10-K 1 form10k.htm COSI INC 10-K 12-30-2013

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10‑K

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
for the fiscal year ended December 30, 2013
OR
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
for the transition period from ______to______

Commission File No. 000-50052

Cosi, Inc.
(Exact name of registrant as specified in its charter)

Delaware
06-1393745
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

1751 Lake Cook Road, Suite 600, Deerfield, Illinois 60015
(Address and Zip Code of Principal Executive Offices)

(847) 597-8800
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 
Title of class
Common Stock
($.01 par value)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Exchange Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such a shorter period that the registrant was required to submit and post such files.)  Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K .Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $36.7 million on July 1, 2013, based upon the closing price of the registrant’s common stock on The Nasdaq Capital Market on such date, the last trading day of the registrant’s most recently completed second fiscal quarter. Shares of voting stock held by each executive officer and director and by each person who, as of such date, may be deemed to have beneficially owned more than 5% of the outstanding voting stock have been excluded. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.

18,308,934 shares of the registrant’s common stock were outstanding on March 31, 2014.

DOCUMENTS INCORPORATED BY REFERENCE
 
Part III of this Form 10-K incorporates certain information from the Registrant’s definitive proxy statement for its Annual Meeting of Stockholders expected to be held in June, 2014.  The definitive proxy statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days from the end of the Registrant’s fiscal year ended December 30, 2013.
 


TABLE OF CONTENTS

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PART I

Item 1. BUSINESS
 
General
 
Cosi, Inc., a Delaware corporation incorporated on May 15, 1998, owns, operates and franchises fast-casual restaurants which sell 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 and specialty coffees along with other soft drink beverages, bottled beverages including premium still and sparkling water, teas and beer and wine in some locations. Our restaurants are located in a wide range of markets and trade areas, including business districts and residential communities in both urban and suburban locations. We believe that we have created significant brand equity in our markets and that we have demonstrated the appeal of our concept to a wide variety of customers.
 
As of December 30, 2013, there were 122 Company-owned and franchised restaurants operating in 16 states, the District of Columbia, the United Arab Emirates (UAE), and Costa Rica.
 
Our internet website is www.getcosi.com. We make available free-of-charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission (“SEC”). In addition, our internet website includes, among other things, our corporate governance principles, charters of various committees of the Board of Directors, and our code of business conduct and ethics applicable to all employees, officers and directors. Copies of these documents may be obtained free of charge from our internet website. Any stockholder also may obtain copies of these documents, free of charge, by sending a request in writing to: Cosi, Inc., c/o Investor Relations, 1751 Lake Cook Road, Suite 600, Deerfield, Illinois 60015.
 
Business Strategy
 
Our goal is to become the preferred fast-casual dining concept nationally. We strive to serve flavorful food prepared quickly, with unparalleled customer service, in a unique, welcoming and sophisticated ambiance. The Cosi® restaurant concept, whose name was inspired by Mozart’s famous opera, Così Fan Tutte, originated in Paris as a Parisian café. We strive to create a romance between our famous, freshly-made bread, our barista-crafted coffees and specialty drinks, and our loyal guests.
 
We are working to change things at Cosi. Our goal is to become America’s Greatest Restaurant Company. We look to achieve this by:
 
Offering a creative menu featuring a combination of both healthy alternatives and edgy options. Our restaurants offer innovative, freshly made-to-order products featuring our authentic hearth-baked signature Cosi® bread and distinctive high quality, fresh ingredients. We believe the guest sees us as a cutting edge alternative to other fast casual restaurants and we will strive to deliver on this expectation.

Providing customers with an exceptional service and dining experience. We believe there are three areas that will give us distinction in category. First, our people need to provide hospitality beyond the guest’s expectation. Second, we need to be as fast as the guest needs us to be: speed can provide a competitive advantage. Third, our restaurants need to provide a distinctive environment whether in an urban setting, a university setting, the suburbs or at the airport.
Creating an environment where great people want to work. Building a great company is dependant on having outstanding managers and hourly partners. Cosi will focus first on being the employer of choice, creating a positive environment where our people love to come to work. We believe if we create a positive environment and focus on the development of our people, we can hold ourselves to a standard of excellence. By becoming a great company for our people we will be able to expect everyone to take great care of the guest and our company.

Brand Position. We believe we understand how the guest sees Cosi and how the industry is evolving. We believe Cosi is properly positioned in an industry where “better, better for you” is the direction the consumer’s taste is heading. We are working to position Cosi as a food-forward concept through new menu innovation that utilizes differentiated ingredients such as our use of Kale, Avocados and Sweet Potatoes. We will strive to continue to enhance our catering offerings with a focus on fresh and flavorful products to drive growth in catering sales in the breakfast, lunch and snacking segments. We will continue to focus on combinations of healthy alternatives and bold flavors: unique ingredient combinations that we believe appeal to our guests’ preferences for flavorful and nutritional food.

Developing a contemporary and welcoming environment. During 2013, we opened several Company-owned and franchised locations that included more contemporary design elements reflecting the look and feel of an urban café. These locations included ambience enhancements such as communal tables, distinctive lighting treatments, chalk boards, and the use of more contemporary color throughout the restaurant. There are key learnings in our recent openings we will bring together for a consistent go forward design for Cosi.

Operating our restaurants efficiently. Cosi has long been committed to operating disciplines that are designed to optimize the cost structure of our restaurants and to be applied consistently across all our restaurants, Company-owned and franchised, and we continuously seek to refine and improve upon those disciplines both domestically and internationally.
 
Growth Strategy
 
We plan to grow in both existing and new markets through the following:
 
Build a system of franchised restaurants and develop Company-owned restaurants. For the near term our financial health is directly tied to our Company-owned restaurants (restaurants that we own as opposed to franchised restaurants): these restaurants must be profitable for Cosi to be profitable. We must increase comparable restaurant sales and we believe the strategies set forth above will help us achieve those sales. At the same time our franchising and area developer model will be the primary driver of our growth strategy.
 
We launched our franchising program in fiscal 2004 and seek to expand our franchise system by attracting highly qualified domestic franchisees. Key to this is a replicable restaurant model which generates strong returns. We believe the model exists within our current portfolio and we have made capturing this model a priority. As part of our strategy to expand our franchise base and attract quality franchisees, we will consider the potential sale of a restaurant or a group of restaurants to serve as a base for new franchisees looking to develop Cosi. We prefer that our franchisees have experience in multi-unit restaurant operations and development. We believe that our concept positioning, national and international opportunity for growth, and potential for strong unit-level economics will enable us to attract experienced and well-capitalized area developers. We are currently eligible to offer franchises in 47 states and the District of Columbia.
We will continue to pursue nontraditional trade channel development. We will continue to explore strategic alliances with the Cosi concept in educational institutions, airports, train stations and other venues that meet our operating and financial criteria. We believe that this is an attractive opportunity to further Cosi’s growth through alternative venues in either a full service or smaller grab-and-go format. We currently operate Cosi® restaurants at St. Joseph’s University in Philadelphia, PA and Georgetown University in Washington, DC under a franchise agreement with Aramark and at Temple University in Philadelphia, PA and Fordham University in New York, NY under a franchise agreement with Sodexo. We also operate at several airport locations (Logan, Dulles, and Reagan) under franchise agreements with some sites offering a more limited menu.
 
Cosi® Product Offerings
 
We offer proprietary food and beverage products for four major dayparts — breakfast, lunch, snacking and dinner. Our food menu includes Cosi® Squagels®, sandwiches, salads, bowls, soups, appetizers, melts, flatbread pizzas, breakfast wraps, S’mores and other desserts. We feature our authentic hearth-baked signature Cosi® bread in two varieties, Original and Multi-Grain. Our beverage menu features a variety of house coffees and other espresso-based beverages, seasonal fruit smoothies and hand-crafted specialty drinks, soft drinks, flavored teas and bottled beverages, which include premium still and sparkling waters. Core to the Cosi menu is a commitment to healthy alternatives including our “lighter side” menu options featuring lower-calorie versions of popular menu items and other unique salads, bowls, and sandwiches that are lower in calorie content than other items in the same menu categories. We offer beer and wine at many of our locations and an additional limited selection of alcoholic beverages in some locations. For our young guests, we offer our Parent Magazine award-winning Kids Menu which includes an activity page and crayons.
 
Most of our restaurants offer catering service for breakfast, lunch, and afternoon snacking. Our catering offerings include breakfast baskets, lunch buffets, box lunches, dessert platters, parfait bars, hot soups, steel-cut oatmeal, and most of our menu offerings. We operate a catering call center in New York City which coordinates the ordering and fulfillment process for 35 catering hub locations in seven of the markets in which Cosi operates. We offer set up and delivery services by Cosi® personnel to all of our catering customers.
 
We periodically introduce new menu platforms and products in order to keep our product offerings relevant to consumers in each daypart. Our expanded breakfast menu now includes Cosi® Squagels®, oatmeal, fresh fruit parfaits and a variety of craveable signature breakfast wraps and sandwiches. We enhance our guests’ dining options by offering “Cosi® Duo Taste Two” which allows them to create their own meal by combining two items of proportion from our offerings of unique sandwiches, fresh salads and soups, and shareable-sized flatbread pizzas. New recipes are developed by our culinary innovation team with the support of the supply chain team.
 
People
 
On December 30, 2013, we had 70 Company-owned restaurants and 1,674 employees, of whom 52 served in administrative or executive capacities, 162 served as restaurant management employees and 1,460 were hourly restaurant employees. None of our employees are covered by a collective bargaining agreement, and we have never experienced an organized work stoppage or strike. We believe that our compensation packages are competitive and our relations with our employees are good.
Restaurant Operations
 
Management Structure. The restaurant operations team is built around regional districts led by District Managers, who report to Regional Directors. The Regional Directors report directly to the Chief Executive Officer. The Regional Directors and the District Managers are responsible for all operations, training, recruiting and human resources within their regions. The Regional Directors are also responsible for the financial plan for their respective Company-owned locations and for the people development plan to support the execution of the financial plan.
 
To ensure consistent performance, execution and application of our policies and procedures, we have a Standard Operations Manual which is reviewed and updated periodically.
 
Sales Forecasting. The Regional Directors and District Managers have real-time access to sales forecasts and actual sales information through our web-based reporting system. This allows the entire management team to plan staffing requirements on a weekly, daily and even hourly basis to effectively serve our customers.
 
Product Quality. Our food and beverage product quality is managed at four critical stages: sourcing, distribution, line readiness and product preparation. Products are delivered to the restaurants several times each week so that all restaurants maintain fresh, quality products. Because our restaurants serve a different variety of products during different dayparts, a specific line-readiness checklist is completed to ensure that the products have been rotated, prepared and staged correctly. Finally, our partner training program includes certification in both product knowledge and product preparation standards.
 
Food and Labor Cost Controls. Our information system allows us to track actual versus theoretical cost of goods sold. Detailed reports are available at the restaurant level showing variances on an item‑by‑item basis. The system is interfaced into our accounts payable and general ledger systems so that restaurant managers have control of their operations and can be held accountable for their results.
 
Our labor management standards help our managers control labor and ensure that staffing levels are appropriate to meet our service standards. Our reporting system provides our multi‑unit managers with performance reports that help them make staffing adjustments during the course of the week. All labor scheduling is approved by a District Manager and unit-level performance is reviewed weekly.
 
For manager and support controllable costs, we use either a fixed dollar budget standard or a percentage of net sales approach to plan expenditures effectively. Actual performance for each of these expense items is compared to budget on a weekly basis to help ensure accountability and operational alignment with financial planning efforts. We believe that the combination of these structured restaurant operating systems and technologies allows our restaurant managers to focus their time more effectively on the day‑to‑day drivers of our business.
 
Management Information Systems
 
Our systems are structured for the integration of data from the point-of-sale and back-office modules in the restaurants to our financial, reporting, and inventory management systems. Key information relating to restaurant operations is uploaded onto a secure website multiple times throughout the day. This operational restaurant information is available to key internal customers, along with pre-selected reports that are automatically distributed to our operations team.
We use a select group of service providers to supplement our information technology infrastructure and system offerings.  This provides us access to up-to-date technology and allows us the flexibility to adjust service levels and costs as needed. Our application strategy includes utilizing web-based technology to provide timely information to operate and manage the business.
 
