UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

(Mark One)

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

 

For the quarterly period ended September 30, 2011

 

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

 

57th Street General Acquisition Corp.

(Former Name, Former Address, and Former Fiscal

Year, if Changed Since Last Report)

 

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. þ 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). þ 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 þ

 

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

 

As of November 11, 2011, the registrant had 5,505,885 shares of Common Stock outstanding.

 

 

EXPLANATORY NOTE

 

This Amendment No. 1 on Form 10-Q/A to the Quarterly Report of Crumbs Bake Shop, Inc. (“CBS”) on Form 10-Q for the quarter ended September 30, 2011 which was initially filed with the Securities and Exchange Commission (the “SEC”) on November 14, 2011 (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. 1 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. 1 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	ITEM 1.	Financial Statements	3
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	ITEM 4.	Controls and Procedures	23
PART II	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’ Registration Statement on Form S-3 (File No. 333-175408); (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

(Formerly Known As 57th Street General Acquisition Corp.)

CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS

 

		September 30,				December 31,
		2011				2010
		(Unaudited)				(Audited)
		(Restated)
ASSETS
Current assets
Cash		$	8,628,335			$	655,022
Trade receivables			330,750				248,061
Inventories			365,836				240,965
Prepaid rent			576,997				386,718
Deferred financing costs			-				215,302
Other current assets			349,808				81,631
Total current assets			10,251,726				1,827,699
Property and equipment, net			11,287,077				8,784,505
Other assets
Deferred tax asset			4,773,500				-
Restricted certificates of deposit			673,000				30,000
Intangible assets, net			383,577				429,238
Deposits			286,853				276,513
Other			93,064				35,951
Total other assets			6,209,994				771,702
		$	27,748,797			$	11,383,906
LIABILITIES, MEMBERS' EQUITY AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	1,726,383			$	2,615,481
Payroll liabilities			391,061				141,337
Sales tax payable			69,472				47,580
Gift cards and certificates outstanding			124,425				120,002
Total current liabilities			2,311,341				2,924,400
Long-term liabilities
Deferred rent			2,665,279				1,863,243
Payable to related parties pursuant to tax receivable agreement			2,386,750				-
Warrant liability			1,909,705				-
Total liabilities			9,273,075				4,787,643
Members' equity			-				6,596,263
Stockholders' equity
Preferred stock, $.0001 par value; 1,000,000 shares authorized; 390,000 shares issued and outstanding at September 30, 2011			39				-
Common stock, $.0001 par value; 100,000,000 shares authorized; 7,100,469 shares issued, 5,505,885 outstanding at September 30, 2011			710				-
Additional paid-in capital			26,986,744				-
Accumulated deficit			(326,718	)			-
Treasury stock, at cost			(15,913,948	)			-
Total Crumbs Bake Shop, Inc. stockholders' equity			10,746,827				-
Non-controlling interest			7,728,895				-
Total stockholders' equity			18,475,722				-
		$	27,748,797			$	11,383,906

 

See accompanying notes to condensed consolidated interim financial statements.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(Formerly Known As 57th Street General Acquisition Corp.)

 

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(Restated)								(Restated)
Net sales		$	8,876,352			$	7,505,940			$	28,889,120			$	22,545,536
Cost of sales
(exclusive of depreciation shown separately below)			3,768,076				3,061,819				12,194,066				9,212,198
Gross profit			5,108,276				4,444,121				16,695,054				13,333,338
Operating expenses
Selling expenses			282,910				239,096				1,010,002				817,921
Staff expenses			3,100,749				2,081,545				9,208,912				5,982,307
Occupancy expenses			1,827,159				1,240,024				5,191,957				3,504,316
General and administrative			659,639				349,146				1,682,279				935,294
New store expenses			418,555				171,222				532,923				351,270
Depreciation and amortization			362,277				212,882				1,037,476				613,676
			6,651,289				4,293,915				18,663,549				12,204,784
Income (loss) from operations			(1,543,013	)			150,206				(1,968,495	)			1,128,554
Other income (expense)
Interest and other income			61				56				334				103
Abandoned lease projects			(6,184	)			(189,532	)			(19,628	)			(198,018	)
Change in fair value of warrant liability			12,276,675				-				2,455,335				-
			12,270,552				(189,476	)			2,436,041				(197,915	)
Income (loss) before income taxes			10,727,539				(39,270	)			467,546				930,639
Income taxes			10,510				-				10,510				-
Net income (loss) attributable to the controlling and non-controlling interests			10,717,029				(39,270	)			457,036				930,639
Less: Net (income) loss attributable to non-controlling interest			(4,443,280	)			-				(189,487	)			-
Net income (loss) attributable to stockholders		$	6,273,749			$	(39,270	)		$	267,549			$	930,639
Net income (loss) per common share, basic and diluted		$	1.14			$	(0.01	)		$	0.05			$	0.29
Weighted average number of common shares outstanding, basic and diluted			5,505,885				6,062,556	*			5,567,802				3,177,198	*

 

* The weighted average number of common shares outstanding is that of Crumbs Bake Shop, Inc.

 

See accompanying notes to condensed consolidated interim financial statements.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(Formerly Known As 57th Street General Acquisition Corp.)

