It's never a good sign when The Nasdaq Stock Market moves to delist a company for failure to file quarterly earnings reports or meet minimum bid price requirements. It's even worse when a company is cited for both.
So continues the twisting, turning saga of NexCen Brands, Inc, the beleaguered New York City–based acquisition and management firm whose holdings include several quick-service restaurant franchises, in addition to a number of apparel and athletic footwear brands.
The twists took a turn for the worse after NexCen purchased the Great American Cookie Company from Mrs. Fields Famous Brands in January, culminating in a November 14 notification from NASDAQ that the company faced delisting for its failure to file its quarterly report on Form 10-Q for the period ending September 30. The same notification advised NexCen it would be delisted if it failed to regain compliance with NASDAQ's minimum price requirement of $1 by April 13, 2009.
The two issues are intertwined, as became apparent in May, when then-NexCen CEO Robert D'Loren disclosed that, during a review of company books, employees not only discovered reporting errors, but an obligation to pay off $21 million in debt associated with the Great American Cookie purchase by October.
Stocks plunged 77 percent on the news there was "substantial doubt" that NexCen, whose holdings include franchises Maggie Moos, Pretzel Time, Pretzelmaker, and Marble Slab Creamery, would remain in business, owing to the resulting cash crunch.
"We believe management credibility has hit a new low," Eric Beder, an analyst with New York City-based Brean, Murray, Carret & Co., indicated in a May note to investors. "Investors should avoid the stock until there is some semblance of normalcy and credibility at the company."
Since then, NexCen CFO David Meister has exited the picture, as has D'Loren, but financial and legal challenges remain.
In July, New York City-based law firm Cohen, Milstein, Sellers & Toll filed a class action suit in the U.S. District for the Southern District of New York on behalf of purchasers of NexCen common stock, citing "the omission of critical information regarding the existence of an accelerated-redemption feature in the loan NexCen used to finance its acquisition of the Great American Cookie Company, which resulted in a lack of liquidity so extreme as to cause questions about the company's ability to operate."
"NexCen's actions amount to securities fraud," says CHS&T attorney Avi Garbow, who indicated similar complaints have been filed against NexCen by several other parties. "We're awaiting hearings in to determine who the lead plaintiff will be," he said.
Rather than file for bankruptcy, as was widely expected, NexCen restructured its debt with lender BTMU Capital Group in August. In accordance with the agreement, the company sold home furnishings brand Waverly Brands in September to boost its liquidity, though the deal netted only $26 million, about $10 million less than NexCen paid for for the brand last year. Fashion brand Bill Blass also is on the block.
Due to the Waverly sale, as well as the finalization of charges for its refinanced credit facility and other corporate charges, NexCen says it is unable to issue complete earnings reports. Hence, its problems with Nasdaq. Also pending is a restatement for the full year ended December 2007.
At press time, company stock was selling for less than a dime per share, an indication "NexCen has lost all credibility with investors," says Beder, who spoke with QSR Magazine in early December. "In fact, it's fair to say they aren't paying attention to NexCen at all. Despite some positive moves by its new management team, NexCen faces a a long, hard road to restoring its credibility."
His advice: "Stay the current course and do what you can to increase your visibility on the street."
The good news is that NexCen's franchise business, from which the majority of its revenues derive, appears to be booming. For the quarter ended June 30, the company saw revenues from the business more than double—from $4.7 million to $12 million —as compared to the same period a year earlier. Total franchised location s for the period totaled 1,895, up from 1,174 for the quarter ended June 30, 2007.
Upon release of select preliminary third-quarter results in mid-November, newly appointed CEO Kenneth J. Hall reported that "revenues from continuing operations are expected to have almost doubled compared to the same period of 2007. We have reduced operating expenses and improved cash flow through the quarter. In addition, our sales pipeline of letters of intent and franchise agreements has continued to grow as the year progressed. Overall, we are encouraged by the performance of our franchise business, despite a difficult economic environment."
NexCen later disclosed it closed on franchise agreements for an additional 105 units across all its brands, including 40 Great American Cookie locations in Canada. "This agreement, together with the development agreement previously announced for 30 stores to be opened in Mexico, provides a platform for Great American Cookie Stores to be opened throughout America," the company indicated in a December 2 statement.
Though NexCen declined to comment on the initiative, a spokeswoman says the company eventually expects to open 100 units in Canada, with the initial roll out focusing on Calgary, Alberta, and London, Ontario. Three stores will open in early February, she says.
The move mirrors that of a successful NexCen initiative involving the Marble Slab Creamery, lending credence to the notion that while NexCen might have stumbled, the cookie has yet to crumble.