company’s common stock that may be issued to Lincoln Park under the Purchase Agreement.

The Company will determine, at its own discretion, the timing and amount of its sales of common stock, subject to certain conditions and limitations. The purchase price of the shares that may be sold to Lincoln Park under the Purchase Agreement will be based on the market price of the Company’s shares of common stock immediately preceding the time of sale without any fixed discount, provided that in no event will such shares be sold to Lincoln Park when the closing sale price is less than $0.35 per share. There are no upper limits on the per share price that Lincoln Park may pay to purchase such common stock. The purchase price will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split or similar transaction occurring during the business days used to compute such price.

Pursuant to the Purchase Agreement, Lincoln Park initially purchased 600,000 shares of the Company’s common stock for $300,000. In consideration for entering into the Purchase Agreement, the Company issued to Lincoln Park 919,500 shares of common stock as a commitment fee and shall issue up to 330,000 shares pro rata, when and if, Lincoln Park purchases at the Company’s discretion the remaining $8,000,000 aggregate commitment. The Purchase Agreement may be terminated by the Company at any time at its discretion without any cost to the Company.

On December 12, 2013, this registration statement was declared effective by the SEC.

The Company incurred $58,656 in direct expenses in connection with the Purchase Agreement and registration statement. These were recorded as share issuance costs as a charge against additional paid in capital during the year ended January 31, 2014. The shares of common stock issued a commitment fee are being recorded as a share issuance cost at par value with a corresponding charge against additional paid in capital in the period they are issued. During the nine months ended October 31, 2014, the Company did not issue any securities under this Purchase Agreement.

11.

Stockholders’ Equity

Authorized

On June 6, 2014, the Company’s board of directors approved 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 a majority vote of written consent of the Company’s stockholders on August 21, 2014.

F-36



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

Nine months ended October 31, 2014

i)

On May 12, 2014, the Company issued an aggregate of 1,815,535 common shares in settlement of loans outstanding of $180,703, including aggregate accrued interest of $5,703.

   
ii)

On June 17, 2014, the Company issued 330,000 common shares as partial consideration related to the settlement of a loan outstanding of $124,444.

   
iii)

On June 17, 2014, the Company issued 60,210 common shares as payment to a vendor for fees rendered, pursuant to a debt settlement agreement dated May 16, 2014 whereby the Company agreed to settle $4,605 (CDN$5,000) in amounts owing to the vendor. This resulted in a loss on extinguishment of debt of $3,945. The fair value of $0.142 per share was determined with reference to the quoted market price of the Company’s stock on the date of issuance.

   
iv)

On September 25, 2014, the Company issued 225,000 common shares to a director of the Company as consideration under a board agreement dated September 24, 2013 (the “Board Agreement”). These shares were recorded at their fair values on the date they were committed to be issued pursuant to the Board Agreement. The fair values per share were determined with reference to the quoted market price of the Company’s stock on the respective commitment dates.

Nine months ended October 31, 2013

i)

On February 21, 2013, the Company reduced the price of 200,000 units and 14,000 common shares issued during the year ended January 31, 2013 from $0.50 to $0.25 per unit and share, respectively. Consequently, the Company issued 200,000 units and 14,000 common shares for no additional consideration. Each unit consisted of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one share of common stock at an exercise price of $0.75 per share for a period of two years from the date of the initial offering. The Company determined that the aggregate fair value on the grant date of these units and shares was $239,680 and recorded the entire amount as a shareholder dividend in the financial statements during the three months ended October 31, 2013. The fair value of $1.12 per share was determined by reference to the quoted market price of the Company’s stock on the date of issuance.

     
ii)

On April 19, 2013, the Company issued 1,993,000 shares of common stock at a price of $0.25 per share and 100,000 units of the Company at $0.25 per unit for gross proceeds of $523,250. Each unit consisted of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one share of common stock at an exercise price of $0.25 per share for a period of two years. In connection with the foregoing private placement, the Company issued 104,440 warrants to four finders. Each warrant is exercisable into one share of common stock of the Company at an exercise price of $0.75 per share for a period of two years. The Company paid finder’s fees of $26,610 in connection with this private placement.

     
iii)

On May 6, 2013, the Company issued 1,000,000 shares of common stock at a price of $0.25 per share for gross proceeds of $250,000 to be received in four tranches as follows:

     
(i)

$50,000 payable on closing of the Financing (the “Closing”)(received);

     
(ii)

$50,000 payable on or before the date which is five months from the Closing (the “First Tranche”)(received);

F-37



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

  (iii)

$50,000 payable on or before the date which is ten months from the Closing (the “Second Tranche”); and

     
  (iv)

the remaining $100,000 payable on or before the date which is one year from the Closing (the “Final Tranche”)

In connection with the 800,000 common shares issuable in connection with the First Tranche, the Second Tranche and the Final Tranche, the Company entered into an escrow agreement pursuant to which these shares were placed in escrow to be released when the Company received full payment for such shares.

