Our Business
We are an apparel and
lifestyle brand company that is currently focused on innerwear products for women and men. Under our flagship brand name and registered
trademark “Naked
®
”, we design, manufacture and sell men’s and women’s underwear, intimate
apparel, loungewear and sleepwear through retail partners and direct to consumer through our online retail store www.wearnaked.com.
We have a growing retail footprint for our innerwear products in premium department and specialty stores and internet retailers
in North America, including accounts such as Nordstrom Dropship, Dillard’s, Bloomingdale’s, Amazon.com, Chico’s,
SaksFifthAvenue.com, and others.
The Naked brand was
founded on one basic desire: to create a new standard for how products worn close to the skin fit, feel and function. Our core
brand philosophy for Naked is “the freedom to be you” and we endeavor to provide products that help people feel confident,
attractive and empowered while being as comfortable as wearing nothing at all. The Naked brand was founded in Vancouver, Canada
in 2010, as a men’s underwear manufacturer. In 2014 we relocated our headquarters to New York City, expanded our men’s
collections and developed women’s intimate apparel, sleepwear and loungewear collections. Our first women’s sleep and
loungewear collections became available for retail sale online at www.wearnaked.com in September 2015 and at retail locations and
other online retailers in February 2016. Also, in February 2016, we launched our women’s intimate apparel products. In the
future, we intend to expand the Naked brand through existing channels and through licensing partnerships into other apparel and
product categories that exemplify the mission of our brand, such as athleisure apparel, swimwear, sportswear, hosiery, bedding
and home products and others.
Our expansion into
the women’s sleepwear and intimate apparel in fiscal 2017 is a key part of our growth strategy given that these market segments
represent $17.8 billion, or over 77% of the overall innerwear market according to data from the NPD Group. Daywear products that
address consumer demand for versatile “athleisure” apparel have been the fastest growing segment of the women’s
market. Our ability to attract women customers for the Naked brand is also very important to our effort to penetrate the men’s
$4.3 billion U.S. innerwear market since a number of consumer research reports show that women purchase as much as 50% of men’s
underwear for their husbands, boyfriends or sons.
Our products currently
target men and women who are fashion and performance conscious, care about innovation and contemporary design, and desire comfort,
quality and fit in their innerwear and apparel. We aim to provide an affordable luxury product for the successful and aspirational
customer that enjoys the qualities of a premium garment at a price they feel delivers value. With growing awareness of our brand
among these consumers and a broadening array of products, we expect to continue to expand our retail distribution through department
stores, boutiques, online retail channels, hotels, spas, and other retailing channels over the next two years and beyond. We plan
to also grow our direct to consumer business primarily through our online retail store, www.wearnaked.com, through which we will
continue to commercially introduce new products as well as feature certain products, collections and styles exclusively.
Potential Business Combination with
Bendon Limited
On May 25, 2017, we
entered into an Agreement and Plan of Reorganization (as amended, the “Merger Agreement”), by and among Bendon Limited,
a New Zealand limited company (“Bendon”), Bendon Group Holdings Limited, an Australia limited company (“Holdco”),
Naked Merger Sub Inc., a Nevada corporation and a wholly owned subsidiary of Holdco (“Merger Sub”), and, solely for
the purposes of Sections 2.28 and 5.18(b) of the Merger Agreement, Bendon Investments Ltd., a New Zealand company and the owner
of a majority of the outstanding shares of Bendon (the “Principal Shareholder”), pursuant to which Merger Sub will
be merged with and into Naked (the “Merger”) with Naked as the surviving corporation. The Merger Agreement was amended
as of July 26, 2017, February 21, 2018, March 19, 2018 and April 23, 2018.
The Merger Agreement
provides for Bendon and Naked to enter a business combination transaction by means of which (i) Bendon and Holdco will undertake
a reorganization (the “Reorganization” and together with the Merger, the “Transactions”) pursuant to which
all of the shareholders of Bendon will exchange all the outstanding ordinary shares of Bendon (the “Bendon Ordinary Shares”)
for ordinary shares of Holdco (“Holdco Ordinary Shares”), and (ii) immediately thereafter, Merger Sub will merge with
and into Naked, with Naked surviving as a wholly owned subsidiary of Holdco and the Naked stockholders receiving Holdco Ordinary
Shares.
In the Reorganization,
the shareholders of Bendon will exchange all the outstanding Bendon Ordinary Shares for 22,680,527 Holdco Ordinary Shares, subject
to adjustment based on Naked’s Net Assets and Bendon’s Net Debt as of the closing date of the Transactions. Using Naked’s
Net Assets and Bendon’s Net Debt as of February 28, 2018 and assuming Bendon has refinanced certain of its indebtedness and
has completed certain capital raising transactions, we estimate that the shareholders of Bendon will receive approximately 22,680,527
Holdco Ordinary Shares in the Reorganization. See the section entitled “The Merger Proposal — Structure of the Transactions”
for more information, including descriptions of the definition of “Net Assets” and “Net Debt.”
In the Merger, each
outstanding share of common stock of Naked shall be cancelled and shall be automatically converted into the right to receive 0.2
Holdco Ordinary Shares (the “Per Share Consideration”), with the shares issued to the Naked stockholders representing
in the aggregate approximately nine percent of the Holdco Ordinary Shares outstanding immediately after completion of the Transactions.
Naked’s outstanding options and warrants to purchase shares of its common.
The completion of the
Merger is subject to the satisfaction or waiver of certain customary conditions, including, among others: (i) the accuracy of the
other party’s representations and warranties; (ii) performance in all material respects by the other party of its obligations
under the Merger Agreement; (iii) the listing of Holdco Ordinary Shares on the Nasdaq Capital Market or the New York Stock Exchange
(“NYSE”), subject to official notice of issuance; (iv) the declaration of effectiveness by the SEC of the registration
statement on Form F-4 filed by Holdco in connection with the transactions (the “Registration Statement”); (v) Naked
stockholder’s approving the Merger Agreement and the transactions contemplated thereby at a meeting called for such purposes
(the “Stockholder Meeting”); and (vi) other conditions as further described in the Merger Agreement. The Registration
Statement was declared effective by the SEC on April 26, 2018 and includes a definitive proxy statement of Naked and a prospectus
of Holdco.
The Merger Agreement
also contains specified termination rights, including the right to terminate the Merger Agreement (i) by mutual agreement of the
parties to terminate; (ii) by either party if (1) the Merger has not been consummated by if the transactions contemplated by the
Merger Agreement are not consummated on or before the Outside Date (which is June 1, 2018), subject to certain conditions as set
forth below , (2) any law or order permanently prohibits consummation of the Merger, or (3) Naked stockholder approval is not obtained
by the Outside Date; (iii) by either party if the other party has breached or failed to perform in any material respect any of
its representations and warranties or covenants under the Merger Agreement such that a closing condition is not satisfied (subject
to notice and cure and other customary exceptions); and (iv) by Naked if (1) Bendon substantially changes its business as conducted
as of the date of the Merger Agreement, or (2) Naked accepts a Superior Proposal (as defined in the Merger Agreement). However,
the right to terminate due to the Outside Date passing will not be available to any party whose material breach of their obligations
under the Merger Agreement resulted in the failure of the Merger to occur on or before the Outside Date. Notwithstanding the foregoing,
on or before May 22, 2018, Bendon will provide written notice to Naked of any known material breach by Naked of its obligations
under the Merger Agreement which could reasonably be expected to result in the failure of the Merger to occur on or before the
Outside Date. Naked will have no more than ten days to cure any such breach from the date of such notice and the Outside Date will
be extended by the number of days (although not more than ten days in each instance) used by Naked to cure such breach, which date
shall be the new Outside Date. In any event, under no circumstances will the Outside Date be extended beyond June 11, 2018.
Following the Merger, all Naked common stock
will be de-listed from the Nasdaq Capital Market and de-registered under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).
Principal Products
Historically, we were
strictly a men’s innerwear manufacturer and retailer and our men’s collections represented substantially all of our
revenues until the third quarter of fiscal 2016. Our Fall 2015 women’s sleep and loungewear collection became available for
retail sale online at www.wearnaked.com in September 2015 and at retail locations and other online retailers in February 2016.
Also, in February 2016, we launched our women’s intimate apparel products online and at select retailers. Since then, our
women’s collections have seen strong growth and represented approximately 68.6% of our revenues for fiscal 2018.
Men’s Collections
We currently offer
a variety of innerwear products for men including boxer briefs, trunks, briefs, undershirts, t-shirts, lounge pants, lounge shorts
and robes. Our three primary men’s collections are: Luxury, Active and Essential. Our men’s Luxury collection utilizes
MicroModal fabric, which is a lightweight, highly soft fabric that has breathable moisture-wicking qualities and made using a carbon-neutral,
eco-friendly process. Our Active collection is based on a high-performance Microfiber fabric, a nylon-based textile that is smooth
and resilient while providing moisture-wicking properties. We have been producing our full line of men’s underwear using
these fabrics since the inception of our business. Our Essential collection is made of Cotton Stretch fabric for a light, comfortable
everyday fit. Underwear and undershirts in this collection are sold in 2-packs to access a broader customer base.
We also offer men’s
products in other fabrics including Microfiber with X-Static® Silver, French Terry, Modal Cotton and Tencel. All of the fabrics
we use are readily available in many countries. Additionally, we produce boxer briefs and V-neck t-shirts with microfiber using
X-Static® Silver, a high-performance fabric, which helps regulate body temperature and provides anti-odor and antimicrobial
protection. X-Static® Silver fabric contains 99.9% pure silver woven into the garment’s nylon threads, which naturally
deters odor-causing bacteria, wicks away moisture, is anti-chaffing and naturally cooling.
During fiscal 2017,
we expanded our Essentials collection to include loungewear in Peruvian Pima Cotton, a superior cotton that is prized for its softness
and breathability. We also introduced a new product called the Naked Shield™ which incorporates special fabric featuring
Circuitex technology that provides wireless shielding and antimicrobial/anti-odor properties.
Women’s Collections
Our women’s loungewear
and sleepwear collections are based on two of the same fabrics used in our collections for men: Luxury MicroModal and Essential
Cotton Stretch. Our three primary women’s collections are: Luxury, Everyday, and Essential. These women’s collections
include a range of products such as boyshorts, hipsters, lounge pants, camisoles, tank tops, pajamas, chemises and sleepshirts.
We also make French terry robes, Alpaca throws, as well as Double Gauze woven cotton sleepwear. True to our brand mission, we believe
these designs deliver superior fit, feel and function with timeless looks and at premium affordable prices that make them appealing
to a broad consumer market.
Our Everyday collection
consists of three core groups of daily essentials including wire-free bralettes and thong, modern brief and hipster style panties
meant for everyday use for a range of different occasions. Everyday Naked, is constructed from Peruvian Pima cotton stretch fabric
that is designed to be ultra-light, soft and breathable. Naked Luxury intimates, is made from soft MicroModal fabric with 360-degree
stretch that is designed to naturally wick away moisture and be cool to the touch. We have designed our intimate apparel collection
according to our mission to deliver the highest standard of fit, feel, function, and look for the modern active woman.
