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NexCen Losses Shrink, but Insolvency Concerns Remain

NEW YORK CITY—NexCen Brands Inc. filed its 2009 10-K annual statement Friday, reporting a net loss of only $2.8 million, a remarkable 1 percent of 2008's $256 million net loss. The franchising firm also saw a fourth quarter net loss of $543,000, just 3 percent of the same period in 2008, when it had a massive net loss of $16 million.

During economic bad times the company showed $45.1 million in revenues. That is down by only 4 percent from $47 million in 2008. Total revenues in the fourth quarter of 2009 decreased by 16 percent to $10.6 million from the $12.6 million reported in the same quarter in 2008.

NexCen Brands Inc. (PINK: NEXC) owns the intellectual property rights and franchise agreements to two retail franchise concepts, The Athlete's Foot [TAF] and Shoebox New York. It also franchises four quick-service restaurant brands: Great American Cookies, MaggieMoo's, Marble Slab Creamery and the now combined brands of Pretzelmaker and Pretzel Time.

Amidst a crippling credit crunch that has franchisee candidates struggling to find small business loans, NexCen has tried hard to offset its shrinking system by selling more franchises. It sold 71 new franchise units in 2009, compared to 65 the year before. It also pushed the selling of master franchise licenses in various countries, which provides significantly more cash than the selling of single-unit domestic stores.

But the troubled franchising conglomerate still saw its franchise systems shrink by 6 percent from the 1,826 stores reported as of December 31, 2008. The company states that those closures reflect "underperforming and non-compliant stores."

Kenneth J. Hall, chief executive officer of NexCen Brands, states that the firm remains focused on growing the franchise business. He also discusses the progress made: "We are pleased with the milestones we reached in 2009 in our efforts to improve and stabilize the business. As we closed out the year, we recorded our fourth consecutive quarter of operating income and positive cash flow from operations; we right-sized our expense structure; we remediated all material weaknesses in internal controls; and we made investments in our business for future organic revenue growth."

Ongoing concern over solvency

Despite the firm's improvement, its CEO issued this warning to note holders: "We recognize, however, that the company's current debt and capital structure does not support the company's long-term growth, viability and shareholder value. Addressing this issue continues to be our priority for the near future."

In a conference call on Friday, the firm's chief financial officer Mark Stanko added, "There remains uncertainty with respect to our ability to continue as a going concern." He went on to say, "We are highly leveraged. We have no additional capacity with our credit facility, and our credit facility [BTMU] imposes restrictions on our ability to freely access capital markets. In addition, our credit facility imposes various restrictions on the use of our cash generated from operations."

At the heart of the issue has been a wall of outstanding debt, now chiseled down slightly to $138.2 million. NexCen's debt obligations were brought on by a whole business securitization of all of its brands and the firm's operations. During its buying bonanza from late 2006 until 2008 of nine retail brands, its purchases hit an apex in January of 2008 when NexCen purchased its final chain, the Great American Cookies brand from troubled Mrs. Field's Cookies, which was in great need of cash from its own debt commitments. A previously overlooked amendment to the loan had NexCen's former CEO, Robert D'Loren, warn of possible insolvency when it was brought to the company's attention by its new chief financial officer Ken Hall and his financial team. Hall was soon promoted to chief executive officer.

In response, NexCen sold away the earliest of its nine brands, Bill Blass and Waverly. The distressed firm also sold its trademark and rights to The Athlete's Foot (TAF) in Australia and New Zealand for $6 million and used $5 million of those proceeds in August of 2009 to help pay down pressing debt obligations.

Under its credit facility BTMU Capital Corporation, NexCen has reclassified all of its outstanding debt as current liability as of December 31, 2009. In a press release the company states it "is in the process of evaluating alternatives to its debt and capital structure. NexCen has retained an investment bank to assist it with identifying and evaluating various strategic alternatives, and the Company continues to be in discussions with its lender as the Company needs the lender's consent to proceed with any strategic transaction or debt restructuring."

CEO Hall emphasizes the strides made. "We have made significant progress in our turnaround strategy, refining our business to one that generates positive cash flow and operating profits," he states. "At the same time, we are exploring alternatives to our current capital and debt structure with the goal of maximizing long-term value for all of the Company's stakeholders."

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