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.

iv)

On June 3, 2013, the Company issued 75,000 common shares in exchange for services rendered pursuant to a consulting agreement dated April 11, 2013. The shares were recorded at a fair value of $89,250. The fair value of $1.19 per share was determined with reference to the quoted market price of the company’s common stock on the commitment date.

   
v)

On October 7, 2013, the Company issued 240,000 units at a price of $0.25 per share for gross proceeds of $60,000. Each unit consisted of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one share of common stock at an exercise price of $0.25 per share for a period of eighteen months.

2014 Stock Option Plan

On June 6, 2014, the Company’s board of directors approved a 2014 Long-Term Incentive Plan (the “2014 Plan”), which provides for the grant of stock options, restricted shares, restricted share units and performance stock and units to directors, officers, employees and consultants of the Company. Stockholder approval of the plan was obtained on August 21, 2014.

The maximum number of our common 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). As a result of the adoption of the 2014 Plan, no further option awards will be granted under any previously existing stock option plan. Stock option awards previously granted under previously existing stock option plans remain outstanding in accordance with their terms.

The 2014 Plan is administered by the board of directors, except that it may, in its discretion, delegate such responsibility to a committee of such board. The exercise price will be determined by the board of directors at the time of grant. Stock options may be granted under the 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 2014 Plan.

F-38



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

Stock Based Compensation

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

          Weighted     Weighted Average  
    Number     Average     Grant Date  
    of Options     Exercise Price     Fair Value  
Outstanding at February 1, 2014   3,005,000   $  0.34        
Expired   (285,000 ) $  0.25        
Granted   69,075,000   $  0.13   $  0.22  
                   
Outstanding at October 31, 2014   71,795,000   $  0.14   $  0.22  
                   
Exercisable at October 31, 2014   9,100,000   $  0.20        
                   
Exercisable at January 31, 2014   2,246,184   $  0.38        

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

    Exercise     Expiry     Number  
 Number   Price     Date     Vested  
20,000 $ 0.25     February 1, 2015     20,000  
90,000 $ 0.25     February 14, 2015     90,000  
15,000 $ 0.25     July 25, 2015     15,000  
250,000 $ 0.75     October 1, 2015     250,000  
15,000 $ 0.25     December 19, 2015     15,000  
150,000 $ 0.35     January 6, 2016     150,000  
150,000 $ 0.55     January 6, 2016     150,000  
200,000 $ 0.75     January 6, 2016     200,000  
55,000 $ 0.25     April 1, 2016     55,000  
600,000 $ 0.25     October 9, 2017     600,000  
50,000 $ 0.25     February 1, 2018     50,000  
150,000 $ 0.25     May 1, 2018     75,000  
80,000 $ 0.25     April 1, 2019     80,000  
1,000,000 $ 0.25     July 30, 2022     1,000,000  
67,970,000 $ 0.128     June 6, 2024     6,350,000  
1,000,000 $ 0.15     June 10, 2024     -  
                   
71,795,000               9,100,000  

The aggregate intrinsic value of stock options outstanding is calculated as the difference between the exercise price of the underlying awards and the fair value of the Company’s common stock. At October 31, 2014, the aggregate intrinsic value of stock options outstanding is $4,254,140 and exercisable is $393,700 (January 31, 2014: $Nil and $Nil, respectively).

During the three months and nine months ended October 31, 2014, the Company recognized a total fair value of $1,973,875 and $2,094,586, respectively (2013: $127,088 and $606,561, respectively) of stock based compensation expense relating to the issuance of stock options in exchange for services.

F-39



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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:

    2014     2013  
Expected term of stock option (years) (1)   6.54     1.79  
Expected volatility (2)   110.84%     215.88%  
Stock price at date of issuance $ 0.13   $ 0.39  
Risk-free interest rate   2.07%     0.24%  
Dividend yields   0.00%     0.00%  

(1) As the Company has insufficient historical data on which to estimate the expected term of the options, the Company has elected to apply the short-cut method to determine the expected term under the guidance of Staff Accounting Bulletin No. 110 (“SAB 110”).

(2) As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company has estimated expected share price volatility based on the historical share price volatility of comparable entities.

