Attached files

file filename
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
EX-32.1 - EXHIBIT 32.1 - NAKED BRAND GROUP INC.exhibit32-1.htm
EX-31.2 - EXHIBIT 31.2 - NAKED BRAND GROUP INC.exhibit31-2.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, 2015

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]


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: 1,755,005 common shares issued and outstanding as of December 9, 2015.

ii


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 (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been omitted in accordance with such SEC 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. These interim condensed consolidated financial statements should be read in conjunction with our annual audited consolidated financial statements for the fiscal year ended January 31, 2015.

iii


 

Naked Brand Group Inc.
Interim Condensed Consolidated Financial Statements
For the Quarterly Periods Ended October 31, 2015 and October 31,
2014

 



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

    October 31,     January 31,  
    2015     2015  
    (unaudited)        
ASSETS            
 Current assets            
     Cash $  318,237   $  1,943,235  
     Accounts receivable, net   165,046     99,145  
     Inventory, net   1,341,387     183,226  
     Deferred costs   50,000     -  
     Prepaid expenses and deposits   30,948     383,651  
 Total current assets   1,905,618     2,609,257  
 Equipment, net   16,429     21,141  
 Intangible assets, net   71,935     44,156  
 Deferred costs   22,066     43,422  
             
TOTAL ASSETS $  2,016,048   $  2,717,976  
             
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)            
 Current liabilities            
     Accounts payable and accrued liabilities $  845,006   $  299,887  
     Interest payable   176,194     62,650  
     Factored line of credit   580,407     -  
     Promissory notes payable   3,450     3,450  
Total current liabilities   1,605,057     365,987  
     Deferred compensation   203,702     170,369  
     Convertible promissory notes   651,363     605,850  
     Derivative financial instruments   -     3,799,950  
             
TOTAL LIABILITIES   2,460,122     4,942,156  
             
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)            
 Common stock            
     Authorized 
               11,250,000 common shares, par value $0.001 per share
      Issued and outstanding 
               1,755,005 common shares (January 31, 2015: 1,010,391)
  1,755     1,011  
 Common stock to be issued   15,000     15,000  
 Accumulated paid-in capital   35,346,186     25,083,735  
 Accumulated deficit   (35,800,770 )   (27,317,681 )
 Accumulated other comprehensive income (loss)   (6,245 )   (6,245 )
Total stockholders' equity (capital deficit)   (444,074 )   (2,224,180 )
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) $  2,016,048   $  2,717,976  

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

2



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

    Three months ended Oct 31,     Nine months ended Oct 31,  
    2015     2014     2015     2014  
                         
Net sales $  317,748   $  145,790   $  938,157   $  430,590  
                         
Cost of sales   249,274     132,447     664,081     668,253  
                         
Gross profit (loss)   68,474     13,343     274,076     (237,663 )
                         
Operating Expenses                        
  General and administrative expenses   3,371,705     2,928,788     8,670,296     4,379,802  
  Foreign exchange   1,778     6,790     729     18,764  
                         
Total operating expenses   3,373,483     2,935,578     8,671,025     4,398,566  
                         
Operating loss   (3,305,009 )   (2,922,235 )   (8,396,949 )   (4,636,229 )
                         
Other income (expense)                        
  Interest expense   (133,432 )   (116,760 )   (494,788 )   (218,118 )
  Accretion of debt discounts and finance charges   (94,980 )   19,863     (300,252 )   (2,263,122 )
  Derivative expense   -     -     -     (12,028,383 )
  Gain (loss) on extinguishment of debt   -     15,555     -     (810,765 )
  Debt conversion expense   -     -     -     (309,011 )
  Fair value mark-to-market adjustments   -     10,231,200     708,900     (2,773,982 )
                         
Total other income (expense)   (228,412 )   10,149,858     (86,140 )   (18,403,381 )
                         
Net income (loss) for the period $  (3,533,421 ) $  7,227,623   $  (8,483,089 ) $  (23,039,610 )
                         
Net income (loss) per share                        
  Basic $  (2.08 ) $  7.94   $  (6.51 ) $  (25.94 )
  Diluted $  (2.08 ) $  (0.59 ) $  (6.51 ) $  (25.94 )
                         
Weighted average shares outstanding                        
  Basic   1,695,437     910,089     1,302,714     888,265  
  Diluted   1,695,437     4,901,600     1,302,714     888,265  

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

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     Accumulated     Comprehensive     Equity  
    Shares     Amount     Capital     to be issued     Deficit     Income (Loss)     (Capital Deficit)  
Balance, February 1, 2015   1,010,391   $  1,011   $  25,083,735   $  15,000   $  (27,317,681 ) $  (6,245 ) $  (2,224,180 )
Shares issued pursuant to the conversion of debt   79,025     79     236,985     -     -     -     237,064  
Shares issued in settlement of debt   2,500     2     11,998     -     -     -     12,000  
Shares issued as payment for interest owing under convertible debt arrangements   55,377     55     280,176     -     -     -     280,231  
Shares issued pursuant to the exercise of amended warrants   585,705     586     2,342,410     -     -     -     2,342,996  
Less; commissions paid               (91,422 )                     (91,422 )
Rounding shares issued in connection with reverse stock split   22,007     22     (22 )                     -  
Derivative liability reclassifications   -     -     3,091,050     -     -     -     3,091,050  
Stock based compensation   -     -     4,391,276     -     -     -     4,391,276  
Net loss for the period   -     -     -     -     (8,483,089 )   -     (8,483,089 )
Balance, October 31, 2015   1,755,005   $  1,755   $  35,346,186   $  15,000   $  (35,800,770 ) $  (6,245 ) $  (444,074 )

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

4



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

for the nine months ended October 31,   2015     2014  
             
Cash flows from operating activities            
  Net loss for the period $  (8,483,089 ) $  (23,039,610 )
  Adjustments to reconcile net loss to net cash            
     used in operating activities:            
     Provision for (recovery of) doubtful accounts   20,226     (3,612 )
     Provision for obsolete inventory   -     290,000  
     Depreciation and amortization   13,526     19,181  
     Other non cash items (Schedule 1)   3,982,628     19,854,719  
     Unrealized foreign exchange   -     2,760  
  Finance fees paid in connection with debt extinguishment   -     (38,008 )
  Finance fees paid in connection with long term debt offering   -     525,113  
  Changes in operating assets and liabilities:            
     Accounts receivable   (86,127 )   (43,121 )
     Prepaid expenses and deposits   352,703     (9,325 )
     Inventory   (1,158,161 )   53,065  
     Deferred costs   (50,000 )   50,000  
     Accounts payable   556,874     (256,854 )
     Interest payable   397,702     172,438  
     Deferred compensation   33,333     103,703  
Net cash used in operating activities   (4,420,385 )   (2,319,551 )
             
Cash flows from investing activities            
  Acquisition of intangible assets   (32,155 )   (22,535 )
 Purchase of equipment   (4,439 )   (19,888 )
Net cash used in investing activities   (36,594 )   (42,423 )
             
Cash flows from financing activities            
  Proceeds from share issuances   2,342,996     -  
  Share issuance offering costs   (91,422 )   -  
  Proceeds from share subscriptions received   -     -  
  Proceeds from the issuance of promissory notes   -     927,168  
  Repayments of promissory notes   -     (413,385 )
  Proceeds from convertible promissory notes   -     6,094,100  
  Repayments of convertible promissory notes   -     (364,640 )
  Debt offering costs   -     (616,237 )
  Repayments on factoring arrangements   (429,593 )   -  
  Advances under factoring arrangements   1,010,000     -  
Net cash provided by financing activities   2,831,981     5,627,006  
             
Net increase (decrease) in cash   (1,624,998 )   3,265,032  
Cash at beginning of the period   1,943,235     67,478  
Cash at end of the period $  318,237   $  3,332,510  

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

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,   2015     2014  
             
Cash paid during the period for:            
 Interest $ 70,923   $  30,127  
 Taxes   -     -  
Non-cash financing activities:            
 Extinguishment of accounts payable with equity $  12,000   $  11,158  
 Repayment of promissory note through the issuance of new promissory note   -     205,083  
 Settlement of notes through the issuance of shares   -     299,444  
 Reclassification of derivative liability to additional paid in capital   3,091,050     -  
 Conversion of convertible debt to shares   233,382     -  
 Interest paid in shares   283,913     -  
             
Schedule 1 to the Statements of Cash Flows            
             
Profit and loss items not involving cash consists of:            
     Shares to be issued in exchange for services $  -   $  39,900  
     Loss on extinguishment of debt   -     810,765  
     Stock based compensation   4,391,276     2,094,586  
     Derivative expense   -     12,028,383  
     Change in fair value of derivative financial instruments   (708,900 )   2,773,982  
     Debt issuance costs paid in warrants   -     1,552,700  
     Debt conversion expense   -     309,011  
     Amortization of deferred financing fees   21,356     142,043  
     Interest capitalized to convertible debt   -     10,372  
     Shares issued as penalty under debt agreements   -     1,250  
     Accretion of debt discount   278,896     91,727  
             
  $  3,982,628   $  19,854,719  

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

6



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

1.

