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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

R   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to_________________

 

Commission File Number: 001-35220

 

Crumbs Bake Shop, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   27-1215274

(State or Other Jurisdiction of Incorporation or

Organization)

  (I.R.S. Employer Identification No.)
     
110 West 40th Street, Suite 2100, New York, NY   10018
(Address of Principal Executive Offices)   (Zip Code)
     
Registrant’s Telephone Number, Including Area Code   (212) 221-7105

 

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. R Yes           ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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). R Yes           ¨ No

 

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.

 

Large accelerated filer ¨   Accelerated filer ¨
     
Non-accelerated filer ¨   Smaller Reporting Company R

 

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

 

As of October 31, 2012, the registrant had 11,803,353 shares of Common Stock outstanding.

 

 
 

 

Crumbs Bake Shop, Inc.

TABLE OF CONTENTS

 

      Page
       
PART I ITEM 1. Financial Statements 4
       
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
       
  ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 19
       
  ITEM 4. Controls and Procedures 19
       
PART II ITEM 1A. Risk Factors 20
       
  ITEM 6. Exhibits 20
       
SIGNATURES 21
       
EXHIBIT INDEX 22

 

 
 

 

PART I

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements.” Statements that are not historical in nature, including those that include the words “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “target”, “aim”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, or the negative of those words and other comparable words, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which Crumbs operates, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions, including real estate market conditions; changes in Crumbs’ competitive position or competitive actions by other companies; Crumbs’ ability to maintain strong relationships with its customers; disruptions in Crumbs’ supply chain; Crumbs’ ability to retain key personnel; Crumbs’ ability to achieve and/or manage growth; Crumbs’ ability to successfully implement new products and strategies; Crumbs’ ability to comply with government regulations; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond Crumbs’ control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized or, if substantially realized, will have the expected consequences on Crumbs’ business or operations. These and other risks are discussed in detail in the periodic reports that Crumbs Bake Shop, Inc. files with the Securities and Exchange Commission (the “SEC”) (see Item 1A of Part II of this quarterly report for further information). Except as required by applicable laws, Crumbs Bake Shop, Inc. does not intend to publish updates or revisions of any forward-looking statements it makes to reflect new information, future events or otherwise. Readers should understand that it is not possible to predict or identify all risks and uncertainties to which Crumbs may be subject. Consequently, readers should not consider such disclosures to be a complete discussion of all potential risks or uncertainties.

 

Unless the context clearly suggests otherwise, references in this quarterly report to “CBS” refers to Crumbs Bake Shop, Inc.; references to “Holdings” refers to Crumbs Holdings LLC; and references to “Crumbs” refers collectively to Crumbs Bake Shop, Inc., Holdings, and their subsidiaries.

 

3
 

 

ITEM 1. FINANCIAL STATEMENTS

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2012   2011 
   (Unaudited)     
         
ASSETS          
           
Current assets          
Cash  $156,176   $5,940,982 
Trade receivables   359,592    405,519 
Inventories   611,828    503,008 
Prepaid rent   570,510    621,184 
Deferred financing costs   11,146    - 
Other current assets   376,302    196,975 
           
Total current assets   2,085,554    7,667,668 
           
Property and equipment, net   13,617,367    12,398,749 
           
Other assets          
Deferred tax asset   4,815,540    4,808,500 
Restricted certificates of deposit   673,000    673,000 
Intangible assets, net   383,972    397,039 
Deposits   283,178    318,024 
Other   339,847    104,906 
           
Total other assets   6,495,537    6,301,469 
           
   $22,198,458   $26,367,886 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities          
Accounts payable and accrued expenses  $1,809,644   $2,431,924 
Payroll liabilities   59,153    250,307 
Sales tax payable   118,642    69,063 
Gift cards and certificates outstanding   168,654    179,563 
           
Total current liabilities   2,156,093    2,930,857 
           
Long-term liabilities          
Deferred rent   3,657,231    3,030,182 
Payable to related parties pursuant to tax receivable agreement   2,386,750    2,386,750 
           
Total liabilities   8,200,074    8,347,789 
           
Commitments and contingencies          
           
Stockholders' equity          
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; 390,000 shares issued and outstanding at September 30, 2012 and December 31, 2011   39    39 
Common stock, $0.0001 par value; 100,000,000 shares authorized; 7,380,969 shares issued, 5,786,385 outstanding at September 30, 2012 and 7,100,469 shares issued, 5,505,885 outstanding at December 31, 2011   738    710 
Additional paid-in capital   30,546,434    30,264,456 
Accumulated deficit   (6,815,360)   (4,253,042)
Treasury stock, at cost   (15,913,948)   (15,913,948)
           
Total Crumbs Bake Shop, Inc. stockholders' equity   7,817,903    10,098,215 
           
Non-controlling interest   6,180,481    7,921,882 
           
Total stockholders' equity   13,998,384    18,020,097 
           
   $22,198,458   $26,367,886 

 

See accompanying notes to condensed consolidated financial statements.

 

4
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2012   2011   2012   2011 
                 
Net sales  $9,895,174   $8,876,352   $32,253,222   $28,889,120 
                     
Cost of sales   4,445,034    3,768,076    13,982,584    12,194,066 
                     
Gross profit   5,450,140    5,108,276    18,270,638    16,695,054 
                     
Operating expenses                    
Selling expenses   296,033    314,710    982,364    1,133,302 
Staff expenses   3,325,414    3,101,496    10,070,254    9,221,517 
Occupancy expenses   2,514,437    1,795,359    7,306,828    5,068,657 
General and administrative   772,159    658,797    2,401,923    1,669,674 
New store expenses   141,814    418,650    322,804    532,923 
Depreciation and amortization   476,342    362,277    1,391,355    1,037,476 
                     
    7,526,199    6,651,289    22,475,528    18,663,549 
                     
Loss from operations   (2,076,059)   (1,543,013)   (4,204,890)   (1,968,495)
                     
Other income (expense)                    
Interest and other income   1,470    61    19,343    334 
Loss on disposal of assets   -    -    (13,841)   - 
Abandoned projects   (66,823)   (6,184)   (111,371)   (19,628)
                     
    (65,353)   (6,123)   (105,869)   (19,294)
                     
Loss before income tax benefit (expense)   (2,141,412)   (1,549,136)   (4,310,759)   (1,987,789)
                     
Income tax benefit (expense)   7,040    (10,510)   7,040    (10,510)
                     
Net loss attributable to the controlling and non-controlling interests   (2,134,372)   (1,559,646)   (4,303,719)   (1,998,299)
                     
Less: Net loss attributable to non-controlling interests   859,298    646,629    1,741,401    828,495 
                     
Net loss attributable to stockholders  $(1,275,074)  $(913,017)  $(2,562,318)  $(1,169,804)
                     
Net loss per common share, basic and diluted  $(0.23)  $(0.17)  $(0.47)  $(0.21)
                     
Weighted average number of common shares outstanding, basic and diluted   5,505,885    5,505,885    5,505,885    5,567,802 

 

See accompanying notes to condensed consolidated financial statements.

