UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10–K





x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009


OR


o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934


COMMISSION
FILE NUMBER: 000–27707


NEXCEN
BRANDS, INC.


(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)




DELAWARE
              20-2783217(State
      or other jurisdiction of incorporation or organization)
              (IRS
      Employer Identification Number)1330
      Avenue of the Americas, 34th
      Floor, New York, N.Y.
              10019-5400(Address
      of principal executive offices)
              (Zip
      Code)





(Registrant’s
telephone number, including area code): (212) 277–1100


SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE


SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


Common Stock, par value
$.01


(Title of
class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈ No  ̈


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No  ̈





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  ̈No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  ̈No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S–K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10–K or any amendment of this
Form 10–K.   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large
      accelerated filer
                 ̈
                Accelerated
      filer
                 ̈Non-accelerated
      filer
                 ̈
                Smaller
      reporting company
                x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).    Yes  ̈ No x




The
aggregate market value of voting stock held by non-affiliates of the registrant
was $9,869,307 ($.18 per share) as of June 30, 2009.




As of
February 28, 2010, 56,951,730 shares of the registrant’s common stock, $.01 par
value per share, were outstanding.





DOCUMENTS INCORPORATED BY
REFERENCE





The
registrant will disclose the information required under Part III, Items 10, 11,
12, 13 and 14 by (a) incorporating the information by reference from the
registrant’s definitive proxy statement or (b) filing an amendment to this Form
10-K which contains the required information no later than 120 days after the
end of the registrant’s fiscal year.





NEXCEN
BRANDS, INC.


ANNUAL
REPORT ON FORM 10-K


FOR
THE YEAR ENDED DECEMBER 31, 2009





INDEX





PART
      IItem
      1
                    Business
                    
                    2Item
      1A
                    Risk
      Factors
                    
                    8Item
      1B
                    Unresolved
      Staff Comments
                    
                    15Item
      2
                    Properties
                    
                    15Item
      3
                    Legal
      Proceedings
                    
                    15Item
      4
                    [Removed
      and Reserved]
                    
                    17PART
      IIItem
      5
                    Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    
                    18Item
      6
                    Selected
      Financial Data
                    
                    19Item
      7
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    20Item
      7A
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    30Item
      8
                    Financial
      Statements and Supplementary Data
                    
                    31Item
      9
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    
                    63Item
      9A(T)
                    Controls
      and Procedures
                    
                    63Item
      9B
                    Other
      Information
                    
                    64PART
      IIIItem
      10
                    Directors,
      Executive Officers and Corporate Governance
                    
                    65Item
      11
                    Executive
      Compensation
                    
                    65Item
      12
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    
                    65Item
      13
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    
                    65Item
      14
                    Principal
      Accounting Fees and Services
                    
                    65PART
      IVItem
      15
                    Exhibits,
      Financial Statement Schedules
                    
                    66







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 in Item 1A of this Report under the heading
“Risk Factors,” as well as elsewhere in this Report.  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.




1





PART
I




ITEM
1. BUSINESS




Overview




The terms
“NexCen,” “we,” “us,” “our,” and the “Company” refer to NexCen Brands, Inc., a
Delaware corporation, and our predecessors and subsidiaries, unless otherwise
indicated by context. We also use the term NexCen Brands to refer to NexCen
Brands, Inc. alone whenever a distinction between NexCen Brands, Inc. and our
subsidiaries is required or aids in the understanding of this
filing.





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 quick service restaurant (“QSR”) industry. The other two brands (The
Athlete’s Foot® and
Shoebox New York®) are in
the retail footwear and accessories industry. NexCen Franchise Management, Inc.
(“NFM”), a wholly owned subsidiary of NexCen Brands, manages all seven
brands.  Our franchise network, across all of our brands, consists of
approximately 1,700 retail stores in 38 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 to our franchisees of
products produced in our manufacturing facilities.





General
Development of Business




We commenced our brand management
business in June 2006 when we acquired UCC Capital Corporation (“UCC Capital”),
an investment banking firm that provided financial advisory services,
particularly to companies involved in monetizing intellectual property assets.
 In acquiring UCC Capital, our strategy was to begin building a brand
management business by acquiring and operating businesses that own valuable
brand assets and other intellectual property and that earn revenues primarily
from the franchising or licensing of their intellectual property.
We acquired our seven franchised
brands as follows:




·
            The Athlete’s Foot (acquired
      November 7, 2006)


·
            MaggieMoo’s (acquired February
      28, 2007)


·
            Marble Slab Creamery (acquired
      February 28, 2007)


·
            Pretzel Time (acquired August 7,
      2007)


·
            Pretzelmaker (acquired August 7,
      2007)


·
            Shoebox New York (joint
      venture interest – January 15,
2008)


·
            Great
      American Cookies (acquired January 29,
  2008)





Previously,
we had owned and licensed the Bill Blass consumer products brand in the apparel
industry, which we acquired on February 15, 2007, and the Waverly consumer
products brand in the home goods industry, which we acquired on May 2, 2007. We
sold the Waverly brand on October 3, 2008 and the Bill Blass brand on December
24, 2008.





Financial
Information about Operating Segments




We
operate in only one business segment, Franchising. For financial information
about our Franchising segment, see our Consolidated Financial
Statements.





Narrative
Description of Business




General




Through
our seven franchised brands, the Company franchises a system of retail stores
and licensed branded products that are distributed primarily through franchised
retail stores. Additionally, the Company manufactures and supplies cookie dough
and other products to our Great American Cookies franchisees. We are expanding
production capabilities of our manufacturing facility in 2010 to enable us
to produce and sell pretzel mix to our pretzel franchisees. Our franchise
network, across all of our brands, consists of approximately 1,700 retail stores
in 38 countries. A listing of the states in which our franchisees
operated as of December 31, 2009 is set forth below.


2


Total
Domestic Franchised Stores:  1,208





Location
                        
                        Stores
                        
                        Location
                        
                        StoresAlabama
                        
                        41
                        
                        Missouri
                        
                        26Alaska
                        
                        1
                        
                        Montana
                        
                        4Arizona
                        
                        13
                        
                        Nebraska
                        
                        5Arkansas
                        
                        14
                        
                        Nevada
                        
                        11California
                        
                        42
                        
                        New
      Hampshire
                        
                        4Colorado
                        
                        22
                        
                        New
      Jersey
                        
                        20Connecticut
                        
                        17
                        
                        New
      Mexico
                        
                        1Delaware
                        
                        4
                        
                        New
      York
                        
                        50District
      of Columbia
                        
                        2
                        
                        North
      Carolina
                        
                        50Florida
                        
                        80
                        
                        North
      Dakota
                        
                        4Georgia
                        
                        69
                        
                        Ohio
                        
                        31Hawaii
                        
                        8
                        
                        Oklahoma
                        
                        23Idaho
                        
                        8
                        
                        Oregon
                        
                        4Illinois
                        
                        35
                        
                        Pennsylvania
                        
                        19Indiana
                        
                        19
                        
                        Rhode
      Island
                        
                        –Iowa
                        
                        24
                        
                        South
      Carolina
                        
                        40Kansas
                        
                        7
                        
                        South
      Dakota
                        
                        4Kentucky
                        
                        13
                        
                        Tennessee
                        
                        56Louisiana
                        
                        50
                        
                        Texas
                        
                        233Maine
                        
                        1
                        
                        Utah
                        
                        20Maryland
                        
                        18
                        
                        Vermont
                        
                        –Massachusetts
                        
                        10
                        
                        Virginia
                        
                        34Michigan
                        
                        21
                        
                        Washington
                        
                        9Minnesota
                        
                        8
                        
                        West
      Virginia
                        
                        9Mississippi
                        
                        12
                        
                        Wisconsin
                        
                        9Wyoming
                        
                        3





A listing of the
jurisdictions outside of the United States in which our franchisees or
licensees operated as of December 31, 2009 is set forth below.





Total
International Franchised and Licensed Stores:  505





Location
                      
                      Stores
                      
                      Location
                      
                      StoresAntigua
                      
                      1
                      
                      Palau
                      
                      1Aruba
                      
                      2
                      
                      Peru
                      
                      2Australia
                      
                      132
                      
                      Philippines
                      
                      10Bahamas
                      
                      2
                      
                      Portugal
                      
                      11Bahrain
                      
                      7
                      
                      Puerto
      Rico
                      
                      4Botswana
                      
                      1
                      
                      Qatar
                      
                      2Canada
                      
                      119
                      
                      Russia
                      
                      4China
                      
                      2
                      
                      Saipan
                      
                      2Curacao
                      
                      1
                      
                      Saudi
      Arabia
                      
                      9Denmark
                      
                      1
                      
                      South
      Korea
                      
                      33Ecuador
                      
                      4
                      
                      Singapore
                      
                      2Guam
                      
                      3
                      
                      St.
      Kitts/Nevis
                      
                      1Indonesia
                      
                      28
                      
                      Sweden
                      
                      2Kuwait
                      
                      18
                      
                      Trinidad
      & Tobago
                      
                      2Lebanon
                      
                      3
                      
                      United
      Arab Emirates
                      
                      18Mexico
                      
                      60
                      
                      United
      Kingdom
                      
                      2New
      Zealand
                      
                      8
                      
                      Venezuela
                      
                      5Oman
                      
                      1
                      
                      Vietnam
                      
                      1Pakistan
                      
                      1





In 2009,
international franchise revenues were $5.4 million, which represented
approximately 11.9% of our total franchise revenues. For additional information
about our geographic sources of revenue, see Note 20 – Segment Reporting to our Consolidated
Financial Statements.


3


The
Franchised Brands




The
following is a brief description of each of our franchised brands as of
December 31, 2009.




Great American
Cookies®




Great
American Cookies was founded in Atlanta, Georgia in 1977 on the strength of an
old family chocolate chip cookie recipe. For over 30 years, Great American
Cookies has maintained the heritage and integrity of its products by producing
original cookie dough exclusively from its plant in Atlanta. Great American
Cookies is also known for its signature Cookie Cakes, signature flavors and menu
of gourmet products baked fresh in store. Great American Cookies has
approximately 300 franchised stores in the United States, Canada, Guam, Bahrain
and Mexico.




MaggieMoo’s®




Each
MaggieMoo’s Ice Cream & Treatery features a menu of freshly made
super-premium ice creams, mix-ins, smoothies, sorbets and custom ice cream
cakes. MaggieMoo’s is known as the innovator of the ice cream cupcake and
consistently has been awarded blue ribbons by the National Ice Cream Retailers
Association for the quality of its ice creams. MaggieMoo’s is the franchisor of
approximately 160 stores located across the United States and in Puerto
Rico.




Marble Slab
Creamery®




Marble
Slab Creamery is a purveyor of super-premium hand-mixed ice cream. It was
founded in 1983 and was the innovator of the frozen slab technique. All Marble
Slab Creamery ice cream is made in small batches in franchise locations using
some of the finest ingredients from around the world and fresh dairy from local
farms. Marble Slab Creamery has an international presence with approximately 350
locations in the United States, Canada, United Kingdom, Bahrain, Kuwait,
Lebanon, Singapore and the United Arab Emirates.





Pretzelmaker®and Pretzel
Time®




Pretzelmaker
and Pretzel Time are franchised concepts that specialize in offering hand-rolled
soft pretzels, innovative soft pretzel products, dipping sauces and beverages.
The brands were founded independently of each other in 1991, united under common
ownership in 1998, and in 2008 we began consolidating the brands to become the
new Pretzelmaker. Collectively, Pretzelmaker and Pretzel Time are the second
largest soft pretzel franchise in the U.S. by store count with approximately 360
franchised stores located domestically and in Canada, Guam and
Mexico.




The Athlete’s
Foot®(“TAF®”)




TAF is
the world's first franchisor of athletic footwear stores and is recognized today
as a leader in athletic footwear franchising. The first The Athlete's Foot store
opened in 1971 in Pittsburgh, Pennsylvania, and it was the first athletic
footwear specialty store of its kind in the United States. Soon thereafter, The
Athlete's Foot began franchising domestically with the first franchised store
opening in Oshkosh, Wisconsin. The first international franchised store opened
in 1978 in Adelaide, Australia. TAF now has approximately 530 franchised stores
in the United States and approximately 35 countries.




Shoebox New York®




The
Shoebox New York concept had its genesis from The Shoe Box, one of New York's
premier women's multi-brand retailers for high-fashion footwear, handbags and
accessories. Established in 1954 and known for its vast product assortment and
trend-setting styles from top European and American designers, The Shoe Box
garnered a dedicated following of sophisticated women. We continue this
tradition by offering high-quality, high-fashion shoes and accessories under the
Shoebox New York franchised brand in 8 stores in the United States and 7 stores
internationally in Aruba, Vietnam, South Korea and Kuwait.




Franchising
Operations




NexCen
generates revenue from franchising and other commercial arrangements related to
our seven brands. We also own and operate a manufacturing facility that
manufactures and supplies cookie dough to our franchisees and supplies ancillary
products sold through our Great American Cookies franchised stores. We are
expanding production capabilities of our manufacturing facility in 2010 to
enable us to produce and sell pretzel mix to our pretzel
franchisees.




Generally,
our franchise arrangements consist of the following types of agreements under
which we require franchisees to pay an initial franchise or development fee and
an on-going royalty on net sales. Royalty rates vary from 1% to 7%, depending on
the market and the brand. In addition, most domestic franchisees must contribute
to an advertising and marketing fund in amounts that range from 0.6% to 2.0% of
net sales.


4




Domestic Development
Agreements. Our domestic franchise development agreements provide for the
development of specified numbers of stores for a specified brand within a
defined geographic territory. Generally, these agreements call for the
development of the stores over a specified period of time, with targeted opening
dates for each store. Our developers pay an initial development fee, the amount
of which varies depending on the franchise brand, size of territory and number
of total stores to be developed. These development fees typically are paid in
full and non-refundable when the agreement is executed. In addition, our
domestic development agreements typically provide for non-refundable franchise
fees to be paid upon execution of franchise agreements for each store opened
pursuant to the development schedule.


International Master License
Agreements. Our international master license agreements provide for the
development of specified number of stores for a specified brand within a defined
international territory, and generally call for the development of the stores
over a specified period of time, with targeted opening dates for each store. Our
international developers typically pay an initial development fee based on the
franchise brand, size of territory and number of total stores to be developed.
These development fees typically are fully paid when the agreement is executed.
Master licensees generally are granted franchise and sub-franchise rights in
their territory.




Domestic Franchise
Agreements. Our domestic franchise agreements convey the right to operate
a specific store for a specified brand in a particular geographic territory.
Franchisees may enter into a domestic franchise agreement either singly or
pursuant to a domestic development agreement. If for a single store, our
franchisees typically pay a non-refundable initial franchise fee of up to
$39,900, depending on the franchise brand, when the agreement is executed. If
pursuant to a domestic development agreement, non-refundable franchise fees
typically are paid upon execution of franchise agreements for each
store opened pursuant to the development schedule.




International Franchise
Agreements. The terms of our international franchise agreements are
substantially similar to those of our domestic franchise agreements, except that
these agreements may be modified to reflect the multi-national nature of the
transaction and to comply with the requirements of applicable local laws. The
effective royalty rates in international franchise agreements may be lower than
in domestic franchise agreements due to the more limited support services that
we may provide to our international franchisees.




All of
our franchise agreements require that our franchisees operate stores in
accordance with our defined operating procedures, adhere to the menu or product
mix established by us, and meet applicable quality and service standards. We may
terminate the franchise rights of any franchisee that does not comply with these
standards and requirements.




In order
to provide on-going support to our franchise systems and our franchisees, we
built a centralized training, research, development and operations center in
Norcross, Georgia, which we call NexCen University. We believe NexCen University
provides our Company with the infrastructure to operate and grow our current
franchise systems and integrate additional franchise systems, all in a cost
efficient manner. The following graphic provides a summary of the services that
NexCen University provides across all of our franchise systems:


5








NexCen
University allows us to achieve cost savings and operational efficiencies by
consolidating back office functionalities such as IT, HR, legal and finance, as
well as front end drivers such as research and development, marketing and
sales.  We believe that NexCen University also provides franchisees
with the tools, training and support needed to optimize their performance in the
marketplace.





Diversification
and Growth




With our
portfolio of franchised brands, we operate a business that is diversified in
several ways:




·
            across multiple categories,
      ranging from footwear to baked goods to ice
  cream;


·
            across geographies (both within
      the United States and
internationally);


·
            across channels of distribution,
      ranging from mall-based stores to strip shopping centers to stand-alone
      stores;


·
            across franchisees/licensees,
      ranging from individuals to multi-unit developers;
    and


·
            across multiple demographic
      groups.




We
believe that multi-category diversification may help reduce potential volatility
in our financial results.




We
believe that our business also offers a multi-tiered growth opportunity. Our
businesses can grow both domestically and internationally through organic growth
and synergistically through cross-selling and co-branding across our multiple
franchise systems.




Competition




Our
brands are all subject to extensive competition by numerous domestic and foreign
brands, not only for end consumers but also for management, hourly personnel,
suitable real estate sites and qualified franchisees. Each is subject to
competitive risks and pressures within its specific market and distribution
channels, including price, quality and selection of merchandise, reputation,
store location, advertising and customer service. The retail footwear and retail
food industries, in which the Company competes, are often affected by changes in
consumer tastes; national, regional or local economic conditions; currency
fluctuations; demographic trends; traffic patterns; the type, number and
location of competing footwear and food retailers and products; and disposable
purchasing power. Our success is dependent on the image of our brands to
consumers and prospective franchisees and on our franchisees' ability to sell
products under our brands. Competing brands may have the backing of companies
with greater financial and operating stability and greater distribution,
marketing, capital and other resources than we or our franchisees
have.


6


Trademarks




The
Company owns numerous registered trademarks and service marks. The Company
believes that many of these marks, including The Athlete’s Foot®,
TAF®, Great
American Cookies®,
MaggieMoo’s®, Marble
Slab Creamery®, Pretzel
Time®,
Pretzelmaker®, and
Shoebox New York® are
vital to our business. Our policy is to pursue registration of our important
marks whenever feasible and to oppose vigorously any infringements of our marks.
We have authorized the use of these marks by franchisees and licensees in
franchise and license agreements. Under current law and with proper use, the
Company’s rights in our marks generally can last indefinitely.




Seasonality




The
business associated with certain of our brands is seasonal. However, we believe
the seasonality of our brands is complementary, so that the Company’s operations
do not experience material seasonality on an aggregate basis. For example,
average sales of our mall-based QSR’s (Great American Cookies, Pretzel Time, and
Pretzelmaker) are higher during the winter months, especially in December,
whereas average sales of our ice cream brands (MaggieMoo’s and Marble Slab
Creamery) are higher in the summer months and lower during the winter
months.





Research and Development
(“R&D”)




In May
2009, we opened a new innovation laboratory in our manufacturing facility in
Atlanta, Georgia where we develop new flavors, new offerings and new
formulations of our food products across all of our QSR brands. Independent
suppliers provided equipment and other resources for the new innovation
laboratory. From time to time, independent suppliers also conduct or fund
research and development activities for the benefit of our QSR brands. In
addition, we conduct consumer research to determine our end-consumer’s
preferences, trends and opinions.




Supply and
Distribution




The
Company negotiates supply and distribution agreements with a select number of
food, beverage, footwear and accessories, paper, packaging, distribution and
equipment vendors for the purpose of providing the lowest prices for our
franchisees while ensuring compliance with certain quality standards. We have
begun aggregating the purchasing power of our franchisees across our multiple
brands to leverage scale to drive savings and effectiveness in the supply and
distribution function.




Government
Regulation




Many
states and the Federal Trade Commission, as well as certain foreign countries,
require franchisors to transmit disclosure statements to potential franchisees
before granting a franchise. Additionally, some states and certain foreign
countries require us to register our franchise offering documents before we may
offer a franchise. Due to the scope of our business and the complexity of
franchise regulations, we may encounter compliance issues from time to time.
Significant delays in registering our franchise offering documents may prevent
us from selling franchises in certain jurisdictions, which may have a material
adverse effect on our business.




Local,
state and federal governments have adopted laws and regulations that affect us
and our franchisees including, but not limited to, those relating to
advertising, franchising, health, safety, environment, zoning and employment.
The Company strives to comply with all applicable existing statutory and
administrative rules and cannot predict the effect on our operations from the
issuance of additional requirements in the future.




Employees




As of
December 31, 2009, we employed a total of 117 persons, all full time
employees.  We believe that our relations with our employees are good.
None of our employees are covered by a collective bargaining
agreement.





Historical
Operations





The
Company was originally formed as Aeros, LLC in January 1996. We changed our name
to Aether Technologies International, LLC in August 1996 and to Aether Systems
LLC in September 1999. Immediately prior to completing our initial public
offering of common stock on October 20, 1999, we converted from a limited
liability company to a Delaware corporation and changed our name to Aether
Systems, Inc. Until late 2004, the Company owned, acquired and operated a number
of mobile and wireless communications businesses. These businesses never became
profitable, and during 2004 we sold these businesses and started a
mortgage-backed securities, or MBS, business. During 2004 and 2005, we assembled
a leveraged portfolio of MBS investments. On July 12, 2005, the Company, with
shareholder approval, effectuated a holding company reorganization so that
Aether Systems, Inc. became a wholly-owned subsidiary of Aether Holdings, Inc.
Market conditions for the MBS business changed significantly during 2005 and
into 2006, and the profitability of our leveraged MBS portfolio declined. In
light of these changing market conditions, in late 2005 and into 2006, we began
to explore additional and alternative business strategies that we thought could
help us become profitable more quickly and create shareholder value. These
efforts resulted in our decision to acquire UCC Capital in June 2006. On October
31, 2006, at the 2006 annual meeting of stockholders, our stockholders approved
the sale of our MBS portfolio for the purpose of discontinuing our MBS business
and allocating all cash proceeds from such sale to the growth and development of
our brand management business. Our stockholders also approved a change of our
Company name from Aether Holdings, Inc. to NexCen Brands. We sold our MBS
investments in November 2006, and since that time, we have focused entirely on
our brand management business.


7


Tax Loss Carry-Forwards and
Limits on Ownership of Our Common Stock





As a
result of the substantial losses incurred by our predecessor businesses through
2004 and additional losses through 2009, as of December 31, 2009, we had federal
net operating loss carry-forwards of approximately $837.0 million that expire on
various dates through 2028. In addition, as of December 31, 2009, we had capital
loss carry-forwards of approximately $15.4 million that expire between 2010 and
2011. If we have an “ownership change” as defined in the Internal Revenue Code
of 1986, as amended (“IRC”) in Section 382 (“Code Section 382”), our net
operating loss carry-forwards and capital loss carry-forwards generated prior to
the ownership change would be subject to annual limitations, which could reduce,
eliminate, or defer the utilization of these losses.




To help
guard against a change of ownership occurring under Code Section 382, shares of
our common stock are subject to transfer restrictions contained in our
certificate of incorporation. In general, the transfer restrictions prohibit any
person from acquiring 5% or more of our stock without our consent. Persons who
owned 5% or more of our stock prior to May 4, 2005 are permitted to sell the
shares owned as of May 4, 2005 without regard to the transfer restrictions.
Shares acquired by such persons after May 4, 2005 are subject to the transfer
restrictions. Our Board of Directors has the right to waive the application of
these restrictions to any transfer.




To date,
we do not believe that we have experienced an ownership change as defined under
Code Section 382 resulting from the transfer of shares by our existing
shareholders or from deemed ownership changes resulting from the various
amendments to the BTMUCC Credit Facility. However, there remain significant
uncertainties as to our ability to realize any tax savings in the future. See
Note 10 – Income Taxes
to our Consolidated Financial Statements for a more detailed discussion of our
deferred tax assets. For a discussion on the risks associated with our tax loss
carry-forwards and the limits on ownership of our common stock, please see Item
1A – Risk Factors,
under the caption “Risks of Our Business.”




General Corporate
Matters




Our
executive offices are located at 1330 Avenue of the Americas, 34th Floor,
New York, NY 10019. Our telephone number is (212) 277-1100 and our fax number is
(212) 277-1160.




Availability of
Information




We
maintain a website at www.nexcenbrands.com,
which provides a wide variety of information on each of our brands. You may read
and copy any materials we file with the Securities and Exchange Commission (the
“SEC”) at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC
20549. For further information concerning the SEC’s Public Reference Room, you
may call the SEC at 1-800-SEC-0330. Some of this information also may be
accessed on the SEC’s website at www.sec.gov. We also
make available free of charge, on or through our website, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished to the SEC pursuant to Section
13(a) or Section 15(d) of the Exchange Act as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the SEC. We
also maintain the following sites for each of the Company's brands and
operations: www.nexcenfranchises.com,
www.theathletesfoot.com,
www.greatamericancookies.com,
www.maggiemoos.com,
www.marbleslab.com,
www.pretzeltime.com,
www.pretzelmaker.com,
and www.shoeboxny.com. We
are providing the address of our internet websites solely for the information of
investors. We do not intend the internet addresses to be active links in this
Report, and the contents of these websites are not incorporated into, and do not
constitute a part of, this Report.




ITEM
1A. RISK FACTORS




You
should carefully consider the following risks along with the other information
contained in this Report.  All of the following risks could materially
and adversely affect our business, financial condition or results of
operations.  In addition to the risks discussed below and elsewhere in
this Report, other risks and uncertainties not currently known to us or that we
currently consider immaterial could, in the future, materially and adversely
affect our business, financial condition and financial results.


8


Risks
Related to Our Financial Condition




Our
substantial indebtedness limits cash flow available for our operations, and we
may not be able to generate sufficient cash flow to service our debt as it is
currently structured.




We are
highly leveraged. As of December 31, 2009, we had approximately $138.2 million
of debt outstanding with BTMU Capital Corporation (“BTMUCC”) under a credit
facility (the “BTMUCC Credit Facility”). (See Note 9 – Debt for detailed information
regarding the BTMUCC Credit Facility.) The BTMUCC Credit Facility requires us to
dedicate a substantial portion of our cash flow from operations to interest and
principal payments on our debt thereby reducing the availability of our cash
flow to fund working capital, capital expenditures, research and development
efforts and other general corporate purposes. Under the BTMUCC Credit Facility,
substantially all revenues earned by the Company are remitted to “lockbox
accounts,” and the terms of the BTMUCC Credit Facility limit the amount of cash
flow from operations that may be distributed to NexCen for operating expenses,
capital expenditures and other general corporate purposes. The BTMUCC Credit
Facility also prohibits us from securing any additional borrowings without the
prior written consent of BTMUCC. Thus, our indebtedness could, among other
things:




·
            increase our vulnerability to
      general adverse economic and industry
  conditions;


·
            limit our flexibility in planning
      for, or reacting to, changes in our business and the industries in which
      we operate;


·
            place us at a competitive
      disadvantage if any of our competitors have less debt;
      and


·
            limit our ability to borrow
      additional funds.




Based on
our current projections, we anticipate that cash generated from operations will
provide us with sufficient liquidity to meet our scheduled debt service
obligations for at least the next twelve months. However, we are subject to
numerous prevailing economic conditions and to financial, business, and other
factors beyond our control. In addition, the BTMUCC Credit Facility obligates us
to make a final scheduled principal payment on our Class B Franchise Note of
$34.5 million in July 2011. We currently do not expect that we will be able to
meet this obligation. As a result, we cannot guarantee that we will be able to
generate sufficient cash flow to service our interest and principal payment
obligations related to our outstanding debt, or that cash flow, future
borrowings or equity financing will be available for the payment or refinancing
of our debt. Failure to meet the interest and principal payment obligations of
our debt would result in a default under the BTMUCC Credit Facility, which could
then trigger among other things the lender’s right to accelerate principal
payment obligations, foreclose on virtually all of the assets of the Company and
take control of all of the Company’s cash flow from operations. We have
classified all of the debt outstanding under the BTMUCC Credit Facility as a
current liability as of December 31, 2009.





We
are exploring alternatives to the Company’s current debt and capital structure.
Any strategic transaction, including restructuring of debt, may result in
dilution of existing shareholders and may trigger an ownership change that would
limit our ability to utilize our tax loss carry-forwards.





In the
wake of our efforts to stabilize the Company in 2008 and 2009, we have evaluated
our business and concluded that for the long-term growth and viability of our
business, we must address the Company’s debt and capital structure. We,
therefore, retained an investment bank to assist us with identifying and
evaluating strategic alternatives, including recapitalization of the
Company,  restructuring of our debt and/or sale of some or
substantially all of our assets, and we are in discussions with BTMUCC regarding
potential alternatives needs BTMUCC’s consent is required to proceed with
any strategic transaction or debt restructuring. There can be no guarantee that
BTMUCC will agree to any strategic transaction or debt restructuring, and
certain transactions may significantly dilute existing shareholders and/or
trigger an ownership change under the tax laws that would limit our ability to
utilize our tax loss carry-forwards assuming we have taxable
income.


Absent
waivers, a strategic transaction or further restructuring of our debt, we likely
will breach certain covenants of the BTMUCC Credit Facility in 2010 and likely
will fail to make a required principal payment in July 2011.


The
BTMUCC Credit Facility contains numerous affirmative and negative covenants,
including, among other things, restrictions on indebtedness, liens, fundamental
changes, asset sales, acquisitions, capital and other expenditures, common stock
repurchases, dividends and other payments affecting subsidiaries. The Company’s
failure to comply with the financial and other restrictive covenants relating to
our indebtedness would result in a default under the indebtedness, which could
then trigger among other things the lender’s right to accelerate principal
payment obligations, foreclose on virtually all of the assets of the Company and
take control of all of the Company’s cash flow from operations.





BTMUCC
has provided the Company amendments and waivers following the restructuring of
the debt in August 2008, including reduction of interest rates, deferral of
scheduled principal payment obligations and certain interest payments, waivers
and extensions of time related to the obligations to issue dilutive warrants,
allowance of certain payments to be excluded from debt service obligations, as
well as relief from debt service coverage ratio requirements, certain capital
and operating expenditure limits, certain loan-to-value ratio requirements,
certain free cash flow margin requirements, and the requirement to provide
financial statements by certain deadlines. We anticipate that we will breach
certain covenants under the BTMUCC Credit Facility in 2010 unless we are able to
obtain additional waivers or amendments from our lender. There can be no
assurance that we will be able to obtain waivers or amendments, and our lender
may default the Company and seek to accelerate our principal payment obligations
pursuant to any of the covenants or other provisions of the BTMUCC Credit
Facility. In addition, we currently do not expect that we will be able to meet a
principal payment of $34.5 million due in July 2011 on our debt as
currently structured. Accordingly, we have classified all of the debt
outstanding under the BTMUCC Credit Facility as a current liability as of
December 31, 2009.


9


We
may not have sufficient working capital, which could materially and adversely
impact our business, financial condition and results of operations.




The terms
of the BTMUCC Credit Facility limit the amount of cash flow from operations that
may be used for operating expenses, capital expenditures, and other general
corporate purposes. As a result, certain non-ordinary course expenses or
expenses beyond a certain annual total limit must be paid out of cash on hand.
In December 2009, we exceeded the total annual expense limit for 2009
established by the BTMUCC Credit Facility (which limit does not apply to cost of
goods for our manufacturing facility). Under the BTMUCC Credit Facility, we are
not reimbursed out of the cash in the lockbox accounts for any expenses paid in
excess of our annual expense limit. Instead those amounts are released to BTMUCC
to pay down principal in excess of scheduled principal payments. In order to
manage our cash balance, we deferred payment of expenses incurred in excess of
our 2009 expense limit until the expense limit reset for 2010. On January 14,
2010, we entered into an amendment of the BTMUCC Credit Facility that, among
other things, essentially allowed the Company to retroactively increase its
expense limit for 2009 by $0.5 million by decreasing its expense limit for 2010
by the same amount.  (See Note 9 – Debt for detailed information
regarding the BTMUCC Credit Facility.)





We may
exceed our expense limit in 2010, and we can provide no guarantees that our
current cash on hand and cash from operations after debt service will continue
to satisfy our working capital requirements in the future. We may require future
working capital in order to operate, implement our revised business plan and/or
further improve operations. We have no committed sources of working capital and
do not know whether additional financing will be available when needed, or, if
available, that the terms will be favorable. The BTMUCC Credit Facility also
prohibits us from securing any additional borrowings without the prior written
consent of our lender. The failure to satisfy our working capital requirements
will adversely affect our business, financial condition and results of
operations.




We may
seek additional funding through strategic transactions, further restructuring of
our debt, a recapitalization transaction, a sale of some or substantially all of
our assets, and/or private or public sales of our securities. We can provide no
assurance, however, that we can obtain additional funding on reasonable terms,
or at all, and such funding, if available, may significantly dilute existing
shareholders and trigger an ownership change that would limit our ability to
utilize our tax loss carry-forwards assuming we have taxable income. If we
cannot obtain adequate funds, we may need to significantly curtail our expenses,
which may adversely affect our business, financial condition and results of
operations.


Doubt
about our ability to continue as a going concern could adversely impact our
business, financial condition and results of operations.




Our
future success depends in large part on the support of our current and future
investors, lenders, franchisees, business partners and employees. Uncertainties
with respect to our corporate viability and financial condition may discourage
investors from purchasing our stock, lenders from providing additional capital,
current and future franchisees from renewing existing agreements or executing
new agreements with us, vendors and service providers from dealing with us
without prepayment or other credit assurances, and/or current and future
employees from committing to us, any or all of which could adversely affect our
business, financial condition and results of operations.




We
are vulnerable to interest rate risk with respect to a substantial portion of
our debt.