 

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

 

From January 1, 2010 through September 30, 2011

 

																														Total Crumbs Bake								Total				Total
		Preferred Stock								Common Stock								Additional				Accumulated				Treasury				Shop, Inc.				Non-Controlling				Stockholders'				Members'
		Shares				Amount				Shares				Amount				Paid-in-capital				Deficit				Stock				Stockholders' Equity				Interest				Equity				Equity
Balances, January 1, 2010			-			$	-				-			$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	6,152,065
Capital distributions			-				-				-				-				-				-				-				-				-				-				(352,173	)
Net income			-				-				-				-				-				-				-				-				-				-				796,371
Balances, December 31, 2010 (Audited)																																											6,596,263
Merger of Crumbs Holdings LLC into 57th Street Merger Sub LLC (Restated)			454,139				45				6,089,075				609				23,254,792				(594,267	)			-				22,661,179				8,219,455				30,880,634				(6,596,263	)
Common stock tender of 1,594,584 shares pursuant to Offer to Purchase at $9.98 per share			-				-				-				-				-				-				(15,913,948	)			(15,913,948	)			-				(15,913,948	)			-
Warrants exchanged for common stock pursuant to Insider Warrant Exchange Agreement (Restated)			-				-				370,000				37				2,216,115				-				-				2,216,152				743,848				2,960,000				-
Liquidity shares exchanged for common stock pursuant to Exchange and Support Agreement			(64,139	)			(6	)			641,394				64				1,515,837				-				-				1,515,895				(1,423,895	)			92,000				-
Net loss (Restated)			-				-				-				-				-				267,549				-				267,549				189,487				457,036				-
Balances, September 30, 2011 (Unaudited) (Restated)			390,000			$	39				7,100,469			$	710			$	26,986,744			$	(326,718	)		$	(15,913,948	)		$	10,746,827			$	7,728,895			$	18,475,722			$	-

 

See accompanying notes to condensed consolidated interim financial statements.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(Formerly Known As 57th Street General Acquisition Corp.)

 

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED)

 

For the Nine Months Ended September 30,		2011				2010
		(Restated)
Cash flows from operating activities
Net income (loss)		$	457,036			$	930,639
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			1,037,476				613,676
Abandoned lease projects			19,628				198,018
Change in fair value of warrant liability			(2,455,335	)			-
Changes in operating assets and liabilities:
Trade receivables			(61,028	)			12,188
Inventories			(124,871	)			(46,054	)
Prepaid rent			(190,279	)			(24,749	)
Other current assets			(268,177	)			(102,774	)
Deposits			(10,340	)			(15,356	)
Accounts payable and accrued expenses			(902,739	)			(70,134	)
Payroll liabilities			249,724				136,374
Sales tax payable			21,892				10,634
Gift cards and certificates outstanding			4,423				13,717
Deferred rent			802,036				373,124
Net cash provided by (used in) operating activities			(1,420,554	)			2,029,303
Cash flows from investing activities
Purchase of restricted certificates of deposit			(643,000	)			-
Purchases of property and equipment			(3,448,039	)			(1,650,128	)
Proceeds from sales of property and equipment			-				135,550
Purchases of intangible assets			(52,024	)			(39,899	)
Purchases of other assets			(71,065	)			-
Net cash used in investing activities			(4,214,128	)			(1,554,477	)
Cash flows from financing activities
Proceeds retained from reverse merger			13,697,319				-
Capital distributions			(89,324	)			(334,251	)
Net cash provided by (used in) financing activities			13,607,995				(334,251	)
Net increase in cash			7,973,313				140,575
Cash, beginning of period			655,022				808,528
Cash, end of period		$	8,628,335			$	949,103
Supplemental disclosure of non-cash financing activities
Net assets acquired in reverse merger		$	2,087,468			$	-
Exchange of New Crumbs Class B Exchangeable Units for common stock of Crumbs Bake Shop, Inc.		$	1,423,895			$	-

 

See accompanying notes to condensed consolidated interim financial statements.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS 57^TH STREET GENERAL ACQUISITION CORP. )

 

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

1.	Restatement of financial information

 

Crumbs Bake Shop, Inc., formerly known as 57th Street General Acquisition Corp., (“CBS”) has restated its unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2011 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 changes in fair value of the warrants from May 5, 2011 to June 30, 2011 and June 30, 2011 to September 30, 2011. 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).

 

		As Previously								As
		Reported				Adjustments				Restated
		($)				($)				($)
Condensed Consolidated Balance Sheet as of September 30, 2011
Warrant liability			-				1,909,705				1,909,705
Total liabilities			7,363,370				1,909,705				9,273,075
Additional paid-in capital			30,254,849				(3,268,105	)			26,986,744
Accumulated retained earnings (deficit)			(1,764,071	)			1,437,353				(326,718	)
Non-controlling interest			7,807,848				(78,953	)			7,728,895
Total stockholders' equity			20,385,427				(1,909,705	)			18,475,722
Condensed Consolidated Statement of Operations for the three months ended September 30, 2011
Change in fair value of warrant liability			-				12,276,675				12,276,675
Net income (loss) attributable to the controlling and non-controlling interests			(1,559,646	)			12,276,675				10,717,029
Less: Net (income) loss attributable to non-controlling interest			646,629				(5,089,909	)			(4,443,280	)
Net income (loss) attributable to stockholders			(913,017	)			7,186,766				6,273,749
Net income (loss) per common share, basic and diluted			(0.17	)			1.31				1.14
Condensed Consolidated Statement of Operations for the nine months ended September 30, 2011
Change in fair value of warrant liability			-				2,455,335				2,455,335
Net income (loss) attributable to the controlling and non-controlling interests			(1,998,299	)			2,455,335				457,036
Less: Net (income) loss attributable to non-controlling interest			828,495				(1,017,982	)			(189,487	)
Net income (loss) attributable to stockholders			(1,169,804	)			1,437,353				267,549
Net income (loss) per common share, basic and diluted			(0.21	)			0.26				0.05
Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2011
Net income (loss) attributable to the controlling and non-controlling interests			(1,998,299	)			2,455,335				457,036
Change in fair value of warrant liabiilty			-				(2,455,335	)			(2,455,335	)