 

5
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

For the Nine Months Ended September 30,  2012   2011 
         
Cash flows from operating activities          
Net loss attributable to the controlling and non-controlling interests  $(4,303,719)  $(1,998,299)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,391,355    1,037,476 
Deferred income tax benefit   (7,040)   - 
Loss on disposal of assets   13,841    - 
Abandoned projects   111,371    19,628 
Stock-based compensation   281,978    - 
Deferred rent   627,049    802,036 
Changes in operating assets and liabilities:          
Trade receivables   45,927    (61,028)
Inventories   (108,820)   (124,871)
Prepaid rent   50,674    (190,279)
Other current assets   (179,327)   (268,177)
Deposits   34,846    (10,340)
Accounts payable and accrued expenses   (923,762)   (1,331,575)
Payroll liabilities   (191,154)   249,724 
Sales tax payable   49,579    21,892 
Gift cards and certificates outstanding   (10,909)   4,423 
           
Net cash used in operating activities   (3,118,111)   (1,849,390)
           
Cash flows from investing activities          
Purchase of restricted certificate of deposit   -    (643,000)
Purchases of property and equipment   (2,310,148)   (3,019,203)
Purchases of intangible assets   (125,763)   (52,024)
Purchases of other assets   (230,812)   (71,065)
           
Net cash used in investing activities   (2,666,723)   (3,785,292)
           
Cash flows from financing activities          
Proceeds retained from reverse merger   -    13,697,319 
Proceeds from issuance of common stock under equity incentive plan   28    - 
Capital distributions   -    (89,324)
           
Net cash provided by financing activities   28    13,607,995 
           
Net increase (decrease) in cash   (5,784,806)   7,973,313 
           
Cash, beginning of year   5,940,982    655,022 
           
Cash, end of period  $156,176   $8,628,335 
           
Supplemental disclosure of non-cash investing and financing activities          
Net assets acquired in reverse merger  $-   $2,087,468 
           
Exchange of New Crumbs Class B Exchangeable Units for common stock of CBS  $-   $1,423,895 
           
Payables related to capital expenditures  $290,336   $- 
           
Private investment in public equity costs financed through accounts payable  $11,146   $- 

 

See accompanying notes to condensed consolidated financial statements.

 

6
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.Nature of business and summary of significant accounting policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated interim financial statements of Crumbs Bake Shop, Inc. (“CBS”), formerly known as 57th Street General Acquisition Corp. (“57th Street”), and Crumbs Holdings LLC and its wholly-owned subsidiaries (CBS and Crumbs Holdings LLC and its wholly-owned subsidiaries are collectively referred to herein as “Crumbs”) as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 have been prepared in conformity with the accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codifcation (“ASC”) Topic 270, “Interim Reporting,” and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and notes required for annual financial statements. In the opinion of management, such unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim financial information. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of results that may be expected for any future interim period or the year ending December 31, 2012. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in CBS’ Annual Report on Form 10-K for the year ended December 31, 2011. As used in these notes, the term “Holdings” refers to Crumbs Holdings LLC and, unless the context requires otherwise, its wholly-owned subsidiaries.

 

Reverse Merger

 

On January 9, 2011, CBS, 57th Street Merger Sub LLC, a Delaware limited liability company and wholly-owned subsidiary of 57th Street (“Merger Sub”), Holdings, a Delaware limited liability company, the members of Holdings immediately prior to the consummation of the Merger (individually, a “Member” or, collectively, the “Members”) and the representatives of the Members and Holdings, entered into a Business Combination Agreement, amended on each of February 18, 2011, March 17, 2011 and April 7, 2011 (the “Business Combination Agreement”), pursuant to which Merger Sub merged with and into Holdings with Holdings surviving the merger as a non-wholly owned subsidiary of CBS (the “Merger”). The entity surviving the Merger kept the Crumbs Holdings LLC name; however, references herein to the Members of Holdings refer only to the members of Crumbs Holdings LLC immediately prior to the consummation of the Merger and Julian R. Geiger, and therefore exclude the members of Merger Sub. The transactions contemplated by the consummation of the Merger and Business Combination Agreement are referred to herein collectively as the “Transaction.” Management has concluded that Holdings is the accounting acquirer based on its evaluation of the facts and circumstances of the acquisition.

 

Pursuant to the Business Combination Agreement, in February 2011, 57th Street commenced a tender offer, as amended from time to time, to ultimately purchase up to 1,803,607 shares of its issued and outstanding common stock for $9.98 per share, net to the seller in cash without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase, as supplemented by the Schedule TO, and the Third Amended and Restated Letter of Transmittal (which together, as amended or supplemented from time to time, constituted the “Offer”). The Offer expired at 5:00 p.m. Eastern time, on May 4, 2011. 57th Street promptly purchased all 1,594,584 shares of its common stock validly tendered and not withdrawn, for an aggregate purchase price of approximately $15,914,000.

 

Upon consummation of the Merger, the Members of Holdings received consideration in the form of newly issued securities and approximately $22,086,000 in cash. The securities consisted of (i) 4,541,394 New Crumbs Class B Exchangeable Units (“Class B Units”) issued by Holdings (the aggregate of which is exchangeable for 4,541,394 shares of CBS common stock, and 2,201,394 of which Class B Units have been exchanged for shares of CBS common stock (see Note 10)) and (ii) 454,139.4 shares of Series A Voting Preferred Stock (“Series A Preferred Stock”) issued by CBS (each such share entitling its holder the right to vote 10 votes per share in all matters for which the holders of common stock are entitled to vote, and 220,139.4 of which have been surrendered and cancelled by CBS upon the exchange of 2,201,394 Class B Units for the 2,201,394 shares of common stock (see Note 10)). In addition, Holdings, as the entity surviving the Merger, received, as a capital contribution from CBS, the sum of approximately $13,725,000 (not including refunds receivable after the closing of the Merger) after giving effect to the retention of approximately $53,000 by CBS for future public company expenses and the payment of approximately $149,000 for CBS’ then outstanding franchise taxes.

 

7
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.Nature of business and summary of significant accounting policies (continued)

 

Nature of Business

 

Crumbs engages in the business of selling a wide variety of cupcakes, cakes, pies, cookies and other baked goods as well as hot and cold beverages. Crumbs offers these products through its stores, e-commerce division, catering services and wholesale distribution business.

