CRMBQ Crumbs Bake Shop Inc (CE)

Item 1A. RISK FACTORS.

You should carefully consider the risks described below together with the other information set forth in this report, which could materially affect our business, financial condition and future results. The risks described below are not the only risks facing the Company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.

Risks Related to Our Business and Industry

The report issued by our independent registered public accounting firm with respect to our financial statements for the year ended December 31, 2013 includes an explanatory paragraph with respect to our ability to continue as a going concern, which may adversely affect the prices for CBS’ securities and our ability to raise capital.

In their report dated March 31, 2014, which is included in this Annual Report, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern. We have a history of incurring losses and negative cash flows from operations, have an accumulated deficit as of December 31, 2013, and will require additional financing to fund future operations. The financial statements included in this Annual Report do not include any adjustments that might result from the uncertainty about our ability to continue in business. Our ability to continue as a going concern is subject to our ability to obtain necessary funding from outside sources, which may include obtaining additional funding from the sale of our securities. The risk that we may not continue as a going concern may cause investors to lose confidence in the Company, which may have a material and adverse effect on the market prices of CBS’ securities. In addition, this risk may prevent us from obtaining necessary financing on favorable terms or in amounts and/or at times that we deem necessary, which could require us to cease or significantly curtail our operations and could cause investors to lose their entire investments.

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 CBS’ existing security holders, restrict our operations or require us to relinquish proprietary rights.

We need to raise additional funds to finance our future operations. Our ability to raise additional funds is primarily based on two sources: (i) the sale of equity and/or debt securities by CBS; and (ii) our entry into a strategic arrangement with one or more third parties. Both sources are subject to various limitations and may require the consent of the holders of CBS’ senior debt instruments. In addition, our ability to obtain capital will be subject to a number of factors that are beyond our control, including market conditions, our operating performance and investor sentiment. As such, no assurance can be given that we will be successful in securing capital on desirable terms or in the amounts and/or at the times needed. If we are unable to secure capital in the amount necessary to fund our future cash flow requirements, then our operations will likely consume our capital resources and liquidity, our ability to successfully implement our cost-savings and other business strategies could be materially limited, and we could default under certain of our contractual obligations, including, without limitation, our payment obligations under the senior unsecured convertible promissory notes issued by CBS and the senior secured convertible promissory notes issued by CBS and Holdings. If CBS issues additional equity securities, then its stockholders’ ownership will be diluted and the securities that are issued may have rights, preferences or privileges that are senior to those of CBS’ common stock.

If we pursue debt financing, then we may be required to pay interest costs, which could materially impact our future cash flow and liquidity demands. Moreover, any future debt financing may involve covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, make certain investments and/or engage in certain merger, consolidation or asset sale transactions, among other restrictions. If we raise additional funds through licensing or similar arrangements, it may be necessary to relinquish potentially valuable rights to our products or intellectual property or grant licenses on terms that are not favorable to us. Any of these factors could have a material adverse effect on the market prices for CBS’ securities.  

We have a limited operating history and may be unable to achieve or maintain profitability.

The first Crumbs Bake Shop store was opened in 2003. As of December 31, 2013, we were operating 70 stores, 22 of which had been open for less than one year. Accordingly, there is limited information with which to evaluate our business and prospects. As a result, forecasts of our future revenue, expenses and operating results will not be as accurate as they would be if we had a longer history of operations, particularly in the mall-based stores. In addition, we have recorded substantial operating losses and negative cash flow from operations for each of the fiscal years ended December 31, 2013 and 2012. As of December 31, 2013, we had an accumulated deficit of approximately $25.0 Million. Management expects that we will also incur operating losses and negative cash flow from operations for the year ending December 31, 2014. Our actual cash flow will be subject to various factors, such as market acceptance of our existing products and any new products that we develop, marketing and sales costs, our ability to control operating expenses, the extent to which we are able to successfully implement our growth and business strategies, the extent to which we are able and elect to pay interest due under our senior secured and unsecured convertible promissory notes in shares of common stock rather than in cash, and the extent to which holders of those notes convert them into shares of common stock. None of these factors are within our control or can be predicted with any certainty. The failure to generate sufficient cash flow to fund our forecasted expenditures would require us to reduce our cash burn rate, which would in turn impede our ability to achieve our business objectives. If we are unable to generate sufficient cash flow or obtain additional capital, then we may be unable to continue our operations, develop or enhance our products, take advantage of future opportunities or respond to competitive pressures.

