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| CRMB > SEC Filings for CRMB > Form 10-Q on 15-May-2012 | All Recent SEC Filings |
15-May-2012
Quarterly Report
Introduction
The following discussion and analysis is intended as a review of significant factors affecting CBS' financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented in this report, as well as the audited consolidated financial statements and related notes included in CBS' Annual Report on Form 10-K for the year ended December 31, 2011.
CBS is a Delaware corporation organized in October 2009 under the name 57th Street General Acquisition Corp. ("57th Street"). 57th Street was organized as a blank check company for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets. On January 9, 2011, 57th Street, 57th Street Merger Sub LLC, a Delaware limited liability company and wholly-owned subsidiary of 57th Street ("Merger Sub"), Holdings, the members of Holdings immediately prior to the consummation of the Merger (individually, a "Member" or, collectively, the "Members") and the representatives of the Members and Holdings, entered into a Business Combination Agreement, amended on each of February 18, 2011, March 17, 2011 and April 7, 2011 (the "Business Combination Agreement"), pursuant to which Merger Sub merged with and into Holdings with Holdings surviving the Merger as a non-wholly owned subsidiary of CBS (the "Merger"). Following the Merger, in October 2011, 57th Street changed its name to Crumbs Bake Shop, Inc. to reflect the nature of its business more accurately.
CBS, through its consolidated subsidiary, Holdings, a Delaware limited liability company, engages in the business of selling a wide variety of cupcakes, cakes, pies, cookies and other baked goods as well as hot and cold beverages under the trade name Crumbs Bake Shop. Cupcake sales have historically comprised the majority of Crumbs' business. Crumbs believes its baked goods appeal to a wide demographic of customers who span a broad range of socio-economic classes. Crumbs operates in urban, suburban, commercial, and residential markets. 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, and mall-based centers, such as Queens Center in Elmhurst, New York.
As of March 31, 2012, there were 51 Crumbs Bake Shop stores operating in seven states and Washington, D.C., including 20 stores in Manhattan, New York. Of the total stores, 15 were opened in 2011. Crumbs' sales are primarily conducted through its stores in New York, California, Illinois, Connecticut, New Jersey, Virginia, Washington, D.C and Massachusetts. A small percentage of baked goods sales are from Crumbs' wholesale distribution business and catering services. Crumbs' e-commerce division at http://www.crumbs.com permits cupcakes to be shipped nationwide. In light of the decline in operating performance at a number of Crumbs' stores, management continues to evaluate and, as necessary, address weaknesses and implement improvements in Crumbs' operations and growth strategies as part of its efforts to maximize overall profitability and shareholder value.
Results of Operations and Known Trends
Crumbs' results of operations as a percentage of net sales and period-over-period variances are discussed in the following sections.
Net Income/(Loss)
For the three months ended March 31, 2012, Crumbs recorded a net loss attributable to common stockholders of $(0.52) million, or basic and diluted net loss per common share of $(.09), compared to net income available to common stockholders of $0.07, or basic and diluted net income per common share of $.01 for the same period of 2011. The change resulted from a decrease in net sales and increases in cost of sales and operating expenses.
Net Sales
Net sales for the three months ended March 31, 2012 were $11.28 million compared to $9.72 million for the three months ended March 31, 2011, an increase of 16.0%. The increase in net sales was attributable to additional store openings, offset by decreases in same store sales at a number of stores opened before 2011.
During the three months ended March 31, 2012, cupcakes represented 78.1% of net sales compared to 77.5% for the three months ended March 31, 2011. Other baked goods sales from cookies, cakes, pies, brownies, muffins and assorted pastries for the three months ended March 31, 2012 represented 10.7% of net sales compared to 11.8% for the three months ended March 31, 2011. The stores also sell beverages, including drip coffees, espresso-based drinks, whole-leaf teas and hot chocolate. During the three months ended March 31, 2012, beverages represented 9.9% of Crumbs' net sales compared to 8.1% for the three months ended March 31, 2011.
Cost of Sales
Cost of sales is primarily comprised of products purchased for resale. Baked goods are delivered to stores daily by independent commercial bakeries. In each major market, Crumbs contracts with a commercial bakery to supply proprietary products to stores on an exclusive basis. As of March 31, 2012, Crumbs had relationships with one commercial bakery in each of New York, Los Angeles, Northern Virginia and Chicago. Beverage materials and packaging are purchased from both national and local suppliers. The e-commerce division utilizes a third party in New York for both shipping and handling.
Cost of sales for the three months ended March 31, 2012 were $4.76 million compared to $4.07 million for the three months ended March 31, 2011, an increase of 17.0%. The increase was primarily attributable to store openings that occurred in the second half of 2011. Cost of sales as a percentage of net sales for the three months ended March 31, 2012 were 42.2% compared to 41.9% for the three months ended March 31, 2011. The increase was primarily attributable to increases in promotional incentives.
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 division), kosher certification fees and product promotional giveaways.
Selling expenses for the three months ended March 31, 2012 were $0.29 million compared to $0.38 million for the three months ended March 31, 2011, a decrease of 23.7%. This decrease was due to a reduction in public relations fees in 2012 and the elimination of product giveaway expenses incurred in 2011 during investor presentations related to the Merger. Selling expenses as a percentage of net sales were 2.6% for the three months ended March 31, 2012 compared to 3.9% for the three months ended March 31, 2011.
Staff expenses include salaries and wages for both store employees and corporate positions, guaranteed payments made prior to the Merger in 2011, employment taxes, medical insurance and workers compensation insurance.
