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| NEXC.PK > SEC Filings for NEXC.PK > Form 10-Q on 16-Nov-2009 | All Recent SEC Filings |
16-Nov-2009
Quarterly Report
FORWARD-LOOKING STATEMENTS
In this Report, we make statements that are considered forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words "anticipate," "believe," "estimate," "intend," "may," "will," "expect," and similar expressions often indicate that a statement is a "forward-looking statement." Statements about non-historic results also are considered to be forward-looking statements. None of these forward-looking statements are guarantees of future performance or events, and they are subject to numerous risks, uncertainties and other factors. Given the risks, uncertainties and other factors, you should not place undue reliance on any forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include those discussed throughout this Report, in Item 1A, under the heading "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2008 ("2008 10-K"), and our other periodic reports filed with the Securities and Exchange Commission. Forward-looking statements reflect our reasonable beliefs and expectations as of the time we make them, and we have no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
OVERVIEW
OVERVIEW
NexCen is a strategic brand management company that owns and manages a portfolio of seven franchised brands, operating in a single business segment: Franchising. Five of our brands (Great American Cookies, Marble Slab Creamery, MaggieMoo's, Pretzel Time and Pretzelmaker) are in the QSR industry. The other two brands (TAF and Shoebox New York) are in the retail footwear and accessories industry. NFM manages all seven franchised brands. Our franchise network, across all of our brands, consists of approximately 1,750 retail stores in approximately 40 countries.
We earn revenues primarily from the franchising, royalty, licensing and other contractual fees that third parties pay us for the right to use the intellectual property associated with our brands and from the sale of cookie dough and other ancillary products to our Great American Cookies franchisees.
We discuss our business in detail in Item 1-Business of our 2008 10-K, and we discuss the risks affecting our business in Item 1A-Risk Factors of our 2008 10-K.
The Company's financial condition and operating results for the three and nine month periods ended September 30, 2009 reflect the changes that the Company implemented to address the financial and operational challenges that we faced in 2008. By the end of 2008, we improved our cash management, reduced operating expenses, restructured our credit facility, sold our Waverly and Bill Blass businesses, reduced our outstanding debt, and ceased all activities of UCC Capital. As a result of these changes, for the three and nine month periods ended September 30, 2009 as compared to the same periods in 2008, the Company generated positive cash flow from operations, operating income instead of operating loss, and significantly decreased its net loss.
The following factors impacted our operating results for the three and nine month periods ended September 30, 2009 compared to the same periods in 2008:
· We acquired Great American Cookies on January 28, 2008.
Thus, our financial results for the nine months ended September
30, 2009 reflect a full period of ownership of Great American
Cookies, whereas our financial results for the nine months ended
September 30, 2008 do not.
· We acquired our joint venture interest in Shoebox New York on
January 15, 2008. Fees paid to the Company by the joint venture
to manage the brand are reflected in the Company's revenues. The
Company's portion of income or expense from the joint venture
investment is included in non-operating income (expense).
· We report the Bill Blass, Waverly and UCC Capital businesses as
discontinued operations for all periods presented.
· We disclosed issues related to our debt structure in May 2008
that materially and negatively affected the Company. As a result
of the events of May 2008, we incurred significant expenses in
the third quarter of 2008 that we did not incur in the third
quarter of 2009, including $1.7 million in professional fees
related to special investigations, $28.1 million of impairment
charges related to our intangible assets, and $0.3 million in
restructuring charges. Thus, our expenses in 2009 reflect the
effects of our ongoing cost reduction measures that began in May
2008 as well as more normalized expenses.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are the accounting policies that are most important to the presentation of our financial condition and results of operations and require management's most difficult, subjective or complex estimates and judgments. Our critical accounting policies include valuation of our deferred tax assets, valuation of trademarks and intangible assets, valuation of stock-based compensation and valuation of allowances for doubtful accounts. We discuss these critical accounting policies in detail in our 2008 10-K in Item 7 under the heading "Critical Accounting Policies." We also discuss our significant accounting policies in Note 2 to our Unaudited Condensed Consolidated Financial Statements contained in this Report and in Notes 2 and 3 to our Audited Consolidated Financial Statements included in Item 8 in our 2008 10-K.
We discuss new accounting pronouncements in Note 2 to the Unaudited Condensed Consolidated Financial Statements contained in this Report.
