NAKED BRAND GROUP INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, including the risks in the section entitled "Risk Factors", uncertainties and other factors, which may cause our or our industry's actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. These risks and uncertainties include: a continued downturn in international economic conditions; any adverse occurrence with respect to the development or marketing of our apparel products; our ability to successfully bring apparel products to market; product development or other initiatives by our competitors; fluctuations in the availability and cost of materials required to produce our products; any adverse occurrence with respect to distribution of our products; potential negative financial impact from claims, lawsuits and other legal proceedings or challenges; and other factors beyond our control.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Cautionary Note Regarding Management's Discussion and Analysis This Management's Discussion and Analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes. The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis, we review our estimates and assumptions. The estimates were based on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions. The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and the related notes that appear elsewhere in this quarterly report.

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

As used in this quarterly report, the terms "we", "us" "our" and "the Company" mean Naked Brand Group Inc. and our wholly-owned subsidiary, Naked Boxer Brief Clothing Inc..

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

Current Business and Plan of Operations Our principal executive offices are located at #2 34346 Manufacturers Way, Abbotsford, British Columbia V2S 7M1, and our telephone number is (604) 855-4767. Our common stock is quoted on the OTCQB under the symbol "NAKD".

We were incorporated in the State of Nevada on May 17, 2005. Following incorporation, we commenced the business of marketing websites and accessories throughout North America. However, as we were not successful in developing our business marketing websites and accessories prior to the entry into the acquisition agreement and had no source of revenue from our business plan, we determined to seek out a new business opportunity to increase value for our shareholders.

-------------------------------------------------------------------------------- 5 Naked Boxer Brief Clothing Inc. ("Naked") was incorporated under the federal laws of Canada on May 21, 2009 as "In Search of Solutions Inc." and changed its corporate name to "Naked Boxer Brief Clothing Inc." on May 17, 2010. It commenced business operations on February 1, 2010 as a manufacturer and seller of direct and wholesale men's undergarments to consumers and retailers. Naked has been realizing revenues from its operations since September, 2010. Naked continued from the federal jurisdiction of Canada to the jurisdiction of the State of Nevada on July 27, 2012. As part of the continuation, all classes of shares of Naked, including the Class C, D, E and F common shares, were converted into one class of common shares of the Nevada corporation.

On July 30, 2012, we closed an Acquisition Agreement dated February 28, 2012, as amended (the "Acquisition Agreement"), with Naked whereby we acquired 100% of the issued and outstanding shares of Naked in exchange for 13,500,000 shares of our common stock (the "Acquisition"). As, upon closing, the former stockholders of Naked controlled 50% of the our issued and outstanding shares of common stock and former management of Naked comprised more than 50% of our board of directors, the acquisition was accounted for as a reverse acquisition, with Naked deemed to be the acquirer for accounting purposes. As a result, its assets and liabilities are included in the consolidated balance sheet for the continuing entity at their historical carrying values and these consolidated financial statements are presented as a continuation of Naked. The merger of Naked and SBH Acquisition Corp. was completed on July 30, 2012. As a result of the foregoing, Naked became a wholly-owned subsidiary of our company.

Effective August 29, 2012, we completed a merger with a newly-formed subsidiary, Naked Brand Group Inc., a Nevada corporation, which was incorporated solely to effect a change of name. As a result, effective August 29, 2012, we changed our name from "Search By Headlines.com Corp." to "Naked Brand Group Inc.".

Our primary operations are conducted through our wholly-owned subsidiary, Naked.

We will continue to produce men's undergarments and we expect to begin selling t-shirts during the last month of the third quarter of fiscal 2013. We also intend to ship limited styles of women's underwear by the end of the third quarter of fiscal 2013.

