UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 2)

 

(Mark One)

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

 

For the quarterly period ended June 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. x 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). x 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 x

 

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

 

As of July 31, 2012, the registrant had 5,787,385 shares of Common Stock outstanding.

 

 

EXPLANATORY NOTE

 

This Amendment No. 2 on Form 10-Q/A to the Quarterly Report of Crumbs Bake Shop, Inc. (“CBS”) on Form 10-Q for the quarter ended June 30, 2012, which was initially filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2012 (the “Original Filing”), is being filed to restate CBS’ consolidated financial statements contained therein and to make related revisions to certain other items of the Original Filing. Specifically, Items 1 and 2 of Part I of the Original Filing have been amended to reflect the reclassification of CBS’ outstanding common stock purchase warrants from equity to a warrant (derivative) liability, and Item 4 of Part I of the Original Filing has been amended with respect to management’s conclusions regarding CBS’ disclosure controls and procedures. In addition, CBS has revised portions of Items 1 and 2 of Part I of the Original Filing to address comments issued on December 6, 2012 by the SEC with respect to CBS’ Annual Report on Form 10-K for the year ended December 31, 2011, which was amended on January 4, 2013 in response thereto, to the extent such comments are also relevant to the disclosures contained in the Original Filing. Pursuant to Exchange Act Rule 12b-15, new certifications by CBS’ principal executive officer and principal accounting officer are filed or furnished with this Amendment No. 1 as Exhibits 31.1, 31.2 and 32, so Item 6 of Part II of the Original Filing has also been amended.

 

Except as expressly provided above, this Amendment No. 2 on Form 10-Q/A speaks as of the date of the Original Filing and CBS has not updated the disclosures contained in any item thereof to speak as of a later date. All information contained in this Amendment No. 2 on Form 10-Q/A is subject to updating and supplementing as provided in CBS’ reports filed with the SEC subsequent to the date on which the Original Report was filed.

 

   

Crumbs Bake Shop, Inc.

TABLE OF CONTENTS

			Page
PART I	Financial Information		4
	ITEM 1.	Financial Statements	5
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	ITEM 4.	Controls and Procedures	23
PART II	Other Information		24
	ITEM 6.	Exhibits	24
SIGNATURES			25
EXHIBIT INDEX			26

 

 

PART I

 

As used in this report, the term “CBS” refers to Crumbs Bake Shop, Inc., the term “Holdings” refers to Crumbs Holdings LLC, the term “Crumbs” refers collectively to Holdings and its wholly-owned subsidiaries, and the terms “the “Company”, “we”, “us” and “our” refer collectively to CBS and Crumbs.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “project,” “target,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. These statements are based on the beliefs of our management as well as assumptions made by and information currently available to us and reflect our current view concerning future events. As such, they are subject to risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, among many others: (i) the risk that the businesses of Crumbs will not be integrated successfully; (ii) the risk that the benefits anticipated from the business transaction with Crumbs may not be fully realized or may take longer to realize than expected; (iii) the risk that any projections, including earnings, revenue, expenses, synergies, margins or any other financial items are not realized; (iv) the risk of disruption from the business transaction making it more difficult to maintain relationships with customers, employees or suppliers; (v) a reduction in industry profit margin; (vi) the inability to continue the development of the Crumbs brand; (vii) changing interpretations of generally accepted accounting principles; (viii) continued compliance with government regulations; (ix) changing legislation and regulatory environments; (x) the ability to meet the NASDAQ Stock Market continued listing standards; (xi) a lower return on investment; (xii) the inability to manage rapid growth; (xiii) requirements or changes affecting the business in which Crumbs is engaged; (xiv) the general volatility of the market prices of CBS’ securities and general economic conditions; (xv) the Company’s ability to successfully implement new strategies; (xvi) operating hazards; (xvii) competition; (xviii) the loss of key personnel; (xix) any of the factors in the “Risk Factors” section of CBS’ periodic reports filed with the SEC (see Item 1A of Part II of this quarterly report for further information); (xx) other risks identified in this report; and (xxi) any statements of assumptions underlying any of the foregoing. You should also carefully review other reports that we file with the SEC. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

 

 

ITEM 1. FINANCIAL STATEMENTS

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS 

 