Share Purchase Warrants

At October 31, 2014, the Company had 66,075,946 share purchase warrants outstanding as follows:

  Exercise     Expiry  
Number Price     Date  
400,000 $0.75     September 24, 2014  
400,000 $0.50     November 26, 2014  
100,000 $0.50     December 10, 2014  
72,000 $0.75     December 31, 2014  
240,000 $0.25     April 7, 2015  
120,000 $0.25     April 19, 2015  
104,440 $0.75     April 19, 2015  
120,000 $0.28     October 4, 2015  
498,000 $0.25     August 10, 2017  
250,000 $0.10     November 14, 2016  
250,000 $0.10     November 26, 2016  
227,500 $0.10     December 24, 2016  
150,000 $0.25     August 10, 2018  
2,400,000 $0.15     April 4, 2019  
44,164,332 $0.15     June 10, 2019  
6,202,098 $0.075     June 10, 2019  
8,255,867 $0.15     July 8, 2019  
1,173,709 $0.075     July 8, 2019  
948,000 $0.20     October 23, 2019  
           
66,075,946          

During the nine months ended October 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.

F-40



Naked Brand Group Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Expressed in US Dollars)
(Unaudited)

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

    Number of       Weighted Average  
    Warrants       Exercise Price  
Outstanding at January 31, 2013   2,162,506   S   0.47  
Issued   1,609,940   $   0.31  
Outstanding at January 31, 2014   3,770,446   S   0.40  
Cancelled   (600,000 ) $   0.50  
Issued   63,144,006   $   0.14  
Expired   (238,506 ) $   0.70  
               
Outstanding at October 31, 2014   66,075,946   $   0.15  

12.

Customer Concentrations

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

For the three and nine months ended October 31, 2014, the Company had concentrations of sales with a customer equal to 29% and 34%, respectively of the Company’s net sales. As at October 31, 2014 the accounts receivable balance for this customer was $29,700 (January 31, 2014: $15,462).

For the three and nine months ended October 31, 2013, the Company had concentrations of sales with three customers equal to 79% and 60%, respectively of the Company’s net sales.

13.

Commitments

Pursuant to a service agreement dated May 15, 2014, the Company has agreed to pay a 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-41


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.

On June 10, 2014, we completed a private placement offering (the “Offering”) and on July 8, 2014, we closed a second tranche of the Offering, resulting in total aggregate proceeds of $7,309,832 to the Company, before deducting commissions and other transaction related expenses, and including the conversion of convertible notes in the aggregate amount of $1,094,159. Each Unit consists of (i) a 6% convertible senior secured debenture in the principal amount of $25,000, each convertible into shares of common stock at a price of $0.075 per share and (ii) a warrant to purchase 166,667 common shares of the Company at an exercise price of $0.15 per share, subject to adjustment.

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 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.


6

Recent Corporate Developments

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

1.

We launched a new branding, packaging, marketing and advertising campaign, including a new corporate website www.nakedbrands.com. The campaign, which will take effect early in 2015, will communicate our new voice and visual identity through messaging and will include new product packaging, an entirely redesigned online store (www.thenakedshop.com), as well as innovative and targeted marketing, advertising, social media, and public relations initiatives.

   
2.

In our third quarter we spent approximately $160,000 on product development. We have engaged several men’s and women’s designers and consultants who are developing an expanded and redesigned men’s collection and a complimentary women’s line.

   
3.

On August 21, 2014, we received shareholder consent for the adoption of our 2014 Long-Term Incentive Plan (the “2014 Plan”) through written consent by the majority of our stockholders. The 2014 Plan provides for the grant of stock options, restricted shares, restricted share units and performance stock and units to directors, officers, employees and consultants of our Company. The maximum number of shares of common stock reserved for issue under the plan is 110,000,000 shares.

   
4.

On October 8, 2014, we filed a registration statement on Form S-1 with the Securities and Exchange Commission to cover the resale of up to 41,569,071 shares of our common stock that may be issued upon exercise of warrants issued in connection with the Offering.

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 design 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.

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

Revenues

During the three months ended October 31, 2014, our net sales increased by $28,269, or 24% over the comparative three month period ended October 31, 2013. Net sales increased as a result of the addition of new specialty store accounts, and increased department store sales as a result of the addition of Nordstrom Canada and Hudson’s Bay Company. Increases in department and specialty store sales were partially offset by a decrease in off sales as a result of the selloff of old slower moving cotton inventory in the comparative period.

We expect our sales will increase modestly in the fourth quarter as a result of seasonal sales, marketing and promotional activities and the addition of new customer accounts, with more markable increases throughout 2015, as our new collections are released and management works to implement its more long-term business strategies.

Gross Margins

In the current quarter we realized a gross margin of 9%, compared to (4)% in the quarter ended October 31, 2013. The main reason for the increase was as a result of lower than average margins in the comparative period as a result of a $35,500 credit granted to our largest customer, Nordstrom, in that period to compensate for its decreased gross margins associated with our marked down cotton products, which were also sold off in that period. In the current quarter, higher margins on our core underwear products were offset by the selloff of prior season loungewear products.