CBS and Holdings have a substantial amount of senior indebtedness. The inability to repay such indebtedness would have a material adverse effect on our financial condition and ability to continue as a going concern.

As of the date of this report, CBS and Holdings had approximately $3.5 million of principal owing under senior secured indebtedness, evidenced by a convertible Tranche I Note (the “Tranche I Note”) issued under a Senior Secured Loan and Security Agreement (the “Loan Agreement”) by and among Holdings, CBS and Fischer Enterprises, L.L.C. (the “Secured Lender”), and CBS had approximately $9.7 million of principal and interest owning under its senior unsecured indebtedness, evidenced by Senior Convertible Notes (the “Unsecured Notes” and, together with the Tranche I Note, the “Senior Notes”). The Tranche I Note is senior in right of payment to almost all other indebtedness of Crumbs, including the Unsecured Notes, and the Unsecured Notes are senior in right of payment to almost all other indebtedness of Crumbs other than the Tranche I Note. This means that CBS and/or Holdings must make payments under the Senior Notes when due before we can satisfy our other indebtedness. CBS’ and Holdings’ obligations under the Tranche I Note are secured by substantially all of our assets used in continuing operations. If we do not have sufficient capital to pay interest and/or repay principal under the Senior Notes as and when they become due, then CBS and/or Holdings would be in default under the Senior Notes, which would have a material adverse effect on our business, our ability to raise capital in the future and our ability to continue as a going concern. In addition, the terms of the Senior Notes contain various affirmative and negative covenants which could restrict the manner in which we conduct business. If CBS and/or Holdings were to default in any of such covenants or otherwise default under the Senior Notes, then the lenders could, among other things, accelerate the maturity dates of the indebtedness and, in the case of the Tranche I Note, exercise its rights to, among other things, foreclose on our assets. Our outstanding indebtedness could exacerbate or even cause any of the other risks discussed below to be realized.

Subject to certain closing conditions, CBS and Holdings contemplate issuing $1.5 million in additional senior secured indebtedness to the Secured Lender under the Loan Agreement on April 1, 2014, which will be evidenced by a convertible Tranche II Note (together with the Tranche I Note, the “Tranche Notes”) having substantially the same terms as the Tranche I Note.

In addition, the Unsecured Notes permit their holders to accelerate CBS’ repayment obligations if there is a change in control (as defined in the Unsecured Notes) of CBS at any time before the maturity dates of the Unsecured Notes. Further, if a change in control occurs on or before the third anniversary of an Unsecured Note’s issuance date, CBS would be obligated to pay a cash premium on the unpaid principal balance to the holder of that Unsecured Note equal to 15.0% if the change in control occurs on or before the first anniversary of the issuance date, 10.0% if the change in control occurs between the first and second anniversaries of the issuance date, and 5.0% if the change in control occurs between the second and third anniversaries of the issuance date. These provisions could delay or make more difficult certain types of transactions involving a change of control of CBS or its management and could adversely affect the market price of CBS’ securities.

Our business could be materially and adversely affected if we are unable to achieve our growth strategy.

Any inability to achieve our growth strategy could materially and adversely affect our business, financial condition, operating results or cash flows. Our ability to expand our brand successfully will depend on a number of factors, some of which are beyond our control. We may also, from time to time, choose to alter those plans driving our growth strategies based on any one or more of the following factors:

The geographic concentration of our stores primarily in the Northeast region of the United States subjects us to an increased risk of loss of revenue from events beyond our control or conditions affecting that region.

As of December 31, 2013, we operated 63 of our 70 stores in the Northeast, of which 18 are located in Manhattan, New York. As a result, we are particularly susceptible to adverse trends, severe weather, competition and economic conditions in that area. In addition, given our geographic concentration, negative publicity regarding any of our stores could have a material adverse effect on our business and operations, as could other regional factors impacting the local economies in a market.

Security holders should not rely on our historical average store sales because they may not be indicative of future results.