		June 30,				December 31,
		2012				2011
		(Unaudited)
		(Restated)
ASSETS
Current assets
Cash		$	3,120,830			$	5,940,982
Trade receivables			318,493				405,519
Inventories			564,952				503,008
Prepaid rent			524,440				621,184
Other current assets			479,898				196,975
Total current assets			5,008,613				7,667,668
Property and equipment, net			12,586,908				12,398,749
Other assets
Deferred tax asset			4,808,500				4,808,500
Restricted certificates of deposit			673,000				673,000
Intangible assets, net			393,761				397,039
Deposits			291,553				318,024
Other			146,632				104,906
Total other assets			6,313,446				6,301,469
		$	23,908,967			$	26,367,886
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	1,539,347			$	2,431,924
Payroll liabilities			211,450				250,307
Sales tax payable			166,072				69,063
Gift cards and certificates outstanding			165,961				179,563
Total current liabilities			2,082,830				2,930,857
Long-term liabilities
Deferred rent			3,425,838				3,030,182
Payable to related parties pursuant to tax receivable agreement			2,386,750				2,386,750
Warrant liability			545,630				654,756
Total liabilities			8,441,048				9,002,545
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.0001 par value; 1,000,000 shares authorized;
390,000 shares issued and outstanding at June 30, 2012
and December 31, 2011			39				39
Common stock, $0.0001 par value; 100,000,000 shares authorized;
7,371,969 shares issued, 5,777,385 outstanding at June 30, 2012 and
7,100,469 shares issued, 5,505,885 outstanding at December 31, 2011			737				710
Additional paid-in capital			27,159,123				26,996,351
Accumulated deficit			(3,302,789	)			(2,081,042	)
Treasury stock, at cost			(15,913,948	)			(15,913,948	)
Total Crumbs Bake Shop, Inc. stockholders' equity			7,943,162				9,002,110
Non-controlling interest			7,524,757				8,363,231
Total stockholders' equity			15,467,919				17,365,341
		$	23,908,967			$	26,367,886

 

See accompanying notes to condensed consolidated financial statements.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
		(Restated)								(Restated)
Net sales		$	11,080,954			$	10,294,163			$	22,358,048			$	20,012,768
Cost of sales (exclusive of items shown separately below)			4,775,068				4,351,477				9,537,550				8,425,990
Gross profit			6,305,886				5,942,686				12,820,498				11,586,778
Operating expenses
Selling expenses			397,065				442,582				686,330				818,592
Staff expenses			3,349,667				3,264,738				6,744,840				6,120,020
Occupancy expenses			2,426,853				1,705,541				4,792,391				3,273,298
General and administrative			838,294				627,188				1,629,763				1,010,877
New store expenses			72,092				51,122				180,991				114,273
Depreciation and amortization			466,920				345,405				915,013				675,199
Loss on disposal of assets			13,841				-				13,841				-
			7,564,732				6,436,576				14,963,169				12,012,259
Loss from operations			(1,258,846	)			(493,890	)			(2,142,671	)			(425,481	)
Other income (expense)
Interest and other income			9,589				73				17,873				272
Abandoned lease projects			(32,021	)			(14,044	)			(44,549	)			(13,444	)
Change in fair value of warrant liability			545,630				(9,821,340	)			109,126				(9,821,340	)
			523,198				(9,835,311	)			82,450				(9,834,512	)
Net loss attributable to the controlling and
non-controlling interests			(735,648	)			(10,329,201	)			(2,060,221	)			(10,259,993	)
Less: Net loss attributable to
non-controlling interests			296,466				4,282,487				838,474				4,253,793
Net loss attributable to stockholders		$	(439,182	)		$	(6,046,714	)		$	(1,221,747	)		$	(6,006,200	)
Net loss per common share, basic and diluted		$	(0.08	)		$	(1.18	)		$	(0.22	)		$	(1.07	)
Weighted average number of common shares
outstanding, basic and diluted			5,505,885				5,141,082				5,505,885				5,599,274

 

See accompanying notes to condensed consolidated financial statements. 

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

For the Six Months Ended June 30,		2012				2011
		(Restated)
Cash flows from operating activities
Net loss attributable to the controlling and non-controlling interests		$	(2,060,221	)		$	(10,259,993	)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization			915,013				675,199
Loss on disposal of assets			13,841				-
Abandoned lease projects			44,549				13,444
Stock-based compensation			162,772				-
Deferred rent			395,656				347,512
Change in fair value of warrant liability			(109,126	)			9,821,340
Changes in operating assets and liabilities:
Trade receivables			87,026				(53,016	)
Inventories			(61,944	)			(153,472	)
Prepaid rent			96,744				(141,507	)
Other current assets			(282,923	)			(326,811	)
Deposits			26,471				(4,099	)
Accounts payable and accrued expenses			(999,451	)			(1,050,651	)
Payroll liabilities			(38,857	)			58,854
Sales tax payable			97,009				22,059
Gift cards and certificates outstanding			(13,602	)			4,428
Net cash used in operating activities			(1,727,043	)			(1,046,713	)
Cash flows from investing activities
Purchase of restricted certificate of deposit			-				(575,000	)
Purchases of property and equipment			(1,019,185	)			(1,147,062	)
Purchases of intangible assets			(37,751	)			(30,879	)
Purchases of other assets			(36,200	)			(14,210	)
Net cash used in investing activities			(1,093,136	)			(1,767,151	)
Cash flows from financing activities
Proceeds retained from reverse merger			-				13,752,985
Proceeds from issuance of common stock under equity incentive plan			27				-
Capital distributions			-				(79,657	)
Net cash provided by financing activities			27				13,673,328
Net increase (decrease) in cash			(2,820,152	)			10,859,464
Cash, beginning of year			5,940,982				655,022
Cash, end of period		$	3,120,830			$	11,514,486
Supplemental disclosure of non-cash financing activities
Net assets acquired in reverse merger		$	-			$	2,087,468
Exchange of New Class B Exchangeable Units for common stock
of the Company		$	-			$	1,423,895
Payables related to capital expenditures		$	106,874			$	116,028