7

Operating Expenses

    Three months ended October 31,     Change        

General and administrative

  2014     2013   $       %  
Bad debts (recovery) $  (951 )$   (1,962 )   1,011     (51.5 )
Bank charges and interest   2,814     1,745     1,069     61.3  
Consulting   (6,669 )   56,216     (62,885 )   (111.9 )
Depreciation   6,029     5,722     307     5.4  
Directors fees   -     47,058     (47,508 )   (100.0 )
Insurance   23,160     13,089     10,071     76.9  
Investor relations   46,176     7,141     39,035     546.6  
Marketing   95,622     58,598     37,024     63.2  
Occupancy and rent   27,236     8,490     18,746     220.8  
Office and miscellaneous   23,227     18,792     4,435     23.6  
Product development   159,472     59,145     100,327     169.6  
Professional fees   156,385     45,301     111,084     245.2  
Salaries and benefits   2,342,199     171,904     2,170,295     1262.5  
Transfer agent and filing fees   8,346     6,203     2,143     34.5  
Travel   28,377     19,157     9,220     48.1  
Warehouse management   17,365     31,137     (13,772 )   (44.2 )
Total $  2,928,788   $  547,736     2,381,052     434.7  

There was an overall increase in general and administrative expenses for the three months ended October 31, 2014, from the three months ended October 31, 2013. This increase is mostly attributable to an increase in non-cash stock based compensation charges accruing as a result of stock options issued to our new core management group. Total share based compensation charges in the current period were $1,973,875, as compared to $127,088 for the three months ended October 31, 2013. These large non-cash share based compensation charges will continue to accrue over the vesting terms of three to four years, of the related options.

There were also increases in marketing, professional fees, product development 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 the filing of a registration statement, as required by us in connection with our June, 2014 financing, the written consent solicitation of our stockholders to effect the 2014 Plan and an increase in authorized share capital, as well as for trademark work.

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

Product development costs have increased significantly in the current period in connection with the engagement of a team of designers and consultants who are working with employees of the company, and other involved partners, on an expanded and redesigned men’s collection and the fabrication and design of an entire complimentary women’s line of intimate apparel.

Other income and expenses

We incurred interest expenses of $116,760 for the three months ended October 31, 2014 as compared to $19,986 for the same period in 2013. This increase in interest is attributable to long term financings entered into during the second quarter of the current fiscal year, in connection with the Offering. Long-term debt is accruing interest at 6% per annum, payable semi-annually.


8

Financing and accretion charges were $(19,863) for the three months ended October 31, 2014 compared to $240,613 for the three months ended October 31, 2013. Financing and accretion expenses decreased as a result of a significant number of short term debt arrangements in the comparative period, which were entered into to bridge operations before a more long-term financing could be arranged.

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, these embedded conversion features and warrants 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 of the application of these accounting rules, which require these derivative financial instruments to be carried at fair value, we recorded a mark to market gain of $10,231,200 during the three months ended October 31, 2014, in correlation with fluctuations in the price of our common stock. In the comparative period, we have a mark to market derivative gain of $425,400, in connection with a derivative liability that was being recognized in our financial statements because of a full ratchet provision included in a convertible promissory note. This promissory note was later repaid.

Net loss and comprehensive loss

Our net income (loss) for the three months ended October 31, 2014 was $7,227,623, or $(0.02) per share on a fully diluted basis, as compared to a net loss of $(396,400), or $(0.01) per share, for the three months ended October 31, 2013. The most significant factor for the decrease in net loss in the current period is the non-cash gain associated with the derivative accounting in connection with the Offering, as described above.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 2014

Revenues

During the nine months ended October 31, 2014, our net sales increased by $15,718, or 4% over the comparative nine month period ended October 31, 2013. Net sales increased as a result of the addition of new specialty store accounts, and increased department store sales as a result of the addition of Nordstrom Canada and Hudson’s Bay Company. We realized this overall increase in revenues despite lower sales in the first half of the current fiscal year as a result of lost sales due to a product packaging changeover and the existence of significant bulk up orders of new products in the comparative period.

We expect our sales will increase modestly in the fourth quarter as a result of seasonal sales, marketing and promotional activities and the addition of new customers, with more markable increases throughout 2015, as our new collections are released and management works to implement its more long-term business strategies.

Gross Margins

During the nine months ended October 31, 2014, we recorded net write downs of inventory in the amount of approximately $317,700 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 in the fourth quarter of the current fiscal year and into the first quarter of our next fiscal year as we make this transformation, after which point we plan to launch new collections in the coming fiscal year.