As of
December 31, 2009, approximately 62% of our current aggregate debt fluctuates
with the 30-day London Interbank Offering Rate ("LIBOR").  Any
increase in LIBOR will increase our interest expense and could negatively impact
our business, liquidity and financial condition.  See Item  7A – Quantitative and Qualitative
Disclosure about Market Risk, under the caption “Interest Rate
Risk.”




Our
ability to access capital markets may be constrained.




We failed
to timely file with the SEC our Quarterly Reports on Form 10-Q for the periods
ended March 31, 2008, June 30, 2008 and September 30, 2008, our Annual
Report on Form 10-K for the fiscal year ended December 31, 2008, and our
Quarterly Reports on Form 10-Q for the periods ended March 31, 2009 and June 30,
2009. We did timely file with the SEC our Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2009.  Until we are timely in our
filings for a period of 12 months, which would be November 2010 if we continue
to make timely filings, we will be precluded from registering any securities
with the SEC on Form S-3, the most simplified registration form used by the SEC.
In addition, we are limited under our BTMUCC Credit Facility from raising equity
in excess of $10 million in either the private or public markets unless certain
conditions are met to protect our lender’s interest. As a result, our ability to
access the capital markets may be constrained, which may adversely affect our
liquidity.


10


Risks
Related to Our Pending Litigation and Governmental Investigations




Any
adverse outcome of the investigation being conducted by the SEC could adversely
affect our business, financial condition, results of operations and cash
flows.




In March
2009, the Company received notice that a formal investigation had been commenced
by the SEC in October 2008. We cannot predict the outcome of the investigation.
The legal costs of such investigation and any negative outcome from the
investigation could have a material adverse effect on our business, financial
condition, results of operations and cash flows. See Item 3 – Legal Proceedings, for a
discussion of this investigation.




Several
lawsuits have been filed against us involving our past public disclosures, and
the outcome of these lawsuits may have a material adverse effect on our
business, financial condition, results of operations and cash
flows.




A
consolidated class action lawsuit, a shareholder derivative lawsuit and a direct
lawsuit have been filed against us, as well as certain of our former officers
and current and former directors, relating to, among other things, allegations
of violations of the securities laws. We cannot predict the outcome of these
lawsuits. Substantial damages or other monetary remedies assessed against us
could have a material adverse effect on our business, financial condition,
results of operations and cash flows, and any requirement to issue additional
stock could be dilutive. See Item 3 – Legal Proceedings, for a
discussion of these lawsuits.





We
may not have sufficient insurance to cover our liability in our pending
litigation claims and future claims due to coverage limits, as a result of
insurance carriers seeking to deny coverage of such claims, or because the
insurance carrier is unable to provide coverage, which in any case could have a
material adverse effect on our business and financial condition.




We
maintain third party insurance coverage against various liability risks,
including securities and shareholder derivative claims, as well as other claims
that form the basis of litigation matters pending against us. While we believe
these insurance arrangements are an effective way to insure against liability
risks, the potential liabilities associated with the litigation matters pending
against us, or that could arise in the future, could exceed the coverage
provided by such arrangements. Our insurance carriers also may seek to rescind
or deny coverage with respect to pending or future actions. If we do not have
sufficient coverage under our policies, or if the insurance companies are
successful in rescinding or denying coverage to us, or if our insurance carrier
is unable to provide coverage, our business, financial condition, results of
operations and cash flows would be materially and adversely
affected.




Our
potential indemnification obligations and limitations on our director and
officer liability insurance could have a material adverse effect on our
business, results of operations and financial condition.




Certain
of our present and former directors, officers and employees are the subject of
lawsuits. Under Delaware law, our bylaws and other contractual arrangements, we
may have an obligation to indemnify our current and former directors, officers
and employees in relation to completed investigations or pending and/or future
investigations and actions.  Indemnification payments that we make may
be material and, in such event, would have a negative impact on our results of
operations and financial condition to the extent insurance does not cover our
costs. The insurance carriers that provide our directors’ and officers’
liability policies may seek to rescind or deny coverage with respect to pending
and future investigations and actions, or we may not have sufficient coverage
under such policies. If the insurance companies are successful in rescinding or
denying coverage to us and/or some of our current and former directors, officers
and employees, or we do not have sufficient coverage under our policies, our
business, financial condition, results of operations and cash flows may be
materially adversely affected.




The
uncertainty of the outcome of the pending litigation and the SEC investigation
may have a material adverse effect on our business.




The
uncertainty and risks of the pending litigation and the SEC investigation may
cause our stock price to be more volatile or lower than it otherwise would be
and may affect our ability to retain and/or attract franchisees, business
partners, investors and/or employees.




Risks
of Our Business




Our
business strategy to focus on our franchised brands may not be
successful.




In the
fourth quarter of 2008, we completed the sale of consumer products brands, Bill
Blass and Waverly, to enable us to streamline the Company to focus solely on our
seven franchised brands. The Company’s efforts to focus on the franchise
business as our core business may not be successful and may not improve the
performance of the Company. We may not be successful in effectively executing
our strategy or in generally operating or expanding our brands or integrating
them into an efficient overall business strategy. We may not be able to retain
existing or attract new investors, franchisees, business partners and
employees.


11


We
may fail to reach our sales and expense projections, which may negatively impact
our business, results of operations and financial condition.





We
establish sales and expense projections each fiscal year based on a strategy of
new market development, further penetration of existing markets and tight
control over operating expenses against a backdrop of current and anticipated
economic conditions. In addition to driving our financial results, we provide
these sales and expense projections to our lender, and our progress in meeting
projections on a monthly and quarterly basis affect our ability to meet debt and
covenant obligations and to negotiate any waivers or amendments we may need
under the BTMUCC Credit Facility. Our ability to meet our sales and expense
projections is dependent on our ability to locate and attract new franchisees
and area developers; maintain and enhance our brands; maintain satisfactory
relations with our franchisees; monitor and audit the reports and payments
received from franchisees; maintain or increase same store sales in existing
markets; achieve new store openings and control expenses – all of which are
dependent on factors both within and outside our control. Our failure to reach
our sales and expense goals, which may be exacerbated by current economic
conditions, may negatively impact our business, financial condition, results of
operation and cash flow.




Our
business depends on market acceptance of our brands in highly competitive
industries.




Continued
market acceptance of our franchised brands is critical to our future success and
subject to great uncertainty. The retail footwear and retail food industries in
which we compete are extremely competitive, both in the United States and
overseas. Accordingly, we and our current and future franchisees, licensees and
other business partners face and will face intense and substantial competition
with respect to marketing and expanding products under our franchised brands. As
a result, we may not be able to attract franchisees, licensees, and other
business partners on favorable terms or at all. In addition, franchisees,
licensees and other third parties with whom we deal may not be successful in
selling products that make use of our brands. They (and we) also may not be able
to expand the distribution of such products and services into new
markets.




In
general, competitive factors include quality, price, style, selection of
merchandise, reputation, name recognition, store location, advertising and
customer service. The retail footwear and retail food industries are often
affected by changes in consumer tastes; national, regional or local economic
conditions; currency fluctuations; demographic trends; traffic patterns; the
type, number and location of competing footwear and food retailers and products;
and disposable purchasing power.  Competing brands may have the
backing of companies with greater financial and operational stability and
greater distribution, marketing, capital and other resources than we or our
franchisees and other business partners have. This may increase the obstacles
that we and they face in competing successfully. Among other things, we may have
to spend more on advertising and marketing or may need to reduce the amounts
that we charge franchisees, licensees and other business partners. This could
have a negative impact on our business, financial condition, and results of
operations.




The
challenging economic conditions and declines in consumer spending have
negatively affected our business and may continue to do so.





Our
business is sensitive to consumer spending patterns and
preferences.  Market and general economic conditions affect the level
of discretionary spending on the merchandise we and our franchisees offer,
including general business conditions, interest rates, taxation, the
availability of consumer credit and consumer confidence in future economic
conditions. The generally unfavorable economic conditions on a local, regional,
national or multi-national level has adversely affected our growth, sales and
profitability and may continue to do so.




Many of
our franchisees’ stores are located in shopping malls, particularly in the
United States. Our franchisees derive revenue, in part, from the high volume of
traffic in these malls. As a result of deteriorating economic conditions, the
inability of mall "anchor" tenants and other
area attractions to generate consumer traffic around our franchised stores and
the decline in popularity of malls as shopping destinations have reduced our
franchising revenue dependent on sales volume and may continue to do
so.




Our
operating results are closely tied to the success of our franchisees, over which
we have limited control.




As a
result of our franchising programs, our operating results are dependent upon the
sales volumes and viability of our franchisees. Any significant inability of our
franchisees to operate successfully could adversely affect our operating
results, and the quality of franchised operations may be impacted by factors
that are not in our control. We provide training and support to our franchisees,
but do not exercise day-to-day control over them. Franchisees may not
successfully operate their businesses in a manner consistent with our standards
and requirements, or may not hire and train qualified managers and other store
personnel. In addition, franchisees may not be able to find suitable sites on
which to develop stores, negotiate acceptable leases for the sites, obtain the
necessary permits or government approvals or meet construction schedules. Any of
these problems could negatively impact our business, could slow our planned
growth and negatively impact our business, results of operations and financial
condition.




The
current disruptions in the availability of financing for current and prospective
franchisees have adversely affected our business, results of operations and
financial condition and may continue to do so.




As a
result of steep declines in the capital markets and the severe limits on credit
availability, current and prospective franchisees have not had access to the
financial or management resources that they need to open or continue operating
the units contemplated by franchise or development agreements. Our franchisees
generally depend upon financing from banks or other financial institutions in
order to construct and open new units. Especially in this tight credit
environment, financing has been difficult to obtain for some of our current and
prospective franchisees. The continued difficulties with franchisee financing
could reduce our store count, franchise fee revenues and royalty revenues, slow
our planned growth, and negatively impact our business, results of operations
and financial condition.


12


We
depend on our franchisees to provide timely and accurate information about their
sales and operations, which we rely upon to effectively manage the franchised
brands.




Our
franchisees are contractually obligated to provide timely and accurate
information regarding their sales and operations, and we rely on this
information to collect royalties and manage the franchised brands. Most of our
franchisees are required to report on a weekly basis. However, the franchise
agreements for our TAF brand require reporting on a monthly or quarterly, versus
weekly, basis. This delay in reporting reduces our visibility into the results
of operations for the TAF brand. In addition, some of our franchisees are not
consistently compliant with their reporting obligations. Our inability to
collect timely and accurate information from our franchisees may adversely
affect our business and results of operation.




Significant
delays or difficulty in registering our franchise offering documents may
adversely affect our business, results of operations and financial
condition.




Many
states and the Federal Trade Commission, as well as certain foreign countries,
require franchisors to transmit disclosure statements to potential franchisees
before granting a franchise. Additionally, some states and certain foreign
countries require us to register our franchise offering documents before we may
offer a franchise. Due to the scope of our business and the complexity of
franchise regulations, we may encounter compliance issues from time to time. In
addition, due to the doubt about our ability to continue as a going concern,
some states may require additional disclosures, impose additional requirements
on our sale franchises, or not permit us to sell franchises at all. Significant
delays or other difficulties in registering our franchise offering documents may
prevent or impede us from selling franchises in certain jurisdictions, which may
have a material adverse effect on our business, results of operations and
financial condition.




We
operate a global business that exposes us to additional risks that may adversely
affect our business, results of operations and financial condition.




Our
franchisees operate in 38 countries. As a result, we are subject to risks
associated with doing business globally. We intend to continue to pursue growth
opportunities for our franchised brands outside the United States, which could
expose us to greater risks. The risks associated with our franchise business
outside the United States include:




·
            Political and economic
      instability or civil unrest;


·
            Armed conflict, natural disasters
      or terrorism;


·
            Health concerns or similar
      issues, such as a pandemic or
epidemic;


·
            Multiple foreign regulatory
      requirements that are subject to change and that differ between
      jurisdictions;


·
            Changes in trade protection laws,
      policies and measures, and other regulatory requirements affecting trade
      and investment;


·
            Differences from one country to
      the next in legal protections applicable to intellectual property assets,
      including trademarks and similar assets, enforcement of such protections
      and remedies available for
infringements;


·
            Fluctuations in foreign currency
      exchange rates and interest rates;
and


·
            Adverse consequences from changes
      in tax laws.




The
effects of these risks, individually or in the aggregate, could have a material
adverse impact on our business, results of operations and financial
condition.




We
may not be able to adequately protect our intellectual property, which could
harm the value of our brands and adversely affect our business.




We
believe that our trademarks and other intellectual property rights are vital to
our success, the success of our brands and our competitive position.
Accordingly, we devote substantial resources to the development and protection
of our trademarks and other intellectual property rights. However, the actions
taken by us may be inadequate to prevent infringement or other unauthorized use
of our intellectual property by others, which may thereby dilute our brands in
the marketplace and/or diminish the value of our proprietary rights. We also may
be unable to prevent others from claiming infringement or other unauthorized use
of their trademarks and intellectual property rights by us. Our rights to our
trademarks may in some cases be subject to the common law or statutory rights of
any person who filed an application and/or began using the trademark (or a
confusingly similar mark) prior to the date of our application and/or our first
use of such trademarks in the relevant territory. We cannot provide assurances
that third parties will not assert claims against our trademarks and other
intellectual property rights or that we will be able to successfully resolve
such claims, which could result in our inability to use certain trademarks or
other intellectual property in certain jurisdictions or in connection with
certain goods or services. Future actions by third parties, including
franchisees or licensees, may diminish the strength of our trademarks or other
intellectual property rights, injure the goodwill associated with our business
and decrease our competitive strength and performance. We also could incur
substantial costs to defend or pursue legal actions relating to the use of our
trademarks and other intellectual rights, which could have a material adverse
effect on our business, results of operations or financial
condition.


13


We
may be required to recognize additional impairment charges for trademarks and
other intangible assets with indefinite or long lives.




As a
result of our acquisition strategy, we recorded a material amount of trademarks
and other intangible assets with indefinite or long lives on our balance sheet.
We assess these assets as and when required by U.S. generally accepted
accounting principles (GAAP) to determine whether they are impaired. Based on
our review in fiscal year 2008, we recorded impairment charges totaling
approximately $242 million in 2008 with respect to our acquired assets. We did
not record any impairment charges in 2009.  However, if market
conditions continue to deteriorate or if operating results decline unexpectedly,
we may be required to record impairment charges in the future, and such charges
would reduce our reported earnings for the periods in which they are recorded.
Those reductions could be material and, in such event, would adversely affect
our financial results.  We also have retained an investment bank to
assist us in identifying and evaluating alternatives to the
Company’s  current debt and capital structure, including
recapitalization of the Company, restructuring of our debt and/or sale of some
or substantially all of our assets (see Note 9 – Debt).  A strategic
transaction, debt restructuring or a sale of some or substantially all of our
assets may result in a future adjustment to the carrying value of our intangible
assets.


We
addressed prior material weaknesses in disclosure controls and procedures and
internal control over financial reporting.  However, any future
material weaknesses could adversely affect our business, our financial condition
and our ability to carry out our strategic business plan.




As
discussed in Item 9A(T) – Controls and Procedures, we
concluded that, as of December 31, 2009, our disclosure controls and procedures
and internal control over financial reporting were effective. In order to
address our prior material weaknesses, we made substantial changes to our
management team and management structure; improved board communication and
corporate governance; made changes to and increased the number of dedicated
full-time accounting personnel; and enhanced internal control policies and
procedures. Nonetheless, if we are unsuccessful in our effort to maintain
effective financial reporting mechanisms and internal controls, our business,
our financial condition, our ability to carry out our strategic business plan,
our ability to report our financial condition and results of operations
accurately in a timely manner, and our ability to retain the trust of our
franchisees, lender, business partners, investors, employees and shareholders
could be adversely affected.




The
time, effort and expense related to internal and external investigations,
litigation, the completion of our delinquent SEC filings, and the development
and implementation of improved internal controls and procedures, have had an
adverse effect on our business.




Our
management team has spent considerable time, effort and expense in dealing with
the Audit Committee investigation, pending litigation, the SEC’s investigation,
completing our delinquent SEC filings and in developing and implementing
accounting policies and procedures, disclosure controls and procedures, and
corporate governance policies and procedures. This has prevented management from
devoting its full attention to our business and many of these matters may
continue to distract management’s attention in the future. The significant time,
effort and expense spent have adversely affected our operations and our
financial condition, and may continue to do so in the future.





Our
stock trades on the over-the-counter “Pink Sheets” market, and our stock price
may be volatile.




On
January 13, 2009, as a result of noncompliance with the NASDAQ Stock Market, LLC
(“NASDAQ”) listing requirements, our common stock was suspended from
trading on NASDAQ. Immediately thereafter, our stock began
trading under the symbol NEXC.PK on the Pink OTC Markets, formerly known as
the Pink Sheets. Although we plan to apply for relisting of our stock on NASDAQ
as soon as we are in compliance with the listing requirements, we may not be
successful in that effort. Our stock price has been volatile in the past and may
continue to be volatile for the foreseeable future.




Limits
on ownership of our common stock could have an adverse consequence to you and
could limit your opportunity to receive a premium on our stock.




Under
transfer restrictions that have been applicable to our common stock since 2005,
acquisitions of 5% or more of our stock are not permitted without the consent of
our Board of Directors. In addition, even if our Board of Directors consented to
a significant stock acquisition, a potential buyer might be deterred from
acquiring our common stock while we still have significant tax losses being
carried forward, because such an acquisition might trigger an ownership change
and severely impair our ability to use our tax losses against future income.
Thus, this potential tax situation could have the effect of delaying, deferring
or preventing a change in control and, therefore, could affect adversely our
shareholders’ ability to realize a premium over the then prevailing market price
for our common stock in connection with a change in control.




The
transfer restrictions that apply to shares of our common stock, although
designed as a protective measure to avoid an ownership change, may have the
effect of impeding or discouraging a merger, tender offer or proxy contest, even
if such a transaction may be favorable to the interests of some or all of our
shareholders. This effect might prevent our stockholders from realizing an
opportunity to sell all or a portion of their common stock at a premium to the
prevailing market price.


14


Our
ability to realize value from our tax loss carry-forwards is subject to
significant uncertainty.




As of
December 31, 2009, we
had federal net operating loss carry-forwards of approximately $837.0 million
that expire at various dates through 2028. In addition, we had capital loss
carry-forwards of approximately $15.4 million that expire between 2010 and 2011.
However, our ability to realize value from our tax loss carry-forwards is
subject to significant uncertainty.




There can
be no assurance that we will have sufficient taxable income or capital gains in
future years to use the net operating loss carry-forwards or capital loss
carry-forwards before they expire. This is especially true for our capital loss
carry-forwards, because they expire over a shorter period of time than our net
operating loss carry-forwards. The amount of our net operating loss
carry-forwards and capital loss carry-forwards also has not been audited or
otherwise validated by the Internal Revenue Service (“IRS”). The IRS could
challenge the amount of our net operating loss carry-forwards and capital loss
carry-forwards, which could result in a decrease in the amounts of such
carry-forwards.





In
addition, if we have an “ownership change” as defined in Section 382 of the
Internal Revenue Code, our net operating loss carry-forwards and capital loss
carry-forwards generated prior to the ownership change would be subject to
annual limitations, which could reduce, eliminate, or defer the utilization of
these losses. As of the date of this Report, we do not believe that we have
experienced an ownership change as defined under Section 382 resulting from
transfer of shares by our existing shareholders or from the various amendments
to the BTMUCC Credit Facility. However, we can provide no assurances that we
will not enter into other transactions or that transfers of stock will not
occur, which may result in an ownership change that would severely limit our
ability to use our net operating loss carry-forwards and capital loss
carry-forwards to offset future taxable income. For additional information
regarding our deferred tax assets, see Note 10 – Income Taxesto our
Consolidated Financial Statements.





ITEM
1B. UNRESOLVED STAFF COMMENTS




Not
applicable.





ITEM
2. PROPERTIES




As of
December 31, 2009, we leased a total of approximately 30,650 square feet of
office space for our operations. Our principal executive office totals 10,250
square feet and is located in New York, New York. Our franchising operations are
centralized in one facility totaling approximately 20,400 square feet located in
Norcross, Georgia. On January 29, 2008, in connection with the acquisition of
Great American Cookies, we acquired a manufacturing facility. The facility is
located on approximately four acres of land in Atlanta, Georgia and totals
approximately 37,400 square feet. The manufacturing facility is subject to
BTMUCC’s security interest. We believe that our facilities are adequate for the
purposes for which they are presently used and that replacement facilities are
available at comparable cost, should the need arise.




Notwithstanding
the sale of the Waverly business in late 2008, we remained obligated as of
December 31, 2009 on the lease for the Waverly showroom. We have sublet the
Waverly showroom to third parties through the lease expiration on February 27,
2018. We also assumed leases for office space in connection with our
acquisitions of MaggieMoo’s and Marble Slab Creamery, which we no longer use. We
negotiated a settlement of the MaggieMoo’s lease for a one-time payment of $0.3
million which was made in January 2008.  We sublet the Marble Slab
Creamery office in Houston, Texas to a third party through the lease expiration
in April 2009.




We do not
own or lease property used by our franchisees, but in connection with certain
acquisitions we are obligated under certain leases and lease guarantees for
certain franchise locations.




ITEM
3. LEGAL PROCEEDINGS




Securities Class
Action. A total of four putative securities class actions were filed in
May, June and July 2008 in the United States District Court for Southern
District of New York against NexCen Brands and certain of our former officers
and a current director for alleged violations of the federal securities laws. On
March 5, 2009, the court consolidated the actions under the caption, In re NexCen Brands, Inc. Securities
Litigation, No. 08-cv-04906, and appointed Vincent Granatelli as lead
plaintiff and Cohen Milstein Sellers & Toll PLLC as lead counsel. On August
24, 2009, plaintiff filed an Amended Consolidated Complaint. Plaintiff alleges
that defendants violated federal securities laws by misleading investors in the
Company’s public filings and statements during a putative class period that
begins on March 13, 2007, when the Company announced the establishment of the
credit facility with BTMUCC, and ends on May 19, 2008, when the Company’s stock
fell in the wake of the Company’s disclosure of the previously undisclosed terms
of a January 2008 amendment to the credit facility, the substantial doubt about
the Company’s ability to continue as a going concern, the Company’s inability to
timely file its periodic report and the expected restatement of its Annual
Report on Form 10-K for the year ended December 31, 2007, initially filed on
March 21, 2008. The amended complaint asserts claims under Section 10(b) of the
Exchange Act and SEC Rule 10b-5, and also asserts that the individual defendants
are liable as controlling persons under Section 20(a) of the Exchange
Act. Plaintiff seeks damages and attorneys’ fees and costs. On October 8,
2009, the Company filed a motion to dismiss the amended complaint. Plaintiff
filed his opposition on December 14, 2009, and the Company filed a reply on
January 27, 2010. The court has scheduled a hearing on the motion to dismiss for
May 5, 2010.


15


Shareholder Derivative
Action. A federal shareholder derivative action premised on essentially
the same factual assertions as the federal securities actions also was filed in
June 2008 in the United States District Court for Southern District of New York
against the directors and former directors of NexCen. This action is captioned:
Soheila Rahbari v. David Oros,
Robert W. D’Loren, James T. Brady, Paul Caine, Jack B. Dunn IV, Edward J.
Mathias, Jack Rovner, George Stamas & Marvin Traub, No. 08-CV-5843
(filed on June 27, 2008). In this action, plaintiff alleges that NexCen’s Board
of Directors breached its fiduciary duties in a variety of ways, mismanaged and
abused its control of the Company, wasted corporate assets, and unjustly
enriched itself by engaging in insider sales with the benefit of material
non-public information that was not shared with shareholders. Plaintiff further
contends that she was not required to make a demand on the Board of Directors
prior to bringing suit because such a demand would have been futile, due to the
board members’ alleged lack of independence and incapability of exercising
disinterested judgment on behalf of the shareholders. Plaintiff seeks damages,
restitution, disgorgement of profits, attorneys’ fees and costs, and
miscellaneous other relief.  On November 18, 2008, the Court informed
the parties that the case would be stayed for 180 days and requested that they
file a status report thereafter so the Court might consider whether the stay
should be extended. Plaintiff thereafter indicated that she intended to file an
amended derivative complaint after the Company filed its amended Annual Report
on Form 10-K for the year ended December 31, 2007, including a restatement of
its 2007 financial results.  On June 2, 2009, the Court lifted the
stay and ordered the plaintiff to file her amended derivative complaint no later
than two weeks after the Company filed its restated 2007 financials. On August
25, 2009, plaintiff filed an amended complaint that includes additional
allegations based on the Company’s August 11, 2009 Form 10-K/A. However, the
amended complaint does not assert any new legal claims, and omits plaintiff’s
previously asserted claim for corporate waste. Defendants moved
to dismiss the amended complaint on October 8, 2009. Plaintiff filed her
opposition on November 23, 2009, and defendants filed their reply on December 8,
2009.  The motion to dismiss is pending.





California
Litigation. A direct action was filed in Superior Court of California,
Marin County against NexCen Brands and certain of our former officers by a
series of limited partnerships or investment funds. The case is captioned: Willow Creek Capital Partners, L.P.,
et al. v. NexCen Brands, Inc., Case No. CV084266 (Cal. Superior Ct.,
Marin Country) (filed on August 29, 2008). Predicated on similar factual
allegations as the federal securities actions, this lawsuit is brought under
California law and asserts both fraud and negligent misrepresentation claims.
Plaintiffs seek compensatory damages, punitive damages and costs.




The
California state court action was served on NexCen on September 2, 2008.
Plaintiffs in the California action served NexCen with discovery requests on
September 19, 2008. On October 17, 2008, NexCen filed two simultaneous but
separate motions in order to limit discovery. First, NexCen filed a motion in
the United States District Court for Southern District of New York to stay
discovery in the California actions pursuant to the Securities Litigation
Uniform Standards Act of 1998. Second, NexCen filed a motion in the California
court to dismiss the California complaint on the ground of forum non conveniens, or to
stay the action in its entirety, or in the alternative to stay discovery,
pending the outcome of the federal class action.




The
California state court held a hearing on NexCen’s motion on December 12, 2008.
At the hearing, the court issued a tentative ruling from the bench granting
defendants’ motion to stay. On December 26, 2008, the court entered a final
order staying the California action in its entirety pending resolution of the
class action securities litigation pending in the Southern District of New York.
Plaintiff filed a motion to lift the stay, which motion was denied on October 8,
2009.





SEC Investigation. We
voluntarily notified the Enforcement Division of the SEC of our May 19, 2008
disclosure. The SEC commenced an informal investigation of the Company regarding
the matters disclosed, and the Company has been cooperating with the SEC and
voluntarily provided documents and testimony, as requested. On or about March
17, 2009, we were notified that the SEC had commenced a formal investigation of
the Company as of October 2008. The Company is continuing to cooperate with the
SEC in its formal investigation.




Legacy Aether IPO
Litigation. The Company was among the hundreds of defendants named
in a series of securities class action lawsuits brought in 2001
against issuers and underwriters of technology stocks that had initial public
offerings during the late 1990’s. These cases were consolidated in the United
States District Court for the Southern District of New York under the caption,
In Re Initial Public Offerings
Litigation, Master File 21 MC 92 (SAS). As to NexCen, these actions
were filed on behalf of persons and entities that acquired the Company’s stock
after our initial public offering on October 20, 1999. Among other
things, the complaints claimed that prospectuses, dated October 20, 1999
and September 27, 2000 and issued by the Company in connection with the
public offerings of common stock, allegedly contained untrue statements of
material fact or omissions of material fact in violation of securities
laws. The complaint alleged that the prospectuses allegedly failed to
disclose that the offerings’ underwriters had solicited and received from
certain of their customers additional and excessive fees, commissions and
benefits beyond those listed in the arrangements, which were designed to
maintain, distort and/or inflate the market price of the Company’s common stock
in the aftermarket. The actions sought unspecified monetary damages and
rescission. NexCen reserved $0.5 million for the estimated exposure for this
matter.


16


In March
2009, the parties, including NexCen, reached a preliminary global settlement of
all 309 coordinated class actions cases under which defendants would pay a total
of $586 million (the “Settlement Amount”) to the settlement class in exchange
for plaintiffs releasing all claims against them. Under the proposed terms of
this settlement, NexCen’s portion of the Settlement Amount would be paid by our
insurance carrier. In October 2009, the district court issued a decision
granting final approval of the settlement. Because NexCen has no out-of-pocket
liability under the approved settlement, we no longer maintain the reserve
of $0.5 million. We recorded the reversal of this reserve in income from
discontinued operations in 2009. On October 23, 2009, certain objectors filed a
petition to the U.S. Court of Appeals for the Second Circuit to appeal the class
certification order on an interlocutory basis. Two other notices of appeal were
filed by nine other objectors.  Plaintiffs, underwriter defendants,
and the issuer defendants filed opposition papers.  The appeals are
pending.





Other.  NexCen
Brands and our subsidiaries are subject to other litigation in the ordinary
course of business, including contract, franchisee, trademark and
employment-related litigation. In the course of operating our franchise systems,
occasional disputes arise between the Company and our franchisees relating to a
broad range of subjects, including, without limitation, contentions regarding
grants, transfers or terminations of franchises, territorial disputes and
delinquent payments.




ITEM
4.[REMOVED AND
RESERVED]




17




PART II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES





PRICE RANGE OF COMMON
STOCK




Our
common stock was quoted on The NASDAQ Stock Market, LLC (“NASDAQ”) under the
symbol NEXC from November 1, 2006 until January 13, 2009. Prior to November 1,
2006, starting with our initial public offering on October 20, 1999, the
Company’s common stock was quoted on NASDAQ under the symbol “AETH.” As a result
of noncompliance with NASDAQ listing requirements, NASDAQ suspended trading of
our common stock effective at the opening of trading on January 13, 2009 and
delisted our stock on February 13, 2009. Starting on January 13, 2009, the
Company’s common stock has been traded under the symbol NEXC.PK on the Pink OTC
Markets, formerly known as the Pink Sheets.




The
following table sets forth, for the periods indicated, the high and low prices
per share of the common stock as reported on NASDAQ and the Pink OTC Markets for
2009 and on NASDAQ for 2008.




2009
                                    
                                    
                                    2008QUARTER
      ENDED
                                    
                                    HIGH
                                    
                                    
                                    LOW
                                    
                                    
                                    HIGH
                                    
                                    
                                    LOWMarch 31
                                    
                                    $
                                    0.14
                                    
                                    
                                    $
                                    0.05
                                    
                                    
                                    $
                                    4.82
                                    
                                    
                                    $
                                    2.83June 30
                                    
                                    $
                                    0.25
                                    
                                    
                                    $
                                    0.10
                                    
                                    
                                    $
                                    3.49
                                    
                                    
                                    $
                                    0.41September 30
                                    
                                    $
                                    0.36
                                    
                                    
                                    $
                                    0.17
                                    
                                    
                                    $
                                    0.67
                                    
                                    
                                    $
                                    0.24December 31
                                    
                                    $
                                    0.25
                                    
                                    
                                    $
                                    0.13
                                    
                                    
                                    $
                                    0.30
                                    
                                    
                                    $
                                    0.07





APPROXIMATE NUMBER OF EQUITY
SECURITY HOLDERS





As of
February 28, 2010, the approximate number of stockholders of record of NexCen’s
common stock was 241.





DIVIDENDS





We have
never declared or paid any cash dividends on our common stock. For the
foreseeable future, we expect to utilize earnings, if any, to reduce our
indebtedness as required under the BTMUCC Credit Facility.





SECURITIES AUTHORIZED FOR
ISSUANCE UNDER EQUITY COMPENSATION PLANS





The
following table sets forth, as of December 31, 2009, information concerning
compensation plans under which our securities are authorized for issuance. The
table does not reflect grants, awards, exercises, terminations or expirations
since that date.





Plan Category
                                          
                                          Plan Name
                                          
                                          Number of
                                            securities
                                            to
                                            be issued upon
                                            exercise
                                            of outstanding
                                            options,
                                            and
                                            restricted stock
                                          
                                          
                                          Weighted-average
                                            exercise price of
                                            outstanding
                                            options,
                                            and restricted
                                            stock
                                          
                                          
                                          Number of
                                            securities
                                            remaining
                                            available for
                                            future
                                            issuance under
                                            equity
                                            compensation
                                            plansEquity
      compensation plans approved by security holders
                                          
                                          1999
      Equity Incentive Plan
                                          
                                          
                                          391,000
                                          
                                          
                                          $
                                          3.74
                                          
                                          
                                          
                                          —2006
      Equity Incentive Plan
                                          
                                          
                                          2,691,999
                                          
                                          
                                          $
                                          1.22
                                          
                                          
                                          
                                          808,001Equity
      compensation plans not approved by security holders
                                          
                                          2000
      Plan
                                          
                                          
                                          24,571
                                          
                                          
                                          $
                                          2.90
                                          
                                          
                                          
                                          —Total
      as of December 31, 2009
                                          
                                          
                                          
                                          
                                          3,107,570
                                          
                                          
                                          $
                                          1.55
                                          
                                          
                                          
                                          808,001


18


The 1999
Plan


In
September 1999, the Company adopted the 1999 Equity Incentive Plan, as amended
on September 5, 2005 (the “1999 Plan”). It was approved by the Company’s sole
stockholder prior to the Company’s initial public offering on October 20,
1999. The 1999 Plan provided for the issuance of NexCen common stock, pursuant
to grants of stock options or restricted stock, in an amount that adjusted
automatically to equal 20% of the Company’s outstanding shares. On September 2,
2005, the Company filed a registration statement with the SEC on Form S-8
registering an additional 973,866 shares under the 1999 Plan. A participant
immediately forfeits any and all unvested options and forfeits all unvested
restricted stock at the time of separation from NexCen, unless the award
agreement provides otherwise. No participant is permitted to exercise vested
options after the 90th day
from the date of termination from NexCen, unless the award grant provides
otherwise.