Our Essential collection
consists of pajamas, sleepshirts, robes, loungewear, yoga wear and chemises made from Peruvian Pima Cotton for everyday comfort
and style.
Distribution
We sell our products
through wholesale relationships and through direct to consumer channels. The wholesale channel is currently our largest channel
and consists of department stores as well as boutique apparel stores and undergarment stores. Our two largest distribution partners
are Nordstrom, which carries our products in its online store Nordstrom.com, and Bloomingdales, which carries our product at select
stores in the U.S. We also sell our products through Dillard’s, Soma.com, SaksFifthAvenue.com and a growing number of boutiques
and specialty stores. We are targeting additional key retail store partners in the U.S. in 2018 for our men’s and women’s
products. In addition to selling in key department stores in North America, Naked also sells through online stores such as Amazon.com,
barenecessities.com, hackberry.com, hisroom.com and freshpair.com.
We also sell all of
our products direct-to-consumer through our internet retail store, www.wearnaked.com. Our internet retail store is optimized for
use on all online platforms and provides our customers with a premium online shopping experience and access to our entire product
line. Our direct-to-consumer channel has become an increasingly significant part of our business and we expect it will continue
to do so as our brand awareness increases in North America and internationally. We believe that the availability of online sales
is convenient for our customers and enhances the image of our brand, making our brand and products more accessible in more markets
than in brick and mortar stores alone. We plan to commercially introduce new products at www.wearnaked.com as well as feature certain
products, collections, and styles exclusively.
Production
We utilize manufacturing
partners outside of the United States to produce our products. Currently, our primary production is in China although we have limited
production in India, Peru, Bangladesh, and Thailand and may expand into other territories in 2018.
We believe we have
developed good relationships with a number of our vendors and we seek to ensure that they share our commitment to quality and ethics.
We do not have any long-term agreements requiring us to use any manufacturer. Our primary production partner during fiscal 2018
has been TMS Fashion, a wholly owned subsidiary of LuenThai Holdings Limited, a Hong Kong Stock Exchange-listed company. We began
working with TMS and LuenThai in 2014 in an effort to streamline and scale up our production capabilities by leveraging a large,
established manufacturing resource. We believe this partnership allows us access to “best-in-class” fabrics, materials
and manufacturing techniques while reducing our need for fixed overhead. Further, until August 2017, we sublet our principal office
location in New York City from Tellas, Inc., another wholly-owned subsidiary of LuenThai operating in the U.S. We have additional
manufacturing relationships for our women’s intimate apparel collections and expect to work with additional manufacturers
as we expand our product offering.
Sources and Availability of Raw Materials
Raw materials, which
include fabric and accessories, are sourced from all over the world, including Italy, Turkey, China, Peru, India and Bangladesh.
We believe these fabrics and raw materials are readily available from multiple sources. Currently, we work closely with TMS Fashion
and LuenThai, who are responsible for all of the sourcing of our raw materials for our men’s and women’s collections.
We have additional sourcing relationships for our women’s intimate apparel collections and we expect to work with additional
sourcing partners as we expand our product offering.
Key Customers
In fiscal 2018, sales
were concentrated with Bloomingdales, Nordstrom.com, and Dillards which accounted for 8.9%, 11%, and 8.2% respectively of our net
sales. During fiscal 2017, Nordstrom accounted for 12.4%, Bloomingdales accounted for 13.7%, and Dillards accounted for 3.3% of
our net sales. The decline in percentage of sales to Nordstrom and Bloomingdales during fiscal 2018 is largely due to an increase
in sales across all channels leading to a decrease in sales concentrations to key customers. Nordstrom.com, Bloomingdales, and
Dillard’s are currently of key importance to our business and our results of operations, which would be materially adversely
affected if these relationships ceased to exist or are significantly reduced. These customers do not have ongoing purchase commitments
with us nor do any of our other customers. Therefore, we cannot guarantee that the volume of sales will remain consistent going
forward. We typically enter into agreements with department store and larger retail customers which cover the material terms and
conditions of purchase orders such as shipping terms, pricing policies, payment terms and cancellation policies. We are targeting
additional department store and retail customers to become additional key accounts of our business in fiscal 2019 and beyond.
Marketing
Our marketing strategy
is primarily focused on digital and social media marketing aimed at increasing brand awareness and helping drive sales growth cost-efficiently.
We have engaged consultants, where necessary, to provide marketing advisory and execution services to our company, including assistance
with brand management, public relations, celebrity alignment, strategic retail placement, manufacturing strategy, and strategic
and creative development and assistance. We intend to continue to grow our investment in marketing and brand awareness-building
activities, including internet and media marketing to consumers and retailers, attendance at apparel trade shows and exploration
of other strategic marketing opportunities.
Competition
Men’s and women’s
innerwear is a very competitive market with many high-profile undergarment manufacturers such as, Calvin Klein, Polo Ralph Lauren,
2(x)ist, Hugo Boss, Tommy John, Saxx Giorgio Armani, Tommy Hilfiger, Michael Kors, DKNY, Natori, Free People, Hanky Panky, Commando,
Cosabella, MeUndies, Bread&Boxers, Frigo and others. We believe there are currently over 100 potential competitors in our market
sector for men’s and women’s undergarments, lounge and sleepwear, and intimate apparel. The market includes increasing
competition from established companies who are expanding their production and marketing of undergarments, as well as frequent new
entrants. We are in direct competition with such companies. Competition is principally on the basis of brand image and recognition,
as well as product quality, innovation, style, distribution and price. We believe that we have the potential to perform well against
competition as a result of the quality, fit and performance of our products, our brand and brand strategy and positioning, our
planned marketing and consumer engagement initiatives, and through brand endorsement and strategic collaboration agreements. The
products we have introduced to market and the products we plan to introduce are targeted at a premium consumer value point, which
means retailing a high-quality product at a competitive price to comparable products, which we believe gives us the opportunity
to penetrate the market successfully.
We believe our competitive
advantages include promoting that our products are as comfortable as wearing nothing at all, which leverages our brand name, and
retailing high quality products at a competitive price with superior fit, feel, function and look. We also believe our brand name
and brand mission and philosophy will be an important competitive differentiator as we expand our marketing and brand awareness
initiatives. However, many of our competitors have significant competitive advantages, including longer operating histories, larger
and broader customer bases, more established relationships with a broader set of suppliers, greater brand recognition and greater
financial, research and development, marketing, distribution and other resources than we do. Our competitors may be able to achieve
and maintain brand awareness and market share more quickly and effectively than we can.
Seasonality of Business
The apparel industry
is generally subject to seasonality of buying which can affect revenue and cash flows. For men, there are generally two distinct
buying seasons in the apparel industry: Fall/Winter season, which occurs in the third to fourth quarters of our fiscal year and
Spring/Summer season, which occurs in the first to second quarters of our fiscal year, with some potential shipments at the last
quarter. The women’s apparel buying markets are more frequent than men’s, although we may elect to focus only on two
main buying markets as we do for men’s products in order to optimize design and production cycles. In fiscal 2018, the largest
revenues were reported in our second and fourth fiscal quarter, arising from seasonal products and sales, as well as due to $441,453
in sales recorded for the fourth quarter relating to the consignment agreement with Bendon, dated October 4, 2017. As a result
of growth and changes to our business with the introduction of new product lines during the fiscal year, the natural seasonality
of our business had a reduced effect. Furthermore, with limited operating history it is difficult to anticipate the effects of
seasonality moving forward. Thus, historical quarterly operating trends may not be indicative of future performance because of
new product launches and continued early stage sales growth.
Intellectual Property
The “Naked”
trademark is a critical component of the value of our business and we rely on the strength of our brand to differentiate ourselves
in the marketing and sale of our products. To protect the Naked brand, we have secured trademark registrations in the United States,
the European Union and Canada. We also own applications and registrations in the United States, Canada and other jurisdictions
for additional Naked-related trademarks. We take steps to enforce and police our Naked trademark and expect to continue to incur
expenses for enforcement-related work and for the filing of trademark and other types of intellectual property applications in
the U.S. and key international markets in fiscal 2019.
Employees
We currently employ six full-time employees,
of which five are employed in the United States and one is employed in Canada. None of our employees are currently covered by a
collective bargaining agreement. We have had no labor-related work stoppages and we believe our relations with our employees are
excellent.
Corporate Information
We were incorporated
in the State of Nevada on May 17, 2005 under the name of Search By Headlines.com Corp. Immediately prior to the transaction with
Naked Inc. described below, we were a public reporting “shell company,” as defined in Rule 12b-2 under the Exchange
Act.
On July 30, 2012, we
completed a reverse acquisition of Naked Inc., whereby we acquired all of the issued and outstanding common shares of Naked Inc.
in exchange for the issuance of 337,500 shares of common stock in the capital of our company to the Naked Inc. stockholders on
a pro-rata basis, representing 50% of the capital stock of our company at the time. As a result of this reverse acquisition transaction,
Naked Inc. became a wholly-owned subsidiary of our company and our business became the manufacture and sale of direct and wholesale
men’s innerwear and intimate apparel products in Canada and the United States to consumers and retailers.
Effective August 29,
2012, we changed our name from “Search By Headlines.com Corp.” to “Naked Brand Group Inc.” This change
in our corporate name was effectuated by merging a wholly owned subsidiary of our company, which was formed solely to effect the
name change, with and into our company.
Naked Inc., our wholly
owned subsidiary, was originally incorporated under the federal laws of Canada on May 21, 2009 as “In Search of Solutions
Inc.” Naked changed its corporate name to “Naked Boxer Brief Clothing Inc.” on May 17, 2010 and to “Naked
Inc.” on February 20, 2013. Naked Inc. continued from the federal jurisdiction of Canada to the jurisdiction of the State
of Nevada on July 27, 2012. As part of the continuation, all classes of shares of Naked, including Class C, D, E and F common shares,
were converted into one class of common stock of the continuing corporation.
Our principal executive
offices are located at 180 Madison Avenue, Suite 505, New York, New York, USA 10016. Our telephone number is (646) 653-7710.
Available Information
Our corporate website
address is www.nakedbrands.com and our online store is www.wearnaked.com. Our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended (“Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the
“SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements,
and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of
charge on our website at ir.nakedbrands.com when such reports are available on the SEC’s website.
The public may read
and copy any materials filed by Naked with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington,
DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC at www.sec.gov.
The contents of the
websites referred to above are not incorporated into this filing. Further, our references to the URLs for these websites are intended
to be inactive textual references only.
Certain factors
may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully
the risks and uncertainties described below, in addition to other information contained in this Form 10-K, including our consolidated
financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks
and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that
adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations,
and future prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline,
and you could lose part or all of your investment.