Our average store sales may not continue at the levels achieved over the last several years. A number of factors have historically affected, and may affect in the future, our average store sales, including:

Changes in our average store sales or our inability to increase our average unit sales could cause our operating results to vary adversely from expectations, which could adversely affect our results of operations. Changes in our average sales results may not meet the expectations of investment analysts or investors, which could cause the market price of CBS’ securities to decline.

Our revenue and growth could be adversely affected if same store sales are less than expected.

The aggregate results of operations of our stores have fluctuated in the past and we may not be able to grow or even maintain same store sales in any future period. A variety of factors affect same store sales, including, among others, consumer trends, competition, current economic conditions, pricing, inflation, changes in our product mix and the success of marketing programs. These factors may cause our same store sales results in the future to differ materially from previous periods and our expectations. If this were to happen, our results of operations and growth could be adversely affected, which could result in a decline in the market prices of CBS’ securities.

Our success depends upon the continued retention of key personnel.

We believe that our future success is dependent to a significant extent on the efforts and abilities of our senior management team. All members of management are currently employed on an ‘‘at-will’’ basis and may resign from employment at any time. Our inability to retain employees who are key to our success could adversely affect our future performance.

We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.

Our intellectual property is material to the conduct of our business. Our ability to implement our business plan successfully depends in part on our ability to build greater brand recognition using our trademarks, service marks and other intellectual property, including our name and logos. Crumbs has made a practice of filing for registration of its core trademarks in the United States and Canada. Crumbs also has registered certain marks in the European Community and Japan; however, if Holdings’ efforts to protect its intellectual property are inadequate, or if a third party misappropriates or infringes on such intellectual property, then the value of our brand may be harmed, which could have a material adverse effect on our business. Although we have not encountered claims against us from prior users of intellectual property relating to our bake shop operations in areas where we operate or intend to conduct operations, there can be no assurances that we will not encounter such claims in the future. Additionally, although we monitor third party uses of our brand, infringing uses could occur, which could dilute the distinctive nature of the Crumbs brand. Any claims against us, or unresolved use by third parties, could harm our image, brand or competitive position or cause us to incur significant costs.

We are subject to risks associated with long-term non-cancelable leases and with respect to the leased real property.

Holdings’ leases executed prior to 2012 generally had initial terms between 10 and 15 years. Holdings generally cannot cancel those leases so if an existing store is not profitable and Holdings decides to close a particular store, it may nonetheless be committed to perform its obligations under the applicable lease including, among other things, payment of the base rent for the remainder of the lease term. In certain instances, there may be change in control provisions in the leases which put Holdings at a competitive disadvantage when negotiating extensions or which require Holdings to obtain landlord consent for certain transactions. Holdings’ leases generally require it to pay a proportionate share of the cost of insurance, taxes, maintenance and utilities. In addition, as each of Holdings’ leases expires, it may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause Holdings to close stores in desirable locations. Finally, locations that we believed were desirable at the time Holdings entered into a lease may have become unattractive over time as demographic patterns and other consumer shopping changes occur, and the risks regarding lease terminations discussed above may limit Holdings’ ability to relocate or close those locations.

If we were to default on one or more of our operating leases, then the applicable lessors could terminate the affected leases and we could lose possession of the affected real estate.

We lease all of the real estate on which our retail stores are located. If we were to default on any one or more of these leases, the applicable lessors could terminate the affected leases and we could lose possession of the affected real estate and any improvements thereon. This may have a significant adverse effect on our business, financial condition and results of operations as we would then be unable to operate all or portions of the affected retail stores. In addition, such defaults could also constitute an event of default under the Senior Notes, which would permit the lenders to, among other things, accelerate the maturity dates of that indebtedness and, in the case of the Tranche I Note, exercise its rights to, among other things, foreclose on our assets. As of March 28, 2014, we owed unpaid rent of approximately $1.2 million related to 23 leased properties.

Our business is affected by changes in consumer preferences and discretionary spending.

Our success depends, in part, upon the popularity of our products and our ability to develop new menu items that appeal to consumers. Shifts in consumer preferences away from our stores or our menu items, our inability to develop new menu items that appeal to consumers, or changes in our menu that eliminate items popular with some consumers could harm our business. Also, our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during economic downturns or during periods of uncertainty. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales, results of operations, business and financial condition.