 

See accompanying notes to condensed consolidated financial statements.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

  

1.

Restatement of financial information

 

Crumbs Bake Shop, Inc., formerly known as 57^th Street General Acquisition Corp., (“CBS”) has restated its unaudited condensed consolidated financial statements for the three and six months ended June 30, 2012 to correct its accounting for its outstanding common stock purchase warrants. The warrants were previously accounted for as a component of equity rather than a warrant (derivative) liability. In addition, fair value disclosures related to the warrant (derivative) liability have been added within Note 2 (See “Warrant liability”, “Fair value – definition and hierarchy” and “Fair value – valuation techniques and inputs”) and as Note 4, “Fair value measurements”.

 

The warrants were issued in May 2010 as part of CBS’ initial public offering and are listed for trading on The NASDAQ Capital Market. The terms of the warrants include a provision (the “Price Reduction Provision”) that requires CBS to reduce their exercise price by a stated formula if (i) CBS completes a transaction involving a reclassification or reorganization of the outstanding shares of its common stock, a merger or consolidation in which it is not the surviving company, or a sale of its assets and (ii) at least 70% of the consideration payable to common stockholders as a result of that transaction is not common stock listed on a national securities exchange or the OTC Bulletin Board.

 

In connection with CBS’ consolidated financial statements for the year ended December 31, 2012, the Audit Committee and CBS’ management further evaluated the warrants under ASC Subtopic 815-40, Contracts in Entity’s Own Equity. ASC Section 815-40-15 addresses equity versus liability treatment and classification of equity-linked financial instruments, including common stock purchase warrants, and states that a warrant may be classified as a component of equity only if, among other things, the warrant is indexed to the issuer’s common stock. Under ASC Section 815-40-15, a warrant is not indexed to the issuer’s common stock if the terms of the warrant require an adjustment to the exercise price upon a specified event and that event in not an input to the fair value of the warrant. Based on its evaluation, the Audit Committee concluded that CBS’ warrants are not indexed to CBS’ common stock because the transactions that will trigger the Price Reduction Provision are not inputs to the fair value of the warrants. Accordingly, the existence of the Price Reduction Provision in the warrants requires CBS to classify them as a warrant (derivative) liability, beginning with the quarter ended June 30, 2011. Under this accounting treatment, CBS is required to measure the fair value of the warrants at the end of each reporting period and recognize changes in the fair value from the prior period in CBS’ operating results for the current period.

 

The restatement reflected below resulted in an expense related to the change in fair value of the warrants from January 1, 2012 to June 30, 2012. The adjustments have no impact on the Company’s (defined in Note 2) cash flows, and will not affect previously reported amounts of cash and cash equivalents, operating expenses or operating income (loss).

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.

Restatement of financial information (continued)

 

The effects of the restatement as of and for the three and six months ended June 30, 2012 are summarized below:

  

		As Previously Reported ($)				Adjustments ($)				As Restated ($)
Condensed Consolidated Balance Sheet as of June 30, 2012
Warrant liability			-				545,630				545,630
Total liabilities			7,895,418				545,630				8,441,048
Additional paid-in capital			30,427,228				(3,268,105	)			27,159,123
Accumulated retained earnings (deficit)			(5,540,286	)			2,237,497				(3,302,789	)
Non-controlling interest			7,039,779				484,978				7,524,757
Total stockholders' equity			16,013,549				(545,630	)			15,467,919
Condensed Consolidated Statement of Operations
for the three months ended June 30, 2012
Change in fair value of warrant liability			-				545,630				545,630
Net income (loss) attributable to the
controlling and non-controlling interests			(1,281,278	)			545,630				(735,648	)
Less: Net (income) loss attributable to non-controlling interest			516,355				(219,889	)			296,466
Net income (loss) attributable to stockholders			(764,923	)			325,741				(439,182	)
Net income (loss) per common share, basic and diluted			(0.14	)			0.06				(0.08	)
Condensed Consolidated Statement of Operations
for the six months ended June 30, 2012
Change in fair value of warrant liability			-				109,126				109,126
Net income (loss) attributable to the
controlling and non-controlling interests			(2,169,347	)			109,126				(2,060,221	)
Less: Net (income) loss attributable to non-controlling interest			882,103				(43,629	)			838,474
Net income (loss) attributable to stockholders			(1,287,244	)			65,497				(1,221,747	)
Net income (loss) per common share, basic and diluted			(0.23	)			0.01				(0.22	)
Condensed Consolidated Statement of Cash Flows
for the six months ended June 30, 2012
Net income (loss) attributable to the
controlling and non-controlling interests			(2,169,347	)			109,126				(2,060,221	)
Change in fair value of warrant liability			-				(109,126	)			(109,126	)

 

  

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

2.