Nature of Business

Naked Brand Group Inc. (the “Company”) is a manufacturer and seller of direct and wholesale men’s and women’s undergarments and intimate apparels in the United States and Canada to consumers and retailers through its wholly owned subsidiary, Naked Inc. (“Naked”). In the future, the Company plans to expand into other apparel and product categories.

The Company currently operates out of New York, United States of America.

Effective August 10, 2015, the Company effected a reverse stock split of the basis of 1:40. As such, the Company’s authorized capital was decreased from 450,000,000 shares of common stock to 11,250,000 shares of common stock and an aggregate of 53,278,818 shares of common stock issued and outstanding were decreased to 1,331,977 shares of common stock. These financial statements give retroactive effect to such reverse split and all share and per share amounts have been adjusted accordingly.

2.

Ability to Continue as a Going Concern

These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) on a going concern basis, which assumes that the Company will continue to realize its assets and discharge its obligations and commitments in the normal course of operations. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.

As of October 31, 2015, 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 will be required to obtain the necessary financing to pursue its plan of operation. Management plans to obtain the necessary financing through the issuance of equity and/or debt. Should the Company not be able to obtain this financing, it may need to substantially scale back operations or cease business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

3.

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, 2015 are not necessarily indicative of the results that may be expected for the year ending January 31, 2016.

The consolidated balance sheet at January 31, 2015 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.

7



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

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, 2015.

Fair Value of Financial Instruments

The Company accounts for its financial assets and liabilities in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy contains three levels of inputs that may be used to measure fair value as follows:

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals;

Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, interest payable, notes payable, factored line of credit and convertible promissory notes. Other than convertible promissory notes, the fair values of these financial instruments approximate their respective carrying values because of the short maturity of these instruments. The Company determined that the aggregate fair value of promissory notes payable outstanding at October 31, 2015 and January 31, 2015, based on Level 2 inputs in the fair value hierarchy, was equal to their aggregate book value based on the short maturities and current borrowing rates available to the Company.

8



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

The fair value of the Company’s convertible promissory notes is based on Level 3 inputs in the fair value hierarchy. The Company calculated the fair value of these notes by discounting future cash flows using rates representative of current borrowing rates for debt instruments without a conversion feature and by using the Black Scholes option pricing model to determine the fair value of the conversion feature using the following assumptions:

      October 31, 2015     January 31 2015  
  Risk-free interest rate   0.66%     0.61%  
  Expected life (years)   1.59     2.34  
  Expected volatility(1)   133.05%     147.42%  
  Stock price $ 3.18   $ 4.80  
  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 Company determined that the fair value of the convertible promissory notes at October 31, 2015 was $14,110,100 (January 31, 2015: $15,476,300) based on a market interest rate of 18%.

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, 2015 and January 31, 2015, there is only a single reportable operating segment.

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

    Three months ended     Nine months ended  
          October 31,           October 31,  
    2015     2014     2015     2014  
                         
United States $ 267,448   $ 78,840     722,039   $ 270,003  
Canada   50,300     66,950     216,118     160,587  
                         
  $ 317,748   $ 145,790     938,157   $ 430,590  

9



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

At October 31, 2015 and January 31, 2015, the net book value of long-lived assets all located within North America were as follows:

    October 31, 2015     January 31, 2015  
    Equipment     Intangible assets     Equipment     Intangible assets  
                         
United States $ 9,793   $ 41,990   $ 12,688   $ 14,211  
Canada   6,636     29,945     8,453     29,945  
                         
  $ 16,429   $ 71,935   $ 21,141   $ 44,156  

Loss per share

Net loss per share was determined as follows:

    Three months ended October 31,     Nine months ended October 31,  
    2015     2014     2015     2014  
  Numerator                        
     Net income (loss) $ (3,533,421 )   7,227,623   $ (8,483,089 ) $ (23,039,610 )
  Less: Adjustment to income   -     (10,103,774 )   -     -  
  $ (3,533,421 ) $ (2,876,151 ) $ (8,483,089 ) $ (23,039,610 )
  Denominator                        
Weighted average common shares outstanding   1,695,437     910,089     1,302,714     888,265  
Effect of dilutive securities                        
           Warrants   -     1,494,900     -     -  
           Convertible debt   -     2,496,611     -     -  
Diluted weighted average common shares outstanding   1,695,437     4,901,600     1,302,714     888,265  
Basic net income (loss) per share $ (2.08 ) $ 7.94   $ (6.51 ) $ (25.94 )
Diluted net income (loss) per share $ (2.08 ) $ (0.59 ) $ (6.51 ) $ (25.94 )
   Anti-dilutive securities not
   included in diluted loss per share

   relating to:
               
  Warrants and options outstanding   3,712,167     1,951,874     3,712,167     3,446,774  
  Convertible debt   2,372,150     -     2,372,150     2,496,611  
    6,084,317     1,951,874     6,084,317     5,943,385  

10



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

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, 2017. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

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

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

In April 2015, the Financial Accounting Standards Board (FASB), issued the Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. For public business entities, the final guidance will be effective for fiscal years beginning after December 15, 2015, however, early adoption (including in interim periods) is permitted. Upon adoption, an entity must apply the new guidance retrospectively to all prior periods presented in the financial statements. An entity is also required in the year of adoption to provide certain disclosures about the change in accounting principle, including the nature of and reason for the change, the transition method, a description of the prior-period information that has been retrospectively adjusted and the effect of the change on the financial statement line items (that is, debt issuance cost asset and the debt liability). The Company plans to adopt this standard beginning February 1, 2016. The Company is currently evaluating the impact this guidance will have on its financial condition, results of operations and cash flows.

11



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

4.

Inventory

Inventory of the Company consisted of the following:

    October 31,     January 31,  
    2015     2015  
             
Finished goods $  1,423,185   $  362,226  
Raw materials   9,202     -  
    1,432,387     362,226  
Less: allowance for obsolete inventory   (91,000 )   (179,000 )
             
Total inventory $  1,341,387   $  183,226  

Balances at October 31, 2015 and January 31, 2015 are recorded at historical cost, less amounts for potential declines in value. At October 31, 2015, management has recorded an allowance for obsolescence of $91,000 (2015: $179,000) to reduce inventory to its estimated net realizable value.

5.

Equipment

Equipment of the Company consisted of the following at October 31, 2015 and January 31, 2015:

    October 31,     January 31,  
    2015     2015  
             
Furniture & equipment $  10,250   $  11,630  
Computer equipment   25,400     20,963  
             
    35,650     32,593  
Less: Accumulated depreciation   (19,221 )   (11,452 )
             
  $  16,429   $  21,141  

Depreciation expense for the three and nine month periods ended October 31, 2015 was $2,943 and $9,151, respectively (2014: $2,155 and $4,179, respectively).

12



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

6.

Intangible Assets

Intangible assets of the Company consisted of the following at October 31, 2015 and January 31, 2015:

    October 31,     January 31,     Useful life  
    2015     2015     (Years)  
                   
Trade Names/Trademarks $  71,935   $  39,781     Indefinite  
Website   49,512     49,512     2  
                   
    121,447     89,293        
Less: accumulated amortization   (49,512 )   (45,137 )      
                   
  $  71,935   $  44,156        

Amortization expense for the three and nine month periods ended October 31, 2015 was $Nil and $4,375, respectively (2014: $3,874 and $15,002, respectively).

7.

Related Party Transactions and Balances

Related Party Balances

At October 31, 2015, included in accounts payable and accrued liabilities is $24,186 (January 31, 2015: $17,060) owing to a director and officer of the Company for reimbursable expenses, an officer of the Company for an accrued management bonus and a former director and officer of the Company for an accrued management bonus. These amounts are unsecured, non-interest bearing with no specific terms of repayment.