We have business continuity procedures in place for all critical hardware, software, data and related processes. The procedures encompass scheduled back-ups, off‑site storage, security, and failover configurations with redundancy built into key processes.
 
Purchasing
 
We have agreements with some of the nation’s largest food, paper, and beverage manufacturers in the industry. This enables us to provide our restaurants with high quality proprietary food products and non-food items at competitive prices. We source and negotiate prices directly with these suppliers and distribute these products to our restaurants primarily through a national network that consists of some of the nation’s largest independent distributors. We do not utilize a commissary system. Our inventory control system allows each restaurant to place orders electronically with our master distributor and then transmit the invoices electronically to our accounts payable system. Our scalable system eliminates duplicate work, and we believe it gives our management tight control of costs while ensuring quality and consistency across all restaurants.

We have an agreement with Distribution Market Advantage, Inc. (“Distribution Marketing Advantage”) that provides us access to a national network of independent distributors. Under this agreement the independent distributors supply us with approximately 76% of our food and paper products, primarily under fair-value pricing agreements that we negotiate directly with the suppliers. This agreement was renegotiated and has been extended through December 2015.

We have a long-term beverage marketing agreement with the Coca‑Cola Company. We received a marketing allowance under this agreement, which is being recognized as a reduction to expense ratably based on actual products purchased. Effective January 1, 2011, the beverage marketing agreement with the Coca-Cola Company was amended to provide for additional products as well as higher marketing allowance on purchases.

In October 2010, we entered into an agreement to purchase all contracted coffee products through a single supplier, Royal Cup Coffee, Inc. This agreement expires in October 2015.
 
Our primary suppliers and independent distributors have parallel facilities and systems to minimize the risk of any disruption of our supply chain.
 
Competition
 
The restaurant industry is intensely competitive and we compete with many well‑established food service companies, including other sandwich retailers, specialty coffee retailers, bagel shops, fast food and casual dining restaurants, delicatessens, cafes, bars, take‑out food service companies, supermarkets and convenience stores. The principal factors on which we compete are taste, quality and price of products, customer service, atmosphere, location and overall guest experience. Our competitors change with each daypart, ranging from coffee bars and bakery cafes in the morning daypart, to fast-food restaurants and cafes during the lunch daypart, to casual-dining chains during the dinner daypart. Many of our competitors or potential competitors have substantially greater financial and other resources than we do which may allow them to react more quickly to changes in pricing, marketing and the quick-service restaurant industry. We also compete with other employers in our markets for hourly workers and may be subject to higher labor costs. We believe that our concept, attractive price‑value relationship and quality of products and service allow us to compete favorably with our competitors.
Intellectual Property
 
We have the following U.S. Trademark registrations: “COSÌ”, “(SUN & MOON DESIGN)”, “GET COSÌ”, “COSÌ (& SUN & MOON DESIGN)”, “LIFE SHOULD BE DELICIOUS”, “(SUN & MOON SMILEY FACE DESIGN)”, “COSÌ (& HEARTH DESIGN)”, “(HEARTH DESIGN)”, “COSÌ BREAK BAR”, “COSÌ CARD”, “COSÌ CORNERS”, “COSÌ DOWNTOWN”, “COSÌ PRONTO”, “HEARTH-BAKED DINNERS”, “RELAX. CATERING BY COSÌ (& DESIGN)”, “SIMPLY GOOD TASTE”, “SQUAGELS”, “XANDO”, “SQUAGEL” and “TASTE TWO”.

We have U.S. Trademark applications pending for the following trademark: “SMART FIT”.

“COSÌ SANDWICH BAR”, “ARCTIC”, “SLIM LATTE”, “COSÌ LIGHTER SIDE”, “COSÌ DUO TASTE TWO”, and “(RECYCLING DESIGN)” are unregistered trademarks.
 
We have registered the trademark “COSÌ” in twenty three foreign jurisdictions with respect to restaurant services. Also, we have registered the following trademarks with respect to restaurant services:  “COSI (& HEARTH DESIGN)” in two foreign jurisdictions; “(HEARTH DESIGN)” in six foreign jurisdictions; “SIMPLY GOOD TASTE” in two foreign jurisdictions; “COSI (& SUN & MOON DESIGN) in two foreign jurisdictions, “COSI (in Russian)” in one foreign jurisdiction, “LIFE SHOULD BE DELICIOUS” in two foreign jurisdiction, “(SUN & MOON DESIGN)” in one foreign jurisdiction and “COSITICO” in one foreign jurisdiction.
 
We have trademark applications pending for registration of the following trademarks with respect to restaurant services:  “COSÌ” in two foreign jurisdictions; and “COSI (& SUN AND MOON DESIGN)” in one foreign jurisdiction.
 
Governmental Regulation
 
Our restaurants are subject to regulation by federal agencies and to licensing and regulation by state, local and, where applicable, foreign health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to environmental, building, construction and zoning requirements, franchising and the preparation and sale of food and alcoholic beverages. In addition, our facilities are licensed and subject to regulation under state and local fire, health and safety codes.
 
Our restaurants that sell alcoholic beverages are required to obtain a license from a state authority and, in certain locations, county and/or municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages. We have not encountered any material problems relating to alcoholic beverage licenses to date. The failure to receive or retain a liquor license in a particular location could adversely affect that restaurant and may impact our ability to obtain such a license elsewhere. We currently serve alcohol in 30 of our restaurants.
We are subject to “dram shop” statutes in the states in which our restaurants sell alcoholic beverages. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual. We carry liquor liability coverage as part of our existing comprehensive general liability insurance, which we believe is consistent with coverage carried by other similarly-situated entities in the restaurant industry. Although we are covered by insurance, a judgment against us under a dram‑shop statute in excess of our liability coverage could have a material adverse effect on us.
 
Our operations are also subject to federal and state laws governing such matters as wages, working conditions, work eligibility requirements, overtime, insurance matters, workers’ compensation, child labor laws, and anti-discrimination laws. Some states have set minimum wage requirements higher than the federal level. Some of our hourly personnel at our restaurants are paid at rates based on the applicable minimum wage, and increases in the minimum wage will directly affect our labor costs.
 
We are also subject to the Americans with Disabilities Act of 1990, which, among other things, prohibits discrimination on the basis of disability in public accommodations and employment. We are required to comply with the Americans with Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities.
 
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, labeling and advertising practices. Casual dining chains have been a particular focus. For example, New York City has adopted regulations requiring that chain 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. We may in the future become subject to other initiatives in the area of nutritional disclosure or advertising, such as requirements to provide information about the nutritional content of our food, which could increase our expenses, particularly given differences among applicable legal requirements and practices within the restaurant industry with respect to testing and disclosure, or otherwise adversely affect us.

Item 1A. RISK FACTORS

Risks Related to Our Growth Strategy
 
During our operating history, we have been unable to achieve profitability.
 
In fiscal 2013, we incurred net losses of approximately $11.4 million, and, since we were formed, we have incurred net losses of approximately $293.4 million through the end of fiscal 2013, primarily due to funding operating losses, which have included significant impairment charges, costs associated with closing restaurants, early lease termination fees, and new restaurant opening expenses. We cannot predict whether we will be able to achieve or sustain revenue growth, profitability or positive cash flow in the future. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and the financial statements included in this Annual Report on Form 10‑K for information on the history of our losses.
If internally generated cash flow from our restaurants does not meet our expectations, our business, results of operations and financial condition could be materially adversely affected.
 
Our cash resources, and therefore our liquidity, are highly dependent upon the level of internally generated cash from operations and upon future financing transactions. Although we believe that we have sufficient liquidity to fund our working capital requirements for the next twelve months, if cash flows from our existing restaurants or from franchise fees and royalties do not meet our expectations or are otherwise insufficient to satisfy our cash needs, we may have to seek additional financing from external sources to continue funding our operations or reduce or cease our plans to open or franchise new restaurants. We cannot predict whether any such financing will be available on terms acceptable to us, or at all.
 
We may need additional capital in the future and it may not be available on acceptable terms.
 
Our business has in the past required, and may continue to require, significant additional capital  to, among other things, fund our operations, increase the number of Company-owned or franchised restaurants, expand the range of services we offer and finance future acquisitions and investments. There is no assurance that financing will be available on terms acceptable to us, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financings unattractive to us. If we are unable to raise additional capital, our business, results of operations and financial condition could be materially adversely affected.
 
We may not be able to achieve our planned expansion. If we or our franchisees are unable to successfully open new restaurants, our revenue growth rate and profits may be reduced.
 
To successfully expand our business, we and our franchisees must open new restaurants on schedule and in a profitable manner. In the past, we have experienced delays in restaurant openings and may experience similar delays in the future. Delays or failures in opening new restaurants could hurt our ability to meet our growth objectives, which may affect the expectations of securities analysts, investors, and others and thus our stock price. We cannot guarantee that we or our franchisees will be able to achieve our expansion goals or that new restaurants will be operated profitably. Further, any restaurants that we, or our franchisees, open may not obtain operating results similar to those of our existing restaurants. Our ability to expand successfully will depend on a number of factors, many of which are beyond our control. These factors include, but are not limited to:
 
· locating suitable restaurant sites in new and existing markets;
 
· negotiating acceptable lease terms;
 
· ability to obtain financing for new restaurant development;
 
· generating positive cash flow from existing and new restaurants;
 
· successful operation and execution in new and existing markets;
 
· recruiting, training and retaining qualified corporate and restaurant personnel and management;
· attracting and retaining qualified franchisees with sufficient experience and financial resources to develop and operate our restaurants successfully;
 
· cost effective and timely planning, design and build-out of restaurants;
 
· the reliability of our customer and market studies;
 
· the reliability of our site identification studies;
 
· consumer trends;
 
· obtaining and maintaining required local, state, federal and where applicable, foreign governmental approvals and permits related to the construction of the sites and the sale of food and alcoholic beverages;
 
· creating customer awareness of our restaurants in new markets;
 
· competition in our markets, both in our business and in locating suitable restaurant sites;
 
· the cost of our principal food products and supply and delivery shortages or interruptions;
 
· weather conditions; and
 
· general economic conditions.
 
We must identify and obtain a sufficient number of suitable new restaurant sites for us to achieve a sustainable revenue growth rate.
 
We require that all proposed restaurant sites, whether Company-owned or franchised, meet site-selection criteria established by us. We and our franchisees may not be able to find sufficient new restaurant sites to support our planned expansion in future periods. We face significant competition from other restaurant companies and retailers for sites that meet our criteria and the supply of sites may be limited in some markets. As a result of these factors, our costs to obtain and lease sites may increase, or we may not be able to obtain certain sites due to unacceptable costs. Our inability to obtain suitable restaurant sites at reasonable costs may reduce our growth rate, which may affect the expectations of securities analysts and others and thus our stock price.
 
Our expansion in existing markets can cause sales in some of our existing restaurants to decline, which could result in restaurant closures.
 
As part of our expansion strategy, we and our franchisees intend to open new restaurants in our existing markets. Since we typically draw customers from a relatively small radius around each of our restaurants, the sales performance and customer counts for restaurants near the area in which a new restaurant opens may decline due to cannibalization, which could result in restaurant closures. In addition, new restaurants added in existing markets may not achieve the same operating performance as our existing restaurants.
Our expansion into new markets, both foreign and domestic, may present increased risks due to our unfamiliarity with the area. The restaurants we open in new geographic regions may not achieve market acceptance.
 
Some of our new franchised restaurants are located in areas where we have little or no meaningful experience. Those markets may have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns than our existing markets that may cause our new restaurants to be less successful than restaurants in our existing markets. An additional risk in expansion into new markets is the lack of market awareness of the Cosi® brand. Restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets and may have higher restaurant-level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer to reach mature average annual Company-owned restaurant sales, if at all, thereby affecting the profitability of these restaurants.

