NexCen Brands, Inc., the parent of The Athlete’s Foot, reported its cash on was approximately $8 million at the end of its first quarter ended March 31, remaining consistent with cash on hand at December 31, 2008. The amount of the company’s outstanding debt was approximately $142 million at March 31, 2009, remaining level with the amount of outstanding debt at December 31, 2008.
Due to financial accounting irregularities, the company had not provided any financial information since the fourth quarter of 2007. Its 2007 results will be restated.
Nexcen’s Its franchise brands that includes two retail franchises: TAF (The Athlete’s Foot) and Shoebox New York, as well as five quick service restaurant (QSR) franchises: Great American Cookies, MaggieMoo’s, Marble Slab Creamery, Pretzelmaker and Pretzel Time.
For the first quarter, NexCen expects to report revenues from its franchise business of $12 million against $10 million a year ago, a 15% gain. First quarter 2009 results fully reflect the acquisition of Great American Cookies and the joint venture interest in Shoebox New York, which were completed in January 2008. On a pro-forma basis, assuming these two transactions had been completed on January 1, 2008, revenues from continuing operations were approximately $12 million for the first quarter of 2008.
Royalty and licensing revenues were approximately $6 million, 7% greater than the first quarter of 2008. Franchise fee revenue from the sale of new franchises was approximately $1 million, a decline of approximately 20% from the first quarter of 2008.
Deferred revenue related to the pipeline for franchise stores to be opened pursuant to executed Letters of Intent and Franchise Agreements was approximately $3 million at March 31, 2009, a decrease of approximately $2 million or 32% from $5 million at December 31, 2008.
The company’s overall effective interest rate and related interest expense related to its outstanding debt declined due to repayments of principal in the fourth quarter of 2008, modification of interest rates in the first quarter of 2009 and declines in LIBOR rates. The company’s average effective interest rate for its credit facility was 6.8% and 6.6% in the first and second quarters of 2009, respectively, as compared to an average rate of 8.6% in the fourth quarter of 2008. The average monthly cash interest expense was $822,000 and $780,000 in the first and second quarters of 2009, respectively, as compared to average monthly cash interest expense of $1.0 million in the fourth quarter of 2008.
Regarding current business developments, Nexcen said it had executed franchise agreements for 20 new franchise units across its seven franchise businesses in the second quarter, versus franchise agreements for 24 new franchise units in the first quarter of 2009. For the second quarter, NexCen’s pipeline of franchise stores to be opened pursuant to Letters of Intent and Franchise Agreements increased to 367 stores at June 30, versus 310 stores at March 31, 2009.
Kenneth J. Hall, CEO, stated, "Our first quarter results and our franchise expansion activities are reflective of our efforts over the past year to streamline our business, reduce operating expenses, improve cash flow and grow our franchised brands. We have improved EBITDA and operating cash flows as compared to 2008, and we anticipate further improvements in these key metrics as we move forward in 2009. We also continue to execute on our four-pronged business strategy for 2009, to strengthen each of our brands, integrate our brands, increase profitability of our franchisees, and leverage our franchising platform. Overall, we are encouraged by our performance in our franchise business, despite a challenging economic environment. We believe we are now starting to see the fruits of our efforts to improve the business, after a difficult year in 2008."
2008 Preliminary Results
For 2008, NexCen said it expects to report revenues from continuing operations of its franchise business of approximately $47 million for the year ended December 31, 2008 compared to approximately $20 million for the year ended December 31, 2007, an increase of $27 million or 139%. The results for 2008 fully reflect the acquisitions completed in 2007, and include the acquisition of Great American Cookies and the joint venture interest in Shoebox New York that were completed in January 2008. On a pro forma basis, assuming all acquisitions of franchised brands had been completed on January 1, 2007, revenues from continuing operations were approximately $50 million for 2007 and $49 million for 2008.
Royalty and licensing revenues were approximately $26 million versus $16 million in 2007, an increase of approximately $10 million or 59%. Franchisee fee revenue from the sale of new franchises was approximately $4 million, an increase of approximately 5% over 2007. Plant revenue from its Great American Cookies factory, which was acquired in January 2008, was approximately $17 million.
The company’s cash on hand at December 31, 2008 was approximately $8 million as compared to cash on hand of $47 million at December 31, 2007. The amount of the company’s outstanding debt was approximately $142 million at December 31, 2008, an increase of $32 million as compared to the amount of outstanding debt of approximately $110 million at December 31, 2007. The acquisition of Great American Cookies completed in January 2008 substantially increased the outstanding debt to approximately $179 million, which was then subsequently reduced.
Deferred revenue related to the pipeline of franchise stores to be opened pursuant to executed Letters of Intent and Franchise Agreements was approximately $5 million at December 31, 2008, an increase of approximately $1 million or 17% from $4 million at December 31, 2007.
Revenues relating to NexCen’s consumer branded licensing business, which consisted of Bill Blass and Waverly, are being reported as discontinued operations due to the sale of those businesses completed in 2008.
Material Increases in Operating Expenses
The company said its efforts in 2008 to stabilize its financial condition, enhance its liquidity and position itself for long-term viability and future growth had a significant negative impact on its 2008 financial results. The company’s total operating expenses increased materially in 2008, as compared to 2007, due primarily to impairment related to intangible assets, significant increases in restructuring charges, loss on the sale of Bill Blass and Waverly, and increased professional fees related to internal and external investigations and the restructuring of its debt facility.
Decreases in Value of Intangible Assets
The company expects that its balance sheet as of December 31, 2008 will reflect significant reductions in the value of its intangibles, which comprise its principal assets, due to anticipated impairment charges of approximately $242 million in 2008 and the sale of the Bill Blass and Waverly businesses. The anticipated loss on sale for those businesses is approximately $7 million.
Hall stated, "The past year was a significant transition year for NexCen as the company went through dramatic change, including restructuring its debt facility, narrowing its strategic focus on franchising and completing the sale of Bill Blass and Waverly to reduce the company’s debt. While our 2008 results will reflect significant losses as a result of the additional expenses and charges that the company incurred as a result of these actions, we believe we have entered 2009 as a stronger company."
The company announced that it anticipates being able to file with the Securities and Exchange Commission (SEC) by July 31, 2009 an amended Annual Report on Form 10-K/A for the year ended December 31, 2007, which will include a restatement of its 2007 financial results. The company anticipates being able to file by August 31, 2009 its Annual Report on Form 10-K for the year ended December 31, 2008 and its Quarterly Report on Form 10-Q for the quarter ending March 31, 2009.
The company plans to hold an investor conference call following each of these filings to review in greater detail the respective financial and operating results.