Operating Expenses

    Nine months ended October 31,     Change        

General and administrative

  2014     2013   $  %        
Bad debts $  58   $  (3,726 )   3,784     (101.6 )
Bank charges and interest   12,379     5,053     7,326     145.0  
Consulting   22,869     393,972     (371,103 )   (94.2 )
Depreciation   19,181     16,445     2,736     16.6  
Directors fees   24,900     147,691     (122,791 )   (83.1 )
Insurance   49,812     41,147     8,665     21.1  
Investor relations   121,149     186,593     (65,444 )   (35.1 )
Marketing   239,185     222,739     16,446     7.4  
Occupancy and rent   54,647     23,431     31,216     133.2  
Office and miscellaneous   56,030     79,393     (23,363 )   (29.4 )
Product development   200,555     184,279     16,276     8.8  
Professional fees   548,571     205,759     342,812     166.6  
Salaries and benefits   2,821,348     491,169     2,330,179     474.4  
Transfer agent and filing fees   29,577     18,982     10,595     55.8  
Travel   99,346     85,193     14,153     16.6  
Warehouse management   80,195     69,445     10,750     15.5  
Total $  4,379,802   $  2,167,565     2,212,237     102.1  


9

There was an overall increase in general and administrative expenses for the nine months ended October 31, 2014, as compared to the nine months ended October 31, 2013. This increase is mostly attributable to an increase in non-cash stock based compensation charges accruing as a result of stock options issued to our new core management group. Total share based compensation charges in the current period were $2,094,586, as compared to $606,561 for the nine months ended October 31, 2013. These large non-cash share based compensation charges will continue to accrue over the vesting terms of three to four years, of the related options.

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 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 nine months ended October 31, 2014.

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, and as a result of the allocation of non-cash stock based compensation charges, as described above.

Other income and expenses

We incurred interest expenses of $218,118 for the nine months ended October 31, 2014 as compared to $50,060 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 semi-annually.

Financing and accretion charges increased to $2,263,122 for the nine months ended October 31, 2014 from $362,374 for the nine months ended October 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. In the comparative period, financing and accretion charges were mostly the result of the amortization of financing fees associated with the issuance of short term promissory notes, as well as amendment of an existing loan facility with Kalamalka Partners.


10

During the nine months ended October 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, these embedded conversion features and warrants 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. 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 net mark to market expense of $2,773,982 during the nine months ended October 31, 2014, in correlation with fluctuations in the price of our common stock. In the comparative period, we have a mark to market derivative gain of $87,100, in connection with a derivative liability that was being recognized in our financial statements because of a full ratchet provision included in a convertible promissory note. This promissory note was later repaid.

We had debt conversion expense of $309,011 and net losses on extinguishment of debt of $810,765 during the nine months ended October 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 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 nine months ended October 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 nine months ended October 31, 2014 was $(23,039,610), or $(0.65) per share, as compared to a net loss of $(3,077,120), or $(0.11) per share, for the nine months ended October 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.

LIQUIDITY AND FINANCIAL CONDITION

Private Placement Offering (the “Offering”)

During the nine months ended October 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. Interest accruing under the debentures is payable semi-annually, in cash or in kind, at the option of the Company as long as certain equity conditions are satisfied. At October 31, 2014, such equity conditions had not been satisfied and, consequently, interest is payable in cash unless such equity conditions failure has been waived by each holder. The funds raised from the sale of the Units are being used for marketing and new product development and design, as well as general working capital requirements.


11

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

In connection with the issuance of the Units, we entered into a Registration Rights Agreement with each purchaser pursuant to which we agreed to file a registration statement covering the resale of the shares issuable upon conversion of the debentures and upon exercise of the warrants. The Company filed such registration statement with the Securities and Exchange Commission (“SEC”) on October 8, 2014. However, due to a limit on the number of shares that could be registered pursuant to SEC policy, the Company was unable to include in such registration statement the shares underlying the debentures (the “Conversion Shares”). As a result of our Company’s inability to include such Conversion Shares, a condition of the Debentures is triggered which limits the ability of our Company to elect payment of interest accruing under the Debentures in shares of common stock (“in kind”) unless such condition is formally waived by each holder. Subsequent to October 31, 2014 and in connection with the first interest payment date, the Company received waivers from holders of $4,074,482 in outstanding principal amounts of the Debentures. Such holders received payment of interest in kind, resulting in the issuance of 1,595,301 shares of our common stock and 44,492 shares of our common stock to be issued as payment for $122,984 in interest due.

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 October 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.

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.


12

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.

On April 4, 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 on April 4, 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, on April 7, 2014, the other remaining principal balance of $75,000 plus accrued interest was converted into a SPA Note, as defined and described above.

