Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

CBS is a Delaware corporation organized in October 2009 under the name 57th Street General Acquisition Corp. 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. Following the Transaction (discussed above in Item 1 of Part I of this Annual Report on Form 10-K), in October 2011, 57thStreet changed its name to Crumbs Bake Shop, Inc. to reflect the nature of its business more accurately.

CBS, through its consolidated subsidiary, Holdings, 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 December 31, 2011, there were 48 Crumbs Bake Shop stores operating in six 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, and Washington, D.C. 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 the Company's stores, management continues to evaluate and, as necessary, address weaknesses and implement improvements in the Company's operations and growth strategies as part of its efforts to maximize overall profitability and shareholder value.

Results of Operations and Known Trends

The Company's results of operations as a percentage of net sales and variances between 2011 and 2010 are discussed in the following sections.

Net Sales

Net sales in 2011 were $39.88 million compared to $31.08 million in 2010, an increase of 28.3%. This increase was attributable to $11.32 million in sales from 26 new stores opened between November 4, 2009 and December 31, 2011. The increase was offset by sales decreases of $2.51 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. Same store sales represent the change in sales for stores beginning in their sixteenth full calendar month of operation. The decrease in same store sales was predominately 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. Although management is in the process of developing the necessary initiatives aimed at improving each of these situations, there can be no assurance that such initiatives will have the effect of improving same store sales in any future period.

Net sales from Crumbs' catering services, e-commerce division and wholesale distribution business in 2011 were $2.43 million compared to $2.47 million in 2010, a 1.6% decrease. The decrease was primarily attributable to a decrease in net sales from Crumbs' wholesale distribution business offset by increased sales from its e-commerce division.

During 2011, cupcakes represented 76.3% of net sales compared to 76.9% in 2010. Other baked goods sales from cookies, cakes, pies, brownies, muffins and assorted pastries in 2011 represented 11.9% of net sales compared to 12.2% in 2010. The stores also sell beverages including drip coffees, espresso-based drinks, whole-leaf teas and hot chocolate. In 2011, beverages represented 9.6% of Crumbs' net sales compared to 8.1% in 2010.

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 December 31, 2011, 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.

In 2011, Crumbs reclassified to cost of sales (i) certain amounts associated with promotional activities, which included expenses related to buy-one-get-one-free incentives and (ii) product costs associated with redemptions from Crumbs' coffee loyalty card program, through which customers receive free product after a designated number of purchases. For 2011 and 2010, Crumbs reclassified approximately $0.03 million and $0.05 million, respectively, as cost of sales that were previously reported as selling expenses.

Cost of sales in 2011 were $16.95 million compared to $12.88 million in 2010, an increase of 31.6%. The increase was primarily attributable to the additional new store openings in 2011. Cost of sales as a percentage of net sales in 2011 were 42.5% compared to 41.4% in 2010. The increase was primarily attributable to increases in packaging and beverage costs and higher levels of discarded merchandise.

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) and product promotional giveaways.

Selling expenses in 2011 were $1.42 million compared to $1.14 million in 2010, an increase of 24.6%. This increase was due to additional expenses associated with new store openings, particularly in the new markets of Washington, D.C. and Chicago, and was consistent with Crumbs' growth in net sales. Selling expenses as a percentage of net sales were 3.6% in 2011 compared to 3.7% in 2010.

Staff expenses include salaries and wages for both store employees and corporate positions, guaranteed payments made prior to the Merger, employment taxes, medical insurance and workers compensation insurance. Expenses related to the issuance of equity to Julian R. Geiger in connection with his retention as the new President and Chief Executive Officer in November 2011 (the "Geiger Issuance") are also included; these expenses include $1.88 million of non-cash compensation and $74,000 of payroll taxes. The non-cash compensation represents 50% of the total expense to be incurred in connection with Mr. Geiger's retention; there will also be an expense of $1.88 million in November 2012 when the remainder of the equity issued to Mr. Geiger becomes vested.

Staff expenses in 2011 were $14.56 million. Excluding amounts related to the Geiger Issuance, staff expenses were $12.61 million in 2011 compared to $8.27 million in 2010, an increase of 52.5%. Staff expenses, as a percentage of net sales in 2011, excluding the Geiger Issuance, were 31.6% compared to 26.6% in 2010. The increase was attributable to new corporate staff members, corporate salaries and staff expenses in Crumbs' stores. There were 14 corporate staff positions added in 2011, which increased staff expenses by approximately $0.42 million. To staff the 15 new stores opened in 2011, 150 store staff positions were added, increasing staff expenses by approximately $1.23 million. In addition, approximately $1.56 million of the staff expense increase was attributable to expenses incurred for a full year in 2011 by eight stores opened between August 11, 2010 and December 31, 2010.

