10QSB 1 v058663_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark one) |X| Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2006 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1939 For the transition period from ________ to ________ Commission File Number 1-13984 Brooklyn Cheesecake & Desserts Company, INC. (Formerly Creative Bakeries, Inc.) (Exact name of Registrant as specified in its Charter) New York 13-3832215 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 20 Passaic Avenue, Fairfield, NJ 07004 (Address of principal executive offices) (973) 808-9292 (Registrant's telephone number, including area code) This report has not been reviewed by the Company's Independent Registered Public Accounting Firm. Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes |_| No |X| As of November 21, 2006, there were 684,445 shares of the registrant's common stock, par value $0.025 per share, outstanding. Transitional Small Business Disclosure Format (check one) Yes |_| No |X| BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. (FORMERLY CREATIVE BAKERIES, INC.) NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 INDEX PART I. FINANCIAL INFORMATION Item 1. Condensed financial statements: Balance sheet as of September 30, 2006 (unaudited/unreviewed) F-2 Statements of operations for the nine and three months ended September 30, 2006 and 2005 (unaudited/unreviewed) F-3 Statements of cash flows for the nine months ended September 30, 2006 and 2005 (unaudited/unreviewed) F-4 Notes to condensed consolidated financial Statements F-5 - F-7 Item 2. Management's discussion and analysis of plan of operations F-8 Item 3. Controls and Procedures F-9 PART II. OTHER INFORMATION F-10 Item 6. Exhibits SIGNATURES CERTIFICATIONS PART I. FINANCIAL INFORMATION BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. (FORMERLY CREATIVE BAKERIES, INC.) CONDENSED BALANCE SHEET - SEPTEMBER 30, 2006 (UNAUDITED/UNREVIEWED) ASSETS Current assets: Fees receivable $ 4,614 Prepaid expenses 2,401 ----------- Total current assets 7,015 ----------- Property and equipment, net Other assets: Tradename, net of amortization 62,625 ----------- Total other assets 62,625 ----------- $ 69,640 LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 18,000 Accrued expenses 55,975 Notes payable 815,000 ----------- Total current liabilities 888,975 ----------- Other liabilities: Notes payable, officer, net of current portion 11,120 ----------- Total other liabilities 11,120 ----------- Stockholders' deficiency: Preferred stock $.001 par value, authorized 2,000,000 shares, none issued Common stock, $.025 par value, authorized 30,000,000 shares, issued and outstanding 684,445 shares 17,110 Additional paid in capital 12,254,135 Accumulated deficit (13,101,700) ----------- Total stockholders' deficiency (830,455) ----------- $ 69,640 =========== See notes to condensed financial statements. F-2 BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. (FORMERLY CREATIVE BAKERIES, INC.) CONDENSED STATEMENTS OF OPERATIONS NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED/UNREVIEWED) Nine Months Three Months Ended Sept 30 Ended Sept 30, 2006 2005 2006 2005 --------- ---------- --------- --------- Net sales $ -- $ -- $ -- $ -- Licensing Fees 4,614 -- 2,136 -- Cost of sales -- -- -- -- --------- ---------- --------- --------- Gross profit 4,614 -- 2,136 -- --------- ---------- --------- --------- Selling, general and administrative expenses 189,324 97,303 20,901 32,919 Interest expense 52,975 -- 26,488 -- --------- ---------- --------- --------- 242,299 848,533 47,389 32,919 --------- ---------- --------- --------- Loss from Continuing Operations $(237,685) $ (97,303) $ (45,253) $ (32,919) ========= ========== ========= ========= Discontinued operations Loss from discontinued Operations (383,781) (535,896) -- (176,587) Gain on disposal of assets 527,371 -- -- -- --------- ---------- --------- --------- Gain (loss) from discontinued Operations 143,590 (535,896) -- (176,587) --------- ---------- --------- --------- Net loss $ (94,095) $ (633,199) $ (45,253) $(209,506) ========= ========== ========= ========= Earnings per common share: Primary and fully diluted: Net loss per common share - basic and diluted $ (0.15) $ (1.25) $ (0.07) $ (0.50) ========= ========== ========= ========= Weighted average number of common shares outstanding 642,413 479,556 684,445 515,318 basic and diluted ========= ========== ========= ========= See notes to condensed financial statements. F-3 BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. (FORMERLY CREATIVE BAKERIES, INC.) CONDENSED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED/UNREVIEWED)
2006 2005 --------- -------- Operating activities: Loss from continuing operations $(237,685) $(97,303) Adjustments to reconcile net loss from Operations to cash used in operating activities: Changes in discontinued operations Depreciation and amortization 36,154 64,636 Common stock issued for services 179,271 187,250 Loss from discontinued assets and (383,781) (535,896) liabilities from operations: Accounts receivable 103,865 157,609 Fees receivable (4,614) Inventory 200,328 (460,346) Prepaid expenses 30,804 42,393 Website development 99,604 -- Financing Costs 2,342 -- Security deposits 6,242 (477) Accounts payable (530,448) 65,904 Accrued expenses (30,335) 48,653 Deferred rent (25,040) 6,020 --------- -------- Net cash used in operating activities (553,293) (521,557) --------- -------- Investing activities: Purchase of property and equipment -- (30,163) Gain on disposal of assets 527,371 Sale of Property & equipment 249,198 -- --------- -------- Net cash Provided by (used in) investing activities 776,569 (30,163) --------- -------- Financing activities: Proceeds from notes payable 15,000 232,560 Proceeds from capital lease obligation -- 4,691 Proceeds from officers loans 11,120 280,264 Principal payment of notes payable (208,241) -- Principal payment of officers' loans (48,599) -- --------- -------- Net cash provided by financing activities (230,720) 517,515 --------- -------- Net decrease in cash and cash equivalents (7,444) (34,205) --------- -------- Cash and cash equivalents, beginning of period 7,444 35,225 --------- -------- Cash and cash equivalents, end of period $ -- $ 1,020 ========= ======== Supplemental disclosures: Cash paid during the year for: Interest: $ -- $ 77,520 ========= ======== Non cash transactions affecting investing and financing: Issuance of restricted common shares for debt $ -- $168,034 ========= ========