At October 31, 2015, an amount of $953,779 (January 31, 2015: $978,779) in principal amounts of convertible notes payable and $22,420 in accrued interest payable (January 31, 2015: $8,247), was owing to directors and officers of the Company. Included in convertible notes payable at October 31, 2015 is an amount of $7,063 (January 31, 2015: $791) in respect of these amounts owing, after applicable unamortized debt discounts.

Related party transactions

During the three and nine months ended October 31, 2015, included in general and administrative expenses is $1,612,952 and $4,017,737, respectively (2014: $1,872,467 and $1,975,515, respectively) in respect of share based compensation expense for the vesting of stock options granted to directors and officers of the Company, and $71,646 and $230,728, respectively (2014: $43,500 and $89,000, 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 agreed to issue 1,875 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 7,500 common shares over the term. During the three and nine months ended October 31, 2015, the Company recorded directors fees of $Nil (2014: $43,500 and $157,300, respectively) in respect of common shares 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 1,428,750 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 $5.12 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 issued 2,500 common shares to a consultant of the Company. The fair value of $4.80 per share was determined with reference to the quoted market price of the Company’s shares on the date these shares were committed to be issued. At October 31, 2015, an amount of $203,702 (January 31, 2015: $170,369) is included in deferred compensation, relating 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. On June 10, 2015, the CEO became eligible to receive her full base salary pursuant to the terms of her employment agreement, however, such base salary has not yet been paid as of October 31, 2015. The Company accrued base salary compensation payable of $166,665 during the nine months ended October 31, 2015, and the CEO has agreed to allow the Company to defer payment of such amounts until such time as the Company closes a currently contemplated underwritten public offering of its common stock. Such deferred and unpaid base salary will accrue interest at a rate of 3% per annum. Upon closing of the currently contemplated underwritten public offering, the Company has agreed to issue the CEO shares of its common stock with a fair market value equal to, and in lieu of, the cash amount owing for all deferred and unpaid base salary, plus interest up to the date of settlement. Following the date of settlement, the CEO will receive her base salary compensation in cash pursuant to the original terms of her employment agreement.

13



Naked Brand Group Inc.
Notes to Condensed Consolidated 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 70,000 shares of common stock of the Company (the “CFO Options”), with each option exercisable at $5.12 per share and vesting annually over a period of four years from the date of grant.

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 92,500 shares of common stock of the Company (the “Officer Options”), with each option exercisable at $5.12 per share and vesting annually over a period of four years from the date of grant.

14



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

8.

Factoring Line of Credit

On June 11, 2015, the Company entered into a factoring agreement (the “Factoring Agreement”) with Capital Business Credit LLC (the “Factor”) whereby the Company may borrow the lesser of (i) $750,000 or (ii) the sum of up to 80% of trade receivables, 60% of finished goods inventory and 100% of any accepted side collateral, under the terms and conditions as outlined in the Factoring Agreement. A director and officer of the Company has provided side collateral supporting a portion of the borrowings under the Factor Agreement. The facility is secured by a general security interest over all of the Company assets and interests. The term of the agreement is for a period of one year and will automatically renew for additional one year terms, unless terminated at any time by the Factor or by the Company prior to such renewal, with thirty days prior written notice.

Under the terms of the Factoring Agreement, the Company may sell and assign eligible accounts receivable to the Factor in exchange for advances made to the Company. The Factor purchases eligible accounts receivable net of a factoring commission of 0.9% of such receivable. The Company bears the risk of credit loss on the receivable, except where the Factor has provided credit approval in writing on such receivable. These receivables are accounted for as a secured borrowing arrangement and not a sale of financial assets. Factor expenses charged to operations during the three and nine months ended October 31, 2015 were $14,147 and $24,500 respectively (2014: $Nil and $Nil, respectively).

The facility bears interest on the daily net balance of any moneys owed at a rate of the greater of (i) 5.5% per annum; and (ii) 2% above the Prime Rate as quoted in the Wall Street Journal (the “Prime Rate”). At October 31, 2015, the Prime Rate was 3.25%, thus the facility was bearing interest at 5.5% . To the extent that net advances owing exceed the borrowing base described above, additional interest of 1% per annum shall be charged based upon the daily balance of any such over advance.

At October 31, 2015, an amount of $580,407 (January 31, 2015: $Nil) was owing under the terms of the Factoring Agreement, for advances made to the Company, net of repayments of such advances through the collection of factored receivables.

15



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

9.

Promissory Notes Payable


  (i)

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. At October 31, 2015, an amount of $3,450 (CDN$3,750) (January 31, 2015: $3,450 (CDN$3,750)) is outstanding relating to the OID, which is repayable upon the Company reporting net income from operations in any single month.


  (ii)

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, 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.

     
 

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 10(i)), at an exchange rate equal to 90% of the price paid by investors in that offering. During the nine months ended October 31, 2014, 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, 2015, the Company recorded $Nil and $Nil, respectively (2014: $Nil and $10,372, respectively) in respect of interest on this note and $Nil and $Nil, respectively (2014: $Nil and $89,849, respectively) in respect of the accretion of deferred financing fees.

     
  (iii)

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 19,922 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 being recorded on the consolidated statement of operations during the nine months ended October 31, 2014. The fair value of $10 per share was determined with reference to the quoted market price of the Company’s stock on the date of issuance.

16



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

  (iv)

On February 12, 2014, the Company issued a promissory note in the principal amount of CDN$61,295. The Company received $48,464 (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.

     
  (v)

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.


10.

Convertible Promissory Notes Payable


    October 31, 2015     January 31, 2015  
             
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). $  6,936,450   $  7,169,832  
             
First and Second Kalamalka Amendment Agreement, bearing interest at 6% per annum, collateralized by a priority general security agreement over all of the present and future assets of the company ranked pari passu to Senior Secured Convertible Debentures due June 10, 2017 (ii)   600,000     600,000  
Less: debt discounts   (6,885,087 )   (7,163,982 )
  $  651,363   $  605,850  

(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 4,167 of our common shares at an exercise price of $6.00 per share, subject to certain adjustment as set out in the warrant agreements (the “Warrants”).

17



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

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, 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 matures on June 10, 2017 and bears interest at the rate of 6% per annum, payable quarterly, in cash or in shares of common stock, 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, 2015, such equity conditions had not been met and, consequently, payment of interest owing in shares of common stock is not permitted under the terms of the Debentures, unless such condition is formally waived by each holder. During the nine months ended October 31, 2015 and in connection with the second interest payment dates, the Company received waivers from holders of $5,537,577 in outstanding principal amounts of the Debentures. Such holders received payment of interest in shares of common stock of the Company, resulting in the issuance of 55,377 shares of our common stock as payment for $166,127 in interest due, based on a contractual conversion price of $3 applied to the cash amount of interest owing. The fair value of the shares issued of $280,231 was determined with reference to the quoted market price of the shares on the date they were issued. The difference between the fair value of the shares issued and the cash amount of interest payable was recorded as interest expense on the consolidated statement of operations for the three and nine months ended October 31, 2015.

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 $3.00 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 1,218,308 Warrants to the Purchasers to purchase, for a period of five years from the date of issuance, up to 1,218,308 shares of common stock at an initial exercise price of $6.00 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 $16.00 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.

At the date of issuance of the Debentures and Warrants, the Company was authorized to issue 2,500,000 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 consolidated financial statements (Note 11).

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 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 that have not been included in an effective registration statement as derivative financial instruments pursuant to the guidance of ASC 815.

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.

18



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

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 year ended January 31, 2015. 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, 2015, the Company recorded accretion expense of $26,927 and $45,867, respectively (2014: $1,684 and $2,205, 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 276,592 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 $ 6.00   $ 6.50  
  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 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 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 1,039,227 shares issuable upon exercise of certain of the warrants issued in connection with the Offering, including 60,000 warrants issued under the Kalamalka Notes (Note 10(ii)) which contained piggyback registration rights, and 979,227 of the Warrants. On October 8, 2014, the SEC declared the registration statement effective.

During the nine months ended October 31, 2015, the Company issued an aggregate of 79,025 shares of common stock pursuant to the conversion of debt, including 77,789 shares pursuant to the conversion of $233,382 in principal and 1,236 shares as payment for $3,682 in interest amounts owing under the Debentures for principal amounts converted. During the nine months ended October 31, 2015 In connection with these conversion, the Company recorded accelerated accretion expense of $232,977 (2014: $Nil).

19



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

(ii)

Senior Secured Convertible Note Agreements with Kalamalka Partners

On August 10, 2012, and November 14, 2013, the Company and its wholly owned subsidiary, Naked, entered into certain Agency Agreements with Kalamalka and certain lenders (the “Lenders”) as set out in the Agency Agreements 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.