The 2000
Plan


Effective
December 15, 2000, the Company adopted the Acquisition Incentive Plan (the “2000
Plan”) to provide options or direct grants to all employees (other than
directors and officers), consultants and certain other service providers of the
Company and our related affiliates, without shareholder approval. NexCen’s Board
of Directors authorized the issuance of up to 1,900,000 shares of NexCen common
stock under the 2000 Plan, in connection with the grant of stock options or
restricted stock. All options granted under the 2000 Plan were required to be
nonqualified stock options.





The 2006
Plan


Effective
October 31, 2006, the Company adopted the 2006 Equity Incentive Plan (the “2006
Plan”) to replace the 1999 Plan and the 2000 Plan. The Company’s stockholders
approved the adoption of the 2006 Plan at the annual meeting held on October 31,
2006. The 2006 Plan is now the sole plan for providing stock-based compensation
to eligible employees, directors and consultants. The 1999 Plan and the 2000
Plans remain in existence solely for the purpose of addressing the rights of
holders of existing awards already granted under those plans. No new awards have
been or will be granted under the 1999 Plan and the 2000 Plan.





A total
of 3.5 million shares of common stock were initially reserved for issuance under
the 2006 Plan, which represented approximately 7.4% of NexCen’s outstanding
shares at the time of adoption. Options under the 2006 Plan expire after ten
years from the date of grant and are granted at an exercise price no less than
the fair value of the common stock on the grant date.  In the event of
a “change of control” as such term is defined in the 2006 Plan, awards of
restricted stock and stock options became fully vested or exercisable, as
applicable, to the extent the award agreement granting such restricted stock or
options provides for such acceleration. A participant immediately forfeits any
and all unvested options and forfeits all unvested restricted stock at the time
of separation from NexCen, unless the award agreement provides otherwise. No
participant is permitted to exercise vested options after the 90th day
from the date of termination from NexCen, unless the award grant provides
otherwise.





Stock Option Cancellation
Program





On
November 12, 2008, in light of the limited number of shares available for future
issuance under the 2006 Plan, the Company instituted a stock option cancellation
program for vested or unvested stock options issued under the 2006 Plan for
certain eligible directors and employees (the “Stock Option Cancellation
Program”). The Stock Option Cancellation Program was a voluntary,
non-incentivized program. The Company provided no remuneration or consideration
of any kind for the cancellation of stock options. In addition, to ensure that
the program was in no way coercive or perceived to be coercive, we limited it to
directors and executives at the level of vice president or above. The Company
recaptured 856,666 options through this program.




PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS





None.





ITEM
6. SELECTED FINANCIAL DATA





We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this
item.


19


ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





The
following discussion of the results of operations and financial condition of
NexCen Brands should be read in conjunction with the information contained in
the Consolidated Financial Statements and related Notes, which appear in Item 8
of this Report.





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. All seven
franchised brands are managed by NFM, a wholly owned subsidiary of NexCen
Brands. Our franchise network, across all of our brands, consists of
approximately 1,700 stores in 38 countries.




We
acquired our seven franchised brands as follows:





·
            TAF (acquired November 7,
      2006)


·
            MaggieMoo’s (acquired February
      28, 2007)


·
            Marble Slab Creamery (acquired
      February 28, 2007)


·
            Pretzel Time (acquired August 7,
      2007)


·
            Pretzelmaker (acquired August 7,
      2007)


·
            Shoebox New York (joint
      venture interest – January 15,
2008)


·
            Great American Cookies (acquired
      January 29, 2008)





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 are expanding
production capabilities of our manufacturing facility in 2010 to enable us
to produce and sell pretzel mix to our pretzel franchisees.





As
discussed in detail in Item 1– Business, we commenced our
brand management business in June 2006, when we acquired UCC Capital, an
investment banking firm that provided financial advisory services, particularly
to companies involved in monetizing intellectual property assets. In acquiring
UCC Capital, our strategy was to begin building a brand management business by
acquiring and operating businesses that own valuable brand assets and other
intellectual property and that earn revenues primarily from the franchising or
licensing of their intellectual property. In addition to our seven franchised
brands, we also owned the Bill Blass consumer products brand in the apparel
industry and the Waverly consumer products brand in the home goods industry. We
sold the Waverly brand on October 3, 2008 and the Bill Blass brand on December
24, 2008.




Our
financial condition and operating results during 2009 reflect the changes that
were implemented to address the financial and operational challenges that we
faced in 2008. In May 2008, we disclosed issues related to our debt structure
that materially and negatively affected the Company. Specifically, we disclosed
previously undisclosed terms of a January 2008 amendment to the BTMUCC Credit
Facility, which was made in connection with our acquisition of Great American
Cookies, and stated that the effects of that amendment on the Company’s
financial condition and liquidity raised substantial doubt about our ability to
continue as a going concern.  The Company also disclosed our inability
to timely file our periodic report and our expected restatement of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2007 (“Original 2007
10-K”). The Company announced that it was actively exploring all strategic
alternatives to enhance its liquidity including the possible sale of one or more
of our businesses. These disclosures had an immediate and significant adverse
impact on our business. The price of our common stock dropped; the Company and
certain current and former officers and directors of the Company were sued for
various claims under the federal securities laws and certain state statutory and
common laws; and we became the subject of an investigation by the Enforcement
Division of the SEC. (See Item 3 – Legal
Proceedings.)  As a result of noncompliance with the listing
requirements of NASDAQ including delays in filing our periodic reports, our
common stock was suspended from trading on NASDAQ on January 13, 2009 and
delisted from NASDAQ on February 13, 2009.





In
addition, starting in 2008 and continuing throughout 2009, the worldwide
financial markets experienced unprecedented deterioration, affecting both debt
and equity markets in the U.S. and internationally. The economy underwent a
significant slowdown due to uncertainties related to, among other factors,
energy prices, availability of credit, difficulties in the banking and financial
services sectors, softness in the housing market, severely diminished market
liquidity, geopolitical conflicts, falling consumer confidence and rising
unemployment rates.





By the
end of 2008, we improved our cash management, reduced operating expenses,
restructured the BTMUCC 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, during 2009 as compared to 2008, we
generated positive cash flow from operations instead of cash used in operations,
generated operating income instead of operating loss, and significantly
decreased our net loss and net loss per share.


20


Nonetheless,
our 2009 results were materially impacted by the corporate events of 2008, as
well as the continued global economic recession, tight credit markets, and
diminished consumer spending. Although we significantly reduced operating
expenses as compared to 2008, we incurred higher than normal expenses associated
with our efforts to amend our Original 2007 10-K, complete our delinquent SEC
filings, and improve internal controls and procedures. Moreover, our revenues
declined through the course of 2009 in comparison to 2008.





The following factors also impacted our
operating results for 2009 compared to 2008.





·
            On
      August 6, 2009, we entered into long-term license agreements with the
      master franchisee for TAF for the territories of Australia and New
      Zealand through our wholly owned subsidiary TAF Australia, LLC
      (“TAFA”). Pursuant to these TAFA license agreements, which replaced all
      prior franchise agreements among the parties, we granted exclusive
      licenses of the TAF trademarks and trade dress for the territories of
      Australia and New Zealand for an initial 99-year term. In consideration
      for these TAFA license agreements, we were paid one-time, non-refundable
      licensing fees of $6.2 million and ceased receiving royalties from
      franchised stores in Australia and New
Zealand.


·
            On
      August 6, 2009, in connection with the TAFA license transaction,
      NexCen entered into an amendment of the BTMUCC Credit Facility whereby the
      Company used $5.0 million of the licensing proceeds to pay down a portion
      of the Class B Franchise Note and BTMUCC released its security interest in
      the intellectual property that is the subject of the license agreements.
      The balance of the Class B Franchise Note following the re-payment was
      approximately $36.4 million, and the Company’s repayment resulted in
      interest expense savings of $0.4 million on an annualized
      basis.


·
            We
      acquired Great American Cookies on January 29, 2008. Thus, our
      financial results for the year ended December 31, 2009 reflect a full year
      of ownership of Great American Cookies, whereas our financial results for
      the year ended December 31, 2008 reflect approximately 11 months of
      ownership.


·
            In
      2008, we exited the licensing business for consumer branded products and
      ceased all activities of UCC Capital. We report the Bill Blass, Waverly
      and UCC Capital businesses as discontinued operations for all periods
      presented.


·
            Starting in late May 2008, we
      began reducing non-essential corporate staff and incurred restructuring
      charges that continued through the remainder of 2008. Corporate selling,
      general and administrative expenses thus decreased starting in second
      quarter 2008, although these decreases were offset in the fourth quarter
      of 2008 by a stock compensation charge of $2.1 million associated with the
      voluntary cancellation of stock option
  grants.


·
            Professional fees related to
      special investigations, corporate and franchising, increased throughout
      most of 2008, due to the increased legal costs and auditing costs
      associated with the events of May 2008, the growth of the Company and the
      integration of acquisitions.


·
            As
      a result of the events of May 2008 and the general downturn of the
      economy, the Company recorded material impairments of its intangible
      assets in the second and third quarters of
2008.




In
discussing our financial results for 2009 and 2008 below, we refer to certain
adjusted results, which exclude certain material special charges and expenses
that we incurred in relation to the events of 2008.  We believe the
adjusted non-GAAP results provide more meaningful year-over-year
comparisons.  See “Results of Continuing Operations for the Years
Ended December 31, 2009 and 2008.”





DISCONTINUED
OPERATIONS




In 2008,
we narrowed our business model to focus only on our franchised brands. We sold
the Waverly brand on October 3, 2008 and the Bill Blass brand on December 24,
2008. Accordingly, we have reflected the Waverly and Bill Blass brands
(collectively “Consumer Branded Products”) as discontinued operations. Bill
Blass Ltd, LLC also is reflected in discontinued operations. The loss from
operations of the Waverly and Bill Blass brands is presented in the Consolidated
Statements of Operations as a component of loss from discontinued
operations.  The loss on the sale of the Waverly and Bill Blass brands
is discussed in Note 15 – Discontinued Operations to
our Consolidated Financial Statements. In 2008, we also discontinued all
acquisition activities that we conducted through UCC Capital, which also earned
loan servicing revenues.





LITIGATION
SETTLEMENTS





In
October 2009, we resolved a pending litigation for which we had reserved $0.5
million. We had been among the hundreds of defendants named in a series
of class action lawsuits seeking damages due to alleged violations of
securities law, which was consolidated and pending in the United States District
Court for the Southern District of New York under the caption In Re Initial Public Offerings
Litigation, Master File 21 MC 92 (SAS). In March 2009, the parties,
including NexCen, reached a preliminary global settlement of all 309 coordinated
class actions cases. Under the proposed terms of this global settlement,
NexCen’s portion of the settlement amount would be paid by our insurance
carrier. In October 2009, the district court issued a decision granting final
approval of the settlement. Because NexCen has no out-of-pocket liability under
the approved settlement, we reversed the reserve during 2009, and the reversal
is reflected in income from discontinued operations in the Consolidated
Statement of Operations. For additional details regarding this litigation, see
Note 14(a) – Legal
Proceedings to our Consolidated Financial Statements.


21


On
December 28, 2009, we resolved a pending litigation with a former TAF franchisee
whereby the former franchisee agreed to pay NexCen $0.3 million to settle
past-due royalties and terminate all agreements between the parties. As a result
of the settlement, we recorded $0.3 million as other income in
2009.





On March
4, 2010, we resolved pending litigation with the former owners of MaggieMoo’s.
Pursuant to the terms of the acquisition, the former owners were to receive
additional consideration of $0.8 million pursuant to an earn-out provision which
was payable on March 31, 2008. NexCen had not paid the earn-out due to on-going
disputes between the parties regarding certain indemnification claims with which
NexCen sought to offset the earn-out. The parties reached a settlement whereby
NexCen agreed to pay $0.4 million to the former owners of MaggieMoo’s with $0.2
million due on March 5, 2010 and $37,500 payable in five quarterly payments
beginning on June 30, 2010 and ending on June 30, 2011. In the event we default
on any of our payments, we will be obligated to pay a total amount of $0.5
million less any payments made under the terms of the settlement agreement. As a
result of the settlement agreement, we recorded $0.2 million as other income in
2009 which represents the net difference between the settlement amount and the
earn-out amount as offset by $0.2 million of indemnity claims.





CRITICAL ACCOUNTING
POLICIES





Our
critical accounting policies affect the amount of income and expense we record
in each period, as well as the value of our assets and liabilities and our
disclosures regarding contingent assets and liabilities. In applying these
critical accounting policies, we must make estimates and assumptions to prepare
our financial statements, which, if made differently, could have a positive or
negative effect on our financial results. We believe that our estimates and
assumptions are both reasonable and appropriate, and in accordance with United
States generally accepted accounting principles (“GAAP”). However, estimates
involve judgments with respect to numerous factors that are difficult to predict
and are beyond management’s control. As a result, actual amounts could
materially differ from estimates.




We
believe that the following accounting policies represent “critical accounting
policies,” which are most important to the portrayal of our financial condition
and results of operations and require our most difficult, subjective, or complex
judgments, often because we must make estimates about uncertain and changing
matters.





·
            We recognize income taxes using
      the asset and liability method. Under this method, we recognize deferred
      tax assets and liabilities for the future tax consequences attributable to
      differences between the financial statement carrying amounts of existing
      assets and liabilities and their respective tax bases. We measure deferred
      tax assets and liabilities using enacted tax rates expected to apply to
      taxable income in the years in which we expect to recover or settle those
      temporary differences. We recognize the effect of a tax rate change on
      deferred tax assets and liabilities as income in the period that includes
      the enactment date. In assessing the likelihood of realization of deferred
      tax assets, we consider whether it is more likely than not that some
      portion or all of the deferred tax assets will not be realized. The
      ultimate realization of deferred tax assets is dependent upon the
      generation of future taxable income during periods in which these
      temporary differences become
deductible.





·
            We classify intangible assets
      into three categories: (1) goodwill; (2) intangible assets with indefinite
      lives not subject to amortization; and (3) intangible assets with definite
      lives subject to amortization.  We do not amortize goodwill and
      indefinite-lived intangible assets. We evaluate the remaining useful
      life of an intangible asset that is not being amortized each reporting
      period to determine whether events and circumstances continue to support
      an indefinite useful life. If an intangible asset that is not being
      amortized is subsequently determined to have a finite useful life, we
      amortize the intangible asset prospectively over its estimated remaining
      useful life. Amortizable intangible assets are amortized on a
      straight-line basis.





Goodwill
was assigned to reporting units for purposes of impairment testing. Our
reporting unit is our operating segment. We recorded impairment charges in 2008
that reduced the carrying value of our goodwill to $0, and we no longer have
goodwill recorded in our financial statements.





Trademarks
represent the value of expected future royalty income associated with the
ownership of the Company’s brands, namely, the Great American Cookies,
MaggieMoo’s, Marble Slab Creamery, Pretzelmaker and TAF trademarks. Other
non-amortizable intangible assets consist primarily of the customer/supplier
relationship with Great American Cookies franchisees. We do not amortize
trademarks and the customer/supplier relationship acquired in a purchase
business combination, which we determined to have an indefinite useful life, but
instead test them for impairment at least annually unless it is subsequently
determined that the intangible asset has a finite useful life. At each reporting
period, we assess trademarks and other non-amortizable intangible assets to
determine if any changes in facts or circumstances require a re-evaluation of
the estimated value. We capitalize material costs associated with registering
and maintaining trademarks.





We
amortize intangible assets with estimable useful lives over their respective
estimated useful lives to their estimated residual values, and review them for
impairment. Amortizable intangible assets consist of franchise agreements and
non-compete agreements of key executives and others, which we are amortizing on
a straight-line basis over a period ranging from one to twenty
years.


22


In 2009,
we did not record any impairment charges with respect to our intangible assets.
In 2008, we determined that goodwill, trademarks, and other non-amortizable
intangible asset valuations associated with certain brands were impaired. As a
result, we recognized impairment charges within the Consolidated Statement of
Operations for the year ended December 31, 2008. See Note 6 - Goodwill, Trademarks and Other
Intangible Assets.





·
            We account for share-based
      payments, such as grants of stock options, restricted shares, warrants,
      and stock appreciation rights, at fair value as an expense in our
      financial statements over the requisite service period. We estimate
      forfeitures in calculating the fair value of each award. See Note 12
      –Stock Based
      Compensation, for
      the assumptions used to calculate the stock compensation expense under the
      fair-value method discussed above. We use the Black-Scholes option pricing
      model to value the compensation expense associated with our stock option
      awards. In addition, we estimate forfeitures when recognizing compensation
      expense associated with our stock options, and adjust our estimate of
      forfeitures when we anticipate changes in the rate. Key input
      assumptions used to estimate the fair value of stock options included the
      market value of the underlying shares at the date of grant, the exercise
      price of the award, the expected option term, the expected volatility
      (based on historical volatility) of our stock over the option’s expected
      term, the risk-free interest rate over the option’s expected term, and the
      expected annual dividend yield, if
any.




·
            We maintain an allowance for
      doubtful accounts for estimated losses resulting from the inability of our
      customers to make required payments. In evaluating the collectability of
      accounts receivable, we consider a number of factors, including the age of
      the accounts, changes in status of the customers’ financial condition and
      other relevant factors. We revise estimates of uncollectible amounts each
      period, and record changes in the period we become aware of
      them.





RECENT ACCOUNTING
PRONOUNCEMENTS





Accounting
Standards Adopted in 2009





On
January 1, 2009, we adopted FASB ASC 825-10-65, “Financial Instruments,” which
requires disclosures about the fair value of financial instruments for interim
reporting periods in addition to the current requirement to make disclosures in
annual financial statements. This guidance also requires disclosure of the
methods and significant assumptions used to estimate the fair value of financial
instruments and description of changes in the methods and significant
assumptions. The carrying amounts of cash, cash equivalents and restricted cash
approximate their fair values (Level 1). The fair value of debt, as discussed in
Note 9 – Debt, is based
on the fair value of similar instruments as well as model-derived valuations
whose inputs are not observable (Level 3).  The adoption of this
standard did not have any effect on our results of operations or financial
position.




On June
30, 2009, we adopted the revisions to U.S. GAAP included in Codification Topic
855, Subsequent Events, which provides guidance for disclosing events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. The adoption of these revisions did not have any effect
on our results of operations or financial position.




On
September 30, 2009, we adopted the FASB ASC. The ASC does not alter current
GAAP, but rather integrates existing accounting standards with other
authoritative guidance. The ASC provides a single source of authoritative GAAP
for nongovernmental entities and supersedes all other previously issued non-SEC
accounting and reporting guidance. The adoption of the ASC did not have any
effect on our results of operations or financial position. We have revised all
prior references to GAAP to conform to the ASC. The FASB issues updates to the
ASC in the form of Accounting Standards Updates (“ASU”).





Accounting
Standards Not Yet Adopted





FASB ASC
810, “Consolidation Variable
Interest Entities,” requires an enterprise to perform an analysis to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a variable interest entity. This analysis
identifies the primary beneficiary of a variable interest entity as the
enterprise that has both of the following characteristics, among others:
(a) the power to direct the activities of a variable interest entity, which
most significantly impact the entity’s economic performance and (b) the
obligation to absorb losses of the entity, or the right to receive benefits from
the entity, which could potentially be significant to the variable interest
entity. This guidance requires ongoing reassessments of whether an enterprise is
the primary beneficiary of a variable interest entity. This guidance is
effective for the Company on January 1, 2010, and we do not expect it to
have a material impact on our results of operations or financial position.





RESULTS OF CONTINUING
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008





In
discussing our financial results for 2009 and 2008, we refer to certain adjusted
results, which exclude certain material special charges and expenses that we
incurred in relation to the events of 2008.  We believe the adjusted
non-GAAP results provide a more meaningful comparison. The following table
represents our unaudited operating results on a non-GAAP adjusted basis (in
thousands, except share data):


23





Year Ended December 31,2009
                
                
                2008Total
      revenues
                
                $
                45,119
                
                
                $
                46,956Total
      operating expenses
                
                
                (38,913
                )
                
                
                (194,173
                )Adjustments
      for special charges:Special
      investigations (1)
                
                
                91
                
                
                
                3,897Impairment
      of intangible assets (2)
                
                
                -
                
                
                
                137,881Restructuring
      charges (3)
                
                
                527
                
                
                
                1,096Total
      operating expenses, as adjusted
                
                
                (38,295
                )
                
                
                (51,299
                )Operating
      income (loss), as adjusted
                
                
                6,824
                
                
                
                (4,343
                )Total
      non-operating expenses
                
                
                (9,159
                )
                
                
                (12,349
                )Loss
      from continuing operations before income taxes, as
      adjusted
                
                
                (2,335
                )
                
                
                (16,692
                )Income
      taxes
                
                
                (395
                )
                
                
                5,994Deferred
      income tax adjustments (2)
                
                
                -
                
                
                
                (6,331
                )Income
      taxes, as adjusted
                
                
                (395
                )
                
                
                (337
                )Loss
      from continuing operations, as adjusted
                
                $
                (2,730
                )
                
                $
                (17,029
                )





(1)
            The
      Company incurred outside legal fees related to special investigations,
      namely, investigations conducted at the direction of the Audit Committee
      of the Board of Directors, the Company and the SEC, respectively,
      regarding the Company's public disclosure on May 19, 2008 of previously
      undisclosed terms of a January 2008 amendment of the BTMUCC Credit
      Facility.


(2)
            During
      2008, the Company determined that it was necessary to evaluate goodwill
      and trademarks for impairment between annual tests due to, among other
      factors, a decline in the Company's stock price and deterioration of the
      economy. As a result, the Company recognized deferred tax benefits related
      to the reversal of deferred tax liabilities associated with the intangible
      assets.


(3)
            Restructuring
      charges relate primarily to employee separation benefits in connection
      with staff reductions in the New York corporate
  office.





Royalty,
Franchise Fee, Factory, and Licensing and Other Revenues





We
recognized $45.1 million in revenues in 2009, a decrease of $1.8 million, or 4%,
from $47.0 million in revenues in 2008. Of the $45.1 million in revenues
recognized in 2009, $23.2 million related to royalties, a decrease of 6%
from 2008; $17.4 million related to factory revenues, an increase of 1% from
2008; $3.5 million related to franchise fees, a decrease of 4% from 2008; and
$1.1 million related to licensing and other revenues, a decrease of 15% from
2008. Other revenues consist primarily of management fees paid to us from the
Shoebox New York joint venture and rebates earned from vendors with which we
conduct business.





On a pro
forma basis, assuming that we had acquired Great American Cookies on January 1,
2008 instead of January 29, 2008 and we had entered into the TAFA license
agreements on January 1, 2008 instead of August 6, 2009, our revenues for 2009
declined approximately 7% from 2008.





Our
royalty revenues have declined as a result of the year-over-year lower store
count, reduced consumer spending which has affected all of our brands, as well
as a decline in TAF revenue as a result of the TAFA license agreements. We
anticipate that the TAFA license agreements will result in a decline in our
future royalties of approximately $0.8 million per year. Because of the economic
factors that have negatively affected our revenues during 2009, we currently are
unable to determine whether our revenues will stabilize or will continue to
decline in 2010.





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. The year-over-year decrease in
initial franchise fees 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.


24





Cost
of Sales





During
2009, we incurred $10.9 million in cost of sales, a decrease of 5% from 2008.
Cost of sales is comprised of raw ingredients, labor and other direct
manufacturing costs associated with our manufacturing facility. 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 37% in 2009 from 34% in 2008.  During 2009
and 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 $0.2 million in the first
quarter of 2008 resulting from purchase accounting adjustments related to
inventory acquired. Together, these factors resulted in year-over-year increase
in the gross profit margin.





Selling,
General and Administrative Expenses (“SG&A”)





SG&A
expenses consist primarily of compensation, stock compensation expense and
personnel related costs, rent, facility related support costs, travel,
advertising and bad debt expense.





In 2009,
we recorded Corporate SG&A expenses of $7.4 million, a decrease of 52% from
2008.  This year-over-year decrease is the result of a reduction in
stock compensation expense of $4.9 million, along with reductions in
compensation expense as a result of our corporate restructurings in 2009 and
2008 and other cost reduction efforts. We recorded Franchising SG&A of
$13.0 million in 2009, a decrease of 24% from 2008. The year-over-year decrease
reflects reductions in travel, entertainment, and general office expenses as
well as  lower bad debt expense due to improved collections and fewer
past due balances, partially offset by increased compensation
expense.





Professional
Fees





We
incurred corporate professional fees of $2.1 million in 2009, a decrease of 20%
from 2008. Corporate professional fees primarily consist of legal fees
associated with public reporting, compliance and litigation, and accounting fees
related to auditing and tax services.  The year-over-year decrease
reflects a more normalized need for legal professionals subsequent to the events
of 2008 and negotiated reductions in legal fees but nonetheless reflects the
additional accounting fees incurred in the completion of delinquent SEC
filings.





We
incurred professional fees related to franchising of $2.1 million in 2009, an
increase of 25% from 2008. Franchising professional fees primarily consist of
legal and accounting fees associated with franchising activities and trademark
maintenance. The year-over-year increase reflects the legal costs associated
with the Company’s increased enforcement efforts against non-compliant
franchisees.





In 2009,
we incurred $0.1 million in professional fees related 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, respectively, regarding the Company’s public disclosures of previously
undisclosed terms of a January 2008 amendment to the BTMUCC Credit Facility. The
professional fees related to special investigations represent the cost of
outside attorneys in either conducting the investigations or responding to the
investigations, as well as the cost of outside consultants that we engaged to
assist the Company and the Board of Directors to investigate and address the
Company’s financial condition resulting from the January 2008 amendment to the
BTMUCC Credit Facility.  In 2008, we incurred $3.9 million in
professional fees related to special investigations.





Impairment
of Intangible Assets





As a result of our previous acquisition
strategy, we recorded a material amount of trademarks, goodwill and other
intangible assets with indefinite or long lives. We test 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 the intangible assets of a reporting unit below their
respective carrying amounts.





We did not record any impairment
charges in 2009. In 2008, as a result of the deterioration of market and
economic conditions, we recorded impairment charges and reduced the book value
of such assets relating to continuing operations by a total of $137.9 million.
See Note 6 –Goodwill,
Trademarks and Other Intangible Assetsfor additional details regarding the
impairment charges.





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.


25





We
recorded depreciation and amortization expenses of $2.7 million in 2009 compared
to $2.9 million in 2008. The decrease is primarily attributable to accelerated
depreciation of corporate assets following the Company’s May 2008 corporate
restructuring that affected both years, but had a greater impact in
2008.




Restructuring
Charges





We
reduced the staff in our New York corporate office in connection with our sales
of the Waverly and Bill Blass brands and our cost reduction efforts, including
the transition of certain corporate functions to our Norcross, Georgia offices.
Accordingly, we recorded $0.5 million in restructuring charges in 2009 and $1.1
million in restructuring charges in 2008.  Restructuring charges
relate primarily to employee separation benefits.





Total
Operating Expenses





Total
operating expenses in 2009 were $38.9 million, a decrease of 80% from 2008. The
2008 results included impairment charges related to intangible assets of $137.9
million, $3.9 million in professional fees related to special investigations,
and $1.1 million in restructuring costs. The results for 2009 included $0.1
million in professional fees related to special investigations and restructuring
costs of $0.5 million. Excluding these special items, we incurred operating
expenses, as adjusted, of $38.3 million in 2009, a decrease of 25% from 2008.
This decrease reflects the Company’s ongoing cost reduction measures that began
in May 2008 which have generated savings in SG&A and other expenses, as well
as the higher stock compensation costs in 2008 due to the voluntary cancellation
of options granted to certain executives and directors.





Operating
Income (Loss)





Excluding
the aforementioned special items, we generated operating income, as adjusted, of
$6.8 million in 2009 compared to an operating loss of $4.3 million in 2008. The
$11.1 million improvement was primarily the result of the reduction in operating
expenses resulting from the cost reduction measures we implemented in 2008 and
improved factory gross margins, partially offset by lower revenues.





Interest
Income





We
recognized interest income of $0.2 million in 2009, a decrease of 54% from 2008.
Interest income primarily reflects the interest earned on our average cash
balances, which have declined year-over-year, along with interest rates.
Interest income also includes interest earned on the loan agreement with the
Athletes Foot Marketing Support Fund, LLC (the “TAF MSF”), a marketing fund for
the TAF brand, as described below under Off-Balance Sheet
Arrangements.





Interest
Expense





We
recorded interest expense of $10.9 million in 2009, an increase of 2% from
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 amortization of deferred loan costs and
debt discount of $1.5 million in 2009 and $2.6 million in 2008, and imputed
interest of $0.2 million in 2009 and 2008 related to a long-term consulting
agreement liability assumed in the TAF acquisition (which expires in 2028). The
year-over-year increase in interest expense is primarily due to increased
borrowings related to our continuing operations after the acquisition of Great
American Cookies in January 2008, as well as interest accrued on the Deficiency
Note, partially offset by lower interest rates on the variable rate debt and on
the Class B Franchise Note. For additional details regarding the BTMUCC
Credit Facility, see Note 9 – Debt to our Consolidated
Financial Statements.





Financing
Charges





We
incurred $0.1 million in net financing charges during 2009 as compared to $1.8
million during 2008. Financing charges consist primarily of legal fees related
to the amendments to the BTMUCC Credit Facility. In the second and third
quarters of 2008, we incurred significant legal fees related to the
restructuring of the BTMUCC Credit Facility, which was finalized in August
2008.





Other
Income (Expense)





We
recorded other income of $1.7 million in 2009, which included $0.5 million
related to litigation settlements (including for past due prior period TAF
royalties), $0.5 million in settlements of lease obligations relating to
MaggieMoo’s franchisees and $0.3 million of income from the Company’s equity
investment in Shoebox New York and $0.4 million relating to other matters. We
recorded other expense of $0.3 million in 2008, related to our share of losses
from our equity investment in Shoebox New York.


26





Loss
from Continuing Operations before Income Taxes





Excluding
the aforementioned special items, loss from continuing operations before income
taxes, as adjusted, of $2.3 million in 2009 improved from a loss from continuing
operations before income taxes, as adjusted, of $16.7 million in 2008. The $14.4
million improvement was primarily the result of the reduction in operating
expenses resulting from the cost reduction measures we implemented in 2008,
improved factory gross margins and increased other income, partially offset by
lower revenues.





Income
Taxes – Continuing Operations





In 2009,
we recorded a current provision for income taxes of $0.4 million, consisting
primarily of $0.1 million in state income taxes and $0.3 million in foreign
taxes withheld on franchise royalties received from foreign based franchisees in
accordance with applicable tax treaties. In 2008, we recorded current income tax
expense of $0.3 million. This reflects $0.1 million of state income tax expense
and $0.2 million of foreign taxes withheld on franchise royalties received from
franchisees located outside of the United States in accordance with applicable
tax treaties.





We
recorded no deferred tax benefit or expense in 2009. In 2008, we recorded
combined federal and state deferred tax benefit of $6.3 million. The 2008
deferred tax benefit resulted from the timing differences between the
amortization of trademarks and other intangible assets for tax purposes and
impairment charges recorded for book purposes. For more information about our
deferred tax expense and benefit, see Note 10 – Income Taxes to our
Consolidated Financial Statements.





As
discussed in Item 1 – Business under the caption
“Tax Loss Carry-Forwards and Limits on Ownership of Our Common Stock,” we have
accumulated significant deferred tax assets related to tax loss carry-forwards.
However, under GAAP, we are not able to recognize the value of our deferred tax
assets attributable to our tax loss carry-forwards until such time as we have
satisfied GAAP requirements that there exists objective evidence of our ability
to generate sustainable taxable income from our operations. Because we have a
history of losses, we have not satisfied this requirement as of December 31,
2009. Even if we are able to report net income in 2010 and beyond, we may not
satisfy this accounting requirement over the next several quarters (and perhaps
longer) because continued amortization of trademarks in future periods may
generate additional tax losses. In addition, our net tax loss carry-forwards
will not offset all state, local and foreign tax liabilities, and we will remain
subject to alternative minimum taxes.





Discontinued
Operations





In 2009,
we recorded net income from discontinued operations of $0.5 million or $0.01 per
share resulting primarily from the reversal of a reserve for litigation of $0.5
million; see Note 14(a) – Legal Proceedings to our
Consolidated Financial Statements for further information. The impact of income
taxes on our results from discontinued operations was $0.2 million in
2009.  For a detailed Statement of Operations from the Company’s
discontinued operations, see Note 15 – Discontinued Operations to
our Consolidated Financial Statements.





In 2008,
we recorded net losses from discontinued operations of $102.2 million or ($1.81)
per share. This amount includes $53.8 million of operating loss (including
impairment charges of $66.9 million) from Bill Blass and Waverly which comprised
our Consumer Branded Products business, a net loss of approximately $10.6
million on the sale of those businesses, an impairment of UCC Capital goodwill
of $37.5 million, and $0.8 million in net loss from the Company’s discontinued
UCC Capital loan servicing business. For a detailed Statement of Operations from
the Company’s discontinued operations, see Note 15 – Discontinued Operations to
our Consolidated Financial Statements. Our net income tax benefit from
discontinued operations in 2008 was $19.9 million. The 2008 deferred tax benefit
resulted from the timing differences relating to the amortization of trademarks
for book versus tax purposes.  See Note 10 – Income Taxes to our
Consolidated Financial Statements.




