Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
COSI > SEC Filings for COSI > Form 10-Q on 16-May-2013All Recent SEC Filings

Show all filings for COSI INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COSI INC


16-May-2013

Quarterly Report


Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the fiscal quarters ended April 1, 2013 and April 2, 2012 should be read in conjunction with "Selected Consolidated Financial Data" and our audited consolidated financial statements and the notes to those statements that are in our 2012 Annual Report on Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under "Cautionary Note Regarding Forward-Looking Statements" below and elsewhere in this Quarterly Report.

OVERVIEW



System wide restaurants:



                                               For the Three Months Ended
                                     April 1, 2013                    April 2, 2012
                             Company-                         Company-
                              Owned     Franchise    Total     Owned     Franchise    Total

Restaurants at beginning
of period                          75          50       125         80          56       136
New restaurants opened              -           -         -          -           -         -
Restaurants permanently
closed                              1           -         1          -           1         1
Restaurants at end of
period                             74          50       124         80          55       135

As of April 1, 2013, there were 74 Company-owned and 50 franchised restaurants operating in 16 states, the District of Columbia, the United Arab Emirates (UAE), and Costa Rica. During the first quarter of fiscal 2013, we closed one Company-owned restaurant in Ohio at the expiration of its lease. During the first quarter of fiscal 2012, one franchised restaurant in New Jersey closed due to the termination of its lease.

Our restaurants offer innovative, savory, made-to-order products featuring our authentic hearth-baked crackly crust signature Cosi® bread and fresh distinctive ingredients. We maintain a pipeline of new menu offerings that are introduced seasonally through limited time offerings to keep our products relevant to our target customers. Our menu features high-quality, made-to-order hot and cold sandwiches, hand-tossed salads, bowls, breakfast wraps, Cosi® Squagels®, hot melts, flatbread pizzas, S'mores and other desserts, and a variety of coffees along with other soft drink beverages, bottled beverages including premium still and sparkling water, teas, alcoholic beverages, and other specialty coffees and beverages. Our restaurants offer lunch and afternoon coffee in a counter-service format, with most offering breakfast and/or dinner and dessert menus as well.

We are currently eligible to offer franchises in 46 states and the District of Columbia. We offer franchises to area developers and individual franchise operators. The initial franchise fee, payable to us, for both an area developer and an individual franchise operator, is $40,000 for the first restaurant and $35,000 for each additional restaurant.

We believe that offering Cosi® franchised restaurants to area developers and individual franchisees offers the prospects of strong financial returns. By franchising, we believe we will be able to increase the presence of our restaurants in various markets throughout the country and generate additional revenue without the large upfront capital commitments and risk associated with opening Company-owned restaurants.

We believe that incorporating a franchising and area developer model into our strategy will position us to maximize the market potential for the Cosi® brand and concept consistent with our available capital, and we expect that Company-owned restaurants (restaurants that we own as opposed to franchised restaurants) will


Table of Contents

always be an important part of our new restaurant growth.

We also continue to explore strategic opportunities with our Cosi Pronto® (our grab-and-go concept) and full-service concepts in educational establishments, airports, train stations and other public venues that meet our operating and financial criteria.

Recent Development

On May 8, 2013, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation to implement a one-for-four reverse split of its common stock, par value $0.01 per share, as approved by the Company's stockholders at the Annual Meeting of Stockholders on May 8, 2013. The reverse split was effective as of 8:00 a.m. (Eastern Time) on May 9, 2013, and the Company's common stock began trading on the NASDAQ Global Market on a post-split basis on May 9, 2013.

Critical Accounting Policies

Our discussion and analysis of our consolidated financial condition and results of operations is based upon the consolidated financial statements and notes to the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of the consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable and generally accepted for companies in the restaurant industry. We believe that the following addresses the more critical accounting policies used in the preparation of our consolidated financial statements and requires management's most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. There have been no material changes in the application of our most critical accounting policies and estimates, judgments and assumptions during the first quarter of fiscal 2013.

Long Lived Assets: ASC 360-10-35 Property, Plant, & Equipment requires management judgments regarding the future operating and disposition plans for marginally-performing assets, and estimates of expected realizable values for assets to be sold. The application of this standard has affected the amount and timing of charges to operating results that have been significant in recent years. We evaluate possible impairment at the individual restaurant level periodically and record an impairment loss whenever we determine impairment factors are present. We consider a history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the same period. Restaurants are not considered for impairment during the "ramp-up" period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.

