A Pretzelmaker shop, part of NexCen's 7 brands

In the final segment of this three-part interview, NexCen Brands' CEO Ken Hall speaks about the company's chronic losses and about the company getting into serious financial trouble when it bought its franchise chains through a financial tool called securitization. Securitization is the process by which NexCen’s assets, like future franchise royalties, franchise ad funds, etc., were packaged and sold into securities in order for the company to obtain money right away. Mortgage-backed securities are a similar risk bundling.

From November 2006 through January 2008 NexCen went on a shopping spree, buying nine brands in 14 months. In the end, NexCen choked after the acquisition of the Great American Cookie franchise chain, when the interest on its debt was so large that it placed the company on the edge of insolvency. The firm's new chief executive officer, Ken Hall, and his team miraculously managed to turn the franchising conglomerate from a $38 million net loss in Q3 of 2008 to a $1 million net loss in Q3 of 2009.

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.

BMM: Has NexCen Brands caught up completely with its annual 10-K statements?

Hall: Yes. We have been current as of this third quarter. We held our annual shareholders meeting back in early December, the first shareholders meeting in two years. So we are current with all the reporting and administrative items.

BMM: After reviewing NexCen Brands' 10-K annual financial statements, I could not find a year in the last four where NexCen Brands had a positive net profit. When was the last time NexCen had a net profit? And is net profit even important for NexCen Brands?

Hall: Notice that I used the term, “operating income.” Not to get too technical in accounting jargon, but the company is generating profit, [that is to say] positive income on an operating basis before dealing with depreciation, amortization, interest, taxes, things of that sort. So operating-wise, we are profitable. If you take it down to the bottom line and you come up with the net income, net loss, we are still losing money, but at a dramaticly reduced level year over year.

NEXC Quarterly chart, Source: Google Finance

To answer your question, “is that important?”, let me just put it in perspective. Last year, through the first nine months of the year, the company had a net loss of approximately $240 million. This year, our net loss through the same nine-month period was a mere $2.3 million. So we’re about one percent of what the loss was from a year ago. It’s a vast improvement.

Is it important that we have a positive net income? I would tell you first and foremost it is critical that we have a positive operating income. NexCen has had three consecutive quarters of that. We are confident with the progress that we have made. We expect to have a positive net income. It is something we will see in the foreseeable future.

I am not going to tell you when, but given that year over year improvement that was made, one could expect that it should be obtainable in the near future.

BMM: One thing in your 10-K that caught my eye was the statement that under a January 2008 loan amendment, a large debt was incurred. NexCen pledged the Great American Cookies assets, including its trademarks, franchise agreements, manufacturing facility and supply business assets as collateral in a legal, securitized structure that was similar to the original BTMUCC credit facility. Was this a whole business securitization? Is that what we’re talking about here when you say securitized structure?

Hall: NexCen had a credit facility in place with its lender, BTMUCC. That credit facility afforded NexCen to borrow X amount of dollars. In return for borrowing, NexCen then had to pledge the assets for the different businesses that it was acquiring. In January 2008, in order to acquire Great American Cookies, the purchase price for Great American Cookies and the cash used to acquire it exceeded the credit that remained on the facility. The bank, once given the details about the Great American Cookies acquisition, approved and agreed to increase the amount of the credit facility. In return for that, they [BTMUCC] asked that, as had been done with the prior eight brands that had been acquired, that the asset's intellectual properties, the trademarks all be pledged in order to secure the facility. So GAC was handled no differently than the other acquisitions other than it was the last acquisition. It took us above the existing credit limit at that point in time.

Things had to be modified in order to accommodate it. One of the additional modifications that occurred was the addition of having this balloon payment occur in October of 2008.

BMM: Did you securitize future royalties that will be gathered from your franchises?

Hall: Those royalties were pledged as part of the loan, for all the brands.

BMM: Some sort of a servicing shop [that reports the day-to-day financial performance of the franchise system to note holders] was set up for all of the brands.

Hall: What NexCen did was not atypical. When you acquire a business as was done here, both for Great American Cookies, as the other eight brands, the royalties from the franchisees were going into a third-party lockbox, controlled by a bank.

BMM: Where was the money spent from the very large cash proceeds given NexCen by securitization of the franchises?

Hall: The proceeds from the securitization went to the lender, the cash coming in. That is what was used to go out and help acquire the nine brands.

BMM: And how do those brands and their franchisor, NexCen Brands, Inc., stand today?

Hall: I think the company has come quite a distance since we had our [insolvency] issues back 18 months ago. We are on much firmer footing. It is now a much stronger company, not just financially, but operationally and the brands themselves. We have worked very hard to make sure that the corporate financial issues were not a distraction to our franchisees and our consumers.

I believe that our franchise community today, while it is smaller from a store count point of view, it is stronger, with better operators. More importantly, we believe that our [seven] brands are in much stronger health than they were previously.

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Read parts one and two of this three-part interview series:

1. CEO Ken Hall Speaks on the Turnaround of NexCen Brands
2. Interview: NexCen Speaks about Its Franchises