FINANCIAL
CONDITION





As a
result of the August 15, 2008 comprehensive restructuring of the original BTMUCC
Credit Facility and subsequent amendments in 2008 and 2009, as well as actions
taken to restructure the Company, pay down debt and reduce our recurring
operating expenses, we improved our cash flow, generated operating income
instead of operating loss and reduced the Company’s debt as compared to 2008.
Nonetheless, our financial condition and liquidity as of December 31, 2009 raise
substantial doubt about our ability to continue as a going concern.




We remain
highly leveraged; we have no additional borrowing capacity under the BTMUCC
Credit Facility; and the BTMUCC Credit Facility imposes restrictions on our
ability to freely access the capital markets. The BTMUCC Credit Facility also
imposes various restrictions on our use of cash generated from operations.
See Note 1(c) – Liquidity and
Going Concern. Based on our current projections, we anticipate that cash
generated from operations will provide us with sufficient liquidity to meet our
scheduled debt service obligations for at least the next twelve months. However,
we are subject to numerous prevailing economic conditions and to financial,
business, and other factors beyond our control. In addition, the BTMUCC Credit
Facility obligates us to make a scheduled principal payment of $34.5 million on
our Class B Franchise Note in July 2011. We currently do not expect that we will
be able to meet this obligation.


27





If we
fail to meet debt service obligations or otherwise fail to comply with the
financial and other restrictive covenants, we would default under our BTMUCC
Credit Facility, which could then trigger, among other things, BTMUCC’s right to
accelerate all payment obligations, foreclose on virtually all of the assets of
the Company and take control of all of the Company’s cash flow from operations.
(See Note 9 –Debt to
the Consolidated Financial Statements for details regarding the security
structure of the debt.)





Our
BTMUCC Credit Facility contains numerous affirmative and negative covenants,
including, among other things, restrictions on indebtedness, liens, fundamental
changes, asset sales, acquisitions, capital and other expenditures, dividends
and other payments affecting subsidiaries. The BTMUCC Credit Facility also
contains a subjective acceleration clause whereby our lender has the right to
accelerate all principal payment obligations upon a “material adverse change,”
which is broadly defined as the occurrence of any event or condition that,
individually or in the aggregate, has had, is having or could reasonably be
expected to have a material adverse effect on (i) the collectability of interest
and principal on the debt, (ii) the value or collectability of the assets
securing the debt, (iii) the business, financial condition, or operations of the
Company or our subsidiaries, individually or taken as a whole, (iv) the ability
of the Company or our subsidiaries to perform its respective obligations under
the loan agreements, (v) the validity or enforceability of any of the loan
documents, and (vi) the lender’s ability to foreclose or otherwise enforce its
interest in any of the assets securitizing the debt. To date, BTMUCC has not
invoked the “material adverse change” provision or otherwise sought acceleration
of our principal payment obligations.





We have
received waivers or amendments from BTMUCC, including reduction of interest
rates, deferral of scheduled principal payment obligations and certain interest
payments, waiver and extension of time related to the obligations to issue
dilutive warrants, allowance of certain payments to be excluded from debt
service obligations, as well as relief from debt service coverage ratio
requirements, certain capital and operating expenditure limits, certain
loan-to-value ratio requirements, certain free cash flow margin requirements and
the requirement to provide financial statements by certain deadlines. We
anticipate that we will breach certain covenants under the BTMUCC Credit
Facility in 2010 and will fail to make a required principal payment of $34.5
million in July 2011 unless we are able to obtain waivers or amendments
from our lender. There can be no assurance that we will be able to obtain
waivers or amendments, and our lender may default the Company and seek to
accelerate our principal payment obligations pursuant to any of the covenants or
the subjective acceleration clause of the BTMUCC Credit Facility. Accordingly,
we have classified all of the debt outstanding under the BTMUCC Credit Facility
as a current liability as of December 31, 2009.





In the
wake of our efforts to stabilize the Company in 2008 and 2009, we have evaluated
our business and concluded that for long-term growth and viability of our
business, we must address the Company’s debt and capital structure. We,
therefore, retained an investment bank to assist us with identifying and
evaluating alternatives to the Company’s current debt and capital structure,
including
recapitalization of the Company, restructuring of our debt and/or sale of some
or substantially all of our assets.We are in discussions with BTMUCC
regarding potential alternatives. There can be no guarantee that BTMUCC will
agree to any strategic transaction or restructuring of debt, and certain
transactions, including recapitalization or debt restructuring, may
significantly dilute existing shareholders and trigger an ownership change that
would limit our ability to utilize our tax loss carry-forwards assuming we have
taxable income.


During
2009, our total assets decreased by approximately $11.3 million, while our total
liabilities decreased by approximately $11.8 million. These changes primarily
reflect the $6.2 million TAFA licensing transaction and $5.0 million reduction
of Class B Franchise Note and other principal repayments of $1.4
million.





As of
December 31, 2009, we had a total of $7.8 million of cash on hand representing
$3.8 million of cash received from franchisees and licensees that is being held
in lockbox accounts established with our commercial bank in connection with the
BTMUCC Credit Facility to perfect the lender’s security interest in such cash
receipts. Cash on hand also includes $0.6 million of cash previously restricted
to secure a letter of credit for our New York office lease. We are in the
process of negotiating new lease terms and expect to replace the letter of
credit in 2010 upon the execution of a new lease agreement.





As of
December 31, 2009, we had short-term restricted cash of $1.4 million
representing the cash held in lockbox accounts that we expected would not be
released to the Company but instead would be applied to pay down principal of
our debt. In December 2009, we exceeded the total annual expense limit for 2009
established by the BTMUCC Credit Facility (which limit does not apply to cost of
goods for our manufacturing facility). Under the BTMUCC Credit Facility, we are
not reimbursed out of the cash in the lockbox accounts for any expenses paid in
excess of our annual expense limit. Instead those amounts are released to BTMUCC
to pay down principal in excess of scheduled principal payments. In order to
manage our cash balance, we deferred payment of expenses incurred in excess of
our 2009 expense limit until the expense limit reset for 2010. On January 14,
2010, we entered into an amendment of the BTMUCC Credit Facility that, among
other things, essentially allowed the Company to retroactively increase its
expense limit for 2009 by $0.5 million by decreasing its expense limit for 2010
by the same amount. (See Note 9 – Debt.)  In February
2010, the $1.4 million of short-term restricted cash was applied as additional
principal payments on our debt. For a discussion on the risks associated with
the impact of the BTMUCC Credit Facility on our cash flow and our working
capital, please see Item 1A – Risk Factors, under the
caption “Risks of Our Business.”


28





As of
December 31, 2009, we also had long-term restricted cash of $1.0 million, which
consists of security deposits on leases and a portion of the one-time,
non-refundable licensing fees that we received from the TAFA licensing
transaction. (See Note 6 – Goodwill, Trademarks and Other
Intangible Assets.) We plan to use approximately $0.7 million of this
restricted cash in 2010 to fund the balance of the capital improvements to
expand production capabilities of our manufacturing facility to enable us to
produce and sell pretzel mix to our pretzel franchisees as permitted under the
BTMUCC Credit Facility.





The
following table reflects use of net cash for operations, investing, and
financing activities (in thousands):





Year Ended December 31,2009
                        
                        
                        2008Net
      income (loss) adjusted for non-cash activities
                        
                        $
                        4,059
                        
                        
                        $
                        (8,578
                        )Working
      capital changes
                        
                        
                        (2,453
                        )
                        
                        
                        693Discontinued
      operations
                        
                        
                        511
                        
                        
                        
                        (2,524
                        )Net
      cash  provided by (used in) operating activities
                        
                        
                        2,117
                        
                        
                        
                        (10,409
                        )Net
      cash provided by (used in) investing activities
                        
                        
                        3,806
                        
                        
                        
                        (56,601
                        )Net
      cash (used in) provided by financing activities
                        
                        
                        (6,406
                        )
                        
                        
                        28,734Net
      decrease  in cash and cash equivalents
                        
                        $
                        (483
                        )
                        
                        $
                        (38,276
                        )





Cash flow
from operating activities consists of (i) net income adjusted for depreciation,
amortization, impairment charges and certain other non-cash items; (ii) changes
in working capital; and (iii) cash flows from discontinued operations. We
generated $4.1 million in net income adjusted for non-cash items in 2009, an
increase of $12.7 million from the $8.6 million net loss adjusted for non-cash
items in 2008. The year-over-year improvement is a result of the Company’s
successful efforts to reduce costs and manage expenses. Partially offsetting
this improvement was a use of cash of $2.5 million for working capital purposes
in 2009 compared to a source of cash of $0.7 million in 2008. This change
primarily reflects our efforts to reduce our accounts payable and accrued
expenses in 2009, partially offset by improved collections on accounts
receivable.  The cash used in operating activities in 2008 reflects
cash generated from operations offset by an increase to working capital. Net
cash used in operating activities in 2008 includes higher expenditures for
special investigations,  restructuring costs and increased
professional fees as discussed above, and does not reflect the full year effects
of cost reduction efforts that were implemented starting in May
2008.





Net cash
provided by investing activities in 2009 was $3.8 million. On August 6, 2009, we
entered into long-term license agreements with RCG Corporation Ltd. and The
Athlete’s Foot Australia Pty Ltd. through our wholly owned subsidiary TAFA. In
consideration for these license agreements, The Athlete’s Foot Australia Pty
Ltd. paid one-time, non-refundable licensing fees of $6.2 million. We used $5.0
million of the licensing proceeds to pay down a portion of the Class B Franchise
Note. We retained the remaining $1.2 million of net proceeds as long-term
restricted cash. As of December 31, 2009, we have used $0.5 million of this
restricted cash to expand production capabilities of our manufacturing facility
to enable us to produce and sell pretzel mix to our pretzel franchisees and
expect to use the remaining $0.7 million in 2010 to complete the
project.


Net cash
used in investing activities in 2008 was $56.6 million, primarily for the
acquisition of Great American Cookies, offset by proceeds of $35.4 million from
the sale of our Consumer Branded Products business. See Note 17 – Acquisition of Great American
Cookies to our Consolidated Financial Statements for details regarding
the acquisition and Note 15 – Discontinued Operations for
details regarding the sale of our Consumer Branded Products business. The
Company also used $0.7 million for the acquisition of an equity interest in Shoe
Box Holdings, LLC and $1.3 million for the purchase of one half of the minority
interest of Designer Equity Holding Company LLC (“DEHC”), equaling 5% percent,
in BB Jeans, LLC, formerly known as Bill Blass Jeans, LLC, a now inactive
subsidiary of the Company.





Net cash
used in financing activities in 2009 was $6.4 million consisting of principal
payments of debt.  Net cash provided by financing activities in 2008
was $28.7 million, which primarily reflects the borrowing of $70.0 million under
a January 2008 amendment to the Original BTMUCC Credit Facility, which is
discussed in Note 9 – Debt to our Consolidated
Financial Statements, offset by principal repayments in 2008 of approximately
$37.9 million.





Contractual
Obligations





We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.





Off
Balance Sheet Arrangements





We
maintain advertising funds in connection with our franchised brands (“Marketing
Funds”). The Marketing Funds are funded by franchisees pursuant to franchise
agreements. We consider these Marketing Funds to be separate legal entities from
the Company and use them exclusively for marketing of the respective franchised
brands. The TAF MSF is a Marketing Fund for the TAF brand. Historically, on an
as needed basis, the Company advanced funds to the TAF MSF under a loan
agreement. The terms of the loan agreement include a borrowing rate of prime
plus 2%, and repayment by the TAF MSF with no penalty at any time. We do not
consolidate this or other Marketing Funds.   For further
discussion of Marketing Funds, see Note 2(q) – Advertising to our
Consolidated Financial Statements.


29





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The
Company is exposed to certain market risks, which exist as part of our ongoing
business operations. The following discussion about our market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in these forward-looking statements.





Interest
Rate Risk





Our
primary exposure to market risk is to changes in interest rates on our debt. As
of December 31, 2009, the Company had outstanding borrowings of $138.2 million
under the BTMUCC Credit Facility in three separate tranches: (1) approximately
$85.4 million of Class A Franchise Notes, (2) approximately $36.2 of Class B
Franchise Note and (3) $16.6 million of a Deficiency Note. The Class B Franchise
Note bears a fixed interest rate of 8% per year and the Deficiency Note bears a
fixed interest rate of 15% per year. However, the Class A Franchise Notes,
representing approximately 62% of the outstanding debt, bear interest at 30-day
LIBOR plus 3.75% per year through July 31, 2011 and then LIBOR plus 5% per year
thereafter until maturity on July 31, 2013.  Although LIBOR rates
fluctuate on a daily basis, our LIBOR rate resets monthly on the 15th day of
each month.





We are
subject to interest rate risk on our rate-sensitive financing to the extent
interest rates change. Our fixed and variable rate debt as of December 31, 2009
is shown in the following table (in millions).





Balance
                              
                              
                              % of TotalFixed
      Rate Debt
                              
                              $
                              52.8
                              
                              
                              
                              38
                              %Variable
      Rate Debt
                              
                              
                              85.4
                              
                              
                              
                              62
                              %Total
      debt
                              
                              $
                              138.2
                              
                              
                              
                              100
                              %





The
estimated fair value of our debt as of December 31, 2009 was approximately $92.7
million.





A change
in LIBOR can have a material impact on our interest expense and cash flows.
Under the BTMUCC Credit Facility and based upon the principal balance as of
December 31, 2009, a 1% increase in 30-day LIBOR would have resulted in
additional $0.9 million in interest expense per year, while a 1% decrease in
LIBOR would have reduced interest expense by $0.9 million per year. We did not
in 2009, and do not currently, utilize any type of derivative instruments to
manage interest rate risk. If our lender requests it, however, we will be
obligated to hedge the interest rate exposure on our outstanding debt if 30-day
LIBOR exceeds 3.5%.





Foreign
Exchange Rate Risk





The
Company is exposed to fluctuations in foreign currency on a limited basis due to
our international franchisees that transact business in currencies other than
the U.S. dollar. However, the overall exposure to foreign exchange gains and
losses is not expected to have a material impact on the consolidated results of
operations. Because international development fees and store opening fees are
paid in U.S. dollars, our primary foreign currency exchange exposure involves
continuing royalty revenue from our international franchisees, which for the
year ended December 31, 2009 was approximately $3.2 million or 7.1% of our total
revenues.


30


ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





TABLE OF
CONTENTS





Report
      of Independent Registered Public Accounting Firm
                
                32Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                
                33Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      2008
                
                34Consolidated
      Statements of Stockholders’ Equity (Deficit) for the years ended
      December 31, 2009 and 2008
                
                35Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008
                
                36Notes
      to Consolidated Financial Statements
                
                37




31


Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders


NexCen
Brands, Inc.:




We have
audited the accompanying consolidated balance sheets of NexCen Brands, Inc. and
subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity (deficit), and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NexCen Brands, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
  The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company faces certain liquidity
uncertainties that raise substantial doubt about its ability to continue as a
going concern.  Management’s plans in regard to these matters are
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.




/s/ KPMG
LLP




New York,
New York


March 26,
2010


32




NEXCEN
BRANDS, INC.


CONSOLIDATED
BALANCE SHEETS


(IN
THOUSANDS, EXCEPT SHARE DATA)





December 31,2009
                                      
                                      
                                      2008ASSETSCash
      and cash equivalents
                                      
                                      $
                                      7,810
                                      
                                      
                                      $
                                      8,293Short-term
      restricted cash
                                      
                                      
                                      1,436
                                      
                                      
                                      
                                      —Trade
      receivables, net of allowances of $1,472 and $1,367,
      respectively
                                      
                                      
                                      4,061
                                      
                                      
                                      
                                      5,617Other
      receivables
                                      
                                      
                                      946
                                      
                                      
                                      
                                      834Inventory
                                      
                                      
                                      1,123
                                      
                                      
                                      
                                      1,232Prepaid
      expenses and other current assets
                                      
                                      
                                      1,379
                                      
                                      
                                      
                                      2,439Total
      current assets
                                      
                                      
                                      16,755
                                      
                                      
                                      
                                      18,415Property
      and equipment, net
                                      
                                      
                                      3,262
                                      
                                      
                                      
                                      4,395Investment
      in joint venture
                                      
                                      
                                      335
                                      
                                      
                                      
                                      87Trademarks
      and other non-amortizable intangible assets
                                      
                                      
                                      72,522
                                      
                                      
                                      
                                      78,422Other
      amortizable intangible assets, net of amortization
                                      
                                      
                                      5,020
                                      
                                      
                                      
                                      6,158Deferred
      financing costs and other assets
                                      
                                      
                                      3,770
                                      
                                      
                                      
                                      5,486Long-term
      restricted cash
                                      
                                      
                                      980
                                      
                                      
                                      
                                      940Total
      assets
                                      
                                      $
                                      102,644
                                      
                                      
                                      $
                                      113,903LIABILITIES
      AND STOCKHOLDERS’ DEFICITAccounts
      payable and accrued expenses
                                      
                                      $
                                      6,596
                                      
                                      
                                      $
                                      9,220Restructuring
      accruals
                                      
                                      
                                      312
                                      
                                      
                                      
                                      153Deferred
      revenue
                                      
                                      
                                      3,151
                                      
                                      
                                      
                                      4,044Current
      portion of debt, net of debt discount of $853 and $541,
      respectively
                                      
                                      
                                      137,330
                                      
                                      
                                      
                                      611Acquisition
      related liabilities
                                      
                                      
                                      820
                                      
                                      
                                      
                                      4,689Total
      current liabilities
                                      
                                      
                                      148,209
                                      
                                      
                                      
                                      18,717Long-term
      debt, net of debt discount of $0 and $852, respectively
                                      
                                      
                                      —
                                      
                                      
                                      
                                      140,262Acquisition
      related liabilities
                                      
                                      
                                      196
                                      
                                      
                                      
                                      480Other
      long-term liabilities
                                      
                                      
                                      3,231
                                      
                                      
                                      
                                      3,937Total
      liabilities
                                      
                                      
                                      151,636
                                      
                                      
                                      
                                      163,396Commitments
      and contingenciesStockholders’
      deficit:Preferred
      stock, $0.01 par value; 1,000,000 shares authorized; 0 shares issued and
      outstanding as of December 31, 2009 and 2008,
      respectively
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Common
      stock, $0.01 par value; 1,000,000,000 shares authorized; 57,146,302 shares
      issued and 56,951,730 outstanding at December 31, 2009; and 56,865,215
      shares issued and 56,670,643 outstanding as of December 31,
      2008
                                      
                                      
                                      571
                                      
                                      
                                      
                                      569Additional
      paid-in capital
                                      
                                      
                                      2,684,936
                                      
                                      
                                      
                                      2,681,600Treasury
      stock, at cost; 194,572 shares at December 31, 2009 and
    2008
                                      
                                      
                                      (1,757
                                      )
                                      
                                      
                                      (1,757
                                      )Accumulated
      deficit
                                      
                                      
                                      (2,732,742
                                      )
                                      
                                      
                                      (2,729,905
                                      )Total
      stockholders’ deficit
                                      
                                      
                                      (48,992
                                      )
                                      
                                      
                                      (49,493
                                      )Total
      liabilities and stockholders’ deficit
                                      
                                      $
                                      102,644
                                      
                                      
                                      $
                                      113,903





See
accompanying notes to consolidated financial statements.


33


NEXCEN
BRANDS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT PER SHARE DATA)





Year Ended
                                                December 31,2009
                                              
                                              
                                              2008Revenues:Royalty
      revenues
                                              
                                              $
                                              23,158
                                              
                                              
                                              $
                                              24,735Factory
      revenues
                                              
                                              
                                              17,369
                                              
                                              
                                              
                                              17,310Franchise
      fee revenues
                                              
                                              
                                              3,490
                                              
                                              
                                              
                                              3,616Licensing
      and other revenues
                                              
                                              
                                              1,102
                                              
                                              
                                              
                                              1,295Total
      revenues
                                              
                                              
                                              45,119
                                              
                                              
                                              
                                              46,956Operating
      expenses:Cost
      of sales
                                              
                                              
                                              (10,921)
                                              
                                              
                                              
                                              (11,484
                                              )Selling,
      general and administrative expenses:Franchising
                                              
                                              
                                              (13,025)
                                              
                                              
                                              
                                              (17,078
                                              )Corporate
                                              
                                              
                                              (7,412)
                                              
                                              
                                              
                                              (15,460
                                              )Professional
      fees:Franchising
                                              
                                              
                                              (2,114)
                                              
                                              
                                              
                                              (1,685
                                              )Corporate
                                              
                                              
                                              (2,146)
                                              
                                              
                                              
                                              (2,696
                                              )Special
      Investigations
                                              
                                              
                                              (91)
                                              
                                              
                                              
                                              (3,897
                                              )Impairment
      of intangible assets
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (137,881
                                              )Depreciation
      and amortization
                                              
                                              
                                              (2,677)
                                              
                                              
                                              
                                              (2,896
                                              )Restructuring
      charges
                                              
                                              
                                              (527)
                                              
                                              
                                              
                                              (1,096
                                              )Total
      operating expenses
                                              
                                              
                                              (38,913)
                                              
                                              
                                              
                                              (194,173
                                              )Operating
      income (loss)
                                              
                                              
                                              6,206
                                              
                                              
                                              
                                              (147,217
                                              )Non-operating
      income (expense):Interest
      income
                                              
                                              
                                              202
                                              
                                              
                                              
                                              439Interest
      expense
                                              
                                              
                                              (10,905)
                                              
                                              
                                              
                                              (10,690
                                              )Financing
      charges
                                              
                                              
                                              (146)
                                              
                                              
                                              
                                              (1,814
                                              )Other
      income (expense), net
                                              
                                              
                                              1,690
                                              
                                              
                                              
                                              (284
                                              )Total
      non-operating expense
                                              
                                              
                                              (9,159)
                                              
                                              
                                              
                                              (12,349
                                              )Loss
      from continuing operations before income taxes
                                              
                                              
                                              (2,953)
                                              
                                              
                                              
                                              (159,566
                                              )Income
      taxes:Current
                                              
                                              
                                              (395)
                                              
                                              
                                              
                                              (337
                                              )Deferred
                                              
                                              
                                              —
                                              
                                              
                                              
                                              6,331Loss
      from continuing operations
                                              
                                              
                                              (3,348)
                                              
                                              
                                              
                                              (153,572
                                              )Income
      (loss) from discontinued operations, net of tax benefits of $233
      and  $19,923
                                              
                                              
                                              511
                                              
                                              
                                              
                                              (102,207
                                              )Net
      loss
                                              
                                              $
                                              (2,837)
                                              
                                              
                                              $
                                              (255,779
                                              )Loss
      per share (basic and diluted) from continuing operations
                                              
                                              $
                                              (0.06)
                                              
                                              
                                              $
                                              (2.71
                                              )Income
      (loss) per share (basic and diluted) from discontinued
      operations
                                              
                                              
                                              0.01
                                              
                                              
                                              
                                              (1.81
                                              )Net
      loss per share – basic and diluted
                                              
                                              $
                                              (0.05)
                                              
                                              
                                              $
                                              (4.52
                                              )Weighted
      average shares outstanding - basic and diluted
                                              
                                              
                                              56,882
                                              
                                              
                                              
                                              56,550





See
accompanying notes to consolidated financial statements.


34


NEXCEN
BRANDS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


(IN
THOUSANDS)





ADDITIONALPREFERRED
                              
                              
                              COMMON
                              
                              
                              PAID-IN
                              
                              
                              TREASURY
                              
                              
                              ACCUMULATEDSTOCK
                              
                              
                              STOCK
                              
                              
                              CAPITAL
                              
                              
                              STOCK
                              
                              
                              DEFICIT
                              
                              
                              TOTALBalance
      as of December 31, 2007
                              
                              $
                              -
                              
                              
                              $
                              557
                              
                              
                              $
                              2,668,289
                              
                              
                              $
                              (1,757
                              )
                              
                              $
                              (2,474,126
                              )
                              
                              $
                              192,963Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (255,779
                              )
                              
                              
                              (255,779
                              )Total
      comprehensive loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (255,779
                              )Exercise
      of options and warrants
                              
                              
                              -
                              
                              
                              
                              1
                              
                              
                              
                              4
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5Stock-based
      compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              8,657
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              8,657Common
      stock issued
                              
                              
                              -
                              
                              
                              
                              11
                              
                              
                              
                              4,650
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              4,661Balance
      as of December 31, 2008
                              
                              
                              -
                              
                              
                              
                              569
                              
                              
                              
                              2,681,600
                              
                              
                              
                              (1,757
                              )
                              
                              
                              (2,729,905
                              )
                              
                              
                              (49,493
                              )Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              (2,837)
                              
                              
                              
                              (2,837)Total
      comprehensive loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (2,837)Stock-based
      compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              384
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              384Common
      stock issued
                              
                              
                              -
                              
                              
                              
                              2
                              
                              
                              
                              2,952
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,954Balance
      as of December 31, 2009
                              
                              $
                              -
                              
                              
                              $
                              571
                              
                              
                              $
                              2,684,936
                              
                              
                              $
                              (1,757)
                              
                              
                              $
                              (2,732,742)
                              
                              
                              $
                              (48,992)





See
accompanying notes to consolidated financial statements.


35




NEXCEN
BRANDS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(IN
THOUSANDS)





Year Ended December 31,2009
                                                  
                                                  
                                                  2008Cash
      flows from operating activities:Net
      loss
                                                  
                                                  $
                                                  (2,837
                                                  )
                                                  
                                                  $
                                                  (255,779
                                                  )Add:
      Net (income) loss from discontinued operations
                                                  
                                                  
                                                  (511
                                                  )
                                                  
                                                  
                                                  102,207Net
      loss from continuing operations
                                                  
                                                  
                                                  (3,348
                                                  )
                                                  
                                                  
                                                  (153,572
                                                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Provision
      for doubtful accounts
                                                  
                                                  
                                                  698
                                                  
                                                  
                                                  
                                                  1,816Impairment
      of intangible assets
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  137,881Restructuring
      charges
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  443Depreciation
      and amortization
                                                  
                                                  
                                                  2,814
                                                  
                                                  
                                                  
                                                  3,016Stock
      based compensation
                                                  
                                                  
                                                  384
                                                  
                                                  
                                                  
                                                  5,291Deferred
      income taxes
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (6,331
                                                  )Unrealized
      (gain) loss on investment in joint venture
                                                  
                                                  
                                                  (307
                                                  )
                                                  
                                                  
                                                  266Realized
      gain on sale of licensing agreement
                                                  
                                                  
                                                  (41
                                                  )
                                                  
                                                  
                                                  —Amortization
      of debt discount
                                                  
                                                  
                                                  540
                                                  
                                                  
                                                  
                                                  507Amortization
      of deferred financing costs
                                                  
                                                  
                                                  952
                                                  
                                                  
                                                  
                                                  2,064Accrued
      interest on Deficiency Note
                                                  
                                                  
                                                  2,323
                                                  
                                                  
                                                  
                                                  41Loss
      on disposal of property and equipment
                                                  
                                                  
                                                  44
                                                  
                                                  
                                                  
                                                  —Changes
      in assets and liabilities, net of acquired assets and
      liabilities:Decrease
      (increase) in trade receivables
                                                  
                                                  
                                                  858
                                                  
                                                  
                                                  
                                                  (2,723
                                                  )(Increase)
      decrease in other receivables
                                                  
                                                  
                                                  (112
                                                  )
                                                  
                                                  
                                                  3,378Decrease
      in inventory
                                                  
                                                  
                                                  109
                                                  
                                                  
                                                  
                                                  427Decrease
      (increase) in prepaid expenses and other assets
                                                  
                                                  
                                                  1,824
                                                  
                                                  
                                                  
                                                  (1,530
                                                  )(Decrease)
      increase in accounts payable and accrued expenses
                                                  
                                                  
                                                  (4,399
                                                  )
                                                  
                                                  
                                                  1,401Increase
      in restructuring accruals
                                                  
                                                  
                                                  159
                                                  
                                                  
                                                  
                                                  140Decrease
      in deferred revenue
                                                  
                                                  
                                                  (892
                                                  )
                                                  
                                                  
                                                  (400
                                                  )Net
      cash provided by (used in) operating activities from continuing
      operations
                                                  
                                                  
                                                  1,606
                                                  
                                                  
                                                  
                                                  (7,885
                                                  )Net
      cash provided by (used in) operating activities from discontinued
      operations
                                                  
                                                  
                                                  511
                                                  
                                                  
                                                  
                                                  (2,524
                                                  )Net
      cash provided by (used in) operating activities
                                                  
                                                  
                                                  2,117
                                                  
                                                  
                                                  
                                                  (10,409
                                                  )Cash
      flows from investing activities:(Increase)
      decrease in restricted cash
                                                  
                                                  
                                                  (1,476
                                                  )
                                                  
                                                  
                                                  5,890Purchases
      of property and equipment
                                                  
                                                  
                                                  (846
                                                  )
                                                  
                                                  
                                                  (676
                                                  )Investment
      in joint venture
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (725
                                                  )Proceeds
      from sale of licensing agreements
                                                  
                                                  
                                                  6,200
                                                  
                                                  
                                                  
                                                  —Purchase
      of trademarks, including registration costs
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (46
                                                  )Distributions
      from joint venture
                                                  
                                                  
                                                  59
                                                  
                                                  
                                                  
                                                  371Acquisitions,
      net of cash acquired
                                                  
                                                  
                                                  (131
                                                  )
                                                  
                                                  
                                                  (95,000
                                                  )Cash
      provided by discontinued operations for investing
    activities
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  33,585Net
      cash provided by (used in) investing activities
                                                  
                                                  
                                                  3,806
                                                  
                                                  
                                                  
                                                  (56,601
                                                  )Cash
      flows from financing activities:Proceeds
      from debt borrowings
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  70,000Financing
      costs
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (2,549
                                                  )Principal
      payments on debt
                                                  
                                                  
                                                  (6,406
                                                  )
                                                  
                                                  
                                                  (37,353
                                                  )Proceeds
      from the exercise of options and warrants
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  5Cash
      used in discontinued operations for financing activities
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (1,369
                                                  )Net
      cash (used in) provided by financing activities
                                                  
                                                  
                                                  (6,406
                                                  )
                                                  
                                                  
                                                  28,734Net
      decrease in cash and cash equivalents
                                                  
                                                  
                                                  (483
                                                  )
                                                  
                                                  
                                                  (38,276
                                                  )Cash
      and cash equivalents, at beginning of year
                                                  
                                                  
                                                  8,293
                                                  
                                                  
                                                  
                                                  46,569Cash
      and cash equivalents, at end of year
                                                  
                                                  $
                                                  7,810
                                                  
                                                  
                                                  $
                                                  8,293





See
accompanying notes to consolidated financial statements.


36





NEXCEN
BRANDS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





(1)
            BUSINESS
      AND BASIS OF PRESENTATION





(a)
BUSINESS





NexCen
Brands, Inc. (“NexCen,” “we,” “us,” “our” or the “Company”) 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 Quick Service Restaurant (“QSR”) industry. The other
two brands (The Athlete’s Foot and Shoebox New York) are in the retail footwear
and accessories industry. NexCen Franchise Management, Inc. (“NFM”), a wholly
owned subsidiary of NexCen Brands, manages all seven franchised brands. Our
franchise network, across all of our brands, consists of approximately 1,700
retail stores in 38 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 are expanding
production capabilities of our manufacturing facility in 2010 to enable us to
produce and sell pretzel mix to our pretzel franchisees.





In 2008,
we narrowed our business model to focus only on our franchised brands.
Previously, we owned and licensed two consumer products brands in the apparel
and home goods industries: Bill Blass and Waverly. We sold the Waverly brand on
October 3, 2008 and the Bill Blass brand on December 24, 2008. We present the
following footnotes based upon our sole operating segment:
Franchising.





(b) BASIS
OF PRESENTATION





We have
prepared our financial statements in accordance with U.S. generally accepted
accounting principles (“GAAP”), as defined in the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 270 for financial
information and with the instructions to Rule 8.02 of Regulation S-X. In
the opinion of management, we have made all adjustments, including normal
recurring adjustments, necessary to fairly present the Consolidated Financial
Statements.




(c)
LIQUIDITY AND GOING CONCERN





As of
December 31, 2009, we had $7.8 million of cash on hand, which included
approximately $3.8 million of cash payments from franchisees and licensees that
were held in special accounts (the “lockbox accounts”) controlled by our lender,
BTMU Capital Corporation (“BTMUCC”), in accordance with the terms of our credit
facility (the “BTMUCC Credit Facility”). BTMUCC subsequently applied a portion
of these funds to the principal and interest due on the debt associated with the
BTMUCC Credit Facility, and then released the remainder of the funds to the
Company for corporate purposes. See Note 2 – Accounting Policies and
Pronouncements - Cash and Cash Equivalents and Note 9 – Debt for additional
information about the BTMUCC Credit Facility.





As of
December 31, 2009, we had short-term restricted cash of $1.4 million
representing the cash held in lockbox accounts that we expected would not be
released to the Company but instead would be applied to pay down principal of
our debt. In December 2009, we exceeded the total annual expense limit for 2009
established by the BTMUCC Credit Facility (which limit does not apply to cost of
goods for our manufacturing facility). See Note 2(e) – Short-term Restricted Cash
for additional information. Under the BTMUCC Credit Facility, we are not
reimbursed out of the cash in the lockbox accounts for any expenses paid in
excess of our annual expense limit. Instead those amounts are released to BTMUCC
to pay down principal in excess of scheduled principal payments. In order to
manage our cash balance, we deferred payment of expenses incurred in excess of
our 2009 expense limit until the expense limit reset for 2010. On January 14,
2010, we entered into an amendment of the BTMUCC Credit Facility that, among
other things, essentially allowed the Company to retroactively increase its
expense limit for 2009 by $0.5 million by decreasing its expense limit for 2010
by the same amount. (See Note 9 – Debt.) In February 2010, the
$1.4 million of short-term restricted cash was applied as additional principal
payments on our debt.