Recent Corporate Developments Since the commencement of our third quarter ended October 31, 2012, we have experienced the following significant corporate developments: 1. On August 10, 2012, we entered into an Agency and Interlender Agreement (the "Agency Agreement") with Kalamalka Partners Ltd. ("Kalamalka") and certain lenders (the "Lenders") as set out in the Agency Agreement whereby we agreed to borrow up to $800,000 from the Lenders under a revolving loan arrangement by the issuance of convertible promissory notes (the "Notes") from time to time as such funds are required by us. The Notes are secured by a general security agreement over the present and future assets of the Company and will bear interest at 12% per annum, calculated and payable monthly. The principal amount outstanding under any Note and all accrued and unpaid interest therein, are convertible into common shares of the Company at $0.75 per share at any time at the option of the Lender.

This significant development allows the Company to fund inventory levels beyond initial purchase orders so Naked can have sufficient inventory on hand. It also allows for Naked to finance its accounts receivable in an efficient and economical way.

In connection with the closing of the Agency Agreement, the Company issued four Notes in the aggregate principal amount of $400,000 and an aggregate of 100,000 share purchase warrants to the Lenders (collectively, the "Lender Warrants"). Each of the Lender Warrants are exercisable into one common share of the Company as follows: 25,000 Lender Warrants are exercisable at $0.25 until August 10, 2015, 25,000 Lender Warrants are exercisable at $0.50 until August 10, 2015 and 50,000 Lender Warrants are exercisable at $0.25 until August 10, 2014.

-------------------------------------------------------------------------------- 6 2. Since the commencement of our third quarter, we have raised an aggregate of $332,000 through the issuance shares and units of our common stock. We issued 200,000 units at a price of $0.50 per unit for gross proceeds of $100,000 on September 24, 2012. Each unit consisted of one common share and one share purchase warrant exercisable into one share of common stock at $0.75 per share for a period of two years. In November, 2012, we issued an aggregate of 500,000 units at a price of $0.25 per unit and 400,000 shares at a price of $0.25 per share for gross proceeds of $225,000 with each unit consisting of one share of common stock and one share purchase warrant. Each warrant is exercisable into one share of common stock at a price of $0.50 per share for a period of two years.

3. On November 12, 2012, we announced that we shipped products to 39 of Nordstrom`s best stores across the United States and on Nordstrom.com, giving us an immediate distribution channel through one of the nation`s most sought after department stores. The Nordstrom launch was supported by a national public relations and marketing campaign, giving us the opportunity to expand into 117 Nordstrom full-line stores. The initial order from Nordstrom will represent approximately 60% of year to date revenue for the Company at the time of shipment.

4. On October 9, 2012, we entered into a binding memorandum of understanding with Shark Investments, LLC ("Shark"), whereby Shark has agreed to provide consulting services to our company, including assistance with brand management, celebrity alignment, strategic retail placement, manufacturing strategy, strategic and creative development of licensed products and financing assistance, for a two year period. Under the terms of the Agreement, Shark will be paid a monthly fee of $5,000, effective September 1, 2012. We also granted to Shark 600,000 stock options, each exercisable into one share of our common stock at a price of $0.25 per share until October 9, 2017. During the term of the agreement, the Company shall have the right to use and permit the use of Daymond John's name and approved likenesses and approved biographical information in connection with developing, securing financing, producing, marketing or otherwise promoting the Naked Brand; provided Company obtains Shark's prior written approval in each instance.

Outlook The Company will continue to operate in the underwear market in quarter four and has no current plans to change operations. We shipped our initial order to major US retailer, Nordstrom, on November 2, 2012. We anticipate sales for quarter four to be $350,000 to $400,000 from revenue in North America.

We have begun development of a sub-line to open up distribution channels in the lower end of the market. This development came at the request of one of our customers, Holt Renfrew. Holt Renfrew is creating a department store called "hr2" to sell products to individuals at a lower end of the market.

The Company plans to draw up to another $100,000 in debt in connection with the Agency Agreement to fund further inventory and receivables financing requirements.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2012 The following discussion of our financial condition and results of operations should be read together with the unaudited interim financial statements and the notes to the unaudited interim financial statements included in this quarterly report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.

Revenue During the three months ended October 31, 2012, we generated net sales of $59,254 compared to $21,446 for the same period in 2011, an increase of $37,808.