Nature of business and summary of significant accounting policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated interim financial statements of CBS and Crumbs Holdings LLC (“Holdings”) and its wholly-owned subsidiaries (such subsidiaries, together with Holdings, are referred to herein as “Crumbs”) as of June 30, 2012 and for the three and six months ended June 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 (CBS and Curmbs are collectively referred to herein as the “Company”). 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 six months ended June 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 financial statements should be read in conjunction with the audited financial statements and notes thereto included in CBS’ Annual Report on Form 10-K, as amended on Form 10-K/A, for the year ended December 31, 2011.

 

Reverse Merger

 

On January 9, 2011, CBS, 57^th Street Merger Sub LLC (“Merger Sub”), Holdings, all the members of Holdings immediately prior to the consummation of the Merger (as described below) (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, CBS 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. CBS 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 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 641,394 of which Class B Units have been exchanged for shares of CBS common stock) and (ii) 454,139.4 shares of Series A Voting Preferred Stock (“Series A Voting 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 64,139.4 of which have been surrendered and cancelled by CBS upon the exchange of 641,394 Class B Units for the 641,394 shares of common stock). 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.

 

  

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

2.

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

 

Nature of Business

 

The 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. The Company offers these products through its stores, e-commerce division, catering services and wholesale distribution business.

 

Principles of Consolidation

 

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

 

Restricted Certificates of Deposit

 

As of June 30, 2012 and December 31, 2011, the Company had $673,000 of cash restricted from withdrawal and held by banks as certificates of deposit securing letters of credit (see Note 5). The letters of credit are required as security deposits for certain of the Company’s non-cancellable store operating leases.

 

Tax Receivable Agreement

 

Holdings intends to make an election under Section 754 of the Internal Revenue Code (the "Code") effective for each taxable year in which an exchange of Class B Units for shares of CBS common stock occurs, which may 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 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 intangible assets of Holdings on the date of the Merger, (ii) these increases in tax basis and (iii) certain other tax benefits related to the Company 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 11). 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

 

The Company’s 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.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

2.

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.

 

Warrant liability

 

The Company accounts for CBS’ 5,456,300 outstanding publicly-traded warrants in accordance with the guidance contained in ASC 815-40-15-7D. Pursuant to this guidance, management has determined that the warrants do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instruments as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statements of operations. The fair value of warrants issued by CBS has been estimated using the warrants’ quoted market price.

 

Fair value - definition and hierarchy

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

In determining fair value, the Company uses various valuation approaches. A fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs are to be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:

 

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments are not applied to Level 1 investments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these investments does not entail a significant degree of judgment.

 

Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

Fair value - valuation techniques and inputs

 

Warrant liability: The Company determined the fair value of the warrant liability using the quoted market prices for the warrants. On reporting dates where there are no active trades, the Company uses the last reported sales price of the warrants to determine the fair value (Level 2). There were no transfers between Level 1, 2 or 3 during the three and six months ended June 30, 2012.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

2.

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

 

Recently Issued Accounting Standards

  

The Company 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 previously reported net loss.

 

3.

Inventories

 

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

 

		June 30, 2012				December 31, 2011
Packaging inventory		$	205,366			$	186,688
E-Commerce packaging inventory			180,551				165,629
Merchandise inventory			22,799				27,663
Beverage supply inventory			85,972				78,526
Candy inventory			33,260				-
Store supplies			37,004				44,502
Total		$	564,952			$	503,008

 

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

 

4.

Fair value measurements

 

The Company complies with ASC 820, “Fair Value Measurement”, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

4.

Fair value measurements (continued)

 

The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the liability, and includes situations where there is little, if any, market activity for the liability:

 

Description

June 30, 2012

Quoted Prices in Active Markets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Other Unobservable Inputs (Level 3)

Liabilities:

Warrant liability

$

545,630

Description

December 31, 2011

Quoted Prices in Active Markets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Other Unobservable Inputs (Level 3)

Liabilities:

Warrant liability

$

654,756

 

5.

Letters of credit

 

In lieu of security deposits required pursuant to the terms of several operating leases, Crumbs has chosen to obtain letters of credit issued by two financial institutions, when such substitution is allowed by the landlords. As of June 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 June 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 June 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 2).