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS 57^TH STREET GENERAL ACQUISITION CORP. )

 

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

2.	Nature of business and summary of significant accounting policies

 

Unaudited Interim Financial Information

 

The accompanying condensed consolidated interim financial information 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 September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 is unaudited and has been prepared on the same basis as the audited consolidated financial statements (CBS and Crumbs are collectively referred to herein as the “Company”). In the opinion of management, such unaudited financial information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Operating results for the three and nine months ended September 30, 2011 and 2010 are not necessarily indicative of results that may be expected for the year ending December 31, 2011. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in CBS’ Third Amended and Restated Offer to Purchase, dated April 18, 2011 (as amended and supplemented on each of April 21, 2011, April 25, 2011, April 26, 2011, April 27, 2011 and May 5, 2011), filed with the Securities and Exchange Commission.

 

Reverse Merger

 

On January 9, 2011, CBS, 57th 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 Holdings and the Members, 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 CBS acquired Holdings. Pursuant to the terms of the Business Combination Agreement, among other things, Merger Sub merged with and into Holdings with Crumbs surviving as a non-wholly owned subsidiary of CBS (the “Merger”) in exchange for consideration in the form of cash, newly issued preferred stock of CBS, and newly issued exchangeable units of Holdings. The Merger was consummated on May 5, 2011. Management has concluded that Holdings is the accounting acquirer based on its evaluation of the facts and circumstances of the acquisition. The entity surviving the Merger kept the Crumbs Holdings LLC name.

 

Pursuant to the Business Combination Agreement, upon consummation of the Merger, Holdings amended and restated its limited liability company operating agreement to replace the various classes of its existing membership interests with two new classes of membership interests:

 

•

a class of membership interests designated New Crumbs Class A Voting Units (the “New Crumbs Class A Voting Units”); and

 

•

a class of membership interests designated New Crumbs Class B Exchangeable Units (the “New Crumbs Class B Exchangeable Units”).

 

Upon consummation of the Merger, Holdings issued to the Members an aggregate of 4,541,394 New Crumbs Class B Exchangeable Units, which have limited voting rights. The New Crumbs Class B Exchangeable Units are exchangeable for shares of CBS’ common stock on a one for one basis (subject to certain adjustments related to organic dilution) at the request from time to time of any holder of such units pursuant to the terms of an Exchange and Support Agreement (“Exchange and Support Agreement”) between the Members, CBS, and Holdings. CBS accordingly reserved 4,541,394 shares of its common stock for issuance to the Members upon their exchange of 4,541,394 New Crumbs Class B Exchangeable Units. CBS also reserved an additional 4,400,000 shares of its common stock for issuance in exchange for up to 4,400,000 New Crumbs Class B Exchangeable Units which may be earned by the Members if certain financial or stock price targets are met.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS 57^TH STREET GENERAL ACQUISITION CORP. )

 

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

Reverse Merger (continued)

 

Additionally, CBS issued to the Members 454,139.4 shares of Series A Voting Preferred Stock of CBS (the “Series A Voting Preferred Stock“). Holders of Series A Voting Preferred Stock have the right to vote on all matters submitted to a vote of CBS’ common stockholders, voting together with the holders of common stock as a single class; each share of Series A Voting Preferred Stock held on the record date for determining stockholders initially will be entitled to 10 votes (subject to adjustment for organic dilution). Upon exchange of the New Crumbs Class B Exchangeable Units in accordance with the Exchange and Support Agreement, 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 New Crumbs Class B Exchangeable Units, the Series A Voting Preferred Stock will not be redeemable. Except as provided in the Exchange and Support Agreement and the Business Combination Agreement, Series A Voting Preferred Stock will have no other conversion, preemptive or other subscription rights with respect to the Series A Voting Preferred Stock , and there are no sinking fund provisions applicable to the Series A Voting Preferred Stock.

 

Upon consummation of the Merger, Holdings issued to CBS 4,494,491 New Crumbs Class A Voting Units. Holders of New Crumbs Class A Voting Units possess all voting rights in Crumbs on ordinary matters. CBS is the sole holder of New Crumbs Class A Voting Units. In the event Members exchange their New Crumbs Class B Exchangeable Units for CBS common stock, CBS will be issued New Crumbs Class A Voting Units equal to the number of New Crumbs Class B Exchangeable Units being exchanged pursuant to the Exchange and Support Agreement.

 

The aggregate amount of cash consideration paid by the Company pursuant to the Business Combination Agreement was approximately $22 million.

