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

Introduction

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

CBS is a Delaware corporation organized in October 2009 under the name 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 Newark Liberty International Airport in Newark, New Jersey, and mall-based centers, such as Queens Center in Elmhurst, New York.

As of June 30, 2012, there were 51 Crumbs Bake Shop stores operating in seven states and Washington, D.C., including 20 stores in Manhattan, New York. Of the total stores, 15 were opened in 2011. Crumbs' sales are primarily conducted through its stores in New York, California, Illinois, Connecticut, New Jersey, Virginia, Washington, D.C and Massachusetts. A small percentage of baked goods sales are from Crumbs' wholesale distribution business and catering services. Crumbs' e-commerce division at http://www.crumbs.com ships cupcakes nationwide. In light of the decline in operating performance at a number of Crumbs' stores, management continues to evaluate and, as necessary, address weaknesses and implement improvements in Crumbs' operations and growth strategies as part of its efforts to maximize overall profitability and shareholder value.

Recent Developments

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

Results of Operations and Known Trends

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

Net Loss

For the three and six months ended June 30, 2012, Crumbs recorded a net loss attributable to common stockholders of $(0.76) million and $(1.29) million, respectively, or basic and diluted net loss per common share of $(0.14) and $(0.23), respectively, compared to a net loss attributable to common stockholders of $(0.30) million and $(0.26) million, respectively, or basic and diluted net loss per common share of $(0.06) and $(0.05), respectively, for the three and six months ended June 30, 2011.

Net Sales

Net sales for the three and six months ended June 30, 2012 were $11.08 million and $22.36 million, respectively, an increase of 7.7% and 11.7%, as compared to $10.29 million and $20.01 million, respectively, for the same periods in 2011. The increases in net sales were attributable to additional store openings, offset by decreases in same store sales at a number of stores opened before 2011.

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

During the three and six months ended June 30, 2012, cupcakes represented 77.2% and 77.7%, respectively, of net sales compared to 76.6% and 77.0%, respectively, for the same periods in 2011. Other baked goods sales from cookies, cakes, pies, brownies, muffins and assorted pastries for the three and six months ended June 30, 2012 represented 10.4% and 10.6%, respectively, of net sales compared to 11.8% for both of the same periods in 2011. The stores also sell beverages, including drip coffees, espresso-based drinks, whole-leaf teas and hot chocolate. During the three and six months ended June 30, 2012, beverages represented 10.5% and 10.2%, respectively, of Crumbs' net sales compared to 9.4% and 8.8%, respectively, for the same periods in 2011.

Cost of Sales

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

Cost of sales for the three and six months ended June 30, 2012 were $4.78 million and $9.54 million, respectively, a 9.9% and 13.2% increase, as compared to $4.35 million and $8.43 million, respectively, for the same periods in 2011. The increases were primarily attributable to store openings that occurred in the second half of 2011, offset by decreases in costs at a majority of the stores opened prior to 2011. Cost of sales as a percentage of net sales for the three and six months ended June 30, 2012 were 43.1% and 42.7%, respectively, as compared to 42.3% and 42.1%, respectively, for the same periods in 2011. The increases were primarily attributable to increases in promotional incentives.

Operating Expenses

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

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

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

Staff expenses for the three and six months ended June 30, 2012 were $3.35 million and $6.74 million, respectively, a 2.8% and 10.1% increase, as compared to $3.26 million and $6.12 million, respectively, for the same periods in 2011. The increases were attributable to the addition of corporate staff members and the addition of staff for new stores opened in the second half of 2011 and the first quarter of 2012. Staff expenses as a percentage of net sales for the three and six months ended June 30, 2012 were 30.2% and 30.1%, respectively, as compared to 31.7% and 30.6%, respectively, for the same periods in 2011.

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

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

Occupancy expenses for the three and six months ended June 30, 2012 were $2.43 million and $4.79 million, respectively, a 42.1% and 46.5% increase, as compared to $1.71 million and $3.27 million, respectively, for the same periods in 2011. Occupancy expenses as a percentage of net sales for the three and six months ended June 30, 2012 were 21.9% and 21.4%, respectively, as compared to 16.6% and 16.3% for the same periods in 2011. Occupancy expense increases were primarily related to lease expenses associated with the opening of 16 additional stores over the past 12 months. Lease expenses incurred from the date of possession to the date a store opens are included in new store expenses, while lease expenses incurred after a store opens are included in occupancy expenses. Post-opening lease expenses for the three and six months ended June 30, 2012 were $1.93 million and $3.83 million, respectively, an increase of 46.2% and 50.8%, as compared to $1.32 million and $2.54 million, respectively, for the same periods in 2011.

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

General and administrative expenses for the three and six months ended June 30, 2012 were $0.84 million and $1.63 million, respectively, a 33.3% and 61.4% increase, as compared to $0.63 million and $1.01 million, respectively, for the same periods in 2011. General and administrative expenses as a percentage of net sales for the three and six months ended June 30, 2012 were 7.6% and 7.3%, respectively, compared to 6.1% and 5.0% for the same periods in 2011. The increase was primarily attributable to public company costs and professional fees.

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

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

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

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

Liquidity and Capital Resources

As a result of the Merger in 2011, CBS contributed approximately $13.7 million to Holdings. Aside from this initial capitalization, Holdings' primary source of liquidity has been, and is, cash from the sale of baked goods and beverages. Holdings' primary uses of cash are cost of sales, operating expenses and capital expenditures, including expenditures associated with the construction and opening of new stores.

During the last six months, management has identified and instituted six key initiatives which it believes will improve the financial performance of the Company, bolster the image of the Crumbs brand, and position Crumbs to grow in a more predictable and profitable manner. These initiatives contemplate special attention being paid to corporate structure, supply chain management, identification of real estate opportunities relating to existing and new stores, the frequent introduction of new cupcakes, and a wide sweeping improvement in customer interaction. To implement these initiatives effectively and maximize the benefits that management believes will result from those initiatives, the decision has been made that it is necessary and desirable to accelerate the velocity of new store openings. This acceleration will require working capital in greater amounts and over a shorter period of time than contemplated under Crumbs' recent growth strategy.

As of June 30, 2012, Crumbs had approximately $2.93 million in cash and other current assets, net of current liabilities, which could be used to fund working capital needs, compared to $4.74 million at December 31, 2011. Unless Crumbs can generate a significant increase in cash from sales, it will need to raise additional capital through public or private financings to fund management's accelerated store growth strategy. Crumbs is currently consulting with nationally-recognized financial advisors for the purpose of investigating opportunities for raising the additional capital that management believes will be needed to fund Crumbs' strategies for the remainder of 2012 and 2013.

Cash Flows

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

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

Off-Balance Sheet Arrangements

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.