 

6.

Income taxes

 

The Company files income tax returns in the U.S. federal jurisdiction, and may file income tax returns in various states. Generally, the Company is subject to income tax examinations by major taxing authorities since inception. The Company may be subject to potential examination by U.S. federal or states’ authorities in the areas of income taxes. 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. The Company does not expect that the total amount of unrecognized tax benefits, if any, will materially change over the next six months.

 

At the date of the Merger, the Company 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. An additional deferred tax asset of approximately $35,000 was recorded in 2011 for estimated local income tax effects of the Company’s net loss for the year ended December 31, 2011. The Company had a net deferred tax asset of approximately $4,808,000 at June 30, 2012 and December 31, 2011, which can be utilized to offset future taxable income through 2026.

 

  

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

7.

Intangible assets

 

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

 

						Accumulated
		Cost				Amortization				Net
Branding Costs		$	547,338			$	(295,884	)		$	251,454
Website Design			300,338				(158,031	)			142,307
Total		$	847,676			$	(453,915	)		$	393,761

 

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

 

						Accumulated
		Cost				Amortization				Net
Branding Costs		$	536,950			$	(255,539	)		$	281,411
Website Design			247,974				(132,346	)			115,628
Total		$	784,924			$	(387,885	)		$	397,039

 

Amortization expense was approximately $33,000 and $66,000, respectively, for each of the three and six months ended June 30, 2012 and was $33,000 and $65,000, respectively, for the three and six months ended June 30, 2011.

 

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

 

December 31,		Amount
2012		$	66,000
2013			99,000
2014			27,000
2015			14,000
2016			2,000

 

8.

Related party

 

For the three and six months ended June 30, 2011, the Company paid $0 and $4,500, respectively, in fees, unrelated to audit services, to an accounting firm of which an officer of the Company is a part owner. No similar payments have been made in 2012.

 

For the three and six months ended June 30, 2012, the Company paid approximately $5,200 and $10,500, respectively, in rent to a landlord that is partially owned by an officer of the Company, compared to $5,200 and $10,000, respectively, for the three and six months ended June 30, 2011.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9.

Net income (loss) per common share

 

The Company 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 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 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 six months ended June 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 six months ended June 30, 2012, non-vested stock awards relating to 271,500 shares of common stock (see Note 10) were excluded from the calculation of diluted income (loss) per share because their effect would have been anti-dilutive.

 

10.

Restricted stock

 

CBS maintains an equity incentive plan (the “Plan”) for the Company’s 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 by 700,000, from 338,295 to 1,038,295, the number of shares of common stock that may be issued thereunder, which CBS intends to register during the third quarter of 2012. During the three and six months ended June 30, 2012, CBS granted 20,500 and 217,000 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 six months ended June 30, 2011. During the three months ended June 30, 2012, 1,500 shares of restricted stock awards were forfeited before completion of applicable vesting provisions. The total fair market value of the stock awards outstanding is approximately $996,000 based on a weighted average grant date fair value of $3.67 per share. The shares are subject to cliff vesting schedules which vary between one and three years.

 

As of June 30, 2012, 766,795 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 June 30, 2012:

 

														Weighted
										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			(273,000	)			273,000			$	3.67
Forfeited			1,500				(1,500	)		$	3.75
Vested			-				-			$	-
Balances as of June 30, 2012			766,795				271,500			$	3.67				2.22

 

Total stock-based compensation expense was approximately $116,000 and $163,000, respectively, for the three and six months ended June 30, 2012 and $0 for both the three and six months ended 2011. For the three and six months ended June 30, 2012, stock-based compensation expense related to employees was $63,500 and $93,000, respectively, and was $0 for both the three and six months ended June 30, 2011. For the three and six months ended June 30, 2012, stock-based compensation expense related to board members was $52,500 and $70,000, respectively, and $0 for both the three and six months ended June 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.

 

  

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

10.

Restricted stock (continued)

 

Total stock-based compensation expense not yet recognized of approximately $834,000 as of June 30, 2012 has a weighted average period of 2.22 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.

 

11.

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 2), the Members were issued 4,541,394 Class B Units and 454,139.4 Series A Voting 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 Voting 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 Voting Preferred Stock will not be 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 Voting 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, 57^th Street GAC Holdings LLC (“57^th 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 57^th Street GAC and the underwriters of CBS’ initial public offering in May 2010.

 

On November 14, 2011, the Company 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 the Company 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 the Company that may be in effect during the term of the agreement. The Company 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 shall 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 shall vest in November 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 Voting Preferred Stock.

 

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 in November 2012, additional non-cash staff expenses related to this stock-based compensation of $1,877,650 will be recorded.