 

Nature of Business

 

The Company specializes in the sale of comfort-oriented and elegant baked goods, with more than 150 varieties of goods baked fresh daily, but is specifically known for its line of gourmet cupcakes. Other items sold include beverages and logoed merchandise. Sales are primarily conducted through retail locations in New York, California, Connecticut, Illinois, New Jersey, Virginia and Washington D.C., while a small percentage of baked goods sales stem from wholesale distribution and catering sales to several metropolitan area vendors. The Company also commenced its e-commerce business in early 2009 enabling nationwide cupcake sales.

 

Holdings was the sole member of 59 limited liability companies, all operating under the trade name “Crumbs Bake Shop,” as of September 30, 2011. A new limited liability company is formed for each retail location and business, and as of September 30, 2011, 39 retail locations, the wholesale business, e-commerce and catering business were in operation.

 

Basis of Presentation

 

The condensed consolidated interim financial statements have been prepared in conformity with the accounting principles generally accepted in the United States of America (“GAAP”).

 

Principles of Consolidation

 

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

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS 57^TH STREET GENERAL ACQUISITION CORP. )

 

NOTES TO CONDENSED CONSOLIDATED INTERIM 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 accounting principles generally accepted in the United States of America 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 period. Actual results could differ from those estimates.

 

Restricted Certificates of Deposit

 

As of September 30, 2011 and December 31, 2010, the Company had $673,000 and $30,000, respectively, 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 Crumbs’ non-cancellable retail store operating leases.

 

New Store Expenses

 

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

 

Sales Incentives and Promotions

 

Expenses related to buy-one-get-one-free incentives and product costs associated with redemptions from our coffee loyalty card program, through which customers receive free product after a designated number of purchases are recorded in cost of sales (See “Reclassifications” within Note 2). Ongoing promotional product giveaway costs are included in selling expenses, whereas product giveaway costs associated with new store openings are included in new store expenses.

 

Income Taxes

 

The Company complies with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

The Company is required to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously recognized results in the Company recording a tax liability that reduces ending stockholders’ equity. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2011 and 2010. However, the Company’s conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized as of and for the three and nine months ended September 30, 2011 and 2010.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS 57^TH STREET GENERAL ACQUISITION CORP. )

 

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

Income Taxes (continued)

 

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’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

 

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 New Crumbs Class B Exchangeable Units for shares of CBS’ common stock as described above occurs, which may result in an adjustment to the tax basis of the assets of Holdings at the time of an exchange of New Crumbs Class B Exchangeable Units. As a result of both the initial purchase of New Crumbs Holdings Class B Exchangeable 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 New Crumbs Class B Exchangeable 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 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 our 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. 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 accounts receivable. The carrying amounts for cash and cash equivalents and accounts receivable approximate fair value due to the short term nature of the instruments.

 

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 the Corporation has been estimated using the warrants’ quoted market price.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS 57^TH STREET GENERAL ACQUISITION CORP. )

 

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

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).

 

Net Income (loss) per common share

 

The Company complies with accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Net income (loss) per common share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Warrants to purchase 5,456,300 shares of common stock for the three and nine months ended September 30, 2011 and 2010 were excluded from the calculation of diluted income (loss) per share because they would have been anti-dilutive. As a result, diluted income (loss) per common share is the same as basic loss per common share for the period.

 

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 financial position and results of operations.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS 57^TH STREET GENERAL ACQUISITION CORP. )

 

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

Reclassifications

 

Certain reclassifications have been made to the prior year financial statements in order for them to be in conformity with the current year presentation. Such reclassifications have no effect on reported net income.

 

During the three months ended September 30, 2011, the Company reclassified to cost of sales certain costs associated with promotional activities, which included expenses related to buy-one-get-one-free incentives and product costs associated with redemptions from our coffee loyalty card program, through which customers receive free product after a designated number of purchases. For the six months ended June 30, 2011, the Company reclassified approximately $32,000 as cost of sales that were previously recorded as selling expenses under these programs. For the three and nine months ended September 30, 2010, the Company reclassified approximately $13,500 and $34,000, respectively, as cost of sales that were previously recorded as selling expenses under these programs.

 

3.	Inventories

 

Inventories are valued at the lower of cost or market, with cost being determined using the average cost method. At September 30, 2011 and December 31, 2010, inventories consisted of the following:

 

		September 30, 2011 (Unaudited)				December 31, 2010 (Audited)
Packaging		$	164,448			$	54,980
E-Commerce packaging			138,466				117,445
Merchandise			21,109				45,599
Store supplies			41,813				22,941
Total Inventory		$	365,836			$	240,965

 

Packaging inventory 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 retail stores. 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.

 

The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis as of June 30, 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:

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS 57^TH STREET GENERAL ACQUISITION CORP. )

 

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

4.	Fair value measurements (continued)

 

Description

September 30, 2011

Quoted Prices in Active Markets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Other Unobservable Inputs (Level 3)

Liabilities:

Warrant liability

$

1,909,705

 

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, where such substitution is allowed by the landlords. As of September 30, 2011 and December 31, 2010, issued and unused letters of credit totaled $637,425 and $529,425, respectively. 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 Holdings member. Letters of credit amounting to $539,425 and $499,425 were reserved under this line of credit as of September 30, 2011 and December 31, 2010, respectively, and therefore cannot exceed $575,000. The line of credit is secured by a certificate of deposit. Letters of credit in the amount of $98,000 issued by the second institution are also secured by certificates of deposit. No amounts were outstanding at September 30, 2011 and December 31, 2010.

 

The certificates of deposit used to secure the letters of credit are recorded as restricted certificates of deposit in the balance sheet (See Note 2).

