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NEW YORK CITY —From Nov 2006 through Jan 2008 NexCen went on a buying spree, starting with The Athlete's Foot (TAF), altogether acquiring nine brands in 14 months. In the end, NexCen bit off more than it could chew.
It choked when it bought the Great American Cookies brand by not discovering and reporting on an accelerated redemption feature of its amended loan. The interest on the amended loan was so large that it placed the company on the edge of insolvency.
After being hired as chief financial officer in April of 2008, Kenneth J. Hall was promoted to CEO when Robert D'Loren resigned from the post in August after learning of the large interest payment coming NexCen's way. Since then, Hall has focused on cash flow, renegotiating debt payments and cutting expenses to turn around distressed NexCen Brands. Hall has miraculously managed to pull the franchising conglomerate from the abyss of a $38 million net loss in Q3 of 2008 to a $1 million net loss in Q3 of 2009.
The company sold retailers Waverly and Bill Blass brands to stay afloat. Now NexCen Brands, Inc. (OTC: NEXC) is a collection of seven brands that franchise, including retailers TAF and Shoebox New York, as well as five quick-service-restaurant franchise brands: Great American Cookies, MaggieMoo's, Marble Slab Creamery, Pretzelmaker and Pretzel Time.
This is part one of a three-part interview given by Ken Hall, CEO of NexCen Brands and Chris Dull, president of NexCen Franchise Management, to Blue MauMau (BMM).
BMM: In 2008, NexCen had not reported an accelerated redemption feature of a loan it made in connection with its buying of the Great American Cookies brand. The interest on the loan was so large that it placed the company on the edge of insolvency, according to then-CEO Loren. I understand that the problem was discovered by you.
Hall: I came on board a week after the 2007 annual financial statements, known as the 10K, were filed with the SEC. In my six weeks after coming on board, getting up to speed with the company and then getting the organization to file our first quarter 2008 financials, the team collectively came across this issue.
Let me say it was an unintentional oversight due to material weaknesses in NexCen's internal controls prior to my joining the company that contributed to this discrepancy. It is something that the company has collectively worked very hard at in the last 18 months since then so as to make sure that we have the appropriate internal controls, the appropriate personnel, the appropriate communications and the appropriate disclosure policies in place.
I believe that since that time we have remediated everything and it's not something that could or would happen again.
BMM: The debt was so large that NexCen could not pay the service fee on it. What is your financial situation now?
Hall: NexCen had a balloon payment that was scheduled to come up in October of 2008. As you pointed out, we did not have the cash resources to meet that. As part of our restructuring activities, we sat down with the bank and we were able to get the bank comfortable with our underlying financial condition, and that the business was not imploding but rather there was a solid business that could support the debt on a restructured basis.
Our lender did agree to restructure the debt. Eighteen months later we are in a much stronger position than we were in 2009. We've had three consecutive quarters this year where we've had positive operating income and positive cash flow from operations. If you look at year-over-year results, 2008 vs. 2009, for the first nine months that we have publicly recorded information, you will see quite dramatic improvements in the performance of the company year over year. Not only from a profit and loss point of view, but from a cash flow point of view. We've reduced our debt by about $38 million or 21 percent as well. So we've de-levered ourselves, we've improved the operating income, and improved to get the company back to cash flow positive on an operating basis. And with that, we have reinvested a lot of money back into strengthening our brands, repositioning them, so we feel very optimistic about the future of the brands as well.
BMM: Can you give me some specifics of how you were able to turn the company around, to bring the debt down, and to increase the strength of the brands? You were hired into the position of CFO, and shortly thereafter became CEO. You were pretty new to NexCen Brand's leadership team.
Hall: I have almost 30 years of operating experiences as an executive, both financial and operating. I've led company turnarounds. I didn't come to NexCen expecting to do a turnaround, but fortunately, I had prior turnaround experience, so it wasn't as though I was just thrown to the wolves unprepared in that regard.
I'm lucky to have a partner by the name of Christopher Dull [president of the company's franchising arm, NexCen Franchise Management], who worked very closely with me in helping to assess the business itself. And from the get-go we looked at the nine brands that we had. Our businesses were structured into two different lines. We had a franchising division that contained seven of our brands and then we had a licensing division that contained two additional brands.
We did very simply a financial analysis, and looked to see the underlying profitability and cash flow of the businesses. It was very clear that the licensing business was consuming cash and the franchising business was generating cash. So we decided to focus on our core competency as a franchisor and to divest ourselves of the licensing business. We then went about right-sizing the expense structure f the organization. That right-sizing was everything from a head count point of view, as well as from looking at the underlying expenses that we were incurring throughout the organization. In several cases we went back to key vendors, be it landlords, or be it advertising parties, in order to restructure or eliminate expenses that we were incurring.
BMM: What was the biggest challenge in turning NexCen around?
Hall: First, when you do a turnaround, communication is paramount. There was a lot of misinformation out there regarding the company and its financial position. One of the first things that Chris and I did was to put in place a communication plan. So as to have ongoing regular updates with our franchisees both electronically as well as in person. I got out in front of franchisees at different conferences that we had. No question was off limits.
I wanted to let them understand what our road to recovery was. We presented to NexCen's franchisees what the different steps were on a month-by-month basis that we had accomplished and what remained to be accomplished.
At the beginning, there was a very lengthy list of things that needed to be accomplished, but we one-by-one did it. We kept on communicating to the franchisee community, making them aware of what our progress was. But more importantly, letting them understand that we had a clear understanding of what we needed to do. As I said, I had prior experience in a turnaround so it was a question of sharing with the franchisee community that I had a clear vision of what steps needed to be done. That was reassuring to the franchisee community, to the financial community, with our lender, and our investors.
It came down to an execution issue and our ability to be able to execute. You want to cut fat. You don't want to cut the muscle. One of the things we always held as being very important was not to do anything to inhibit what we viewed as our core competency, which is franchising. We don't want to kill the goose that's laying the golden egg. Franchising was our core and we wanted to make sure that we were, if anything, reinvesting and strengthening that.
We cut head count that was predominantly non-franchising. We began to look at our infrastructure, our information systems, our reporting, our IT at the retail level point of sales, things of that sort, to say are we as 1) cost effective as possible and 2) are we as integrated as possible.
When you acquire nine disparate brands, as you can imagine, trying to integrate those, we were in various stages of integration and in some cases, disarray. We spent a lot of time making sure that we had a solid foundation in order to build the company going forward focused on those seven core franchise brands.
Read Part 2 of the 3 part interview series where NexCen's Hall and Dull discuss how the franchising firm is helping the profitability of its 1,700 franchise owners
Editor's note: This interview by Blue MauMau with Mr. Ken Hall took place in December of 2009.