 

 

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 CBS’ financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited 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 57^th Street General Acquisition Corp. (“57^th Street”). 57^th 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, 57^th 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. More recently, it has expanded into transportation hubs, such as Union Station in Washington, D.C. and Newark Liberty International Airport in Newark, New Jersey, and mall-based centers, such as Queens Center in Elmhurst, New York.

 

As of June 30, 2012, there were 51 Crumbs Bake Shop stores operating in seven states and Washington, D.C., including 20 stores in Manhattan, New York. Of the total stores, 15 were opened in 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.

 

 

Recent Developments

 

On August 3, 2012, CBS entered into an agreement with Starbucks Corporation to bring Starbucks® brewed coffees, teas and espresso-based drinks to all Crumbs locations. 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 audiences outside of Starbucks’ company-operated retail stores. Starbucks beverages will first be made available at all Crumbs stores in the New York area beginning in September 2012, and will then be rolled out to all other Crumbs locations. Crumbs expects that the availability of Starbucks drinks in its stores will increase its beverage business and will increase demand of its baked goods. There can be no assurance, however, that this new relationship will have the impacts anticipated by management.

 

Results of Operations and Known Trends

 

The Company’s 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 six months ended June 30, 2012, the Company recorded a net loss attributable to common stockholders of $(0.44) million and $(1.22) million, respectively, or basic and diluted net loss per common share of $(0.08) and $(0.22), respectively, compared to a net loss attributable to common stockholders of $(6.05) million and $(6.01) million, respectively, or basic and diluted net loss per common share of $(1.18) and $(1.07), respectively, for the three and six months ended June 30, 2011.

 

Net Sales

 

On January 1, 2012, there were 26 stores in the same store sales base, with two and 8 additional stores entering the base during the three and six months ended June 30, 2012, respectively. Same store sales represent the change in sales for stores after their 15^th full calendar month of operation. Net sales for the three and six months ended June 30, 2012 were $11.08 million and $22.36 million, respectively, an increase of 7.7% and 11.7%, as compared to $10.29 million and $20.01 million, respectively, for the same periods in 2011. The increase in net sales for the three months ended June 30, 2012 was primarily attributable to $2.81 million in sales from 18 new stores opened between January 19, 2011 and June 30, 2012. The increase was offset by a $1.90 million decrease in same store sales for 31 stores in the same store sales base, including partial periods from new stores that entered the same store sales base during the year. The increase in net sales for the six months ended June 30, 2012 was primarily attributable to $5.40 million in sales from 25 new stores opened between November 8, 2010 and June 30, 2012. The increase was offset by a $2.80 million decrease in same store sales for 32 stores in the same store sales base, including partial periods from new stores that entered the same store sales base during the year. The decrease in same store sales was predominantly due to negative effects of locating new stores in close proximity to existing stores, resulting in a reduction in sales in same stores previously opened, lack of sufficient new and innovative product offerings and deterioration in the quality of store level staffing and support.

 

 

Net sales from Crumbs’ catering services, e-commerce division and wholesale distribution business for the three and six months ended June 30, 2012 were $0.47 million and $0.94 million, respectively, a decrease of 23.0% and 26.0%, as compared to $0.61 million and $1.27 million, respectively, for the same periods in 2011. The decreases were primarily attributable to decreases in net sales from Crumbs’ e-commerce division and wholesale distribution business.

 

During the three and six months ended June 30, 2012, cupcakes represented 77.2% and 77.7%, respectively, of net sales compared to 76.6% and 77.0%, respectively, for the same periods in 2011. Other baked goods sales from cookies, cakes, pies, brownies, muffins and assorted pastries for the three and six months ended June 30, 2012 represented 10.4% and 10.6%, respectively, of net sales compared to 11.8% for both of 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 six months ended June 30, 2012, beverages represented 10.5% and 10.2%, respectively, of Crumbs’ net sales compared to 9.4% and 8.8%, 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 June 30, 2012, Crumbs had relationships 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 six months ended June 30, 2012 were $4.78 million and $9.54 million, respectively, a 9.9% and 13.2% increase, as compared to $4.35 million and $8.43 million, respectively, 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 costs at a majority of the stores opened prior to 2011. Cost of sales as a percentage of net sales for the three and six months ended June 30, 2012 were 43.1% and 42.7%, respectively, as compared to 42.3% and 42.1%, respectively, for the same periods in 2011. The increases were primarily attributable to increases in promotional incentives.

 

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 six months ended June 30, 2012 were $0.40 million and $0.69 million, respectively, a 9.1% and 15.9% decrease, as compared to $0.44 million and $0.82 million, respectively, for the same periods in 2011. The decreases were due to reductions in public relations fees in 2012, reductions in kosher certification fees and the elimination of product giveaway expenses incurred in 2011 during investor presentations related to the Merger. Selling expenses as a percentage of net sales for the three and six months ended June 30, 2012 were 3.6% and 3.1%, respectively, as compared to 4.3% and 4.1%, 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, employment taxes, medical insurance and workers compensation insurance.

