Despite Big Loss Naked Pushing Aggressively

Naked Brand Group, the underwear and intimates firm where Carole Hochman became CEO in mid 2014, reported a loss of $21,078,265 on sales of $557,212 for the year ended January 31, 2015. More than half of this deficit is composed of “substantial non-cash losses associated with the derivative accounting in connection with” a private placement offering last year to raise capital for the firm.

In the fiscal year before Hochman signed on, the company lost $4,238,490 on higher sales of $639,107.

A second factor involved in the big loss in fiscal 2015 was “an increase in general and administrative expenses as a result of stock based compensation charges related to stock options issued to a new core management team as part of incentive based compensation packages.”

Last summer Naked, based on Hochman’s strong reputation in the sleepwear and intimates categories, raised $7.3 million in the private offering. Naked had been a men’s-only underwear producer, but has assembled a team of experienced apparel professionals with the intention of first expanding into women’s intimates and eventually building “a global lifestyle brand business offering innovative apparel, home and personal products.”

Though sales actually declined in 2014, the company has begun 2015 aggressively. It began showing a “complimentary line of women’s innerwear, lounge and sleepwear products” in May. Prior to that it had upgraded its men’s underwear website at thenakedshop.com, and launched new men’s underwear collections.

In February Naked introduced its men’s Essential Cotton Stretch collection, and offered underwear and undershirts “in 2-packs to access a broader customer base for Naked.” At the same time, the firm introduced its men’s Signature Collection made of modal cotton fabrics. Finally, “In February 2015, we introduced entirely new packaging for our Luxury, Active, Essential and Signature collections to feature our new logo, enhanced brand messaging and improve of product presentation to customers.”

The new women’s collection utilizes many of the same fabrics as the men’s collections. Included are “a range of products soft bras, panties, boyshorts, hipsters, lounge pants and tops, camisoles, tank tops, pajamas, teddies and nightgowns and sleepshirts. We expect some of these products will be available for sales online and in select boutiques during Summer and Fall 2015. Other products, including all of our intimate apparel collections will be introduced for retail in early 2016.”

Naked, stated its products are sold at “premium fashion stores in North America, primarily in Canada and on the West Coast of the United States including Holt & Renfrew, Hudson Bay Company and Nordstrom.” The annual report also revealed that the company sells through such online sites as “Amazon.com, hackberry.com, hisroom.com and freshpair.com.”

In its annual filing with the SEC, Naked admitted, “In 2015 sales were heavily concentrated with Nordstrom, which accounted for 28% of our sales. During fiscal 2014, Nordstrom accounted for 37% of our sales and Holt Renfrew accounted for 12%. Nordstrom is currently of key importance to our business and our results of operations would be materially adversely affected if this relationship ceased.”

In discussing it’s sales results for the year ended January 31, Naked provided only an incomplete explanation of the reasons behind its sales decline. “Net sales decreased as a result of the liquidation of old inventory as a result of our planned transition to new product collections featuring new branding, product design and production improvements, all of which were brought to market subsequent to the end of the fiscal year. The reduction was also the result of new product introductions in the comparative period (our Tencel and Silver product lines) which resulted in larger initial bulk up orders during fiscal 2014.”

The annual report disclosed some serious challenges ahead for the firm. “As at January 31, 2015 we had not yet achieved profitable operations and expect to continue to incur significant losses from operations in the immediate future. These factors cast substantial doubt about our ability to continue as a going concern. To remain a going concern, we will be required to obtain the necessary financing to meet our obligations and repay our substantial existing liabilities as well as further liabilities arising from normal business operations as they come due. Management plans to obtain the necessary financing through the issuance of equity to existing stockholders.”

Naked further admitted that “Should we be unable to obtain this financing, we may need to substantially scale back operations or cease business. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances that we will be able to obtain additional financing necessary to support our working capital requirements. To the extent that funds generated from operations are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to us.”

For her efforts to make Naked a success, Hochman is well compensated. The report stated, “we entered into an employment agreement, dated June 6, 2014, for a term of three years whereby (a) we will pay Ms. Hochman a base salary of $400,000 per year, provided Ms. Hochman will forgo the first twelve months of the base salary and will receive only $1 for that period; (b) Ms. Hochman received a sign-on stock option grant to purchase 57,150,000 shares of our common stock, equal to 20% of our issued shares of common stock on a fully-diluted basis following the final closing of the private placement, with each option exercisable at $0.128 per share and vesting in equal monthly installments over a period of three years from June 10, 2014; (c) Ms. Hochman will be eligible to receive an annual cash bonus for each whole or partial year during the employment term payable based on the achievement of one or more performance goals established annually by our board of directors; (d) Ms. Hochman will be entitled to participate in our company’s employee benefit plans; and (e) Ms. Hochman will be entitled to an annual expense allowance.”

Naked products “have been made in Canada, Turkey, and China,” the company explained in the filing, but added that before the end of its fiscal year “we entered into a strategic manufacturing partnership pursuant to which our primary production moved to China.”