 

Principles of Consolidation

 

The accompanying condensed consolidated interim financial statements include the accounts of CBS and Holdings. Intercompany transactions and balances have been eliminated in consolidation.

 

Restricted Certificates of Deposit

 

As of September 30, 2012 and December 31, 2011, Crumbs had $673,000 of cash restricted from withdrawal and held by banks as certificates of deposit securing letters of credit (see Note 3). The letters of credit are required as security deposits for certain of Crumbs’ store operating leases.

 

Intangible Assets

 

Intangible assets related to branding costs and website design are amortized over their useful lives, estimated to be five years. Intangible assets related to Crumbs’ trademark costs, including initial registration, are considered to have indefinite useful lives and are evaluated annually for impairment.

 

Tax Receivable Agreement

 

Holdings has made an election under Section 754 of the Internal Revenue Code (the "Code"), which resulted in and may continue to result in an adjustment to the tax basis of the assets of Holdings at the time of an exchange of Class B Units. As a result of both the initial purchase of Class B Units from the Members in connection with the Merger and these subsequent exchanges, CBS became and will become entitled to a proportionate share of the existing tax basis of the assets of Holdings. In addition, the purchase of Class B Units and subsequent exchanges are expected to result in increases in the tax basis of the assets of Holdings that otherwise would not have been available. Both this proportionate share and these increases in tax basis may reduce the amount of tax that CBS would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

 

CBS entered into a tax receivable agreement with Holdings that will provide for the payment by CBS to the Members of up to 75% of the amount of the tax benefits, if any, that CBS is deemed to realize as a result of (i) the existing tax basis in the assets of Holdings on the date of the Merger, (ii) these increases in tax basis and (iii) certain other tax benefits related to Crumbs entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. These payment obligations are obligations of CBS and not of Holdings. On November 14, 2011, Julian Geiger became a party to the tax receivable agreement as part of the Geiger Employment Agreement (see Note 10). For purposes of the tax receivable agreement, the benefit deemed realized by CBS will be computed by comparing the actual income tax liability of Holdings (calculated with certain assumptions) to the amount of such taxes that CBS would have been required to pay had there been no increase to the tax basis of the assets of Holdings as a result of the purchase or exchanges, had there been no tax benefit from the tax basis in the intangible assets of Holdings on the date of the Merger and had CBS not entered into the tax receivable agreement. The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless CBS exercises its right to terminate the tax receivable agreement for an amount based on the agreed payments remaining to be made under the agreement or CBS breaches any of its material obligations under the tax receivable agreement, in which case all obligations will generally be accelerated and due as if CBS had exercised its right to terminate the agreement.

 

Fair Value of Financial Instruments

 

Crumbs’ financial instruments consist primarily of cash in banks, certificates of deposit and trade receivables. The carrying amounts for cash and cash equivalents, certificates of deposit and trade receivables approximate fair value due to the short term nature of the instruments.

 

8
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.Nature of business and summary of significant accounting policies (continued)

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

 

Restricted Stock

 

Compensation cost for restricted stock is measured using the market price of CBS’ common stock at the date the common stock is granted. The compensation cost is recognized over the period between the issue date and the date any restrictions lapse.

 

Recently Issued Accounting Standards

 

Crumbs does not believe that the adoption of any recently issued accounting standards will have a material impact on its current financial position and results of operations.

 

Reclassifications

 

Certain reclassifications have been made to amounts previously reported for 2011 to conform with the 2012 presentation. Such reclassifications have no effect on the previously reported net loss.

 

2.Inventories

 

Inventories are valued at the lower of cost or market, with cost being determined using the average cost method. At September 30, 2012 and December 31, 2011, inventories were comprised of the following:

 

   September 30, 2012   December 31, 2011 
Packaging inventory  $162,251   $186,688 
E-Commerce packaging inventory   136,715    165,629 
Beverage supply inventory   224,613    78,526 
Candy inventory   51,222    - 
Store supplies and merchandise inventory   37,027    72,165 
Total  $611,828   $503,008 

 

Packaging and e-commerce packaging inventories consists of labels, boxes, bags and gel packs for packaging and shipping baked goods. Beverage supply inventory consists of coffee, tea and flavored syrups, and candy inventory primarily consists of bulk candy sold by weight. Store supplies and merchandise inventory consists of paper goods, decorating materials, other miscellaneous supplies purchased in bulk and consumed in daily operations and logoed hats, t-shirts, bandanas and aprons used primarily as employee uniforms.

 

9
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

3.Letters of credit

 

In lieu of security deposits required pursuant to the terms of several operating leases, Holdings has chosen to obtain letters of credit issued by two financial institutions, when such substitution is allowed by the landlords. As of September 30, 2012 and December 31, 2011, issued and unused letters of credit totaled $637,425. In May 2011, Holdings entered into a loan agreement in connection with the letters of credit issued by one of the institutions in the form of a $575,000 revolving line of credit, with a variable rate based on the Wall Street Journal Prime Rate. Prior to entering into this agreement, the letters of credit were guaranteed by a Member of Holdings. Letters of credit amounting to $539,425 were reserved under this line of credit as of September 30, 2012 and December 31, 2011. The line of credit is secured by a certificate of deposit, and no amounts were outstanding on the line of credit at September 30, 2012 and December 31, 2011. Letters of credit in the amount of $98,000 issued by a second financial institution are also secured by certificates of deposit.

 

The certificates of deposit used to secure the letters of credit are recorded as restricted certificates of deposit in the balance sheet (see “Restricted Certificates of Deposit,” Note 1).

 

4.Income taxes

 

Crumbs files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various states. Generally, Crumbs is subject to income tax examinations by major taxing authorities since inception. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal and state tax laws. Crumbs does not expect that the total amount of unrecognized tax benefits, if any, will materially change over the next three months.

 

At the date of the Merger, Crumbs recorded a deferred tax asset of approximately $9,547,000 for estimated income tax effects of the increase in tax basis of the purchased interests and future projected payments under the tax receivable agreement. During the three months ended September 30, 2012 and the year ended December 31, 2011, an additional deferred tax asset of approximately $7,000 and $35,000, respectively, was recorded for estimated local income tax effects of Crumbs’ net loss for the year ended December 31, 2011. Crumbs had a net deferred tax asset of approximately $4,816,000 and $4,808,000, respectively, at September 30, 2012 and December 31, 2011, which can be utilized to offset future taxable income through 2026.