Staff expenses of $8.74 million were attributable to store staff expense in 2011 compared to $5.63 million in 2010, an increase of 55.2%. Store staff expenses as a percentage of store net sales in 2011 were 23.3% compared to 19.7% in 2010. The increase was 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 period.

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 which 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, kosher certification, maintenance, property and liability insurance are also included in occupancy expenses.

Occupancy expenses in 2011 were $7.37 million compared to $4.71 million in 2010, an increase of 56.5%. Occupancy expenses as a percentage of net sales in 2011 were 18.5% compared to 15.2% in 2010. Occupancy expense increases were primarily related to lease expenses associated with the opening of 15 additional stores since December 31, 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 $5.58 million in 2011 compared to $3.65 million in 2010, an increase of 52.9%.

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 in 2011 were $0.84 million compared to $0.78 million in 2010, an increase of 7.7%. New store expenses as a percentage of net sales were 2.1% in 2011 compared to 2.5% 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. Also included are store expenses for miscellaneous supplies, uniforms and quality control.

General and administrative expenses in 2011 were $2.71 million compared to $1.37 million in 2010, an increase of 97.8%. General and administrative expenses as a percentage of net sales in 2011 were 6.8% compared to 4.4% in 2010. The increase was primarily attributable to professional fees related to the retention of Mr. Geiger as President and Chief Executive Officer, public company costs and additional professional fees.

Depreciation and amortization expenses in 2011 were $1.46 million compared to $0.93 million in 2010, an increase of 57.0%. Depreciation and amortization expenses as a percentage of net sales were 3.7% compared to 3.0% in 2010. Depreciation and amortization expenses increased as a result of new store additions in 2011, including related lease review and negotiation fees.

Other Expenses

In 2011, Crumbs recorded a non-cash loss on impairment of leasehold improvements related to five underperforming stores that were opened prior to 2010, including three stores in California, one in Huntington, New York, and one in New Canaan, Connecticut. No decision has been made by management to close the impaired stores. The carrying amount of the assets remaining, after impairing all leasehold improvements at the stores, was $0.19 million and included tangible personal property Crumbs could utilize in alternate locations during the assets' remaining useful lives. There was no non-cash loss on impairment in 2010.

Income Taxes

The provision for income taxes was $0.01 million in 2011, and there was no provision for income taxes in 2010. Crumbs' effective tax rate was a 0.2% benefit for 2011 and 0.0% in 2010. See Note 6 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for further information about income taxes.

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, 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. On occasion, weather conditions have caused Crumbs to close stores during normal business hours. 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 sales days due to the storm.

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.

Liquidity and Capital Resources

As a result of the Merger, CBS contributed approximately $13.7 million to Holdings. Crumbs' primary source of liquidity from operations 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 December 31, 2011, Crumbs' working capital was approximately $4.74 million. Crumbs believes it has sufficient capital resources to meet its future liquidity needs.

Cash Flows

Crumbs' net cash used in operating activities was $1.73 million in 2011 compared to $3.37 million provided by operating activities in 2010. The increase in operating cash outflows in 2011 was primarily due to operating expense increases, inventory increases attributable to additional stores and additional packaging expenses related to the e-commerce division shipments of new products and an increase in prepaid rent due to the addition of new stores in 2011.

Net cash used in investing activities in 2011 was $6.61 million compared to $3.17 million in 2010. Investing cash outflows in 2011 consisted primarily of total costs related to 15 new stores, construction in progress costs for six additional stores and $0.64 million for the purchase of certificates of deposit used as security for letters of credit.

As a result of the consummation of the Merger, financing inflows in 2011 included $13.7 million in net proceeds from 57th Street's initial public offering.

Contractual Obligations

Crumbs' contractual obligations relate to operating leases. See Note 7 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for a discussion of Crumbs' operating lease commitments.

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 and Estimates

Crumbs describes its significant accounting policies in Note 1 of its Consolidated Financial Statements in this report on Form 10-K. The preparation of the financial statements requires Crumbs 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. Crumbs 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, Crumbs 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 store assets are identified at the individual store level. Long-lived assets to be disposed of are recorded at the lower of their carrying amount, or fair value less estimated costs to sell.

Estimates of future cash flows can be significantly impacted by many factors, including operating costs, competition and consumer and demographic trends. A change in the projections used to determine future cash flows or a change in judgment regarding the ability to use tangible personal property in alternate locations could alter the impairment amounts recognized.

Lease Obligations. Crumbs leases 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, and many contain options to extend the term by five to ten years. 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 in preparation for its intended use and excludes future renewal periods. Crumbs also depreciates leasehold improvements over the lesser of an asset's useful life or the term of the lease, excluding future renewal periods. If Crumbs 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 the Company does not charge any service fees that cause a decrement to customer balances.

Income Taxes. Crumbs 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, Crumbs 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. Crumbs 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.

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 and results of operations.