The Notes were collateralized by a first priority 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 amounts outstanding under any Note and all accrued and unpaid interest therein, were convertible into common shares at $30 per share at any time at the option of the Lender. These terms were later amended, as described below. On November 13, 2013, the Company entered into another Agency and Interlender Agreement with Kalamalka and certain lenders whereby the Company agreed to borrow up to an additional $300,000.

On April 4, 2014, the Company entered into another Amendment Agreements with Kalamalka and certain of the Lenders (the “Amendment Agreements”). In connection with the Amendment Agreements, the Company amended several of the Notes in the aggregate principal amount of $600,000 as follows; (i) the Company extended the due date of the Notes to October 1, 2016; (ii) the Company reduced the interest rate accruing under the Notes to 6% per annum, calculated and payable quarterly; (iv) the Company removed certain borrowing margin requirements; (iii) the Company reduced the conversion price on Notes in the aggregate principal amount of $400,000 from $20 per share to $10 per share; and (v) 12,500 share purchase warrants exercisable at a strike price of $20 until August 10, 2017 held by Kalamalka and 2,500 share purchase warrants at a strike price of $20 until August 10, 2018 (the “Existing Warrants”) were exchanged for 15,000 New Warrants, as defined and described below (the “Exchanged Warrants”).

As consideration for facilitating such amendments, the Company granted 45,000 share purchase warrants to the Lenders and Kalamalka (the “New Warrants”).

Each New Warrant issued to Kalamalka and the Lenders is exercisable into one common share at a price of $6 per share for a period of five years. The Company has the right to call the New Warrants if the volume weighted average closing price of the Company’s shares exceeds $16 per share for more than 20 consecutive trading days at any time after June 10, 2016. 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 Warrants. In addition, the New Warrants contained piggyback registration rights on any subsequent registration statement filed with the SEC. The New Warrants were included in the registration statement declared effective by the SEC on October 8, 2014 (Note 10(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 $694,100 as the premium of the aggregate fair value of the amended notes and Warrants over their carrying values 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:

20



Naked Brand Group Inc.
Notes to Condensed Consolidated 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 $ 9.20  
  Dividend yields   0.00%  

The fair value of the New Warrants of $384,100 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 $ 9.20  
  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 $ 9.20   $ 9.20  
  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 consolidated statement of operations during the nine months ended October 31, 2014, with a corresponding credit to additional paid in capital. In connection with the Amendment Agreements, the Company incurred $36,993 in 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, 2015, the Company recorded financing expense of $7,102 and $21,356, respectively (2014: $7,006 and $16,130, respectively) in respect of the amortization of these charges.

During the nine months ended October 31, 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 25,467 common shares of the Company at a conversion price of $4 per share. During the nine months ended October 31, 2014, 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.

21



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

(iii)

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 a convertible promissory note in the principal amount of $124,444 in exchange for (i) a one-time cash payment of $175,000 and (ii) 8,250 common shares of the Company. The promissory note had been convertible, at any time by the 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”). 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 $5.12 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.


(iv)

During the nine months ended October 31, 2014, the Company repaid various convertible promissory notes in the aggregate principal amount of $133,500 through cash payments of $189,640. The repayment of these promissory resulted in net gains on extinguishment of debt of $30,693, being the cash consideration paid upon redemption less the carrying value of the Note and any related embedded conversion features of $64,900, which were being accounted for as derivative financial instruments.

22



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

11.

Derivative financial instruments

The following table presents the components of the Company’s derivative financial instruments associated with convertible promissory notes (Notes 10(i)), which have no observable market data and were 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, 2015 and January 31, 2015:

    October 31,     January 31,  
    2015     2015  
Embedded conversion features $  -   $ 1,769,100  
Warrants   -     2,030,850  
  $  -   $ 3,799,950  

These derivative financial instruments arose 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 year ended January 31, 2015, 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 10(i)). Further, these embedded conversion features and warrants issued during the year ended January 31, 2015 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 until such time as the shares become eligible for sale without volume limitations or other restrictions. As a result, the Company was required to account for these instruments as derivative financial instruments until such time as the shares were no longer subject to the constraints of the registration rights agreement.

During the year ended January 31, 2015, the Company received stockholder approval through written shareholder consent to increase the authorized shares of common stock in the Company from 2,500,000 to 11,250,000, which amount is now sufficient to fully settle all the outstanding contracts. In addition, during the year ended January 31, 2015, 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. Additionally, certain registration exemptions were triggered to permit the resale of certain of the shares underlying embedded conversion features.

During the nine months ended October 31, 2015, the Company obtained a waiver of the registration rights agreement from certain remaining debenture holders, waiving their rights under the registration rights agreement that were triggering liability accounting.

Consequently, these warrants and embedded conversion features 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 the triggering event or 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.

As a result of the application of ASC 815, the Company has recorded these derivative financial instruments for the nine months ended October 31, 2015 and 2014 at their fair value as follows:

23



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

    Nine months ended October 31,  
             
    2015     2014  
             
             
Derivative financial instruments, beginning of the period $  3,799,950   $  241,618  
Fair value of warrants and embedded conversion features at commitment dates   -     20,890,900  
Fair value mark to market adjustments   (708,900 )   2,773,982  
Extinguishment of derivative liability upon extinguishment of host contract   -     (240,000 )
Reclassification of derivative liability upon change in triggering events   (3,091,050 )   (6,139,000 )
             
Derivative financial instruments, end of the period $  -   $  17,527,500  

During the three and nine months ended October 31, 2015, the Company recorded other income (expenses) of $Nil and $708,900, respectively (2014: $Nil and $(12,028,383), 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 January 31, 2015 and as at their reclassification dates using the binomial option pricing model based on the following weighted average management assumptions:

      Reclassification     January 31,  
      Date     2015  
  Risk-free interest rate   0.89%     0.92%  
  Expected life (years)   3.17     3.42  
  Expected volatility(1)   115.02%     136.25%  
  Stock price $ 4.40   $ 4.80  
  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.

During the year ended January 31, 2015, 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.

12.

Stockholders’ Equity

Effective August 10, 2015, the Company effected a reverse stock split of the basis of 1:40. As such, the Company’s authorized capital was decreased from 450,000,000 shares of common stock to 11,250,000 shares of common stock and an aggregate of 53,278,818 shares of common stock issued and outstanding were decreased to 1,331,977 shares of common stock. These financial statements give retroactive effect to such reverse split and all share and per share amounts have been adjusted accordingly.

Authorized

11,250,000 shares of common stock, par value $0.001.

24



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

Nine months ended October 31, 2015

i)

In connection with a debt settlement agreement, the Company issued 2,500 common shares to a consultant of the Company. The fair value of $4.80 per share was determined with reference to the quoted market price of the Company’s shares on the date these shares were committed to be issued. There was no gain or loss in connection with the debt settlement agreement.

   
ii)

On July 3, 2015, the Company issued an aggregate 205,248 shares of common stock at $4 per share, in connection with warrant amendment agreements (the “Warrant Amendments”) for gross proceeds of $821,000. Under the terms of the Warrant Amendments, the holders of such warrants elected to reduce the exercise price of the warrants from $6 to $4, subject to a shortened exercise period and subject to certain resale restrictions on the shares issuable upon exercise of such warrants. Of the total, an aggregate of 140,249 of the shares issued were issued to a director and officer of the Company and a director of the Company for an aggregate exercise price of $560,996.

   

The Company determined that the Warrant Amendments must be accounted for using modification accounting pursuant to the guidance under Accounting Standards Codification 718 (“ASC 718”). Under this guidance, a short-term inducement offer shall be accounted for as a modification of the terms of equity based awards, to the extent that the inducement is accepted by the equity holders. Modification accounting requires the incremental fair value of the instrument arising from the modification to be recognized as an expense on the income statement, or a charge directly to equity, depending on the nature of the offer. The Company determined that it was appropriate to record the incremental fair value of the Warrant Amendments as an expense on the income statement and consequently the Company recorded the incremental fair value as a component of general and administrative expenses on the consolidated statement of operations for the three and nine months ended October 31, 2015. The Company determined that the incremental fair value of the instruments arising from the modification was $32,800, based on the difference between the fair value of the warrants immediately prior to the amendment and the fair value of these instruments immediately after the amendment. The fair values were determined using the Black Scholes option pricing model based on the following assumptions: risk free interest rate 1.33%, expected life: 3.94 years, expected volatility: 139.54%, dividend yields: 0.00%.

   
iii)

On August 3, 2015, the Company consummated a tender offer to amend and exercise certain warrants to purchase common stock of the Company. Under the terms of the tender offer, the holders of such warrants elected to reduce the exercise price of the warrants from $6 to $4, subject to a shortened exercise period and subject to certain resale restrictions on the shares issuable upon exercise of such warrants. Pursuant to the tender offer, the holders of an aggregate of 380,457 warrants agreed to amend their warrants and tendered and exercised such warrants for gross proceeds to the Company of $1,521,996.