SEASONALITY
Royalty revenues associated with our brands are seasonal, but the seasonality is complementary so that we generally do not experience material seasonality in royalty revenues on an aggregate basis. For example, our royalty revenues from our mall-based QSR's (Great American Cookies, Pretzel Time and Pretzelmaker) and our retail brands (TAF and Shoebox New York) tend to be higher in the fourth quarter of the year due to higher retail sales from higher mall traffic around the holiday season. Conversely, royalty revenues from our ice cream brands (MaggieMoo's and Marble Slab Creamery) tend to be higher in the warmer months of the second and third quarters from the higher retail sales in those months.
COMPARISON OF RESULTS FOR THREE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND
SEPTEMBER 30, 2008
RESULTS OF CONTINUING OPERATIONS
Royalty, Franchise Fee, Factory, Licensing and Other Revenues
We recognized $10.8 million in revenues for the three months ended September 30, 2009, a decrease of $1.4 million, or 11%, from $12.2 million in revenues for the three months ended September 30, 2008. Of the $10.8 million in revenues recognized for the three months ended September 30, 2009, $5.9 million related to royalties, a decrease of $0.8 million, or 13%, from the 2008 comparable quarter; $4.0 million related to factory revenues from the sales of cookie dough and other products to our Great American Cookies franchisees, a decrease of $0.6 million, or 13%, from the 2008 comparable quarter; $0.6 million related to franchise fees, an increase of $0.1 million, or 41%, from the 2008 comparable quarter; and $0.3 million related to licensing and other revenues, a decrease of $0.1 million from the 2008 comparable quarter. Other revenues consist primarily of management fees paid to the Company from the Shoebox New York joint venture and rebates earned from vendors with which the Company conducts business.
Our royalty revenues have declined as a result of the quarter-over-quarter lower store count and lower consumer spending that have affected all of our brands, as well as a decline in TAF revenue as a result of the TAFA licensing transaction. We anticipate that the TAFA licensing transaction will result in a decline in our future royalties of approximately $0.2 million per quarter, as we ceased receiving royalties from franchised stores in Australia or New Zealand upon the execution of the TAFA licensing transaction on August 6, 2009.
The quarter-over-quarter decrease in our factory revenue is due to lower consumer sales of products from our Great American Cookies franchised stores, resulting in decreased demand for cookie dough from our franchisees.
The quarter-over-quarter increase in initial franchise fees is attributable to the timing of store openings, which allowed us to recognize the associated initial franchise fees in the third quarter. We generally recognize franchise fee revenues upon the opening of the franchisee's store, which is dependent on, among other factors, real estate availability, construction build-out, and financing. Thus, we experience variability in our initial franchise fee revenue from both our sales of new franchises and in the timing of the opening of the franchisee's store. We believe that the amount of initial franchise fees that we recognized in the third quarter of 2009, while greater than those recognized in the 2008 comparable quarter, nonetheless reflects the difficulties we have experienced in selling new franchises in light of the challenged economic environment and the lack of ready credit to current and prospective franchisees who generally depend upon financing from banks or other financial institutions in order to build out and open new units.
Because of lower mall traffic, lower consumer spending and tight credit market, trends which negatively affected our revenues for third quarter of 2009, have persisted for several quarters, we currently are unable to determine whether our revenues will stabilize or will continue to decline in the fourth quarter of 2009 and into 2010.
Cost of Sales
For the three months ended September 30, 2009, the Company recorded $2.5 million in cost of sales, a decrease of $0.6 million, or 20%, from $3.1 million from the 2008 comparable quarter. Cost of sales is comprised of raw ingredients, labor and other direct manufacturing costs associated with our Great American Cookies manufacturing facility. Consistent with manufacturing revenues, the decrease is due to lower consumer sales of products from our Great American Cookies franchised stores, resulting in decreased demand for cookie dough from our franchisees and ultimately decreased manufacturing costs. The gross profit margin on the manufacture and supply of cookie dough and the supply of ancillary products sold through our Great American Cookies franchised stores increased to 38% for the three months ended September 30, 2009 from 33% for the three months ended September 30, 2008. The quarter-over-quarter increase in our gross profit margin reflects the fact that in 2008 we instituted price increases on our cookie dough to adjust for certain increases to our cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses consist of compensation, stock compensation expense and personnel related costs, rent, facility related support costs, travel and advertising.