We have an international license agreement with a licensee for the development of Cosi® restaurants in six countries in the Persian Gulf. This licensee currently operates two franchise locations in the United Arab Emirates. We also have an international license agreement with a licensee in Costa Rica who currently operates three franchised restaurant there. As these franchise locations and future foreign locations open, the Company's international operations will be subjected to various factors of uncertainty. The Company's business outside of the United States is subject to a number of additional factors, including international economic and political conditions, local economic conditions, differing cultures and consumer preferences, currency regulations and fluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of rights and obligations in connection with international license agreements and the collection of royalties from international licensees, the availability and cost of land and construction costs, and the availability of experienced management, appropriate licensees, and joint venture partners. Although we believe that we have developed the support structure required for international growth, there is no assurance that such growth will occur or that international operations will be profitable.
 
We may not be able to successfully incorporate a franchising and area developer model into our strategy.
 
We have and will continue to incorporate a franchising and area developer model into our business strategy in certain selected markets. We may not be successful in attracting franchisees and developers to the Cosi® concept or identifying franchisees and developers that have the business abilities or access to financial resources necessary to open our restaurants or to successfully develop or operate our restaurants in a manner consistent with our standards.  Incorporating a franchising and area developer model into our strategy also requires us to devote significant management and financial resources to support the franchise of our restaurants. Our future performance will depend on our franchisees’ ability to execute our concept and capitalize upon our brand recognition and marketing. We may not be able to recruit franchisees who have the business abilities or financial resources necessary to open restaurants on schedule, or who will conduct operations in a manner consistent with our concept and standards. Our franchisees may not be able to operate restaurants in a profitable manner. If we are not successful in incorporating a franchising or area developer model into our strategy, we may experience delays in our growth or may not be able to expand and grow our business.
 
If our franchisees cannot develop or finance new restaurants, build them on suitable sites or open them on schedule, our growth and success may be impeded.
 
Our growth depends in large part upon our ability to establish a successful and effective franchise program and to attract qualified franchisees. If our franchisees are unable to locate suitable sites for new restaurants, negotiate acceptable lease or purchase terms, obtain the necessary financial or management resources, meet construction schedules or obtain the necessary permits and government approvals, our growth plans may be negatively affected. We cannot assure you that any of the restaurants our franchisees open will be profitable.
Additional foodservice strategic alliances may not be successful and may materially adversely affect our business and results of operations.
 
We may decide to enter into additional alliances with third parties to develop foodservice strategic alliances in select markets or through select channels. Identifying strategic partners, negotiating agreements and building such alliances may divert management’s attention away from our existing businesses and growth plans. If we are not successful in forming additional foodservice strategic alliances, we may experience delays in our growth and may not be able to expand and grow our business. If we do form additional strategic alliances, we cannot assure you that the restaurants opened pursuant to these strategic alliances will be profitable.
 
Any inability to manage our growth effectively could materially adversely affect our operating results.
 
Failure to manage our growth effectively could harm our business. We intend to grow substantially in the future both through a franchising strategy and opening new Company-owned restaurants. Our existing restaurant management systems, financial and management controls and information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively will require us to continue to enhance these systems, procedures and controls. We must attract and retain talented operating personnel to maintain the quality and service levels at our existing and future restaurants. We may not be able to effectively manage these or other aspects of our expansion.  We cannot assure you that we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our existing infrastructure. If we are unable to manage our growth effectively, our business, results of operations and financial condition could be materially adversely impacted.
 
If we are unable to successfully integrate future acquisitions, our business could be negatively impacted.  Any acquisitions may also be costly.
 
We may consider future strategic acquisitions. Acquisitions involve numerous risks, including difficulties assimilating new operations and products. In addition, acquisitions may require significant management time and capital resources. We cannot assure you that we will have access to the capital required to finance potential acquisitions on satisfactory terms, that any acquisition would result in long-term benefits to us, or that management would be able to manage effectively the resulting business. Future acquisitions are likely to result in the incurrence of additional indebtedness, which could contain restrictive covenants, or the issuance of additional equity securities, which could dilute our existing stockholders. We may also pay too much for a concept that we acquire relative to the actual economic return obtained. If our integration efforts are unsuccessful, our business and results of operations could suffer.
 
Risks Related to Our Business
 
If we are unable to execute our business strategy, we could be materially adversely affected.
 
Our ability to successfully execute our business strategy will depend on a number of factors, some of which are beyond our control, including, but not limited to:
 
· our ability to generate positive cash flow from operations;
 
· identification and availability of suitable restaurant sites;
· competition for restaurant sites and customers;
 
· negotiation of favorable leases;
 
· management of construction and development costs of new and renovated restaurants;
 
· securing required governmental approvals and permits;
 
· recruitment and retention of qualified operating personnel;
 
· successful operation and execution in new and existing markets;
 
· recruiting, training and retaining qualified corporate and restaurant personnel and management;
 
· identification of under‑performing restaurants and our ability to improve or efficiently close under‑performing restaurants, including securing favorable lease termination terms;
 
· the rate of our internal growth, and our ability to generate increased revenue from existing restaurants;
 
· our ability to incorporate a franchising and area developer model into our strategy;
 
· competition in new and existing markets;
 
· the reliability of our customer and market studies;
 
· the impact of the general economic conditions and high unemployment rates on consumer spending, particularly in geographic regions that contain a high concentration of our restaurants;
 
· the cost of our principal food products and supply and delivery shortages or interruptions;
 
· changes in commodity costs, labor, supply, fuel, utilities, distribution and other operating costs;
 
· availability of additional capital and financing;
 
· weather conditions; and
 
· general regional, national and, where applicable, foreign economic conditions.
 
Each of these factors could delay or prevent us from successfully executing our business strategy, which could adversely affect our growth, revenues and our results of operations.
Economic conditions in the United States and globally could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources.
 
If the economic conditions deteriorate or fail to substantially improve, many sectors of the economy may continue to be adversely impacted. As a retailer that depends upon consumer discretionary spending, we could face a challenging fiscal 2014 because our customers may make fewer discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and falling home prices. Cosi®, as an “affordable luxury,” may be disproportionably affected by a significant decrease in customer traffic or lower average check prices as a result of customers switching to lower-priced products on our menu. Deterioration in the economic environment could potentially have a material adverse effect on our liquidity and capital resources, including our ability to raise additional capital if needed or to maintain satisfactory credit terms with our suppliers.
 
Seasonality, inclement weather and other variable factors may adversely affect our sales and results of operations and could cause our quarterly results to fluctuate and fall below expectations of securities analysts and investors, resulting in a decline in our stock price.
 
Our business is subject to significant seasonal fluctuations and weather influences on consumer spending and dining out patterns. Inclement weather may result in reduced frequency of dining at our restaurants or lost restaurant visits. Customer counts (and consequently revenues) are generally highest in spring and summer months and lowest during the winter months because of the high proportion of our restaurants located in the Northern part of the country where inclement winter weather affects customer visits. As a result, our quarterly and yearly results have varied in the past, and we believe that our quarterly operating results will vary in the future. Other factors such as unanticipated increases in labor, commodities, energy, insurance or other operating costs may also cause our quarterly results to fluctuate. For this reason, you should not rely upon our quarterly operating results as indications of future performance.
 
Our franchisees could take actions that could harm our business.
 
Franchisees are independent operators and are not our employees. Although we have developed criteria to evaluate and screen prospective franchisees, we are limited in the amount of control we can exercise over our franchisees, and the quality of franchised restaurant operations may be diminished by any number of factors beyond our control. Franchisees may not have the business acumen or financial resources necessary to successfully operate restaurants in a manner consistent with our standards and requirements and may not hire and train qualified managers and other restaurant personnel. Poor restaurant operations may affect each restaurant’s sales. Our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could significantly decline if our franchisees do not operate successfully.
 
We could face liability from our franchisees.
 
A franchisee or government agency may bring legal action against us based on the franchisee/franchisor relationships. Various state, federal and, where applicable, foreign and international laws govern our relationship with our franchisees and potential sales of our franchised restaurants. If we fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties. Expensive litigation with our franchisees or government agencies may adversely affect both our profits and our important relations with our franchisees.
 
Our financial results are affected by the financial results of our franchisees.
 
We receive royalties from our franchisees. Our financial results are therefore to an extent contingent upon the operational and financial success of our franchisees, including implementation of our strategic plans, as well as their ability to secure adequate financing. If sales trends or economic conditions worsen for our franchisees, their financial health may worsen and our collection rates may decline. Additionally, refusal on the part of franchisees to renew their franchise agreements may result in decreased royalties. Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future.
Our restaurants are currently concentrated in the Northeastern, Midwestern, and Mid-Atlantic regions of the United States, particularly in the New York City, Chicago and Philadelphia areas. Accordingly, we are highly vulnerable to negative occurrences in these regions.
 
We currently operate 72 Company-owned restaurants in Northeastern, Midwest, and Mid-Atlantic states, of which 25 are located in the New York City, Chicago and Philadelphia central business districts. As a result, we are particularly susceptible to adverse trends and economic conditions in these areas. In addition, given our geographical concentration, negative publicity regarding any of our restaurants could have a material adverse effect on our business and operations, as could other regional occurrences impacting the local economies in these markets.
 
You should not rely on past average unit volumes as an indication of our future results of operations because they may fluctuate significantly.
 
A number of factors have historically affected, and will continue to affect, our average unit sales, including, among other factors:
 
· our ability to execute our business and growth strategy effectively;
 
· success of promotional and marketing initiatives including advertising and new product and concept development;
 
· sales performance by our new and existing restaurants;
 
· management turnover in the restaurants;
 
· competition;
 
· general regional, national, and where applicable, foreign economic conditions;
 
· weather conditions; and
 
· the impact of the general economic conditions and high unemployment rates on consumer spending, particularly in geographic regions that contain a high concentration of our restaurants.
 
Changes in our average unit volumes could cause the price of our common stock to fluctuate substantially.
 
Regulatory and Legal Risks
 
If we fail to comply with governmental regulations in one or more of the following areas or if these regulations change, our business could suffer.
 
Employment and Immigration Regulations
 
We are subject to various federal and state laws governing our relationship with and other matters pertaining to our employees, including wage and hour laws, requirements to provide meal and rest periods or other benefits, family leave mandates, requirements regarding working conditions and accommodations to certain employees, citizenship or work authorization and related requirements, insurance and workers’ compensation rules and anti-discrimination laws. Complying with these rules subjects us to substantial expense and can be cumbersome, and can also expose us to liabilities from claims for non-compliance
We may from time to time get audited for compliance with citizenship or work authorization requirements as well. Various states in which we operate are considering or have already adopted new immigration laws, and the U.S. Congress and Department of Homeland Security from time to time may consider or implement changes to Federal immigration laws, regulations or enforcement programs as well. Changes in immigration or work authorization laws may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. This may subject us to fines or penalties, and we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees.
 
The comprehensive U.S. health care reform law enacted in 2010, the Patient Protection and Affordable Care Act, requires employers such as us to provide health insurance for all qualifying employees or pay penalties for not providing coverage. We are evaluating the impact the new law will have on us, and although we cannot predict with certainty the financial and operational impacts the new law will have, we expect that the requirement that we provide more extensive health benefits to employees than we currently do could have an adverse effect on our results of operations and financial position, as well as the restaurant industry in general. The most significant increase in costs will likely begin in 2015. Such increases will likely be large enough to materially impact our labor costs. Alternatively, if we choose not to provide the required health insurance or if some employees do not qualify for the required insurance, our employee culture may be harmed and we may face adverse publicity that negatively impacts our brand.
 
Additionally, while we do not currently have any unionized employees, union organizers have engaged in efforts to organize employees of other restaurant companies. If a significant portion of our employees were to become union organized, our labor costs could increase and our efforts to maintain a culture appealing only to top performing employees could be impaired. Potential changes in labor laws could increase the likelihood of some or all of our employees being subjected to greater organized labor influence, and could have an adverse effect on our business and financial results by imposing requirements that could potentially increase our costs, reduce our flexibility and impact our employee culture.
 