   

In connection with the Tender Offer, the Company incurred issuance costs of $91,422.

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 2,750,000 shares subject to adjustment in the event of a change of the Company’s capitalization (as described in the 2014 Plan). As a result of the adoption of the 2014 Plan, no further option awards will be granted under any previously existing stock option plan. Stock option awards previously granted under previously existing stock option plans remain outstanding in accordance with their terms.

25



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

The 2014 Plan is administered by the board of directors, except that it may, in its discretion, delegate such responsibility to a committee of such board. The exercise price will be determined by the board of directors at the time of grant. Stock options may be granted under the 2014 Plan for an exercise period of up to ten years from the date of grant of the option or such lesser periods as may be determined by the board, subject to earlier termination in accordance with the terms of the 2014 Plan. At October 31, 2015, 607,101 options remain available for issuance under the 2014 Plan.

Stock Based Compensation

A summary of the status of the Company’s outstanding stock options for the periods ended October 31, 2015 and January 31, 2015 is presented below:

          Weighted     Weighted Average  
    Number     Average     Grant Date  
    of Options     Exercise Price     Fair Value  
Outstanding at February 1, 2014   75,125   $  13.60        
Expired   (7,125 ) $  10.00        
Granted   1,726,875   $  5.20   $  8.40  
                   
Outstanding at January 31, 2015   1,794,875   $  5.48   $  8.40  
Expired   (9,375 ) $  23.33        
Forfeited   (3,750 ) $  4.48        
Granted   422,399   $  4.48   $  4.16  
                   
Outstanding at October 31, 2015   2,204,149   $  5.22        
                   
Exercisable at October 31, 2015   1,113,471   $  5.49        
                   
Exercisable at January 31, 2015   346,563   $  6.80        

At October 31, 2015, 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  
375   $ 10.00     December 19, 2015     375  
3,750   $ 14.00     January 6, 2016     3,750  
3,750   $ 22.00     January 6, 2016     3,750  
5,000   $ 30.00     January 6, 2016     5,000  
1,375   $ 10.00     April 1, 2016     1,375  
15,000   $ 10.00     October 9, 2017     15,000  
1,250   $ 10.00     February 1, 2018     1,250  
3,750   $ 10.00     May 1, 2018     3,750  
2,000   $ 10.00     April 1, 2019     2,000  
25,000   $ 10.00     July 30, 2022     25,000  
1,699,250   $ 5.12     June 6, 2024     949,750  
25,000   $ 6.00     June 10, 2024     15,000  
37,500   $ 4.48     February 3, 2025     -  
37,500   $ 4.48     February 25, 2025     -  
6,250   $ 4.80     July 6, 2025     -  
337,399   $ 4.40     August 18, 2025     87,471  
                     
2,204,149                 1,113,471  

26



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

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, 2015, the aggregate intrinsic value of stock options outstanding is $Nil and exercisable is $Nil (January 31, 2015: $Nil and $Nil, respectively).

During the three and nine months ended October 31, 2015, the Company recognized a total fair value of $1,613,117 and $4,065,628, respectively (2014: $1,973,875 and $2,094,586, respectively) of stock based compensation expense relating to the issuance of stock options in exchange for services. An amount of approximately $9,232,000 in stock based compensation expense is expected to be recognized over the remaining vesting term of these options to August, 2018.

The fair value of each option award was estimated on the date of the grant using the Black-Scholes option pricing model based on the following weighted average assumptions:

      2015     2014  
  Expected term of stock option (years) (1)   6.43     2.14  
  Expected volatility (2)   124.33%     142.13%  
  Stock price at date of issuance $ 4.71   $ 5.60  
  Risk-free interest rate   1.81%     0.53%  
  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, 2015, the Company had 1,508,018 share purchase warrants outstanding as follows:

    Exercise     Expiry  
Number   Price     Date  
6,250 $ 4.00     November 14, 2016  
6,250 $ 4.00     November 26, 2016  
5,688 $ 4.00     December 24, 2016  
12,451 $ 10.00     August 10, 2017  
3,750 $ 10.00     August 10, 2018  
60,001 $ 6.00     April 4, 2019  
555,968 $ 6.00     June 10, 2019  
155,052 $ 3.00     June 10, 2019  
168,883 $ 6.00     July 8, 2019  
29,343 $ 3.00     July 8, 2019  
24,625 $ 8.00     October 23, 2019  
365,688 $ 4.80     June 15, 2022  
36,569(1) $ 4.80     June 15, 2022  
15,000 $ 4.80     July 6, 2022  
62,500 $ 5.11     September 1, 2022  
             
1,508,018            

  (1)

These warrants may vest and become exercisable only under certain anti-dilution performance conditions contained in the warrant

27



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

During the nine months ended October 31, 2015, the Company issued an aggregate of 479,757 warrants exercisable at a weighted average exercise price of $4.84 per share for a period of seven years from the date of issuance, pursuant to negotiated consulting and endorsement agreements. The weighted average grant date fair value of these warrants at issuance was $4.61 for an aggregate grant date fair value of $2,239,000, based on the Black-Scholes option pricing model using the following weighted average assumptions: expected term 7 years, expected volatility 153.15%, expected dividend yield 0.00%, risk free interest rate 2.12% . Stock based compensation is being recorded in the financial statements over the vesting term of three years from the date of grant. The Company recognized stock based compensation expense of $165,849 and $325,648 during the three and nine months ended October 31, 2015, respectively (2014: $Nil and $Nil, respectively) in connection with warrants granted.

Certain of the warrants granted during the nine months ended October 31, 2015 become exercisable only under certain anti-dilution performance conditions contained in the warrant agreement. The fair value of these warrants at issuance was calculated to be $168,530 based on the Black-Scholes option pricing model using the following assumptions: expected term 7 years, expected volatility 153.00%, expected dividend yield 0.00%, risk free interest rate 2.11% . No stock-based compensation has been recorded in the financial statements as none of the performance conditions have yet been met.

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

    Number of     Weighted Average  
    Warrants     Exercise Price  
Outstanding at February 1, 2014   94,262   $ 16.00  
Cancelled   (15,000 ) $ 20.00  
Issued   1,579,581   $ 5.60  
Expired   (30,262 ) $ 25.60  
           
Outstanding at January 31, 2015   1,628,581   $ 5.74  
Issued   479,757   $ 4.84  
Exercised   (585,709 ) $ 4.00  
Expired   (14,611 ) $ 9.82  
Outstanding at October 31, 2015   1,508,018   $ 5.10  

13.

Customer Concentrations

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

28



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

For the three and nine months ended October 31, 2015, the Company had concentrations of sales with a customer equal to 40% and 43%, respectively of the Company’s net sales (2014: 29% and 34%, respectively). As at October 31, 2015 the accounts receivable balance for this customer was $80,770 (January 31, 2015: $2,755).

14.

Commitments

In accordance with a negotiated agreement, the Company paid a non-refundable guaranteed advance on royalties of $50,000, and is required to pay royalty fees based on the greater of a pre-determined percentage not to exceed 10% of net wholesale sales, as defined in such agreements, or a minimum annual amount. The $50,000 will be charged to operations during the fourth quarter ended January 31, 2016, beginning on the first day of the period for which royalties accrue under the terms of the related agreement.

The Company is committed to minimum royalty payments as follows:

Year ending January 31,     Amount  
2016   $  200,000  
2017     362,500  
2018     350,000  
2019     350,000  
2020     87,500  
    $  1,350,000  

29


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 in the future extend the Naked brand to active wear, swim as well as bed and bath products; (3) the enforceability of our intellectual property rights; (4) projections of market prices and costs; (5) supply and demand for our products; (6) future capital expenditures; (7) our collaboration with Dwayne Wade; 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) our ability to successfully collaborate with Dwayne Wade; (6) product development or other initiatives by our competitors; (7) fluctuations in the availability and cost of materials required to produce our products; (8) any adverse occurrence with respect to distribution of our products; (9) potential negative financial impact from claims, lawsuits and other legal proceedings or challenges; (10) our ability to enforce our intellectual property rights; (11) our ability to hire and retain senior management and key employees; and (12) 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 of Financial Condition and Results of Operations 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 our unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this quarterly report, 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 condensed 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.

