Crumbs’ Accountants Have ‘Substantial Doubt’ The Cupcake Chain Can Stay In Business

Crumbs bake shop cupcakes
A tray of cupcakes is pictured at a Crumbs Bake Shop, which specialises in over 50 varieties of cupcakes. REUTERS/Fred Prouser

It’s getting hot in Crumbs’ kitchen.

In Crumbs Bake Shop’s most recent Form 10-Q filed with the SEC, the company disclosed that its auditors, Rothstein Kass, “expressed substantial doubt about our ability to continue as a going concern.”

A company is considered a “going concern” when it has sufficient resources to continue operations. When a company is no longer a going concern, it’s out of business.

Earlier in May, two members of the company’s board resigned.

Since Crumbs went public in 2011 as part of a $US66 million reverse merger with 57th Street General Acquisition Corp., it’s been mostly bad news for the company. Last year, we chronicled the problems facing the gourmet cupcake business here, here and here.

In short, charging a premium price for a product that can easily be made at home is a big ask for a successful business. According to Crumbs’ website, a 6-pack of its signature cupcakes goes for $US27. A quick Amazon search turns up results for a 12-pack of Duncan Hines cupcake mix that goes for $US19.99. And while Duncan Hines cupcake batter is not the premium product Crumbs sells, the 144 cupcakes yielded for less than the price of 6 Crumbs cupcakes is an enormous disparity.

At the time of the company’s IPO, it had 34 locations, and in its first earnings report as a public company, the company reaffirmed its commitment to open 200 stores by the end of this year. As of March 31, Crumbs had 65 shops opened. By the time it filed its 10-Q with the SEC on May 15, that number was down to 58.

Crumbs investors have been experiencing pain almost since the time of the stock’s debut. By the end of 2011, shares were near $US4 after trading as high as $US14 that summer. Today, Crumbs shares are at around $US0.35.

But Crumb’s present problem is not just that its auditor doesn’t think the company will make, but that the company itself sees a number of obstacles to continuing operations.

From its 10-Q (emphasis theirs):

We need additional capital to fund future cash flow requirements, and we may not be able to obtain such funds on acceptable terms. Raising additional funds by issuing securities or through lending or licensing arrangements may cause dilution to [Crumbs’] existing security holders, restrict our operations or require us to relinquish proprietary rights. Management believes that our cash flow requirements will likely consume our existing capital resources and cash from anticipated sales unless we are able to raise additional funds prior to June 30, 2014.”

Crumbs’ filing contains plenty of additional ominous language.

And while much of the language describes the company’s troubles in somewhat detached legalese, any prospective investor that wants to take a long shot on Crumbs right now should be able to read through the lines and discern that it does not get much worse for a company.

(via Crain’s New York)