Staff expenses for the three months ended March 31, 2012 were $3.40 million compared to $2.86 million for the three months ended March 31, 2011, an increase of 18.9%. Staff expenses as a percentage of net sales for the three months ended March 31, 2012 were 30.1% compared to 29.4% for the three months ended March 31, 2011. The increase was attributable to the addition of corporate staff members and the addition of staff for new stores opened in the second half of 2011 and the first quarter of 2012.
Staff expenses of $2.39 million were attributable to store staff for the three months ended March 31, 2012 compared to $2.06 million for the three months ended March 31, 2011, an increase of 16.0%. Store staff expenses as a percentage of store net sales were 21.2% for each of the three month periods ended March 31, 2012 and March 31, 2011.
Occupancy expenses are primarily attributable to Crumbs' stores and corporate office leases. The leases range in term from three to 15 years, many with options to extend to 20 years. Most lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent escalation clauses and/or contingent rent provisions. For scheduled rent escalation clauses during lease terms or for rent payments commencing at a date other than the date of initial occupancy, Crumbs records minimum rental expenses on a straight-line basis over the terms of the leases. This treatment causes a non-cash expense in the early years of these leases that reverses in the later years of the leases. Expenses related to the leases, such as real estate taxes, common area maintenance fees, insurance, advertising and commissions, are included in occupancy expenses. Other expenses, such as utilities, cleaning, licenses, maintenance, property and liability insurance are also included in occupancy expenses.
New store expenses consist primarily of manager salaries, employee payroll and related training costs incurred prior to the opening of a store, straight-line rent from the possession date to store opening date, related occupancy costs incurred prior to opening and start-up and promotion of new store openings.
New store expenses for the three months ended March 31, 2012 were $0.11 million compared to $0.06 million for the three months ended March 31, 2011, an increase of 83.3%. New store expenses as a percentage of net sales were 1.0% for the three months ended March 31, 2012 compared to 0.6% for the three months ended March 31, 2011.
General and administrative expenses primarily include corporate expenses, such as public company operating expenses, office supplies, travel, professional fees and bank service charges. Also included are store expenses for miscellaneous supplies, uniforms and quality control.
General and administrative expenses for the three months ended March 31, 2012 were $0.79 million compared to $0.38 million for the three months ended March 31, 2011, an increase of 107.9%. General and administrative expenses as a percentage of net sales for the three months ended March 31, 2012 were 7.0% compared to 3.9% for the three months ended March 31, 2011. The increase was primarily attributable to public company costs and professional fees.
Depreciation and amortization expenses for the three months ended March 31, 2012 were $0.45 million compared to $0.33 million for the three months ended March 31, 2011, an increase of 36.0%. Depreciation and amortization expenses as a percentage of net sales for the three months ended March 31, 2012 were 4.0% compared to 3.4% for the three months ended March 31, 2011. Depreciation and amortization expenses increased primarily as a result of new store additions in the second half of 2011 and the first quarter of 2012, including related lease review and negotiation fees.
General Economic Trends and Seasonality
Crumbs' results of operations are generally affected by the economic trends in its market areas due to the dependence on its customers' discretionary spending. Weakness in the national or regional economy in its market areas, combined with other factors including inflation, labor and healthcare costs and availability of suitable locations for its stores, may negatively impact its business. If consumer activities associated with the consumption of its products decline or the business activities of its corporate customers decrease, then its net sales and sales volumes may decline.
Crumbs' results to date have not been significantly impacted by inflation.
While Crumbs' business is not highly seasonal, it is impacted by weather. Extreme hot, cold and wet weather may cause decreased sales in the affected stores and could impact the daily delivery of its baked goods.
In addition, Crumbs' sales do peak throughout the year on certain holidays/events such as Valentine's Day, Easter, Mother's Day, Halloween, Thanksgiving and Christmas/Hanukkah. The timing of these holidays in a particular year could impact quarterly results.
As a result of the Merger in 2011, CBS contributed approximately $13.7 million to Holdings. Crumbs' primary source of liquidity is cash from the sale of baked goods, beverages and merchandise. Crumbs' primary uses of cash are cost of sales, operating expenses and capital expenditures.
As of March 31, 2012, Crumbs' working capital was approximately $3.88 million compared to $4.74 million at December 31, 2011. Crumbs believes it has sufficient capital resources to meet its future liquidity needs.
Cash Flows
Crumbs' net cash used in operating activities was $1.04 million during the three months ended March 31, 2012 compared to $0.73 million provided by operating activities during the three months ended March 31, 2011. The increase in operating cash outflows in 2012 was primarily due to operating expense increases, the prepayment of annual liability and directors and officers insurance policies totaling $0.21 million, a reduction in accounts payable of $0.12 million related to the packaging, fulfillment and shipping of holiday e-commerce orders during December 2011, and a reduction in accounts payable of $0.31 million related to December 2011 store construction costs.
Net cash used in investing activities during the three months ended March 31, 2012 was $0.73 million compared to $0.93 million during the three months ended March 31, 2011. Investing cash outflows consisted primarily of total costs related to three new stores for the three months ended March 31, 2012 and consisted primarily of costs related to five new stores and construction in progress related to one store for the three months ended March 31, 2011.
Crumbs has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
CBS' critical accounting policies are identified and described in its Annual Report on Form 10-K for the year ended December 31, 2011. CBS believes that there have been no changes in its critical accounting policies since they were last disclosed.
Recent Accounting Pronouncements
Crumbs has evaluated recent accounting pronouncements and does not believe the adoption of any recently issued accounting standards will have a material impact on its financial position or results of operations.
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