Risks Related to Our Business
We have a limited operating history,
which makes it difficult to evaluate our company or future operations.
We are still evolving
our business plan as a growing company. As a result, we have no way to evaluate the likelihood that we will be able to operate
the business successfully. For the years ended January 31, 2018 and 2017, our net revenues were $2,859,884 and $1,842,065, respectively.
Naked commenced operations in 2010 and, since beginning operations, we have generated limited total revenues. As a relatively new
company, we are subject to many risks associated with the initial organization, financing, expenditures, and impediments inherent
in a new business and there is limited history upon which to base any assumption as to the likelihood that we will prove successful.
We have a history of
operating losses and negative cash flow that may continue into the foreseeable future. If we fail to execute our strategy to achieve
and maintain profitability in the future, investors could lose confidence in the value of our common stock, which could cause our
stock price to decline and adversely affect our ability to raise additional capital. Investors should evaluate an investment in
our company in light of the obstacles that may be encountered by a start-up company in a competitive market.
If we are unable to obtain additional
financing on acceptable terms, we may have to curtail our growth or cease our development plans and operations.
The operation of our
business and our growth efforts will require significant cash outlays. We are largely dependent on outside capital to implement
our business plan and support our operations. We anticipate for the foreseeable future that cash on hand and cash generated from
operations will not be sufficient to meet our cash requirements, and that we will need to raise additional capital through investments
to fund our operations and growth. We cannot assure you that we will be able to raise additional working capital as needed on terms
acceptable to us, if at all. If we are unable to raise capital as needed, we may be required to reduce the scope of our growth
efforts, which could harm our business plans, financial condition and operating results, or cease our operations entirely, in which
case, you may lose all your investment. Financings, including future equity investments, if obtained, may be on terms that are
dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than
the price at which you purchase your shares. Furthermore, the terms of securities issued in a financing, if obtained, may be more
favorable for new investors.
Investors should be
aware that the value of an investment in our company may go down as well as up. In addition, there can be no certainty that the
market value of an investment in our company will fully reflect its underlying value.
Our auditors’ report on our
January 31, 2018 consolidated financial statements included an explanatory paragraph regarding there being substantial doubt about
our ability to continue as a going concern.
For the years ended
January 31, 2018 and 2017, we incurred a net loss of $5,789,805 and $10,798,503, respectively. We anticipate generating losses
for at least the next 12 months. Therefore, there is substantial doubt about our ability to continue operations in the future as
a going concern, as noted by our auditors with respect to the consolidated financial statements for the year ended January 31,
2018. Although our consolidated financial statements raise substantial doubt about our ability to continue as a going concern,
they do not reflect any adjustments that might result if we are unable to continue our business. If we cannot continue as a viable
entity, our stockholders may lose some or all of their investment in our company.
We have a concentration of sales
to key customers and any substantial reduction in sales to these customers would have a material adverse effect on our business.
During the year ended
January 31, 2018, sales were concentrated with Bloomingdales, Nordstrom.com, and Dillard’s, which accounted for 8.9%, 11%,
and 8.2%, respectively, of our net sales. During fiscal 2017, Nordstrom accounted for 12.4%, Bloomingdales accounted for 13.7%,
and Dillards accounted for 3.3% of our net sales. The decline in percentage of sales to Nordstrom and Bloomingdales during fiscal
2018 is largely due to an increase in sales across all channels leading to a decrease in sales concentrations to key customers.
Nordstrom.com, Bloomingdales, and Dillard’s are currently of key importance to our business and our results of operations
would be materially adversely affected if these relationships ceased. Although we have diversified our customers and continue to
receive increasing sales orders from existing customers, these customers do not have any ongoing purchase commitment agreement
with us; therefore, we cannot guarantee that the volume of sales will remain consistent going forward. Any substantial change in
purchasing decisions by these customers, whether due to actions by our competitors, industry factors or otherwise, could have a
material adverse effect on our business and our financial condition.
We operate in a highly competitive market and the size
and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of our market
share and a decrease in our net revenue and profitability.
The market for innerwear
products is highly competitive. Competition may result in pricing pressures, reduced profit margins or lost market share or a failure
to grow our market share, any of which could substantially harm our business and results of operations. We compete directly against
wholesalers and direct retailers of innerwear products, including large, diversified companies with substantial market share and
strong worldwide brand recognition, such as Calvin Klein, Polo Ralph Lauren, 2(x)ist, Hugo Boss, Tommy John, Saxx Giorgio Armani,
Tommy Hilfiger, Michael Kors, DKNY, Natori, Free People, Hanky Panky, Commando, Cosabella, MeUndies, Bread&Boxers, Frigo and
others. Many of our competitors have significant competitive advantages, including longer operating histories, larger and broader
customer bases, more established relationships with a broader set of suppliers, greater brand recognition and greater financial,
research and development, marketing, distribution and other resources than we do. Our competitors may be able to achieve and maintain
brand awareness and market share more quickly and effectively than we can. Many of our competitors promote their brands through
traditional forms of advertising, such as print media and television commercials, and through celebrity endorsements, and have
greater and substantial resources to devote to such efforts. Our competitors may also create and maintain brand awareness using
traditional forms of advertising more quickly than we can. Our competitors may also be able to increase sales in their new and
existing markets faster than we can by emphasizing different distribution channels than we do, such as catalog sales or an extensive
franchise network, as opposed to distribution through retail stores, wholesale or internet, and many of our competitors have substantial
resources to devote toward increasing sales in such ways.
If we are unable to anticipate consumer
preferences and successfully develop and introduce new, innovative and updated products, we may not be able to maintain or increase
our sales and profitability.
Our success depends
on our ability to identify and originate product trends as well as to anticipate and react to changing consumer demands in a timely
manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. We may be unable
to introduce new products in a timely manner. Our customers may not accept our new products including our recently launched women’s
products, or our competitors may introduce similar products in a more timely fashion. Failure to anticipate and respond in a timely
manner to changing consumer preferences could lead to, among other things, lower sales and excess inventory levels. Even if we
are successful in anticipating consumer preferences, our ability to adequately react to and address those preferences will in part
depend upon our continued ability to develop and introduce innovative, high-quality products. Our failure to effectively introduce
new products that are accepted by consumers could have a material adverse effect on our financial condition.
If we are unable to obtain or maintain
our endorsements by professional athletes and celebrities, our ability to market and sell our products may be harmed.
An important element
of our marketing strategy is to obtain endorsements from prominent athletes and celebrities, which may contribute to the image
of our brands. To date, we have entered into one celebrity endorsement agreement with Dwyane Wade, an NBA basketball player of
which was terminated in the fourth quarter of fiscal 2018 We believe that this strategy will continue be an effective means of
gaining brand exposure worldwide and creating broad appeal for our products. We cannot assure you that we will be able to attract
new athletes and celebrities to endorse our products. We also are subject to risks related to the selection of athletes and celebrities
whom we choose to endorse our products. We may select athletes who are unable to perform at expected levels or who are not sufficiently
marketable. In addition, negative publicity concerning any of our athletes and celebrities could harm our brand and adversely impact
our business. If we are unable in the future to secure prominent athletes and celebrities and arrange endorsements of our products
on terms we deem to be reasonable, we may be required to modify our marketing platform and to rely more heavily on other forms
of marketing and promotion, which may not prove to be effective. In any event, our inability to obtain endorsements from professional
athletes and celebrities could adversely affect our ability to market and sell our products, resulting in loss of revenues.
An economic downturn or economic
uncertainty in our key markets may adversely affect consumer discretionary spending and demand for our products.
Many of our products
may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items
include general economic conditions, particularly those in the United States, and other factors such as consumer confidence in
future economic conditions, fears of recession, the availability of consumer credit, levels of unemployment, tax rates and the
cost of consumer credit. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer
discretionary spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the
future. The current volatility in the United States economy in particular has resulted in an overall slowing in growth in the retail
sector because of decreased consumer spending, which may remain depressed for the foreseeable future. These unfavorable economic
conditions may lead consumers to delay or reduce purchase of our products. Consumer demand for our products may not reach our sales
targets, or may decline, when there is an economic downturn or economic uncertainty in our key markets, particularly in North America.
Our sensitivity to economic cycles and any related fluctuation in consumer demand may have a material adverse effect on our financial
condition.
Our sales and profitability may decline
as a result of increasing product costs and decreasing selling prices.
Our business is subject
to significant pressure on pricing and costs caused by many factors, including intense competition, constrained sourcing capacity
and related inflationary pressure, pressure from consumers to reduce the prices we charge for our products and changes in consumer
demand. These factors may cause us to experience increased costs, reduce our sales prices to consumers or experience reduced sales
in response to increased prices, any of which could have a material adverse effect on our financial conditions, operating results
and cash flows.
Our results of operations could be
materially harmed if we are unable to accurately forecast customer demand for our products.
To ensure adequate
inventory supply, we must forecast inventory needs and place orders with our manufacturers based on our estimates of future demand
for particular products. Our ability to accurately forecast demand for our products could be affected by many factors, including
an increase or decrease in customer demand for our products or for products of our competitors, our failure to accurately forecast
customer acceptance of new products, product introductions by competitors, unanticipated changes in general market conditions,
and weakening of economic conditions or consumer confidence in future economic conditions. If we fail to accurately forecast customer
demand, we may experience excess inventory levels or a shortage of products available for sale in our stores or for delivery to
customers. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess
inventory at discounted prices, which would adversely affect our results of operations and could impair the strength and exclusivity
of our brand. Conversely, if we underestimate customer demand for our products, our manufacturers may not be able to deliver products
to meet our requirements, and this could result in damage to our reputation and customer relationships.
We rely on third-party suppliers
and manufacturers to provide fabrics for and to produce our products, and we have limited control over them and may not be able
to obtain quality products on a timely basis or in sufficient quantity.
We do not manufacture
our products or the raw materials for them and rely instead on third-party suppliers and manufacturers. Many of the specialty fabrics
used in our products are technically advanced textile products developed and manufactured by third parties and may be available,
in the short-term, from only one or a very limited number of sources. We may experience a significant disruption in the supply
of fabrics or raw materials from current sources or, in the event of a disruption, we may be unable to locate alternative materials
suppliers of comparable quality at an acceptable price, or at all. In addition, if we experience significant increased demand,
or if we need to replace an existing supplier manufacturer, we may be unable to locate additional suppliers of fabrics or raw materials
or additional manufacturing capacity on terms that are acceptable to us, or at all, or we may be unable to locate any supplier
or manufacturer with sufficient capacity to meet our requirements or to fill our orders in a timely manner. Identifying a suitable
supplier is an involved process that requires us to become satisfied with their quality control, responsiveness and service, financial
stability and labor and other ethical practices. Even if we are able to expand existing or find new manufacturing or fabric sources,
we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers
in our methods, products and quality control standards. Delays related to supplier changes could also arise due to an increase
in shipping times if new suppliers are located farther away from other participants in our supply chain. Any delays, interruption
or increased costs in the supply of fabric or manufacture of our products could have an adverse effect on our ability to meet customer
demand for our products and result in lower net revenue and income from operations both in the short and long term. We have occasionally
received, and may in the future continue to receive, shipments of products that fail to comply with our technical specifications
or that fail to conform to our quality control standards. In that event, unless we are able to obtain replacement products in a
timely manner, we risk the loss of net revenue resulting from the inability to sell those products and related increased administrative
and shipping costs. If defects in the manufacture of our products are not discovered until after our customers purchase such products,
our customers could lose confidence in the technical attributes of our products and our results of operations could suffer and
our business could be harmed.