Americans with Disabilities Act and Similar State Laws
 
We are subject to the U.S. Americans with Disabilities Act, or ADA, and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas. Although the costs that we have incurred in the past in connection with ADA-related complaints have not been material, we may in the future have to modify restaurants, for example by adding access ramps or redesigning certain architectural features, to provide service to or make reasonable accommodations for disabled persons under these laws. The expenses associated with these modifications, or any damages, legal fees and costs associated with litigating or resolving claims under the ADA or similar state laws, could be material.
Nutrition and Food Regulation
 
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, labeling and advertising practices. Casual dining chains have been a particular focus. For example, New York City has adopted regulations requiring that chain 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. The U.S. health care reform law included nation-wide menu labeling and nutrition disclosure requirements as well, and our restaurants will be covered by these national requirements when they go into effect. Initiatives in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of our food, may increase our expenses or slow customers as they move through the line, decreasing our throughput. These initiatives may also change customer buying habits in a way that adversely impacts our sales.
 
Local Licensure, Zoning and Other Regulation
 
Each of our restaurants is also subject to state and local licensing and regulation by health, alcoholic beverage, sanitation, food and workplace safety and other agencies. If we fail to obtain or maintain all necessary licenses, we may be forced to delay or cancel new restaurant openings and close or reduce operations at existing locations. In addition, our sale of alcoholic beverages subjects us to “dram shop” statutes in some states. These statutes allow an injured person to recover damages from an establishment that served alcoholic beverages to an intoxicated person. Although we take significant precautions to ensure that all employees are trained in the responsible service of alcohol and maintain insurance policies in accordance with all state regulations regarding the sale of alcoholic beverages, the misuse of alcoholic beverages by customers may create considerable risks for us. If we are the subject of a judgment substantially in excess of our insurance coverage, or if we fail to maintain our insurance coverage, our business, financial condition, operating results or cash flows could be materially and adversely affected. In addition, stringent and varied requirements of local regulators with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations.
 
General Business Risks
 
Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.
 
We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, and proprietary rights to certain of our core menu offerings. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which might cause us to incur significant litigation costs and could harm our image or our brand or competitive position.
 
We also cannot assure you that third parties will not claim that our trademarks or offerings infringe the proprietary rights of third parties. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.
If we default on our Senior Secured Promissory Note, our business, results of operations and financial condition could be materially adversely affected.
 
Our cash resources, and therefore our liquidity, are primarily dependent upon the proceeds of the Senior Secured Promissory Note. We believe that with the proceeds from the Senior Secured Promissory Note, we have sufficient liquidity to fund our working capital requirements for the next twelve months. If we default on the Senior Secured Promissory Note, we may be forced to pay higher interest costs or repay the debt earlier than anticipated. If that were to occur we may have to seek additional financing from external sources to cure the default and continue funding our operations. We cannot predict whether such financing will be available on terms acceptable to us, or at all.
 
We hold significant amounts of illiquid assets and may have to dispose of them on unfavorable terms.
 
As of the end of fiscal 2013, we had approximately $8.2 million in net fixed assets that we have defined as illiquid assets, which include leasehold improvements, equipment, and furniture and fixtures. These assets cannot be converted into cash quickly and easily. We may be compelled, based on a significant underperformance of a specific location or market, to dispose of some illiquid assets on unfavorable terms, which could have a material adverse effect on our business.
 
We may face litigation that could have a material adverse effect on our business, financial condition and results of operations.
 
From time to time, we are a defendant in litigation arising in the ordinary course of our business. Our customers may file complaints or lawsuits against us alleging that we are responsible for an illness or injury they suffered at or after a visit to a Cosi® restaurant, or alleging that there was a problem with food quality or operations at a Cosi® restaurant. We may also be subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims, claims from franchisees and claims alleging violations of federal, state and, where applicable, foreign law regarding workplace and employment matters, discrimination and similar matters. We could also become subject to class action lawsuits related to these matters in the future.
 
Regardless of whether any future claims against us are valid or whether we are found to be liable, claims may be expensive to defend and may divert our management's attention away from our operations and hurt our performance. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. A judgment significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our services or those of our franchisees, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may have a material adverse affect on our business, financial condition and results of operations. Moreover, complaints, litigation or adverse publicity experienced by one or more of our franchisees could also hurt our business as a whole.
 
If we are unable to protect our customers’ credit card data, we could be exposed to data loss, litigation and liability, and our reputation could be significantly harmed.
 
In connection with credit card sales, we transmit confidential credit card information securely over public networks. Third parties may have the technology or know-how to breach the security of this customer information, and our security measures may not effectively prohibit others from obtaining improper access to this information. If a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation.
We rely on computer systems and information technology to run our business. Any material failure, interruption or security breach of our computer systems or information technology may adversely affect the operation of the business and our results of operations.
 
Computer viruses or terrorism may disrupt our operations and adversely affect our operating results. Despite our implementation of security measures, all of our technology systems are vulnerable to disability or failures due to hacking, viruses, acts of war or terrorism, and other causes. If our technology systems were to fail and we were unable to recover in a timely manner, we would be unable to fulfill critical business functions, which could have a material adverse effect on our business, operating results, and financial condition.
 
Risks Relating to the Food Service Industry
 
Our business is affected by changes in consumer preferences.
 
Our success depends, in part, upon the popularity of our food and beverage products, our ability to develop new menu items that appeal to consumers and what we believe is an emerging trend in consumer preferences toward fast casual restaurants. We depend on consumers who prefer made-to-order food in a sophisticated environment and are willing to pay a premium price for our products. We also depend on trends toward consumers eating away from home more often. Shifts in consumer preferences away from our restaurants or cuisine, 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 and future profitability.
 
Natural disasters, war, acts of terrorism or other armed conflict, or the threat of such actions, on the United States or international economies may cause a decline in discretionary consumer spending, which would negatively affect our business.
 
Our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic and political conditions and the availability of discretionary income. Discretionary consumer spending may decline in the event of a natural disaster, war, acts of terrorism or other armed conflict. Accordingly, we may experience a decline in sales during periods of uncertainty like the one that followed the September 11, 2001 terrorist attacks on the United States. In addition, economic uncertainty due to military action overseas, such as the recent wars in Iraq and Afghanistan, and other military, diplomatic or financial responses, may lead to further declines in sales. Any decline in consumer spending or economic conditions could reduce customer traffic or impose practical limits on pricing, either of which could have a material adverse effect on our sales, results of operations, business and financial condition. In the event of a natural disaster or acts of terrorism in the United States, or the threat of either, we may be required to suspend operations in some or all of our restaurants, which could have a material adverse impact on our business, financial condition, and results of operation.
 
Our success depends on our ability to compete with many food service businesses.
 
The restaurant industry is intensely competitive and we compete with many well-established food service companies on the basis of taste, quality and price of product offered, customer service, atmosphere, location and overall customer experience. We compete with other sandwich retailers, specialty coffee retailers, bagel shops, fast-food restaurants, delicatessens, cafes, bars, take-out food service companies, supermarkets and convenience stores. Our competitors change with each daypart (breakfast, lunch and dinner), ranging from coffee bars and bakery cafes during the breakfast and lunch dayparts to casual dining chains during the dinner daypart. Aggressive pricing 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 we do, which may allow them to react to changes in pricing, marketing and the quick-service restaurant industry better than we can. As competitors expand their operations, we expect competition to intensify. We also compete with other employers in our markets for hourly workers and may be subject to higher labor costs.
 
Changes in food and supply costs and availability could adversely affect our results of operations.
 
Our restaurants receive frequent deliveries of products. Most of these deliveries are made by distributors who are part of a national network of independent distributors with whom we have a distribution agreement. These independent distributors supply us with approximately 76% of our food and paper products under an agreement which expires in December 2015. Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs, such as the volatility in certain commodity markets we experienced in recent years. Certain commodities such as wheat, coffee, poultry, fresh produce, and dairy and dairy-related products have experienced significant fluctuations in the recent past. These types of increases could have an adverse effect on us during fiscal 2014 and in future fiscal years. Although many of our products are made to our specifications, we believe that alternative distribution sources are available for the majority of our ingredients and products.
 
We believe that we have adequate sources of supply for our ingredients and products to support our restaurant operations and, if necessary, we can make menu modifications to address any material supply issues. However, there are many factors which can cause shortages or interruptions in the supply of our ingredients and products including weather, unanticipated demand, labor, production or distribution problems, quality issues and cost, some of which are beyond our control, and any of which could have an adverse effect on our business and results of operations.
 
Health concerns relating to the consumption of beef, poultry, produce or other food products could adversely affect the price and availability of beef, poultry, produce, and other food products, consumer preferences and our results of operations and stock price.
 
Outbreaks of avian flu (bird flu) or other food-borne illnesses, such as “mad cow disease,” E.coli, salmonella, or hepatitis A could adversely affect the price and availability of beef, poultry or other food products. As a result, we could experience a significant increase in cost of food.
 
In addition, like other restaurant chains, consumer preferences could be affected by health concerns about the consumption of poultry, beef, or produce, the key ingredients in many of our menu items, or by negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning, E.coli, salmonella, “mad cow disease” or “bird flu”, publication of government or industry findings about food products we serve or other health concerns or operating issues stemming from the food served in our restaurants. Our operational controls and training may not be fully effective in preventing all food-borne illnesses. Some food-borne illness incidents could be caused by food suppliers and transporters and would be outside of our control. If our food suppliers and transporters do not comply with governmental health regulations, they may not be able to deliver food products or we may be subject to food product recalls. Any negative publicity, health concerns or specific outbreaks of food-borne illnesses attributed to one or more of our restaurants, or the perception of an outbreak, could result in a decrease in customer traffic to our restaurants and could have a material adverse effect on our sales, results of operations, business, financial condition and stock price.
The food service 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 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 restaurant or a limited number of restaurants. 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 liabilities if a lawsuit or claim results in a decision against us or if we incur litigation costs, regardless of the result.
 
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 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 restaurant managers and staff, to keep pace with our needs. If we are unable to do so, our results of operations may be adversely affected.
Item 1B.
UNRESOLVED STAFF COMMENTS
 
We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2013 fiscal year and that remain unresolved.
 
Item 2.
PROPERTIES
 
Our principal corporate offices are currently located at 1751 Lake Cook Road, Suite 600, Deerfield, Illinois 60015. We have entered into an agreement to terminate the lease for our corporate offices effective as of May 31, 2014. We are in the process of identifying available office space that is of a suitable size and location for our current needs.
 
All of our restaurants are located on leased properties. Each lease typically has a 10‑year base rent period, with various renewal options. In addition to the base rent, some leases provide for contingent rental payments, insurance, common area, and other operating costs. At most locations, we reimburse the landlord for a proportionate share of the landlord’s annual real estate taxes.
 
The following table lists existing Company-owned restaurants, by region, as of December 30, 2013:
 
Street Address
City, State
Date Opened
MIDATLANTIC
234 South 15th Street
Philadelphia, PA
September-96
325 Chestnut Street
Philadelphia, PA
April-97
1128 Walnut Street
Philadelphia, PA
December-97
140 South 36th Street
Philadelphia, PA
August-98
761 Lancaster Avenue
Bryn Mawr, PA
September-98
2050 Wilson Boulevard
Arlington, VA
April-99
1700 Market Street
Philadelphia, PA
September-99
700 King Street
Alexandria, VA
May-00
4250 Fairfax Drive
Arlington, VA
June-00
201 South 18th Street
Philadelphia, PA
October-00
7251 Woodmont Avenue
Bethesda, MD
December-00
11909 Democracy Drive
Reston, VA
May-01
6390 Sawmill Road
Columbus, OH
September-02
2212 East Main Street
Bexley, OH
September-02
295 Main Street
Exton, PA
November-02
7166 N. High Street
Worthington, OH
December-02
177 Kentlands Blvd
Gaithersburg, MD
January-03
1801 N. Lynn Street
Arlington, VA
November-05
4025 Welsh Road
Willow Grove, PA
December-05
50 Yorktown Plaza
Elkins Park, PA
April-06
833 Chestnut
Philadelphia, PA
June-06
424 West Swedesford Road
Berwyn, PA
June-06
100 South Charles
Baltimore, MD
July-06
513 West Broad Street
Falls Church, VA
October-06
3503 Fairfax Drive, Suite 200
Arlington, VA
November-06
201 N. Washington #290
Rockville, MD
March-07
2955 Market St.
Philadelphia, PA
July-07
2011 Crystal Drive, Suite 100
Arlington, VA
May-08
4077 Fenlon Street
Columbus, OH
June-13