Our success depends on our ability to compete with cupcake-specific bakeries, traditional bakeries and other food service businesses.

The retail consumable foods industry is intensely competitive and we compete with many well-established traditional bakeries, cupcake-specific bakeries and other companies providing baked goods and coffee, on the basis of taste, quality and price of products offered, customer service, atmosphere, location, convenience and overall customer experience. We also compete with quick-services restaurants, delicatessens, cafés, take-out food service companies, supermarkets and convenience stores that offer the same types of baked goods. Aggressive discounts by our competitors or the entrance of new competitors into our markets could reduce our sales and profit margins.

Many of our competitors or potential competitors have substantially greater financial and other resources than us, which may allow them to compete more effectively than us with respect to some or all of the factors set forth in the preceding paragraph. As our competitors expand their operations, we expect competition to intensify. In addition, other new or established companies may develop baked goods stores that operate with concepts similar to ours, including the sale of gourmet cupcakes. Competition also could cause us to modify or evolve our products, designs or strategies. If we do so, we cannot guarantee that we will be successful in implementing the changes or that our profitability will not be negatively impacted by them.

We also compete with other employers in our markets for hourly workers and may be subject to higher labor costs.

Finally, we compete with all retail establishments in our markets for desirable store locations.

If we are unable to successfully compete in our markets, then we may be unable to sustain or increase our revenues and profitability.

We are dependent upon a small number of independent commercial bakeries for a significant amount of our menu items. The loss of a supplier, other disruptions to our supply chain, and/or our inability to predict demand could adversely affect our operating results.

We currently rely on, and have agreements with, five independent commercial bakeries for the manufacture and daily delivery of our baked goods products in the New York, Los Angeles, Chicago, Boston and Baltimore area markets. Accordingly, we are particularly susceptible to risks related to these suppliers, including their continued ability to maintain sufficient production of baked goods, to produce baked goods that meet our quality standards, and the risk of delivery disruptions that could arise due to a number of factors including adverse weather, traffic conditions and mechanical issues related to their delivery trucks. Our dependence on frequent deliveries to our stores by regional distributors could cause shortages, supply interruptions and/or the need to quickly seek alternative suppliers at higher prices, all of which could adversely impact our operations. Additionally, because none of our stores bake the baked goods they sell, each of our stores is required to estimate and order sufficient inventory daily. If stores are unable to predict the demand accurately, then our profitability and operating results may be adversely affected. There are many factors which could cause shortages or interruptions in the supply of our products, including weather, unanticipated demand, labor, production or distribution problems, quality issues and cost, and the financial health of our suppliers, most of which are beyond our control, and which could have an adverse effect on our business and results of operations.

Our business could be adversely affected by increased labor costs or labor shortages.

Labor is a primary component in the cost of operating our business. We devote significant resources to recruiting and training our managers and hourly employees. Increased labor costs due to competition, increased minimum wage or employee benefits costs or otherwise, would adversely impact our operating expenses. In addition, our success depends on our ability to attract, motivate and retain qualified employees, including store managers and staff, to keep pace with our growth strategy. If we are unable to attract, motivate and retain qualified employees, then our results of operations may be adversely affected.

Fluctuations in various food and supply costs, including dairy, could adversely affect our operating results.

Supplies and prices of the various products that are used to prepare our baked goods (including flour, milk, sugar and eggs) or coffee can be affected by a variety of factors, such as weather, seasonal fluctuations, demand, politics and economics in the producing countries, and such prices may fluctuate. An increase in pricing of any ingredient that is used in our baked goods could result in an increase in costs from our suppliers, and we may not be able to increase prices to cover increased costs which would have an adverse effect on our operating results and profitability.

We could become a party to litigation that could adversely affect us by distracting management, increasing our expenses or subjecting us to material money damages and other remedies.

We may be subject to the filing of complaints or lawsuits against us alleging that we are responsible for some illness or injury suffered at our stores or after consuming our products, or alleging problems with quality or other concerns regarding our products or operations. We are also subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters, and we could become subject to class action or other lawsuits related to these or different matters in the future. Claims may be expensive to defend and may divert time and money away from our operations and hurt its performance. A judgment in excess of our insurance coverage or our insurance carriers’ decision to deny or limit insurance coverage for any claims could materially and adversely affect our financial condition or results of operations. Any adverse publicity resulting from these allegations may also materially and adversely affect our reputation or prospects, which in turn could adversely affect our results of operations and profitability.