The fluctuating cost of raw materials
could increase our cost of goods sold and cause our results of operations and financial condition to suffer.
The fabrics used by
our suppliers and manufacturers include synthetic fabrics whose raw materials include petroleum-based products. Our products also
include natural fibers, including cotton. Our costs for raw materials are affected by, among other things, weather, consumer demand,
speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries
and other factors that are generally unpredictable and beyond our control. Increases in the cost of raw materials could have a
material adverse effect on our cost of goods sold, results of operations, financial condition and cash flows.
Our ability to source our merchandise
profitably or at all could be hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.
The United States and
the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties,
tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. Countries impose,
modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national
economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade
restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards and customs restrictions, could increase the
cost or reduce the supply of products available to us or may require us to modify our supply chain organization or other current
business.
Our operating results are subject
to seasonal and quarterly variations in our net revenue from operations, which could cause the price of our common stock to decline.
We have experienced,
and expect to continue to experience, significant seasonal variations in our net revenue from operations. Seasonal variations in
our net revenue are primarily related to increased sales of our products during our fiscal fourth quarter, reflecting our historical
strength in sales during the holiday season.
Our quarterly results
of operations may also fluctuate significantly as a result of a variety of other factors, including, among other things, net revenue
and profits contributed by new retailers; increases or decreases in comparable sales; changes in our product mix; and the timing
of new advertising and new product introductions.
As a result of these
seasonal and quarterly fluctuations, we believe that comparisons of our operating results between different quarters within a single
fiscal year are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance.
As a result of growth
and changes to our business with the introduction of new product lines during the 2018 and 2017 fiscal years, the natural seasonality
of our business has had a reduced effect. However, our operating history and nature as a developing company make it difficult to
assess the impact of seasonal factors on our business or whether or not our business is susceptible to cyclical fluctuations in
the economy in the markets in which we operate. Likewise, our growth may have obscured the effect of any seasonal or cyclical factors
on our business to date. Seasonal or cyclical variations in our business may become more pronounced over time and may harm our
results of operations in the future. Any future seasonal or quarterly fluctuations in our results of operations may not match the
expectations of market analysts and investors. Disappointing quarterly results could cause the price of our common stock to decline.
Seasonal or quarterly factors in our business and results of operations may also make it more difficult for market analysts and
investors to assess the longer-term strength of our business at any particular point, which could lead to increased volatility
in our stock price. Increased volatility could cause our stock price to suffer in comparison to less volatile investments.
If we are unable to adequately demonstrate
that our independent manufacturers use ethical business practices and comply with applicable laws and regulations, our brand image
could be harmed due to negative publicity.
Our core values, which
include developing the highest quality products while operating with integrity, are an important component of our brand image,
which makes our reputation particularly sensitive to allegations of unethical business practices. While our internal and vendor
operating guidelines promote ethical business practices such as environmental responsibility, fair wage practices, and compliance
with child labor laws, among others, and we, along with a third party that we retain for this purpose, monitor compliance with
those guidelines, we do not control our independent manufacturers or their business practices. Accordingly, we cannot guarantee
their compliance with our guidelines. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could
increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations. Violation
of labor or other laws by our independent manufacturers or the divergence of an independent manufacturer’s labor or other
practices from those generally accepted as ethical in the United States, Canada or other markets in which we do business could
also attract negative publicity for us and our brand. This could diminish the value of our brand image and reduce demand for our
merchandise if, as a result of such violation, we were to attract negative publicity. Other apparel manufacturers have encountered
significant problems in this regard, and these problems have resulted in organized boycotts of their products and significant adverse
publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm our brand image,
stock price and results of operations.
Our operating experience and limited
brand recognition in new international markets may limit our expansion strategy and cause our business and growth to suffer.
Our future growth depends,
to an extent, on our international expansion efforts. We have limited experience with regulatory environments and market practices
internationally, and we may not be able to penetrate or successfully operate in any new market. We may also encounter difficulty
expanding into new international markets because of limited brand recognition leading to delayed acceptance of our products by
customers in these new international markets. Our failure to develop new international markets or disappointing growth outside
of existing markets will harm our business and results of operations.
Our current operations in international
markets and our efforts to expand into additional international markets, and any earnings in those markets, may be affected by
legal and regulatory risks.
We are subject to the
U.S. Foreign Corrupt Practices Act, in addition to the anti-corruption laws of the foreign countries in which we operate and manufacture
our products. Although we implement policies and procedures designed to promote compliance with these laws, our employees, contractors
and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation
of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation
and operating results.
Our success depends on our ability
to maintain the value and reputation of our brand.
Our success depends
on the value and reputation of the Naked brand. The Naked name is integral to our business as well as to the implementation of
our strategies for expanding our business. Maintaining, promoting, and positioning our brand will depend largely on the success
of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. We rely on
social media as one of our marketing strategies to have a positive impact on both our brand value and reputation. Our brand could
be adversely affected if we fail to achieve these objectives or if our public image or reputation were to be tarnished by negative
publicity. Negative publicity regarding the production methods of any of our suppliers or manufacturers could adversely affect
our reputation and sales and force us to locate alternative suppliers or manufacturing sources. Additionally, while we devote considerable
efforts and resources to protecting our intellectual property, if these efforts are not successful the value of our brand may be
harmed, which could have a material adverse effect on our financial condition.
Any material disruption of our information
systems could disrupt our business and reduce our sales.
We rely on information
systems to operate our e-commerce website, process transactions, respond to customer inquiries, manage inventory, purchase, sell
and ship goods on a timely basis and maintain cost-efficient operations. Any material disruption or slowdown of our systems, including
a disruption or slowdown caused by our failure to successfully upgrade our systems, system failures, viruses, cyber-attack or other
causes, could cause information, including data related to customer orders, to be lost or delayed which could result in delays
in the delivery of merchandise to our customers or lost sales, which could reduce demand for our merchandise and cause our sales
to decline. If changes in technology cause our information systems to become obsolete, or if our information systems are inadequate
to handle our growth, we could lose customers. If our systems are damaged, fail to function properly or become obsolete, we may
have to make monetary investments to repair or replace the systems, and we could endure delays in our operations.
If we are unable to safeguard against
security breaches with respect to our information systems, our business may be adversely affected.
In the course of our
business, we gather, transmit and retain confidential information, including personal information about our customers, and process
payment transactions through our information systems. Although we endeavor to protect confidential information and payment information
through the implementation of security technologies, processes and procedures, it is possible that an individual or group could
defeat security measures and access sensitive information about our customers, employees and other third parties. Any misappropriation,
loss or other unauthorized disclosure of confidential or personally identifiable information gathered, stored or used by us could
have a material impact on the operation of our business, including damaging our reputation with our customers, employees, third
parties and investors. We could also incur significant costs implementing additional security measures to comply with applicable
federal, state or international laws and regulations governing the unauthorized disclosure of confidential or personally identifiable
information as well as increased costs such as organizational changes, implementing additional protection technologies, training
employees or engaging consultants. In addition, we could incur lost revenues and face increased litigation as a result of any potential
cyber-security breach. We are not aware of that we have experienced any material misappropriation, loss or other unauthorized disclosure
of confidential or personally identifiable information as a result of a cyber-security breach or other act, however, a cyber-security
breach or other act and/or disruption to our information technology systems could have a material adverse effect on our business,
prospects, financial condition or results of operations.
Our fabrics and manufacturing technology
are not patented and can be imitated by our competitors.
The intellectual property
rights in the technology, fabrics and processes used to manufacture our products are owned or controlled by our suppliers and are
generally not unique to us. Our ability to obtain intellectual property protection for our products is therefore limited and we
currently own no patents or exclusive intellectual property rights in the technology, fabrics or processes underlying our products.
As a result, our current and future competitors are able to manufacture and sell products with performance characteristics, fabrics
and styling similar to our products. Because many of our competitors have significantly greater financial, distribution, marketing,
and other resources than we do, they may be able to manufacture and sell products based on our fabrics and manufacturing technology
at lower prices than we can. If our competitors do sell similar products to ours at lower prices, our net revenue and profitability
could suffer.
Our failure or inability to protect
our intellectual property rights could diminish the value of our brand and weaken our competitive position.
We currently rely on
trademarks, as well as confidentiality procedures, to establish and protect our intellectual property rights. We cannot assure
you that the steps taken by us to protect our intellectual property rights will be adequate to prevent infringement of such rights
by others, including imitation of our products and misappropriation of our brand. In addition, intellectual property protection
may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our intellectual
property rights as fully as in the United States, Canada or the European Union, and it may be more difficult for us to successfully
challenge the use of our intellectual property rights by other parties in these countries. If we fail to protect and maintain our
intellectual property rights, the value of our brand could be diminished, and our competitive position may suffer.
Our future success is substantially
dependent on the continued service of our senior management.
Our future success
is substantially dependent on the continued service of our senior management and other key employees, particularly our Chief Executive
Officer and Chief Creative Officer, Carole Hochman. The loss of the services of our senior management or other key employees could
make it more difficult to successfully operate our business and achieve our business goals. We also may be unable to retain existing
personnel that are critical to our success, which could result in harm to our customer and employee relationships, loss of key
information, expertise or know-how and unanticipated recruitment and training costs.
Because a portion of our sales may
be generated in foreign countries, fluctuations in foreign currency exchange rates may negatively affect our results of operations.
The reporting currency
for our consolidated financial statements is the US dollar. In the future, we expect to continue to derive a significant portion
of our net revenue in foreign countries, and changes in exchange rates between the currencies for those countries and the US dollar
may have a significant, and potentially adverse, effect on our results of operations. Our primary risk of loss regarding foreign
currency exchange rate risk is caused by fluctuations in the exchange rates between the US dollar and the currencies for those
countries. We have not historically engaged in hedging transactions and do not currently contemplate engaging in hedging transactions
to mitigate foreign exchange risks. As we continue to recognize gains and losses in foreign currency transactions, depending upon
changes in future currency rates, such gains or losses could have a significant, and potentially adverse, effect on our results
of operations.
Our reported financial results may
be adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted
accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, the American
Institute of Certified Public Accountants, the SEC and the Public Company Accounting Oversight Board and various bodies formed
to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant
effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a
change.
While we believe we have taken the
steps necessary to improve the effectiveness of our internal control over financial reporting, we can give no assurance that any
material weaknesses will not arise in the future.