Lease Termination Charges: ASC 420-10-30 Exit or Disposal Cost Obligations requires companies to recognize a liability for the costs associated with an exit or disposal activity when the liability is incurred, rather than at the time of a commitment to an exit or disposal plan. For all exit activities, we estimate our likely liability under contractual leases for restaurants that have been closed. Such estimates have affected the amount and timing of charges to operating results and are impacted by management's judgments about the time it may take to find a suitable subtenant or assignee, or the terms under which a termination of the lease agreement may be negotiated with the landlord.

Accounting for Lease Obligations: In accordance with ASC 840-10-25 Leases, we recognize rent expense on a straight-line basis over the lease term commencing on the date we take possession. We include any rent escalations, rent abatements during the construction period and any other rent holidays in our straight-line rent expense calculation.


Table of Contents

Landlord Allowances: In accordance with ASC 840-10-25 Leases, we record landlord allowances as deferred rent in other long-term liabilities on the consolidated balance sheets and amortize them on a straight-line basis over the term of the related leases.

Stock-Based Compensation Expense: In accordance with ASC 718-10-25 Compensation
- Stock Compensation we recognize stock-based compensation expense according to the fair value recognition provision, which generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that all the resulting compensation expense be recognized in the financial statements.

We measure the estimated fair value of our granted stock options using a Black-Scholes pricing model and of our restricted stock based on the fair market value of a share of registered stock on the date of grant. The weighted average fair values of the stock options granted through 2013, were determined using the Black-Scholes option-pricing model.

Income Taxes: We have recorded a full valuation allowance to reduce our deferred tax assets that relate primarily to net operating loss carry-forwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carry-forwards based on the Company's operating results. A positive adjustment to income will be recorded in future years if we determine that we could realize these deferred tax assets.

Revenue

Restaurant Net Sales: Our Company-owned restaurant sales are composed almost entirely of food and beverage sales. We record revenue at the time of the purchase of our products by our customers.

Franchise Fees and Royalties: Franchise fees and royalties includes fees earned from franchise agreements entered into with area developers and franchise operators, as well as royalties received based on sales generated at franchised restaurants. We recognize the franchise fee in the period in which a franchise location opens or when fees are forfeited as a result of a termination of an area developer agreement. We recognize franchise royalties in the period in which sales are made by our franchise operators.

Gift Card Sales: We offer our customers the opportunity to purchase gift cards at our restaurants and through our website. Customers can purchase these cards at varying dollar amounts. At the time of purchase by the customer, we record a gift card liability for the face value of the card purchased. We recognize the revenue and reduce the gift card liability when the gift card is redeemed. We do not reduce our recorded liability for potential non-use of purchased gift cards.

Comparable Restaurant Sales

In calculating comparable restaurant sales, we include a restaurant in the comparable restaurant base after it has been in operation for 15 full months. We remove from the comparable restaurant base for the period any restaurant that is temporarily shut down for remodeling during that period. At April 1, 2013 and April 2, 2012, there were 74 and 80 restaurants in our comparable restaurant base, respectively.

Costs and Expenses

Cost of Food and Beverage. Cost of food and beverage is composed of food and beverage costs. Food and beverage costs are variable and fluctuate with sales volume.

Restaurant Labor and Related Benefits. The costs of restaurant labor and related benefits include direct hourly and management wages, bonuses, payroll taxes, health insurance and all other fringe benefits.


Table of Contents

Occupancy and Other Restaurant Operating Expenses. Occupancy and other restaurant operating expenses include direct restaurant-level operating expenses, including the cost of paper and packaging, supplies, repairs and maintenance, utilities, rent and related occupancy costs.

General and Administrative Expenses. General and administrative expenses include all corporate and administrative functions that support our restaurants and provide an infrastructure to operate our business. Components of these expenses include executive management costs; supervisory and staff salaries; non-field stock-based compensation expense; non-field bonuses and related taxes and employee benefits; travel; information systems; training; support center rent and related occupancy costs; and professional and consulting fees. The salaries, bonuses and employee benefits costs included as general and administrative expenses are generally more fixed in nature and do not vary directly with the number of restaurants we operate. Stock-based compensation expense includes the charges related to recognizing the fair value of stock options and restricted stock as compensation for awards to certain key employees and non-employee directors, except the costs related to stock-based compensation for restaurant employees which are included in restaurant labor and related benefits.

Depreciation and Amortization. Depreciation and amortization principally relates to restaurant assets.