MIDWEST
116 S. Michigan Avenue
Chicago, IL
September-00
230 W. Washington Street
Chicago, IL
November-00
203 North LaSalle Street
Chicago, IL
May-01
101 North Old Woodward Avenue
Birmingham, MI
August-01
25 E. Hinsdale
Hinsdale, IL
December-01
8775 N. Port Washington Road
Fox Point, WI
December-01
230 West Monroe Street
Chicago, IL
May-02
301 East Grand River Avenue
East Lansing, MI
May-02
28674 Telegraph Road
Southfield, MI
November-02
37652 Twelve Mile Road
Farmington Hills, MI
December-02
233 North Michigan Avenue
Chicago, IL
December-02
33 N Dearborn
Chicago, IL
June-05
1740 Sherman Avenue
Evanston, IL
September-05
2200 North Clark
Chicago, IL
August-06
8310 Greenway Boulevard, #106
Middleton, WI
September-06
250 State Street
Madison, WI
September-06
910 North Milwaukee Avenue, Suite A
Lincolnshire, IL
November-06
Crystal Court Ste 150, 710 Marquette Ave
Minneapolis, MN
March-09
2100 Patriot Blvd
Glenview, IL
September-09
NORTHEAST
38 East 45th Street
New York, NY
February-97
60 East 56th Street
New York, NY
September-97
55 Broad Street
New York, NY
March-98
1633 Broadway
New York, NY
July-98
61 West 48th Street
New York, NY
August-98
685 Third Avenue
New York, NY
June-99
970 Farmington Avenue
W. Hartford, CT
August-99
461 Park Avenue South
New York, NY
January-00
50 Purchase Street
Rye, NY
March-00
841 Broadway
New York, NY
September-00
15 S. Moger Avenue
Mt. Kisco, NY
December-00
77 Quaker Ridge Road
New Rochelle, NY
November-01
1298 Boston Post Road
Larchmont, NY
December-01
385 West Main Street
Avon, CT
December-02
29 Washington Street
Morristown, NJ
December-02
498 7th Avenue
New York, NY
December-02
700 6th Avenue
New York, NY
February-03
129 West Putnam Avenue
Greenwich, CT
February-06
441 South Oyster Bay Road
Plainview, NY
June-06
1209 High Ridge Road
Stamford, CT
July-06
53 E. 8th St.
New York, NY
April-07
230 Tresser Blvd.  Ste 005
Stamford, CT
November-07

Item 3.
LEGAL PROCEEDINGS
 
From time to time, we are a defendant in litigation arising in the ordinary course of our business. As of the date of this report, there are no legal proceedings pending which, at this time, are expected to have a material adverse effect if decided against the Company.

Item 4.
MINE SAFETY DISCLOSURES

Not applicable.
PART II
 
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, STOCK AND RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
On November 22, 2002, our common stock began trading on The Nasdaq Global Market System (“Nasdaq”) under the symbol “COSI.” The closing price of our common stock on Nasdaq was $1.19 on March 31, 2014.

Reverse Common Stock Split

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.

Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing

On August 20, 2013, the Company received notice from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, for the period ended July 1, 2013, the Company no longer met the required minimum of $10,000,000 in stockholders' equity needed for continued listing under Listing Rule 5450(b)(1)(A). The notification letter stated that the Company had until October 4, 2013 to submit a plan to regain compliance. If a plan was submitted and accepted, the Company could be afforded up to 180 calendar days, or until February 16, 2014, to regain compliance. If a plan was submitted and not accepted, the Company might appeal to a Nasdaq Listing Qualifications Panel. Alternatively, the Company might consider applying for a transfer to The Nasdaq Capital Market provided it satisfied the requirements for continued listing on that market.

On October 4, 2013, the Company submitted an application to transfer its securities to The Nasdaq Capital Market. On October 7, 2013, the Company received notice from the Nasdaq Listing Qualifications Department indicating that the application was approved and that the Company’s securities would be transferred to the Nasdaq Capital Market at the opening of business on October 9, 2013.
 
Stock Price Information
 
Set forth below are the high and low closing sale prices for shares of our common stock for each quarter during fiscal 2013 and 2012 as reported by Nasdaq.
 
 
Fiscal 2013
   
Fiscal 2012
 
Fiscal Quarter
 
High
   
Low
   
High
   
Low
 
First Quarter
 
$
0.92
   
$
0.69
   
$
1.25
   
$
0.65
 
Second Quarter
 
$
3.07
(a)
 
$
1.93
(a)
 
$
1.10
   
$
0.67
 
Third Quarter
 
$
2.62
(a)
 
$
2.08
(a)
 
$
0.84
   
$
0.68
 
Fourth Quarter
 
$
2.39
(a)
 
$
1.35
(a)
 
$
0.78
   
$
0.57
 

(a) Denotes a post-reverse-stock-split price

Stockholders
 
The number of our registered common stockholders of record as of March 3, 2014 was 42. This number excludes stockholders whose stock is held in nominee or street name by brokers.
 
Dividend Policy
 
We have never paid cash dividends on our common stock, and we do not currently intend to pay any dividends.

Securities Authorized for Issuance under Equity Compensation Plans

The information relating to securities authorized for issuance under our equity compensation plans is disclosed in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.

Set forth below is a graph comparing the cumulative total stockholder return on Così’s common stock with The Nasdaq Composite Index and the Standard & Poor’s Small Cap 600 Index for the period covering our initial public offering on November 22, 2002, through the end of our 2013 fiscal year on December 30, 2013. The Company’s common stock trades on The Nasdaq Capital Market under the symbol “COSI.” The graph assumes an investment of $100.00 made at the opening of trading on November 22, 2002, in (i) Così’s common stock, (ii) the stocks comprising The Nasdaq Composite Index, and (iii) stocks comprising the Standard & Poor’s Small Cap 600 Index.

Item 6.
SELECTED FINANCIAL DATA
 
The following table sets forth our summary of selected consolidated financial data, which should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this report. The selected statement of operations data for fiscal years 2013, 2012, and 2011 and selected balance sheet data for fiscal years 2013 and 2012 are derived from our audited consolidated financial statements that are included in this report. The selected statement of operations data for fiscal years 2010 and 2009 and selected balance sheet data for fiscal years 2011, 2010, and 2009 are derived from our audited consolidated financial statements not included in this report. The following historical results of consolidated operations are not necessarily indicative of results to be expected for any subsequent period.

 
 
Fiscal Year
 
 
 
2013
   
2012
   
2011
   
2010
   
2009
 
 
  (in thousands, except per share data)  
Consolidated Statement of Operations Data:
 
   
   
   
   
 
Revenues
 
   
   
   
   
 
Restaurant net sales
 
$
83,338
   
$
94,757
   
$
98,920
   
$
106,636
   
$
116,375
 
Franchise fees and royalties
   
2,989
     
3,195
     
3,215
     
3,063
     
2,198
 
Total revenus
   
86,327
     
97,952
     
102,135
     
109,699
     
118,573
 
 
                                       
Costs and expenses:
                                       
 
                                       
Cost of food and beverage
   
20,736
     
22,171
     
22,902
     
24,366
     
26,429
 
Restaurant labor and related benefits
   
32,379
     
34,165
     
36,068
     
40,161
     
43,151
 
Occupancy and other restaurant operating expenses
   
28,971
     
30,337
     
31,330
     
33,977
     
36,617
 
 
   
82,086
     
86,673
     
90,300
     
98,504
     
106,197
 
General and administrative expenses
   
11,746
     
11,641
     
13,824
     
13,692
     
14,635
 
Depreciation and amortization
   
2,724
     
3,613
     
4,230
     
4,773
     
7,050
 
Restaurant pre-opening expenses
   
29
     
-
     
-
     
-
     
13
 
Provision for losses on asset impairments and disposals
   
1,122
     
424
     
431
     
732
     
1,530
 
Closed store costs
   
124
     
117
     
61
     
152
     
48
 
Lease termination expense (income), net
   
57
     
(13
)
   
22
     
203
     
322
 
Gain on sale of assets
   
(34
)
   
-
     
(149
)
   
(5,205
)
   
(102
)
Total costs and expenses
   
97,854
     
102,455
     
108,719
     
112,851
     
129,693
 
Operating loss
   
(11,527
)
   
(4,503
)
   
(6,584
)
   
(3,152
)
   
(11,120
)
Other income (expense):
                                       
Interest income
   
-
     
-
     
-
     
1
     
3
 
Interest expense
   
-
     
-
     
(1
)
   
(4
)
   
(4
)
Other income
   
83
     
62
     
46
     
14
     
17
 
Total other income
   
83
     
62
     
45
     
11
     
16
 
Net loss
 
$
(11,444
)
 
$
(4,441
)
 
$
(6,539
)
 
$
(3,141
)
 
$
(11,104
)
 
                                       
Per share data:
                                       
Loss per share, basic and diluted
 
$
(0.64
)
 
$
(0.29
)
 
$
(0.51
)
 
$
(0.25
)
 
$
(0.27
)
 
                                       
Weighted average shares used in computing net loss per share - basic and diluted
   
17,994
     
15,208
     
12,842
     
12,660
     
10,106
 

 
 
Fiscal Year
 
 
 
2013
   
2012
   
2011
   
2010
   
2009
 
 
  (in thousands, except per share data)  
Selected Consolidated Balance Sheet Data:
 
   
   
   
   
 
Cash and cash equivalents
 
$
6,021
   
$
15,417
   
$
7,222
   
$
10,307
   
$
4,079
 
Total assets
 
$
18,603
   
$
31,193
   
$
24,705
   
$
31,351
   
$
31,570
 
Total stockholders' equity
 
$
2,719
   
$
14,035
   
$
5,518
   
$
11,686
   
$
9,325
 
 
                                       
Selected Consolidated Statement of Cash Flow Data:
                                       
Net cash used in operating activities
 
$
(7,294
)
 
$
(2,955
)
 
$
(1,318
)
 
$
(3,963
)
 
$
(1,190
)
Net cash (used in) provided by investing activities
 
$
(2,102
)
 
$
(1,409
)
 
$
(1,767
)
 
$
5,317
   
$
(682
)
Net cash provided by financing activities
 
$
-
   
$
12,559
   
$
-
   
$
4,874
   
$
362
 
 
                                       
Selected Operating Data:
                                       
 
                                       
Company-owned restaurants open at the end of the fiscal year
   
70
     
75
     
80
     
83
     
99
 

Item 7.
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 years ended December 30, 2013, December 31, 2012, and January 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 included elsewhere in this Annual Report. 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 Annual Report.

Business Overview
 
System-wide Restaurants:
 
 
 
Fiscal Year
 
 
 
2013
   
2012
   
2011
 
 
 
Company-Owned
   
Franchise
   
Total
   
Company-Owned
   
Franchise
   
Total
   
Company-Owned
   
Franchise
   
Total
 
 
 
   
   
   
   
   
   
   
   
 
Restaurants at beginning of period
   
75
     
50
     
125
     
80
     
56
     
136
     
83
     
59
     
142
 
Company-owned sold to franchisee
   
1
     
1
     
0
     
-
     
-
     
-
     
-
     
-
     
-
 
New restaurants opened
   
-
     
4
     
4
     
-
     
2
     
2
     
-
     
-
     
0
 
Restaurants permanently closed
   
4
     
3
     
7
     
5
     
8
     
13
     
3
     
3
     
6
 
Restaurants at end of period
   
70
     
52
     
122
     
75
     
50
     
125
     
80
     
56
     
136
 
 
As of December 30, 2013, there were 70 Company-owned and 52 franchised fast-casual restaurants operating in 16 states, the District of Columbia, the United Arab Emirates (UAE), and Costa Rica. During fiscal 2013, we closed four Company-owned restaurants, two in Ohio and one of each in New York and New Jersey. During the same period, three franchised restaurants closed and four new franchised restaurants opened and we sold one Company-owned restaurant in Maryland to a franchisee. Subsequent to the end of fiscal 2013, one additional franchised restaurant closed and two franchised restaurants were converted to Company-owned.
 
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 47 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 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.

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 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.

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 is 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, the last time we issued stock options, 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 franchised restaurant 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 fiscal years ended December 30, 2013, December 31, 2012, and January 2, 2012, there were 70, 75, 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.
 