30


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.

All references to “common shares” refer to the shares of our common 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 converted from the federal jurisdiction of Canada to the jurisdiction of the State of Nevada on July 27, 2012. As part of the conversion, 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.

On August 10, 2015, we effected a 1-for-40 reverse split of our issued and outstanding shares of common stock.

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

Business

We are an apparel and lifestyle brand company that is currently focused on innerwear products for women and men. Under our flagship brand name and registered trademark “Naked®”, we design, manufacture and sell men’s and women’s underwear, intimate apparel, loungewear and sleepwear through retail partners and direct to consumer through our online retail store www.wearnaked.com. We have a growing retail footprint for our men’s innerwear products in premium department and specialty stores and internet retailers in North America including, Nordstrom, Hudson Bay Company, Holt & Renfrew, Amazon.com, barenecessities.com and many others.

The Naked brand was founded on one basic desire, to create a new standard for how products worn close to the skin fit, feel and function. Our core brand philosophy for Naked is “the freedom to be you” and we endeavor to provide products that help people feel confident, attractive and empowered while being as comfortable as wearing nothing at all. In June 2014, renowned designer and sleepwear pioneer, Carole Hochman, joined is as our Chief Executive Officer, Chief Creative Officer and Chairwoman with the goal of growing our company into a global lifestyle brand. Since Ms. Hochman has joined our company, we have relocated our headquarters to New York City, expanded our men’s collections and developed women’s intimate apparel, sleepwear and loungewear collections. Our Fall 2015 women’s sleep and lounge wear collection became available for retail sale online at wearnaked.com in September 2015 and will begin to be available at retail locations and other online retailers in late 2015 and early 2016. We expect to launch our women’s intimate apparel products online and at retail during the first quarter of calendar 2016. In the future, we intend to expand the Naked brand on our own and through licensing partnerships into other apparel and product categories that exemplify the mission of our brand, such as athleisure apparel, swimwear, sportswear, hosiery, bedding and bath products, and others.

The U.S. innerwear market, which is the core focus of our current commercial strategy, represented an estimated $23.1 billion in retail sales in the twelve-month period ended March 2015 according to data from NPD Group, Inc. Our expansion into the women’s sleepwear and intimate apparel market is a key part of our growth strategy given that these market segments represent $17.8 billion or over 77% of the overall innerwear market. Daywear products that address consumer demand for versatile “athleisure” apparel – similar to several styles in our Fall 2015 women’s collection – have been the fastest growing segment of the women’s market. Our ability to attract women customers for the Naked brand is also very important to our effort to penetrate the men’s $4.3 billion U.S. innerwear market since a number of consumer research reports show that women purchase as much as 50% of men’s underwear for their husbands, boyfriends or sons.

31


In June 2015, we announced a collaboration and endorsement agreement with NBA Champion Dwyane Wade (“Wade”) whereby Wade agreed to act as a spokesperson for our brand and spearhead a brand ambassador marketing campaign that we initiated in November 2015. Wade also joined our corporate Advisory Board. Further, he is serving as Creative Director for the development of a Wade X Naked signature collection of men’s innerwear that we expect to present at market to retailers in late calendar 2015 and launch commercially in calendar 2016. This collection will encompass underwear, undershirts, loungewear, sleepwear and robes for men and boys. We anticipate that our relationship with Wade will:

  assist us with building broader brand awareness with consumers and accelerating sales growth;
help us attract additional distribution relationships in North America, Asia and Europe where basketball is a particularly popular sport and Wade is well known to consumers;
provide us a collaborative brand extension product platform to create new and differentiated products to attract new retail and wholesale customers; and
strengthen our brand credibility to help attract future endorsements and consumer influencer relationships

Our products are currently targeted at men and women who are fashion and performance conscious, care about innovation and contemporary design, and desire comfort, quality and fit in their innerwear and apparel. We aim to provide an affordable luxury product for the successful and aspirational customer that enjoys the qualities of a premium garment at a price they feel delivers value. With growing awareness of our brand among these consumers and a broadening array of products, we expect to expand our U.S. and Canadian retail distribution through department stores, boutiques, online retail channels, hotels, spas, and other retailing channels over the next two years and beyond. We plan to also grow our direct to consumer business primarily through our online retail store wearnaked.com, through which we will continue to commercially introduce new products as well as feature certain products, collections and styles exclusively. We are currently exploring international distribution relationships for our Naked and Wade X Naked products and we anticipate that we will commence selling a limited number of products in Europe, Asia, and Central and South America in by 2017 or earlier.

Recent Corporate Developments

Since the commencement of our third quarter ended October 31, 2015, we have experienced the following significant corporate developments:

  1.

On August 5, 2015, we closed our offer to amend and exercise outstanding warrants with aggregate gross proceeds of approximately $2.34 million, which included $821,000 received during the quarter ended July 31, 2015. The Company paid commissions and expenses totaling $91,422 in connection with the offer.

     
  2.

On August 10, 2015, we effected a 1-for-40 reverse split of our issued and outstanding shares of common stock.

     
  3.

On August 26, 2015, we launched our Fall 2015 women’s collection of loungewear and sleepwear for direct consumer purchase. In conjunction with the launch of this women’s collection, we also unveiled further enhancements to our website www.wearnaked.com. This first women’s collection consists of three core groups of transitional basics including super soft Essential cotton stretch, eco-friendly, versatile Tencel and Luxury Micromodal.

     
  4.

On September 30, 2015, we entered into a strategic consulting agreement with CAA Sports Consulting, a division of entertainment and sports agency Creative Artists Agency. Pursuant to this agreement, CAA Sports Consulting will assist in building and managing endorsement, influencer and partner relationships to help drive awareness and interest in the Naked brand.

32



  5.

In October 2015, we shipped an initial order of men’s underwear collections to Dillard’s, one of the nation’s largest fashion apparel retailers and our products are now available at select Dillard’s stores and nationwide on Dillards.com.

     
  6.

In October 2015, we also shipped an initial order of men’s collections to Bloomingdale’s, one of America’s leading department store chains. Naked collections will be available for purchase at select retail locations and at Bloomingdales.com. In addition, Bloomingdales placed a purchase order to stock the brand’s full collection of women’s intimate apparel, sleepwear and loungewear starting in Spring, 2016.

     
  7.

In November 2015, we launched The Naked Truth marketing and advertising campaign, featuring brand partner and NBA Champion Dwayne Wade. The Naked Truth campaign expresses the core brand philosophy of Naked, “the freedom to be you”, by celebrating the character, experience and life philosophy of accomplished individuals like Wade who will serve as “Truth Tellers” and exemplify Naked’s brand ideals of freedom and authenticity.

Outlook

We are actively focused on growing wholesale distribution and direct online sales for our men’s and women’s innerwear collections. Our men’s collections currently encompass underwear and undershirts primarily. In September, 2015, we introduced new men’s sleep and loungewear products through retail partners and directly online. Our women’s collections currently encompass primarily lounge and sleepwear products, and will grow to include a broad range of intimate apparel products including bras and panties in early 2016. We currently anticipate quarter over quarter sales growth for these products as we increase our distribution channels and partners and expand our direct sales online through new marketing and brand awareness initiatives. We expect our women’s innerwear, loungewear and sleepwear products will be an increasingly important component of our continued sales growth. In the future, we plan to extend the Naked brand to other apparel product categories including swimwear and activewear.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2015

Revenues

During the three months ended October 31, 2015, our net sales increased by $171,958, or 118% over the comparative three month period ended October 31, 2014. Net sales increased significantly as a result of increased department store sales and additional department store accounts. We also saw an approximately 139% increase in our direct to consumer online sales through our direct Internet retail site www.wearnaked.com.

We expect to continue to see positive growth in our revenues in fiscal 2016 as a result of marketing and promotional activities and the launch of additional women’s collections.

Gross Margins

During the three months ended October 31, 2015 we realized a gross margin of 22%, compared to 9% in the quarter ended October 31, 2014. Our positive margins in the current quarter are a result of production efficiencies and increased direct to consumer sales outlined above, which generate higher margins. Lower gross margin in the comparative period was due to the sell off of old inventory in the comparative period as a result of a new core management team and manufacturing partnership introduced during that period.

