In a large bowl, combine warm water, milk, yeast, and 1 tablespoon of sugar. Stir until everything is well mixed. If you’re new to baking, let the mixture sit for 5–10 minutes to check that it becomes foamy, this means the yeast is active. Add the flour, egg, and salt to the yeast mixture and stir until combined. Then add the butter and mix until fully incorporated. Cover the bowl and let the dough rise in a warm place for 1 hour.

Using kitchen scissors, snip each dough ball into irregular pieces. Dip each piece into melted butter, then toss in the cinnamon-sugar mixture. Arrange back in the dish.

Preheat oven to 370 °F (188 °C). Bake the bites for about 40 minutes, until puffed and golden.

While the bites bake, beat cream cheese, softened butter, milk, and powdered sugar until smooth and fluffy.

Let the baked bites cool slightly, then spread or drizzle with cream cheese frosting. Warm the caramel sauce and drizzle generously over the top. Serve warm.