Future Financing

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


13

Working Capital (Consolidated)   October 31, 2014     Jan 31, 2014  
    (unaudited)        
Current Assets $ 3,789,074   $ 861,049  
Current Liabilities $ 531,425   $ 2,300,433  
Working Capital (Deficit) $ 3,257,649   $ (1,439,384 )

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

  (i)

we extended the maturity date and certain other terms of other current obligations in the aggregate amount of $600,000, thus improving our working capital position; and

     
  (ii)

we received cash proceeds of $6,094,100 in connection with the issuance of 6% senior secured convertible promissory notes

During the nine months ended October 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

    Nine months ended October 31,  
    2014     2013  
Cash Flows Used In Operating Activities $ (2,319,551 ) $ (1,357,105 )
Cash Flows Used In Investing Activities   (42,423 )   (7,513 )
Cash Flows Provided By Financing Activities   5,627,006     1,329,107  
Net change in Cash During Period $ 3,265,032   $ (35,511 )

Operating Activities

Cash flows used in our operating activities was $2,319,551 for the nine months ended October 31, 2014, compared to $1,357,105 for the comparative period. 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 $19,854,719, mostly related to derivative liability accounting and share based compensation charges as described above.

Investing Activities

Investing activities used cash of $42,423 during the nine months ended October 31, 2014, compared to $7,513 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 $5,627,006 for the nine month period ended October 31, 2014, compared to $1,329,107 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 $413,385 and convertible promissory notes in the amount of $364,640. We also incurred debt offering costs of $616,237 related to commissions and direct transaction related expenses related to the Offering.

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


14

Commitments and capital expenditures

Subsequent to October 31, 2014, we entered into an Information Technology Application Solution Provider Agreement whereby we are implementing an ERP system at a cost of $40,000 for the initial set up and monthly fees of approximately $2,500 per month for a minimum of one year.

Disclosure of Outstanding Share Data

As of December 12, 2014, there were 38,194,185 shares of our common stock issued and outstanding. In addition, at December 12, 2014, the total dilutive securities outstanding, including options, warrants and shares issuable upon conversion of convertible debt instruments was approximately 237,800,000 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 considers realizability based on the Company’s marketing strategies and sales forecasts to determine if an allowance is necessary. If market value is below cost then an allowance is created to adjust the inventory carrying amount to reflect this.

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.

ITEM 4. CONTROLS AND PROCEDURES.


17

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

There were no changes in our internal control over financial reporting during the fiscal quarter ended October 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.

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.


18

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:

net revenue and profits contributed by new retailers;
   
increases or decreases in comparable sales;
   
changes in our product mix; and
   
the timing of new advertising and new product introductions.

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

We began selling our products in Canada in January 2010. Our limited operating history 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.


19

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.

We are authorized to issue up to 450,000,000 shares of common stock, of which 38,194,185 shares are issued and outstanding as of December 12, 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.


20

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

On December 10, 2014 in connection with the first interest payment date under the Debentures, we issued 1595,301 shares of our common stock and 44,492 shares of our common stock are to be issued as payment for $122,984 in interest due.

On November 19, 2014 we issued stock options to purchase 500,000 shares of our common stock to a consultant of our company as consideration for services to be rendered. The options are exercisable at $0.17 per share and are vesting over a period of two years.

We issued and intend to issue these shares and options to accredited investors pursuant to Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None

Item 6. Exhibits.

Exhibit

Number

Description

 

 

(3)

Articles of Incorporation and Bylaws

3.1

Articles of Incorporation (incorporated by reference from our registration statement on Form SB- 2, as filed with the Commission on December 8, 2006)

 

3.2

Articles of Merger (incorporated by reference from Exhibit 10.1 of our current report on Form 8- K, as filed with the Commission on August 30, 2012)

 

3.3

Certificate of Amendment to Articles of Incorporation (incorporated by reference from Exhibit 3.3 of our quarterly report on Form 10-Q, as filed with the Commission on September 15, 2014)

 

3.4

Amended Bylaws (incorporated by reference from Exhibit 3.1 to our current report on Form 8-K, as filed with the Commission on January 28, 2013)

 

(10)

Material Contracts

 

10.1

Acquisition Agreement dated February 28, 2012 among our company, Naked Boxer Brief Clothing Inc. and SBH Acquisition Corp. (incorporated by reference from Exhibit 10.1 of our current report on Form 8-K, as filed with the Commission on March 1, 2012)

 

10.2

Loan Agreement dated January 16, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on January 17, 2012)



21

10.3

General Security Agreement dated January 16, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on January 17, 2012)

 

10.4

Addendum to Loan Agreement dated April 4, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on April 12, 2012)

 

