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CRMB > SEC Filings for CRMB > Form 10-K on 15-Apr-2013All Recent SEC Filings

Show all filings for CRUMBS BAKE SHOP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for CRUMBS BAKE SHOP, INC.


15-Apr-2013

Annual Report


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, cookies and other baked goods under the trade name "Crumbs Bake Shop" as well as hot and cold beverages under the "We Proudly Service" Starbucks coffee program. 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 commercial and residential sections of urban and suburban markets. Recently, Crumbs has expanded into key super-regional shopping malls in the New Hampshire to Virginia corridor and in Chicago, Illinois.

As of December 31, 2012, there were 59 Crumbs Bake Shop stores operating in nine states and Washington, D.C., including 21 stores in Manhattan, New York. Of the total stores, 11 were opened in 2012. Crumbs' sales are primarily conducted through its stores in New York, New Jersey, California, Illinois, Connecticut, Washington, D.C., Massachusetts, Delaware, Pennsylvania, and Virginia. A small percentage of baked goods sales are from Crumbs' wholesale distribution business, catering services and Crumbs' e-commerce division at http://www.crumbs.com which ships cupcakes nationwide.

Recent Initiatives

In an effort to maximize overall profitability and stockholder value, management continuously evaluates store performance and the effectiveness of and outlook for Crumbs' growth strategies. When necessary, management seeks to formulate and implement changes that it believes will correct weaknesses in store operations that could be causing declining sales results. In addition, management may revise, scale back or accelerate Crumbs' growth strategies to reflect market conditions, operating performance and cash available for growth. Operating performance at a number of Crumbs' stores has declined during the 18 months ended December 31, 2012. During the last year, management has identified and instituted six key initiatives which it believes will improve the overall financial performance of Crumbs, 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. Management believes that the success of these initiatives is dependent, in part, on a shift in strategy from in-line stores to mall-based stores, better placement of new stores, and the closure of underperforming stores for which management believes the performance outlook is unfavorable. In an effort to maximize the benefits that management believes can be achieved from these initiatives, management decided to accelerate the timing of new store openings in 2012.

In October 2012, to fund this growth strategy, CBS consummated a private placement of common stock in which it received gross proceeds of approximately $9.9 million (the "Capital Transaction"). The Capital Transaction is further discussed below under the heading "Liquidity and Capital Resources".

Results of Operations and Known Trends

Crumbs' results of operations as a percentage of net sales and variances between 2012 and 2011 are discussed in the following sections.

Net Loss

For the year ended December 31, 2012 Crumbs recorded a net loss attributable to common stockholders of $(7.7) million, or basic and diluted net loss per common share of $(1.12), compared to a net loss attributable to common stockholders of $(1.5) million, or basic and diluted net loss per common share of $(0.27), for the year ended December 31, 2011.

Net Sales

On January 1, 2012 there were 26 stores in the comparable store base, with 11 additional stores entering the base during the year, for a total of 37 stores at December 31, 2012. Same store sales represent the change in sales for stores after their 15th full calendar month of operation. Net sales in 2012 were $43.0 million, an increase of 7.9% over $39.9 million in 2011. This increase was primarily attributable to $9.7 million in sales from 33 new stores opened between November 8, 2010 and December 31, 2012. The increase was offset by a $5.9 million decrease in same store sales for 36 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 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. Management believes that more consistent introduction of new cupcakes, improvements in the quality of store personnel and a centralized automated ordering system (on which it is currently working) will lead to improvements in same store sales.

Stores that are too close together may attract customers within a common trading area, and, as a result, a new store that is not appropriately located may have the effect of decreasing same store sales at a pre-existing store. Although management attempts to position new stores so that their impact on existing stores will be minimized, it is impossible to predict certain customers' shopping patterns. As such, management's decisions in this regard are based on various assumptions and judgments that may prove to be inaccurate and/or may be impacted by the materialization of known or unknown risks and uncertainties.

Net sales from Crumbs' catering services, e-commerce division and wholesale distribution business in 2012 were $1.7 million, a decrease of 28.3%, compared to $2.4 million in 2011. During 2012, net sales from the e-commerce division declined by $0.4 million, and net sales from the wholesale distribution business and catering services each declined by $0.1 million when compared to 2011.

During 2012, cupcakes represented 77.0% of net sales compared to 76.3% in 2011. Sales of candy and other baked goods (i.e., cakes, cookies, brownies, muffins and assorted pastries) in 2012 represented 10.8% of net sales compared to 11.9% in 2011. The stores also sell beverages including drip coffees, espresso-based drinks, whole-leaf teas and hot chocolate. In 2012, beverages represented 11.1% of Crumbs' net sales compared to 9.6% 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 December 31, 2012, Crumbs had relationships with four commercial bakeries - one in each of New York, Los Angeles, Baltimore and Chicago. Beverage materials and packaging were purchased from both national and local suppliers. The e-commerce division utilized a third party in New York for both shipping and handling.