For the three months ended September 30, 2009, the Company recorded Corporate SG&A expenses of $1.7 million, a decrease of $1.3 million, or 45%, from $3.0 million for the three months ended September 30, 2008. The quarter-over-quarter decrease is primarily the result of a reduction in stock compensation expense of $0.7 million, along with reductions in compensation expense due to the Company's corporate restructuring in 2008 and other cost reduction efforts. The Company recorded Franchising SG&A of $3.0 million for the three months ended September 30, 2009, a decrease of $0.4 million, or 13%, from $3.4 million for the 2008 comparable quarter. This quarter-over-quarter decrease reflects reductions in marketing, general office expenses, and contract labor expenses.
Professional Fees
For the three months ended September 30, 2009, the Company incurred $5,000 in professional fees related to special investigations as compared to $1.6 million during the three months ended September 30, 2008.
For the three months ended September 30, 2009, the Company incurred corporate professional fees of $0.3 million, an increase of $0.2 million, or 383%, from $0.1 million for the three months ended September 30, 2008. Corporate professional fees primarily consist of legal fees associated with public reporting, compliance and litigation (including claims arising from the same events as the special investigations), and accounting fees related to auditing and tax services. The Company incurred professional fees related to franchising of $0.8 million for the three months ended September 30, 2009, an increase of $0.3 million, or 59%, from $0.5 million for the 2008 comparable quarter. Franchising professional fees primarily consist of legal and accounting fees associated with franchising activities and trademark maintenance. The total professional fees incurred in the third quarter of 2009 reflect a more normalized expense structure than the professional fees incurred in the third quarter of 2008, which were affected by the events of May 2008. In the third quarter of 2008, we redirected our resources to engage outside attorneys and outside consultants to assist the Company and the Board of Directors with respect to special investigations conducted at the direction of the Audit Committee of the Board of Directors, the Company and in response to information requested by the SEC.
Impairment of Intangible Assets
The Company tests trademarks and other intangible assets for potential impairment annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit or the assets below its respective carrying amount.
The Company did not record any impairment charges in the three months ended September 30, 2009. For the three months ended September 30, 2008, we recorded impairment charges totaling $28.1 million. In May 2008, the Company disclosed issues related to our debt structure that materially and negatively affected the Company.
Depreciation and Amortization
Depreciation expenses arise from property and equipment purchased for use in our operations, including our factory. Amortization costs arise from amortizable intangible assets acquired in acquisitions.
For the three months ended September 30, 2009 and 2008, the Company recorded depreciation and amortization expenses of approximately $0.6 million and $0.9 million, respectively. The quarter-over-quarter decrease primarily reflects the depletion of corporate fixed assets that had been subject to accelerated depreciation beginning in the second quarter of 2008.
Restructuring Charges
In the three months ended September 30, 2009, the Company recorded $0.2 million in restructuring charges primarily related to employee separation benefits in connection with the reduction of staff in the New York corporate offices. In the three months ended September 30, 2008, the Company recorded $0.3 million in restructuring charges primarily related to employee separation benefits in connection with the reduction of staff in the New York corporate offices.
Total Operating Expenses
Total operating expenses for the three months ended September 30, 2009 were $9.1 million, a decrease of $32.0 million, or 78%, from $41.1 million for the 2008 comparable quarter. The results for the three months ended September 30, 2008 included impairment charges related to intangible assets of $28.1 million, $1.6 million in professional fees related to special investigations, and $0.3 million in restructuring costs. The results for the three months ended September 30, 2009 included restructuring costs of $0.2 million. Excluding these special items, the Company incurred operating expenses of $8.9 million for the three months ended September 30, 2009, a decrease of $2.1 million, or 19% from $11.0 million for the three months ended September 30, 2008. This decrease reflects the Company's ongoing cost reduction measures that began in May 2008.
Operating Income (Loss)
The Company generated operating income of $1.7 million for the three months ended September 30, 2009, an increase of $30.6 million from the operating loss of $28.9 million for the three months ended September 30, 2008. This quarter-over-quarter increase is primarily the result of the Company's cost reduction efforts, lack of impairment charges and the more normalized operating expenses of the Company without the expenses specific to events and circumstances of May 2008.
Interest Income
The Company recognized interest income of $50,000 for the three months ended September 30, 2009, an increase of $6,000, or 14%, from $44,000 for the three months ended September 30, 2008. Interest income primarily reflects the interest earned on our average cash balances. Interest income also includes interest earned from the loan agreement with the TAF MSF.