 

5.Intangible assets

 

At September 30, 2012, intangible assets were comprised of the following:

 

Intangibles subject to amortization:

 

       Accumulated     
   Cost   Amortization   Net 
Branding Costs  $403,459   $(316,058)  $87,401 
Website Design   266,696    (170,105)   96,591 
                
Total  $670,155   $(486,163)  $183,992 

 

Intangibles not subject to amortization:

 

   Cost       
Trademark costs, including initial registration  $199,980        
                
Total  $199,980      

 

10
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

5.Intangible assets (continued)

 

At December 31, 2011, intangible assets were comprised of the following:

 

Intangibles subject to amortization:

 

       Accumulated     
   Cost   Amortization   Net 
Branding Costs  $403,459   $(255,539)  $147,920 
Website Design   247,974    (132,346)   115,628 
                
Total  $651,433   $(387,885)  $263,548 

 

Intangibles not subject to amortization:

 

   Cost         
Trademark costs, including initial registration  $133,491           
                
Total  $133,491           

 

Amortization expense was approximately $32,000 and $98,000, respectively, for each of the three and nine months ended September 30, 2012 and was $33,000 and $98,000, respectively, for the three and nine months ended September 30, 2011.

 

Estimated amortization expense for the next five years, including the remainder of 2012, is:

 

2012  $33,000 
2013  $100,000 
2014  $28,000 
2015  $15,000 
2016  $4,000 

 

6.Purchase commitment

 

In July 2012, CBS entered into an agreement with Starbucks Corporation (“Starbucks”) to bring the full complement of Starbucks® brewed coffees, teas and espresso-based drinks to all of Crumbs’ retail stores, except the Newark Liberty Inernational Airport location (“the Starbucks Agreement”).  CBS agreed to purchase Starbucks coffee, Fontana sauces and syrups, and Tazo teas and paper products directly from Starbucks to satisfy all of its brewed coffee and espresso beverage requirements in its retail stores. Under the Starbucks Agreement, CBS has agreed to purchase a minimum amount of coffee products from this vendor through August 2015.  Although CBS has met the agreed purchase amounts since entering into the Starbucks Agreement (estimated at approximately $15,000 of product per week or $780,000 per year), failure to meet the minimum purchase agreements could result in termination of the Starbucks Agreement or adjustment to the coffee costs listed in the Starbucks Agreement. 

 

7.Related party

 

For the three and nine months ended September 30, 2011, Crumbs paid $300 and $4,800, respectively, in fees, unrelated to audit services, to an accounting firm of which an officer of Curmbs is a part owner. No similar payments have been made in 2012.

 

For the three and nine months ended September 30, 2012, Crumbs paid approximately $6,900 and $17,300, respectively, in rent to a landlord that is partially owned by an officer of Crumbs, compared to $5,200 and $15,200, respectively, for the three and nine months ended September 30, 2011.

 

11
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

8.Net loss per common share

 

Crumbs complies with accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share.” Basic net income (loss) per common share is computed by dividing net income (loss) attributable to stockholders by the weighted average number of CBS common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted net income (loss) per share is derived by dividing net income (loss) attributable to CBS common stockholders by the weighted average number of common shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents. There is no dilutive effect on the net income (loss) per share during loss periods. For the three and nine months ended September 30, 2012 and 2011, warrants to purchase 5,456,300 shares of common stock were excluded from the calculation of diluted income (loss) per share because their effect would have been anti-dilutive. In addition, for the three and nine months ended September 30, 2012, non-vested stock awards relating to 280,500 shares of common stock (see Note 9) were excluded from the calculation of diluted income (loss) per share because their effect would have been anti-dilutive.

 

9.Restricted stock

 

CBS maintains an equity incentive plan (the “Plan”) for Crumbs’ directors, officers and employees that provides for an aggregate of 1,038,295 shares of CBS’ common stock to be avabilable for awards, which may be in the form of incentive and nonqualified stock options, stock appreciation rights, restricted shares of common stock, restricted stock units, stock bonus awards, and performance compensation awards. At the Annual Meeting of Stockholders of CBS in June 2012, the stockholders approved an amendment to the Plan to increase the number of shares of common stock that may be issued thereunder by 700,000, from 338,295 to 1,038,295, which CBS registered on November 9, 2012. During the three and nine months ended September 30, 2012, CBS granted 10,000 and 227,000 shares, respectively, of its common stock as restricted stock awards to eligible employees and 0 and 56,000 shares, respectively, to members of the Board of Directors. There were no shares of common stock granted during the three and nine months ended September 30, 2011. During the three and nine months ended September 30, 2012, 1,000 and 2,500 shares of restricted stock awards, respectively, were forfeited before completion of applicable vesting provisions. The total fair market value of the stock awards outstanding is approximately $1,015,000 based on a weighted average grant date fair value of $3.62 per share. The shares are subject to cliff vesting schedules which vary between one and three years.

 

As of September 30, 2012, 757,795 shares were authorized for future grant under the Plan. Awards that expire or are canceled generally become available for issuance again under the Plan. CBS utilizes newly issued shares of common stock that have been reserved pursuant to the Plan to make restricted stock grants.

 

The following is a summary of restricted stock activity through September 30, 2012:

 

           Weighted   Average 
   Shares   Number of   Average   Remaining 
   Available for   Shares   Grant Date   Term 
   Grant   Outstanding   Fair Value   (in years) 
Balances as of December 31, 2011   -    -   $-    - 
Authorized   1,038,295    -   $-      
Granted   (283,000)   283,000   $3.62      
Forfeited   2,500    (2,500)  $3.75      
Vested   -    -   $-      
Balances as of September 30, 2012   757,795    280,500   $3.62    2.00 

 

12
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9.Restricted stock (continued)

 

Total stock-based compensation expense was approximately $119,000 and $282,000, respectively, for the three and nine months ended September 30, 2012 and $0 for both the three and nine months ended September 30, 2011. For the three and nine months ended September 30, 2012, stock-based compensation expense related to employees was $66,700 and $159,500, respectively, and was $0 for both the three and nine months ended September 30, 2011. For the three and nine months ended September 30, 2012, stock-based compensation expense related to board members was $52,500 and $122,500, respectively, and $0 for both the three and nine months ended September 30, 2011. Stock-based compensation expense related to employees is included in staff expenses in the condensed consolidated statements of operations, and stock-based compensation expense related to board members is included in general and administrative expenses in the condensed consolidated statements of operations.

 

Total stock-based compensation expense not yet recognized of approximately $734,000 as of September 30, 2012 has a weighted average period of two years over which the compensation expense is expected to be recognized. Compensation expense is amortized on a straight-line basis over the vesting period. Restricted stock grants are included in CBS’ total issued and outstanding common shares.