RESULTS OF OPERATIONS



Our operating results for the three-month periods ended April 1, 2013 and
April 2, 2012, expressed as a percentage of total revenues (except where
otherwise noted), were as follows:



                                                            Three Months Ended
                                                           April 1,    April 2,
                                                             2013        2012

Revenues:
Restaurant net sales                                           96.7 %      97.0 %
Franchise fees and royalties                                    3.3         3.0
Total revenues                                                100.0       100.0
Cost and expenses:
Cost of food and beverage (1)                                  24.9        23.3
Restaurant labor and related benefits (1)                      38.9        36.8
Occupancy and other restaurant operating expenses (1)          34.3        32.1
                                                               98.1        92.2
General and administrative expenses                            12.8        11.3
Provision for lossess on asset impairments and disposals        1.6           -
Depreciation and amortization                                   3.5         4.0
Closed store costs                                              0.1           -
Lease termination expense (income)                                -        (0.1 )
Total costs and expenses                                      112.8       104.6
Operating loss                                                (12.8 )      (4.6 )
Other income                                                    0.1           -
Net loss and comprehensive loss                               (12.7 )%     (4.6 )%



(1) Expressed as a percentage of restaurant net sales versus all other items expressed as a percentage of total revenues.


Table of Contents

Restaurant Net Sales



                                    Restaurant net sales
                                                as a % of total
                              (in thousands)       revenues
Quarter ended April 1, 2013   $        20,854              96.7 %
Quarter ended April 2, 2012   $        23,921              97.0 %

Restaurant net sales. Restaurant net sales decreased 12.8%, or approximately $3.1 million, during the first quarter of fiscal 2013 due primarily to a decrease in net sales of approximately $1.6 million related to restaurants closed during and subsequent to the first quarter of fiscal 2012, as well as a decrease in net sales in our comparable restaurant base of 6.6%, or approximately $1.5 million. The decrease in comparable restaurant net sales was comprised of 8.5% decrease in traffic, offset by 1.9% increase in average check.

Franchise Fees and Royalties



                                    Franchise fees and royalties
                                                    as a % of total
                              (in thousands)           revenues
Quarter ended April 1, 2013   $           707                      3.3 %
Quarter ended April 2, 2012   $           752                      3.0 %

Franchise fees and royalties. Franchise fees and royalties decreased 6.0%, or approximately $0.05 million, due primarily to lower royalties related to franchised stores closed during and after the first quarter of fiscal 2012, as well as the decrease in comparable franchised restaurant net sales in the quarter.

Costs and Expenses



                                     Cost of food and beverage
                                                 as a % of restaurant
                               (in thousands)         net sales
Quarter ended April 1, 2013   $          5,202                   24.9 %
Quarter ended April 2, 2012   $          5,566                   23.3 %

Cost of food and beverage. The increase in cost of food and beverage, as a percentage of restaurant net sales, is largely due to higher costs of certain commodities, primarily poultry and produce, the latter of which was adversely impacted by unseasonably cold weather in the Southwestern United States earlier this year as well as a switch to utilizing more fresh vegetables in our sandwiches, salads and new bowl products. Also driving the increase in the cost of food and beverage, as a percentage of restaurant net sales, was the introduction of bowls during the last quarter of fiscal 2012 which, as a category, carry a higher cost of goods as a percentage of net sales. These increases were partially offset by the favorable impact of menu price increases.

                                   Restaurant labor and related benefits
                                                      as a % of restaurant
                               (in thousands)              net sales
Quarter ended April 1, 2013   $          8,110                            38.9 %
Quarter ended April 2, 2012   $          8,815                            36.8 %

Restaurant labor and related benefits. The increase in restaurant labor and related benefits, as a percentage of restaurant net sales, is due primarily to the unfavorable impact on labor of the decrease in comparable net restaurant sales, primarily the impact on the fixed-portion of manager labor, as well as higher costs related to


Table of Contents

healthcare benefits.

                                   Occupancy and other restaurant
                                         operating expenses
                                                  as a % of restaurant
                               (in thousands)          net sales
Quarter ended April 1, 2013   $          7,144                    34.3 %
Quarter ended April 2, 2012   $          7,686                    32.1 %

Occupancy and other restaurant operating expenses. The increase in occupancy and other restaurant operating expenses, as a percentage of restaurant net sales, is due primarily to the unfavorable effect on fixed occupancy-related costs of the decrease in comparable net restaurant sales, as well as the increase in paper and packaging costs resulting from both a year-over-year increase in catering sales and the higher costs for resin-based packaging, as well as higher credit card fees resulting from greater usage and an increase in interchange rates, partially offset by lower costs for repairs and maintenance of existing Company-owned restaurants and lower local store marketing expenditures.