As of
December 31, 2009, we also had long-term restricted cash of $1.0 million that
consists of security deposits on leases and a portion of the one-time,
non-refundable licensing fees that we received from the licenses of The
Athlete’s Foot trademarks and trade dress for the territories of Australia and
New Zealand (See Note 6 – Goodwill, Trademarks and Other
Intangible Assets). We plan to utilize approximately $0.7 million of this
restricted cash in 2010 to fund the balance of the capital
improvements to expand the production capabilities of our manufacturing
facility to enable us to produce and sell pretzel mix to our pretzel franchisees
as permitted under the BTMUCC Credit Facility.


37


As of
December 31, 2009, our total debt outstanding under the BTMUCC Credit Facility
before debt discount was $138.2 million. Scheduled principal payments in 2010
are $3.4 million, excluding the additional principal payments associated with
our exceeding the annual expenditure limit noted above.




Our
financial condition and liquidity as of December 31, 2009 raise substantial
doubt about our ability to continue as a going concern. We remain highly
leveraged; we have no additional borrowing capacity under the BTMUCC Credit
Facility; and the BTMUCC Credit Facility also imposes restrictions on our
ability to freely access the capital markets. The BTMUCC Credit Facility
imposes various restrictions on the cash we generate from operations. Based
on our current projections, we anticipate that cash generated from operations
will provide us with sufficient liquidity to meet our scheduled debt service
obligations for at least the next twelve months. However, we are subject to
numerous prevailing economic conditions and to financial, business, and other
factors beyond our control. In addition, our scheduled principal payments under
the BTMUCC Credit Facility include a final principal payment on our Class B
Franchise Note of $34.5 million in July 2011. We do not expect that we will be
able to meet this obligation.




If we
fail to meet debt service obligations or otherwise fail to comply with the
financial and other restrictive covenants, we would default under our BTMUCC
Credit Facility, which could then trigger, among other things, BTMUCC’s right to
accelerate all payment obligations, foreclose on virtually all of the assets of
the Company and take control of all of the Company’s cash flow from operations.
(See Note 9 –Debt to
the Consolidated Financial Statements for details regarding the security
structure of the debt.)




Our
BTMUCC Credit Facility contains numerous affirmative and negative covenants,
including, among other things, restrictions on indebtedness, liens, fundamental
changes, asset sales, acquisitions, capital and other expenditures, dividends
and other payments affecting our subsidiaries. Our BTMUCC Credit Facility also
contains a subjective acceleration clause whereby our lender has the right to
accelerate all principal payment obligations upon a “material adverse change,”
which is broadly defined as the occurrence of any event or condition that,
individually or in the aggregate, has had, is having or could reasonably be
expected to have a material adverse effect on (i) the collectability of interest
and principal on the debt, (ii) the value or collectability of the assets
securing the debt, (iii) the business, financial condition, or operations of the
Company or our subsidiaries, individually or taken as a whole, (iv) the ability
of the Company or our subsidiaries to perform its respective obligations under
the loan agreements, (v) the validity or enforceability of any of the loan
documents, and (vi) the lender’s ability to foreclose or otherwise enforce its
interest in any of the assets securitizing the debt. To date, BTMUCC has not
invoked the “material adverse change” provision or otherwise sought acceleration
of our principal payment obligations.





We have
received waivers or amendments from BTMUCC, including reduction of interest
rates, deferral of scheduled principal payment obligations and certain interest
payments, waiver and extension of time related to the obligations to issue
dilutive warrants, allowance of certain payments to be excluded from debt
service obligations, as well as relief from debt coverage ratio requirements,
certain capital and operating expenditure limits, certain loan-to-value ratio
requirements, certain free cash flow margin requirements and the requirement to
provide financial statements by certain deadlines. We anticipate that we will
breach certain covenants under the BTMUCC Credit Facility in 2010 and fail to
make a required scheduled principal payment of $34.5 million in
July 2011 unless we are able to obtain waivers or amendments from our
lender. There can be no assurance that we will be able to obtain waivers or
amendments, and our lender may default the Company and seek to accelerate our
principal payment obligations pursuant to any of the covenants or the subjective
acceleration clause of the BTMUCC Credit Facility. Accordingly, we have
classified all of the debt outstanding under the BTMUCC Credit Facility as a
current liability as of December 31, 2009.




We have
retained an investment bank to assist us in identifying and evaluating
alternatives to the Company’s current debt and capital structure, including
recapitalization of the Company, restructuring of our debt and/or sale of some
or substantially all of our assets. We are in active discussions with BTMUCC
regarding potential alternatives, but there can be no guarantee that BTMUCC will
agree to any strategic transaction or restructuring of debt.




We have
prepared the accompanying Consolidated Financial Statements assuming that the
Company will continue as a going concern, and have not included any adjustments
that might result if we were unable to continue as a going concern.





(2)
ACCOUNTING POLICIES AND PRONOUNCEMENTS





(a)
PRINCIPLES OF CONSOLIDATION





The
Consolidated Financial Statements include the accounts of the Company and our
majority-owned subsidiaries. We have eliminated all intercompany transactions
and balances in consolidation. The Consolidated Financial Statements do not
include the accounts or operations of certain brand and marketing funds. See
Note 2 (q) – Advertising.





(b)
RECLASSIFICATIONS




We have
reclassified certain prior year amounts to conform to the current year
presentation.




38




(c) USE
OF ESTIMATES





The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the
reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates. We use estimates in accounting for,
among other things, valuation of goodwill and intangible assets, estimated
useful lives of identifiable intangible assets, accrued revenues, guarantees,
depreciation, restructuring accruals, valuation of deferred tax assets and
contingencies. We review our estimates and assumptions periodically and reflect
the effects of revisions in the consolidated financial statements in the period
we determine them to be necessary.





(d) CASH
AND CASH EQUIVALENTS





Cash
equivalents include all highly liquid investments purchased with original
maturities of ninety days or less. Cash and cash equivalents consisted of the
following (in thousands):




December 31,
                        2009
                      
                      
                      December 31,
                        2008Cash
                      
                      $
                      3,874
                      
                      
                      $
                      6,632Money
      market accounts
                      
                      
                      3,936
                      
                      
                      
                      1,661Total
                      
                      $
                      7,810
                      
                      
                      $
                      8,293





The cash
balances as of December 31, 2009 and 2008 include approximately $3.8 million and
$5.3 million, respectivelyof cash received from
franchisees and licensees that is being held in lockbox accounts established
with our commercial bank in connection with the BTMUCC Credit Facility to
perfect the lender’s security interest in such cash receipts. Our lender first
applies the cash received into the lockbox accounts to pay the principal and
interest on the debt associated with our BTMUCC Credit Facility on a monthly
basis and then releases the remaining cash from the lockbox accounts to us for
general corporate purposes. Our lender then utilizes any excess cash to prepay
the debt in accordance with the BTMUCC Credit Facility. See Note 9 – Debt. Cash on hand also
includes $0.6 million of cash previously restricted to secure a letter of credit
for our New York office lease. We are in the process of negotiating new lease
terms and expect to replace the letter of credit in 2010 upon the execution of a
new lease agreement.





(e)
SHORT-TERM RESTRICTED CASH





As of
December 31, 2009, we had short-term restricted cash of $1.4 million
representing the cash held in lockbox accounts that we expected would not be
released to the Company but instead would be applied to pay down principal of
our debt. Under the BTMUCC Credit Facility, we are not reimbursed out of the
cash in the lockbox accounts for any expenses paid in excess of our annual
expense limit. Instead those amounts are released to BTMUCC to pay down
principal in excess of scheduled principal payments. We
exceeded the expense limit for 2009. Accordingly, in February 2010, this
short-term restricted cash was released to BTMUCC to pay down $1.4 million of
our debt.




(f)
LONG-TERM RESTRICTED CASH





As of
December 31, 2009, we had long-term restricted cash of $1.0 million which
consists of security deposits on leases and a portion of the one-time,
non-refundable licensing fees that we received from the licenses of The
Athlete’s Foot trademarks and trade dress for the territories of Australia and
New Zealand. See Note 6 – Goodwill, Trademarks and Other
Intangible Assets. We plan to utilize approximately $0.7 million of this
restricted cash in 2010 to fund the balance of the capital improvements to
expand production capabilities of our manufacturing facility to enable us to
produce and sell pretzel mix to our pretzel franchisees as permitted under the
BTMUCC Credit Facility.




(g) TRADE
RECEIVABLES, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS





Trade
receivables consist of amounts we expect to collect from franchisees for
royalties, franchise fees and cookie dough sales, and from licensees for license
fees, net of allowance for doubtful accounts of approximately $1.5 million and
$1.4 million as of December 31, 2009 and 2008, respectively. We provide a
reserve for uncollectible amounts based on our assessment of individual
accounts. We classify cash flows related to net changes in trade receivable
balances as increases or decreases in net cash provided by (used in) operating
activities in the Consolidated Statements of Cash Flows.


39





Details
of activity in the allowance for doubtful accounts are as follows (in
thousands):




December 31,
                        2009
                      
                      
                      December 31,
                        2008Beginning
      balance
                      
                      $
                      1,367
                      
                      
                      $
                      1,401Additions
                      
                      
                      698
                      
                      
                      
                      1,816Write-offs
                      
                      
                      (593)
                      
                      
                      
                      (1,850)Total
                      
                      $
                      1,472
                      
                      
                      $
                      1,367





(h)
INVENTORY




Inventories
consist of finished goods and raw materials and we record them at the lower of
cost (first-in, first-out method) or market value.  In assessing our
ability to realize inventories, we make judgments as to future demand
requirements and product expiration dates. The inventory requirements
change based on projected customer demand, which changes due to fluctuations in
market conditions and product life cycles.  We classify cash flows related
to changes in inventory as increases or decreases in net cash provided by (used
in) operating activities in the Consolidated Statements of Cash Flows.
Inventories consisted of the following (in thousands):




December 31,
                        2009
                      
                      
                      December 31,
                        2008Finished
      goods
                      
                      $
                      590
                      
                      
                      $
                      728Raw
      materials
                      
                      
                      533
                      
                      
                      
                      504Total
                      
                      $
                      1,123
                      
                      
                      $
                      1,232





(i) FAIR
VALUE OF FINANCIAL INSTRUMENTS





Effective
January 1, 2008, the Company adopted the fair value measurement and disclosure
requirements of FASB ASC 820. This guidance defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), for which the Company adopted the
requirements on January 1, 2009. The January 1, 2009 adoption did not have an
impact on the Consolidated Financial Statements.





The
determination of the applicable level within the hierarchy of a particular asset
or liability depends on the inputs used in valuation as of the measurement date,
notably the extent to which the inputs are market-based (observable) or
internally derived (unobservable).  A financial instrument’s
categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. The three levels are
defined as follows:





•
            Level 1 —
      inputs to the valuation methodology based on quoted prices (unadjusted)
      for identical assets or liabilities in active
  markets.





•
            Level 2 —
      inputs to the valuation methodology based on quoted prices for similar
      assets and liabilities in active markets for substantially the full term
      of the financial instrument; quoted prices for identical or similar
      instruments in markets that are not active for substantially the full term
      of the financial instrument; and model-derived valuations whose inputs or
      significant value drivers are
observable.





•
            Level 3 —
      inputs to the valuation methodology based on unobservable prices or
      valuation techniques that are significant to the fair value
      measurement.





The
carrying amounts of cash and cash equivalents and restricted cash approximate
their fair values (Level 1). The carrying amounts of debt are based on the
actual amounts due under the BTMUCC Credit Facility. The fair value of debt, as
discussed in Note 9 –Debt , is based on the fair
value of similar instruments as well as model-derived valuations whose inputs
are not observable (Level 3). These inputs include estimates of the Company’s
credit rating and the returns required for similar instruments by market
participants. Management used these inputs to determine discount factors ranging
from 12.6% to 40.0% and applied these factors to the forecasted payment streams
to determine the fair value of debt as of December 31, 2009. A 1% increase in
the discount factors would result in a decrease in the fair value of
approximately $2.7 million.





(j)
PROPERTY AND EQUIPMENT, NET





We record
property and equipment at cost, net of accumulated depreciation. We calculate
depreciation using the straight-line method over the estimated useful lives of
the assets, which range from three to twenty-five years. We capitalize the costs
of leasehold improvements and amortize them using the straight-line method over
the shorter of the lease term or the estimated useful life of the
asset.


40





We review
long-lived assets, such as property, plant, and equipment for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. We measure recoverability of assets to be held
and used by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, we
recognize an impairment charge in the amount by which the carrying amount of the
asset exceeds the fair value of the asset. We would present separately on the
balance sheet assets to be disposed of and would report them at the lower of the
carrying amount or fair value less costs to sell, and would no longer depreciate
them. We would present the assets and liabilities of a disposed group classified
as held for sale separately in the appropriate asset and liability sections of
the balance sheet.





(k)
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS





We
classify intangible assets into three categories: (1) goodwill; (2) intangible
assets with indefinite lives not subject to amortization; and (3) intangible
assets with definite lives subject to amortization.  We do not
amortize goodwill and indefinite-lived intangible assets. We evaluate the
remaining useful life of an intangible asset that we are not amortizing in each
reporting period to determine whether events and circumstances continue to
support an indefinite useful life. If we subsequently determine that an
intangible asset that we are not amortizing has a finite useful life, we
amortize the intangible asset prospectively over its estimated remaining useful
life. We generally amortize the amortizable intangible assets on a
straight-line basis.





We have
assigned goodwill to reporting units for purposes of impairment testing. Our
reporting unit is our operating segment. We evaluate goodwill for impairment on
an annual basis or more often if an event occurs or circumstances change that
indicate impairment might exist. Goodwill impairment tests consist of a
comparison of each reporting unit’s fair value with its carrying
value. Fair value is the price a willing buyer would pay for a reporting
unit, which we estimate using multiple valuation techniques. These include an
income approach, based upon discounted expected future cash flows from
operations, and a market approach, based upon business enterprise multiples of
comparable companies. We use a discount rate based on our estimate of the
required rate of return that a third-party buyer would expect to receive when
purchasing from us a business that constitutes a reporting unit. We believe
the discount rate is commensurate with the risks and uncertainty inherent in the
forecasted cash flows.





If the
carrying value of a reporting unit exceeds its fair value, we write down
goodwill to its implied fair value. We determine the implied fair value of
goodwill by allocating the fair value of the reporting unit to all of its assets
and liabilities other than goodwill. The remaining value, after the fair value
of the reporting unit has been allocated to the identifiable assets, is the
implied fair value of goodwill.




Trademarks
represent the value of expected future royalty income associated with the
ownership of the Company’s brands, namely, the Great American Cookies,
MaggieMoo’s, Marble Slab Creamery, Pretzelmaker and The Athlete’s Foot (“TAF”)
trademarks. Other non-amortizable intangible assets consist primarily of the
customer/supplier relationship with the Great American Cookies franchisees. We
do not amortize trademarks and the customer/supplier relationship acquired in a
purchase business combination. Instead we test them for impairment at least
annually unless we subsequently determine that the intangible asset has a finite
useful life. At each reporting period, we assess trademarks and other
non-amortizable intangible assets to determine if any changes in facts or
circumstances require a re-evaluation of the estimated value. We capitalize
material costs associated with registering and maintaining
trademarks.





We
amortize other intangible assets over their respective estimated useful lives to
their estimated residual values, and review them for impairment. Amortizable
intangible assets consist of franchise agreements and non-compete agreements of
key executives and others, which we are amortizing on a straight-line basis over
a period ranging from one to twenty years.





In 2009,
we did not incur any impairment charges with respect to our intangible assets.
In 2008, we determined that goodwill, trademarks, and other non-amortizable
intangible asset valuations associated with certain brands were impaired. We
recognized impairment charges for these amounts within the Consolidated
Statement of Operations for the year ended December 31, 2008. See Note 6 - Goodwill, Trademarks and Other
Intangible Assets.





(l)
DEFERRED FINANCING COSTS





We
capitalize costs incurred in connection with borrowings or establishment of
credit facilities. We amortize these costs as an adjustment to interest expense
over the life of the borrowing or life of the BTMUCC Credit Facility using the
effective interest method. The balance of deferred financing costs at December
31, 2009 and 2008 was $2.2 million and $3.2 million, respectively. The amount of
amortization of deferred financing costs included in interest expense was $1.0
million in 2009 and $2.1 million in 2008.


41


(m)
INCOME TAXES





The
Company recognizes income taxes using the asset and liability method. Under this
method, we recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. We measure deferred tax assets and liabilities using enacted tax rates
expected to apply to taxable income in the years in which we expect to recover
or settle those temporary differences. We recognize the effect of a tax rate
change on deferred tax assets and liabilities as income in the period that
includes the enactment date. In assessing the likelihood of realization of
deferred tax assets, we consider whether it is more likely than not that we will
not realize some portion or all of the deferred tax assets. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during periods in which these temporary differences become
deductible.





(n) STOCK
BASED COMPENSATION





We
account for share-based payments, such as grants of stock options, restricted
shares, warrants, and stock appreciation rights, at fair value as an expense in
our financial statements over the requisite service period. See Note 12
– Stock Based
Compensation, for the assumptions used to calculate the stock
compensation expense under the fair-value method discussed above.





We use
the Black-Scholes option pricing model to value the compensation expense
associated with our stock option awards.  In addition, we estimate
forfeitures when recognizing compensation expense associated with our stock
options, and adjust our estimate of forfeitures when appropriate.  The
key input assumptions we use to estimate the fair value of stock options include
the market value of the underlying shares at the date of grant, the exercise
price of the award, the expected option term, the expected volatility (based on
historical volatility) of our stock over the option’s expected term, the
risk-free interest rate over the option’s expected term, and the expected annual
dividend yield, if any.





(o)
EARNINGS PER SHARE




We
compute basic earnings per share by dividing net income (loss) for the period by
the weighted average number of common shares outstanding during the period. We
compute diluted earnings per share by dividing the net income (loss) for the
period by the weighted average number of common and dilutive common equivalent
shares outstanding during the period. We compute the dilutive effects of
options, warrants and their equivalents using the “treasury stock”
method. As we had a net loss in each of the periods presented, basic and
diluted net loss per share are the same. We have excluded options and warrants
to purchase a total of 330,000 and 250,000 shares of the Company’s common stock
from the calculation of diluted net loss per share in 2009 and 2008,
respectively, because their inclusion would be anti-dilutive.





(p)
REVENUE RECOGNITION





Royalties
represent periodic fees we receive from franchisees, which we determine as a
percentage of franchisee net sales and recognize as revenues when we earn them
on an accrual basis. Franchise fees represent initial fees paid by franchisees
for franchising rights. We defer recognition of these revenues and related
direct costs until we have performed substantially all initial services required
by the franchise agreements, which generally we consider to be upon the opening
of the franchisee’s store (or the first franchised store under an area
development agreement). Licensing revenues represent amounts we earn from the
use of the Company’s trademarks and we recognize these revenues when we earn
them on an accrual basis. We recognize revenues from the sale of goods that
we produce and sell to certain franchisees at the time of shipment and classify
them in factory revenues.





(q)
ADVERTISING





We
maintain advertising funds in connection with our franchise brands (“Marketing
Funds”). We consider these Marketing Funds to be separate legal entities from
the Company. Franchisees fund the Marketing Funds pursuant to franchise
agreements that generally require domestic franchisees to remit up to 2% of
their gross sales to the applicable Marketing Fund. We use these funds
exclusively for marketing of the respective franchised brands. The purpose of
the Marketing Funds is to centralize the advertising of the respective franchise
concept into regional and national campaigns. The Company serves as the
administrator of the Marketing Funds, and the Marketing Funds reimburse the
Company on a cost-only basis for the amount the Company spends for advertising
expenses related to the franchised brands. Additionally, if we dissolve the
Marketing Funds, we will either distribute any remaining cash in the fund back
to the franchisees or spend it on advertising.




Based on
the foregoing, we have determined that the Marketing Funds are variable interest
entities. The Company is not the primary beneficiary of these variable interest
entities and does not have the power to direct the activities of the Marketing
Funds, which most significantly impact their economic performance. Therefore we
exclude these funds from our Consolidated Financial
Statements.  Franchisee contributions to these Marketing Funds totaled
approximately $4.1 million in 2009 and $4.5 million in 2008.  At
December 31, 2009 and 2008, respectively, our Consolidated Financial Statements
include loans and advances receivable of $1.2 million and $1.7 million due from
The Athlete’s Foot Marketing Support Fund, LLC (“TAF MSF”). As of December 31,
2009 and 2008, we did not have any outstanding loans and advances from any other
Marketing Fund.  We also established a matching contribution program
with the TAF MSF whereby we have agreed to match certain franchisee
contributions representing the expected net present value of these future
contributions, which we include in our franchising selling, general and
administrative expenses. We contributed approximately $0.4 million in 2009 and
$0 in 2008 to the TAF MSF.  As of December 31, 2009 and 2008 the
amount of the liability recorded related to the matching contribution program
with the TAF MSF was $0.7 million and $1.1 million,
respectively.


42


(r)  RESEARCH
AND DEVELOPMENT (“R&D”)




In May
2009, we opened a new innovation laboratory in our manufacturing facility in
Atlanta, Georgia where we develop new flavors, new offerings and new
formulations of our food products across all of our QSR brands. Independent
suppliers provided equipment and other resources for the new R&D facility.
From time to time, independent suppliers also conduct or fund research and
development activities for the benefit of our QSR brands. In addition, we
conduct consumer research to determine our end-consumer’s preferences, trends
and opinions.  R&D expenses were $0.2 million in 2009 and $0.1
million in 2008.





(s)  INVESTMENTS
IN UNCONSOLIDATED ENTITIES





Shoe Box
Holdings, LLC (See Note 7 – Joint Venture Investments – Shoebox
New York) is an unconsolidated joint venture, the purpose of which is to
franchise retail stores that sell high-quality and high-fashion shoes. We use
the equity method of accounting for unconsolidated entities over which we have
significant influence but do not control, generally representing ownership
interests of at least 20% and not more than 50%. Under the equity method of
accounting, we recognize our proportionate share of the profits and losses of
the entity. The joint venture agreement specifies the distributions of capital,
profit and losses.





(t)
RECENT ACCOUNTING PRONOUNCEMENTS





Accounting
Standards Adopted in 2009




On January 1, 2009, we adopted FASB ASC
825-10-65, “Financial
Instruments,” which
requires disclosures about the fair value of financial instruments for interim
reporting periods in addition to the current requirement to make disclosures in
annual financial statements. This guidance also requires disclosure of the
methods and significant assumptions used to estimate the fair value of financial
instruments and description of changes in the method and significant
assumptions. The carrying
amounts of cash, cash equivalents and restricted cash approximate their fair
values (Level 1). The fair value of debt, as discussed in Note 9 –Debt, is based on the fair value of similar
instruments as well
as model-derived valuations whose inputs are not observable(Level 3).
The adoption of this standard did not have any effect on our results of
operations or financial position.




On June 30, 2009, we adopted the
revisions to U.S. GAAP included in Codification Topic 855, Subsequent Events,
which provides guidance for disclosing events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
The adoption of these revisions did not have any effect on our results of
operations or financial position.




On
September 30, 2009, we adopted the FASB ASC. The ASC does not alter current
GAAP, but rather integrates existing accounting standards with other
authoritative guidance. The ASC provides a single source of authoritative GAAP
for nongovernmental entities and supersedes all other previously issued non-SEC
accounting and reporting guidance. The adoption of the ASC did not have any
effect on our results of operations or financial position. We have revised all
prior references to GAAP to conform to the ASC. The FASB issues updates to the
ASC in the form of Accounting Standards Updates (“ASU”).





Accounting
Standards Not Yet Adopted





FASB ASC
810, “Consolidation Variable
Interest Entities,” requires an enterprise to perform an analysis to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a variable interest entity. This analysis
identifies the primary beneficiary of a variable interest entity as the
enterprise that has both of the following characteristics, among others:
(a) the power to direct the activities of a variable interest entity, which
most significantly impact the entity’s economic performance and (b) the
obligation to absorb losses of the entity, or the right to receive benefits from
the entity, which could potentially be significant to the variable interest
entity. This guidance requires ongoing reassessments of whether an enterprise is
the primary beneficiary of a variable interest entity. This guidance is
effective for the Company on January 1, 2010, and we do not expect it to
have a material impact on our
results of operations or financial position.





(3)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RELATED TO DISCONTINUED
OPERATIONS





Management
has used the following accounting principles in the preparation of our
Consolidated Financial Statements relating principally to the Company’s
discontinued operations:


43





(a) FAIR
VALUE OF FINANCIAL INSTRUMENTS





The
carrying amounts of our financial instruments, which included cash and cash
equivalents, restricted cash, accounts receivable and accounts payable and
accrued expenses, approximate their fair value due to the relatively short
duration or variable rates of the instruments.


(b)
REVENUE RECOGNITION - LICENSING





Revenues
from license agreements represent income that we determine as the greater of a
minimum fixed periodic fee or a percentage of licensee net sales as defined in
the license agreements (whichever is greater). We recognize revenues from
licensees whose sales exceed contractual minimums when our licenses are sold or
reported sales of licensed products. For licensees whose sales do not exceed
contractual sales minimums, we recognize licensing revenues ratably based on
contractual minimums.





(c)
ADVERTISING




We
expensed advertising and marketing costs paid by the Company in connection with
Bill Blass and Waverly, our former Consumer Branded Products business, as
incurred. Advertising expense was $0 in 2009 and $2.3 million in 2008. The
Company received advertising contributions from licensees of the Bill Blass and
Waverly brands, generally as a percentage of sales, to defray part or all of the
advertising expense relating to those brands. Contributions from licensees were
$0 in 2009 and $0.4 million in 2008.





(d)
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS





Goodwill
represents the excess of costs over the fair value of assets related to the UCC
Capital Corporation (“UCC Capital”), Bill Blass and Waverly businesses, and
trademarks represents the value of future licensing income associated with the
ownership of the Bill Blass and Waverly trademarks. Other identifiable
intangible assets associated with UCC Capital, Bill Blass and Waverly include
the value of non-compete agreements of key executives and license agreements of
acquired businesses, which we amortized on a straight-line basis over a period
ranging from one to twenty years. We amortized intangible assets with estimable
useful lives over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment. We did not amortize goodwill and
trademarks acquired in a purchase business combination determined to have an
indefinite useful life, but instead tested them for impairment at least
annually. There were no remaining intangible assets associated with our
discontinued operations as of December 31, 2009 or 2008.





(4)
SUPPLEMENTAL CASH FLOW INFORMATION





Supplemental
cash flow information consists of the following (in thousands):





Year Ended December 31,2009
                      
                      
                      2008Interest
      paid
                      
                      $
                      7,197
                      
                      
                      $
                      13,128Taxes
      paid
                      
                      $
                      95
                      
                      
                      $
                      368




Significant
non-cash investing and financing activities:





In 2009,
we released approximately 281,000 shares of our common stock (valued at $10.51
per share at the time of issuance) for an aggregate value as calculated at the
time of issuance of approximately $3.0 million in connection with the 2007
acquisition of MaggieMoo’s.





In 2008, we issued 1,099,290 shares of
our common stock (valued at $4.24 per share at the time of issuance) and 300,000
warrants with an aggregate value of $5.6 million as calculated at the time of
issuance in connection with the acquisition of Great American Cookies. We also
issued 200,000 warrants to BTMUCC with an aggregate value of $0.9 million
at the time of issuance in connection with the financing of the acquisition
of Great American Cookies. We applied restricted cash of
approximately $3.7 million to pay principal and interest on a note issued in
connection with the acquisition of Marble Slab. The restricted cash was held in
escrow and was paid directly to the noteholders.


44





(5)
PROPERTY AND EQUIPMENT, NET





Property
and equipment, net, consists of the following (in thousands):





Estimated
                            
                            Year Ended December 31,Useful Lives
                            
                            2009
                            
                            
                            2008Furniture
      and fixtures
                            
                            7 - 10 Years
                            
                            $
                            749
                            
                            
                            $
                            745Computers
      and equipment
                            
                            3 - 5 Years
                            
                            
                            2,206
                            
                            
                            
                            1,591Software
                            
                            3 Years
                            
                            
                            714
                            
                            
                            
                            699Building
                            
                            25 Years
                            
                            
                            1,129
                            
                            
                            
                            966Land
                            
                            Unlimited
                            
                            
                            263
                            
                            
                            
                            263Leasehold
      improvements
                            
                            Term of Lease or
                              Economic Life
                            
                            
                            2,882
                            
                            
                            
                            2,937Total
      property and equipment
                            
                            
                            
                            
                            7,943
                            
                            
                            
                            7,201Less
      accumulated depreciation
                            
                            
                            
                            
                            (4,681
                            )
                            
                            
                            (2,806
                            )Property
      and equipment, net of accumulated depreciation
                            
                            
                            
                            $
                            3,262
                            
                            
                            $
                            4,395





Depreciation
expense related to property and equipment was $1.9 million during 2009 and 2008.
We included depreciation expense of $0.1 million related to our factory plant
and equipment in cost of sales in 2009 and 2008.




(6)
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS





We test
goodwill, trademarks and other non-amortizable intangibles 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.




Inherent in our fair value
determinations are certain judgments and estimates, including projections of
future cash flows, the discount rate reflecting the risk inherent in future cash
flows, the interpretation of current economic indicators and market valuations,
and our strategic plans with regard to our operations. A change in these
underlying assumptions would cause a change in the results of the tests, which
could cause the fair value to be more or less than their respective carrying
amounts. In addition, to the extent that there are significant changes in market
conditions or overall economic conditions or our strategic plans change, it is
possible that impairment charges related to reporting units, which currently are
not impaired, may occur in the future.We have retained an investment bank to assist us in
identifying and evaluating alternatives to our current debt and capital
structure, including recapitalization of the Company, restructuring of our
debt and/or sale of some or substantially all of our assets (see Note 9 –Debt). A strategic transaction, debt
restructuring, or sale of some or substantially all of our assets may result in
a future adjustment to the carrying value of our intangible assets.





In 2009,
we did not incur any impairment charges with respect to our intangible assets.
During 2008, we determined that it was necessary to evaluate goodwill and
trademarks for impairment between annual tests. On May 19, 2008, we disclosed
issues related to our debt structure that materially and negatively affected the
Company. Specifically, we disclosed previously undisclosed terms of a January
2008 amendment to the BTMUCC Credit Facility, the substantial doubt about our
ability to continue as a going concern, our inability to file our periodic
report timely and our expected restatement of our Original 2007 10-K. We also
announced that the Company was actively exploring all strategic alternatives to
enhance its liquidity including the possible sale of one or more of its
businesses. These disclosures had an immediate and significant adverse impact on
our business. The price of our common stock dropped; the Company and certain
current and former officers and directors of the Company were sued for various
claims under the federal securities laws and certain state statutory and common
laws; and we became the subject of a formal investigation by the Enforcement
Division of the SEC. In addition, as a result of non-compliance with the listing
requirements of NASDAQ, including delays in filing our periodic reports,
our common stock was suspended from trading on The NASDAQ Stock Market, LLC
(“NASDAQ”) on January 13, 2009 and delisted on February 13, 2009. These events
and circumstances had a swift, material and adverse effect on the value of our
goodwill, trademarks and other intangibles which comprise our principle assets.
As a result of impairment testing, we recorded impairment charges related to
goodwill, trademarks and other intangible assets of $109.7 million and $28.2
million, respectively, in the second and third quarters of 2008.





On August
6, 2009, we entered into long-term license agreements with RCG Corporation Ltd.
and The Athlete’s Foot Australia Pty Ltd. through our wholly owned subsidiary
TAF Australia, LLC (“TAFA”). The Athlete’s Foot Australia Pty Ltd., a
subsidiary of RCG Corporation Ltd., was previously the master franchisee for TAF
for the territories of Australia and New Zealand. Pursuant to the license
agreements, which replace all prior franchise agreements among the parties, TAFA
granted The Athlete’s Foot Australia Pty Ltd. exclusive licenses of the TAF
trademarks and trade dress for the territories of Australia and New Zealand for
an initial 99-year term. In consideration for these license agreements, The
Athlete’s Foot Australia Pty Ltd. paid one-time, non-refundable licensing fees
of $6.2 million. The license agreements are renewable for three 50-year terms
for nominal additional consideration. TAFA is a special purpose,
bankruptcy-remote limited liability company formed under the laws of Delaware,
whose only assets consisted of the license agreements and the intellectual
property that is the subject of those license agreements. Although the Company
retained legal ownership and control of the TAF trademarks and trade dress in
Australia and New Zealand, the economic benefits or risks related to these
intangible assets no longer impact the Company. In addition, the Company has no
substantive obligations under the long-term license agreements. As a result, the
Company has accounted for this transaction as a sale of the related intangible
assets. The Company evaluated the fair market value of the amortizable and
non-amortizable intangible assets at the date of the transaction and determined
the value of the non-amortizable intangible assets to be $5.9 million and the
amortizable intangible assets to be $0.3 million. The Company reduced the
carrying value of the assets by these amounts and recorded a realized gain of
$41,000 on the licensing agreements in other income in the accompanying
Consolidated Statements of Operations.