 

6.	Related party

 

In 2010, Crumbs leased building space for seven of its retail locations as sub-leases from Bauer Holdings, Inc., formerly known as Crumbs, Inc., a member of Holdings, which is controlled and owned by officers of the Company. Crumbs paid the original unrelated lessor directly at the original terms of the agreements. Two of these sub-leases were terminated during 2010, and the remaining five sub-leases were assigned to their respective successor entities in the second quarter of 2011.

 

For the three and nine months ended September 30, 2011, the Company paid approximately $285 and $4,870, respectively, and for the three and nine months ended September 30, 2010, paid $6,982 and $24,188, respectively, in fees, unrelated to audit services, to an accounting firm in which an officer of the Company is a part owner.

 

Additionally, for the three and nine months ended September 30, 2011, the Company paid approximately $5,175 and $15,525, respectively, and for the three and nine months ended September 30, 2010, paid $4,315 and $13,025, respectively, in rent to a landlord that is partially owned by an officer of the Company.

 

 

CRUMBS BAKE SHOP, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS 57^TH STREET GENERAL ACQUISITION CORP. )

 

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

7.	Preferred stock

 

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” in Note 2), the Members were issued 4,541,394 New Crumbs Class B Exchangeable Units and 454,139.4 shares of Series A Voting Preferred Stock. Upon exchange of the New Crumbs Class B Exchangeable 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 New Crumbs Class B Exchangeable Units, the Series A Voting Preferred Stock will not be redeemable.

 

In June 2011, 641,394 New Crumbs Class B Exchangeable Units were exchanged for 641,394 shares of common stock, and in turn, 64,139.4 shares of Series A Voting Preferred were automatically redeemed and cancelled pursuant to the Exchange and Support Agreement.

 

8.	Subsequent event

 

On October 26, 2011, 57^th Street General Acquisition Corp. filed its Third Amended and Restated Certificate of Incorporation with the State of Delaware Secretary of State to change its name to Crumbs Bake Shop, Inc.

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

 

Overview

 

About the Company

 

Crumbs Bake Shop, Inc. was formed in Delaware in October 2009 under the name of 57^th Street General Acquisition Corp. (“57^th Street”). 57^th Street entered into a Business Combination Agreement dated as of January 9, 2011 and amended on each of February 18, 2011, March 17, 2011 and April 7, 2011 (as amended, from time-to-time, the “Business Combination Agreement”), by and among 57^th Street, 57^th Street Merger Sub LLC, a Delaware limited liability company and wholly-owned subsidiary of 57^th Street (“Merger Sub”), Holdings, a Delaware limited liability company, the members of Holdings immediately prior to the consummation of the Merger (the “Members”) and the representatives of the Members and Holdings pursuant to which, subject to the terms and conditions contained therein, Merger Sub was merged with and into Holdings with Holdings surviving the merger as a non-wholly owned subsidiary of 57th Street (the “Merger”). The entity surviving the Merger kept the Crumbs Holdings LLC name. 57^th Street filed its Third Amended and Restated Certificate of Incorporation with the State of Delaware Secretary of State to change its name to Crumbs Bake Shop, Inc. on October 26, 2011.

 

We, through Crumbs, operate our business under the trade name of Crumbs Bake Shop. We offer a wide variety of cupcakes, cakes, pies, cookies and other baked treats. Cupcake sales have historically comprised the majority of our business. Crumbs believes that its baked goods appeal to a wide demographic of customers who span every socio-economic class. 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 the Continental Airlines Terminal at Newark Liberty International Airport in Newark, New Jersey.

 

As of November 1, 2011, there were 44 Crumbs retail stores operating in six states and Washington, D.C., including 19 locations in Manhattan, New York. Crumbs’ sales are primarily conducted through its retail locations in New York, California, Illinois, Connecticut, New Jersey, Virginia and Washington, D.C. However, a small percentage of baked goods sales are from Crumbs’ wholesale distribution business and catering sales to several metropolitan area vendors. Crumbs’ e-commerce division at http://www.crumbs.com allows cupcakes to be shipped nationwide. In light of the decline in operating performance at a number of Crumbs’ stores, Management and the Board are engaged in an ongoing process to evaluate and, as necessary, address weaknesses and implement improvements in Crumbs’ management, operations and growth strategies as part of our efforts to maximize overall profitability and shareholder value.

 

2011 Highlights

 

Store Development. During the nine months ended September 30, 2011 we opened six new Crumbs Bake Shop store locations, and subsequent to the quarter ended September 30, 2011, we have opened five additional locations. We have also entered into ten additional leases for upcoming store locations.

 

Sales Growth. Net sales grew from approximately $22.55 million to approximately $28.89 million for the first nine months of 2011 compared to the same period in 2010, an increase of 28.1%.