Net sales increased as a result of new customers and from increased orders from existing key customers, including increased orders from our largest customer, Holt Renfrew, as a result of an auto-replenishment program commencing in the second quarter of 2012. We shipped to 60 stores versus 43 stores year over year.

We expect further increases in net sales going into our fourth quarter as a result of orders which were shipped in November, 2012.

-------------------------------------------------------------------------------- 7 Sales declined over the previous quarter due late shipment of inventory which caused our new cotton line to be introduced in quarter four.

Concurrently, we had an increase in cost of sales due to the higher volume of sales. Our gross profit margin increased to 34% in the quarter ended October 31, 2012 from 16% in the quarter ended October 31, 2011. This was due to significant cost savings as a result of more efficient shipping pricing policies. Beginning in the current fiscal quarter, we moved some of our production of our cotton line to Turkey to increase quality and to further lower the costs of production, which we expect will impact our profit margins favorably going forward.

Operating Expenses Three months ended October 31, Change General and administrative 2012 2011 $ % Bad debts $ 179 $ - 179 N/A Bank charges and interest 3,823 589 3,234 548.9 Consulting 13,601 4,749 8,852 186.4 Depreciation 5,627 683 4,944 724.1 Insurance 2,436 841 1,595 189.6 Inventory loss 13,895 829 13,066 1576.7 Marketing 57,257 24,313 32,944 139.0 Occupancy and rent 6,018 5,742 276 4.8 Office and miscellaneous 15,167 2,283 12,883 564.1 Product development 11,589 13,421 (1,832 ) (13.6 ) Professional fees 100,229 9,029 91,200 1010.1 Salaries and benefits 64,330 16,418 47,912 291.8 Share based compensation 179,738 - 179,738 N/A Transfer agent and filing fees 15,235 - 15,235 N/A Travel 25,514 9,400 16,114 171.4 Warehouse management 17,232 - 17,232 N/A Total $ 531,870 $ 88,981 442,889 508.1 There was an increase in general and administrative expenses to $531,870 for the three months ended October 31, 2012, compared to $88,981 for the three months ended October 31, 2011. The largest change was non-cash share based compensation expense for Shark's contract valued at $140,603 and calculated using the Black Scholes model. The value of management's stock options expensed for the period was $31,809 and represented the first period of this expense. Our marketing expenses increased because we added a public relations firm since last year and paid for product placement into a music video. We also had additional expenses incurred to maintain our listing on the public market, including increased professional fees and significant professional fees associated with the closing of the long-term financing agreement and new contracts with advisors. In October, we added a third party logistics company to handle all of our warehouse management in the United States for U.S. customers. The costs incurred were mostly one-time setup costs and receiving of initial inventory. Inventory loss increased because of spoilage due to inadequate staffing.

Salaries and benefits also increased by $47,912 to $64,330 in the three months ended October 31, 2012 (2011: $16,418) due to the hiring of one full time staff member to support the finance team, a production manager and a technical supervisor during July 2012, and as a result of salary increases to existing management. At the end of the period, the Company laid off the production manager due to lack of available work.

Other income and expenses We incurred interest expenses of $13,762 for the three months ended October 31, 2012 as compared to $1,053 for the same period in 2011, an increase of $12,709.

This increase in interest is attributable to the loan advances made in connection with the Acquisition and in connection with the revolving loan agreement entered into in August, 2012 and accretion expense associated with the financing agreement.

-------------------------------------------------------------------------------- 8 Financing charges increased to $17,971 for the three months ended October 31, 2012 from $244 for the three months ended October 31, 2011. This increase was due to non-cash financing fees associated with the warrants issued in connection with the Agency Agreement in August 2012. For the quarter ending October 31, 2011, there were only insignificant financing charges related to our factoring relationship with Liquid Capital Corporation, which has since been terminated.

Net loss and comprehensive loss Our net loss for the three months ended October 31, 2012 was $554,753, or $0.02 per share, as compared to a net loss of $87,860, or $0.01 per share, for the three months ended October 31, 2011, as a result of the increased general and administrative expenses described above.

