Cenntro Inc. annual report, Q4 FY2019

Business context and reporting period

The supplied filing is Naked Brand Group Limited’s audited annual report on Form 20-F for the fiscal year ended January 31, 2019, prepared under IFRS in New Zealand dollars (NZ$). It is not a Cenntro Inc. filing and does not provide 2018 Q4 results; the requested company and period therefore do not match the source.

Naked designed, distributed, wholesaled and retailed intimate apparel and swimwear through stores, e-commerce and wholesale partners. Bendon and Naked Brand Group Inc. completed a business combination on June 19, 2018; the filing treats Bendon as the accounting acquirer. The year’s results include Naked Brand Group Inc. from the acquisition date, while the comparative year covers Bendon, limiting comparability.

Key financial metrics

Unless indicated otherwise, amounts below are NZ$ millions; balance-sheet figures are as of January 31.

The NZ$20.0 million Bank of New Zealand facility bore interest at 5.57% at year-end and was secured over group assets. The filing reports breaches of minimum gross EBITDA and inventory/receivables covenants; the lender had not declared an event of default and was reviewing the breaches.

Material changes versus the prior comparable year

• Revenue fell NZ$19.5 million, or 14.8%. Management attributed the decline to liquidity-related stock shortages, the end of key U.S. wholesale relationships, the strategic exit from the EU/UK market and the loss of the Stella McCartney license, which expired June 30, 2018.
• Gross margin was broadly flat year over year at about 33.4%, but remained affected by discounts and limited current-season inventory. Gross profit declined with lower sales.
• Net loss widened by NZ$11.6 million to NZ$49.2 million. Brand transition, restructuring and transaction costs rose to NZ$10.075 million, including US listing costs; impairment expense increased to NZ$8.173 million.
• Brand management and administrative expenses declined, but corporate expenses increased. Finance expense fell to NZ$4.041 million, mainly due to lower interest on external and shareholder borrowings.
• Operating cash outflow more than doubled, while cash fell by NZ$8.8 million. Financing included NZ$23.248 million of share proceeds, partly used to repay NZ$18.489 million of bank borrowings.
• Intangible assets included NZ$25.075 million of patents and licenses, NZ$10.205 million of brands and NZ$2.320 million of goodwill after impairment. The report records NZ$8.173 million of impairment expense overall.

Outlook, risks and unusual items

• Going concern: The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. The group reported recurring losses, NZ$9.434 million of operating cash outflow, negative working capital, overdue trade creditors and covenant breaches. The financial statements contain no adjustments for a possible failure to continue as a going concern.
• Funding plan: Management said it expected to raise a further NZ$31.587 million between March 2019 and January 2020; NZ$12.179 million had been raised by the report date, leaving a stated NZ$19.409 million target. The filing also says additional follow-on funding may be required. Management expected the business to trend toward positive cash flow during the year ending January 31, 2021, and to be fully cash-flow positive from the beginning of the year ending January 31, 2022. These plans depend on financing, trading improvements, creditor support and renewal or refinancing of the bank facility.
• Subsequent financing and dilution: March 2019 share issuances included shares issued to creditors in settlement of payables and private placements accompanied by warrants. In May, the company issued a US$3.0 million secured convertible note with an initial principal balance of US$3.32 million, 10% annual interest, a November 2020 maturity and conversion rights. The filing also describes additional May equity and warrant issuances.
• Acquisitions and related-party matters: The company acquired FOH Online Corp. in December 2018 to obtain a direct Frederick’s of Hollywood license relationship. Consideration included forgiveness of approximately US$9.9 million in debt and issuance of shares. The filing also reports material procurement purchases from shareholder-owned Whitespace Atelier and a shareholder lawsuit alleging an incorrect share allocation in the merger.
• Controls and listing: Management concluded disclosure controls and internal control over financial reporting were ineffective at January 31, 2019, citing weaknesses in oversight, skilled accounting resources, documented controls and financial review. Nasdaq had notified the company of a minimum-bid-price deficiency, with an August 5, 2019 compliance deadline.
• Other exposures: The filing highlights customer and licensing concentration, seasonality, supplier and inventory constraints, foreign-exchange exposure, competition, lease obligations and the risk of needing additional capital. Non-cancellable operating lease commitments were NZ$28.057 million; contracted license commitments were NZ$12.982 million. The company reported no legal proceedings expected to have a material adverse effect, but disclosed rent guarantees, letters of credit and customs/merchant-service guarantees totaling about NZ$1.186 million.
• Accounting change: Management expected IFRS 16 lease accounting, adopted from February 1, 2019, to materially affect the statements by bringing most leases onto the balance sheet.

Important facts for investors to verify

1. Confirm the filing is for Naked Brand Group Limited, not Cenntro Inc., and that it reports the year ended January 31, 2019 rather than 2018 Q4.
2. Review the full audited statements and notes for the going-concern assumptions, cash runway, overdue creditor balances and the lender’s treatment of covenant breaches.
3. Check whether the stated remaining NZ$19.409 million fundraising target and subsequent financing were completed, and assess dilution from shares, warrants and convertible debt.
4. Assess whether inventory availability, sales, gross margins and operating cash flow improved in line with management’s cash-flow timetable.
5. Review the impairment assumptions and the provisional accounting for the Naked and FOH transactions, as well as related-party dealings and the disclosed shareholder claim.
6. Track remediation of the reported control weaknesses, Nasdaq listing compliance and the balance-sheet impact of IFRS 16.