 

Results of Operations and Known Trends

 

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

 

  

Net Sales

 

On January 1, 2011, there were 22 stores in the same store sales base, with three additional stores entering the base during the nine months ended September 30, 2011. There were no stores that entered the same store sales base during the three months ended September 30, 2011. 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 nine months ended September 30, 2011 were $8.88 million and $28.89 million, respectively, an increase of 18.3% and 28.1%, as compared to $7.51 million and $22.55 million, respectively, for the same periods in 2010. The increase in net sales for the three months ended September 30, 2011 was primarily attributable to $2.47 million in sales from 14 new stores opened from August 11, 2010 through September 30, 2011, offset by sales decreases of $1.08 million from 25 stores in the same store sales base. The increase in net sales for the nine months ended September 30, 2011 was primarily attributable to $7.74 million in sales from 17 new stores opened from November 4, 2009 through September 30, 2011, offset by sales decreases of $1.54 million from 23 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 our catering, e-commerce and wholesale operations for the three and nine months ended September 30, 2011 were $0.45 million and $1.72 million, as compared to $0.47 million and $1.63 million, respectively, for the same period in 2010, a decrease of 4.9% for the three months then ended and an increase of 5.2% for the nine months then ended. The primary reason for the increase for the nine months ended September 30, 2011 was the growth of our e-commerce operation, while the decrease for the three months ended September 30, 2011 was primarily attributable to a decrease in sales from our wholesale operation.

 

During the three and nine months ended September 30, 2011, cupcakes represented 75.2% and 76.5%, respectively, of Crumbs’ net sales as compared to 77.1% and 77.2%, respectively, for the same periods in 2010. Each Crumbs store offers more than 150 different baked goods daily. Products include a full line of breakfast items, such as danishes, scones, croissants and muffins, as well as other popular desserts including brownies, cakes, pies and cookies. Other baked goods sales during the three and nine month periods ended September 30, 2011 represented 12.2% and 11.9%, respectively, of Crumbs’ net sales as compared to 12.0% and 12.3%, respectively, for the same periods in 2010. The stores also carry beverages including whole leaf teas, espresso based drinks, drip coffees, hot chocolate, homemade sodas, and fresh squeezed lemonade. During the three and nine months ended September 30, 2011, beverages represented 10.8% and 9.4%, respectively, of Crumbs’ net sales as compared to 8.8% and 8.1%, respectively, for the same periods in 2010. The remaining net sales were primarily attributable to delivery and handling charges.

 

Cost of Sales

 

Product purchases for resale comprise the greater part of cost of sales. Baked goods are delivered to Crumbs’ stores by independent commercial bakeries. In each major market, Holdings contracts with a bakery able to exclusively supply proprietary products to Crumbs’ stores within a two hour drive. As of the date of this filing, Holdings has relationships with commercial bakeries in New York, Los Angeles, Northern Virginia and Illinois. Beverage materials and packaging are purchased from both national and local vendors. Deliveries for the stores are handled by local couriers. The e-commerce operation utilizes a fulfillment company in New York for both shipping and handling.

 

During the three months ended September 30, 2011, the Company reclassified to cost of sales certain costs associated with promotional activities, which included expenses related to buy-one-get-one-free promotions and product costs associated with redemptions from our coffee loyalty card program, through which customers receive free product after a designated number of purchases. For the six months ended June 30, 2011, the Company reclassified approximately $32,000 as cost of sales that were previously recorded in selling expenses under these programs. For the three and nine months ended September 30, 2010, the Company reclassified approximately $13,500 and $34,000, respectively, as cost of sales that were previously recorded in selling expenses under these programs.

 

 

Cost of sales reported for the three and nine months ended September 30, 2011 was $3.77 million and $12.19 million, respectively, an increase of 23.1% and 32.4% as compared to $3.06 million and $9.21 million, respectively, for the same periods in 2010. Cost of sales as a percentage of net sales for the three and nine months ended September 30, 2011 was 42.5% and 42.2%, respectively, an increase of 1.7% and 1.3% as compared to 40.8% and 40.9%, respectively, for the same periods in 2010. The increase was primarily attributable to increases in packaging and beverage costs, excess inventory during periods of bad weather and increased percentage of revenue from suburban stores, which maintain more baked goods inventory than our urban stores.

 

Operating Expenses

 

Selling expenses include merchant account fees, fees paid to a public relations consultant, advertising (most of Crumbs’ advertising expenses are related to the e-commerce operation) and product promotional giveaways.

 

Selling expenses reported for the three and nine month periods ended September 30, 2011 were $0.28 million and $1.01 million, respectively, an increase of 18.3% and 23.5% as compared to $0.24 million and $0.82 million, respectively, for the same periods in 2010. This increase is due to additional expenses associated with our growth, particularly in the new markets of Washington, D.C. and Chicago, and is consistent with our growth in revenue. Selling expenses as a percentage of net sales were consistent at 3.2% for the three months ended September 30, 2011 and 2010, and decreased 0.4% to 3.2% from 3.6% for the nine months ended September 30, 2011 as compared to the same period in 2010.

 

Staff expenses include salaries and wages for both Crumbs retail store employees and corporate positions, guaranteed payments to certain members of Crumbs, as well as employment taxes, medical insurance and workers compensation insurance.

 

Staff expenses reported for the three and nine month periods ended September 30, 2011 were $3.10 million and $9.21 million, respectively, an increase of 49.0% and 53.9% as compared to $2.08 million and $5.98 million, respectively, for the same periods in 2010. Staff expenses as a percentage of net sales for the three and nine months ended September 30, 2011 were 34.9% and 31.9%, respectively, an increase of 7.2% and 5.4% as compared to 27.7% and 26.5%, respectively, for the same periods in the prior year. The increase is attributable to the addition of corporate staff members and increased corporate salaries, as well as increased staff expenses in our stores. The Company increased corporate salaries and added 14 corporate positions during the 12 months ended September 30, 2011, which increased staff expenses by approximately $0.33 million and $0.88 million during the three and nine months ended September 30, 2011, respectively. In addition, Crumbs opened 13 new stores during the 12 months ended September 30, 2011 and staffed the stores with 159 new store staff positions, which increased staff expenses by approximately $0.62 million and $1.77 million during the three and nine months ended September 30, 2011, respectively.