                                  General and administrative expenses
                                                      as a % of total
                               (in thousands)             revenues
Quarter ended April 1, 2013   $          2,757                        12.8 %
Quarter ended April 2, 2012   $          2,779                        11.3 %

General and administrative expenses. The slight decrease in general and administrative expenses in the quarter is due primarily to lower third-party professional fees, including lower legal fees, partially offset by costs related to the design of our new store prototype.

                                    Provision for losses on asset
                                      impairments and disposals
                                                    as a % of total
                              (in thousands)            revenues
Quarter ended April 1, 2013   $           339                       1.6 %
Quarter ended April 2, 2012   $             -                         -

Provision for losses on asset impairments and disposals: The provision for losses on asset impairments and disposals during the first quarter of fiscal 2013 relates to three underperforming restaurants.

                                    Depreciation and amortization
                                                    as a % of total
                              (in thousands)            revenues
Quarter ended April 1, 2013   $           748                       3.5 %
Quarter ended April 2, 2012   $           994                       4.0 %


Table of Contents

Depreciation and amortization. The lower depreciation and amortization expense during the first quarter of fiscal 2013 is due primarily to the impact of impairments recorded during and subsequent to the first quarter of fiscal 2012 as well as the impact on depreciation of assets in our restaurant base that have become fully depreciated in the last year.

                                      Closed store costs
                                                 as a % of total
                               (in thousands)       revenues
Quarter ended April 1, 2013   $             17               0.1 %
Quarter ended April 2, 2012   $              -                 -

Closed store costs. The closed store costs incurred during the first quarter of fiscal 2013 are related to the closing of one Company-owned restaurant at the expiration of its lease. We did not incur any closed store costs during the first quarter of fiscal 2012.

                                    Lease termination expense (income)
                                                       as a % of total
                               (in thousands)              revenues
Quarter ended April 1, 2013   $              4                             -
Quarter ended April 2, 2012   $            (28 )                        (0.1 )%

Lease termination expense. The lease termination expense adjustment in the first quarter of fiscal 2013 was immaterial. The lease termination benefit adjustment during the first quarter of fiscal 2012 is related to the reversal of a previously recorded subtenant lease expense.

                                         Other income
                                                 as a % of total
                               (in thousands)       revenues
Quarter ended April 1, 2013   $             21               0.1 %
Quarter ended April 2, 2012   $             11               0.0 %

Other income: Other income was immaterial and included adjustments related to the discounting of the long-term portion of a note receivable in each of the first quarters of fiscal 2013 and 2012.

                                          Net loss
                                                as a % of total
                              (in thousands)       revenues
Quarter ended April 1, 2013   $        (2,741 )           (12.7 )%
Quarter ended April 2, 2012   $        (1,128 )            (4.6 )%

Net loss: The increase in net loss in the quarter is due primarily to the unfavorable effect of the decrease in comparable restaurant net sales on the fixed-portion of manager labor and occupancy-related costs, the increase in food and beverage and paper and packaging costs, and the net impact of locations closed during and subsequent to the first quarter of fiscal 2012, partially offset by the lower depreciation expense.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were approximately $12.1 million on April 1, 2013, compared with $15.4 million on December 31, 2013. We had positive working capital of approximately $5.3 million on April 1, 2013, compared with positive working capital of approximately $7.1 million in December 31, 2012. The decrease in working capital in the first quarter of fiscal 2013 was a result of funding our operating loss, net of depreciation and other non-cash expenses as well as payments made for capital expenditures. Our principal requirements for cash in 2013 will be for working capital needs, new restaurant openings, if any, and routine maintenance of our existing restaurants.

Net cash used in operating activities during the first quarter of 2013 was approximately $3.0 million, compared with $2.2 million in the first quarter of 2012. The increase was primarily due to the higher operating loss, net


Table of Contents

of depreciation and other non-cash expenses, the unfavorable timing difference in the payment of current payroll obligations related to our bi-weekly calendar, as well as the timing of payments on certain vendor obligations, partially offset by the receipt of payments on fiscal 2012 outstanding receivables.

Cash used in investing activities was approximately $0.3 and $0.2 million in the first quarters of fiscal 2013 and 2012, respectively, and was the result of capital expenditures for existing company-owned restaurants.

No cash was used in or provided by financing activities during the first quarters of fiscal 2013 and 2012.

During the first quarter of fiscal 2013, as well as the last two quarters of fiscal 2012, a total of three payments of $62,500 each were not received as scheduled in accordance with the terms of the Subordinated Secured Promissory . . .

  Add COSI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for COSI - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.