45





The
Company had no goodwill as of December 31, 2009 and 2008.





A summary
of impairment charges recorded during 2008 related to goodwill, trademarks and
other non-amortizable intangible assets by brand and the impact of the TAF
licensing transaction in 2009 are as shown below (in thousands). See Note 15 -
Discontinued Operations
for impairment charges of brands within discontinued operations.




Balance at
                                                      December 31,
                                                        2007
                                                    
                                                    
                                                    Additions/
                                                      Reclassifications
                                                      in 2008
                                                    
                                                    
                                                    Impairments
                                                      in 2008
                                                    
                                                    
                                                    Balance at
                                                        December 31,
                                                        2008
                                                    
                                                    
                                                    Licensing
                                                      Agreement
                                                      2009
                                                    
                                                    
                                                    Balance at
                                                      December 31,
                                                        2009The
      Athlete's Foot
                                                    
                                                    $
                                                    51,669
                                                    
                                                    
                                                    $
                                                    45
                                                    
                                                    
                                                    $
                                                    (40,364
                                                    )
                                                    
                                                    $
                                                    11,350
                                                    
                                                    
                                                    $
                                                    (5,900
                                                    )
                                                    
                                                    $
                                                    5,450Great
      American Cookies
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    90,219
                                                    
                                                    
                                                    
                                                    (45,328
                                                    )
                                                    
                                                    
                                                    44,891
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    44,891Marble
      Slab Creamery
                                                    
                                                    
                                                    24,118
                                                    
                                                    
                                                    
                                                    118
                                                    
                                                    
                                                    
                                                    (15,174
                                                    )
                                                    
                                                    
                                                    9,062
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    9,062MaggieMoo's
                                                    
                                                    
                                                    21,586
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (17,392
                                                    )
                                                    
                                                    
                                                    4,194
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    4,194Pretzel
      Time
                                                    
                                                    
                                                    17,386
                                                    
                                                    
                                                    
                                                    (310
                                                    )
                                                    
                                                    
                                                    (17,076
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Pretzelmaker
                                                    
                                                    
                                                    11,091
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2,166
                                                    )
                                                    
                                                    
                                                    8,925
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    8,925Subtotal
                                                    
                                                    
                                                    125,850
                                                    
                                                    
                                                    
                                                    90,072
                                                    
                                                    
                                                    
                                                    (137,500
                                                    )1
                                                    
                                                    
                                                    78,422
                                                    
                                                    
                                                    
                                                    (5,900
                                                    )
                                                    
                                                    
                                                    72,522UCC
      Capital2
                                                    
                                                    
                                                    37,514
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (37,514
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Total
                                                    
                                                    $
                                                    163,364
                                                    
                                                    
                                                    $
                                                    90,072
                                                    
                                                    
                                                    $
                                                    (175,014
                                                    )
                                                    
                                                    $
                                                    78,422
                                                    
                                                    
                                                    $
                                                    (5,900
                                                    )
                                                    
                                                    $
                                                    72,522





1Excludes approximately
$0.4 million of impairment relating to a non-compete agreement recorded in other
amortizable intangible assets.


2The impairment of UCC
Capital’s non-amortizable intangible assets is included within discontinued
operations in the Statements of Operations for the year ended December 31,
2008.





Other
non-amortizable assets consist of the customer/supplier relationship related to
the acquired exclusive supply and customer relationship with Great American
Cookies franchisees. Trademarks and other non-amortizable intangible assets by
brand are as follows (in thousands):




Year Ended December 31,2009
                              
                              
                              2008Trademarks:The
      Athlete's Foot
                              
                              $
                              5,450
                              
                              
                              $
                              11,350Great
      American Cookies
                              
                              
                              16,481
                              
                              
                              
                              16,481Marble
      Slab Creamery
                              
                              
                              9,062
                              
                              
                              
                              9,062MaggieMoo's
                              
                              
                              4,194
                              
                              
                              
                              4,194Pretzelmaker
                              
                              
                              8,925
                              
                              
                              
                              8,925Total
      trademarks
                              
                              
                              44,112
                              
                              
                              
                              50,012Customer/supplier
      relationships related to Great American Cookies
                              
                              
                              28,410
                              
                              
                              
                              28,410Total
      trademarks and other non-amortizable intangible assets
                              
                              $
                              72,522
                              
                              
                              $
                              78,422




46





Other
amortizable intangible assets are as follows (in thousands):




Year Ended December 31,2009
                            
                            
                            2008The
      Athlete's Foot
                            
                            $
                            2,300
                            
                            
                            $
                            2,600Great
      American Cookies
                            
                            
                            780
                            
                            
                            
                            780Marble
      Slab Creamery
                            
                            
                            1,229
                            
                            
                            
                            1,229MaggieMoo's
                            
                            
                            654
                            
                            
                            
                            654Pretzel
      Time
                            
                            
                            1,322
                            
                            
                            
                            1,322Pretzelmaker
                            
                            
                            788
                            
                            
                            
                            788Total
      Other Intangible Assets
                            
                            
                            7,073
                            
                            
                            
                            7,373Less:
      Accumulated Amortization
                            
                            
                            (2,053
                            )
                            
                            
                            (1,215
                            )Total
                            
                            $
                            5,020
                            
                            
                            $
                            6,158





Other
amortizable intangible assets consist of franchise agreements, non-compete
agreements of key executives and the Pretzel Time trademark assets. During 2008,
the Company decided to convert the Pretzel Time franchised stores to the
Pretzelmaker brand and, therefore, is amortizing the Pretzel Time trademark over
its remaining useful life. We are amortizing other intangible assets generally
on a straight-line basis over a period ranging from one to twenty years. Total
amortization expense was $0.9 million in 2009 and $1.1 million in
2008.





The
following table presents the future amortization expense expected to be
recognized over the amortization period of our other amortizable intangible
assets as of December 31, 2009 (in thousands):




Weighted Average
                              Amortization Period
                            
                            Year Ended December 31,(Years)
                            
                            2010
                            
                            
                            2011
                            
                            
                            2012
                            
                            
                            2013
                            
                            
                            2014
                            
                            
                            ThereafterThe
      Athlete's Foot
                            
                            20
                            
                            $
                            115
                            
                            
                            $
                            115
                            
                            
                            $
                            115
                            
                            
                            $
                            115
                            
                            
                            $
                            115
                            
                            
                            $
                            1,361Great
      American Cookies
                            
                            7
                            
                            
                            111
                            
                            
                            
                            111
                            
                            
                            
                            111
                            
                            
                            
                            111
                            
                            
                            
                            111
                            
                            
                            
                            9Marble
      Slab
                            
                            20
                            
                            
                            61
                            
                            
                            
                            61
                            
                            
                            
                            61
                            
                            
                            
                            61
                            
                            
                            
                            61
                            
                            
                            
                            750MaggieMoo's
                            
                            20
                            
                            
                            33
                            
                            
                            
                            33
                            
                            
                            
                            33
                            
                            
                            
                            33
                            
                            
                            
                            33
                            
                            
                            
                            398Pretzel
      Time
                            
                            5
                            
                            
                            257
                            
                            
                            
                            225
                            
                            
                            
                            35
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Pretzel
      Maker
                            
                            5
                            
                            
                            166
                            
                            
                            
                            166
                            
                            
                            
                            53
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Total
      Amortization
                            
                            
                            
                            $
                            743
                            
                            
                            $
                            711
                            
                            
                            $
                            408
                            
                            
                            $
                            320
                            
                            
                            $
                            320
                            
                            
                            $
                            2,518





(7)
JOINT VENTURE INVESTMENT – SHOEBOX NEW YORK





Shoe Box
Holdings, LLC is a joint venture among the Company, the VCS Group, LLC (“VCS”),
a premier women's fashion footwear company, and TSBI Holdings, LLC (“TSBI”), the
originator of The Shoe Box, a multi-brand shoe retailer based in New York. In
January 2008, Shoe Box Holdings, LLC acquired the trademarks and other
intellectual property of TSBI for $0.5 million. The purpose of the joint venture
is to franchise The Shoe Box’s high-quality, high-fashion shoes and accessories
concept under the Shoebox New York brand.





The
Company and VCS each contributed $0.7 million to Shoe Box Holdings, LLC. TSBI
contributed its knowledge and expertise in retail operations. Until the Company
and VCS are re-paid their respective initial investments of $0.7 million, the
Company and VCS each receive 50% of the profits and losses. Once the Company and
VCS are re-paid, each member of the joint venture party is entitled to share
equally in joint venture entity profits. As of December 31, 2009, our maximum
loss exposure is limited to our investment of $0.3 million in the joint
venture.





A wholly
owned subsidiary of Shoe Box Holdings, LLC holds the acquired intellectual
property of The Shoe Box, Inc. and the intellectual property of the Shoebox New
York franchise concept (collectively, the “Shoebox Intellectual Property”). A
subsidiary of Shoe Box Holdings, LLC retained the principal of TSBI to assist in
the development of the Shoebox New York concept pursuant to a consulting
agreement (the “Consulting Agreement”), and granted TSBI a non-exclusive license
to the Shoebox Intellectual Property (the “License Agreement) to continue
operating the existing The Shoe Box stores and to open additional stores under
the Shoebox New York brand. If the License Agreement is terminated due to a
breach by TSBI or if the Consulting Agreement is terminated due to a breach by
the principal of TSBI, Shoe Box Holdings, LLC has the right to repurchase all of
TSBI’s ownership interest for $1.00. The terms of the transaction also include
an option for TSBI to purchase all of the ownership units of Shoe Box Holdings,
LLC in the event that 20 franchised stores are not opened and operating on or
prior to the date that is 36 months from the transaction’s second closing date
(January 15, 2011) or the date that is 48 months from the transaction’s second
closing date (January 15, 2012, collectively, the “Trigger Dates”). The purchase
price for the Company and VCS’ ownership interests would be an amount equal to
their respective initial investments of $0.7 million less any distributions they
received through the Trigger Dates. TSBI also has an alternative option, in the
event that 20 franchised stores are not opened and operating on or prior to
either of the Trigger Dates, to withdraw from Shoe Box Holdings, LLC by
surrendering its ownership units, terminating the License Agreement, and by
ceasing all uses of the Shoebox Intellectual Property.


47





NFM
manages the Shoebox New York brand, as it does NexCen’s other brands, and
receives a management fee for its services, in addition to any distributions
that NexCen Brands may receive from the joint venture entity. NFM received
management fees of $0.2 million in 2009 and $0.4 million in 2008, which we
included in our operating income. As of December 31, 2009, there are 8 stores
open in the United States and 7 stores open internationally in Vietnam, South
Korea, Kuwait and Aruba.




Our
investment in this joint venture was $0.3 million at December 31, 2009 and $0.1
million at December 31, 2008. We recorded an equity income of $0.3 million in
2009 and loss of $0.3 million in 2008. While Shoe Box Holdings, LLC is a
variable interest entity (“VIE”), due primarily to the aforementioned TSBI
options and ownership interest versus economic interests, we believe the Company
is not the primary beneficiary as it does not have the power to direct the
activities that most significantly impact the VIE’s economic performance.
Accordingly, we have recorded our investment in Shoe Box Holdings, LLC under the
equity method of accounting.





(8)
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND RESTRUCTURING ACCRUALS





(a)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES





Accounts
payable and accrued expenses consist of the following (in
thousands):




December 31,2009
                        
                        
                        2008Accounts
      payable
                        
                        $
                        4,470
                        
                        
                        $
                        5,883Accrued
      interest payable
                        
                        
                        245
                        
                        
                        
                        353Accrued
      professional fees
                        
                        
                        150
                        
                        
                        
                        901Deferred
      rent - current portion
                        
                        
                        80
                        
                        
                        
                        80Accrued
      compensation and benefits
                        
                        
                        203
                        
                        
                        
                        106Income
      taxes
                        
                        
                        249
                        
                        
                        
                        429All
      other
                        
                        
                        1,199
                        
                        
                        
                        1,468Total
                        
                        $
                        6,596
                        
                        
                        $
                        9,220





(b)
RESTRUCTURING ACCRUALS




In 2008
and 2009, in conjunction with cost cutting efforts, the sales of our Waverly and
Bill Blass brands, and the consolidation of our accounting functions, we reduced
the staff in the New York corporate office and recorded charges to earnings from
continuing operations related primarily to separation benefits. As we expect to
pay the employee separation benefits within one year of the restructuring
announcement, we have not discounted the corresponding
liability.




A
roll-forward of the restructuring accrual is as follows (in
thousands):





Employee
                                Separation
                                BenefitsRestructuring
      liability as of December 31, 2007
                              
                              $
                              132008
      Restructuring:Charges
      to continuing operations
                              
                              
                              1,096Cash
      payments and other
                              
                              
                              (956
                              )Restructuring
      liability as of December 31, 2008
                              
                              
                              1532009
      Restructuring:Charges
      to continuing operations
                              
                              
                              527Cash
      payments and other
                              
                              
                              (368
                              )Restructuring
      liability as of December 31, 2009
                              
                              $
                              312




48


(9)
DEBT





(a)
BTMUCC Credit Facility




On March
12, 2007, NexCen Acquisition Corp., now NexCen Holding Corp., (“the Issuer”), a
wholly owned subsidiary of the Company, entered into agreements with BTMUCC (the
“Original BTMUCC Credit Facility”). In January 2008, in order to finance the
acquisition of Great American Cookies, the Company and BTMUCC entered into
an  amendment to the Original BTMUCC Credit Facility (the “January
2008 Amendment”).  On August 15, 2008, the Company restructured the
Original BTMUCC Credit Facility and the January 2008 Amendment whereby certain
NexCen entities entered into an amended and restated note funding, security,
management and related agreements with BTMUCC (the “Amended Credit Facility”).
The Amended Credit Facility replaced all of the agreements comprising both the
Original BTMUCC Credit Facility and the January 2008 Amendment. BTMUCC and the
Company subsequently amended the Amended Credit Facility on September 11, 2008,
December 24, 2008, January 27, 2009, July 15, 2009, August 6, 2009, January 14,
2010, February 10, 2010 and March 12, 2010 (as amended, the “BTMUCC Credit
Facility”).





Our debt
consists of borrowings under the BTMUCC Credit Facility, which is comprised of
three separate tranches: the Class A Franchise Notes, the Class B Franchise Note
and the Deficiency Note.  This debt consists of the following (in
thousands):




December
        31,2009
                              
                              
                              2008Class
      A Franchise Notes
                              
                              $
                              85,367
                              
                              
                              $
                              86,300Class
      B Franchise Note
                              
                              
                              36,251
                              
                              
                              
                              41,724Deficiency
      Note
                              
                              
                              16,565
                              
                              
                              
                              14,242Total
                              
                              
                              138,183
                              
                              
                              
                              142,266Less
      debt discount
                              
                              
                              (853
                              )
                              
                              
                              (1,393
                              )Total
                              
                              $
                              137,330
                              
                              
                              $
                              140,873Range
      of interest rates on variable rate debt during the year
                              
                              3.8% to 5.3
                              %
                              
                              5.4% to 8.8
                              %Weighted-average
      rate on variable rate debt during the year
                              
                              
                              5.3
                              %
                              
                              
                              5.9
                              %





The
estimated fair value of the Company’s debt approximated $92.7 million and $101.0
million as of December 31, 2009 and 2008, respectively.




Each
Class A Franchise Note is secured by substantially all of the assets of the
Issuer and each of its subsidiaries (the “Co-Issuers”) and is collectively set
to mature on July 31, 2013. The Class A Franchise Notes bear interest at LIBOR
(which in all cases under the BTMUCC Credit Facility is the one-month LIBOR rate
as in effect from time to time) plus 3.75% per year through July 31, 2011 and
then LIBOR plus 5% per year thereafter until maturity on July 31, 2013. The rate
in effect at December 31, 2009 was 4.0%.





The Class
B Franchise Note is secured by substantially all of the assets of the Issuer and
each Co-Issuer and is set to mature on July 31, 2011. As of January 20, 2009
through maturity, these notes bear interest at a fixed rate of 8% per year.
Prior to a January 27, 2009 amendment to the BTMUCC Credit Facility, the Class B
Franchise Note would have borne interest at a fixed rate of 12% per year through
July 31, 2009 and then 15% per year thereafter. BTMUCC will be entitled to
receive a warrant covering up to 2.8 million shares of the Company’s common
stock at a price of $0.01 per share if the Class B Franchise Note has not been
repaid by March 31, 2010 (“Warrant Trigger Date,” which was changed by the
February 10, 2010 amendment) with the number of shares subject to such warrant
being reduced on a pro-rata basis if less than 50% of the original principal
amount of the Class B Franchise Note remains outstanding on the Warrant Trigger
Date.




The
Deficiency Note represents the amounts outstanding on the note that was backed
by the Bill Blass brand, which remained unpaid because the proceeds from the
sale of the Bill Blass brand were insufficient to pay the related note in full.
The Deficiency Note is set to mature on July 31, 2013 and bears interest at a
fixed rate of 15% per year through maturity. There is no scheduled principal
payment on the Deficiency Note until its maturity date, and interest is due on a
payment-in-kind (“PIK”) basis that defers cash interest payments until its
maturity on July 31, 2013.





On
January 27, 2009, we entered into an amendment of the BTMUCC Credit Facility,
which reduced the interest rate on the Class B Franchise Note, the outstanding
balance of which totaled approximately $41.7 million as of such date, to 8% per
year effective January 20, 2009 through July 31, 2011, the maturity date on the
Class B Franchise Note. In addition to the change in interest rate on the Class
B Franchise Note, the amendment also gave the Company greater operating
flexibility by: (i) reducing the debt service coverage ratio requirements for
the remainder of 2009; (ii) allowing certain funds paid by supply vendors to be
excluded from debt service obligations and capital expenditure limitations;
(iii) revising the covenant causing a manager event of default upon NexCen
filing a qualified financial statement for the 2008 fiscal year such that it
applies to 2009 fiscal year and thereafter; and (iv) eliminating the requirement
for valuation reports for fiscal year 2008, which would be used for measuring
compliance with loan-to-value covenants, unless requested by
BTMUCC.


49





On July
15, 2009, we entered into another amendment of the BTMUCC Credit Facility. The
material terms of the amendment increased certain operating expenditure limits
for 2009, reduced debt service coverage ratio requirements, reduced free cash
flow margin requirements, extended the time period to provide valuation reports,
and waived certain potential defaults. The amendment also extended from July 31,
2009 to December 31, 2009, the Warrant Trigger Date.





On August
6, 2009, in connection with certain Australia and New Zealand license
agreements, we entered into an amendment of the BTMUCC Credit Facility whereby
the Company used $5.0 million of the licensing proceeds to pay down a portion of
the Class B Franchise Note and BTMUCC released its security interest in the
intellectual property that is the subject of the license agreements. The balance
of the Class B Franchise Note following the re-payment was approximately $36.4
million, and the Company’s repayment is resulting in an interest expense savings
of $0.4 million on an annualized basis. The August 6, 2009 amendment also
permitted the Company to use up to $1.2 million of net proceeds from the license
agreements for expenditures, as approved in writing by BTMUCC, including capital
expenditures to expand production capabilities of our manufacturing facility to
produce products beyond cookie dough.





On
January 14, 2010, we entered into an amendment of the BTMUCC Credit Facility
that (1) extended the Warrant Trigger Date from December 31, 2009 to February
28, 2010; (2) modified the cash distribution waterfall such that in February
2010, provided that the Company’s unrestricted cash balance is less than $1.0
million and subject to certain other restrictions, the Company would entitled to
receive (and did
receive in February 2010) $0.5 million to be used to pay operating
expenses, provided that such payment will result in a subsequent proportional
reduction in the overall reimbursable operating expenditure limits for the 2010
calendar year; and (3) waived a failure to meet certain free cash flow margin
requirements for the twelve months ended December 31, 2009.




In
February 2010, we made an additional principal payment of $1.4 million. Under
the BTMUCC Credit Facility, we are not reimbursed out of the cash in the lockbox
accounts for any expenses paid in excess of our annual expense limit. Instead
those amounts were released by BTMUCC to pay down principal in excess of
scheduled principal payments.




On
February 10, 2010, we entered into another amendment that further extended the
Warrant Trigger Date to March 31, 2010 and waived a failure to meet certain free
cash flow margin requirements for the twelve months ended January 31,
2010.




On March
12, 2010, we entered into an amendment, the material terms of which waived a
failure to meet certain free cash flow margin requirements for the twelve months
ended February 28, 2010 and waived the requirement to provide separate audited
financial statements for certain subsidiaries of the Company.




Although
the organization, terms and covenants of the specific borrowings have changed
significantly since its inception, the basic structure of the facility has
remained the same. The Issuer and Co-Issuers issued notes pursuant to the terms
of the BTMUCC Credit Facility. These notes were and are secured by the assets of
each brand, which consist of the respective intellectual property assets and the
related royalty revenues and trade receivables. Special purpose,
bankruptcy-remote entities (each, a “Brand Entity”) hold the assets of each
brand. The Issuer, also a special purpose, bankruptcy-remote entity, is the
parent of all of the Brand Entities. The notes are cross-collateralized with
each other, and each Brand Entity is a Co-Issuer of each note. Repayment of each
note and all other obligations under the facility are the joint and several
obligation of the Issuer and each Brand Entity. Certain other NexCen
subsidiaries (the “Managers”) do not own any assets comprising the brands, but
manage the various Brand Entities and are parties to management agreements that
define the relationship among the Managers and the respective Brand Entities
they manage. In the event that certain adverse events occur with respect to the
Company, or if the Managers fail to meet certain qualifications, BTMUCC has the
right to replace the Managers.





NexCen
Brands is not a named borrowing entity under the BTMUCC Credit Facility.
However, the Brand Entities earn substantially all of our revenues and remit the
related cash receipts to lockbox accounts that we have established in connection
with the BTMUCC Credit Facility to perfect the lender’s security interest in the
cash receipts. See Note 2(d) – Accounting Policies and
Pronouncements - Cash and Cash Equivalents. The terms of the BTMUCC
Credit Facility control the amount of cash that may be distributed by each Brand
Entity to the Managers, the Issuer and NexCen Brands, and certain
non-ordinary course expenses or expenses beyond a certain annual total limit
must be paid out of cash on hand.





Our
BTMUCC Credit Facility prohibits NexCen Brands, the Issuer, the Managers and
each Brand Entity from securing any additional borrowings without the prior
written consent of BTMUCC. It also contains numerous reporting obligations, as
well as affirmative and negative covenants, including, among other things,
restrictions on indebtedness, liens, fundamental changes, asset sales,
acquisitions, capital and other expenditures, dividends and other payments
affecting subsidiaries. The Company’s failure to comply with the financial and
other restrictive covenants could result in a default under the BTMUCC Credit
Facility, which could then trigger, among other things, the lender’s right to
accelerate principal payment obligations, foreclose on virtually all of the
assets of the Company and take control of all of the Company’s cash flows from
operations. Our BTMUCC Credit Facility further contains a subjective
acceleration clause whereby our lender has the right to accelerate all principal
payment obligations upon a “material adverse change,” which is broadly defined
as the occurrence of any event or condition that, individually or in the
aggregate, has had, is having or could reasonably be expected to have a material
adverse effect on (i) the collectability of interest and principal on the debt,
(ii) the value or collectability of the assets securing the debt, (iii) the
business, financial condition, or operations of the Company or our subsidiaries,
individually or taken as a whole, (iv) the ability of the Company or our
subsidiaries to perform its respective obligations under the loan agreements,
(v) the validity or enforceability of any of the loan documents, and (vi) the
lender’s ability to foreclose or otherwise enforce its interest in any of the
assets securitizing the debt. To date, BTMUCC has not invoked the “material
adverse change” provision or otherwise sought acceleration of our principal
payment obligations.




50


BTMUCC
has provided the Company amendments and waivers since the restructuring of the
debt in August 2008, including reduction of interest rates, deferral of
scheduled principal payment obligations and certain interest payments, waivers
and extensions of time related to the obligations to issue dilutive warrants,
allowance of certain payments to be excluded from debt service obligations, as
well as relief from debt service coverage ratio requirements, certain capital
and operating expenditure limits, certain loan-to-value ratio requirements,
certain free cash flow margin requirements, and the requirement to provide
financial statements by certain deadlines. We anticipate that we will breach
certain covenants under the BTMUCC Credit Facility in 2010 unless we are able to
obtain waivers or amendments from our lender. There can be no assurance that we
will be able to obtain waivers or amendments, and our lender may default the
Company and seek to accelerate our principal payment obligations pursuant to any
of the covenants or the subjective acceleration clause of the BTMUCC Credit
Facility. In addition, our scheduled principal payments under the BTMUCC Credit
Facility include a final principal payment on our Class B Franchise Note of
$34.5 million in July 2011. We currently do not expect that we will be able to
make this principal payment. Accordingly, we have classified all of the debt
outstanding under the BTMUCC Credit Facility as a current liability as of
December 31, 2009.




We have
retained an investment bank to assist us in identifying and evaluating
alternatives to our current debt and capital structure, including
recapitalization of the Company, restructuring of our debt and/or sale of some
or substantially all of our assets. We are in active discussions with BTMUCC
regarding potential alternatives, but there can be no guarantee that BTMUCC will
agree to any of them.


The
scheduled aggregate maturities of our debt as of December 31, 2009 are as
follows (in thousands):


Class A(1)
                      
                      
                      Class B(1)
                      
                      
                      Deficiency Note(2)
                      
                      
                      Total2010
                      
                      $
                      3,561
                      
                      
                      $
                      1,286
                      
                      
                      $
                      –
                      
                      
                      $
                      4,8472011
                      
                      
                      3,390
                      
                      
                      
                      34,965
                      
                      
                      
                      –
                      
                      
                      
                      38,3552012
                      
                      
                      3,918
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      3,9182013
                      
                      
                      74,498
                      
                      
                      
                      –
                      
                      
                      
                      28,471
                      
                      
                      
                      102,969Total
                      
                      $
                      85,367
                      
                      
                      $
                      36,251
                      
                      
                      $
                      28,471
                      
                      
                      $
                      150,089




(1)
            Because
      we exceeded our 2009 expense limit under the BTMUCC Credit Facility, a
      portion of the cash receipts in lockbox accounts that otherwise would have
      been released to the Company to reimburse it for operating expenses were
      instead applied in February 2010 to additional principal payments of $0.8
      million on the Class A Franchise Notes and $0.6 million  on the
      Class B Franchise Note.


(2)
            Maturities
      related to the Deficiency Note include PIK interest of approximately $11.9
      million that will be due in 2013 if we do not pay the Deficiency Note
      prior to its maturity.





We are
amortizing certain costs incurred in connection with the Original BTMUCC Credit
Facility and the Amended Credit Facility over the term of the loan using the
effective interest method. We expense certain other third party costs associated
with various amendments to the Original BTMUCC Credit Facility, including the
January 2008 Amendment, the Amended Credit Facility and all subsequent
amendments to date, as we incur them, and we include these costs in our
Consolidated Statements of Operations as Financing Charges.





(b) Direct and
Guaranteed Lease Obligations





We
recognize a liability for the fair value of certain lease obligations undertaken
at the inception of a lease guarantee. We assumed direct lease obligations with
respect to the purchase of certain formerly company-owned and operated
MaggieMoo’s stores (“Lease Obligations”). The Company also assumed certain
guarantees for leases related to certain MaggieMoo’s franchised locations
(“Lease Guarantees”). In general, the Lease Guarantees are contingent guarantees
that become direct obligations of the Company if a franchisee defaults on its
lease agreement. The Company treated all of the direct Lease Obligations and the
Lease Guarantees as assumed liabilities at the time of acquisition of
MaggieMoo’s and as a result included these assumed liabilities in the purchase
price of the acquisition.





We
analyze each Lease Obligation and Lease Guarantee and determine the fair value
based on the facts and circumstances of the lease and franchisee performance.
Based on those analyses, we include the carrying amounts of these liabilities in
acquisition related liabilities for the calendar years ended December 31, 2009
and 2008 as follows (in thousands):


51





December  31,2009
                          
                          
                          2008Lease
      Obligations
                          
                          $
                          313
                          
                          
                          $
                          891Lease
      Guarantees
                          
                          
                          315
                          
                          
                          
                          354Total
                          
                          $
                          628
                          
                          
                          $
                          1,245




December 31,2009
                        
                        
                        2008Current
                        
                        $
                        433
                        
                        
                        $
                        765Long
      term
                        
                        
                        195
                        
                        
                        
                        480Total
                        
                        $
                        628
                        
                        
                        $
                        1,245




Expected
maturities of the Lease Obligations and the Lease Guarantees are as follows (in
thousands):





2010
                  
                  $
                  4332011
                  
                  
                  1752012
                  
                  
                  20$
                  628





At the
end of each calendar year, we review the facts and circumstances of each Lease
Obligation and Lease Guarantee. Based on this review, we may change our
determination as to the carrying amounts of these liabilities and/or expected
maturities of the leases.





In
addition to the Lease Guarantees, under the terms of the Pretzel Time,
Pretzelmaker and Great American Cookies acquisitions, we agreed to reimburse the
respective sellers for 50% of the sellers’ obligations under certain lease
guarantees if certain franchise agreements were terminated after a period of one
year from the date of acquisition. We are not a guarantor of any leases to third
parties and have not recorded any amounts in the financial statement related to
these contingent obligations. We may mitigate our exposure to these lease
guarantees in cases where the primary lessors of the property have also
personally guaranteed the lease obligations by finding new franchisees to
perform on the leases, or by negotiating directly with landlords to settle the
amounts due.We had
a maximum amount of undiscounted potential exposure related to these third-party
contingent lease guarantees as of December 31, 2009 and 2008 of $2.7 million and
$4.1 million, respectively.





(10)
INCOME TAXES





The
components of income tax expense (benefit) from continuing operations for the
calendar years ended December 31 are as follows (in thousands):





2009
                
                
                2008Federal
                
                $
                –
                
                
                $
                (5,940
                )State
      and Local
                
                
                138
                
                
                
                (261
                )Foreign
                
                
                257
                
                
                
                207Total
      income tax expense (benefit) from continuing operations
                
                $
                395
                
                
                $
                (5,994
                )





Total
income tax expense (benefit) is allocated as follows (in
thousands):





2009
                
                
                2008Current
                
                $
                395
                
                
                $
                337Deferred
                
                
                –
                
                
                
                (6,331
                )Total
      income tax expense (benefit) from continuing operations
                
                
                395
                
                
                
                (5,994
                )Taxes
      on (loss) income from and gains on sale of discontinued
      operations
                
                
                (233
                )
                
                
                (19,923
                )Taxes
      on (loss) income
                
                $
                162
                
                
                $
                (25,917
                )




52




A
reconciliation of the difference between the effective income tax rate and the
statutory federal income tax rate from continuing operations is as
follows:





2009
                    
                    
                    2008U.S.
      statutory federal rate
                    
                    
                    -35.0
                    %
                    
                    
                    -35.0
                    %Increase/(decrease)
      resulting from:State
      taxes, net of federal benefit
                    
                    
                    4.7
                    %
                    
                    
                    -5.4
                    %Foreign
      withholding tax
                    
                    
                    8.7
                    %
                    
                    
                    –Changes
      in valuation allowance
                    
                    
                    -1,541.1
                    %
                    
                    
                    36.5
                    %Expiration
      of deferred tax assets
                    
                    
                    1,586.6
                    %
                    
                    
                    –Change
      in deferred tax assets - other
                    
                    
                    -13.2
                    %
                    
                    
                    –Other
                    
                    
                    2.7
                    %
                    
                    
                    0.2
                    %Effective
      tax rate
                    
                    
                    13.4
                    %
                    
                    
                    -3.7
                    %





In 2009,
the Company did not record any deferred tax benefit or expense. In 2008, we
recorded impairment charges relating to intangible assets not amortized for book
purposes (see Note 6 – Goodwill, Trademarks and Intangible
Assets). As a result of these impairment charges, related deferred tax
liabilities recorded in prior years reversed, which resulted in a deferred tax
benefit of $2.9 million for the year ending December 31, 2008. In addition, we
recorded a deferred tax benefit of $3.4 million in 2008 related to the use of
capital tax loss carry-forwards to offset a taxable gain on the sale of a
discontinued business.




Deferred
income taxes reflect the net tax effect of temporary differences that may exist
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, using enacted tax rates
in effect for the year in which the differences are expected to reverse.As of
December 31, 2009, we have accumulated significant deferred tax assets totaling
$359.2 million, consisting primarily of $293.0 million from federal net
operating loss carry-forwards of $837.0 million, which expire at various dates
through 2029, and $36.6 million of deferred tax assets arising from the
impairment of intangible assets.