 

Staff expenses of $2.06 million and $6.32 million, respectively, were attributable to retail store staff expenses for the three and nine month periods ended September 30, 2011, an increase of 44.5% and 54.9% as compared to $1.43 million and $4.08 million, respectively, for the same periods in 2010. Retail store staff expenses as a percentage of retail store net sales for the three and nine months ended September 30, 2011 were 24.4% and 23.2%, respectively, an increase of 4.1% and 3.7% as compared to 20.3% and 19.5%, respectively, for the same periods in 2010. The increase is attributable to increased average staff expenses per store combined with the impact of (i) the addition into the net sales base of new stores with lower average sales and (ii) lower average sales in continuing stores, in each case, during the more recent comparable periods.

 

Holdings and its wholly-owned subsidiaries lease all of their retail store locations and corporate offices. The leases range in term from three to fifteen years, many with options to extend to twenty years. Most of the leases include periods of free rent and monthly rental rate escalation clauses. The Company amortizes the total rent to be paid during the lease term on a straight line basis over the entire base period of each lease. This treatment causes a non-cash expense in the early 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, kosher certification, maintenance, property and liability insurance are also included in occupancy expenses.

 

 

Occupancy expenses reported for the three and nine month periods ended September 30, 2011 were $1.83 million and $5.19 million, respectively, an increase of 47.3% and 48.2% as compared to $1.24 million and $3.5 million, respectively, for the same periods in 2010. Occupancy expenses as a percentage of net sales for the three and nine month periods ended September 30, 2011 were 20.6% and 18.0%, respectively, an increase of 4.1% and 2.5% as compared to 16.5% and 15.5%, respectively, for the same periods in 2010. Occupancy expense increases were primarily related to lease expenses associated with the opening of thirteen additional stores since September 30, 2010. 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 were $1.34 million and $3.88 million, respectively, for the three and nine month periods ended September 30, 2011, an increase of 41.7% and 42.2% as compared to $0.95 million and $2.73 million, respectively, for the same periods in 2010.

 

General and administrative expenses primarily include corporate expenses such as public company operating expenses, office supplies, travel, professional fees and bank service charges. The category also includes, to a lesser degree, retail store based expenses for miscellaneous supplies, uniforms and quality control.

 

General and administrative expenses reported for the three and nine month periods ended September 30, 2011 were $0.66 million and $1.68 million, respectively, an increase of 88.9% and 79.9% as compared to $0.35 million and $0.94 million, respectively, for the same periods in 2010. General and administrative expenses as a percentage of net sales for the three and nine months ended September 30, 2011 were 7.4% and 5.8%, respectively, an increase of 2.7% and 1.7% as compared to 4.7% and 4.1%, respectively, for the same periods in 2010. The increase was primarily attributable to expenses associated with being a public company, such as SEC filing fees, NASDAQ listing fees, director compensation, investor relation fees, legal fees and accounting fees, for the three and nine months ended September 30, 2011.

 

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 recorded 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 reported for the three and nine month periods ended September 30, 2011 were $0.42 million and $0.53 million, respectively, an increase of 144.5% and 51.7% as compared to $0.17 million and $0.35 million, respectively, for the same periods in 2010. New store expenses as a percentage of net sales were 4.7% and 1.8%, respectively, an increase of 2.4% and 0.2% as compared to 2.3% and 1.6%, respectively, for the same periods in 2010. The increase is primarily attributable to the increase in store openings for the three months ended September 30, 2011 as compared to the same period of the prior year. Four of the six store openings during the nine months ended September 30, 2011 took place in the third quarter, whereas only one of the two store openings for the same period in 2010 took place in the three months ended September 30, 2010.

 

Depreciation and amortization expenses reported for the three and nine month periods ended September 30, 2011 were $0.36 million and $1.04 million, respectively, an increase of 70.2% and 69.1% as compared to $0.21 million and $0.61 million, respectively, for the same periods in 2010. Depreciation and amortization expenses as a percentage of net sales were 4.1% and 3.6%, respectively, an increase of 1.3% and 0.9% as compared to 2.8% and 2.7%, respectively, for the same periods in 2010. Depreciation and amortization expenses increased as a result of new store additions and lease review and negotiation fees from those stores opened during the period.

 

Other income (expense) reported for the three and nine month periods ended September 30, 2011 was $12.7 million and $2.4 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 interim 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

 

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

 

Our 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 locations and could impact the daily delivery of its baked goods. On occasion, weather conditions have caused Crumbs to close stores during normal business hours. During the three months ended September 30, 2011, Hurricane Irene’s impact forced 27 Crumbs stores along the east coast to shut down in August 2011. Crumbs lost a total of 45 store days due to the storm.

 

Liquidity and Capital Resources

 

As a result of the Merger, which was consummated on May 5, 2011, approximately $13.7 million was contributed to Holdings. The Company’s primary source of liquidity from operations is cash generated from the sale of baked goods, beverages and merchandise. The Company’s primary uses of cash are cost of sales, operating expenses, capital expenditures, and tax distributions by Holdings to certain members of Holdings subject to individual level taxation on profits and payments to members under a tax benefit agreement.