 

10.Stockholders’ equity

 

CBS is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. In connection with the Merger (see “Reverse Merger,” Note 1), the Members were issued 4,541,394 Class B Units and 454,139.4 Series A Preferred Stock of CBS. Upon exchange of the Class B Units in accordance with the Exchange and Support Agreement, shares of CBS common stock will be issued at the current ratio of 1:1 (subject to certain adjustments related to organic dilution), and concurrently, a proportionate amount of shares of Series A Preferred Stock will be automatically redeemed and cancelled at the current ratio of 1:10, subject to the availability of lawful funds, for its par value of $0.0001 per share and become authorized but unissued preferred stock. Except in connection with the exchange of the Class B Units, the CBS Series A Preferred Stock is not redeemable.

 

In June 2011, 641,394 Class B Units were exchanged for 641,394 shares of common stock, and in turn, 64,139.4 shares of Series A Preferred Stock were automatically redeemed and cancelled pursuant to the Exchange and Support Agreement. In addition, pursuant to the Insider Warrant Exchange Agreement by and among CBS, 57th Street GAC Holdings LLC (“57th Street GAC”), Morgan Joseph TriArtisan LLC, Ladenburg Thalmann & Co. Inc., I-Bankers Securities Incorporated, Maxim Group LLC and Rodman & Renshaw, LLC, dated May 5, 2011, 370,000 shares of common stock were issued in exchange for 3,700,000 warrants that were originally purchased by 57th Street GAC and the underwriters of CBS’ initial public offering in May 2010.

 

On November 14, 2011, Crumbs entered into an employment agreement with Julian R. Geiger (the “Geiger Employment Agreement”) pursuant to which Mr. Geiger will serve as President and Chief Executive Officer of Crumbs commencing November 14, 2011 (the “Effective Date”) and continuing through December 31, 2013. Pursuant to the Geiger Employment Agreement, Mr. Geiger shall receive no salary nor participate in any bonus plan of Crumbs that may be in effect during the term of the agreement. Crumbs agreed that promptly following execution of the Geiger Employment Agreement, Holdings would grant to him 799,000 Class B Units and CBS would grant to him 79,900 shares of Series A Preferred Stock, subject to the following vesting provisions:

 

·50% of the 799,000 Class B Units and of the 79,900 shares of the Series A Preferred Stock would vest as of the Effective Date (such securities, the “First Tranche”); and

 

·the remaining 50% of the 799,000 Class B Units and of the 79,900 shares of Series A Preferred Stock would vest on November 14, 2012 (such securities, the “Second Tranche”).

 

Concurrent with the execution of the Geiger Employment Agreement, EHL Holdings LLC and Bauer Holdings, Inc. (formerly Crumbs, Inc.) agreed to forfeit an aggregate of 799,000 Class B Units and 79,900 shares of the Series A Preferred Stock.

 

13
 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

10.Stockholders’ equity (continued)

 

In 2011, staff expenses related to this stock-based compensation was recorded in connection with the transaction in the amount of $1,877,650, the value of the First Tranche, calculated based upon the price of a share of CBS stock on November 14, 2011. When the Second Tranche vests on November 14, 2012, additional non-cash staff expenses related to this stock-based compensation of $1,877,650 will be recorded.

 

11.Subsequent events

 

On October 9, 2012, pursuant to the Exchange and Support Agreement, (a) Julian R. Geiger exchanged, for no consideration other than the surrender thereof, 319,600 Class B Units and 31,960 shares of Series A Preferred Stock that he owned for 319,600 shares of CBS common stock, (b) EHL Holdings, LLC exchanged, for no consideration other than the surrender thereof, 694,700 Class B Units and 69,470 shares of Series A Preferred Stock that it owned for 694,700 shares of CBS common stock, (c) John D. Ireland exchanged, for no consideration other than the surrender thereof, 39,000 Class B Units and 3,900 shares of Series A Preferred Stock that he owned for 39,000 shares of CBS common stock, and (d) Bauer Holdings, Inc. exchanged, for no consideration other than the surrender thereof, 506,700 Class B Units and 50,670 shares of Series A Preferred Stock that it owned for 506,700 shares of CBS common stock.

 

On October 10, 2012, CBS entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Special Situations Fund III QP, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P. (collectively, the “Special Situations Funds”), Buckingham RAF Partners, L.P., Buckingham RAF Partners II, L.P., Buckingham RAF International Partners Master Fund, LP, Whitney Capital Series Fund LLC – Series LS1, Durban Capital LP, John Mills, P.A.W. Partners, L.P., P.A.W. Small Cap Partners, L.P., Prism Partners I, L.P., Prism Partners III Leveraged, L.P., Prism Partner IV Leveraged Offshore Fund, Arthur J. Samberg, Leonard Potter, Frederick Kraegel, Jeffrey Roseman, Mark Klein, and Julian Geiger (collectively, the “Investors”). Pursuant to the Purchase Agreement, CBS agreed to sell an aggregate 4,456,968 shares (the “Shares”) of CBS’ common stock, par value $.0001 per share, to the Investors at a purchase price of $2.21 per Share (the “Capital Transaction”).

 

The Shares were sold only to accredited investors in a private placement in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.

 

The closing of the Capital Transaction and the sale of the Shares took place on October 11, 2012. CBS received aggregate gross proceeds of $9,849,900 as a result of the Capital Transaction. After deducting the expenses of the Capital Transaction, CBS anticipates that its net proceeds will be approximately $9,300,000. Crumbs intends to use these proceeds to fund new store growth and for general working capital purposes.

 

14
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

The following discussion and analysis is intended as a review of significant factors affecting the consolidated financial condition and results of operations of Crumbs for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes presented in this report, as well as the audited consolidated financial statements and related notes included in CBS’ Annual Report on Form 10-K for the year ended December 31, 2011.

 

CBS is a Delaware corporation organized in October 2009 under the name 57th Street General Acquisition Corp. (“57th Street”). 57th Street was organized as a blank check company for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets. On January 9, 2011, 57th Street, 57th Street Merger Sub LLC, a Delaware limited liability company and wholly-owned subsidiary of 57th Street (“Merger Sub”), Holdings, the members of Holdings immediately prior to the consummation of the Merger (individually, a “Member” or, collectively, the “Members”) and the representatives of the Members and Holdings, entered into a Business Combination Agreement, amended on each of February 18, 2011, March 17, 2011 and April 7, 2011 (the “Business Combination Agreement”), pursuant to which Merger Sub merged with and into Holdings with Holdings surviving the Merger as a non-wholly owned subsidiary of CBS (the “Merger”). Following the Merger, in October 2011, 57th Street changed its name to Crumbs Bake Shop, Inc. to reflect the nature of its business more accurately.