Interest Expense
The Company recorded interest expense of $2.7 million for the three months ended September 30, 2009, a decrease of $0.1 million, or 3%, from $2.8 million for the three months ended September 30, 2008. Interest expense consists primarily of interest incurred in connection with our borrowings related to our continuing operations under the BTMUCC Credit Facility. Interest expense also includes, all for the three months ended September 30, 2009 and 2008, respectively, amortization of deferred loan costs of $237,000 and $280,000, amortization of debt discount of $135,000, and $132,000 and imputed interest of approximately $46,000 and $47,000 related to a long-term consulting agreement liability assumed in the TAF acquisition, which liability expires in 2028. The quarter-over-quarter decrease in interest expense is primarily due to decreased borrowings related to our continuing operations after the $5 million paydown of the Class B Franchise Note in August 2009, the lower interest rates on the variable rate debt, offset by the interest accrued on the Deficiency Note. We include in discontinued operations for the three months ended September 30, 2008 interest expense of approximately $1.0 million related to the Waverly and Bill Blass businesses that we sold during 2008. For additional details regarding the BTMUCC Credit Facility, see Note 7 - Long-Term Debt to our Unaudited Condensed Consolidated Financial Statements.
Financing Charges
The Company recorded $63,000 in financing charges during the three months ended September 30, 2009 as compared to $0.8 million during the three months ended September 30, 2008. Financing charges consist primarily of legal fees related to the amendments to the BTMUCC Credit Facility. In the third quarter of 2008, the Company incurred significant legal fees related to the restructuring of the BTMUCC Credit Facility, which was finalized in August 2008.
Other Income
The Company recognized other income of $139,000 for the three months ended September 30, 2009, which included $18,000 of income from the Company's investment in Shoebox New York. For the three months ended September 30, 2008, the Company recorded other income of $240,000, primarily reflecting settlements of lease obligations relating to MaggieMoo's franchisees.
Loss From Continuing Operations Before Income Taxes
We recognized loss from continuing operations before income taxes of $0.9 million for the three months ended September 30, 2009, a decrease of $31.3 million, from a loss of $32.2 million for the three months ended September 30, 2008. This quarter-over-quarter decrease in loss reflects the changes to the Company's business, the absence of the expenses specific to 2008, and our ongoing cost reduction measures that began in 2008.
Income Taxes - Continuing Operations
For the three months ended September 30, 2009, the Company recorded a current provision for income taxes of $102,000, consisting primarily of foreign taxes withheld on franchise royalties received from foreign based franchisees in accordance with applicable tax treaties. The Company recorded no deferred income tax expense. Income tax expense for the three months ended September 30, 2008 was $72,000.
The Company computes our combined current and deferred quarterly income tax expense or benefit based upon an estimate of the annual effective tax rate from continuing operations. The Company's effective tax rate from continuing operations was approximately 11.5% and 0.2% in the third quarter of 2009 and 2008, respectively.
For a further discussion of the Company's income taxes , including deferred tax assets and liabilities, see Note 9 - Income Taxes to our Unaudited Consolidated Financial Statements.
Discontinued Operations
For the three months ended September 30, 2009, the Company recognized net loss from discontinued operations of approximately $22,000 resulting from administrative expenses associated with Consumer Branded Products. There was no income tax expense incurred in discontinued operations for the three months ended September 30, 2009. For the three months ended September 30, 2008, the Company recognized net loss from discontinued operations of $6.1 million, consisting primarily of net losses from Bill Blass and Waverly, which comprised our Consumer Branded Products business.
COMPARISON OF RESULTS FOR NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND
SEPTEMBER 30, 2008
RESULTS OF CONTINUING OPERATIONS
Royalty, Franchise Fee, Factory, Licensing and Other Revenues
We recognized $34.6 million in revenues for the nine months ended September 30, 2009, an increase of $0.3 million, or 1%, from $34.3 million in revenues for the nine months ended September 30, 2008. Of the $34.6 million in revenues recognized for the nine months ended September 30, 2009, $17.9 million related to royalties, a decrease of $0.7 million, or 4%, from the 2008 comparable period; $12.8 million related to factory revenues, an increase of $0.5 million, or 4%, from the 2008 comparable period; $3.0 million related to franchise fees, an increase of $0.6 million, or 25%, from the 2008 comparable period; and $0.9 million related to licensing and other revenues, 13% below the 2008 comparable period. Other revenues consist primarily of management fees paid to the Company from the Shoebox New York joint venture and rebates earned from vendors with which the Company conducts business.