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 in 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.
 
Restaurant Pre-opening Expenses. Restaurant pre-opening expenses are expensed as incurred and include the costs of recruiting, hiring and training the initial restaurant work force, travel, the cost of food and labor used during the period before opening, the cost of initial quantities of supplies and other direct costs related to the opening or remodeling of a restaurant. Pre-opening expenses also include rent expense recognized on a straight-line basis from the date we take possession through the period of construction, renovation and fixturing prior to opening the restaurant.

Results of Operations
 
The following table sets forth our operating results as a percentage of total revenues, except where otherwise noted, for the periods indicated:
 
 
 
Fiscal Year
 
 
 
2013
   
2012
   
2011
 
 
 
   
   
 
Revenues:
 
   
   
 
Restaurant net sales
   
96.5
%
   
96.7
%
   
96.9
%
Franchise fees and royalties
   
3.5
     
3.3
     
3.1
 
Total revenue
   
100.0
     
100.0
     
100.0
 
Cost and expenses:
                       
Cost of food and beverage (1)
   
24.9
     
23.4
     
23.2
 
Restaurant labor and related benefits (1)
   
38.8
     
36.1
     
36.5
 
Occupancy and other restaurant operating expenses (1)
   
34.8
     
32.0
     
31.7
 
 
   
98.5
     
91.5
     
91.4
 
General and administrative expenses
   
13.6
     
11.9
     
13.5
 
Depreciation and amortization
   
3.2
     
3.7
     
4.1
 
Provision for losses on asset impairments and disposals
   
1.3
     
0.4
     
0.4
 
Closed store costs
   
0.1
     
0.1
     
0.1
 
Lease termination expense
   
0.1
     
-
     
-
 
Gain on sale of assets
   
-
     
-
     
(0.1
)
Total costs and expenses
   
113.4
     
104.6
     
106.4
 
Operating loss
   
(13.4
)
   
(4.6
)
   
(6.4
)
 
                       
Other income
   
0.1
     
0.1
     
-
 
Net loss
   
(13.3
)
   
(4.5
)
   
(6.4
)

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

Fiscal Year 2013 (52 weeks) compared to Fiscal Year 2012 (52 weeks)
 
Restaurant Net Sales
 
 
 
Restaurant Net Sales
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
83,338
     
96.5
%
Fiscal 2012
 
$
94,757
     
96.7
%

Restaurant net sales decreased by approximately $11.4 million, or 12.1%, during fiscal 2013, as compared to fiscal 2012, due to an approximately $6.9 million decrease in net sales related to Company-owned restaurants closed during and subsequent to the first quarter of fiscal 2012 and an approximately $4.5 million, or 5.1%, decrease in net sales in our comparable restaurant base. The decrease in comparable net sales was comprised of 6.5% decrease in traffic, partially offset by 1.4% increase in average check.
 
Franchise Fees and Royalties

 
 
Franchise Fees and Royalties
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
2,989
     
3.5
%
Fiscal 2012
 
$
3,195
     
3.3
%

Franchise Fees and Royalties: Franchise fees and royalties decreased by approximately $0.2 million, or 6.4%, during fiscal 2013, due to approximately $0.2 million in franchise fees recognized during fiscal 2012 resulting from a cancelled area development agreement and a decrease of approximately $0.1 million in royalties from the closing of franchised restaurants during and subsequent to the first quarter of fiscal 2012, partially offset by approximately $0.1 million in franchise fees from the opening of four new franchised restaurants during fiscal 2013.
Costs and Expenses

 
 
Cost of Food and Beverage
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
20,736
     
24.9
%
Fiscal 2012
 
$
22,171
     
23.4
%

Cost of Food and Beverage: The increase in cost of food and beverage, as a percentage of restaurant net sales, is largely due to a shift in day-part sales and menu mix towards products  with higher food costs, as a percentage of sales, as well as the impact of higher costs for the seasonal limited time offer promotional items, when compared to the items promoted during fiscal 2012. Also driving the increase in cost of food and beverage, as a percentage of restaurant net sales, is the introduction of a new product line of bowls in 2013 which, as a category, has a higher cost of goods as a percentage of net sales than our other entrée categories. Beverage sales, primarily fountain drinks and coffee, which historically have a lower average cost than non-beverage product offerings, declined during the 2013 fiscal year. We also experienced some higher costs of certain commodities, such as produce and poultry, during the first half of 2013.

 
 
Restaurant Labor and Related Benefits
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
32,379
     
38.9
%
Fiscal 2012
 
$
34,165
     
36.1
%

Restaurant Labor and Related Benefits: The increase in restaurant labor and related benefits, as a percentage of net sales, is due primarily to the unfavorable impact on labor from the decrease in comparable net restaurant sales, primarily the impact on the fixed-portion of manager labor as well as to the deployment of additional hourly labor, primarily in the latter half of the year, as part of an initiative to improve guest experience and speed of service. The cost of healthcare-related benefits was also higher during fiscal 2013, as compared to the prior year.

 
 
Occupancy and Other Restaurant Operating Expenses
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
28,971
     
34.8
%
Fiscal 2012
 
$
30,337
     
32.0
%

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, higher costs for repairs and maintenance of existing Company-owned restaurants, and the increase in paper and packaging costs resulting from a year-over-year increase in catering sales.
 
 
General and Administrative Expenses
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
11,746
     
13.6
%
Fiscal 2012
 
$
11,641
     
11.9
%

General and Administrative Expenses: The slight increase in general and administrative expenses is due primarily to the charge of approximately $0.6 million for severance pay resulting from administrative workforce reductions during fiscal 2013, as well as the approximately $0.5 million charge to reserve a note receivable from a franchisee, partially offset by labor savings from the administrative workforce reductions, lower expenses for third-party professional fees, and the costs of certain relocation expenses incurred during the fiscal 2012.

 
 
Depreciation and Amortization Expenses
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
2,724
     
3.2
%
Fiscal 2012
 
$
3,613
     
3.7
%

Depreciation and Amortization: The decrease in depreciation and amortization expenses is due primarily to the continued depreciation of our comparable restaurant base and the impact of asset impairments recorded during and subsequent to fiscal 2012.

 
 
Restaurant Pre-opening Expenses
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
29
     
0.0
%
Fiscal 2012
   
-
     
-
 

Restaurant Pre-opening Expenses: The restaurant pre-opening expenses are related to the relocation of one Company-owned restaurant during fiscal 2013.

 
 
Provision for Losses on Asset Impairments and Disposals
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
1,122
     
1.3
%
Fiscal 2012
 
$
424
     
0.4
%

Provision for Losses on Asset Impairments and Disposals: We recorded an impairment loss of approximately $1.0 million during fiscal 2013, as well as a loss of approximately $0.1 million from the disposal of assets related to the closing of Company-owned restaurants.

 
 
Closed Store Costs
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
124
     
0.1
%
Fiscal 2012
 
$
117
     
0.1
%
 
Closed Store Costs: The closed store costs resulted from the closing of Company-owned restaurants during the year.
 
 
Lease Termination Expense (Income), net
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
57
     
0.1
%
Fiscal 2012
 
(13
)
   
0.0
%

Lease Termination Expense/(Income), net: The lease termination expense during fiscal 2013 is related to the closing of two Company-owned restaurants, partially offset by an adjustment resulting from the expiration of our obligation under a previously-transferred lease agreement.

 
 
Gain on Sale of Assets
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
(34
)
   
0.0
%
Fiscal 2012
   
-
     
-
 

Gain on Sale of Assets:  The gain on sale of assets is related to the sale of a liquor license during fiscal 2013.
 
 
 
Other Income
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
$
83
     
0.1
%
Fiscal 2012
 
$
62
     
0.1
%

Other Income: Other income is primarily due to the discounting of the long-term portion of a note receivable.

 
 
Net Loss and Comprehensive Loss
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2013
 
(11,444
)
   
(-13.3
)%
Fiscal 2012
 
(4,441
)
   
(-4.5
)%

Net Loss and Comprehensive Loss: The increase in net loss is due primarily to the unfavorable effect of the decrease in comparable restaurant net sales on the fixed-portion of occupancy-related costs and manager labor, the increase in food and beverage and paper and packaging costs, the increase in the provision for asset impairments, the charge for severance pay, the reserve on a note receivable, and the net impact of locations closed during and subsequent to the first quarter of fiscal 2012, partially offset by lower depreciation expense, savings realized from the administrative workforce reductions, savings in third-party professional fees, and lower costs for marketing materials and advertising media expense.
Fiscal Year 2012 (52 weeks) compared to Fiscal Year 2011 (53 weeks)
 
Restaurant Net Sales

 
 
Restaurant Net Sales
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
94,757
     
96.7
%
Fiscal 2011
 
$
98,920
     
96.9
%

Restaurant net sales decreased by approximately $4.2 million, or 4.2%, in fiscal 2012, as compared to fiscal 2011, due to an approximately $2.0 million decrease in net sales related to Company-owned restaurants closed during and subsequent to the first quarter of fiscal 2011, $1.3 million associated with the additional fifty-third week in fiscal 2011 and an approximately $0.9 million, or 0.9%, decrease in net sales in our comparable restaurant base during the fifty-two weeks of fiscal years 2012 and 2011. The decrease in comparable net sales includes approximately $0.6 million related to the impact of Hurricane Sandy during the fourth quarter of fiscal 2012. Excluding the impact of the hurricane, the decrease in our comparable net restaurant sales was approximately $0.3 million, or 0.3%, and was comprised of a 1.1% decrease in traffic, partially offset by 0.8% increase in average check.
 
Franchise Fees and Royalties

 
 
Franchise Fees and Royalties
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
3,195
     
3.3
%
Fiscal 2011
 
$
3,215
     
3.1
%

Franchise Fees and Royalties: Total franchise fees and royalties during fiscal years 2012 and 2011 were comparable. The additional royalties from the fifty-third week in fiscal 2011 were offset by the franchise fees recognized from the opening of one franchised location in Costa Rica during fiscal 2012.
 
Costs and Expenses

 
 
Cost of Food and Beverage
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
22,171
     
23.4
%
Fiscal 2011
 
$
22,902
     
23.2
%

Cost of Food and Beverage: The increase in cost of food and beverage, as a percentage of restaurant net sales, is due primarily to higher costs of certain commodities, including poultry, and the impact on total menu mix of an increase in sales of breakfast items which carry a higher cost of goods as a percentage of net sales, coupled with a decline in beverages that have a lower cost of goods as a percentage of sales, partially offset by the favorable impact of menu price increases.

 
 
Restaurant Labor and Related Benefits
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
34,165
     
36.1
%
Fiscal 2011
 
$
36,068
     
36.5
%

Restaurant Labor and Related Benefits: The decrease in restaurant labor and related benefits, as a percentage of restaurant net sales, is due primarily to savings realized from better deployment of labor hours during peak and non-peak hours of operation, partially offset by the unfavorable impact on labor of the decrease in comparable net restaurant sales, primarily the impact on the fixed-portion of manager labor from the decrease in sales resulting from Hurricane Sandy, as well as higher costs related to healthcare benefits.
 
 
Occupancy and Other Restaurant Operating Expenses
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
30,337
     
32.0
%
Fiscal 2011
 
$
31,330
     
31.7
%

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 as a percentage of total sales and the higher costs for resin-based packaging, as well as higher credit card fees resulting from greater usage and an increase in rates, partially offset by the lower costs for repairs and maintenance of existing Company-owned restaurants and lower marketing expenditures.

 
 
General and Administrative Expenses
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
11,641
     
11.9
%
Fiscal 2011
 
$
13,824
     
13.5
%

General and Administrative Expenses: The decrease in general and administrative expenses of approximately $2.2 million is due primarily to higher costs in fiscal 2011, including legal fees and certain settlement-related costs, professional and board fees related to the chief executive officer search and certain other shareholder activities, and the impact of the additional fifty-third week of payroll in fiscal 2011. Also driving the decrease in fiscal 2012 were lower costs for marketing materials, advertising media expenses and third-party information-technology fees, partially offset by the cost of certain relocation expenses in connection with the CEO appointment earlier in the year.