See notes to condensed financial statements. F-4 BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. (FORMERLY CREATIVE BAKERIES, INC.) NOTES TO CONDENSED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 1. Basis of presentation: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the nine months ended are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report for the year ended December 31, 2005 included in its Annual Report filed on Form 10-KSB. The results of operations for the nine months ended September 30, 2006 are not necessarily indicative of the results for the full year ending December 31, 2006. 2. Nature of operations, risks and uncertainties: The Company was formerly a manufacturer of baking and confectionery products, which were sold to supermarkets, food distributors, educational institutions, restaurants, mail order and to the public. The Company sold its products throughout the United States, with a concentration on the East Coast. The Company also exported cheesecake to Japan. On March 28, 2006, the Company entered into an asset exchange agreement, tenant's lease assignment, and exclusive licensing agreement with the Company's former Chairman, Chief Executive Officer, and President, Ronald Schutte, whereby the Company exchanged certain assets of its operating subsidiary JM Specialties, Inc. for the assumption of $1,145,315 in liabilities of the Company by an entity established by Mr. Schutte with a personal guarantee by Mr. Schutte. As part of the agreement, Mr. Schutte also acquired the stock of JM Specialties, Inc. The transaction had been subject to a satisfactory fairness opinion. Following the exchange transaction, the Company's business operations changed from the manufacturing of baking and confectionary products to a licensing company of intellectual property. The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. The Company maintains all of its cash balances in New Jersey financial institutions. The balances are insured by the Federal Deposit Insurance Company (FDIC) up to $100,000. At September 30, 2006, the Company had no uninsured cash balances. Certain amounts previously reported for September 30, 2005 have been reclassified to conform with the classifications used in 2006. Such classifications had no effect on the reported net loss. 3. Tradename and licensing agreements: On March 7, 2002, the Company purchased the rights to the tradenames Brooklyn Cheesecake Company, Inc. and Brooklyn Cheesecake and Desserts Company, Inc. and the related corporate logo in exchange for 300,000 shares of the Company's common stock, valued on the purchase date at $90,000. The tradename rights are being amortized on the straight-line basis over a fifteen-year term. Amortization expense was $1,500 for each of the quarters ended September 30, 2006 and 2005. On March 28, 2006 the Company entered into a licensing agreement with its former Chairman and CEO, whereby a one percent of sales fee would be charged for the use of the Brooklyn Cheesecake & Desserts Company, Inc. trademarks. F-5 BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. (FORMERLY CREATIVE BAKERIES, INC.) NOTES TO CONDENSED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 3. Tradename and licensing agreements (continued): The following is a schedule of future amortizations on the trade name: 2007 $6,000 2008 6,000 2009 6,000 2010 6,000 2011 6,000 Thereafter 32,625 ------- $62,625 4. Notes payable: A note dated January 31, 2006 was issued and is payable to Ronald L. Schutte the former Chairman and CEO payable on demand, with interest at the rate of 13%, per annum, and secured by the Company's trademarks. The original amount of the loan was $ 995, 818 of which $195,818 plus additional loans and accrued interest was satisfied upon completion of an exchange agreement dated March 28, 2006 (see note 7). Mr. Schutte also advanced $15,000 to cover additional expenses during the period. 5. Common Stock: The following restricted common stock issuances were made in the nine months ended September 30, 2006: - The Company issued 28,000 shares of common stock for services. The shares were issued to officers of the Company, valued at $35,000, or $1.25 per share, on February 17, 2006, the closing trading price on the date of issuance. - The Company issued 9,017 shares of common stock for merchandise purchased. The shares were issued to a vendor, valued at $11,271, or $1.25 per share, on February 17, 2006 the closing trading price on the date of issuance. - In payment of fees to Company Board members and Corporate Secretary, the Company issued 64,000 shares of common stock. The shares were issued to the directors and corporate secretary, valued at $80,000, or $1.25 per share, on February 17, 2006 the closing trading price on the date of issuance. - In payment of fees to Consultants, the Company issued 30,000 shares of common stock. The shares were issued to the consultants, valued at $37,500, or $1.25 per share, on February 17, 2006 the closing trading price on the date of issuance. - In payment of salaries to