Business Context and Reporting Period
This Form 6-K filing by Naked Brand Group Limited (not Cenntro Inc.) covers the month of May 2019, with the report dated May 17, 2019. The filing discloses the creation of a direct financial obligation through a private placement of a secured convertible promissory note and a debt-for-equity exchange transaction.
Key Financial Metrics and Transactions
- Convertible Note Issuance: The Company sold a Secured Convertible Promissory Note to St. George Investments LLC for a purchase price of $3,000,000.
- Initial Principal Balance: The note's initial principal balance is $3,320,000, inclusive of a $300,000 original issue discount and $20,000 in reimbursed holder expenses.
- Interest Rate: The note accrues interest at 10% per annum, compounded daily.
- Maturity Date: November 13, 2020.
- Conversion Terms: The holder may convert the note into ordinary shares at a price of $0.90 per share, subject to a beneficial ownership limitation of 4.99% (or 9.99% if market cap is under $10 million).
- Debt Exchange: On May 16, 2019, the Company issued 653,595 ordinary shares to cancel $200,000 of existing shareholder debt, resulting in an effective price of $0.306 per share.
- Liquidity and Debt Structure: The new note is secured by a second-priority security interest in all company assets and is subordinated to an existing senior secured credit facility with the Bank of New Zealand.
Material Changes and Covenants
The filing details significant changes to the Company's capital structure and debt covenants:
- Restricted Issuance: The Company is restricted from issuing new debt or incurring new debt obligations while the note is outstanding, with exceptions for bank debt.
- Prepayment Penalty: The Company may prepay the note subject to a 15% premium.
- Redemption Rights: Beginning December 13, 2019, the holder may require the Company to redeem up to $400,000 of the note per month.
- Default Consequences: Upon an event of default, the holder may accelerate the note, increasing the amount due by up to 25% and raising the interest rate to 22%.
- Penalty Clauses: The principal amount may increase by 5% if the Company engages in a restricted convertible debt issuance with consent, or by 3% every 30 days if conversion shares cannot be issued due to lock-up agreements after November 13, 2019.
Guidance, Risks, and Contingencies
The filing does not provide forward-looking financial guidance or management commentary regarding future revenue or profit. However, it outlines specific risks and contingencies associated with the new debt instrument:
- Default Risks: Events of default include failure to pay, failure to deliver shares upon conversion, bankruptcy, inaccuracy of representations, and failure to comply with covenants.
- Market Cap Contingency: The beneficial ownership limit for conversion may increase to 9.99% if the Company's market capitalization falls below $10,000,000.
- Regulatory Status: The securities were sold in private placements to accredited investors under Section 4(a)(2) of the Securities Act, with no underwriting discounts paid.
Investor Verification Checklist
- Verify the Company's current market capitalization to determine the applicable beneficial ownership limit (4.99% vs. 9.99%) for the convertible note.
- Confirm the status of the senior secured credit facility with the Bank of New Zealand to understand the priority of claims on assets.
- Review the Company's ability to meet the 10% interest accrual and potential redemption obligations starting December 2019.
- Assess the impact of the "Restricted Issuance" covenant on the Company's ability to secure additional financing.
- Monitor for any events of default that could trigger the 25% acceleration penalty and 22% interest rate increase.