 
 
Depreciation and Amortization Expenses
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
3,613
     
3.7
%
Fiscal 2011
 
$
4,230
     
4.1
%

Depreciation and Amortization: The decrease in depreciation and amortization expenses is due primarily to the continued depreciation of our comparable restaurant base and the impact of asset impairments recorded during and subsequent to fiscal 2011.

 
 
Provision for Losses on Asset Impairments and Disposals
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
424
     
0.4
%
Fiscal 2011
 
$
431
     
0.4
%
 
Provision for Losses on Asset Impairments and Disposals: We recorded an impairment loss of approximately $0.3 million during fiscal 2012, as well as a loss of approximately $0.1 million from the disposal of assets related to the closing of Company-owned restaurants.
 
 
Closed Store Costs
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
117
     
0.1
%
Fiscal 2011
 
$
61
     
0.1
%

Closed Store Costs: The closed store costs resulted from the closing of Company-owned restaurants at the expiration of their leases.
 
 
 
Lease Termination (Income) Expense, net
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
(13
)
   
-
 
Fiscal 2011
 
$
22
     
-
 

Lease Termination (Income)/Expense, net: The lease termination income during fiscal 2012 is related to an adjustment to the lease termination reserve at one subleased location.
 
 
 
Other Income
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
$
62
     
0.1
%
Fiscal 2011
 
$
46
     
-
 

Other Income: Other income is primarily due to the discounting of the long-term portion of a note receivable.

 
 
Net Loss and Comprehensive Loss
 
 
 
(in thousands)
   
as a % of total
revenues
 
Fiscal 2012
 
(4,441
)
   
(-4.5
)%
Fiscal 2011
 
(6,539
)
   
(-6.4
)%

Net Loss and Comprehensive Loss: The reduction in net loss by approximately $2.1 million, or 32%, is primarily due to the decrease in general and administrative expenses, the decrease in labor costs and the lower depreciation expense, partially offset by the unfavorable effect on fixed occupancy-related costs of the decrease in comparable net restaurant sales, including the effect from the additional fifty-third week in fiscal 2011, as well as the increase in food and beverage and paper and packaging costs.
Liquidity and Capital Resources
 
On April 14, 2014, the Company entered into a $5.0 million Senior Secured Promissory Note Agreement with Milfam II, L.P.. The Note bears interest at nine (9%) per annum, compounded semi-annually, and payable in arrears on a semi-annual basis. At the Company’s option, the first two semi-annual interest payments may be paid at eleven (11%) in kind in the form of additional Notes. The principal obligations under the Note are due three (3) years from the effective date of the Note. The Note agreement provides for the payment of a finance fee of 3.5% of the principal amount of the Note at closing as well as providing a warrant exercisable to purchase up to 1.1 million shares of the Company’s common stock at an exercise price per share of $0.01.  The warrant would not be exercisable to the extent that doing so resulted in the Milfam II L.P. and any related parties, in the aggregate, owning more than 19.9% of the Company’s common stock.  Further, until all the obligations under the Note are paid in full, Milfam II, L.P. will have the right to participate in any future financing transactions consummated by the Company in an amount up to the greater of 1) the then-outstanding balance of obligations under the Note and 2) $4.0 million. The Note is guaranteed by the Company’s subsidiaries and secured by a lien on all assets of the Company and its subsidiaries.  Mr. Lloyd I. Miller, III, is the manager of Milfam LLC, the general partner of Milfam II, L.P.  Mr. Miller is also a significant shareholder of the Company.
 
Cash and cash equivalents were approximately $6.0 million on December 30, 2013, compared with $15.4 million on December 31, 2012. We had negative working capital of approximately $2.5 million on December 30, 2013, compared with positive working capital of $7.1 million on December 31, 2012. The decrease in working capital was a result of funding our operating loss, net of depreciation and other non-cash expenses, as well as payments made for capital expenditures during the year. Our principal requirements for cash in 2014 will be for working capital needs and routine maintenance of our existing restaurants.

Net cash used in operating activities during fiscal 2013 was approximately $7.3 million compared with $3.0 million during fiscal 2012. The increase was primarily the result of the higher operating loss, net of depreciation and other non-cash expenses, partially offset by the collection of $0.6 million in franchise and other miscellaneous receivables, as well as the lower vendor payments made during 2013.

Net cash used in investing activities during fiscal 2013 was approximately $2.1 million compared with net cash used in fiscal 2012 of approximately $1.4 million and was primarily the result of capital expenditures for a new Company-owned location in Columbus, Ohio, maintenance of existing Company-owned restaurants and certain information technology related projects.

No cash was provided by financing activities during fiscal 2013, compared with cash provided of approximately $12.6 million during fiscal 2012 from the proceeds associated with the shareholder rights offering and the private placement of shares to our executive officers and outside directors.

During fiscal 2013, four quarterly payments of $62,500 each were not paid as scheduled in accordance with the terms of the Subordinated Secured Promissory Note associated with the sale of restaurants to a franchisee in 2010. Although still uncertain as to timing, the Company expects the franchisee to satisfy its obligations under the Subordinated Secured Promissory Note which currently has an outstanding balance of $0.925 million. As of December 30, 2013, the Company has established a reserve of $0.45 million.

We expect to incur capital costs associated with the maintenance of existing Company-owned restaurants during fiscal 2014. We expect to fund any required restaurant capital maintenance costs on existing Company-owned restaurants from proceeds of the $5.0 million Senior Secured Promissory Note, cash and cash equivalents on hand, expected cash flows generated by existing Company-owned restaurants, and expected franchise fees and royalties.
 
We believe that our current cash and cash equivalents, the $5.0 million in proceeds received on April 14, 2014 under the Senior Secured Promissory Note entered into with Milfam II, L.P., the expected cash flows from Company-owned restaurant operations and the expected franchise fees and royalties will be sufficient to fund our cash requirements for working capital needs and capital improvements and maintenance of existing restaurants for the next twelve months. Our conclusion is based on our financial performance during fiscal 2013 and our projected financial performance for 2014 and includes a sensitivity analysis that projects varying levels of decline in consumer demand. The range of levels selected was based on our reasonable expectation of demand given the seasonality of our historical performance. The Company also expects to effect additional reductions in general and administrative expense in fiscal 2014 as compared to the fiscal 2013 expense.  In analyzing our capital cash outlays during fiscal years 2013 and 2012, 53.7% and 94.1%, respectively, of our capital expenditures were spent on improvements and repairs and maintenance associated with existing Company-owned locations. Additionally, 44.4% of the fiscal 2013 capital cash outlays were related to a new Company-owned location built in Columbus, Ohio. The balance of the capital cash outlays was spent on information technology related projects.  The Company’s capital expenditures for repairs and maintenance of existing restaurants is expected to be consistent with the fiscal 2013 spend at approximately $1.0 million.
If our Company-owned restaurants do not generate the cash flow levels that we expect, if new franchised restaurants do not open according to our expectations, if we do not generate the franchise fees and royalties that we currently expect, if we incur significant unanticipated cash requirements beyond our normal liquidity needs, or if we experience other unforeseen circumstances then, in order to fund our cash requirements, we may have to effect further labor reductions in general and administrative support functions, seek to sell certain Company-owned locations to franchisees and/or other third parties, seek other sources of  financing or take other actions necessitated by the impact of such unanticipated circumstances.

There can be no assurance that we will be able to obtain such financing or sell Company-owned locations to franchisees or other third parties or that we will be able to do so in a timely manner and on acceptable terms to meet our requirements. Given the continued instability in the credit and financial markets, it may be difficult for the Company to obtain additional financing and for franchisees to obtain the financing necessary to open restaurants or to acquire Company-owned locations. An inability to access additional sources of liquidity to fund our cash needs could materially adversely affect our financial condition and results of operations.
 
If internally generated cash flow from our restaurants does not meet our expectations, our business, results of operations and financial condition could be materially adversely affected.
 
Our cash resources, and therefore our liquidity, are highly dependent upon the level of internally generated cash from operations and upon future financing transactions. Although we believe that we have sufficient liquidity to fund our working capital requirements for the next twelve months, if cash flows from our existing restaurants or cash flows from new restaurants that we open or from franchise fees and royalties do not meet our expectations or are otherwise insufficient to satisfy our cash needs, we may have to seek additional financing from external sources to continue funding our operations or reduce or cease our plans to open or franchise new restaurants. We cannot predict whether such financing will be available on terms acceptable to us, or at all.
 
If we default on our Senior Secured Promissory Note, our business, results of operations and financial condition could be materially adversely affected.
 
Our cash resources, and therefore our liquidity, are primarily dependent upon the proceeds of the Senior Secured Promissory Note. We believe that with the proceeds from the Senior Secured Promissory Note, we have sufficient liquidity to fund our working capital requirements for the next twelve months. If we default on the Senior Secured Promissory Note, we may be forced to pay higher interest costs or repay the debt earlier than anticipated. If that were to occur we may have to seek additional financing from external sources to cure the default and continue funding our operations. We cannot predict whether such financing will be available on terms acceptable to us, or at all.
42

We may need additional capital in the future and it may not be available on acceptable terms.
 
Our business has in the past required, and may continue to require, significant additional capital  to, among other things, fund our operations, increase the number of Company-owned or franchised restaurants, expand the range of services we offer and finance future acquisitions and investments. There is no assurance that financing will be available on terms acceptable to us, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financings unattractive to us. If we are unable to raise additional capital, our business, results of operations and financial condition could be materially adversely affected.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
 
Inflation
 
The primary inflationary factors affecting our business are food and labor costs. Some of our food costs are subject to fluctuations in commodity prices. Volatility in the commodity markets such as the poultry, wheat and dairy markets can have an adverse impact on our results from operations. Some of our hourly personnel at our restaurants are paid at rates based on the applicable minimum wage, and increases in the minimum wage will directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases. Historically, inflation has not had a material impact on our results of operation.

Selected Quarterly Financial Data
 
Quarterly results are determined in accordance with the accounting policies used for annual data and include certain items based upon estimates for the entire year. All quarters in fiscal 2013 and 2012 include results for 13 weeks. The unaudited selected quarterly results for fiscal 2013 and 2012 are shown below:
 
 
 
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
 
 
 
(dollars in thousands, except share data)
 
Fiscal 2013
 
   
   
   
 
 
 
   
   
   
 
Total revenues
 
$
21,561
   
$
23,408
   
$
21,412
   
$
19,946
 
Total costs and expenses
 
$
24,323
   
$
25,547
   
$
23,876
   
$
24,108
 
 
                               
Net loss
 
$
(2,741
)
 
$
(2,135
)
 
$
(2,455
)
 
$
(4,113
)
 
                               
Basic and diluted loss per share:
 
$
(0.15
)
 
$
(0.12
)
 
$
(0.14
)
 
$
(0.23
)
 
                               
Fiscal 2012
                               
 
                               
Total revenues
 
$
24,673
   
$
26,308
   
$
24,359
   
$
22,612
 
Total costs and expenses
 
$
25,812
   
$
26,239
   
$
25,722
   
$
24,682
 
 
                               
Net (loss) income
 
$
(1,128
)
 
$
77
   
$
(1,354
)
 
$
(2,036
)
 
                               
Basic and diluted (loss) income per share:
 
$
(0.09
)
 
$
0.01
   
$
(0.08
)
 
$
(0.11
)

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included in Part II, Item 8 of this report for further details or new accounting pronouncements not yet adopted.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
 
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained or incorporated by reference in this Form 10-K and Annual Report or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are subject to risks and uncertainties, including, without limitation, those described in Item 1A of this Report. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially and adversely affected, and the trading price of our common stock could decline. We do not undertake to publicly update or revise our forward-looking statements even if our future changes make it clear that any projected results expressed or implied therein will not be realized.
 