10.5

Second Addendum to Loan Agreement dated April 11, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on April 12, 2012)

 

10.6

Third Addendum to Loan Agreement dated May 7, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8- K, as filed with the Commission on May 8, 2012)

 

10.7

Fourth Addendum to Loan Agreement dated June 13, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8- K, as filed with the Commission on June 14, 2012)

 

10.8

Fifth Addendum to Loan Agreement dated July 6, 2012 among our company and Naked Boxer Brief Clothing Inc. (incorporated by reference from Exhibit 10.1 to our current report on Form 8- K, as filed with the Commission on July 11, 2012

 

10.9

Form of $0.05 Subscription Agreement (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012)

 

10.10

Form of $0.25 Subscription Agreement (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012)

 

10.11

Form of Pooling Agreement among our company and certain former shareholders of Naked Boxer Brief Clothing Inc., dated June 27, 2012 (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012)

 

10.12

Employment Agreement with Joel Primus dated July 30, 2012 (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012)

 

10.13

Employment Agreement with Alex McAulay dated July 30, 2012 (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012)

 

10.14

2012 Stock Option Plan (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012)

 

10.15

Form of Stock Option Agreement (incorporated by reference from our current report on Form 8-K as filed with the Commission on August 1, 2012)

 

10.16

Agency and Interlender Agreement dated August 10, 2012 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on August 22, 2012)

 

10.17

Security Agreement dated August 10, 2012 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on August 22, 2012)

 

10.18

Form of Subscription Agreement for Convertible Notes and Warrants (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on August 22, 2012)



22

10.19

Form of Warrant Subscription Agreement (incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the Commission on August 22, 2012)

 

10.20

Memorandum of Understanding dated October 1, 2012 with Shark Investments, LLC (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on October 15, 2012)

 

10.21

Form of Stock Option Agreement with Shark Investments, LLC dated October 9, 2012 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on October 15, 2012)

 

10.22

Consulting Agreement with George Creative Consultants Inc. dated February 1, 2012

 

10.23

Consulting Agreement with Kosick Communications Ltd. dated February 1, 2012 (incorporated by reference from our current report on Form 8-K/A as filed with the Commission on November 5, 2012)

 

10.24

Form of Warrant Agreement (incorporated by reference from Exhibit 10.18 to our current report on Form 8-K/A, as filed with the Commission on November 30, 2012)

 

10.25

Amendment Agreement dated July 22, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on July 26, 2013)

 

10.26

Form of Amended and Restated Promissory Note (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on July 26, 2013)

 

10.27

Form of Amendment to Warrant Certificate (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on July 26, 2013)

 

10.28

Promissory Note Dated August 1, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on August 7, 2013)

 

10.29

Promissory Note dated September 3, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on September 11, 2013)

 

10.30

Guarantee dated September 3, 2013 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on September 11, 2013)

 

10.31

Purchase Agreement dated September 10, 2013 with Lincoln Park Capital Fund, LLC (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on September 16, 2013)

 

10.32

Registration Rights Agreement dated September 10, 2013 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on September 16, 2013)

 

10.33

Promissory Note dated October 4, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on October 10, 2013)

 

 

10.34

Guarantee dated October 4, 2013 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on October 10, 2013)



23

10.35

Pledge Agreement dated October 4, 2013 (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on October 10, 2013)

 

10.36

Promissory Note dated November 13, 2013 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on November 19, 2013)

 

10.37

Form of Promissory Note dated November 14, 2013 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on November 19, 2013)

 

10.38

Agency and Interlender Agreement dated November 14, 2013 (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on November 19, 2013)

 

10.39

Amended and Restated Security Agreement dated November 14, 2013 (incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the Commission on November 19, 2013)

 

10.40

Form of Subscription Agreement for Convertible Notes and Warrants (incorporated by reference from Exhibit 10.5 to our current report on Form 8-K, as filed with the Commission on November 19, 2013)

 

10.41

Form of Subscription Agreement for Convertible Notes and Warrants (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on December 31, 2013)

 

10.42

Securities Purchase Agreement dated December 23, 2013 with LG Capital Funding, LLC (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on January 8, 2014)

 

10.43

Securities Purchase Agreement dated December 23, 2013 with GEL Properties, LLC(incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on January 8, 2014)

 

10.44

Form of 8% Convertible Redeemable Note dated December 23, 2013 in the amount of $25,000.00(incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on January 8, 2014)

 

10.45

Form of 8% Convertible Redeemable Back End Note dated December 23, 2013 in the amount of $25,000.00(incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the Commission on January 8, 2014)

 

10.46

Form of Collateralized Secured Offsetting Note Dated December 23, 2013 in the amount of $25,000.00(incorporated by reference from Exhibit 10.5 to our current report on Form 8-K, as filed with the Commission on January 8, 2014)