 

As of September 30, 2011, the Company’s working capital was approximately $7.94 million. We anticipate incurring approximately $2.7 million of additional costs during the three months ended December 31, 2011 associated with the construction and buildout of new store locations, as well as the purchase/lease of equipment necessary to operate our new stores. The Company believes it has sufficient capital resources to meet its needs.

 

Cash Flows

 

The Company’s net cash used in operating activities was $1.42 million for the nine months ended September 30, 2011, as compared to $2.03 million provided by operating activities for the same period of the prior year. The increase in operating cash outflows for the nine months ended September 30, 2011 was primarily due to operating expense increases, inventory increases attributable to additional stores and additional packaging related to e-commerce shipments of new products, a $154,000 increase in prepaid rent as a result of payments due pursuant to the execution of fourteen new leases in 2011, a $148,000 increase in prepaid insurance, and a $0.9 million reduction in accounts payable primarily attributable to construction costs for stores opened in late 2010.

 

Net cash used in investing activities for the nine months ended September 30, 2011 was $4.21 million as compared to $1.55 million for the same period in 2010. Investing cash outflows for the nine months ended September 30, 2011 consisted primarily of total costs related to six new stores, construction in progress costs for fifteen additional stores and $0.64 million for the purchase of certificates of deposit used as security for letters of credit issued to several landlords in lieu of security deposit payments.

 

As a result of the consummation of the Merger on May 5, 2011, financing inflows for the nine months ended September 30, 2011 included $13.7 million in net proceeds from IPO funds held in trust. For the nine months ended September 30, 2011 and 2010, respectively, approximately $90,000 and $0.33 million of net cash used in financing activities was attributable to member capital distributions for state income tax obligations, state estimated tax payments and member personal expenses, treated as distributions.

 

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 describes its significant accounting policies in Note 1 of its consolidated financial statements in CBS’ Third Amended and Restated Offer to Purchase, dated April 18, 2011 (as amended and supplemented on each of April 21, 2011, April 25, 2011, April 26, 2011, April 27, 2011 and May 5, 2011), filed with the SEC. The preparation of the financial statements requires the Company to makes estimates, judgments and assumptions, which it believes to be reasonable, based on the information available. Actual results could differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies and estimates require management’s most subjective judgment in making estimates used in the preparation of its financial statements.

 

Impairment of Long-Lived Assets. When facts and circumstances indicate that the carrying values of long-lived assets may not be recoverable, the Company evaluates long-lived assets for impairment. The Company first compares the carrying value of the asset to the asset’s estimated future cash flows (undiscounted). If the estimated future cash flows are less than the carrying value of the asset, an impairment loss is calculated based on the asset’s estimated fair value. The fair value of the assets is estimated using a discounted cash flow model based on future store revenue and operating costs, using internal projections. Cash flows for retail assets are identified at the individual store level. Long-lived assets to be disposed of are reported at the lower of their carrying amount, or fair value less estimated costs to sell.

 

Lease Obligations. Crumbs leases retail stores and office space under operating leases. Most lease agreements contain rent escalation clauses, and some contingent rent provisions, tenant improvement allowances and rent holidays. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial possession to begin amortization, which is generally when Crumbs enters the space and begins to make improvements in preparation for its intended use and excludes future renewal periods. The Company also depreciates leasehold improvements over the lesser of an asset’s useful life or the term of the lease, excluding future renewal periods. If the Company changed its estimates by including renewal options in its calculations, rent expense and depreciation expense would differ.

 

Revenue Recognition. Crumbs’ stores recognize revenue when payment is tendered at the point of sale. Revenue from Crumbs’ catering services and wholesale distribution business is recognized once goods are delivered, and revenue from Crumbs’ e-commerce division is recognized once goods are shipped. Revenue is reported net of sales, use or other transaction taxes that are collected from customers and remitted to taxing authorities.

 

Revenue from Crumbs’ gift cards and certificates are recognized when tendered for payment, or upon redemption. Outstanding customer balances are included in gift cards and certificates on the consolidated balance sheets. There are no expiration dates on Crumbs’ gift cards and certificates, and Crumbs does not charge any service fees that cause a decrement to customer balances.

 

Income Taxes. The Company complies with Financial Accounting Standards Board Accounting Standards Codification 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

At the date of the Merger, the Company recorded a deferred tax asset of approximately $9.55 million for the estimated income tax effect of the increase in tax basis of the purchased interests and future projected payments under the Tax Receivable Agreement. The Company recorded a valuation allowance of approximately $4.77 million based on its estimation of projected future taxable income. A change in estimation of projected future taxable income would likely result in a different valuation allowance.

 

 

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 nine month periods ended September 30, 2011 is provided in Note 1 to the condensed consolidated interim 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 and 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 November 14, 2011, an evaluation of the effectiveness of these disclosure controls as of September 30, 2011 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 8 to the condensed consolidated interim 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 September 30, 2011 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 September 30, 2011. 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 third quarter of 2011, 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 that are filed or furnished with this report are listed in the Exhibit Index that immediately follows the signatures hereto, which is incorporated 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.

 

Date:  April 12, 2013		Crumbs Bake Shop, Inc.
	By:	/s/ John D. Ireland
		John D. Ireland
		Senior Vice President & Chief Financial Officer
		(Principal Accounting Officer)

 

 

EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 .1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.XSD*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.