The
following summarizes the significant components of our deferred tax assets and
liabilities as of December 31, 2009 and 2008, respectively (in
thousands):





2009
                      
                      
                      2008Deferred
      tax assets:Federal
      net operating loss carry-forwards
                      
                      $
                      292,964
                      
                      
                      $
                      287,954State
      net operating loss carry-forwards
                      
                      
                      2,511
                      
                      
                      
                      2,654Investments
                      
                      
                      5,983
                      
                      
                      
                      5,667Capital
      loss carry-forwards
                      
                      
                      5,375
                      
                      
                      
                      52,228Tax
      credit carry-forwards
                      
                      
                      4,150
                      
                      
                      
                      4,150AMT
      tax credit carry-forwards
                      
                      
                      123
                      
                      
                      
                      25Intangible
      assets
                      
                      
                      43,237
                      
                      
                      
                      45,579Depreciation
      and amortization
                      
                      
                      1,010
                      
                      
                      
                      620Stock-based
      compensation
                      
                      
                      507
                      
                      
                      
                      3,627Other
                      
                      
                      3,293
                      
                      
                      
                      2,157Gross
      deferred tax asset
                      
                      
                      359,153
                      
                      
                      
                      404,661Valuation
      allowance
                      
                      
                      (359,153
                      )
                      
                      
                      (404,661
                      )Net
      deferred tax assets
                      
                      $
                      –
                      
                      
                      $
                      –




Consistent
with ASC 740, the Company has provided a full valuation allowance against our
deferred tax assets for financial reporting purposes because we have not
satisfied the GAAP requirement in order to recognize the value, namely, that
there exists objective evidence of our ability to generate sustainable taxable
income from our operations. Based upon the Company’s historical operating
performance and the reported cumulative net losses to date, as well as
amortization expense relating to intangible assets that will be deductible in
computing taxable income in future years, the Company presently does not have
sufficient objective evidence to support the recovery of our deferred tax
assets. In 2009, the valuation allowance for deferred tax assets decreased by
$45.5 million primarily due to expiration of capital loss
carry-forwards.


53




The
Company adopted the provisions of ASC 740-10 on January 1, 2007. ASC 740-10
prescribes recognition threshold and measurement parameters for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in the Company’s tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by taxing
authorities. The amount recognized is measured as the largest amount of benefit
that has a greater than 50% likelihood upon ultimate settlement. The
unrecognized tax benefits are subject to a valuation allowance, and this
reduction does not affect the effective tax rate.  There are no
significant increases or decreases to unrecognized tax benefits anticipated
within the next twelve months.  A reconciliation (in thousands of
unrecognized tax benefits from the beginning to the end of 2009 is as
follows:
 
 Balance
      at January 1, 2009
                  
                  $
                  32,641Additions
      based on tax positions related to the current year
                  
                  
                  130Balance
      at December 31, 2009
                  
                  $
                  32,771
 
 Unrecognized
tax benefits that would affect the effective tax rate, if recognized, totaled
$0.1 million and $0 at December 31, 2009 and 2008,
respectively.




It is the
Company’s position to recognize interest and/or penalties related to uncertain
tax positions in income tax expense. The Company has not been examined by the
IRS and is not currently under examination. All tax years for which we have
tax loss carry-forwards are subject to future examination by taxing authorities.
The Company is currently under examination by the state of New York for the 2006
through 2008 tax years.





Because
we have significant tax loss carry-forwards, we monitor any potential “ownership
changes” as defined in Section 382 of the Internal Revenue Code (“Code Section
382”) by reviewing available information regarding the transfer of shares by our
existing shareholders and evaluating other transactions that may be deemed an
“ownership change,” such as amendments to our credit facility. If we have an
“ownership change” as defined in Code Section 382, our net operating loss
carry-forwards and capital loss carry-forwards generated prior to the ownership
change would be subject to annual limitations, which could reduce, eliminate, or
defer the utilization of our deferred tax assets. As of the date of this Report,
we do not believe that we have experienced an ownership change as defined under
Code Section 382 resulting from transfer of shares by our existing shareholders
or from deemed ownership changes resulting from the various amendments to the
BTMUCC Credit Facility. In the future, we may enter into additional amendments
to our outstanding debt, other transactions, or have transfers of stock, which
may result in an ownership change that would severely limit our ability to use
our net operating loss carry-forwards and capital loss carry-forwards to offset
future taxable income. In the event of an ownership change, there will be no
impact to our financial position given the valuation allowance recorded on our
deferred tax assets. In addition, we are, and expect that we will continue to
be, subject to certain state, local, and foreign tax obligations, as well as to
a portion of the federal alternative minimum tax for which the use of our tax
loss carry-forwards may be limited.





(11)
BENEFIT PLANS





As a
result of our acquisitions, we assumed responsibility for several defined
contribution plans under Section 401(k) of the Internal Revenue Code that
provide for voluntary employee contributions of 1% to 15% of compensation for
substantially all employees. We are in the process of merging or dissolving all
but one of these plans. Under the terms of the surviving plan, we may, but are
not obligated to, make profit sharing contributions. We made no contributions to
the plans for the years ended December 31, 2009 and 2008.





(12)
STOCK BASED COMPENSATION





Effective
October 31, 2006, the Company adopted the 2006 Equity Incentive Plan (the “2006
Plan”) to replace its former plans including the 1999 Equity Incentive Plan and
the 2000 Acquisition Incentive Plan. The 2006 Plan is now the sole plan for
issuing stock-based compensation to eligible employees, directors and
consultants. The former plans will remain in existence solely for the purpose of
addressing the rights of holders of existing awards already granted under those
plans prior to the adoption of the 2006 Plan. No new awards will be granted
under the former plans.  A total of 3.5 million shares of common stock
were initially reserved for issuance under the 2006 Plan, which represented
approximately 7.4% of NexCen’s outstanding shares at the time of adoption.
Options under the 2006 Plan expire after ten years and are granted at an
exercise price no less than the fair value of the common stock on the grant
date.  We refer to all these plans collectively as “the
Plans.”


54


Information
related to options outstanding under the Plans and warrants issued by the
Company outside of such plans is as follows (in thousands):





2009
                
                
                2008Number of
                  shares
                
                
                Weighted
                  average
                  exercise
                  price
                  (per share)
                
                
                Number of
                  shares
                
                
                Weighted
                  average
                  exercise
                  price
                  (per share)Outstanding
      at beginning of year
                
                
                4,005
                
                
                $
                3.73
                
                
                
                6,994
                
                
                $
                5.37Granted
                
                
                1,137
                
                
                
                0.17
                
                
                
                2,022
                
                
                
                1.27Exercised
                
                
                –
                
                
                
                –
                
                
                
                ( 54
                )
                
                
                0.08Cancelled/Forfeited/Expired
                
                
                (850
                )
                
                
                4.68
                
                
                
                (4,957
                )
                
                
                5.08Outstanding
      at year end
                
                
                4,292
                
                
                $
                2.60
                
                
                
                4,005
                
                
                $
                3.73Exercisable
      at year-end
                
                
                3,079
                
                
                $
                3.45
                
                
                
                3,158
                
                
                $
                4.42





A summary
of the status of the Company’s outstanding grants of options, restricted stock
and warrants that remain subject to vesting as of and for the years ended
December 31, 2009 and 2008, and changes during the year then ended is presented
below:





2009
                
                
                2008Weighted
                
                
                
                
                
                WeightedAverage
                
                
                
                
                
                AveragePer Share
                
                
                
                
                
                Per ShareGrant Date
                
                
                
                
                
                Grant DateShares
                
                
                Fair Value
                
                
                Shares
                
                
                Fair ValueNon-vested
      at beginning of year
                
                
                847
                
                
                $
                1.16
                
                
                
                4,271
                
                
                $
                2.35Granted
                
                
                1,137
                
                
                
                0.17
                
                
                
                2,022
                
                
                
                1.31Vested
                
                
                (704
                )
                
                
                0.75
                
                
                
                (3,114
                )
                
                
                2.07Forfeited
                
                
                (67
                )
                
                
                1.91
                
                
                
                (2,332
                )
                
                
                2.38Non-vested
      at year-end
                
                
                1,213
                
                
                $
                0.43
                
                
                
                847
                
                
                $
                1.16





Total
stock-based compensation expense included in selling, general and administrative
expenses was approximately $0.4 million and $5.3 million for the years ended
December 31, 2009 and 2008, respectively.The total unrecognized
compensation cost related to non-vested share-based compensation agreements
granted under all stock option plans as of December 31, 2009 is approximately
$0.3 million. We expect to recognize this cost over the vesting period of
approximately 2 years.There was no income tax
benefit recognized in the income statement for stock-based compensation
arrangements and no capitalized stock-based compensation cost incurred in 2009
or 2008.





The
weighted average remaining contractual life of the options outstanding and
exercisable was 7.9 years at December 31, 2009.  The aggregate
intrinsic value for the options outstanding and exercisable was less than $0.1
million at December 31, 2009.





We have
estimated the fair value of options granted at the date of grant using a
Black-Scholes option-pricing model with the assumptions described
below:





Assumption
                
                2009
                
                
                2008Fair
      value per share
                
                $
                0.16
                
                
                $
                1.31Dividend
      yield
                
                
                –
                
                
                
                –Volatility
      factors of expected market price of stock
                
                
                157
                %
                
                
                52%
      - 73
                %Risk
      free interest rate
                
                
                2.18
                %
                
                
                2.36%
      - 3.52
                %Expected
      option term (in years)
                
                
                6.0
                
                
                
                3.0
      - 6.0





Through
December 31, 2009, the Company has estimated expected terms of three to six
years for all options. Due to the significant changes in the Company’s business
over the past three years, the Company has elected to use the “simplified”
method to estimate the expected term for stock options granted after December
31, 2005. The simplified method allows companies to estimate an expected term by
using the vesting term plus the original contractual term divided by two. The
Company used historical data for the Company’s stock and for a peer group to
estimate volatility based on the expected term of the options and used its own
historical data to estimate stock option forfeitures. The Company used the
five-year U.S. Treasury daily yield curve rates for the risk-free interest
rate.


55




The total
number of options and warrants issued by the Company from January 1, 2008 to
December 31, 2009 included the following:





·
            On January 29, 2008, as partial
      consideration for an amendment to our BTMUCC Credit Facility, the Company
      issued to BTMUCC a warrant to purchase 200,000 shares of common stock
      at an exercise price of $0.01 per share. BTMUCC may exercise the warrant
      in full or in part at any time from the date of issuance through January
      29, 2018. The Company assigned the warrants a value of $0.9 million and
      recorded this amount as part of debt
  discount.





·
            Also on January 29, 2008 and in
      connection with the acquisition of Great American Cookies, the Company
      issued warrants to certain Great American Cookies franchisees to purchase
      300,000 shares of the Company’s common stock. The warrants have an
      exercise price of $4.23 and were immediately vested upon issuance. The
      Company assigned the warrants a value of $1.0 million and included this
      amount in the purchase price of Great American
    Cookies.





·
            In connection with the August 15,
      2008 amendment to the BTMUCC Credit Facility (see Note 9 –Debt), the Company determined that
      it was probable that a warrant for 2.8 million shares of common stock
      related to the repayment of the Class B Franchise Note would be issued.
      The Company assigned the warrant a value of $1.0 million and recorded this
      amount as a discount on debt. The warrants have an exercise price of $0.01
      per share.





·
            On November 30, 2008, directors
      and executives of the Company voluntarily forfeited an aggregate of
      856,666 stock options (both vested and unvested) having exercise prices of
      greater than $6.90 per share. Management initiated this action to
      reduce future expenses (2009 and beyond) and to more efficiently
      utilize shares authorized under the Company’s equity compensation
      plan to meet the plans’ purposes to attract, motivate and retain key
      talent. The individuals who forfeited options both received and were
      promised nothing in return, such as future equity grants to replace the
      forfeited options.  The Company accelerated the remaining
      expense on these cancelled awards resulting in charges of $2.1 million,
      which is included in the total stock-based compensation expense of $5.3
      million for the year ended December 31,
  2008.




No stock
options were exercised in 2009. The total intrinsic value of stock options
exercised and cash received on exercises during 2008 each were less than $0.1
million. The total number of warrants outstanding as of December 31, 2009 was
1,183,333, all of which were exercisable.  There were 808,001 shares
available for issuance under the Plans as of December 31, 2009.




(13)
RELATED PARTY TRANSACTIONS





We
receive legal services from Kirkland & Ellis LLP, which we consider to be a
related party because a partner at that firm, George P. Stamas, is a member of
our Board of Directors. Expenses related to Kirkland & Ellis LLP were
approximately $0.4 million in 2009 and $2.0 million in 2008. Outstanding
payables due to Kirkland & Ellis LLP were $0.4 million and $1.0 million at
December 31, 2009 and 2008, respectively.





The
Athlete’s Foot Marketing Support Fund, LLC (the “TAF MSF”), is an entity that is
funded by the domestic franchisees of TAF to provide domestic marketing and
promotional services on behalf of the franchisees. We previously advanced funds
to the TAF MSF under a loan agreement. The terms of the loan agreement included
a borrowing rate of prime (on the date of the loan) plus 2%, and repayment by
the TAF MSF with no penalty, at any time. As of December 31, 2009 and 2008, we
had receivable balances of $1.2 million and $1.7 million from the TAF MSF,
respectively.  We recorded interest income earned from the fund in the
amount of $0.1 million in 2009 and $0.2 million in 2008. The Company also
established a matching contribution program with the TAF MSF whereby we agreed
to match certain franchisee contributions, not to exceed $0.1 million per
quarter over 12 quarters.  We recorded advertising expense of $1.1
million in 2008 representing the expected net present value of these future
contributions, which is included in our Franchising selling, general and
administrative expenses. We contributed approximately $0.4 million in 2009 and
$0 in 2008 in matching funds to the TAF MSF.  As of December 31, 2009
and 2008 the amount of the liability
recorded related to the matching contribution program with to the TAF MSF
was $0.7 million and $1.1 million, respectively.





FTI
Consulting, Inc. (“FTI”) assists us with investor relations. In 2008, FTI also
assisted us with crisis management and our efforts to restructure our credit
facility. Mr. Dunn, who was a member of our Board of Directors through his
resignation on September 25, 2008, serves as a director of FTI and/or as its
President and Chief Executive Officer. For the years ended December 31, 2009 and
2008, expenses related to FTI were approximately $0.1 million and $0.6 million,
respectively. As of December 31, 2009 and 2008, the Company had outstanding
payables due to FTI of approximately $0 and $0.1 million,
respectively.





Designer
License Holdings Company, LLC (“DLHC”) is a licensee of the Bill Blass brand,
which we owned until December 24, 2008. The owner of DLHC also is an owner of
Designer Equity Holding Company, LLC (“DEHC”) which owns 5% of BB Jeans, LLC,
formerly known as Bill Blass Jeans, LLC, a now inactive subsidiary of the
Company. As a licensee of Bill Blass, DLHC’s contract provided for payment of a
minimum annual royalty to the Company. For the year ended December 31, 2008, we
recorded royalty and other payments from DLHC of $1.4 million, which are
recorded in revenues from discontinued operations. In February 2008, we
repurchased one half of DEHC’s minority interest, equaling 5%, in BB Jeans for
$1.25 million. On October 24, 2008, DLHC’s contract was amended to lower the
minimum annual royalty and settle certain past due royalty payments.We reported no royalty
or other payments from DEHC in 2009.


56


(14)
COMMITMENTS AND CONTINGENCIES





(a) LEGAL
PROCEEDINGS




Securities Class
Action. A total of four putative securities class actions were filed in
May, June and July 2008 in the United States District Court for Southern
District of New York against NexCen Brands and certain of our former officers
and a current director for alleged violations of the federal securities laws. On
March 5, 2009, the court consolidated the actions under the caption, In re NexCen Brands, Inc. Securities
Litigation, No. 08-cv-04906, and appointed Vincent Granatelli as lead
plaintiff and Cohen Milstein Sellers & Toll PLLC. as lead counsel. On August
24, 2009, plaintiff filed an Amended Consolidated Complaint. Plaintiff alleges
that defendants violated federal securities laws by misleading investors in the
Company’s public filings and statements during a putative class period that
begins on March 13, 2007, when the Company announced the establishment of the
credit facility with BTMUCC, and ends on May 19, 2008, when the Company’s stock
fell in the wake of the Company’s disclosure of the previously undisclosed terms
of a January 2008 amendment to the credit facility, the substantial doubt about
the Company’s ability to continue as a going concern, the Company’s inability to
timely file its periodic report and the expected restatement of its Annual
Report on Form 10-K for the year ended December 31, 2007, initially filed on
March 21, 2008. The amended complaint asserts claims under Section 10(b) of the
Exchange Act and SEC Rule 10b-5, and also asserts that the individual defendants
are liable as controlling persons under Section 20(a) of the Exchange
Act. Plaintiff seeks damages and attorneys’ fees and costs. On October 8,
2009, the Company filed a motion to dismiss the amended
complaint.  Plaintiff filed his opposition on December 14, 2009, and
the Company filed a reply on January 27, 2010. The court has scheduled a hearing
on the motion to dismiss for May 5, 2010.





Shareholder Derivative
Action. A federal shareholder derivative action premised on essentially
the same factual assertions as the federal securities actions also was filed in
June 2008 in the United States District Court for Southern District of New York
against the directors and former directors of NexCen. This action is captioned:
Soheila Rahbari v. David Oros,
Robert W. D’Loren, James T. Brady, Paul Caine, Jack B. Dunn IV, Edward J.
Mathias, Jack Rovner, George Stamas & Marvin Traub, No. 08-CV-5843
(filed on June 27, 2008). In this action, plaintiff alleges that NexCen’s Board
of Directors breached its fiduciary duties in a variety of ways, mismanaged and
abused its control of the Company, wasted corporate assets, and unjustly
enriched itself by engaging in insider sales with the benefit of material
non-public information that was not shared with shareholders. Plaintiff further
contends that she was not required to make a demand on the Board of Directors
prior to bringing suit because such a demand would have been futile, due to the
board members’ alleged lack of independence and incapability of exercising
disinterested judgment on behalf of the shareholders. Plaintiff seeks damages,
restitution, disgorgement of profits, attorneys’ fees and costs, and
miscellaneous other relief.   On November 18, 2008, the Court informed
the parties that the case would be stayed for 180 days and requested that they
file a status report thereafter so the Court might consider whether the stay
should be extended. Plaintiff thereafter indicated that she intended to file an
amended derivative complaint after the Company filed its amended Annual Report
on Form 10-K for the year ended December 31, 2007, including a restatement of
its 2007 financial results.  On June 2, 2009, the Court lifted the
stay and ordered the plaintiff to file her amended derivative complaint no later
than two weeks after the Company filed its restated 2007 financials. On August
25, 2009, plaintiff filed an amended complaint that includes additional
allegations based on the Company’s August 11, 2009 Form 10-K/A. However, the
amended complaint does not assert any new legal claims, and omits plaintiff’s
previously asserted claim for corporate waste. Defendants moved to dismiss the
amended complaint on October 8, 2009. Plaintiff filed her opposition on November
23, 2009, and the defendants filed their reply on December 8, 2009. The motion
to dismiss is pending.





California
Litigation. A direct action was filed in Superior Court of California,
Marin County against NexCen Brands and certain of our former officers by a
series of limited partnerships or investment funds. The case is captioned: Willow Creek Capital Partners, L.P.,
et al. v. NexCen Brands, Inc., Case No. CV084266 (Cal. Superior Ct.,
Marin Country) (filed on August 29, 2008). Predicated on similar factual
allegations as the federal securities actions, this lawsuit is brought under
California law and asserts both fraud and negligent misrepresentation claims.
Plaintiffs seek compensatory damages, punitive damages and costs.




The
California state court action was served on NexCen on September 2, 2008.
Plaintiffs in the California action served NexCen with discovery requests on
September 19, 2008. On October 17, 2008, NexCen filed two simultaneous but
separate motions in order to limit discovery. First, NexCen filed a motion in
the United States District Court for Southern District of New York to stay
discovery in the California actions pursuant to the Securities Litigation
Uniform Standards Act of 1998. Second, NexCen filed a motion in the California
court to dismiss the California complaint on the ground of forum non conveniens, or to
stay the action in its entirety, or in the alternative to stay discovery,
pending the outcome of the federal class action.




The
California state court held a hearing on NexCen’s motion on December 12, 2008.
At the hearing, the court issued a tentative ruling from the bench granting
defendants’ motion to stay. On December 26, 2008, the court entered a final
order staying the California action in its entirety pending resolution of the
class action securities litigation pending in the Southern District of New York.
Plaintiff filed a motion to lift the stay, which motion was denied on October 8,
2009.


57


SEC Investigation. We
voluntarily notified the Enforcement Division of the SEC of our May 19, 2008
disclosure. The SEC commenced an informal inquiry regarding the matters
disclosed, and the Company has been cooperating with the SEC and voluntarily
provided documents and testimony, as requested. On or about March 17, 2009, we
were notified that the SEC had commenced a formal investigation of the Company
as of October 2008. The Company is continuing to cooperate with the SEC in its
formal investigation.




Legacy Aether IPO
Litigation. The Company was among the hundreds of defendants named
in a series of securities class action lawsuits brought in 2001
against issuers and underwriters of technology stocks that had initial public
offerings during the late 1990’s. These cases were consolidated in the United
States District Court for the Southern District of New York under the caption,
In Re Initial Public Offerings
Litigation, Master File 21 MC 92 (SAS). As to NexCen, these actions
were filed on behalf of persons and entities that acquired the Company’s stock
after our initial public offering in October 20, 1999. Among other
things, the complaints claimed that prospectuses, dated October 20, 1999
and September 27, 2000 and issued by the Company in connection with the
public offerings of common stock, allegedly contained untrue statements of
material fact or omissions of material fact in violation of securities
laws. The complaint alleged that the prospectuses failed to disclose that
the offerings’ underwriters had solicited and received from certain of their
customers additional and excessive fees, commissions and benefits beyond those
listed in the arrangements, which were designed to maintain, distort and/or
inflate the market price of the Company’s common stock in the
aftermarket. The actions sought unspecified monetary damages and
rescission. NexCen reserved $0.5 million for the estimated exposure for this
matter.




In March
2009, the parties, including NexCen, reached a preliminary global settlement of
all 309 coordinated class actions cases under which defendants would pay a total
of $586 million (the “Settlement Amount”) to the settlement class in exchange
for plaintiffs releasing all claims against them. Under the proposed terms of
this settlement, NexCen’s portion of the Settlement Amount would be paid by our
insurance carrier. In October 2009, the district court issued a decision
granting final approval of the settlement. Because NexCen has no out-of-pocket
liability under the approved settlement, we no longer maintain the reserve
of $0.5 million. We recorded the reversal of this reserve in income from
discontinued operations in 2009. On October 23, 2009, certain objectors filed a
petition to the U.S. Court of Appeals for the Second Circuit to appeal the class
certification order on an interlocutory basis. Two other notices of appeal were
filed by nine other objectors.  Plaintiffs, underwriter defendants,
and the issuer defendants filed opposition papers.  The
appeals are pending.





Other.  NexCen
Brands and our subsidiaries are subject to other litigation in the ordinary
course of business, including contract, franchisee, trademark and
employment-related litigation. In the course of operating our franchise systems,
occasional disputes arise between the Company and our franchisees relating to a
broad range of subjects, including, without limitation, contentions regarding
grants, transfers or terminations of franchises, territorial disputes and
delinquent payments.




(b)  OPERATING
LEASES





We are
obligated under non-cancelable operating leases for office space that expire at
various dates through 2017 for our continuing and discontinued operations.
Future minimum lease payments under non-cancelable operating leases and related
sublease rent commitments as of December 31, 2009 are as follows (in
thousands):





For the Year Ending December
      31,2010
                                
                                
                                2011
                                
                                
                                2012
                                
                                
                                2013
                                
                                
                                2014
                                
                                
                                ThereafterGross
      lease commitments
                                
                                $
                                1,485
                                
                                
                                $
                                1,461
                                
                                
                                $
                                1,449
                                
                                
                                $
                                1,497
                                
                                
                                $
                                1,512
                                
                                
                                $
                                3,763Less
      sub-leases
                                
                                
                                (399
                                )
                                
                                
                                (408
                                )
                                
                                
                                (389
                                )
                                
                                
                                (412
                                )
                                
                                
                                (427
                                )
                                
                                
                                (1,431
                                )Lease
      commitments, net
                                
                                $
                                1,086
                                
                                
                                $
                                1,053
                                
                                
                                $
                                1,060
                                
                                
                                $
                                1,085
                                
                                
                                $
                                1,085
                                
                                
                                $
                                2,332





In
January 2010, we reached an agreement in principle to revise the lease on our
principal executive office in New York, New York to reduce the rent by
approximately $50,000 per month. Based on the revised lease terms, the above
future minimum lease payments under non-cancellable operating leases will be
reduced by approximately $0.6 million per year through 2017.





Rent
expense related to continuing operations under operating leases was
approximately $1.0 million and $0.9 million for the years ended
December 31, 2009 and 2008, respectively. We recognize rent expense on a
straight-line basis over the lease period based upon the aggregate lease
payments. We determine the lease period as the original lease term without
renewals, unless and until the exercise of lease renewal options is reasonably
assured, and also include any period provided by the landlord as a “free rent”
period. Aggregate lease payments include all rental payments specified in the
contract, including contractual rent increases.




The
sublease amounts shown above pertain to certain leases related to the Waverly
business and the MaggieMoo’s direct Lease Obligations. Notwithstanding the sale
of Waverly in October 2008, we remain obligated on the lease for the Waverly
showroom, but sublet the space to third parties through the lease expiration on
February 28, 2018. After the sale of the Bill Blass business in December 2008,
we also remained obligated on a lease for the Bill Blass showroom which expires
in January 2014. However, on June 11, 2009, we made a one-time payment of
approximately $0.2 million in order to assign the lease to a third
party.


58




Deferred
rent, which represent the value of rent concessions, rent escalations and tenant
improvements provided by the lessors, was $1.4 million at December 31, 2009 and
$1.5 million at December 31, 2008. We will record these amounts as rent expense
on a straight-line basis over the lives of the respective
leases.





(15)
DISCONTINUED OPERATIONS





In 2008,
we narrowed our business model to operate in a single business segment:
Franchising. Previously, we had owned and licensed two brands, Bill Blass
and Waverly, which constituted our Consumer Branded Products
business.





In May
2008, we discontinued all acquisition activities that we conducted through UCC
Capital, which also earned loan servicing revenue.




On
October 3, 2008, the Company and certain of our subsidiaries sold all of the
assets associated with the Waverly business (including the Gramercy and Village
brands) to Iconix Brand Group, Inc. for approximately $26 million in cash and
the assumption of certain liabilities. As a result of the sale of the
business, we recorded a loss of $1.5 million.





On
December 24, 2008, the Company and certain of its subsidiaries sold
substantially all of the assets associated with the Bill Blass licensing
business to Peacock International Holdings, LLC for $10 million in cash. As a
result of the sale of the business, we recorded a loss of approximately $9.1
million, net of deferred tax benefits of $4.2 million.





In 2009,
we recorded the reversal of a $0.5 million reserve related to the Legacy Aether
IPO Litigation settlement. See Note 14(a) – Legal Proceedings. We
reflected this amount as an offset to operating costs and expenses within income
from discontinued operations.





The table
below shows the discontinued operations for the year ended December 31, (in
thousands):


2009
                
                
                2008Revenues
                
                $
                –
                
                
                $
                13,905Operating
      expenses
                
                
                202
                
                
                
                (15,075
                )Impairment
      of intangible assets (1)
                
                
                –
                
                
                
                (104,396
                )Operating
      income (loss)
                
                
                202
                
                
                
                (105,566
                )Other
      income (expense), net
                
                
                76
                
                
                
                (3,909
                )Minority
      interest
                
                
                –
                
                
                
                2,117Income
      (loss) before income taxes
                
                
                278
                
                
                
                (107,358
                )Current
      income tax benefit (expense)
                
                
                233
                
                
                
                (352
                )Deferred
      tax benefit
                
                
                –
                
                
                
                16,117Net
      income (loss) from discontinued operations
                
                
                511
                
                
                
                (91,593
                )Loss
      on disposal of discontinued operations, net of income tax benefit of $0
      and $4,158, respectively
                
                
                –
                
                
                
                (10,614
                )Net
      income (loss) from discontinued operations
                
                $
                511
                
                
                $
                (102,207
                )





(1)
            Includes
      impairment of UCC Capital of $37.5 million (see Note 6 – Goodwill, Trademarks and Other
      Intangible Assets)and impairments relating to Consumer Brands
      of $66.9 million.


59


(16)
QUARTERLY UNAUDITED FINANCIAL INFORMATION (in thousands except share
data):





Statement of
Operations


Three Months EndedMarch
      31,
                  
                  
                  June
      30,
                  
                  
                  September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2009
                  
                  
                  2009
                  
                  
                  2009Revenues
                  
                  $
                  11,960
                  
                  
                  $
                  11,781
                  
                  
                  $
                  10,827
                  
                  
                  $
                  10,551Operating
      expenses
                  
                  
                  (10,154
                  )
                  
                  
                  (10,179
                  )
                  
                  
                  (9,139
                  )
                  
                  
                  (9,441
                  )Operating
      income
                  
                  
                  1,806
                  
                  
                  
                  1,602
                  
                  
                  
                  1,688
                  
                  
                  
                  1,110Non-operating
      expense
                  
                  
                  (2,464
                  )
                  
                  
                  (2,299
                  )
                  
                  
                  (2,577
                  )
                  
                  
                  (1,819
                  )Loss
      from continuing operations before income taxes
                  
                  
                  (658
                  )
                  
                  
                  (697
                  )
                  
                  
                  (889
                  )
                  
                  
                  (709
                  )Income
      tax expense
                  
                  
                  (74
                  )
                  
                  
                  (81
                  )
                  
                  
                  (102
                  )
                  
                  
                  (138
                  )Loss
      from continuing operations
                  
                  
                  (732
                  )
                  
                  
                  (778
                  )
                  
                  
                  (991
                  )
                  
                  
                  (847
                  )(Loss)
      income from discontinued operations, net of taxes
                  
                  
                  (133
                  )
                  
                  
                  362
                  
                  
                  
                  (22
                  )
                  
                  
                  304Net
      loss
                  
                  $
                  (865
                  )
                  
                  $
                  (416
                  )
                  
                  $
                  (1,013
                  )
                  
                  $
                  (543
                  )Loss
      from continuing operations per common share basic and
    diluted
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.02
                  )Income
      (loss) from discontinued operations per common share basic and
      diluted
                  
                  
                  (0.00
                  )
                  
                  
                  0.00
                  
                  
                  
                  (0.00
                  )
                  
                  
                  0.01Net
      loss per share - basic and diluted
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )Weighted
      average shares outstanding – basic and diluted
                  
                  
                  56,671
                  
                  
                  
                  56,952
                  
                  
                  
                  56,952
                  
                  
                  
                  56,952





Three Months EndedMarch
      31,
                  
                  
                  June
      30,
                  
                  
                  September
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2008Revenues
                  
                  $
                  10,225
                  
                  
                  $
                  11,924
                  
                  
                  $
                  12,164
                  
                  
                  $
                  12,643Operating
      expenses
                  
                  
                  (12,781
                  )
                  
                  
                  (125,295
                  )1
                  
                  
                  (41,079
                  )2
                  
                  
                  (15,018
                  )Operating
      loss
                  
                  
                  (2,556
                  )
                  
                  
                  (113,371
                  )
                  
                  
                  (28,915
                  )
                  
                  
                  (2,375
                  )Non-operating
      expense
                  
                  
                  (2,549
                  )
                  
                  
                  (3,470
                  )
                  
                  
                  (3,300
                  )
                  
                  
                  (3,030
                  )Loss
      from continuing operations before income taxes
                  
                  
                  (5,105
                  )
                  
                  
                  (116,841
                  )
                  
                  
                  (32,215
                  )
                  
                  
                  (5,405
                  )Income
      tax (expense) benefit
                  
                  
                  (1,267
                  )
                  
                  
                  4,019
                  
                  
                  
                  (72
                  )
                  
                  
                  3,314Loss
      from continuing operations
                  
                  
                  (6,372
                  )
                  
                  
                  (112,822
                  )
                  
                  
                  (32,287
                  )
                  
                  
                  (2,091
                  )Income
      (loss) from discontinued operations, net of taxes
                  
                  
                  1,067
                  
                  
                  
                  (83,027
                  )
                  
                  
                  (6,067
                  )
                  
                  
                  (14,180
                  )Net
      loss
                  
                  $
                  (5,305
                  )
                  
                  $
                  (195,849
                  )
                  
                  $
                  (38,354
                  )
                  
                  $
                  (16,271
                  )Loss
      from continuing operations per common share basic and
    diluted
                  
                  $
                  (0.11
                  )
                  
                  $
                  (1.99
                  )
                  
                  $
                  (0.57
                  )
                  
                  $
                  (0.04
                  )Income
      (loss) from discontinued operations per common share basic and
      diluted
                  
                  
                  0.02
                  
                  
                  
                  (1.47
                  )
                  
                  
                  (0.11
                  )
                  
                  
                  (0.25
                  )Net
      loss per share - basic and diluted
                  
                  $
                  (0.09
                  )
                  
                  $
                  (3.46
                  )
                  
                  $
                  (0.68
                  )
                  
                  $
                  (0.29
                  )Weighted
      average shares outstanding – basic and diluted
                  
                  
                  56,267
                  
                  
                  
                  56,621
                  
                  
                  
                  56,639
                  
                  
                  
                  56,671




(1)
            Includes
      impairment of intangible assets of
$109,733.


(2)
            Includes
      impairment of intangible assets of
$28,148.





(17)
ACQUISITION OF GREAT AMERICAN COOKIES





In
January 2008, we acquired substantially all of the assets of Great American
Cookie Company Franchising, LLC and Great American Manufacturing, LLC
(collectively, “Great American Cookies”) for the purchase price of approximately
$95.5 million, consisting of $89.0 million in cash and 1,099,290 shares of the
Company’s common stock (valued at $4.24 per share which was the closing price of
one share of the Company’s common stock on January 29, 2008). In addition,
pursuant to a settlement agreement with certain franchisees, the Company issued
300,000 warrants to purchase shares of the Company’s common stock valued at
$3.28 per warrant. The Company funded the $89.0 million cash portion of the
purchase price with $70.0 million borrowed pursuant to the January 2008
Amendment and $20.0 million of cash on hand. The Company allocated the purchase
price of the assets acquired and liabilities assumed at the estimated fair
values at the acquisition date.