If we fail to comply with governmental laws or regulations or if these laws or regulations change, then our business could suffer.

In connection with the operation of our business, we are subject to extensive federal, state, local and foreign laws and regulations, including those related to:

Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, and accommodation and working conditions, benefits, citizenship requirements, insurance matters, workers’ compensation, disability laws such as the Federal Americans with Disabilities Act, child labor laws and anti-discrimination laws.

These labor laws are complex and vary from location to location, which complicates monitoring and compliance. As a result, regulatory risks are inherent in our operations. We may experience material difficulties or failures with respect to compliance with these labor laws in the future. Our failure to comply with these labor laws could result in required renovations to our facilities, litigation, fines, penalties, judgments or other sanctions including the temporary suspension of the operation of our stores or a delay in construction or opening of stores, any of which could adversely affect our business, operations and reputation.

In recent years, there has been an increased legislative, regulatory and consumer focus at the federal, state and municipal levels on the food industry, including nutrition and advertising practices. For example, several states and individual municipalities, including New York City and the State of California, have adopted regulations requiring that certain restaurants include caloric or other nutritional information on their menu boards and on printed menus, which must be plainly visible to consumers at the point of ordering. Likewise, there have been several similar proposals on the national level. As a result, we may in the future become subject to other regulations in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of our food, which could increase our expenses or slow customer flow.

The continuing challenging economic conditions could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources.

Challenging economic conditions could adversely affect our business and financial results. Our customers may make fewer discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and falling home prices. Because a key point in our business strategy is maintaining our transaction count and margin growth, any significant decrease in customer traffic or average profit per transaction will negatively impact our financial performance as reduced revenue creates downward pressure on margins. Financial difficulties experienced by our suppliers could result in product delays or shortages. Additionally, it is unknown when the broader national economy will fully recover. An economy that fails to improve or that further deteriorates could have a material adverse effect on our liquidity and capital resources, including our ability to raise additional capital if needed, or the ability of financial institutions to honor draws on our standby letters of credit, and could otherwise negatively impact our business and financial results.

We may incur costs resulting from security risks that we face in connection with our electronic processing and transmission of confidential customer information.

We use commercially available software and other technologies to provide security for processing and transmission of customer debit and credit card data. Our systems could be compromised in the future, which could result in the misappropriation of customer information or the disruption of systems. These consequences could have a material adverse effect on our reputation and business or subject us to additional liabilities.

Our industry is affected by litigation and publicity concerning food quality, health and other issues, which can cause customers to avoid our products and result in liabilities.

Food service businesses, such as bakeries, can be adversely affected by litigation and complaints from customers or government authorities resulting from food quality, illness, injury or other health concerns or operating issues stemming from one store or a limited number of stores. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from buying our products. We could also incur significant litigation costs or liabilities in connection with a lawsuit or claim against us.

The Members will receive payments for certain tax benefits that CBS may claim arising in connection with the Merger and related transactions, and the amounts that CBS may be required to pay could be significant.

In connection with the Merger, CBS entered into a Tax Receivable Agreement with the Members that provides for the payment by CBS to the Members of up to 75% of the benefits, if any, that CBS is deemed to realize as a result of (i) the payment of the Merger consideration other than the Class B Units, (ii) the exchange of Class B Units for shares of common stock, and (iii) certain other tax benefits in connection with the Merger and related transactions, including tax benefits attributable to payments under the Tax Receivable Agreement.

It is possible that the payments that CBS may be required to pay under the Tax Receivable Agreement will be substantial. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding Tax Receivable Agreement payments. There may be a material negative effect on CBS’ liquidity if, as a result of timing discrepancies or otherwise, the payments under the Tax Receivable Agreement exceed the actual benefits CBS realizes in respect of the tax attributes subject to the Tax Receivable Agreement. The payments under the Tax Receivable Agreement are not conditioned upon continued ownership of CBS’ securities by the Members.

In certain cases, payments under the Tax Receivable Agreement to the Members of Holdings may be accelerated and/or significantly exceed the actual benefits that CBS realizes in respect of the tax attributes subject to the Tax Receivable Agreement.

