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CRMB > SEC Filings for CRMB > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for 57TH STREET GENERAL ACQUISITION CORP

Form 10-Q for 57TH STREET GENERAL ACQUISITION CORP


14-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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: the risk that the businesses of Crumbs Bake Shop, Inc., and Crumbs Holdings LLC and its wholly-owned subsidiaries will not be integrated successfully; the risk that the benefits anticipated from the business transaction may not be fully realized or may take longer to realize than expected; the risk that any projections, including earnings, revenues, expenses, synergies, margins or any other financial items are not realized, the risk of disruption from the business transaction making it more difficult to maintain relationships with customers, employees or suppliers; a reduction in industry profit margin; the inability to continue the development of the Crumbs brand; the timing of and ability to achieve profitability of new stores; changing interpretations of generally accepted accounting principles; continued compliance with government regulations; changing legislation and regulatory environments; the ability to meet the NASDAQ Stock Market continued listing standards; a lower return on investment; the inability to manage rapid growth; requirements or changes affecting the business in which Crumbs Bake Shop, Inc. and Crumbs Holdings LLC and its wholly-owned subsidiaries are engaged; the general volatility of the market prices of our securities and general economic conditions; our ability to successfully implement new strategies; operating hazards; competition; the loss of key personnel; any of the factors in the "Risk Factors" section Item 1A; other risks identified in this Report; and any statements of assumptions underlying any of the foregoing. You should also carefully review other reports that we file with the Securities and Exchange Commission. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.


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Overview
About the Company
Crumbs Bake Shop, Inc. ("CBS") was formed in Delaware in October 2009 under the name of 57th Street General Acquisition Corp. ("57th Street"). 57th 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 57th Street, 57th Street Merger Sub LLC, a Delaware limited liability company and wholly-owned subsidiary of 57th Street ("Merger Sub"), Crumbs Holdings LLC, a Delaware limited liability company ("Crumbs"), the members of Crumbs immediately prior to the consummation of the Merger (the "Members") and the representatives of the Members and Crumbs pursuant to which, subject to the terms and conditions contained therein, Merger Sub was merged with and into Crumbs with Crumbs 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, and is referred to herein as Crumbs. 57th 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. CBS, together with Crumbs and its wholly-owned subsidiaries, is referred to herein as the "Company" or "we."
We, through Crumbs and its wholly-owned subsidiaries, 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 the Company's stores, Management and the Board are engaged in an ongoing process to evaluate and, as necessary, address weaknesses and implement improvements in the Company's 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 6 new Crumbs Bake Shop store locations, and subsequent to the quarter ended September 30, 2011, we have opened 5 additional locations. We have also entered into 10 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%.


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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
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 was primarily attributable to additional store openings, offset by decreases in same store sales at a number of existing stores.
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, Crumbs 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, Crumbs 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.


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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.
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.
Crumbs 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. Crumbs 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.


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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.


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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 Crumbs. Crumbs' primary source of liquidity from operations is cash generated from the sale of baked goods, beverages and merchandise. Crumbs' primary uses of cash are cost of sales, operating expenses, capital expenditures, and tax distributions by Crumbs to certain of Crumbs' members 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
Crumbs' 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 a certificate of deposit used as security for letters of credit issued to several landlords in lieu of security deposit payments.


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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
Crumbs has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Policies
Long-Lived Assets. Property and equipment are carried at cost and are being depreciated on a straight-line basis over their useful lives of 10 to 15 years for leasehold improvements, 5 to 10 years for furniture and equipment and 3 to 5 years for computer equipment. Leasehold improvements are depreciated over the shorter of the lease term or the asset's useful life. Maintenance and repairs are charged to expense as incurred, while capital improvements that extend the useful lives of the underlying assets are capitalized. Intangible assets include branding costs and website design that are amortized over their useful lives, estimated to be 5 years.
Impairment of Long-Lived Assets. When facts and circumstances indicate that the carrying values of long-lived assets may not be recoverable, Crumbs evaluates long-lived assets for impairment. Crumbs 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 revenues and operating costs, using internal projections. Property and equipment assets are grouped at the lowest level for which there are identifiable cash flows when assessing impairment. 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.
Deferred Rent. Crumbs leases retail stores and office space under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives, premiums and minimum rental expenses on a straight-line basis over the terms of the leases, Crumbs uses the date of initial possession to begin amortization, which is generally when Crumbs enters the space and begins to make improvements.
For tenant improvement allowances and rent holidays, Crumbs records a deferred rent liability in other long-term liabilities and amortizes the deferred rent over the terms of the leases as reductions to rent expense.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, Crumbs records minimum rental expenses on a straight-line basis over the terms of the leases.
Revenue Recognition. Revenue is recognized when payment is tendered at the point of sale. Revenue is reported net of sales, use or other transaction taxes that are collected from customers and remitted to taxing authorities.


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Income Taxes. The Company complies with FASB 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. Gift Certificates and Cards. In 2009, Crumbs stopped issuing gift certificates and replaced them with a gift card system. Crumbs has recorded a current liability on the balance sheet for outstanding gift certificates and cards. 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.

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