On a pro forma basis, assuming that we had acquired Great American Cookies on January 1, 2008, the Company's royalty revenues for the nine months ended September 30, 2009 declined approximately $1.2 million, or 6%, and factory revenues declined $1.1 million, or 8%, from the 2008 comparable period. We believe this decrease is attributed to the period-over-period lower store count and lower consumer spending that have affected all of our brands, as well as a decline in TAF revenue as a result of the TAFA licensing transaction whereby we ceased receiving royalties from franchised stores in Australia and New Zealand.
The period-over-period increase in initial franchise fees is attributable to our recognition of significant initial franchise fees for Great American Cookies and the timing of certain store openings, which allowed us to recognize the associated initial franchise fees. We recognized a significantly smaller amount of initial franchise fees for Great American Cookies in the 2008 comparable quarter due to our inability to sell new franchises while we prepared, and in some states registered, our franchise offering documents for Great American Cookies after we acquired the brand in January 2008. We generally record franchise fee revenues upon the opening of the franchisee's store, which is dependent on, among other factors, real estate availability, construction build-out, and financing. Thus, we experience variability in our initial franchise fee revenue from both our sales of new franchises and in the timing of the opening of the franchisee's store. We believe that the amount of initial franchise fees that we recognized in the nine months ended September 30, 2009, while greater than those recognized in the 2008 comparable period, nonetheless reflects the difficulties we have experienced in selling new franchises in light of the challenged economic environment and the lack of ready credit to current and prospective franchisees who generally depend upon financing from banks or other financial institutions in order to construct and open new units.
Cost of Sales
For the nine months ended September 30, 2009, the Company incurred $8.0 million in cost of sales, a decrease of $0.4 million, or 5%, from $8.4 million for the 2008 comparable period. Cost of sales is comprised of raw ingredients, labor and other manufacturing costs associated with our Great American Cookies manufacturing facility. Consistent with manufacturing revenues, the decrease is due to lower consumer sales of products from our Great American Cookies franchised stores, resulting in decreased demand for cookie dough from our franchisees and ultimately decreased manufacturing costs. The gross profit margin on the manufacture and supply of cookie dough and the supply of ancillary products sold through our Great American Cookies franchised stores increased to 38% for the nine months ended September 30, 2009 from 32% for the nine months ended September 30, 2008. In 2008, we instituted price increases on our cookie dough to adjust for certain increases to our raw materials costs and we instituted certain expense reductions. In addition, we recorded cost of sales of $234,000 in the first quarter of 2008 resulting from purchase accounting adjustments related to inventory acquired. Together, these factors resulted in period-over-period increase in the gross profit margin.
Selling, General and Administrative Expenses
For the nine months ended September 30, 2009, the Company recorded Corporate SG&A expenses of $5.6 million, a decrease of $5.2 million, or 48%, from $10.8 million for the 2008 comparable period. This period-over-period decrease is the result of a reduction in stock compensation expense of $2.7 million, along with reductions in compensation expense as a result of the Company's corporate restructuring in 2008 and other cost reduction efforts. The Company recorded Franchising SG&A of $9.6 million for the nine months ended September 30, 2009, a decrease of $2.6 million, or 21%, from $12.2 million for the 2008 comparable period. The period-over-period decrease reflects reductions in travel, entertainment, and general office expenses, partially offset by increased compensation expenses.
Professional Fees
For the nine months ended September 30, 2009, the Company incurred $90,000 in professional fees related to special investigations as compared to $3.6 million during the nine months ended September 30, 2008.
For the nine months ended September 30, 2009, the Company incurred corporate professional fees of $1.8 million, a decrease of $0.3 million, or 12%, from $2.1 million for the nine months ended September 30, 2008. Corporate professional fees primarily consist of legal fees associated with public reporting, compliance and litigation (including claims arising from the same events as the special investigations), and accounting fees related to auditing and tax services. The Company incurred professional fees related to franchising of $1.8 million for the nine months ended September 30, 2009, an increase of $0.7 million, or 56%, from $1.1 million for the 2008 comparable period. Franchising professional fees primarily consist of legal and accounting fees associated with . . .
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