 

Staff expenses for the three and six months ended June 30, 2012 were $3.35 million and $6.74 million, respectively, a 2.8% and 10.1% increase, as compared to $3.26 million and $6.12 million, respectively, for the same periods in 2011. The increases were attributable to the addition of corporate staff, the addition of staff for new stores opened in the second half of 2011 and the first quarter of 2012, and stock compensation expense related to the issuance of CBS’ shares to Crumbs’ employees, offset by a $0.63 million and $1.00 million decrease in store staff expenses in existing stores for the three and six months ended June 30, 2012, respectively. Staff expenses were reduced in an effort to keep labor percentages in line with decreasing store sales. The Company added 13 corporate staff positions during the 12 months ended June 30, 2012, which increased staff expenses by approximately $0.29 million and $0.53 million during the three and six months ended June 30, 2012, respectively. The increase was offset by a $0.12 and $0.11 million decrease in staff expenses during the three and six months ended June 30, 2012, respectively, from one and 7 corporate staff positions eliminated during the same periods, respectively, as well as a $.08 million and $0.30 million decrease from the elimination of guaranteed payments for the three and six months ended June 30, 2012, respectively. In addition, Crumbs opened 16 new stores during the 12 months ended June 30, 2012 and staffed the stores with 127 new store staff positions, which increased staff expenses by approximately $0.65 million and $1.32 million during the three and six months ended June 30, 2012. Employee stock compensation expense was $0.06 million and $0.09 million for the three and six months ended June 30, 2012, and there was no employee stock compensation expense in 2011. Staff expenses as a percentage of net sales for the three and six months ended June 30, 2012 were 30.2% and 30.1%, respectively, as compared to 31.7% and 30.6%, respectively, for the same periods in 2011.

 

 

Staff expenses of $2.23 million and $4.62 million were attributable to store staff for the three and six months ended June 30, 2012, an increase of 0.9% and 8.2%, as compared to $2.21 million and $4.27 million for the same periods in 2011. Store staff expenses as a percentage of store net sales for the three and six months ended June 30, 2012 were 21.0% and 21.6%, respectively, as compared to 22.8% for both of the same periods in 2011.

 

Occupancy expenses are primarily attributable to the Company’s 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, the Company records minimum rental expenses on a straight-line basis over the terms of the leases. This treatment causes 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, advertising and commissions, are included in occupancy expenses. Other expenses, such as utilities, cleaning, licenses, maintenance, property and liability insurance are also included in occupancy expenses.

  

Occupancy expenses for the three and six months ended June 30, 2012 were $2.43 million and $4.79 million, respectively, a 42.1% and 46.5% increase, as compared to $1.71 million and $3.27 million, respectively, for the same periods in 2011. Occupancy expenses as a percentage of net sales for the three and six months ended June 30, 2012 were 21.9% and 21.4%, respectively, as compared to 16.6% and 16.3% for the same periods in 2011. Occupancy expense increases were primarily related to lease expenses associated with the opening of 16 additional stores over the past 12 months. 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 six months ended June 30, 2012 were $1.93 million and $3.83 million, respectively, an increase of 46.2% and 50.8%, as compared to $1.32 million and $2.54 million, respectively, 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 six months ended June 30, 2012 were $0.84 million and $1.63 million, respectively, a 33.3% and 61.4% increase, as compared to $0.63 million and $1.01 million, respectively, for the same periods in 2011. General and administrative expenses as a percentage of net sales for the three and six months ended June 30, 2012 were 7.6% and 7.3%, respectively, compared to 6.1% and 5.0% for the same periods in 2011. The increase was primarily attributable to public company costs and professional fees.

 

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 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 six months ended June 30, 2012 were $0.07 million and $0.18 million, respectively, an increase of 40.0% and 63.6%, as compared to $0.05 million and $0.11 million, respectively, for the same periods in 2011. New store expenses as a percentage of net sales were 0.6% and 0.8%, respectively, for the three and six months ended June 30, 2012 compared to 0.5% for both of the same periods in 2011. The increases were primarily attributable to costs associated with one store scheduled to open later this year.

 

Depreciation and amortization expenses for the three and six months ended June 30, 2012 were $0.47 million and $0.92 million, respectively, an increase of 34.3% and 35.3%, as compared to $0.35 million and $0.68 million, respectively, for the same periods in 2011. Depreciation and amortization expenses as a percentage of net sales for the three and six months ended June 30, 2012 were 4.2% and 4.1%, respectively, as compared to 3.4% for both of the same periods in 2011. Depreciation and amortization expenses increased primarily as a result of new store additions in the second half of 2011 and the first quarter of 2012, including related lease review and negotiation fees.