33


Operating Expenses

    Three months ended October 31,     Change  
General and administrative   2015     2014       $     %  
Bad debts (recovery) $  -   $  (951 )   951     (100.0 )
Bank charges and interest   1,756     2,814     (1,058 )   (37.6 )
Consulting   139,591     (6,669 )   146,260     (2193.1 )
Depreciation   2,942     6,029     (3,087 )   (51.2 )
Directors fees   328,907     -     328,907     n/a  
Insurance   31,041     23,160     7,881     34.0  
Investor relations   49,345     46,176     3,169     6.9  
Marketing   356,225     95,622     260,603     272.5  
Occupancy and rent   36,787     27,236     9,551     35.1  
Office and miscellaneous   57,427     23,227     34,200     147.2  
Product development   205,992     159,472     46,520     29.2  
Professional fees   328,826     156,385     172,441     110.3  
Salaries and benefits(1)   1,672,719     2,342,199     (669,480 )   (28.6 )
Transfer agent and filing fees   14,333     8,346     5,987     71.7  
Travel   36,911     28,377     8,534     30.1  
Warehouse management   108,903     17,365     91,538     527.1  
Total $  3,371,705   $  2,928,788     442,917     15.1  

     (1)   Included in salaries and benefits is an amount of $1,504,499 relating to non-cash stock option compensation charges (2014: $1,973,875).

There was an overall increase in general and administrative expenses for the three months ended October 31, 2015, from the three months ended October 31, 2014.

The increase in general and administrative expenses was mostly attributable to increases in marketing, product development, professional fees and warehouse management, as further explained below.

Our marketing expenses increased in the current quarter as a result of new contracts with a marketing, sales and design consultant engaged to provide general branding, marketing, creative and strategic direction, as well as a contract with a public relations consultant engaged in media relations, media database building, and coordination and execution of promotional efforts, including social media.

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

Professional fees increased due to an increase in SEC compliance work as a result of the Company’s financing related activities in connection with the warrant tender offering and in connection with a proposed public offering expected to be consummated in our fourth fiscal quarter.

Warehouse management increased significantly in the current period in connection with the large increase in inventory in connection with our new and expanded collection and the addition of our women’s line, and as a result of the increase in direct to consumer online sales, which result in higher handling and shipping costs.

34


Other income and expenses

We incurred interest expenses of $133,432 and financing and accretion charges of $94,980 for the three months ended October 31, 2015 as compared to $116,760 in interest expense and $(19,863) in financing and accretion charges (income) for the same period in 2014. This overall increase in financing related charges is attributable to the accretion and conversion of long-term debt during the current period. Long-term debt is currently accruing interest at 6% per annum, payable semi-annually.

During the fiscal year ended January 31, 2015, we issued convertible debentures and warrants, each of which were convertible or exercisable into shares of our common stock and we did not, at the date we issued these securities, have a sufficient number of authorized and unissued shares of common stock available to satisfy the conversion and exercise of all of these securities. As a result, we were required to account for these securities as derivative liabilities. In connection with this, we recorded income related to a mark to market derivative adjustment of $10,231,200 in the third fiscal quarter of fiscal 2015 as a result of the application of related accounting rules, which require these derivative financial instruments to be carried at fair value which resulted in significant mark to market adjustments in correlation with fluctuations in the price of our common stock. We relieved the conditions that previously required these securities to be recorded as derivative liabilities during the nine months ended October 31, 2015 and, as such, we have not incurred such income and charges in the current period.

Net loss and comprehensive loss

Our net loss for the three months ended October 31, 2015 was $(3,533,421), or $(2.08) per share, as compared to a net income of $7,227,623, or $(0.59) per share on a fully diluted basis, for the three months ended October 31, 2014. The most significant factor for the increase in net loss in the current period is a decrease in other income and expenses, specifically derivative related charges and adjustments, as described in detail above.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 2015

Revenues

During the nine months ended October 31, 2015, our net sales increased by $507,567, or 118% over the comparative nine month period ended October 31, 2014. Net sales increased significantly as a result of the launch of our redesigned and expanded Fall 2015 men’s collection in late February, and the launch of our first women’s collection of loungewear and sleepwear in August, 2015. This enhanced product offering has continued to help us gain new department store and specialty store accounts, and has increased sell through rates in our current department store channels. We also saw increased volume in our direct to consumer online sales through our direct Internet retail site www.wearnaked.com.

We expect to continue to see positive growth in our revenues, year over year as a result of marketing and promotional activities and as a result of the addition of our first women’s sleep and loungewear collections, which will be complimented with a complete line of women’s intimate apparel in Spring, 2016.

Gross Margins

During the nine months ended October 31, 2015, we realized a gross margin of 29%, compared to (55)% in the nine months ended October 31, 2014. Our positive margins in the current period are a result of production efficiencies and increased direct to consumer sales outlined above, which generate higher margins. The negative gross margin in the comparative period was due to a large write down of old inventory as a result of a new core management team and manufacturing partnership introduced during that period.

Operating Expenses

    Nine months ended October 31,     Change  
General and administrative   2015     2014       %  
Bad debts (recovery) $  20,246   $  58     20,188     34806.9  
Bank charges and interest   10,034     12,379     (2,345 )   (18.9 )
Consulting   314,183     22,869     291,314     1273.8  
Depreciation   13,524     19,181     (5,657 )   (29.5 )
Directors fees   831,178     24,900     806,278     3238.1  
Insurance   115,804     49,812     65,992     132.5  
Investor relations   87,724     121,149     (33,425 )   (27.6 )
Marketing   789,594     239,185     550,409     230.1  
Occupancy and rent   73,629     54,647     18,982     34.7  
Office and miscellaneous   183,685     56,030     127,655     227.8  
Product development   570,458     200,555     369,903     184.4  
Professional fees   648,309     548,571     99,738     18.2  
Salaries and benefits(1)   4,545,427     2,821,348     1,724,079     61.1  
Transfer agent and filing fees   27,027     29,577     (2,550 )   (8.6 )
Travel   138,257     99,346     38,911     39.2  
Warehouse management   301,217     80,195     221,022     275.6  
Total $  8,670,296   $  4,379,802     4,290,494     98.0  

   (2)   Included in salaries and benefits is an amount of $3,730,538 relating to non-cash stock option compensation charges for the nine months ended October 31, 2015 (2014: $2,026,763).

35



There was an overall increase in general and administrative expenses for the nine months ended October 31, 2015, from the nine months ended October 31, 2014. This increase is mostly attributable to an increase in non-cash stock based compensation charges accruing as a result of stock options issued to new advisors, directors and the core management group as part of certain incentive based compensation packages. Total share based compensation charges in the current period were $4,391,276, as compared to $2,026,763 for the nine months ended October 31, 2014. These charges are included in director’s fees, consulting fees, product development and salaries and benefits, within general and administrative expenses. 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.

The increase in general and administrative expenses was also primarily attributable to increases in marketing, product development, office and miscellaneous and warehouse management, as further explained below.

Our marketing expenses increased in the current period as a result of new contracts with a marketing, sales and design consultants engaged to provide general branding, marketing, creative and strategic direction, as well as a contract with a public relations consultant engaged in media relations, media database building, and coordination and execution of promotional efforts, including social media.

Product development costs have increased significantly in the current period in connection with the engagement of a team of designers and consultants who have been working with employees of the company, and other involved partners during the nine months ended October 31, 2015, focused on the our redesigned men’s collection, new men’s products such as loungewear, and the fabrication and design of our entire women’s lines including sleepwear, loungewear and intimate apparel.

Office and miscellaneous expenses have increased due to our increased staffing levels, the relocation of our offices to New York, as well as the implementation of a fully integrated ERP system in the current period.

Warehouse management increased significantly in the current period in connection with the large increase in inventory in connection with our new and expanded collections and as a result of the increase in direct to consumer online sales, which result in higher handling and shipping costs.

Other income and expenses

We incurred interest expenses of $494,788 and financing and accretion charges of $300,252 for the nine months ended October 31, 2015 as compared to $218,118 in interest expense and $2,263,122 in financing and accretion charges for the same period in 2014. The decrease in accretion charges is attributable to a significant number of short term debt arrangements in place in the comparative period that had been arranged to bridge operations under the long term financing entered into in June and July 2014, in connection with the Offering. The increase in interest expense in the current period is a result of the higher long term interest bearing debt balance during the current period as a result of the June and July, 2014 Offering. Debt conversion expense of $309,011 and net losses on extinguishment of debt of $810,765 in the comparative period are also in connection with these bridge financings in place during that period, and in connection with the modification of existing long term debt arrangements in that period. Long-term debt is currently accruing interest at 6% per annum, payable semi-annually.