Cost of sales in 2012 was $19.1 million, an increase of 12.5% over $16.9 million in 2011. The increase was primarily attributable to 33 new store openings from November 2010 through December 31, 2012, offset by decreases in same store costs. Cost of sales, as a percentage of net sales, was 44.3% in 2012 compared to 42.5% in 2011. The increase was attributable to a variety of factors, including transitioning our private label coffee business to the We Proudly Serve Starbucks program, increases in the cost of baked goods (both through increased levels of discarded product and cost increases from bakers) and increased customer sales discounts from promotional programs. Management has instituted programs to reduce the levels of discarded baked goods and coffee.

Operating Expenses

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

Selling expenses in 2012 were $1.4 million, a decrease of 13.3%, compared to $1.6 million in 2011. The decrease was due to reductions in public relations fees and promotions in 2012 and reductions in kosher certification fees, offset by increases in merchant accounts fees from new stores, marketing research and creative production costs. Selling expenses, as a percentage of net sales, were 3.2% in 2012 compared to 4.0% in 2011.

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

Staff expenses in 2012 were $15.5 million, an increase of 6.5%, compared to $14.6 million in 2011. Staff expenses, as a percentage of net sales, were 36.1% in 2012 compared to 36.5% in 2011. The increase was attributable to the addition of corporate staff, staff for new stores and stock compensation expense related to the issuance of CBS' shares to Crumbs' employees, offset by a $1.8 million decrease in store staff expenses in existing stores. Staff expenses were reduced in an effort to keep labor percentages in line with decreasing store sales. Crumbs added 14 corporate staff positions in 2012, which increased staff expenses by approximately $0.9 million in 2012, offset by a decrease in staff expenses of $0.3 million from eleven corporate staff positions eliminated in 2012. In addition, Crumbs opened 11 new stores in 2012 and staffed the stores with 162 new store staff positions, which increased staff expenses by approximately $0.8 million in 2012. There was an increase of approximately $1.4 million attributable to expenses incurred at 15 new stores opened for a portion of 2011 and a full year in 2012.

Staff expenses of $9.2 million were attributable to store staff expense in 2012 compared to $8.7 million in 2011, an increase of 5.0%. Store staff expenses as a percentage of store net sales in 2012 were 22.2% compared to 23.3% in 2011.

Occupancy expenses are primarily attributable to leases of Crumbs' stores and corporate offices. Generally, the leases have initial terms between 10 and 15 years, and many contain renewal options. Most lease agreements contain rent escalation clauses, and some contain contingent rent provisions, tenant improvement allowances and rent holidays. 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 results in 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 and marketing funds, are also included in occupancy expenses, as well as expenses related to utilities, cleaning, licenses, maintenance, property and liability insurance associated with the leased locations.

Occupancy expenses in 2012 were $10.0 million, an increase of 39.2% when compared to the $7.2 million recorded in 2011. Occupancy expenses, as a percentage of net sales, were 23.3% in 2012 compared to 18.1% in 2011. Occupancy expense increases were primarily related to lease expenses and utilities associated with the opening of 15 stores during 2011 and 11 stores during 2012. 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 $8.0 million in 2012 compared to $5.6 million in 2011, an increase of 42.6%.

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 2012 were $3.3 million, an increase of 23.9%, compared to $2.7 million in 2011. General and administrative expenses, as a percentage of net sales, were 7.7% in 2012 compared to 6.7% in 2011. The increase was primarily attributable to public company costs and store supplies, offset by a reduction in outside consulting and other 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 in 2012 were $0.5 million, a decrease of 46.3%, compared to $0.8 million in 2011. New store expenses, as a percentage of net sales, were 1.1% in 2012 compared to 2.1% in 2011. The decreases were primarily attributable to new stores with shorter pre-opening periods and lower base rent in 2012 when compared to 2011, offset by costs associated with one store opened in the fourth quarter of 2012.

Depreciation and amortization expenses in 2012 were $1.9 million, an increase of 31.3% when compared to the $1.5 million recorded in 2011. Depreciation and amortization expenses, as a percentage of net sales, were 4.5% in 2012 compared to 3.7% in 2011. Depreciation and amortization expenses increased primarily as a result of new stores opened in the second half of 2011 and in 2012, including related lease review and negotiation fees.