Any material weakness
or other deficiencies in our disclosure controls and procedures and internal control over financial reporting may affect our ability
to report our financial results on a timely and accurate basis and to comply with disclosure obligations or cause our consolidated
financial statements to contain material misstatements, which could negatively affect the market price and trading liquidity of
our common stock or cause investors to lose confidence in our reported financial information. Investors relying upon our consolidated
financial statements may make a misinformed investment decision.
Risk Related to Our Common Stock and
Public Reporting Requirements
On February 1, 2018 we received
writing notice from Nasdaq that we were not in compliance with Nasdaq’s continued listing requirements due to our failure
to hold an annual meeting of stockholders for the fiscal year ended January 31, 2017. Our common stock may be delisted from the
Nasdaq Capital Market if we cannot satisfy Nasdaq’s continued listing requirements
.
On February 1, 2018, Naked Brand Group
Inc. (the “Company”) received written notice from the Listing Qualifications Staff of The Nasdaq Stock Market (“Nasdaq”)
notifying the Company that it no longer complies with Nasdaq Listing Rule 5620(a) due to the Company’s failure to hold an
annual meeting of stockholders within twelve months of the end of the Company’s fiscal year ended January 31, 2017 (the “Annual
Meeting Requirement”). The Company delayed holding its 2017 annual meeting of stockholders because of the contemplated business
combination with Bendon Limited and Bendon Group Holdings Limited that would be submitted to the Company’s stockholders for
a vote at a meeting.
Nasdaq’s notice
has no immediate effect on the listing of the Company’s common stock on The Nasdaq Capital Market. Under Nasdaq Listing
Rule 5810(c)(2)(G), the Company has 45 calendar days from February 1, 2018 to submit to Nasdaq a plan to regain compliance with
the Annual Meeting Requirement. If Nasdaq accepts the Company’s plan, Nasdaq may grant an extension of up to 180 calendar
days from the end of the fiscal year ended January 31, 2017, or until July 30, 2018, to regain compliance.
On March 19, 2018, the Company provided
Nasdaq with a plan to regain compliance with the Annual Meeting Requirement, which, among other things, explained the reasons for
the Company’s delay in holding its 2017 annual meeting of stockholders and stated the Company’s intention to hold an
annual meeting of stockholders on or before July 30, 2018.
On March 27, 2018, the Company received
written notice from Nasdaq granting the Company an extension until July 30, 2018 to regain compliance with the Annual Meeting Requirement
by holding an annual meeting of stockholders at which, among other things, the stockholders shall elect directors to the Board
of Directors of the Company. The notice further provides that in the event the Company does not satisfy such terms, Nasdaq will
provide written notification that the Company’s securities will be delisted.
There can be no assurance that the Company
will be able to regain compliance with the Annual Meeting Requirement or maintain compliance with any other Nasdaq requirement
in the future.
Because we can issue additional shares
of common stock, holders of our common stock may experience dilution in the future.
We are authorized to
issue up to 18,000,000 shares of common stock, of which 10,342,191 shares are issued and outstanding as of May 1, 2018. Our board
of directors has the authority to cause us to issue additional shares of common stock without consent of any of our stockholders.
Consequently, our stockholders may experience more dilution in their ownership of our stock in the future.
The stock price of our common stock
may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders
to resell their shares.
Our common stock is
currently listed on the Nasdaq Capital Market. Historically trading in our stock has been thin and characterized by wide fluctuations
in trading prices, due to many factors that may have little to do with our operations or business prospects. Although we believe
that the listing of our common stock on the Nasdaq Capital Market has improved the liquidity of our common stock, our stock has
been historically characterized by large volatility. Accordingly, stockholders may have difficulty reselling shares of our common
stock.
A decline in the price of our common
stock could affect our ability to raise further working capital, may adversely impact our ability to continue operations and we
may go out of business.
A prolonged decline
in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability
to raise capital. Because we may attempt to acquire a significant portion of the funds we need in order to conduct our planned
operations through the sale of equity securities, a decline in the price of our common stock could be detrimental to our liquidity
and our operations because the decline may cause investors to not choose to invest in our stock. If we are unable to raise the
funds we require for all our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a
significant negative effect on our business plan and operations, including our ability to develop new products and continue our
current operations. As a result, our business may suffer, and not be successful and we may go out of business. We also might not
be able to meet our financial obligations if we cannot raise enough funds through the sale of our common stock and we may be forced
to go out of business.
Because we do not intend to pay any
cash dividends on our shares of common stock in the near future, our stockholders will not be able to receive a return on their
shares unless they sell them.
We intend to retain
any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on
our common stock in the near future. The declaration, payment and amount of any future dividends will be made at the discretion
of the board of directors, and will depend upon, among other things, the results of operations, cash flows and financial condition,
operating and capital requirements, and such other factors as the board of directors considers relevant. There is no assurance
that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.
Future sales of shares by existing
stockholders could cause our stock price to decline and investors in this offering may experience dilution by exercises of outstanding
options and warrants.
Sales of a substantial
number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market
that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common
stock.
As of January 31, 2018,
we had outstanding options to purchase an aggregate of 3,472,399 shares of our common stock at a weighted average exercise price
of $3.85 per share and warrants to purchase an aggregate of 1,212,302 shares of our common stock at a weighted average exercise
price of $5.40 per share. The exercise of such outstanding options and warrants will result in further dilution of your investment.
If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that
such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship
between such sales and the performance of our business.
The Financial Industry Regulatory
Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our common
stock.
FINRA has adopted rules
that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that
the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status,
investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability
that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult
for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.
We are a former “shell company”
and as such are subject to certain limitations not applicable to other public companies generally.
Prior to our acquisition
of Naked Inc. in June 2012, we were a public reporting “shell company,” as defined in Rule 12b-2 under the Exchange
Act. Although we are no longer a “shell company,” we are subject to certain restrictions under the Securities Act of
1933, as amended, for the resale of securities issued by issuers that have been at any time previously a shell company. Specifically,
the Rule 144 safe harbor available for the resale of our restricted securities is only available to our stockholders if we have
filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable, during the
preceding twelve months, other than current reports on Form 8-K, at the time of the proposed sale, regardless of whether the restricted
securities were initially issued at the time we were a shell company or subsequent to termination of such status. Accordingly,
holders of our “restricted securities” within the meaning of Rule 144 will be subject to the conditions set forth in
Rule 144 with respect to our company. Other reporting companies that are not former shell companies and have been reporting for
more than twelve months are not subject to this same reporting threshold for non-affiliate reliance on Rule 144.
Accordingly, any restricted
securities we have sold or sell in the future or issue to consultants or employees, in consideration for services rendered or for
any other purpose, may not be resold unless such securities are registered with the SEC or the requirements of Rule 144 have been
satisfied. As a result, it may be harder for us to fund our operations and pay our employees and consultants with our securities
instead of cash. Furthermore, it may be harder for us to raise funding through the sale of debt or equity securities unless we
agree to register such securities with the SEC, which could cause us to expend additional resources in the future. Our prior status
as a “shell company” could prevent us in the future from raising additional funds, engaging employees and consultants,
and using our securities to pay for any acquisitions, which could cause the value of our securities, if any, to decline in value
or become worthless.
Further, as current
and former shell companies and reverse acquisition transactions have been, and remain to some degree, subject to additional scrutiny
by the SEC, FINRA and the national securities exchanges, our prior shell company status and the reverse acquisition transaction
that terminated it may result in delays in the completion of any offering and our attempt to qualify for and list on a national
securities exchange. Specifically, as a former shell company and subject of a reverse acquisition transaction, we may need to demonstrate
the ability to maintain a threshold per share market price for an extended trading period in order to qualify for listing on a
national securities exchange.
If we are unable to obtain additional
financing on acceptable terms, we may have to curtail our growth or cease our development plans and operations.
The operation of our
business and our growth efforts will require significant cash outlays. We are largely dependent on outside capital to implement
our business plan and support our operations. We anticipate for the foreseeable future that cash on hand and cash generated from
operations will not be sufficient to meet our cash requirements, and that we will need to raise additional capital through investments
to fund our operations and growth. We cannot assure you that we will be able to raise additional working capital as needed on terms
acceptable to us, if at all. If we are unable to raise capital as needed, we may be required to reduce the scope of our growth
efforts, which could harm our business plans, financial condition, and operating results, or cease our operations entirely, in
which case, you may lose all your investment. Financings, including future equity investments, if obtained, may be on terms that
are dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower
than the price at which you purchase your shares.
As of January 31, 2018,
the Company had cash totaling $1,414,871. The latest amendment to the Merger Agreement requires Bendon to fund all operating losses
until closing. Due to this requirement, we believe we have sufficient working capital to implement our proposed business plan over
the next 12 months.
If securities
or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price
and trading volume could decline.
The trading market
for our common stock will depend in part upon the research and reports that securities or industry analysts publish about us or
our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities
or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If
we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes
inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts
ceases coverage or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our common
stock price and trading volume to decline.
Risks Related to the Proposed Merger
and the Combined Company
Holdco’s shares may not be
listed on a securities exchange. Even if listed, Holdco may be unable to maintain the listing of its securities in the future.
Holdco has applied
for listing, to be effective at the time of the consummation of the Transactions, of the Holdco Ordinary Shares on Nasdaq. However,
Holdco will be required to meet the initial listing requirements of such exchange in order to be listed. Holdco may not be able
to meet those initial listing requirements. The initial listing requirements for new issuers are stringent and, although Holdco
may explore various actions to meet the requirements, there is no guarantee that any such actions will be successful in bringing
it into compliance with the requirements. For example, Nasdaq has indicated that it will not approve Holdco's application unless
Holdco counteracts the conditions that cast substantial doubt about its ability to continue as a going concern. While Holdco has
a plan to counteract these conditions, there can be no assurance it will be successful in implementing this plan. For this reason,
there can be no assurance that Nasdaq will approve Holdco’s application. It is a condition of the consummation of the Transactions
that Holdco receive confirmation from Nasdaq or the NYSE that the Holdco Ordinary Shares have been approved for listing. This
condition cannot be waived. Accordingly, if Nasdaq does not approve Holdco’s application for listing of the Holdco Ordinary
Shares, the Transactions will not be completed.
Even if the Holdco
Ordinary Shares are so listed
and the Transactions are completed
, Holdco
may be unable to meet the continued listing requirements in the future and accordingly may be unable to maintain the listing of
its securities.
If Holdco meets the
initial listing requirements, but is unable to meet the continued listing requirements and the Holdco Ordinary Shares are subsequently
delisted, Holdco could face significant material adverse consequences, including:
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a limited availability of market quotations for its securities;
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a limited amount of news and analyst coverage for the company; and
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a decreased ability to issue additional securities or obtain additional financing in the future.
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HoldCo, the surviving corporation
in the Merger, has never previously been a US reporting company.