Our other comprehensive income for the three months ended October 31, 2012 was $646, as compared to a comprehensive loss of $6,936 for the three months ended October 31, 2011. The increase in other comprehensive loss was due to the changes in foreign currency translation gains and losses.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 2012 Revenue During the nine months ended October 31, 2012, we generated net sales of $151,502 compared to $89,025 during the same period in 2011. The increase of $62,477 was primarily a result of increases in sales from retail customers, both as a result of new customers and increased sales to existing customers. We shipped to 103 stores during the year versus 76 in the year prior. Average sales per customer increased partially as a result of the implementation of a minimum order volume, and as result of these customers seeing higher turnover of our product.

We had an increase in cost of sales as a result of the higher volume of sales.

Our gross profit margin remained consistent from period to period, at 33% for the nine months ended October 31, 2012 and 35% for the nine months ended October 31, 2011.

Operating Expenses Nine months ended October 31, Change General and administrative 2012 2011 $ % Bad debts $ 3,403 $ 628 2,775 441.9 Bank charges and interest 5,235 1,552 3,683 237.3 Consulting 76,764 8,874 67,890 765.0 Depreciation 7,717 2,091 5,626 269.1 Directors fees 3,002 4,080 (1,078 ) (26.4 ) Insurance 4,479 3,137 1,342 42.8 Inventory loss 15,788 872 14,916 1710.6 Marketing and advertising 115,604 40,500 75,104 185.6 Occupancy and rent 19,216 19,190 26 0.1 Office and miscellaneous 56,400 13,265 43,135 325.2 Product development 38,751 20,094 18,657 92.8 Professional fees 206,693 19,431 187,262 963.7 Salaries and benefits 127,090 46,381 80,709 174.0 Share based compensation 179,738 258,577 (78,839 ) (30.5 ) Transfer agent and filing fees 15,235 - 15,235 N/A Travel 55,000 14,925 40,075 268.5 Warehouse management 17,232 - 17,232 N/A Total $ 947,347 $ 453,597 493,750 108.1 -------------------------------------------------------------------------------- 9 General and administrative expenses were $947,347 for the nine months ended October 31, 2012, compared to $453,597 for the nine months ended October 31, 2011. Increases to general and administrative expenses were attributable to an increase in marketing costs of $75,104 as a result of increased public relations activities and increased sample giveaways as a result of adding more product lines; specifically, we added a public relations firm in May on a monthly retainer (non-contractual) of $5,000 per month. Office expenses increased by $43,135 as a result of increased postages attributable to increased sample giveaways and in association with our increased head office infrastructure.

Product development costs increased by $18,657 and consulting and contractor fees increased by $67,890 as a result of the launch of our new cotton collection and color lines. Professional fees increased by $187,262, primarily due to the development and execution of the Acquisition Agreement, including auditing and quarterly review fees, as well as legal fees associated with entering into various consulting and financing agreements. Travel expenses increased by $40,075 as a result of trips to Turkey to develop relationships with manufacturers in anticipation of outsourcing production of our cotton line, as well as trips to the United States to develop other product relationships. In October, we added a third party logistics company to handle all of our warehouse management in the United States for U.S. customers. The costs incurred were mostly one-time setup costs and receiving of initial inventory. Inventory loss increased because of spoilage due to inadequate staffing.

Depreciation and amortization expenses for the nine months ended October 31, 2012 and October 31, 2011 totaled $7,716 and $2,092 respectively. This increase was due to the addition of two new computers and a server to our property and equipment increases from our new website launched in August 2012.

Other income and expenses Financing charges increased to $29,287 for the nine month period ended October 31, 2012 compared to $569 for the nine months ending October 31, 2011. This increase was due to a $5,000 financing fee for a short term inventory loan associated with the $200,000 note payable and $17,379 for the amortization of financing fees associated with obtaining the revolving loan in August 2012. The remaining increase was a result of financing from our factoring company on increased accounts receivable sales from increased sales and a financing fee of 3.5% on the buyout of the accounts receivable. This factoring relationship ended in July 2012. For the quarter ending October 2011, there were only insignificant financing charges related to our expired line of credit with our banking institution.