In 2012, Crumbs recorded a non-cash loss on impairment of leasehold improvements related to nine underperforming stores, including three stores in the District of Columbia, three stores in Chicago and three stores in New York City. In 2011, Crumbs recorded a non-cash loss on impairment of leasehold improvements related to five underperforming stores, including three stores in California, one in Huntington, New York, and one in New Canaan, Connecticut. In January 2013, a lease termination agreement was executed for one of the Chicago stores, and it was subsequently closed in February 2013. No decision has been made by management to close the remaining impaired stores. The net book value of the assets remaining after impairing all leasehold improvements at the stores was $0.6 million and $0.2 million as of December 31, 2012 and 2011, respectively, and included tangible personal property that Crumbs could utilize in other stores during the assets' remaining useful lives.

Other Income

The decrease in fair value of Crumbs' warrant liability was $0.3 million in 2012, a decrease of 92.6% when compared to the $3.7 million recorded in 2011. See Notes 1 and 8 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for further information about the warrant liability.

Income Taxes

The income tax benefit was $0.01 million in 2012 and 2011, and Crumbs' effective tax rate was a 0.2% benefit for 2012 and 2011. 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 economy and/or regional economies 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, especially street locations, 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, Christmas and Hanukkah (particularly in the mall locations). The timing of these holidays/events in a particular year could impact quarterly results.

Hurricane Sandy resulted in the loss of approximately 250 days of business (number of stores times number of days) of business during October and November 2012 resulting in an estimated loss of approximately $0.7 million of net sales. In 2013, Crumbs received and recorded $0.1 million in insurance recoveries related to the business interruption losses caused by the hurricane. Management anticipates that Crumbs may receive additional minimal recoveries but cannot estimate when these recoveries will be received or their amounts.

Liquidity and Capital Resources

As a result of the Merger in 2011, CBS contributed approximately $13.7 million to Holdings. On October 12, 2012, CBS sold approximately 4.5 million shares of its common stock to 20 accredited investors in the Capital Transaction. CBS received gross proceeds of approximately $9.9 million in the Capital Transaction. After paying expenses, net proceeds of approximately $9.3 million were available to fund future store growth and provide additional working capital.

In addition to the cash received in the Merger and the Capital Transaction, Holdings' primary source of liquidity has been, and is, cash from the sale of cupcakes and other 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. As of December 31, 2012, Crumbs had approximately $5.3 million in cash and other current assets, net of current liabilities, which could be used to fund store growth and working capital needs, compared to $4.7 million at December 31, 2011. Our growth strategy is aggressive, and our current level of cash and other assets may not be sufficient to fully implement our growth strategy without significantly increasing our revenues in the future periods. In that case, the Company would need to obtain additional capital or scale back the implementation of our growth strategy. On April 11, 2013, in an effort to increase the resources available to fund this strategy, CBS entered into a binding term sheet, dated April 11, 2013, with an accredited investor relating to the potential sale by CBS of not less than $10.0 million aggregate principal amount of its senior unsecured convertible promissory notes in a private placement transaction. The term sheet does not obligate the parties to consummate the transaction, but requires them to use their good faith best efforts to negotiate, finalize, execute and deliver definitive agreements relating to the transaction. There can be no assurance that CBS will successfully negotiate and enter into these definitive agreements or consummate the transaction. See the risk factor in Item 1A of Part I of this Annual Report entitled, "We may need additional capital in the future, which may not be available on acceptable terms." and Note 15 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for further information about this potential transaction.

Cash Flows

Crumbs' net cash used in operating activities in 2012 was $4.2 million compared to $2.2 million in 2011. The increase in operating cash outflows in 2012 was primarily attributable to an increase in operating expenses in excess of the increase in gross margins for the period. This increase in cash outflows was partially offset by receivable collections, the consistency of inventory levels from 2011 to 2012 and the reduction of prepaid rent payments made at the time of lease signings.

Net cash used in investing activities in 2012 was $4.8 million compared to $6.2 million in 2011. Investing cash outflows in 2012 consisted primarily of costs related to 11 new stores, construction in progress related to nine stores and corporate computer equipment purchases. In 2011, investing cash outflows consisted primarily of costs related to 15 new stores, construction in progress related to six stores and $0.6 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 noted above, the Capital Transaction provided a cash inflow of $9.3 million in 2012, and the Merger provided a cash inflow of $13.7 million in 2011.

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 Annual Report on Form 10-K. The preparation of the consolidated 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 consolidated 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. 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 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 rent escalation clauses, and some contain contingent rent provisions, tenant improvement allowances and rent holidays. Many leases also contain renewal options. For purposes of recognizing incentives, 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 Crumbs 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 $9.6 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 $4.8 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.

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