HoldCo, which will
be the surviving corporation in the Merger, has never previously been a reporting company in the United States subject to U.S.
federal and state securities laws, including the reporting obligations of the Exchange Act and other requirements of the Sarbanes-Oxley
Act. The combined company will be required to increase its compliance efforts and incur significant costs in connection with complying
with public company requirements under U.S. federal and state securities laws. The attention of management may be diverted on a
frequent basis in order to carry out public company reporting and related obligations, rather than directing their full time and
attention to the operation and growth of the business. Employees and some members of the management team have had limited experience
working for a US reporting company, increasing the risk of non-compliance. The combined company’s disclosure controls and
procedures may not prevent or detect all errors or acts of fraud or misconduct by persons inside or outside the combined company.
Similarly, if the combined company fails to maintain an effective system of internal control over financial reporting, the combined
company may not be able to accurately report its financial condition, results of operations or cash flows. Noncompliance with U.S.
federal and state securities laws and other regulatory requirements could result in administrative or other penalties or civil
or criminal judgments against the combined company or harm to the combined company’s reputation. These consequences could
affect investor confidence in the combined company and cause the price of the stock to decline, result in the delisting of the
combined company’s shares from the Nasdaq Capital Market, require the payment of fines or other amounts, distract management’s
time and attention to the business or result in the loss of customer or supplier relationships, thus reducing the value of the
combined company’s ordinary shares.
The unaudited pro forma financial
information in the definitive proxy statement/prospectus included in the Registration Statement may not be indicative of what
the combined company’s actual financial position or results of operations would have been.
The unaudited pro
forma financial information in the definitive proxy statement/prospectus included in the Registration Statement is presented for
illustrative purposes only, has been prepared based on a number of assumptions and is not necessarily indicative of what the combined
company’s actual financial position or results of operations would have been had the business combination been completed
on the dates indicated. The unaudited pro forma condensed combined financial information does not reflect any cost savings, operating
synergies or revenue enhancements that the combined companies may achieve as a result of the business combination or the costs
to combine the operations of Naked and Bendon or the costs necessary to achieve these cost savings, operating synergies and revenue
enhancements. Each of Bendon and Naked has an explanatory paragraph regarding there being substantial doubt about each company’s
continuing as a going concern.
Holdco has no
operating history. The unaudited pro-forma financial information and the historical combined financial information included in
the definitive proxy statement/prospectus in the Registration Statement, may not be representative of actual results as a combined
company, and accordingly, you have limited financial information on which to evaluate the combined company and your investment
decision.
Bendon and Naked have
no prior history as a combined entity and their operations have not previously been managed on a combined basis. As a result, the
pro forma financial information for the combined company and the combined audited financial statements of Bendon and Naked giving
effect to the Merger included elsewhere in definitive proxy statement/prospectus included in the Registration Statement as presented
are not necessarily indicative of the financial position or results of operations of the combined company that would have actually
occurred had the Merger been completed at or as of the dates indicated, nor are they indicative of the future operating or financial
position of the combined company. The pro-forma financial information for the combined company does not consider potential impacts
of current market conditions on revenues or expense efficiencies. The pro-forma financial information presented in the definitive
proxy statement/prospectus included in the Registration Statement, is based in part on certain assumptions regarding the Merger
that Bendon and Naked believe are reasonable under the circumstances. However, assumptions used in preparing such financial information
may not prove to be accurate over time. Investors should not place any undue reliance on the pro forma financial information of
the combined company.
If the adjournment
proposal is not approved, and an insufficient number of votes have been obtained to approve the consummation of the Transactions,
Naked’s board of directors will not have the ability to adjourn the special meeting to a later date in order to solicit further
votes, and, therefore, the Transactions will not be approved.
Naked’s board
of directors is seeking approval to adjourn the special meeting to a later date or dates, if, based on the tabulated vote, Naked
is unable to consummate the Transactions contemplated by the Merger Agreement. If the adjournment proposal is not approved, Naked’s
board will be unable to adjourn the special meeting to a later date and, therefore, will not have more time to solicit votes to
approve the consummation of the Transactions. In such event, the Transactions would not be completed.
Because the number
of Holdco Ordinary Shares that are issuable to the shareholders of Bendon in the Reorganization is adjustable depending on the
net debt of Bendon and the net assets of Naked, as finally determined in accordance with the Merger Agreement, Naked shareholders
cannot be certain of the precise percentage ownership of Holdco that they will hold immediately following the closing of the Merger.
The number of Holdco
Ordinary Shares that are issuable to the shareholders of Bendon in the Reorganization is adjustable depending on the net debt
of Bendon and net assets of Naked, as finally determined in accordance with the Merger Agreement. If it is finally determined
that Naked’s Net Assets (as defined in the Merger Agreement) at the Closing of the Transactions are less than the Net Asset
Amount (as defined in the Merger Agreement) by at least $150,000, then the number of Holdco Ordinary Shares issuable to Bendon
will be increased by the number equal to the product obtained by multiplying the difference in the asset amount by 2.327. If,
however, the Naked’s Net Assets at the closing of the Transactions are greater than the Net Asset Amount by at least $150,000,
then then the number of Holdco Ordinary Shares issuable to Bendon will be reduced by the same ratio. Notwithstanding the foregoing,
so long as Naked does not incur any expenditures that in the aggregate exceed any line item in the Budget (as defined below) by
more than 10%, unless otherwise agreed to by the Budget Committee, no adjustment will be made based on Naked's Net Assets. Additionally,
if the Bendon’s Net Debt (as defined in the Merger Agreement) at the closing of the Transactions exceeds the Net Debt Amount
(as defined in the Merger Agreement) by at least $1,000,000, then then the number of Holdco Ordinary Shares issuable to Bendon
will be reduced by the number equal to the product obtained by multiplying the difference in the debt amount by 0.167. If, however,
the Bendon’s Net Debt at the closing of the Transactions is less than the Net Debt Amount by at least $1,000,000, then then
the number of Holdco Ordinary Shares issuable to Bendon will be increased by the same ratio. Since the Naked Closing Net Assets
and Bendon Closing Net Debt will not be determined until the closing of the Merger, Naked stockholders cannot be certain of the
exact percentage ownership of Holdco that they will hold immediately following the closing of the Merger.
Failure to complete the Merger could
harm Naked’s future business and operations.
If the Merger is not completed, Naked is
subject to the following risks, among others:
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costs related to the Merger, such as legal and accounting fees, must be paid even if the Merger
is not completed;
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if the Merger Agreement is terminated under certain circumstances, Naked may be required to issue
to Bendon 1,250,000 or 2,500,000 shares of Naked Common Stock (not subject to a registration statement), as adjusted for any stock
splits, stock combinations, stock dividends or similar transactions affecting Naked Common Stock;
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the attention of management of Naked may have been diverted to the Merger rather than to Naked’s
operations and the pursuit of other opportunities that could have been beneficial to it;
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the potential loss of key personnel during the pendency of the Merger as employees may experience
uncertainty about their future roles with the combined company;
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the price of Naked stock may decline and remain volatile;
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Naked will have been subject to certain restrictions on the conduct of its business which may have
prevented it from making certain acquisitions or dispositions or pursuing certain business opportunities while the Merger was pending;
and
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Naked may be subject to litigation related to the Merger or any failure to complete the Merger.
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In addition, if the Merger Agreement is
terminated and the board of directors of Holdco determines to seek another business combination, there can be no assurance that
Naked will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be
provided by Holdco in the Merger.
Bendon and Naked will incur substantial
transaction fees and costs in connection with the Merger.
Bendon and Naked expect
to incur material non-recurring expenses in connection with the Merger and consummation of the Transactions. Additional unanticipated
costs may be incurred in the course of the integration of the businesses of Bendon and Naked. The parties cannot be certain that
the elimination of duplicative costs or the realization of other efficiencies related to the integration of the two businesses
will offset the transaction and integration costs in the near term, or at all.
The Merger may be completed even though material adverse
changes may result from the announcement of the Merger, industry-wide changes and other causes.
In general, either
Naked or Holdco can refuse to complete the Merger if there is a material adverse change affecting the other party between the signing
date of the Merger Agreement, and the planned closing. However, certain types of changes do not permit either party to refuse to
complete the Merger, even if such change could be said to have a material adverse effect on Naked or Holdco, including the following
events (except, in some cases, where the change has a disproportionate effect on a party):
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changes generally affecting the economy, financial or securities markets;
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the announcement of the Merger and the transactions contemplated by the Merger Agreement, including
the impact thereof on the relationships of a party with its employees, customers, suppliers, or partners;
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the outbreak or escalation of war or any act of terrorism, civil unrest, or natural disasters;
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changes (including changes in law) or general conditions in the industry in which the party operates;
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changes in GAAP (or the authoritative interpretation of GAAP); or
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compliance with the terms of, or the taking of any action required by the Merger Agreement.
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If adverse changes occur and Naked and
Holdco still complete the Merger, the combined company’s stock price may suffer. This in turn may reduce the value of the
Merger to the stockholders of Naked.
The pendency of the Merger could
materially adversely affect our business and operations or result in a loss of its employees, which, consequently, could materially
adversely affect the business and operations of the combined company.
Uncertainty about the
effect of the Merger on employees, customers and suppliers may have an adverse effect on our business and, consequently, on the
combined company. These uncertainties may impair our ability to attract, retain and motivate employees until the completion of
the Merger, which may have a material adverse effect on us if the Merger is not completed. If employees depart because of issues
concerning employment security and difficulty of integration or a desire not to remain with the combined company, HoldCo’s
future business could be adversely affected. Similarly, uncertainties about the effect of the Merger could cause customers, suppliers
and others who deal with us to change their existing business relationships, which could negatively affect our revenues, earnings
and cash flows, as well as the market price of our common stock, regardless of whether the Merger is completed. The realization
of any of these risks may materially adversely affect the business and financial results of the combined company.
Current stockholders will have a
reduced ownership and voting interest in the combined company after the Merger.
As a result of the
Merger, Naked stockholders along with Bendon’s affiliates are expected to hold approximately 8.35% of the combined company’s
outstanding ordinary shares immediately following completion of the Transactions. Holdco shareholders and our stockholders currently
have the right to vote for their respective directors and on other matters affecting the applicable company. When the Merger occurs,
each of our stockholders that receives ordinary shares of the combined company will hold a percentage ownership of the combined
company that will be significantly smaller than the stockholder’s current percentage ownership of Naked. The combined company
will be controlled by Bendon’s affiliates, which are expected to approximately 64.8% of all shares of the combined company
on a fully diluted basis. As further discussed below, Bendon and its affiliates will be able to exercise significant influence
over the combined company’s business policies and affairs due to its large ownership percentage. As a result of their reduced
ownership percentages, our former stockholders will have less voting power in the combined company than they now have with respect
to us.
The lack of a
public market for Holdco’s ordinary shares makes it difficult to evaluate the fairness of the Merger, thus the stockholders
of Naked may receive consideration in the Merger that is greater than or less than the fair market value of their Naked shares.