Net loss and comprehensive loss Our net loss for the nine months ended October 31, 2012 was $964,073, or $0.04 per share, as compared to a net loss of $427,585, or $0.05 per share, for the nine months ended October 31, 2011, as a result of the increased general and administrative expenses described above.

Our other comprehensive loss for the nine months ended October 31, 2012 was $3,539 as compared to an other comprehensive loss of $7,364 for the nine months ended October 31, 2011. The increase in other comprehensive loss was due to the changes in foreign currency translation gains and losses.

LIQUIDITY AND FINANCIAL CONDITION On August 10, 2012, we entered into the Agency Agreement with Kalamalka and certain Lenders as set out in the Agency Agreement whereby we agreed to borrow up to $800,000 from the Lenders under a revolving loan arrangement by the issuance of Notes from time to time as such funds are required by us. The Notes are secured by a general security agreement over the present and future assets of the Company and bear interest at 12% per annum, calculated and payable monthly. The principal amount outstanding under any Note and all accrued and unpaid interest therein, are convertible into common shares of the Company at $0.75 per share at any time at the option of the Lender.

In connection with the closing of the Agency Agreement, the Company issued four Notes in the aggregate principal amount of $400,000 and an aggregate of 100,000 share purchase warrants to the Lenders. Each of the Lender Warrants are exercisable into one common share of the Company as follows: 25,000 Lender Warrants are exercisable at $0.25 until August 10, 2015, 25,000 Lender Warrants are exercisable at $0.50 until August 10, 2015 and 50,000 Lender Warrants are exercisable at $0.25 until August 10, 2014.

-------------------------------------------------------------------------------- 10 The Company is required to maintain a borrowing base equivalent to a discount factor of 0.90 multiplied by the value of the sum of the value of its inventory plus its accounts receivable. "Inventory" is agreed to include raw materials in transit to and in possession of the Borrower, materials in the course of production, work in progress and unsold finished goods, all valued at cost.

Receivables are marginable until 60 days from the invoice date, after which time such receivables shall have no value for margining purposes, except that up to $10,000 of receivables will be marginable if such receivables are more than 60 days old but less than 90 days old.

The Company is required to repay to the standby account when the margining requirements are not met. In that event, the Company pays 4% per annum on those funds.

This significant development allows the Company to fund inventory levels beyond initial purchase orders so Naked can have sufficient inventory on hand. It also allows for Naked to finance its accounts receivable in an efficient and economical way. The ability to raise further funds up to $800,000 greatly increases working capital and our ability to fund orders quickly.

The Company plans to draw up to another $100,000 in debt pursuant to the revolving loan arrangement.

Future Financing Provided below is a financing table showing gross cash proceeds from share issuances over the operating life of Naked: 2011 Fiscal Year $ 217,171 2012 Fiscal Year $ 134,923 2013 nine months ending October 31 $ 762,728 Total cash proceeds to date $ 1,114,822 We secured a long term financing arrangement with Kalamalka whereby we can fund up to 90% of our accounts receivable and inventory. "Inventory" includes raw materials in transit and in our possession, materials in the course of production, work in progress and unsold finished goods, all valued at cost.

Receivables are marginable until 60 days from the invoice date, after which time such receivables shall have no value for margining purposes, except that up to $10,000 of receivables will be marginable if such receivables are more than 60 days old but less than 90 days old.

In the long term, to remedy the deficiency in financing for proposed future operations, we intend to raise funds from equity and debt financings.

Working Capital (Consolidated) As at October 31, As at Jan 31, 2012 2012 (unaudited) (audited) Current Assets $ 572,026 $ 161,037 Current Liabilities $ 306,223 $ 225,140 Working Capital (Deficit) $ 265,803 $ (64,103 ) Our increase in working capital is primarily attributable to a significant increase in inventory due to a large purchase order received from Nordstrom, which was shipped in November, 2012. This increased production was financed through the long term revolving loan agreement entered into with Kalamalka in August, 2012. At October 31, 2012, we required further financing to continue to meet ongoing operating obligations, which were financed subsequent to October 31, 2012 through equity issuances.

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