 

CBS, through its consolidated subsidiary, Holdings, a Delaware limited liability company, engages in the business of selling a wide variety of cupcakes, cakes, pies, cookies and other baked goods as well as hot and cold beverages under the trade name “Crumbs Bake Shop”. Cupcake sales have historically comprised the majority of Crumbs’ business. Crumbs believes its baked goods appeal to a wide demographic of customers who span a broad range of socio-economic classes. Crumbs operates in urban, suburban, commercial, and residential markets as well as transportation hubs, such as Union Station in Washington, D.C. and Newark Liberty International Airport in Newark, New Jersey. More recently, it has expanded into mall-based centers, such as Queens Center in Elmhurst, New York, Burlington Mall in Burlington, Massachusetts, Roosevelt Field Mall in Garden City, New York and Natick Mall in Natick, Massachusetts.

 

As of September 30, 2012, there were 54 Crumbs Bake Shop stores operating in seven states and Washington, D.C., including 21 stores in Manhattan, New York. Of the total stores, 15 have been opened since September 30, 2011. Crumbs’ sales are primarily conducted through its stores in New York, California, Illinois, Connecticut, New Jersey, Virginia, Washington, D.C and Massachusetts. A small percentage of baked goods sales are from Crumbs’ wholesale distribution business and catering services. Crumbs’ e-commerce division at http://www.crumbs.com ships cupcakes nationwide.

 

In light of the decline in operating performance at a number of Crumbs’ stores, management continues to evaluate and, as necessary, address weaknesses and implement improvements in Crumbs’ operations and growth strategies as part of its efforts to maximize overall profitability and shareholder value. During the last six months, management has identified and instituted six key initiatives which it believes will improve the financial performance of Crumbs, bolster the image of the Crumbs brand, and position Crumbs to grow in a more predictable and profitable manner. These initiatives contemplate special attention being paid to corporate structure, supply chain management, identification of real estate opportunities relating to existing and new stores, the frequent introduction of new cupcakes, and a wide sweeping improvement in customer interaction. To maximize the benefits that management believes will result from those initiatives, the decision has been made that it is necessary and desirable to accelerate the velocity of new store openings. In order to fund these initiatives, Crumbs entered into the Capital Transaction described below under Recent Developments.

 

Recent Developments

 

On August 3, 2012, CBS entered into an agreement with Starbucks Corporation to serve Starbucks® brewed coffees, teas and espresso-based drinks in all Crumbs locations, except the Newark Liberty International Airport location. This business relationship with Starbucks will make Crumbs the largest national retailer to be included in Starbucks’ We Proudly Serve program, which provides Starbucks-branded beverages, food, and other products to customers outside of Starbucks’ company-operated retail stores. Starbucks beverages were first made available at all Crumbs stores in the New York Metro and Boston, Massachusetts areas beginning in September 2012, and have since been rolled out to all other Crumbs locations. Crumbs expects that the availability of Starbucks beverages in its stores will increase its store traffic and beverage business as well as the demand for its baked goods. There can be no assurance, however, that this new relationship will have the impact anticipated by management.

 

On October 9, 2012, pursuant to the Exchange and Support Agreement, (a) Julian R. Geiger exchanged, for no consideration other than the surrender thereof, 319,600 New Crumbs Class B Units (“Class B Units”) and 31,960 shares of Series A Voting Preferred Stock (“Series A Preferred Stock”) that he owned for 319,600 shares of CBS common stock, (b) EHL Holdings, LLC exchanged, for no consideration other than the surrender thereof, 694,700 Class B Units and 69,470 shares of Series A Preferred Stock that it owned for 694,700 shares of CBS common stock, (c) John D. Ireland exchanged, for no consideration other than the surrender thereof, 39,000 Class B Units and 3,900 shares of Series A Preferred Stock that he owned for 39,000 shares of CBS common stock, and (d) Bauer Holdings, Inc. exchanged, for no consideration other than the surrender thereof, 506,700 Class B Units and 50,670 shares of Series A Preferred Stock that it owned for 506,700 shares of CBS common stock.

 

On October 10, 2012, CBS entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Special Situations Fund III QP, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P. (collectively, the “Special Situations Funds”), Buckingham RAF Partners, L.P., Buckingham RAF Partners II, L.P., Buckingham RAF International Partners Master Fund, LP, Whitney Capital Series Fund LLC – Series LS1, Durban Capital LP, John Mills, P.A.W. Partners, L.P., P.A.W. Small Cap Partners, L.P., Prism Partners I, L.P., Prism Partners III Leveraged, L.P., Prism Partner IV Leveraged Offshore Fund, Arthur J. Samberg, Leonard A. Potter, Frederick G. Kraegel, Jeffrey D. Roseman, Mark D. Klein, and Julian R. Geiger (collectively, the “Investors”). Pursuant to the Purchase Agreement, CBS agreed to sell an aggregate 4,456,968 shares (the “Shares”) of CBS’ common stock, par value $.0001 per share (the “Common Stock”), to the Investors at a purchase price of $2.21 per Share (the “Capital Transaction”). The Shares were sold only to accredited investors in a private placement in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. The closing of the Capital Transaction and the sale of the Shares took place on October 11, 2012. Crumbs received aggregate gross proceeds of $9.85 million as a result of the Capital Transaction. After deducting the expenses of the Capital Transaction, net proceeds will be approximately $9.30 million. Crumbs intends to use these proceeds to fund new store growth and for general working capital purposes.

 

15
 

 

Results of Operations and Known Trends

 

Crumbs’ results of operations as a percentage of net sales and period-over-period variances are discussed in the following sections.

 

Net Loss

 

For the three and nine months ended September 30, 2012, Crumbs recorded a net loss attributable to common stockholders of $(1.28) million and $(2.56) million, respectively, or basic and diluted net loss per common share of $(0.23) and $(0.47), respectively, compared to a net loss attributable to common stockholders of $(0.91) million and $(1.17) million, respectively, or basic and diluted net loss per common share of $(0.17) and $(0.21), respectively, for the three and nine months ended September 30, 2011.

 

Net Sales

 

Net sales for the three and nine months ended September 30, 2012 were $9.90 million and $32.25 million, respectively, an increase of 11.5% and 11.6% over the $8.88 million and $28.89 million, respectively, recorded for the same periods in 2011. The increases in net sales were attributable to additional store openings, offset by decreases in same store sales at a number of stores.

 

Net sales from Crumbs’ catering services, e-commerce division and wholesale distribution business for the three and nine months ended September 30, 2012 were $0.33 million and $1.28 million, respectively, a decrease of 26.7% and 25.6% when compared to the $0.45 million and $1.72 million, respectively, recorded for the same periods in 2011.