The Tax Receivable Agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, or if at any time CBS elects an early termination of the Tax Receivable Agreement, CBS’ (or its successor’s) obligations would be based on certain assumptions, including that CBS would have sufficient taxable income to fully utilize the potential tax benefits arising from the Merger and related transactions (including as a result of entering into the Tax Receivable Agreement). As a result, (i) CBS could be required to make payments under the Tax Receivable Agreement that are greater than or less than the specified percentage of the actual benefits it realizes in respect of the tax attributes subject to the Tax Receivable Agreement and (ii) if CBS elects to terminate the Tax Receivable Agreement early, it would be required to make an immediate payment equal to the present value of the anticipated future tax benefits, which upfront payment may be made years in advance of the actual realization of such future benefits. In these situations, CBS’ obligations under the Tax Receivable Agreement could have a substantial negative impact on its liquidity. There can be no assurance that CBS will be able to finance its obligations under the Tax Receivable Agreement. Payments under the Tax Receivable Agreement will be based on the tax reporting positions determined by CBS. Although CBS is not aware of any issue that would cause the Internal Revenue Service to challenge its expected tax reporting positions, CBS will not be reimbursed for any payments previously made under the Tax Receivable Agreement. As a result, in certain circumstances, payments could be made under the Tax Receivable Agreement in excess of the benefits that CBS actually realizes.

A material weakness or significant deficiency in our disclosure or internal controls could have an adverse effect on us.

CBS is required by the Sarbanes-Oxley Act of 2002 to establish and maintain disclosure controls and procedures and internal control over financial reporting. These control systems are intended to provide reasonable assurance that material information relating to Crumbs is made known to CBS’ management and reported as required by the Exchange Act, to provide reasonable assurance regarding the reliability and preparation of our financial statements, and to provide reasonable assurance that fraud and other unauthorized uses of our assets are detected and prevented. We may not be able to maintain controls and procedures that are effective at the reasonable assurance level. If that were to happen, our ability to provide timely and accurate information about the Company, including financial information, to investors could be compromised and our results of operations could be harmed. Moreover, if the Company or its independent registered public accounting firm were to identify a material weakness or significant deficiency, our reputation could be harmed and investors could lose confidence in us, which could cause the market price of CBS’ common stock to decline and/or limit the trading market for the common stock.

Risks Related to an Investment in CBS’ Securities

CBS is a holding company and relies on dividends, distributions, loans and other payments, advances and transfers of funds from Holdings to pay dividends, pay expenses and meet its other obligations.

CBS has no direct operations and no significant assets other than its ownership of all of the New Crumbs Class A Voting Units issued by Holdings (the “Class A Voting Units”) and the deferred tax asset discussed below. Because CBS conducts its operations through Holdings and the subsidiaries of Holdings, CBS depends in large part on those entities for dividends, loans and other payments to generate the funds necessary to meet its financial obligations, including payments under the Tax Receivable Agreement (“Tax Receivable Agreement”) entered into by and among CBS, Holdings and the Members in connection with the Merger, and CBS’ expenses as a publicly traded company, and to pay any dividends with respect to CBS’ common stock. Without the consent of the requisite holders of the Senior Notes, the terms of the Senior Notes prohibit CBS from paying any cash dividends and prohibit Holdings and its subsidiaries from paying any cash dividends other than to CBS, except as required under the Tax Receivable Agreement and Holdings’ Third Amended and Restated LLC Agreement (the “LLC Agreement”). Under the terms of the LLC Agreement, which was also entered into in connection with the Merger, all proceeds of any securities issuance by CBS are, subject to certain exceptions, required to be contributed or otherwise provided to Holdings and, pursuant to an Exchange and Support Agreement among the Members, Holdings and CBS that was entered into in connection with the Merger, CBS is generally prohibited from engaging in activities other than serving as a publicly traded holding company owning the Class A Voting Units. In addition, CBS is generally required to reserve excess cash generated from income tax distributions from Holdings for the purpose of providing additional working capital to Holdings. Legal and contractual restrictions in agreements governing future indebtedness of Holdings and its subsidiaries, as well as the financial condition and operating requirements of Holdings and its subsidiaries, may limit CBS’ ability to obtain cash from its subsidiaries. The earnings from, or other available assets of, Holdings may not be sufficient to make distributions or loans to enable CBS to pay any dividends on its common stock or satisfy its other financial obligations. CBS’ ability to pay cash dividends to holders of common stock, or satisfy its operating expenses and/or other financial obligations, may be limited by the terms of the LLC Agreement, which generally requires distributions by Holdings to be pro rata to all its members, including CBS and the holders of Class B Units, except in the case of distributions for public company expenses.