employees, the Company issued 12,400 shares of common stock. The shares were issued to the employees, valued at $15,500, or $1.25 per share, on February 17, 2006 the closing trading price on the date of issuance. The issuance of the common stock was exempt from registration pursuant to Section 4(2) of The Securities Act of 1933, as amended. F-6 BROOKLYN CHEESECAKE & DESSERTS COMPANY, INC. (FORMERLY CREATIVE BAKERIES, INC.) NOTES TO CONDENSED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 6. Income taxes: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS No. 109") "Accounting for 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 annually for differences between the financial statement and income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future 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. Income tax expense is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities. There was no cumulative effect of adoption or current effect in continuing operations mainly because the Company has accumulated a net operating loss. The Company has made no provision for a deferred tax asset due to the net operating loss carryforward because a valuation allowance has been provided which is equal to the deferred tax asset. It cannot be determined at this time that a deferred tax asset is more likely than not to be realized. The Company has a loss carryforward of approximately $11,000,000 that may be offset against future taxable income. The carryforward losses expire at the end of the years 2006 through 2025. 7. Exchange Agreement: On March 28, 2006, the Company entered into an exchange agreement with Ronald L. Schutte its former Chairman and CEO whereby the Company exchanged certain assets in exchange for a majority of liabilities of the company and a portion of the secured debt due to Mr. Schutte. The balance of the Company's obligation to Mr. Schutte will be extinguished upon the Company raising additional capital. The Company also entered into an exclusive licensing agreement with Mr. Schutte and a company owned by Mr. Schutte whereby, the Company receives one percent of sales as a royalty for use of the Company's trademarks. Mr. Schutte also acquired the stock of the Company's J.M. Specialty, Inc. subsidiary. 8. Discontinued Operations: The Company's Exchange Agreement has been accounted for under the requirements of paragraph 30 of Statements of Financial Accounting Standards 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." F-7 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview On March 28, 2006 the Company exchanged its baking assets for debt and liabilities with its former Chairman and CEO. In addition the Company entered into a licensing agreement, whereby it has licensed certain intellectual property, namely trademarks. The licensing fees derived from the license agreement, if any, will be used to offset operating costs. Licensing fees were $2,136 in the third quarter based on sales reported by the licensee. Results of Operations Three and Nine Months Ended September 30, 2006 Compared to Three and Nine Months Ended September 30, 2005 The operating company revenue from operations, cost of goods sold and operating expenses for the three and nine months ended September 30, 2006 and 2005 have been reclassified to discontinued operations. Licensing fees were $2,136 and $4,614 for the three and nine months ended September 30, 2006. Slow summer sales were responsible for these results. Selling, general and administrative expenses totaled $20,901 and $32,919 for the three months ended September 30, 2006 and 2005. This was an decrease of $12,018 or 37%. Selling, general and administrative expenses were $189,324 and $97,303 for the nine months ended September 30, 2006 and 2005 respectively. This was an increase of $92,021 or 94%. This was a result of increased legal, professional and directors' fees. Most of these fees were paid in common stock. The Company incurred $26,488 and $52,975 in interest expense during the three and nine months ended Septmeber 30, 2006. Prior year interest was incurred as part of operations. Therefore prior year's interest is included in loss from discontinued operations. Liquidity and Capital Resources Since its inception the Company's only source of working capital has been the $8,455,000 received from the issuance of its securities and $999,754 loans from officers. As of September 30, 2006, the Company had a negative working capital from continuing operations of approximately $881,960 compared to a negative working capital of $1,055,354 at September 30, 2005. F-8 Item 3. Controls and Procedures EVALUATION OF THE COMPANY'S DISCLOSURE AND INTERNAL CONTROLS. The Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" as of the end of the period covered by this report. This evaluation was done with the participation of management, under the supervision of the Chief Executive Officer ("CEO")/Chief Financial Officer ("CFO"). LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls. CONCLUSIONS. Based on our evaluation the CEO/CFO concluded that the issuer's disclosures, controls and procedures are effective to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Security Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROLS There have not been any changes in the issuer's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the issuer's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting. F-9 PART II - OTHER INFORMATION Item 6. Exhibits (a) Exhibits 31.1 Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the issuer duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 20, 2006. Brooklyn Cheesecake & Desserts Company, Inc. By: /s/Anthony J. Merante ----------------------------------- President, Chief Executive Officer, and Chief Financial Officer F-10