The ordinary shares
of Holdco are not currently listed, and no public market currently exists for the Holdco Ordinary Shares. The lack of a public
market makes it extremely difficult to determine the fair market value of Holdco. Because the percentage of Holdco Ordinary Shares
to be issued to Naked stockholders was determined based on negotiations between the parties, it is possible that the value of the
combined company ordinary shares to be issued in connection with the Merger may be less than expected.
Bendon and its affiliates will exercise
significant influence over the combined company, and their interests in the combined company may be different than yours.
Following the completion
of the Merger, Bendon’s affiliates will beneficially own approximately 64.8% of the outstanding ordinary shares of the combined
company calculated on a fully diluted basis. Accordingly, Bendon’s affiliates will be able to exercise significant influence
over the combined company’s business policies and affairs, including the composition of the combined company’s board
of directors and any action requiring the approval of the combined company’s shareholders. The interests of Bendon and its
affiliates may conflict with your interests. For example, these shareholders may support certain long-term strategies or objectives
for the combined company which may not be accretive to shareholders in the short term. The concentration of ownership may also
delay, defer or even prevent a change in control of the combined company, even if such a change in control would benefit our other
stockholders, and may make some transactions more difficult or impossible without the support of these parties. This significant
concentration of share ownership may adversely affect the trading price for the combined company’s ordinary shares because
investors often perceive disadvantages in owning stock in companies with shareholders who own significant percentages of a company’s
outstanding stock.
The combined company may not experience
the anticipated strategic benefits of the Merger.
The respective management
of Naked and Bendon believe that the Merger would provide certain strategic benefits that may not be realized by each of the companies
operating as standalones. Specifically, we believe the Merger would provide certain strategic benefits which would enable each
of Naked and Bendon to accelerate their respective business plans through an increased access to capital in the public equity markets,
increased management strength and management expertise, access to a larger customer base for the combined sales organization. There
can be no assurance that these anticipated benefits of the Merger will materialize or that if they materialize will result in increased
shareholder value or revenue stream to the combined company.
Some of the Bendon and Naked officers and directors have
interests in the Merger that are different from yours and that may influence them to support or approve the Merger without regard
to your interests.
Certain officers of
Bendon and Naked participate in arrangements that provide them with interests in the Merger that are different from yours, including,
among others, continued service as an executive officer or director of the combined company and the right to continued indemnification
for directors, executive officers and former directors and executive officers of Bendon and Naked following the completion of the
Merger.
The Merger Agreement limits Naked’s
ability to pursue alternatives to the Merger, which could discourage a potential acquirer of Naked from making an alternative transaction
proposal and, in certain circumstances, could require Naked to issue to Bendon a substantial number of shares of Naked Common Stock.
Under the Merger Agreement,
Naked is restricted, subject to limited exceptions, from pursuing or entering into alternative transactions in lieu of the Merger.
In general, unless and until the Merger Agreement is terminated, Naked is restricted from, among other things, soliciting, initiating
or knowingly taking any action to facilitate or encourage a competing acquisition proposal. The board of directors of Naked is
limited in its ability to change its recommendation with respect to the Merger. Naked may terminate the Merger Agreement and enter
into an agreement with respect to a superior offer only if specified conditions have been satisfied, including (i) compliance with
the non-solicitation provisions of the Merger Agreement, (ii) the expiration of certain waiting periods during which Holdco may
propose changes to the Merger Agreement so the superior offer is no longer a superior offer and (iii) the issuance to Bendon of
1,250,000 shares of Naked Common Stock (not subject to a registration statement), as adjusted for any stock splits, stock combinations,
stock dividends or similar transactions affecting Naked Common Stock.
The fairness opinion rendered to
the board of directors of Naked by Noble Capital Markets will not reflect changes in circumstances, including general market and
economic conditions or the prospects of Naked or Holdco, between the signing the Merger Agreement and the completion of the Merger.
Noble has issued
to the Naked board of directors a written opinion, subject to the terms, conditions and qualifications set forth therein, as
of the date of execution of the Merger Agreement, the consideration to be received by the stockholders of Naked is fair to
the stockholders of Naked from a financial point of view. Naked’s board of directors has not obtained an updated
fairness opinion as of the date of this Form 10-K. Importantly, the Noble opinion does not reflect changes that may occur or
may have occurred after the date of the opinion, including changes in the operations, performance and prospects of Naked or
Holdco, general market and economic conditions and other factors that may be beyond the control of Naked or Holdco, and on
which the fairness opinion was based, that may alter the value of Naked, Bendon or Holdco or the prices of shares of Naked
common stock or Holdco Ordinary Shares by the time the Merger is completed. The Noble opinion does not speak as of the time
the Merger will be completed or as of any date other than the date of execution of the Merger Agreement. Because Naked does
not anticipate asking Noble to update its opinion, the opinion will not address the fairness of the terms the Merger
consideration, from a financial point of view, at the time the Merger is completed.
Litigation may be instituted against
us, members of our board of directors, Bendon and members of the Bendon board of directors challenging the Merger, and adverse
judgments in these lawsuits may prevent the Merger from becoming effective within the expected timeframe or at all
.
We, members of our
board of directors, Bendon and members of the Bendon board of directors may be named as defendants in class action lawsuits or
other proceedings that may be brought by our stockholders challenging the Merger. If the plaintiffs in any actions that may be
brought are successful, these adverse judgments may prevent the parties from completing the Merger in the expected timeframe, if
at all. Even if the plaintiffs in these potential actions are not successful, the costs of defending against such claims could
adversely affect our financial condition or that of Bendon and such actions could adversely affect the reputations of the parties
and members of their respective boards of directors or management.
We will be subject to various uncertainties and contractual
restrictions while the Merger is pending that could adversely affect the financial results of Naked, Holdco and/or the combined
company.
Uncertainty about the effect of the Merger
on employees, suppliers and customers may have an adverse effect on us. These uncertainties may impair our ability to attract,
retain and motivate key personnel until the Merger is completed and for a period of time thereafter, and could cause customers,
suppliers and others who deal with us to seek to change existing business relationships with us. Employee retention and recruitment
may be particularly challenging prior to completion of the Merger, as employees and prospective employees may experience uncertainty
about their future roles with the combined company. The pursuit of the Merger and the preparation for the integration of the two
companies may place a significant burden on our management and internal resources. Any significant diversion of management’s
attention away from its ongoing businesses, and any difficulties encountered in the transition and integration process, could affect
our financial results.
In addition, the Merger Agreement restricts
us, without the consent of Holdco, from making certain acquisitions and dispositions and taking other specified actions while the
Merger is pending. These restrictions may prevent us from pursuing attractive business opportunities and making other changes to
our rbusiness prior to completion of the Merger or termination of the Merger Agreement.
The Holdco Ordinary Shares to be received by Naked stockholders
as a result of the Merger will have different rights from the shares of Naked common stock.
Upon completion of the Merger, Naked stockholders
will become shareholders of the combined company and their rights as shareholders will be governed by Holdco’s certificate
of registration and constitution. The combined company will be an Australian company and certain of the rights associated with
the combined company ordinary shares will be different from the rights associated with Naked common stock.
The lack of a public market for Holdco’s
shares makes it difficult to evaluate the fairness of the Merger, thus our stockholders may receive consideration in the Merger
that is greater than or less than the fair market value of their Naked shares.
The outstanding ordinary shares of Holdco
are privately held and are not traded in any public market. The lack of a public market makes it extremely difficult to determine
the fair market value of Holdco. Because the number of Holdco Ordinary Shares to be issued to Naked stockholders was determined
based on negotiations between the parties, it is possible that the value of the combined company ordinary shares to be issued in
connection with the Merger may be less than expected.
If the conditions to the completion of the Merger are
not met, the Merger will not occur.
Even if the Merger is approved by our stockholders,
additional specific conditions must be satisfied or waived (to the extent permitted under applicable law) in order to complete
the Merger, including, among others:
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The Registration Statement shall have become effective, and no stop order suspending effectiveness shall have been issued and
remain in effect,
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the completion of the Reorganization (as defined in the Merger Agreement) of Holdco;
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the Holdco Ordinary Shares issuable to Naked’s stockholders in the Merger in accordance with the Merger Agreement will
have been authorized for listing on the Nasdaq or NYSE,
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no governmental entity shall have enacted any law or order which is in effect and which has the effect of making the Merger,
the Reorganization or the other transactions contemplated by the Merger Agreement illegal or otherwise prohibiting consummation
of the Merger, the Reorganization or the other transactions contemplated by the Merger Agreement,
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no action, suit or proceeding shall be pending or threatened before any governmental entity which is reasonably expected to,
among other things, prevent consummation of any of the transactions contemplated by the Merger Agreement or cause any of the transactions
contemplated by the Merger Agreement to be rescinded following consummation,
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the representations and warranties of each party to the Merger Agreement shall be true and correct subject to certain materiality
qualifiers, and
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each party shall have performed or complied with all agreements and covenants required by the Merger Agreement to be performed
or complied with by it at or prior to the closing date.
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These and other conditions are described in detail in the Merger
Agreement. We cannot assure you that all of the conditions to the Merger will be satisfied. If the conditions to the Merger are
not satisfied or waived (to the extent permitted under applicable law), the Merger will not occur or will be delayed, and Naked
may lose some or all of the intended benefits of the Merger.
Delays in completing the Merger may
substantially reduce the expected benefits of the Merger.
Satisfying the conditions
to, and completion of, the Merger may take longer than, and could cost more than, Naked expects. Any delay in completing or any
additional conditions imposed in order to complete the Merger may materially adversely affect the benefits that Holdco and Naked
expect to achieve from the Merger and the integration of their respective businesses. In addition, subject to certain exceptions,
either of Naked and Holdco may terminate the Merger Agreement on notice to the other if the Merger is not completed by June 1,
2018, (as such date may be extended in accordance with the Merger Agreement.
Should the Merger not qualify as tax free reorganization,
for U.S. federal income tax purposes, Naked stockholders may recognize income, gain or loss in connection with the Merger.
It is expected that
the Merger will qualify as a tax-free reorganization for U.S. federal income tax purposes. The parties, however, did not seek a
ruling from the IRS regarding the tax consequences of the Merger. The failure of the Merger to qualify as a tax-free reorganization
for U.S. federal income tax purposes could result in a Naked stockholder recognizing income, gain or loss with respect to the shares
of Naked common stock surrendered by such stockholder.
Failure or delay in obtaining any necessary regulatory
approvals could cause the Merger not to be completed or to be postponed.
To complete the Merger
and all transactions contemplated by the Merger Agreement and the Merger, Holdco must comply with applicable federal and state
securities laws and the rules and regulations of Nasdaq in connection with the issuance and listing of shares of Holdco Ordinary
Shares and the filing of the definitive proxy statement/prospectus with the SEC. Failure or delay in obtaining any necessary approvals
could cause the Merger not to be completed or to be postponed, which may materially adversely affect the benefits that Bendon
and Naked expect to achieve from the Merger and the integration of their respective businesses.