CBS has no history of paying cash dividends on its common stock, and it is unlikely that CBS will pay cash dividends in the foreseeable future.

CBS has not previously paid cash dividends on its common stock. The terms of the Senior Notes prohibit CBS from redeeming, repurchasing or declaring or paying any cash dividends on its common stock without the consent of the requisite holders of the Senior Notes. Because of this restriction on dividends and the limitations discussed in the foregoing risk factor, coupled with our history of losses in prior fiscal periods, it is unlikely that CBS’ Board of Directors will declare or pay any cash dividends in the foreseeable future. As a result, an investor’s only opportunity to achieve a return on an investment in shares of the common stock may be limited to sales of those shares at times when the market prices of the shares have appreciated above the prices paid by the investor at the time of investment.

Concentration of ownership of CBS may have the effect of delaying or preventing a change in control.

Without giving effect to the shares of common stock that may be issued under the Senior Notes, the Series A Holders and CBS’ directors and executive officers beneficially own, in the aggregate, approximately 22.5% of the outstanding voting power of CBS. Such persons, if acting together, have the ability to significantly influence all matters requiring stockholder approval, including the nomination and election of directors, the determination of CBS’ corporate and management policies and the determination of the outcome of significant corporate transaction such as mergers or acquisitions and asset sales. In addition, if CBS achieves adjusted EBITDA (as defined in the Business Combination Agreement) of $17.5 million, $25.0 million, and/or $30.0 million at particular points in time during the period beginning May 6, 2011 and ending on December 31, 2015 (such period referred to as the “Earnout Period”), then certain members of Holdings will be entitled to receive additional securities that will be exchangeable for up to 4,400,000 shares of CBS’ common stock (“Contingency Consideration”). During the Earnout Period, the holders of shares of CBS’ Series A Preferred Stock (the “Series A Holders”), exclusively and as a separate class, are entitled to elect such number of directors of CBS substantially equivalent to a number of directors commensurate with the then-aggregate beneficial ownership of the Series A Holders (the “Commensurate Ownership”); provided, however, that, to the extent that the Commensurate Ownership would result in the ability of the Series A Holders to elect a fraction of a seat on the Board of Directors, the Series A Holders are permitted to “round-up” to the nearest whole-number the number of directors the Series A Holders could appoint to the Board of Directors such that the aggregate number of the directors the Series A Holders could elect would exceed the Commensurate Ownership of the Series A Holders, so long as such rounding-up would not result in the Series A Holders electing a majority of the Board of Directors. Some of our directors and executive officers are members of Holdings who may become entitled to receive such Contingency Consideration. These concentrations of voting power and ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of CBS’ common stock.

Holders of the shares of CBS’ common stock would experience substantial dilution in their investment as a result of subsequent exercises of outstanding warrants, exchanges of other outstanding securities, conversions of the Senior Notes and/or the issuance of additional shares of CBS’ common stock.

As of the date of this report, there were outstanding warrants to purchase 5,456,300 shares of CBS’ common stock, 2,340,000 outstanding Class B Units that are exchangeable for shares of CBS’ common stock on a one-for-one basis, $3.5 million in aggregate principal amount due under the Tranche I Note under which up to approximately 875,000 shares of common stock may be issued, and $9.7 million in aggregate principal amount of Unsecured Notes under which up to 7,901,566 shares of CBS’ common stock may be issued. Pursuant to the arrangements under which the Contingency Securities were issued, Holdings could be required to issue up to an additional 4,400,000 Class B Units. The exercise of the warrants and/or the exchange of the Class B Units would result in the issuance of a significant number of new shares of common stock. In addition, CBS could issue a significant number of shares of common stock in connection with future acquisitions or financings or pursuant to CBS’ Equity Incentive Plan. Any of these issuances would dilute CBS’ existing stockholders, and such dilution could be significant. Moreover, such dilution could have a material adverse effect on the market price for the shares.