 

During the three and nine months ended September 30, 2012, cupcakes represented 76.0% and 77.2%, respectively, of net sales compared to 75.2% and 76.5%, respectively, for the same periods in 2011. Other baked goods sales from cakes, pies, cookies, brownies, muffins and assorted pastries for the three and nine months ended September 30, 2012 represented 11.0% and 10.7%, respectively, of net sales compared to 10.5% and 11.9%, respectively, for the same periods in 2011. The stores also sell beverages, including drip coffees, espresso-based drinks, whole-leaf teas and hot chocolate. During the three and nine months ended September 30, 2012, beverages represented 12.9% and 11.0%, respectively, of Crumbs’ net sales compared to 10.8% and 9.4%, respectively, for the same periods in 2011.

 

Cost of Sales

 

Cost of sales is primarily comprised of products purchased for resale. Baked goods are delivered to stores daily by independent commercial bakeries. In each major market, Crumbs contracts with a commercial bakery to supply proprietary products to stores on an exclusive basis. As of September 30, 2012, Crumbs had a relationship with one commercial bakery in each of New York, Los Angeles, Northern Virginia and Chicago. Beverage materials and packaging are purchased from both national and local suppliers. The e-commerce division utilizes a third party in New York for both shipping and handling.

 

Cost of sales for the three and nine months ended September 30, 2012 were $4.45 million and $13.98 million, respectively, an increase of 18.0% and 14.7% over the $3.77 million and $12.19 million, respectively, recorded for the same periods in 2011. The increases were primarily attributable to store openings that occurred in the second half of 2011, offset by decreases in same store costs. Cost of sales as a percentage of net sales for the three and nine months ended September 30, 2012 were 44.9% and 43.3%, respectively, as compared to 42.5% and 42.2%, respectively, for the same periods in 2011. The increases were primarily attributable to increases in promotional incentives.

 

16
 

 

Operating Expenses

 

Selling expenses include merchant account fees, fees paid to a public relations consultant, promotional displays, advertising, kosher certification fees and product promotional giveaways.

 

Selling expenses for the three and nine months ended September 30, 2012 were $0.30 million and $0.98 million, respectively, a decrease of 3.2% and 13.3% when compared to the $0.31 million and $1.13 million, respectively, recorded for the same periods in 2011. The decreases were due to reductions in public relations fees and promotions in 2012 and reductions in kosher certification fees, offset by increases in merchant account fees from new stores. Selling expenses as a percentage of net sales for the three and nine months ended September 30, 2012 were 3.0% for both periods, as compared to 3.5% and 3.9%, respectively, for the same periods in 2011.

 

Staff expenses include salaries and wages for both store employees and corporate positions, guaranteed payments made prior to the Merger in 2011, stock compensation expense, employment taxes, medical insurance and workers compensation insurance.

 

Staff expenses for the three and nine months ended September 30, 2012 were $3.33 million and $10.07 million, respectively, an increase of 7.4% and 9.2% over the $3.10 million and $9.22 million, respectively, recorded for the same periods in 2011. The increases were attributable to the addition of corporate staff members, the addition of staff for new stores and stock compensation expense related to the issuance of CBS’ shares to Crumbs’ employees. Staff expenses as a percentage of net sales for the three and nine months ended September 30, 2012 were 33.6% and 31.2%, respectively, as compared to 34.9% and 31.9%, respectively, for the same periods in 2011.

 

Staff expenses of $2.25 million and $6.88 million were attributable to store staff for the three and nine months ended September 30, 2012, an increase of 8.7% and 8.3% over the $2.07 million and $6.35 million, respectively, recorded for the same periods in 2011. Store staff expenses as a percentage of store net sales for the three and nine months ended September 30, 2012 were 23.6% and 22.2%, respectively, as compared to 24.6% and 23.4%, respectively, for the same periods in 2011.

 

Occupancy expenses are primarily attributable to Crumbs’ stores and corporate office leases. The original lease terms range from three to 15 years, many with options to extend to 20 years. Most lease agreements contain rent holidays, lease premiums, rent escalation clauses and/or contingent rent provisions, and many contain tenant improvement allowances. For scheduled rent escalation clauses during lease terms or for rent payments commencing at a date other than the date of initial occupancy, Crumbs records minimum rental expenses on a straight-line basis over the terms of the leases. This treatment results in a non-cash expense in the early years of these leases that reverses in the later years of the leases. Expenses related to the leases, such as real estate taxes, common area maintenance fees, insurance and marketing funds, are also included in occupancy expenses, as well as expenses related to utilities, cleaning, licenses, maintenance, property and liability insurance associated with the leased locations.

 

Occupancy expenses for the three and nine months ended September 30, 2012 were $2.51 million and $7.31 million, respectively, an increase of 39.4% and 44.2% over the $1.80 million and $5.07 million, respectively, recorded for the same periods in 2011. Occupancy expenses as a percentage of net sales for the three and nine months ended September 30, 2012 were 25.4% and 22.7%, respectively, as compared to 20.2% and 17.5% for the same periods in 2011. Occupancy expense increases were primarily related to lease expenses and utilities associated with the opening of 15 additional stores since September 30, 2011. Lease expenses incurred from the date of possession to the date a store opens are included in new store expenses, while lease expenses incurred after a store opens are included in occupancy expenses. Post-opening lease expenses for the three and nine months ended September 30, 2012 were $1.94 million and $5.77 million, respectively, an increase of 44.8% and 48.7% over the $1.34 million and $3.88 million, respectively, recorded for the same periods in 2011.

 

General and administrative expenses primarily include corporate expenses, such as public company operating expenses, office supplies, travel, professional fees and bank service charges. Also included are store expenses for miscellaneous supplies, uniforms and quality control.

 

General and administrative expenses for the three and nine months ended September 30, 2012 were $0.77 million and $2.40 million, respectively, an increase of 16.7% and 43.7% increase over the $0.66 million and $1.67 million, respectively, recorded for the same periods in 2011. General and administrative expenses as a percentage of net sales for the three and nine months ended September 30, 2012 were 7.8% and 7.4%, respectively, compared to 7.4% and 5.8% for the same periods in 2011. The increase was primarily attributable to public company costs and professional fees.

 

17
 

 

New store expenses consist primarily of manager salaries, employee payroll and related training costs incurred prior to the opening of a store, straight-line rent from the possession date to the store opening date, related occupancy costs incurred prior to opening and start-up and promotion of new store openings.