 

10.47

Securities Purchase Agreement dated December 17, 2013 with Asher Enterprises, Inc. (incorporated by reference from Exhibit 10.6 to our current report on Form 8-K, as filed with the Commission on January 8, 2014)



24

10.48

Convertible Promissory Note dated December 13, 2013 in the amount of $83,500.00 with Asher Enterprises, Inc. (incorporated by reference from Exhibit 10.7 to our current report on Form 8-K, as filed with the Commission on January 8, 2014)

 

10.49

Amendment Agreement between our company and Mr. Andrew Kaplan dated January 6, 2014 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on January 8, 2014)

 

10.50

Promissory Note dated January 13, 2014 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on January 17, 2014)

 

10.51

Promissory Note dated February 11, 2014 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on February 18, 2014)

 

10.52

Form of Securities Purchase Agreement dated April 7, 2014 (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.53

Form of 6% Convertible Note dated April 7, 2014 (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.54

Form of Security Agreement dated April 7, 2014 (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.55

Note Exchange Agreement with CSD Holdings LLC dated April 4, 2014 (incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.56

Conversion Agreement with Bryce Stephens dated April 4, 2014 (incorporated by reference from Exhibit 10.5 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.57

Debt Settlement Agreement with Canfund Ventures Corporation dated April 7, 2014 (incorporated by reference from Exhibit 10.6 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.58

Amendment to Security Agreements dated April 4, 2014 (incorporated by reference from Exhibit 10.7 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.59

Amendment to Amended and Restated Promissory Note dated April 4, 2014 (incorporated by reference from Exhibit 10.8 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.60

Amendment to Promissory Note dated April 4, 2014 (incorporated by reference from Exhibit 10.9 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.61

Inter-lender Agreement dated April 4, 2014 (incorporated by reference from Exhibit 10.10 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.62

Debt Settlement Agreement with Trend Time Development dated April 3, 2014 (incorporated by reference from Exhibit 10.11 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)



25

10.63

Warrant Agreement with Kalamalka Partners Ltd. (incorporated by reference from Exhibit 10.12 to our current report on Form 8-K, as filed with the Commission on April 10, 2014)

 

10.64

Form of Subscription Agreement by and among the company and the Purchasers (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on June 11, 2014)

 

10.65

Form of Senior Secured Convertible Debenture (incorporated by reference from Exhibit 10.2 to our current report on Form 8-K, as filed with the Commission on June 11, 2014)

 

10.66

Form of Security Agreement (incorporated by reference from Exhibit 10.3 to our current report on Form 8-K, as filed with the Commission on June 11, 2014)

 

10.67

Form of Warrant (incorporated by reference from Exhibit 10.4 to our current report on Form 8-K, as filed with the Commission on June 11, 2014)

 

10.68

Form of Registration Rights Agreement (incorporated by reference from Exhibit 10.5 to our current report on Form 8-K, as filed with the Commission on June 11, 2014)

 

10.69

2014 Long Term Incentive Plan (incorporated by reference from Exhibit 10.6 to our current report on Form 8-K, as filed with the Commission on June 11, 2014)

 

10.70

Note Termination Agreement between the company and JMJ Financial (incorporated by reference from Exhibit 10.7 to our current report on Form 8-K, as filed with the Commission on June 11, 2014)

 

10.71

Form of Stock Option Agreement (incorporated by reference from Exhibit 10.8 to our current report on Form 8-K, as filed with the Commission on June 11, 2014)

 

10.72

Employment Agreement between the company and Carole Hochman (incorporated by reference from Exhibit 10.9 to our current report on Form 8-K, as filed with the Commission on June 11, 2014)

 

10.73

Amended and Restated Stock Option Award Agreement with Carole Hochman (incorporated by reference from Exhibit 10.1 to our current report on Form 8-K, as filed with the Commission on August 26, 2014)

 

(31 and 32)

Certifications

31.1*

Section 302 Certification under Sarbanes-Oxley Act of 2002 of Carole Hochman

 

31.2*

Section 302 Certification under Sarbanes-Oxley Act of 2002 of Michael Flanagan

 

32.1*

Section 906 Certification under Sarbanes-Oxley Act of 2002 of Carole Hochman

 

32.2*

Section 906 Certification under Sarbanes-Oxley Act of 2002 of Michael Flanagan



26

(101) Interactive Data File
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase

* Filed herewith


27

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NAKED BRAND GROUP INC.

By:

/s/ Michael Flanagan

 
  Michael Flanagan  
  Chief Financial Officer  
  (Principal Financial Officer and Duly Authorized Officer)  
  Dated: December 15, 2014