The Units, CBS’ common stock and/or the Warrants could be delisted from the NASDAQ Capital Market if CBS fails to comply with its continued listing standards.

The Units, CBS’ common stock and the Warrants are currently listed on the NASDAQ Capital Market. There can be no assurance that CBS will be able to maintain the listing of these securities on this market. If the NASDAQ Capital Market delists any of these securities from trading on its exchange for failure to meet the continued listing standards or timely regain compliance, then CBS and its security holders could face material adverse consequences which include:

CBS is subject to anti-takeover effects of certain charter and bylaw provisions, Delaware law and the Senior Notes, as well as its substantial insider ownership.

CBS has provisions in its Certificate of Incorporation and Bylaws that:

The terms of the Tranche I Note require CBS and Holdings to provide prior notice to the lender if they or any of their subsidiaries intend to enter into a transaction that could cause a change in control (as defined in the Loan Agreement), and a failure to provide such notice in accordance with the Tranche I Note would constitute an event of default thereunder. As discussed above, the terms of the Unsecured Notes require CBS to pay a cash premium on the unpaid principal balance in the event of a change in control under certain circumstances.

  These and other provisions of CBS’ charter documents, certain provisions of Delaware law, the terms of the Senior Notes, and the substantial insider ownership of CBS’ securities could delay or make more difficult or expensive certain types of transactions involving a change of control of CBS or its management. As a result, the market price of CBS’ securities may be adversely affected.

The Senior Notes impose certain director nomination requirements on CBS’ Board of Directors.

The terms of the Unsecured Notes provide that for so long as (i) Michael Serruya, any of his family members or any of his or their respective affiliates (collectively, the “Serruya Group”) (a) is a holder of an Unsecured Note and (b) beneficially owns in excess of 1.0% of CBS’ common stock, and (ii) the Serruya Group and the other persons who purchased Unsecured Notes, in the aggregate, beneficially own in excess of 5.0% of CBS’ common stock, the Nominating and Corporate Governance Committee of CBS’ Board of Directors (the “Nominating Committee”) is obligated to nominate Mr. Serruya or his designee for election to the Board at each meeting of CBS’ stockholders at which directors are to be elected and the Board is obligated to recommend to stockholders that such designee be so elected, except in the case where the designee cannot satisfy all legal and corporate governance requirements regarding service as a director or the nomination or recommendation of the designee would cause the Nominating Committee or the Board to breach a fiduciary duty. Based on its current beneficial ownership of the issued and outstanding shares of CBS common stock, the Serruya Group has the right to designate one member to the Board. A failure by the Nominating Committee or the Board to comply with their respective nomination obligations would constitute an event of default under the Unsecured Notes.

For so long as either of the Tranche Notes remains outstanding (the “Representation Period”), the Secured Lender will have the right, at any time, to: (i) appoint a representative to attend any and all meetings of CBS’ Board of Directors, and (ii) provided that the Secured Lender or its affiliates (a) is a holder of a Tranche Note and (y) beneficially owns in excess of 5.0% of CBS’ common stock, designate one director candidate for appointment to CBS’ Board of Directors. Following the issuance of the Tranche II Note and throughout the Representation Period (but subject to the foregoing ownership requirements), the Secured Lender will have the right, at any time, to designate a second director candidate for appointment to CBS’ Board of Directors. The foregoing designation rights are, however, subject to the satisfaction of any applicable corporate governance standards and other legal requirements of the NASDAQ Capital Market. The Nominating Committee is required to nominate each such candidate for election to the Board of Directors at each meeting of CBS’ stockholders held during the Representation Period at which directors are to be elected commencing with the first annual meeting after which the Secured Lender has designated a candidate, and CBS’ Board is required to recommend to the stockholders that such candidate be elected at such meeting. Based on its current beneficial ownership of the issued and outstanding shares of CBS common stock, the Secured Lender has the right to designate one member to the Board and upon issuance of the Tranche II Note will have the right to designate a second member to the Board.

Accordingly, and although the power to elect directors will remain with CBS’ stockholders, these nomination obligations will reduce the number of persons that the Nominating Committee and the Board have the sole right to nominate and recommend for nomination.