 

New store expenses for the three and nine months ended September 30, 2012 were $0.14 million and $0.32 million, respectively, a decrease of 66.7% and 39.6% when compared to $0.42 million and $0.53 million, respectively, recorded for the same periods in 2011. New store expenses as a percentage of net sales were 1.4% and 1.0%, respectively, for the three and nine months ended September 30, 2012 compared to 4.7% and 1.8%, respectively, for the same periods in 2011. The decreases were primarily attributable to fewer new stores with shorter pre-opening periods and lower base rent during the quarter and nine months ended September 30, 2012 versus the same periods of the prior year, offset by costs associated with one store scheduled to open subsequent to September 30, 2012.

 

Depreciation and amortization expenses for the three and nine months ended September 30, 2012 were $0.48 million and $1.39 million, respectively, an increase of 33.3% and 33.7% over the $0.36 million and $1.04 million, respectively, recorded for the same periods in 2011. Depreciation and amortization expenses as a percentage of net sales for the three and nine months ended September 30, 2012 were 4.8% and 4.3%, respectively, as compared to 4.1% and 3.6%, respectively, for the same periods in 2011. Depreciation and amortization expenses increased primarily as a result of new store additions, including related lease review and negotiation fees.

 

General Economic Trends and Seasonality

 

Crumbs’ results of operations are generally affected by the economic trends in its market areas due to the dependence on its customers’ discretionary spending. Weakness in the national or regional economy in its market areas, combined with other factors including inflation, labor and health care costs and availability of suitable locations for its stores, may negatively impact its business. If consumer activities associated with the consumption of its products decline or the business activities of its corporate customers decrease, then its net sales and sales volumes may decline.

 

Crumbs’ results to date have not been significantly impacted by inflation.

 

While Crumbs’ business is not highly seasonal, it is impacted by weather. Extreme hot, cold and wet weather may cause decreased sales in the affected stores and could impact the daily delivery of its baked goods.

 

Hurricane Sandy resulted in the loss of over 230 days (number of stores times number of days) of business during October and November 2012. Management cannot at this time estimate the financial impact, some of which may be offset by insurance recoveries, the lost sales will have on the results of operations for the fourth quarter of 2012.

 

In addition, Crumbs’ sales peak throughout the year on certain holidays/events such as Valentine’s Day, Easter, Mother’s Day, Halloween, Thanksgiving, Christmas and Hanukkah. The timing of these holidays/events in a particular year could impact quarterly results.

 

Liquidity and Capital Resources

 

As a result of the Merger in 2011, CBS contributed approximately $13.70 million to Holdings. Aside from this initial capitalization, Holdings’ primary source of liquidity has been, and is, cash from the sale of baked goods and beverages. Holdings’ primary uses of cash are cost of sales, operating expenses and capital expenditures, including expenditures associated with the construction and opening of new stores.

 

As of September 30, 2012, Crumbs had approximately $0.07 million in cash and other current assets, net of current liabilities, which could be used to fund working capital needs, compared to $4.74 million at December 31, 2011. As noted in Recent Developments within Part I, Item 2 of this quarterly report, CBS completed the Capital Transaction on October 11, 2012, resulting in net proceeds of approximately $9.30 million. This capital will be used to fund future store growth and provide additional working capital.

 

Cash Flows

 

Crumbs’ net cash used in operating activities was $3.12 million and $1.85 million, respectively, during the nine months ended September 30, 2012 and 2011. The increase in operating cash outflows, for the 2012 period when compared to the 2011 period was primarily attributable to an increase in operating expenses in excess of the increase in sales for the period. This increase in cash outflows was partially offset by receivable collections and the reduction of prepaid rent payments required at the time of lease signings.

 

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Net cash used in investing activities during the nine months ended September 30, 2012 and 2011 was $2.67 million and $3.79 million, respectively. Investing cash outflows consisted primarily of costs related to six new stores, construction in progress related to nine stores and corporate computer equipment purchases for the nine months ended September 30, 2012. For the nine months ended September 30, 2011, investing cash outflows consisted primarily of costs related to six new stores, construction in progress related to 15 stores and $0.64 million for the purchase of a certificate of deposit used as security for letters of credit issued to several landlords in lieu of security deposit payments.

 

Off-Balance Sheet Arrangements

 

Crumbs has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies

 

CBS’ critical accounting policies are identified and described in its Annual Report on Form 10-K for the year ended December 31, 2011. CBS believes that there have been no material changes in its critical accounting policies since they were last disclosed.

 

Recent Accounting Pronouncements

 

Crumbs has evaluated recent accounting pronouncements and does not believe the adoption of any recently issued accounting standards will have a material impact on its financial position or results of operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There were no material changes in the quantitative and qualitative information about market risk since the end of our most recent fiscal year.

 

ITEM 4. CONTROLS AND PROCEDURES

 

CBS maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in CBS’ reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the SEC, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to management, including CBS’ principal executive officer (“PEO”) and the principal accounting and financial officer (“PAO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

An evaluation of the effectiveness of these disclosure controls as of September 30, 2012 was carried out under the supervision and with the participation of CBS’ management, including the PEO and the PAO. Based on that evaluation, management, including the PEO and the PAO, has concluded that its disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

 

During the third quarter of 2012, there was no change in CBS’ internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

 

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PART II

 

ITEM 1A. RISK FACTORS

 

The risks and uncertainties to which Crumbs’ financial condition and results of operations are subject are discussed in detail in the Annual Report of CBS on Form 10-K for the year ended December 31, 2011 and in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (the “3Q2012 Form 10-Q”). Except for the mitigating effect of the Capital Transaction on the risk factor contained in the 3Q2012 Form 10-Q, management does not believe that any material changes in these risk factors have occurred since they were last disclosed.

 

ITEM 6. EXHIBITS

 

The exhibits filed or furnished with this quarterly report are listed in the Exhibit Index that immediately follows the signatures hereto, which list is incorporated herein by reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, CBS has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CRUMBS BAKE SHOP, INC.
     
Date:  November 14, 2012 By: /s/ Julian R. Geiger
    Julian R. Geiger
    President and Chief Executive Officer
    (Principal Executive Officer)
     
Date:  November 14, 2012 By: /s/ John D. Ireland
    John D. Ireland
    Senior Vice President-Finance, Chief Financial
    Officer and Treasurer
    (Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit No.   Description
     
31.1   Section 302 CEO Certification (filed herewith)
     
31.2   Section 302 CFO Certification (filed herewith)
     
32.1   Section 906 Certifications (furnished herewith)
     
101.INS   Instance Document (furnished herewith)
     
101.SCH   Schema Document (furnished herewith)
     
101.CAL   Calculation Linkbase Document (furnished herewith)
     
101.DEF   Definition Linkbase Document (furnished herewith)
     
101.LAB   Labels Linkbase Document (furnished herewith)
     
101.PRE   Presentation Linkbase Document (furnished herewith)

 

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