36


During the fiscal year ended January 31, 2015, we issued convertible debentures and warrants, each of which were convertible or exercisable into shares of our common stock and we did not, at the date we issued these securities, have a sufficient number of authorized and unissued shares of common stock available to satisfy the conversion and exercise of all of these securities. As a result, we were required to account for these securities as derivative liabilities. In connection with the issuance of these securities in connection with the Offering, we recorded a derivative expense of $12,028,383 in the second fiscal quarter of 2014 related to the fair value of these outstanding contracts at the contract inception date. Further, we recorded net mark to market derivative expense of $2,773,982 in the second and third fiscal quarters of the comparative fiscal year as a result of the application of related accounting rules, which require these derivative financial instruments to be carried at fair value which resulted in significant mark to market adjustments in correlation with fluctuations in the price of our common stock. These were non-cash income and expense items in those periods. During the nine month period ended October 31, 2015, we have relieved the conditions that previously required these securities to be recorded as derivative liabilities and, as such, we have not incurred such charges in the current period.

Net loss and comprehensive loss

Our net loss for the nine months ended October 31, 2015 was $(8,483,089), or $(6.51) per share, as compared to a net loss of $(18,403,381), or $(25.94) per share, for the nine months ended October 31, 2014. The most significant factor for the decrease in net loss in the current period is a decrease in other income and expenses, as described in detail above.

LIQUIDITY AND FINANCIAL CONDITION

Working Capital (Consolidated)   October 31, 2015     January 31, 2015  
    (unaudited)        
             
Current Assets $ 1,855,618   $ 2,609,257  
             
Current Liabilities $ 1,605,057   $ 365,987  
             
Working Capital $ 250,561   $ 2,243,270  

Our decrease in working capital during the period is primarily attributable to cash losses from operations. We also had an increase in current liabilities in connection with a factoring arrangement entered into during the period to fund the acquisition of new inventory.

At October 31, 2015, we required further financing to implement our proposed business plan. Management is actively pursuing a plan to raise funds from a public offering of equity securities to fund these objectives.

Going Concern

At October 31, 2015, we did not have sufficient working capital to implement our proposed business plan over the next 12 months, had not yet achieved profitable operations and expect to continue to incur significant losses from operations in the immediate future. These factors cast substantial doubt about our ability to continue as a going concern. To remain a going concern, we will be required to obtain the necessary financing to meet our obligations and repay our substantial existing liabilities as well as further liabilities arising from normal business operations as they come due. Management plans to obtain the necessary financing through the issuance of equity to existing stockholders. Should we be unable to obtain this financing, we may need to substantially scale back operations or cease business. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances that we will be able to obtain additional financing necessary to support our working capital requirements. To the extent that funds generated from operations are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to us.

37


Cash Flows

    Nine months ended October 31,  
    2015     2014  
Cash Flows Used In Operating Activities $ (4,420,385 ) $ (2,319,551 )
Cash Flows Used In Investing Activities   (36,594 )   (42,423 )
Cash Flows Provided By Financing Activities   2,831,981     5,627,006  
Net change in Cash During Period $ (1,624,998 ) $ 3,265,032  

Operating Activities

The increase in cash used in operations during the period was largely the result of an increase in operating net loss for the period, and cash outlays related to the acquisition of a significant amount of new inventory in connection with the introduction of a redesigned and expanded Fall 2015 men’s collection and our new Fall 2015 women’s collection.

Investing Activities

Investing activities in the current period included cash outlays for a European patent and trademark acquisitions.

Financing Activities

Proceeds from financing activities during the nine months ended October 31, 2015 included net advances of $580,407 made pursuant to a factoring arrangement and net proceeds of $2,251,574 received in connection with the amendment and exercise of outstanding warrants.

Proceeds from financing activities during the nine months ended October 31, 2014 mostly included funds received in our private placement offering of units consisting of a 6% convertible debenture and a warrant to purchase common stock, which closing occurred in June and July 2014. These proceeds were offset by the repayment of several short term loan agreements that had been in place to bridge operations until the close of such offering.

Commitments and capital expenditures

We do not anticipate that we will expend any significant amount on capital expenditures over the next twelve months or enter into any other material commitments.

Disclosure of Outstanding Share Data

As of December 9, 2015, there were 1,755,005 shares of our common stock issued and outstanding. In addition, at December 9, 2015, the total dilutive securities outstanding, including options, warrants and shares issuable upon conversion of convertible debt instruments was approximately 6,084,317 shares.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financial statements.

38


Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts

Sales are recorded when title and risk of loss has passed to the customer, when persuasive evidence of a sales arrangement exists, the selling price is fixed and determinable and collectability is reasonable assured. Significant management judgments and estimates must be made in connection with determination of revenue to be recognized in any accounting period in respect of the timing of when the applicable revenue recognition criteria have been met. If we made different judgments or utilized different estimates for any period material differences in the amount and timing of revenue recognized could result.

Accounts receivables consist of amounts due from customers and are recorded upon the shipment of product to customers. Credit terms are extended to customers in the normal course of business and no collateral is required. We estimate an allowance for doubtful accounts based on historical losses, 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 to consider sell-through prospects based on our marketing strategies and sales forecasts to determine if an allowance is necessary. If market value is below cost then an allowance is created to adjust our inventory carrying amount to reflect this.

Assumptions and estimates about the recoverability of certain inventory may be subject to significant judgment. A variety of factors must be incorporated into these estimates and assumptions such as industry and economic trends and internal factors such as changes in our business and forecasts.

Impairment of Long-Lived Assets

We review our 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 we assess that there is a likelihood of impairment, then we 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 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, stock-based compensation expense, and derivative valuations.

39


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. The risk–free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, ASC 718 requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. We applied an estimated forfeiture rate of 0% in determining the expense recorded in our consolidated statement of operations given our limited forfeiture experience history.

Derivative Liabilities

From time to time, we may issue warrants and convertible instruments with embedded conversion options which, dependent on their specific contractual terms, may be required to be accounted for as separate derivative liabilities. These liabilities are required to be measured at fair value. These instruments are then adjusted to reflect fair value at each period end. Any increase or decrease in the fair value is recorded in results of operations as change in fair value of derivative liabilities. In determining the appropriate fair value, we use the binomial pricing model because these instruments are not quoted on an active market.

Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in assumptions can materially affect the fair value estimate and therefore the binomial model does not necessarily provide a reliable single measure of the fair value of these instruments.

Recent Accounting Pronouncements

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. We are currently evaluating the impact this guidance on our financial condition, results of operations and cash flows.

40


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. We are currently evaluating the impact this guidance on our financial condition, results of operations and cash flows.

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, 2017. We are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.

In April 2015, the Financial Accounting Standards Board (FASB), issued the Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. For public business entities, the final guidance will be effective for fiscal years beginning after December 15, 2015, however, early adoption (including in interim periods) is permitted. Upon adoption, an entity must apply the new guidance retrospectively to all prior periods presented in the financial statements. An entity is also required in the year of adoption to provide certain disclosures about the change in accounting principle, including the nature of and reason for the change, the transition method, a description of the prior-period information that has been retrospectively adjusted and the effect of the change on the financial statement line items (that is, debt issuance cost asset and the debt liability). We plan to adopt this standard beginning February 1, 2016. We are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows

Other than noted above, we do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

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, as amended (the “Exchange Act”) and are not required to provide information under this item.

ITEM 4.  CONTROLS AND PROCEDURES.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under 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 April 30, 2015.

41


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, 2015 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 Exchange Act 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 SEC on April 30, 2015.

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

During the period covered by this Quarterly Report on Form 10-Q, we have not sold any equity securities that were not registered under the Securities Act of 1933, as amended that were not previously reported in a Current Report on Form 8-K.

Item 3.  Defaults Upon Senior Securities.

None

Item 4.  Mine Safety Disclosures.

Not Applicable.

Item 5.  Other Information.

None

42


Item 6.  Exhibits.

Exhibit  
Number Description
   
10.1

Form of Warrant Amendment Agreement (incorporated by reference to Exhibit 10.1 of Current

   
10.2

Report on Form 8-K filed with the Exchange on July 7, 2015) Collaboration & Endorsement Agreement with Wade Enterprises LLC, effective June 15, 2015 (incorporated by reference to Exhibit 10.75 of Form POSAM filed with the Exchange on October 31, 2015

 

(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


(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

43


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 10, 2015

44