60


The final
purchase price allocation is as follows (in thousands):





Purchase price:Cash
      payments
                          
                          $
                          89,028Stock
      consideration
                          
                          
                          5,690Direct
      acquisition costs
                          
                          
                          769Total
      purchase price
                          
                          $
                          95,487Allocation of purchase
    price:Trademarks
                          
                          $
                          43,500Goodwill
                          
                          
                          1,719Franchise
      agreements
                          
                          
                          780Supply/Customer
      Relationship
                          
                          
                          45,000Assets
      acquired
                          
                          
                          5,013Total
      assets acquired
                          
                          
                          96,012Total
      liabilities assumed
                          
                          
                          (525
                          )Net
      assets acquired
                          
                          $
                          95,487




See Note
6 – Goodwill, Trademarks and
Other Intangible Assets for impairment charges recorded in 2008 relating
to the above noted intangible assets.




(18)
ACQUISITIONS RELATED TO BILL BLASS




In
February 2008, the Company repurchased one half of DEHC’s minority interest,
equaling 5%, in BB Jeans, LLC (formerly known as Bill Blass Jeans, LLC) for
$1.25 million. We priced this interest using the same valuation as when DEHC
purchased its initial 10% interest in BB Jeans, LLC in February
2007.





In order
to have greater control of the Bill Blass brand and conduct a more comprehensive
sales process, on July 11, 2008, the Company acquired all of the membership
interests of the limited liability company Bill Blass, Ltd. LLC, which owned and
operated the Bill Blass couture business pursuant to a royalty-free license from
the Company (“Bill Blass Couture”). The purchase price paid at closing was
comprised of nominal consideration and the Company’s assumption of a nominal
amount of net liabilities, excluding amounts owed by Bill Blass Couture to the
Company. Starting in January 2008, the Company made loans, advances and
investments of approximately $2.2 million to Bill Blass Couture. Following the
sale of the Bill Blass licensing business, on December 31, 2008, Bill Blass
Couture (which remained an indirect subsidiary of the Company) filed for
liquidation under Chapter 7 of the United States Bankruptcy Code. The Company
did not recover any of the $2.2 million of loans, advances or investments to
Bill Blass Couture.





(19)
PRO FORMA INFORMATION RELATED TO GREAT AMERICAN COOKIES ACQUISITION
(Unaudited)




We have
prepared the following unaudited supplemental pro forma consolidated summary
of operating data (the "As Adjusted” amounts) for 2008 by adjusting
the historical data as set forth in the accompanying consolidated statements of
operations for the year ended December 31, 2008 to give effect to the 2008
acquisition of Great American Cookies as if it had occurred on January 1, 2008
(in thousands except share data):


2008As Reported
                  
                  
                  As AdjustedRevenues
                  
                  $
                  46,956
                  
                  
                  $
                  49,051Operating
      loss
                  
                  $
                  (147,217
                  )
                  
                  $
                  (146,366
                  )Net
      loss
                  
                  $
                  (255,779
                  )
                  
                  $
                  (255,504
                  )Basic
      and diluted loss per share
                  
                  $
                  (4.52
                  )
                  
                  $
                  (4.52
                  )
  We have
provided this unaudited pro forma information for informational purposes only
and do not purport it to be indicative of the results of operations that would
have occurred if the acquisition had been completed on the date set forth above,
nor is it necessarily indicative of future operating results.  The “As
Reported” and “As Adjusted” amounts for 2008 include (1) impairment charges of
$137.9 million (2) losses from discontinued operations of $102.2 million (3)
special investigation expenses of $3.9 million (4) restructuring charges of $1.1
million and (5) financing charges of $1.8
million.





61


(20)
SEGMENT REPORTING




The
Company operates in one segment: Franchising. Our Consolidated Financial
Statements present the results of our franchising business as continuing
operations for each of the years in the two-year period ended December 31, 2009.
We present the results of the Consumer Branded Products business that we sold in
2008 and the UCC Capital business that we discontinued in 2008 as discontinued
operations.


We earn
most of our revenue from franchisees and licensees operating in the United
States. International revenues were $5.4 million or 11.9% of total revenues in
2009 and $3.6 million or 7.7% of total revenues in 2008.




(21)
SUBSEQUENT EVENTS




On
January 14, 2010, February 10, 2010, and March 12, 2010, respectively, BTMUCC
and the Company amended the BTMUCC Credit Facility.  For additional
information, see Note 9 – Debt.





In
January 2010, we reached an agreement in principle to revise the lease on our
principal executive office in New York, New York.  For additional
information, see Note 14(b) –Operating Leases.





On March
4, 2010, we resolved a pending litigation with the former owners of MaggieMoo’s.
Pursuant to the terms of the acquisition, the former owners were to receive
additional consideration of $0.8 million pursuant to an earn-out provision which
was payable on March 31, 2008.  NexCen had not paid the earn-out due
to on-going disputes between the parties regarding certain indemnification
claims with which NexCen sought to offset the earn-out. The parties reached a
settlement whereby NexCen agreed to pay a total amount of $0.4 million to
the former owners of MaggieMoo’s with $0.2 million due on March 5, 2010 and
$37,500 payable in five quarterly payments beginning on June 30, 2010 and ending
on June 30, 2011. In the event we default on any of our payments, we will be
obligated to pay a total amount of $0.5 million less any payments made under the
terms of the settlement agreement. As a result of the settlement agreement, we
recorded $0.2 million as other income in 2009 which represents the net
difference between the settlement amount and the earn-out amount as offset by
$0.2 million of indemnity claims.


62


ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




None.




ITEM
9A(T). CONTROLS AND PROCEDURES




(a)
Evaluation of Disclosure Controls and Procedures




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
our disclosure controls and procedures, as such terms are defined in Rule
13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”), as of December 31, 2009. Disclosure controls and
procedures refer to controls and procedures designed to ensure that information
required to be disclosed in reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure, and that such information is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.





Based on
their evaluation, the Chief Executive Officer and the Chief Financial Officer of
the Company have concluded that the Company’s disclosure controls and procedures
were effective as of December 31, 2009.




(b)
Management’s Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) and Rule
15d-15(f) under the Exchange Act). Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of our
financial reporting for external purposes in accordance with GAAP. Because of
its inherent limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected. Also, projections of any evaluation
of effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes of conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
  Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “COSO Framework”). Based on the evaluation under the
COSO Framework, our management concluded that our internal control over
financial reporting was effective as of December 31,
2009.





This
Report does not include an attestation report of the Company’s independent
public accounting firm, KPMG LLP, regarding the Company’s internal control over
financial reporting.  Management’s report was not subject to
attestation by KPMG LLP pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this Report.




(c)
Changes in Internal Control Over Financial Reporting





Since the
filing with the SEC on November 16, 2009 of our Quarterly Report
on  Form 10-Q for the period ended September 30, 2009, we have fully
remediated all material weaknesses over our financial reporting as of December
31, 2009. By the end of 2009, we consolidated all accounting functions at NFM,
our principal operating facility in Norcross, Georgia. We supplemented our NFM
accounting staff with additional accounting personnel having the appropriate
level of technical expertise in GAAP and public reporting in order to transition
all corporate accounting functions previously conducted in our New York
headquarters to our NFM offices.


63


ITEM
9B. OTHER INFORMATION





The
Company’s Annual Meeting of Stockholders (the “Annual Meeting”) was held on
December 1, 2009.  At the Annual Meeting, the stockholders acted upon
the following matters:





1.
            The
      stockholders elected five directors to hold office until the 2010 Annual
      Meeting of Stockholders or until their successors are elected and
      qualified.  A separate tabulation with respect to each nominee
      is as follows.





Nominees
                    
                    For
                    
                    
                    Against
                    
                    
                    AbstainDavid
      S. Oros
                    
                    
                    29,129,002
                    
                    
                    
                    8,685,097
                    
                    
                    
                    408,141James
      T. Brady
                    
                    
                    26,513,382
                    
                    
                    
                    11,300,226
                    
                    
                    
                    408,632Paul
      Caine
                    
                    
                    26,557,428
                    
                    
                    
                    11,252,357
                    
                    
                    
                    412,455Edward
      J. Mathias
                    
                    
                    26,547,790
                    
                    
                    
                    11,264,495
                    
                    
                    
                    409,955George
      P. Stamas
                    
                    
                    26,573,753
                    
                    
                    
                    11,234,558
                    
                    
                    
                    413,929





2.
            The
      stockholders ratified the appointment of KPMG LLP as NexCen’s independent
      registered public accounting firm for the fiscal year ending December 31,
      2009 as follows:





For
                                                    
                                                    Against
                                                    
                                                    
                                                    Abstain27,043,210
                                                    
                                                    
                                                    11,064,308
                                                    
                                                    
                                                    
                                                    114,722


64


PART
III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Item 10
is omitted by the Company in accordance with General Instruction G to Form
10-K.  The Company will disclose the information required under this
item either by (a) incorporating the information by reference from the Company’s
definitive proxy statement or (b) filing an amendment to this Form 10-K which
contains the required information no later than 120 days after the end of the
Company’s fiscal year.





ITEM
11.  EXECUTIVE COMPENSATION





Item 11
is omitted by the Company in accordance with General Instruction G to Form
10-K.  The Company will disclose the information required under this
item either by (a) incorporating the information by reference from the Company’s
definitive proxy statement or (b) filing an amendment to this Form 10-K which
contains the required information no later than 120 days after the end of the
Company’s fiscal year.





ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS





Item 12
is omitted by the Company in accordance with General Instruction G to Form
10-K.  The Company will disclose the information required under this
item either by (a) incorporating the information by reference from the Company’s
definitive proxy statement or (b) filing an amendment to this Form 10-K which
contains the required information no later than 120 days after the end of the
Company’s fiscal year.





ITEM
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Item 13
is omitted by the Company in accordance with General Instruction G to Form
10-K.  The Company will disclose the information required under this
item either by (a) incorporating the information by reference from the Company’s
definitive proxy statement or (b) filing an amendment to this Form 10-K which
contains the required information no later than 120 days after the end of the
Company’s fiscal year.





ITEM
14.  PRINCIPAL ACCOUNTING FEES AND SERVICES





Item 14
is omitted by the Company in accordance with General Instruction G to Form
10-K.  The Company will disclose the information required under this
item either by (a) incorporating the information by reference from the Company’s
definitive proxy statement or (b) filing an amendment to this Form 10-K which
contains the required information no later than 120 days after the end of the
Company’s fiscal year.


65


PART
IV





ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





FINANCIAL
STATEMENTS AND SCHEDULES





The
following financial statements required by this item are included in this Report
beginning on page 32.





Report
      of Independent Registered Public Accounting Firm
                32Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                33Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      2008
                34Consolidated
      Statements of Stockholders’ Equity for the years ended December 31,
      2009 and 2008
                35Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008
                36Notes
      to Consolidated Financial Statements
                37





All other
schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or the notes
thereto.





EXHIBITS





The
following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the SEC.





*2.1
              
              Agreement
      and Plan of Merger dated June 5, 2006, by and among UCC Capital Corp., UCC
      Consulting Corp., UCC Servicing, LLC, Aether Holdings, Inc., AHINV
      Acquisition Corp., the holders of UCC Shares identified therein and Robert
      W. D’Loren, as the Security holders’
      Representative.  (Designated as Exhibit 2.1 to the Form 8−K
      filed on June 7, 2006)*2.2
              
              Equity
      Interest and Asset Purchase Agreement dated August 21, 2006, by and among
      Aether Holdings, Inc., NexCen Franchise Brands, Inc., NexCen Franchise
      Management, Inc., Athlete’s Foot Marketing Associates, LLC, Athlete’s Foot
      Brands, LLC, Robert J. Corliss, Donald Camacho, Timothy Brannon and Martin
      Amschler.  (Designated as Exhibit 2.1 to the Form 8−K filed on
      August 22, 2006)*2.3
              
              Stock
      Purchase Agreement dated December 19, 2006, by and among NexCen Brands,
      Inc., Blass Acquisition Corp., Haresh T. Tharani, Mahesh T. Tharani and
      Michael Groveman, Bill Blass Holding Co., Inc., Bill Blass International
      LLC and Bill Blass Licensing Co., Inc.  (Designated as Exhibit
      2.1 to the Form 8−K filed on December 21, 2006)*2.4
              
              Agreement
      and Plan of Merger dated February 14, 2007, by and among NexCen Brands,
      Inc., MM Acquisition Sub, LLC, MaggieMoo’s International, LLC, Stuart
      Olsten, Jonathan Jameson, and the Securityholders’
      Representative.  (Designated as Exhibit 2.1 to the Form 8−K
      filed on February 21, 2007)*2.5
              
              Asset
      Purchase Agreement dated February 14, 2007, by and among NexCen Brands,
      Inc., NexCen Acquisition Corp., and Marble Slab Creamery,
      Inc.  (Designated as Exhibit 2.2 to the Form 8−K filed on
      February 21, 2007)*2.6
              
              Asset
      Purchase Agreement dated March 13, 2007, by and among NexCen Brands, Inc.,
      WV IP Holdings, LLC and F. Schumacher & Co.  (Designated as
      Exhibit 2.4 to the Form 10-K filed on March 16, 2007)*2.7
              
              Asset
      Purchase Agreement dated August 7, 2007, by and among NexCen Asset
      Acquisition, LLC, Pretzel Time Franchising, LLC, Pretzelmaker Franchising,
      LLC and Mrs. Fields Famous Brands, LLC dated August 7,
      2007.  (Designated as Exhibit 2.1 to the Form 8-K filed on
      August 9, 2007)*2.8
              
              Asset
      Purchase Agreement dated January 29, 2008, by and among NexCen Brands,
      Inc., NexCen Asset Acquisition, LLC, Great American Cookie Company
      Franchising, LLC, Great American Manufacturing, LLC and Mrs. Fields Famous
      Brands, LLC.  (Designated as Exhibit 2.1 to the Form 8−K filed
      on January 29, 2008)*2.9
              
              Asset
      Purchase Agreement dated September 29, 2008, by and among NexCen Brands,
      Inc., NexCen Fixed Asset Company, LLC, NexCen Brand Management, Inc., WV
      IP Holdings, LLC, and Iconix Brand Group, Inc..  (Designated as
      Exhibit 2.1 to the Form 8−K filed on September 30,
2008)*2.10
              
              Asset
      Purchase Agreement dated December 24, 2008, by and among NexCen Brands,
      Inc., NexCen Fixed Asset Company, LLC, NexCen Brand Management, Inc., Bill
      Blass Holding Co., Inc., Bill Blass Licensing Co., Inc., Bill Blass Jeans,
      LLC, Bill Blass International, LLC and Peacock International Holdings,
      LLC.  (Designated as Exhibit 2.1 to the Form 8−K filed on
      December 29, 2008)*3.1
              
              Certificate
      of Incorporation of NexCen Brands, Inc.  (Designated as Exhibit
      3.1 to the Form 10-Q filed on August 5, 2005)*3.2
              
              Certificate
      of Amendment of Certificate of Incorporation of NexCen Brands,
      Inc.  (Designated as Exhibit 3.1 to the Form 8-K filed on
      November 1, 2006)*3.3
              
              Amended
      and Restated By-laws of NexCen Brands, Inc.  (Designated as
      Exhibit 3.1 to the Form 8-K filed on March 7, 2008)*4.1
              
              Form
      of Common Stock Certificate.  (Designated as Exhibit 4.3 to the
      Form S-8 filed on December 1, 2006)*4.2
              
              Registration
      Rights Agreement dated June 5, 2006, by and among Aether Holdings, Inc.
      and the stockholders listed on Exhibit A thereto.  (Designated
      as Exhibit 10.6 to the Form 8−K filed on June 7,
  2006)


66





*4.3
              
              Registration
      Rights Agreement dated November 7, 2006, by and among NexCen Brands, Inc.,
      Robert Corliss and Athlete’s Foot Marketing Associates,
      LLC.  (Designated as Exhibit 4.2 to the Form 8−K filed on
      November 14, 2006)*4.4
              
              Registration
      Rights Agreement dated February 15, 2007, by and among NexCen Brands,
      Inc., Haresh Tharani, Mahesh Tharani, Michael Groveman and Designer Equity
      Holding Company, LLC.  (Designated as Exhibit 4.2 to the Form
      8-K filed on February 21, 2007)*4.5
              
              Registration
      Rights Agreement dated February 28, 2007, by and among NexCen Brands, Inc.
      and the holders of the outstanding limited liability company interests of
      MaggieMoo’s International, LLC.  (Designated as Exhibit 4.1 to
      the Form 8-K filed on March 6, 2007)*4.6
              
              Registration
      Rights Agreement dated August 7, 2007, by and among NexCen Brands, Inc.,
      Pretzelmaker Franchising, LLC, and Pretzel Time Franchising,
      LLC.  (Designated as Exhibit 4.1 to the Form 8−K filed on August
      8, 2007)*4.7
              
              Registration
      Rights Agreement dated January 29, 2008, by and among NexCen Brands, Inc.,
      Great American Cookie Company Franchising, LLC and Great American
      Manufacturing, LLC.  (Designated as Exhibit 4.1 to the Form 8−K
      filed on January 29, 2008)*4.8
              
              Registration
      Rights Agreement dated January 29, 2008, by and between NexCen Brands,
      Inc. and BTMU Capital Corporation.  (Designated as Exhibit 4.4
      to the Form 8−K filed on January 29, 2008)*+4.9
              
              Stock
      Purchase Warrant dated June 5, 2006, issued to Robert
      D’Loren.  (Designated as Exhibit 10.2 to the Form 8−K filed on
      June 7, 2006)*4.10
              
              Stock
      Purchase Warrant dated June 5, 2006, issued to Jefferies & Company,
      Inc.  (Designated as Exhibit 10.3 to the Form 8−K filed on June
      7, 2006)*4.11
              
              Common
      Stock Warrant dated November 7, 2006, issued to Robert
      Corliss.  (Designated as Exhibit 4.1 to the Form 8−K filed on
      November 14, 2006)*4.12
              
              Common
      Stock Warrant dated February 15, 2007, issued to Designer Equity Holding
      Company, LLC.  (Designated as Exhibit 4.1 to the Form 8-K filed
      on February 21, 2007)*4.13
              
              Common
      Stock Warrant dated May 2, 2007, issued by NexCen Brands, Inc. to Ellery
      Homestyles, LLC.  (Designated as Exhibit 4.1 to the Form 8-K
      filed on May 8, 2007)*4.14
              
              Form
      of Common Stock Warrant issued by NexCen Brands, Inc. to certain
      Franchisees on January 29, 2008.  (Designated as Exhibit 4.2 to
      the Form 8−K filed on January 29, 2008)*4.15
              
              Common
      Stock Warrant dated January 29, 2008, issued to BTMU Capital
      Corporation.  (Designated as Exhibit 4.3 to the Form 8−K filed
      on January 29, 2008)*9.1
              
              Voting
      Agreement dated November 7, 2006, by and between NexCen Brands, Inc. and
      Robert Corliss.  (Designated as Exhibit 9.1 to the Form 8−K
      filed on November 14, 2006)*9.2
              
              Voting
      Agreement dated November 7, 2006, by and between NexCen Brands, Inc. and
      Athlete’s Foot Marketing Associates, LLC.  (Designated as
      Exhibit 9.2 to the Form 8−K filed on November 14, 2006)*9.3
              
              Voting
      Agreement dated February 15, 2007, by and between NexCen Brands, Inc. and
      Haresh Tharani, Mahesh Tharani, and Michael
      Groveman.  (Designated as Exhibit 9.1 to the Form 8-K filed on
      February 21, 2007)*9.4
              
              Voting
      Agreement dated February 28, 2007, by and among NexCen Brands, Inc.,
      Stuart Olsten and Jonathan Jameson.  (Designated as Exhibit 9.1
      to the Form 8-K filed on March 6, 2007)*9.5
              
              Voting
      Agreement dated August 7, 2007, by and among NexCen Brands, Inc.,
      Pretzelmaker Franchising, LLC, and Pretzel Time Franchising,
      LLC.  (Designated as Exhibit 9.1 to the Form 8−K filed on August
      8, 2007)*9.6
              
              Voting
      Agreement dated January 29, 2008, by and among NexCen Brands, Inc. and
      Great American Cookie Company Franchising, LLC and Great American
      Manufacturing, LLC.  (Designated as Exhibit 9.1 to the Form 8−K
      filed on January 29, 2008)*+10.1
              
              2006
      Management Bonus Plan.  (Designated as Exhibit 10.4 to the Form
      8−K filed on June 7, 2006)*+10.2
              
              2006
      Long-Term Equity Incentive Plan.  (Designated as Exhibit 10.1 to
      the Form 8−K filed on November 1, 2006)*+10.3
              
              Form
      of 2006 Long-Term Equity Incentive Plan Director Stock Option Award
      Agreement.  (Designated as Exhibit 10.15 to the Form 10-K
      filed on March 16, 2007)*+10.4
              
              Form
      of 2006 Long-Term Equity Incentive Plan Employee/Management Stock Option
      Award Agreement.  (Designated as Exhibit 10.16 to the Form
      10-K filed on March 16, 2007)*+10.5
              
              Separation
      Agreement dated August 15, 2008 by and between NexCen Brands, Inc. and
      Robert W. D’Loren.  (Designated as Exhibit 10.1 to the Form 8-K
      filed on August 19, 2008)*+10.6
              
              Separation
      Agreement dated April 28, 2008, by and between NexCen Brands, Inc. and
      David Meister. (Designated as Exhibit 10.9 to the Form 10-K/A filed on
      August 11, 2009)*+10.7
              
              Separation
      and General Release Agreement dated August 14, 2008, by and between NexCen
      Brands, Inc. and James Haran.  (Designated as Exhibit 10.4 to
      the Form 8-K filed on August 19, 2008)*+10.8
              
              Separation
      Agreement and Release of Claims dated June 26, 2008, by and between NexCen
      Brands, Inc. and Charles A. Zona.  (Designated as Exhibit 10.1
      to the Form 8-K filed on June 27, 2008)*+10.9
              
              Employment
      Agreement dated August 29, 2007, by and between NexCen Brands, Inc. and
      Sue Nam.  (Designated as Exhibit 10.1 to the Form 10-Q filed on
      November 9, 2007)


67





+10.10
              
              Amendment
      No. 1 to Employment Agreement dated July 15, 2008, by and between NexCen
      Brands, Inc. and Sue Nam. (Designated as Exhibit 10.15 to the Form 10-K
      filed on October 6, 2009)+10.11
              
              Amendment
      No. 2 to Employment Agreement dated September 26, 2008, by and between
      NexCen Brands, Inc. and Sue Nam. (Designated as Exhibit 10.16 to the Form
      10-K filed on October 6, 2009)*+10.12
              
              Employment
      Agreement dated March 19, 2008, by and between NexCen Brands, Inc. and
      Kenneth J. Hall.  (Designated as Exhibit 10.2 to the Form 8-K
      filed on August 19, 2008)*+10.13
              
              Amendment
      No. 1 to Employment Agreement dated August 15, 2008, by and between NexCen
      Brands, Inc. and Kenneth J. Hall.  (Designated as Exhibit 10.3
      to the Form 8-K filed on August 19, 2008)*+10.14
              
              Employment
      Agreement dated  November 12, 2008, by and between NexCen
      Brands, Inc., NexCen Franchise Management, Inc. and Mark
      Stanko.  (Designated as Exhibit 10.1 to the Form 8-K filed on
      November 12, 2008)+10.15
              
              Amended
      and Restated Employment Agreement effective as of June 30, 2009 by and
      between NexCen Brands, Inc. and Chris Dull. (Designated as Exhibit 10.22
      to the Form 10-K filed on October 6, 2009)*10.16
              
              Amended
      and Restated Security Agreement, by and among NexCen Holding Corp., the
      Subsidiary Borrowers parties thereto and BTMU Capital Corporation, dated
      August 15, 2008.  (Designated as Exhibit 10.1 to the Form 8-K
      filed on August 21, 2008)*10.17
              
              First
      Amendment to Amended and Restated Security Agreement by and among NexCen
      Brands, Inc., NexCen Holding Corp., the Subsidiary Borrowers parties
      thereto and BTMU Capital Corporation dated September 11,
      2008.  (Designated as Exhibit 10.16 to the Form 10-K/A filed on
      August 11, 2009)*10.18
              
              Second
      Amendment to Amended and Restated Security Agreement by and among NexCen
      Brands, Inc., NexCen Holding Corp., the Subsidiary Borrowers parties
      thereto and BTMU Capital Corporation dated December 24,
      2008.  (Designated as Exhibit 10.1 to the Form 8-K filed on
      December 29, 2008)*10.19
              
              Amended
      and Restated Note Funding Agreement, by and among NexCen Holding
      Corporation, the Subsidiary Borrowers Parties thereto, NexCen Brands, Inc.
      and BTMU Capital Corporation, dated August 15,
      2008.  (Designated as Exhibit 10.2 to the Form 8-K filed on
      August 21, 2008)*10.20
              
              Amended
      and Restated Franchise Management Agreement, by and between NexCen
      Franchise Management, Inc. and Athlete’s Foot Brands, LLC, dated August
      15, 2008.  (Designated as Exhibit 10.3 to the Form 8-K filed on
      August 21, 2008)*10.21
              
              Second
      Amended and Restated Brand Management Agreement, by and among NexCen Brand
      Management, Inc., NexCen Holding Corporation, Bill Blass Jeans, LLC and
      Bill Blass International, LLC, dated August 15,
      2008.  (Designated as Exhibit 10.4 to the Form 8-K filed on
      August 21, 2008)*10.22
              
              Second
      Amended and Restated Brand Management Agreement, by and between NexCen
      Brand Management, Inc. and WV IP Holdings, LLC, dated August 15, 2008.
      (Designated as Exhibit 10.5 to the Form 8-K filed on August 21,
      2008)*10.23
              
              Second
      Amended and Restated Franchise Management Agreement, by and among NexCen
      Franchise Management, Inc., PT Franchise Brands, LLC and PT Franchising,
      LLC, dated August 15, 2008.  (Designated as Exhibit 10.6 to the
      Form 8-K filed on August 21, 2008)*10.24
              
              Second
      Amended and Restated Franchise Management Agreement, by and among NexCen
      Franchise Management, Inc., PM Franchise Brands, LLC and PM Franchising,
      LLC, dated August 15, 2008.  (Designated as Exhibit 10.7 to the Form
      8-K filed on August 21, 2008)*10.25
              
              Amended
      and Restated Franchise Management Agreement, by and among NexCen Franchise
      Management, Inc., Marble Slab Franchise Brands, LLC and Marble Slab
      Franchising, LLC, dated August 15, 2008.  (Designated as Exhibit
      10.8 to the Form 8-K filed on August 21, 2008)*10.26
              
              Amended
      and Restated Franchise Management Agreement, by and among NexCen Franchise
      Management, Inc., MaggieMoo’s Franchise Brands, LLC and MaggieMoo’s
      Franchising, LLC, dated August 15, 2008.  (Designated as Exhibit
      10.9 to the Form 8-K filed on August 21, 2008)*10.27
              
              Amended
      and Restated Franchise Management Agreement, by and among NexCen Franchise
      Management, Inc. GAC Franchise Brands, LLC and GAC Franchising, LLC, dated
      August 15, 2008.  (Designated as Exhibit 10.10 to the Form 8-K
      filed on August 21, 2008)*10.28
              
              Amended
      and Restated Supply Management Agreement, by and between NB Supply
      Management Corp. and GAC Supply, LLC, dated August 15,
      2008.  (Designated as Exhibit 10.11 to the Form 8-K filed on
      August 21, 2008)*10.29
              
              Amended
      and Restated Supply Management Agreement, by and between NB Supply
      Management Corp. and GAC Manufacturing, LLC, dated August 15,
      2008.  (Designated as Exhibit 10.12 to the Form 8-K filed on
      August 21, 2008)*10.30
              
              Omnibus
      Amendment dated January 27, 2009 by and among NexCen Brands, Inc., NexCen
      Holding Corporation, the Subsidiary Borrowers parties thereto, the
      Managers parties thereto, and BTMU Capital
      Corporation.  (Designated as Exhibit 10.1 to the Form 8-K filed
      on January 29, 2009)*10.31
              
              Waiver
      and Omnibus Amendment dated July 15, 2009 by and among NexCen Brands,
      Inc., NexCen Holding Corporation, the Subsidiary Borrowers parties
      thereto, the Managers parties thereto, and BTMU Capital
      Corporation.  (Designated as Exhibit 10.1 to the Form 8-K filed
      on July 20, 2009)*10.32
              
              Omnibus
      Amendment dated August 6, 2009 by and among NexCen Brands, Inc., NexCen
      Holding Corporation, the Subsidiary Borrowers parties thereto, the
      Managers parties thereto, and BTMU Capital
      Corporation.  (Designated as Exhibit 10.3 to the Form 8-K filed
      on August 6, 2009)


68





*10.33
                  
                  Australia
      License Agreement dated August 6, 2009, by and among TAF Australia, LLC,
      The Athlete’s Foot Australia Pty Ltd. and RCG Corporation Ltd. (Designated
      as Exhibit 10.1 to the Form 8-K filed on August 6,
2009)*10.34
                  
                  New
      Zealand License Agreement dated August 6, 2009, by and among TAF
      Australia, LLC, The Athlete’s Foot Australia Pty Ltd. and RCG Corporation
      Ltd. (Designated as Exhibit 10.2 to the Form 8-K filed on August 6,
      2009)*10.35
                  
                  Settlement
      and Release Agreement dated January 29, 2008 by and among NexCen Brands,
      Inc., Great American Cookie Company Franchising, LLC, Mrs. Fields Famous
      Brands, LLC, Mrs. Fields Original Cookies, Inc. and certain Franchisees.
      (Designated as Exhibit 10.1 to the Form 8−K filed on January 29,
      2008)*+10.36
                  
                  Offer
      Letter dated September 14, 2009 by and between NexCen Brands, Inc. and
      Brian Lane (Designated as Exhibit 10.1 to the Form 8-K filed on October 8,
      2009)*+10.37
                  
                  Amendment
      No. 1 to Employment Agreement by and between NexCen Brands, Inc. and Mark
      Stanko, dated December 14, 2009 (Designated as Exhibit 10.1 to the Form
      8-K filed on December 18, 2009)*+10.38
                  
                  Amendment
      No. 3  to Employment Agreement by and between NexCen Brands,
      Inc. and Sue Nam, dated December 15, 2009 (Designated as Exhibit 10.2 to
      the Form 8-K filed on December 18, 2009)*10.39
                  
                  Waiver
      and Sixth Amendment dated January 14, 2010, by and among NexCen Brands,
      Inc., NexCen Holding Corporation, the Subsidiary Borrowers parties
      thereto, and BTMU Capital Corporation (Designated as Exhibit 10.1 to the
      Form 8-K filed on January 15, 2010)*10.40
                  
                  Waiver
      and Seventh Amendment dated February 10, 2010, by and among NexCen Brands,
      Inc., NexCen Holding Corporation, the Subsidiary Borrowers parties
      thereto, and BTMU Capital Corporation (Designated as Exhibit 10.1 to the
      Form 8-K filed on February 12, 2010)*10.41
                  
                  Waiver
      and Eighth Amendment dated March 12, 2010, by and among NexCen Brands,
      Inc., NexCen Holding Corporation, the Subsidiary Borrowers parties
      thereto, and BTMU Capital Corporation (Designated as Exhibit 10.1 to the
      Form 8-K filed on March 17, 2010)21.1
                  
                  Subsidiaries
      of NexCen Brands, Inc.23.1
                  
                  Consent
      of KPMG LLP31.1
                  
                  Certification
      pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
      of the Sarbanes−Oxley Act of 2002 for Kenneth J. Hall.31.2
                  
                  Certification
      pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
      of the Sarbanes−Oxley Act of 2002 for Mark E. Stanko.**32.1
                  
                  Certifications
      pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
      Sarbanes−Oxley Act of 2002 for Kenneth J. Hall and Mark E. Stanko
      .








*  Incorporated
by reference.





**  These
certifications are being furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and are not being filed as part of this Annual Report
or as a separate disclosure document.





+  Management
contract or compensatory plan or arrangement.


69




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized on  March 26,
2010.





NEXCEN
      BRANDS, INC.By:
                /s/
      Kenneth J. HallKENNETH
      J. HALLChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the dates
indicated.





SIGNATURE
                    
                    TITLE
                    
                    DATE/s/ David S. Oros
                    
                    Chairman
      of the Board
                    
                    March
      26, 2010DAVID
      S. OROS/s/ Kenneth J. Hall
                    
                    Chief
      Executive Officer
                    
                    March
      26, 2010KENNETH
      J. HALL/s/ Mark E. Stanko
                    
                    Chief
      Financial Officer
                    
                    March
      26, 2010MARK
      E. STANKO/s/
      Brian  D. Lane
                    
                    Chief
      Accounting Officer
                    
                    March
      26, 2010BRIAN
      D. LANE/s/ James T. Brady
                    
                    Director
                    
                    March
      26, 2010JAMES
      T. BRADY/s/ Paul Caine
                    
                    Director
                    
                    March
      26, 2010PAUL
      CAINE/s/ Edward J. Mathias
                    
                    Director
                    
                    March
      26, 2010EDWARD
      J. MATHIAS/s/ George P. Stamas
                    
                    Director
                    
                    March
      26, 2010GEORGE
      P. STAMAS


70