 

  

Other income (expense) reported for the three and six months ended June 30, 2012 was $0.52 million and $0.08 million, respectively, which was primarily composed of income resulting from the change in fair value of the liability associated with CBS’ outstanding warrants to purchase common stock. See Note 1 to the condensed consolidated financial statements included in Item 1 of Part I of this amended report for further information about the warrant liability.

 

General Economic Trends and Seasonality

 

The Company’s 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 healthcare 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.

 

The Company’s 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.

 

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

 

Liquidity and Capital Resources

 

As a result of the Merger in 2011, CBS contributed approximately $13.7 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.

 

During the last six months, management has identified and instituted six key initiatives which it believes will improve the financial performance of the Company, bolster the image of the Crumbs brand, and position the Company 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 implement these initiatives effectively and 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. This acceleration will require working capital in greater amounts and over a shorter period of time than contemplated under the Company’s recent growth strategy.

 

As of June 30, 2012, the Company had approximately $2.93 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. Unless the Company can generate a significant increase in cash from sales, it will need to raise additional capital through public or private financings to fund management’s accelerated store growth strategy. The Company is currently consulting with nationally-recognized financial advisors for the purpose of investigating opportunities for raising the additional capital that management believes will be needed to fund the Company’s strategies for the remainder of 2012 and 2013.

  

Cash Flows

 

The Company’s net cash used in operating activities was $1.73 million and $1.05 million, respectively, during the six months ended June 30, 2012 and 2011. The increase in operating cash outflows was primarily attributable to an increase in operating expenses disproportionate to the increase in sales for the period. The increase in cash outflows was partially offset by receivable collections and the usage of inventory and application of rent paid in prior periods.

 

Net cash used in investing activities during the six months ended June 30, 2012 and 2011 was $1.09 million and $1.77 million, respectively. Investing cash outflows consisted primarily of costs related to three new stores, construction in progress related to two stores and corporate computer equipment purchases for the six months ended June 30, 2012. For the six months ended June 30, 2011, investing cash outflows consisted primarily of costs related to five new stores and construction in progress related to two stores.

 

  

Off-Balance Sheet Arrangements

 

The Company 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

 

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

 

Restatement of Financial Information

 

On February 12, 2013, the Audit Committee of the Board of Directors of CBS concluded, after consulting with management, that CBS’ consolidated financial statements for the year ended December 31, 2011 that were included in CBS’ Annual Report on Form 10-K for the year then ended and the consolidated financial statements for each of the quarters ended September 30, 2012, June 30, 2012, March 31, 2012, September 30, 2011 and June 30, 2011 that were included in CBS’ Quarterly Reports on Form 10-Q for those quarters (collectively, the “Prior Financial Statements”) should no longer be relied upon because of an error in the Prior Financial Statements relating to CBS’ accounting for its outstanding common stock warrants.

 

A more detailed description of the restatements made to the financial statements for the three and six month periods ended June 30, 2012 is provided in Note 1 to the condensed consolidated financial statements included with this report.

 

Recent Accounting Pronouncements

 

We have evaluated recent accounting pronouncements and do not believe the adoption of any recently issued accounting standards will have a material impact on our financial position or results of operations.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in CBS’ reports filed under 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.

 

  

Prior to August 14, 2012, an evaluation of the effectiveness of these disclosure controls as of June 30, 2012 was carried out under the supervision and with the participation of management, including the PEO and the PAO. Based on that evaluation, management, including the PEO and the PAO, concluded and disclosed in the Original Report that our disclosure controls and procedures were, in fact, effective at the reasonable assurance level. As discussed in the Explanatory Note to this amended report and in Note 1 to the condensed consolidated financial statements presented herein, however, management subsequently discovered that CBS, which has historically classified its outstanding common stock purchase warrants as equity, is required pursuant to Accounting Standards Codification Subtopic 815-40, Contracts in Entity’s Own Equity, to classify such warrants as a derivative liability. In light of this discovery, our disclosure controls and procedures as of June 30, 2012 have been re-evaluated under the supervision and with the participation of management, including the PEO and the PAO. Based on such re-evaluation, such officers have determined that our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2012. Management has taken steps which it believes will ensure, to the extent reasonably possible, that this type of error will not occur in the future.

 

During the second 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.

 

PART II

 

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.

 

  

SIGNATURES

 

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

 

	CRUMBS BAKE SHOP, INC.
Date:  April 12, 2013	By:	/s/ Julian R. Geiger
		Julian R. Geiger
		President and Chief Executive Officer
		(Principal Executive Officer)
Date:  April 12, 2013	By:	/s/ John D. Ireland
		John D. Ireland
		Senior Vice President-Finance, Chief Financial
		Officer and Treasurer
		(Principal Accounting Officer)

 

 

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)