Naked stockholders will not be entitled to appraisal rights
in the Merger.
Current holders of Naked common stock will
not be entitled to dissenters’ or appraisal rights in the Merger with respect to their shares of Naked common stock under
Nevada law. Pursuant to the terms of the Merger Agreement, at the Effective Time (as defined in the Merger Agreement), each share
of Naked common stock issued and outstanding immediately prior to the Effective Time (other than shares owned by Naked or its wholly-owned
subsidiary, Naked, Inc., which will be cancelled at the Effective Time without further consideration) will be automatically cancelled
and extinguished and converted into the right to receive one Holdco Ordinary Share.
Declines in Holdco’s stock price or financial results
could give rise to stockholder litigation and potential liability.
In the past, following
periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities
litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management
attention and resources, which could significantly harm the combined company’s profitability and reputation.
Holdco is not expected to pay dividends on its shares
of ordinary shares in the foreseeable future.
For the foreseeable
future, it is expected that the combined company will continue to retain any earnings to finance the development and expansion
of its business, and not to pay any cash dividends on its ordinary shares. Consequently, your only opportunity to achieve a return
on your investment in the combined company will be if the market price of the ordinary shares appreciates and you sell your shares
at a profit. There is no guarantee that the price of Holdco’s ordinary shares that will prevail in the market after the Merger
will ever exceed the value of the Holdco Ordinary Shares exchanged in the Merger.
There may be less publicly available
information concerning Holdco than there is for issuers that are not foreign private issuers because it is anticipated that Holdco
will be considered a foreign private issuer and will be exempt from a number of rules under the Exchange Act and will be permitted
to file less information with the SEC than issuers that are not foreign private issuers. Holdco, as a foreign private issuer, will
be permitted to follow home country practice in lieu of the listing requirements of the Nasdaq, subject to certain exceptions.
A foreign private issuer
under the Exchange Act is exempt from certain rules under the Exchange Act, and is not required to file periodic reports and financial
statements with the SEC as frequently or as promptly as companies whose securities are registered under the Exchange Act but are
not foreign private issuers, or to comply with Regulation FD, which restricts the selective disclosure of material non-public information.
It is anticipated that Holdco will be exempt from certain disclosure and procedural requirements applicable to proxy solicitations
under Section 14 of the Exchange Act. The members of Holdco’s management board, officers and principal shareholders will
be exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act. Accordingly,
there may be less publicly available information concerning Holdco than there is for companies whose securities are registered
under the Exchange Act but are not foreign private issuers, and such information may not be provided as promptly as it is provided
by such companies.
In addition, certain
information may be provided by Holdco in accordance with Australian law, which may differ in substance or timing from such disclosure
requirements under the Exchange Act. Further, as a foreign private issuer, under the Nasdaq rules Holdco may be subject to less
stringent corporate governance requirements. Subject to certain exceptions, the rules of Nasdaq (and the NYSE) permit a foreign
private issuer to follow its home country practice in lieu of the listing requirements of Nasdaq, including, for example, certain
internal controls as well as board, committee and director independence requirements. Holdco would be required to disclose any
significant ways in which its corporate governance practices differ from those followed by U.S. domestic companies under Nasdaq
listing standards in its annual report on Form 20-F filed with the SEC or on its website. Although Holdco presently does not intend
to rely on its home country practice in lieu of the Nasdaq corporate governance requirements, there can be no assurance it won’t
elect to do so in the future. Accordingly, you may not have the same protections afforded to shareholders of companies that are
required to comply with all of the Nasdaq corporate governance requirements.
Holdco may lose
its foreign private issuer status in the future, which could result in significant additional costs and expenses.
As a foreign private
issuer, Holdco would not be required to comply with all the periodic disclosure and current reporting requirements of the Exchange
Act and related rules and regulations. The determination of foreign private issuer status is made annually. There is a risk that
Holdco will lose its foreign private issuer status in the future. Holdco would lose its foreign private issuer status if, for example,
more than 50% of its assets are located in the U.S. and Holdco’s continue to fail to meet additional requirements necessary
to maintain our foreign private issuer status. The regulatory and compliance costs to Holdco under U.S. securities laws as a U.S.
domestic issuer may be significantly greater than the costs Holdco will incur as a foreign private issuer. If Holdco is not a foreign
private issuer, it will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the
SEC, which are more detailed and extensive in certain respects than the forms available to a foreign private issuer. Holdco would
be required under current SEC rules to prepare our financial statements in accordance with U.S. GAAP and modify certain of its
policies to comply with corporate governance practices associated with U.S. domestic issuers. Such conversion and modifications
would involve additional costs. In addition, Holdco may lose its ability to rely upon exemptions from certain corporate governance
requirements on U.S. stock exchanges that are available to foreign private issuers, which could also increase Holdco’s costs.
Risks Related to an Investment in Holdco Ordinary Shares
Currently, there is no public market
for Holdco Ordinary Shares. Naked stockholders cannot be sure that an active trading market will develop for or of the market price
of the Holdco Ordinary Shares they will receive.
Under the Merger Agreement,
each share of Naked Common Stock will be converted into the right to receive one Holdco Ordinary Share. Holdco is newly formed
entity and prior to this transaction it has not issued any securities in the U.S. markets or elsewhere nor has there been extensive
information about it, its businesses or operations publicly available. Under the Merger Agreement, Bendon and Holdco have agreed
to use their best efforts to cause the Holdco Ordinary Shares to be issued in the Merger to be approved for listing on the Nasdaq
or NYSE prior to the effective time of the Merger and the approval of the listing on the Nasdaq or NYSE of the Holdco Ordinary
Shares to be issued in the Merger is a condition to the closing of the Merger. In accordance with these provisions of the Merger
Agreement, Holdco has applied to list the Holdco Ordinary Shares on Nasdaq. However, there can be no assurance that Nasdaq will
approve Holdco’s application, and even if it does, the listing of the shares on Nasdaq does not assure that a market for
the Holdco Ordinary Shares will develop or the price at which the shares will trade. No assurance can be provided as to the demand
for or trading price of Holdco Ordinary Shares following the closing of the Merger and the Holdco Ordinary Shares may trade at
a price less than the current market price of Naked Common Stock.
Even if the combined
company is successful in developing a public market, there may not be enough liquidity in such market to enable shareholders to
sell their ordinary shares. If a public market for the combined Holdco’s ordinary shares does not develop, investors may
not be able to re-sell their ordinary shares, rendering their shares illiquid and possibly resulting in a complete loss of their
investment. Holdco cannot predict the extent to which investor interest in the combined company will lead to the development of
an active, liquid trading market. The trading price of and demand for Holdco Ordinary Shares following completion of the Merger
and the development and continued existence of a market and favorable price for the Holdco Ordinary Shares will depend on a number
of conditions, including the development of a market following, including by analysts and other investment professionals, the businesses,
operations, results and prospects of Holdco, general market and economic conditions, governmental actions, regulatory considerations,
legal proceedings and developments or other factors. These and other factors may impair the development of a liquid market and
the ability of investors to sell shares at an attractive price. These factors also could cause the market price and demand for
Holdco Ordinary Shares to fluctuate substantially, which may limit or prevent investors from readily selling their shares and may
otherwise affect negatively the price and liquidity of Holdco Ordinary Shares. Many of these factors and conditions are beyond
the control of Holdco or Holdco shareholders.
HoldCo’s share price may be
volatile and could decline substantially.
The market price of
Holdco’s ordinary shares may be volatile, both because of actual and perceived changes in the company’s financial results
and prospects, and because of general volatility in the stock market. The factors that could cause fluctuations in Holdco’s
share price may include, among other factors discussed in this section, the following:
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actual or anticipated variations in the financial results and prospects of the company or other companies in the apparel
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changes in financial estimates by Wall Street research analysts;
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actual or anticipated changes in the United States economy or the retailing environment;
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changes in the market valuations of other specialty apparel companies;
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announcements by Holdco or its competitors;
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mergers or other business combinations involving Holdco;
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additions and departures of key personnel;
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changes in accounting principles;
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the passage of legislation or other developments affecting Holdco or its industry;
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the trading volume of Holdco’s ordinary shares in the public market;
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changes in economic conditions;
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financial market conditions;
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natural disasters, terrorist acts, acts of war or periods of civil unrest; and
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the realization of some or all of the risks described in this section.
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In addition, the stock markets have experienced
significant price and trading volume fluctuations from time to time, and the market prices of the equity securities of apparel
companies have been extremely volatile and are sometimes subject to sharp price and trading volume changes. These broad market
fluctuations may materially and adversely affect the market price of Holdco’s ordinary shares.
The financial performance, and price
of the ordinary shares, of the combined company may be affected by factors different from those that historically have affected
Naked.
Upon completion of
the Merger, holders of Naked common stock will become holders of ordinary shares of Holdco. The business and target markets of
Holdco and the combined company differ from those of Naked, and accordingly the results of operations and the price of Holdco Ordinary
Shares will be affected by some factors that are different from those currently affecting the results of operations and stock price
of Naked.
The combined company’s
stock price is expected to be volatile, and the market price of the combined company ordinary shares may drop following the Merger.
The market price of the combined company’s ordinary shares could be subject to significant fluctuations following the Merger.
Moreover, stock markets generally have experienced substantial volatility that has often been unrelated to the operating performance
of individual companies. Such market fluctuations may also adversely affect the trading price of the combined company’s ordinary
shares. Declines in the combined company’s stock price after the Merger may result for a number of reasons including if:
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investors react negatively to the prospects of the combined company’s business and prospects from the Merger;
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the effects of the Merger on the combined company’s business and prospects are not consistent with the expectations of
financial or industry analysts;
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the combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial
or industry analysts; or
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other factors beyond the combined company’s control, including but not limited to fluctuations in the valuation of companies
perceived by investors to be comparable to the combined company.
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Furthermore, the stock
markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities
of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies.
These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions,
interest rate changes or international currency fluctuations, have and may continue to negatively affect the market price of Holdco’s
ordinary shares.
If securities or industry analysts
do not publish research or publish inaccurate or unfavorable research about Holdco or its business, its ordinary shares price and
trading volume could decline.
The trading market for the Holdco’s
ordinary shares will depend in part on the research and reports that securities or industry analysts publish about Holdco or its
business. Securities and industry analysts do not currently, and may never, publish research on Holdco. If no securities or industry
analysts commence coverage of Holdco, the trading price for its ordinary shares would likely be negatively impacted. In the event
securities or industry analysts initiate coverage, if one or more of the analysts who cover Holdco downgrade its securities or
publish inaccurate or unfavorable research about its business, its stock price would likely decline. If one or more of these analysts
cease coverage of Holdco or fail to publish reports on Holdco, demand for its ordinary shares could decrease, which might cause
its ordinary share price and trading volume to decline.