Listed below are just some of the factors that would impact our forward looking statements:
 
· the cost of our principal food products and supply and delivery shortages or interruptions;
 
· labor shortages or increased labor costs;
 
· changes in demographic trends and consumer tastes and preferences, including changes resulting from concerns over nutritional or safety aspects of beef, poultry, produce or other foods or the effects of food-borne illnesses, such as E.coli, “mad cow disease” and avian influenza or “bird flu;”
· competition in our markets, both in our existing business and locating suitable restaurant sites;
 
· our operation and execution in new and existing markets;
 
· expansion into new markets, including foreign countries;
 
· our ability to attract and retain qualified franchisees and our franchisees’ ability to open restaurants on a timely basis;
 
· our ability to locate suitable restaurant sites in new and existing markets and negotiate acceptable lease terms;
 
· the rate of our internal growth, and our ability to generate increased revenue from our new and existing restaurants;
 
· our ability to generate positive cash flow from  existing and new restaurants;
 
· fluctuations in our quarterly results due to seasonality;
 
· increased government regulation and our ability to secure required governmental approvals and permits;
 
· our ability to create customer awareness of our restaurants in new markets;
 
· the reliability of our customer and market studies;
 
· cost effective and timely planning, design and build-out of new restaurants;
 
· our ability to recruit, train and retain qualified corporate and restaurant personnel and management;
 
· market saturation due to new restaurant openings;
 
· inadequate protection of our intellectual property;
 
· our ability to obtain additional capital and financing;
 
· adverse weather conditions, which impact customer traffic at our restaurants; and
 
· adverse economic conditions.
 
The words “believe,” “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive,” “project” or similar words, or the negatives of these words, identify forward‑looking statements. We qualify any forward‑looking statements entirely by these cautionary factors.
45

Item 7A:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
Our market risk exposures are related to our cash and interest that we may pay on debt. We have no derivative financial commodity instruments. We invest our excess cash in investment grade, highly liquid, short‑term investments. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations. During fiscal 2013, we held no short-term investments and, as a result, a hypothetical one percentage point interest change from those in effect during fiscal 2013 would not have resulted in a fluctuation of interest income. In fiscal years 2013 and 2012, the interest income we earned was immaterial and we did not have any significant debt.

Commodity Risk

We are exposed to commodity price risks. Many of the ingredients we use to prepare our food, as well as our packaging materials, are commodities or ingredients that are affected by the price of other commodities, exchange rates, foreign demand, weather, seasonality, production, availability, and other factors outside our control. Some of these commodities are purchased under agreements in effect for periods ranging from one month to one year, usually at fixed prices. As a result, we are subject to commodity risk that current market prices may be below our contractual prices. We also purchase certain ingredients at spot prices, as well as prices that are based on specific formulas related to key components within the commodity category, which could adversely affect our operating result in periods of rising commodity or ingredient prices if we choose, for competitive or other reasons, not to increase menu prices at the same rate at which ingredient costs increase, or if menu price increases result in customer resistance. In fiscal 2013, 2012, and 2011, we did not utilize derivative instruments in managing commodity risk.
 
Foreign Currency Risk
 
As of the end of fiscal 2013, all of our transactions are conducted, and our accounts are denominated, in U.S. dollars. Accordingly, we are not exposed to foreign currency risk.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The following consolidated financial statements are included in this item:

 
Page
 
48
 
49
 
50
 
51
 
52
 
53

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Cosi, Inc.
Deerfield, Illinois

We have audited the accompanying consolidated balance sheets of Cosi, Inc. as of December 30, 2013 and December 31, 2012 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 30, 2013.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cosi, Inc. at December 30, 2013 and December 31, 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP
 
Chicago, Illinois
 
April 15, 2014

Cosi, Inc.
Consolidated Balance Sheets
As of December 30, 2013 and December 31, 2012
(dollars in thousands)

 
 
December 30, 2013
   
December 31, 2012
 
Assets
 
   
 
Current assets:
 
   
 
Cash and cash equivalents
 
$
6,021
   
$
15,417
 
Accounts receivable, net
   
594
     
1,235
 
Notes receivable, current portion
   
551
     
462
 
Inventories
   
779
     
893
 
Prepaid expenses and other current assets
   
1,348
     
1,620
 
Total current assets
   
9,293
     
19,627
 
 
               
Furniture and fixtures, equipment and leasehold improvements, net
   
8,195
     
9,900
 
Notes receivable, net of current portion
   
-
     
573
 
Other assets
   
1,115
     
1,093
 
Total assets
 
$
18,603
   
$
31,193
 
 
               
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Accounts payable
 
$
2,462
   
$
2,886
 
Accrued expenses
   
9,088
     
9,447
 
Deferred franchise revenue
   
18
     
61
 
Current portion of other long-term liabilities
   
196
     
140
 
Total current liabilities
   
11,764
     
12,534
 
 
               
Deferred franchise revenue
   
1,931
     
1,923
 
Other long-term liabilities, net of current portion
   
2,189
     
2,701
 
Total liabilities
   
15,884
     
17,158
 
 
               
Stockholders' equity:
               
Common stock - $.01 par value; 100,000,000 shares authorized, 18,106,979 and 18,278,308 shares issued, respectively
   
181
     
183
 
Additional paid-in capital
   
297,181
     
297,051
 
Treasury stock, 59,886 shares at cost
   
(1,198
)
   
(1,198
)
Accumulated deficit
   
(293,445
)
   
(282,001
)
Total stockholders' equity
   
2,719
     
14,035
 
Total liabilities and stockholders' equity
 
$
18,603
   
$
31,193
 

The accompanying notes are an intergral part of these consolidated financial statements.
Cosi, Inc
Consolidated Statements of Operations and Comprehensive Loss
For the Fiscal Years Ended December 30, 2013, December 31, 2012, and January 2, 2012
(dollars in thousands, except per share data)
 
 
 
December 30, 2013
   
December 31, 2012
   
January, 2 2012
 
 
 
   
   
 
Revenues:
 
   
   
 
Restaurant net sales
 
$
83,338
   
$
94,757
   
$
98,920
 
Franchise fees and royalties
   
2,989
     
3,195
     
3,215
 
Total revenues
   
86,327
     
97,952
     
102,135
 
 
                       
Costs and expenses:
                       
Cost of food and beverage
   
20,736
     
22,171
     
22,902
 
Restaurant labor and related benefits
   
32,379
     
34,165
     
36,068
 
Occupancy and other restaurant operating expenses
   
28,971
     
30,337
     
31,330
 
 
   
82,086
     
86,673
     
90,300
 
General and administrative expenses
   
11,746
     
11,641
     
13,824
 
Depreciation and amortization
   
2,724
     
3,613
     
4,230
 
Restaurant pre-opening expenses
   
29
     
-
     
-
 
Provision for losses on asset impairments and disposals
   
1,122
     
424
     
431
 
Closed store costs
   
124
     
117
     
61
 
Lease termination expense (income), net
   
57
     
(13
)
   
22
 
Gain on sale of assets
   
(34
)
   
-
     
(149
)
Total costs and expenses
   
97,854
     
102,455
     
108,719
 
Operating loss
   
(11,527
)
   
(4,503
)
   
(6,584
)
Other income (expense):
                       
Interest expense
   
-
     
-
     
(1
)
Other income
   
83
     
62
     
46
 
Total other income
   
83
     
62
     
45
 
 
                       
Net loss and comprehensive loss
 
$
(11,444
)
 
$
(4,441
)
 
$
(6,539
)
 
                       
Per Share Data:
                       
Loss per share, basic and diluted
 
$
(0.64
)
 
$
(0.29
)
 
$
(0.51
)
 
                       
Weighted average common shares outstanding
   
17,993,858
     
15,207,588
     
12,842,125
 

The accompanying notes are an integral part of these consolidated financial statements.
Cosi, Inc.
Consolidated Statements of Stockholders' Equity
For the Fiscal Years Ended December 30, 2013, December 31, 2012, and January 2, 2012
(dollars in thousands, except share data)
 
 
 
Common Stock
   
Treasury Stock
   
   
 
 
 
   
   
   
   
   
   
 
 
 
Number of
Shares
   
Amount
   
Additional
Paid In
Capital
   
Shares of
Treasury
Stock
   
Amount
Treasury
Stock
   
Accumulated
Deficit
   
Total
 
Balance, December 27, 2010
   
12,920,723
   
$
129
   
$
283,776
     
59,886
   
$
(1,198
)
 
$
(271,021
)
 
$
11,686
 
Issuance of restricted stock, net of forfeitures
   
321,119
     
3
     
(3
)
                           
-
 
Stock-based compensation
                   
371
                             
371
 
Net loss
                                           
(6,539
)
   
(6,539
)
 
                                                       
Balance, January 2, 2012
   
13,241,841
   
$
132
   
$
284,144
     
59,886
   
$
(1,198
)
 
$
(277,560
)
 
$
5,518
 
Issuance of common stock, net of issuance costs (1)
   
4,915,461
     
50
     
12,509
                             
12,559
 
Issuance of restricted stock, net of forfeitures
   
120,890
     
1
     
(1
)
                           
-
 
Stock-based compensation
                   
399
                             
399
 
Net loss
                                           
(4,441
)
   
(4,441
)
 
                                                       
Balance, December 31, 2012
   
18,278,192
   
$
183
   
$
297,051
     
59,886
   
$
(1,198
)
 
$
(282,001
)
 
$
14,035
 
 
                                                       
Forfeiture of restricted stock
   
(171,213
)
   
(2
)
   
2
                             
-
 
Stock-based compensation
                   
128
                             
128
 
Net loss
                                           
(11,444
)
   
(11,444
)
 
                                                       
Balance, December 30, 2013
   
18,106,979
   
$
181
   
$
297,181
     
59,886
   
$
(1,198
)
 
$
(293,445
)
 
$
2,719
 

(1) Represents the proceeds, net of issuance costs, of approximately $221,000 from the shareholder rights offering and related private placement to directors and officers of the Company, completed in July 2012

The accompanying notes are an integral part of these consolidated financial statements.
Cosi, Inc.
Consolidated Statements of Cash Flows
For the Fiscal Years Ended December 30, 2013, December 31, 2012, and January 2, 2012
(in thousands)

 
 
December 30, 2013
   
December 31, 2012
   
January 2, 2012
 
 
 
   
   
 
Cash flows from operating activities:
 
   
   
 
Net loss
 
$
(11,444
)
 
$
(4,441
)
 
$
(6,539
)
Adjustments to reconcile net loss to net cash used in operating activities
                       
Depreciation and amortization
   
2,724
     
3,613
     
4,230
 
Gain on sale of assets
   
(34
)
   
-
     
(149
)
Non-cash portion of asset impairments and disposals
   
1,122
     
424
     
431
 
Provision for bad debts
   
491
     
46
     
117
 
Stock-based compensation expense
   
128
     
399
     
371
 
Changes in operating assets and liabilities:
                       
Accounts receivable
   
600
     
(683
)
   
(19
)
Notes receivable
   
36
     
175
     
492
 
Inventories
   
115
     
(176
)
   
27
 
Prepaid expenses and other current assets
   
272
     
(140
)
   
159
 
Other assets
   
(28
)
   
26
     
40
 
Accounts payable and accrued expenses
   
(771
)
   
(1,319
)
   
1,180
 
Deferred franchise revenue
   
(35
)
   
(175
)
   
(140
)
Lease termination reserve
   
(64
)
   
(30
)
   
(288
)
Other liabilities
   
(406
)
   
(674
)
   
(1,230
)
Net cash used in operating activities
   
(7,294
)
   
(2,955
)
   
(1,318
)
 
                       
Cash flows from investing activities:
                       
Capital expenditures
   
(2,142
)
   
(1,409
)
   
(2,011
)
Proceeds from sale of assets
   
40
     
-
     
244
 
Net cash used in investing activities
   
(2,102
)
   
(1,409
)
   
(1,767
)
 
                       
Cash flows from financing activities:
                       
Proceeds from issuance of common stock
   
-
     
12,780
     
-
 
Common stock issuance costs
   
-
     
(221
)
   
-
 
Net cash provided by financing activities
   
-
     
12,559
     
-
 
 
                       
Net (decrease) increase in cash and cash equivalents
   
(9,396
)
   
8,195
     
(3,085
)
Cash and cash equivalents, beginning of year
   
15,417
     
7,222
     
10,307
 
Cash and cash equivalents, end of year
 
$
6,021
   
$
15,417
   
$
7,222
 
 
                       
Supplemental disclosures of cash flow information:
                       
Cash paid for:
                       
Corporate franchise and income taxes
 
$
138
   
$
154
   
$
205
 

The accompanying notes are an integral part of these consolidated financial statements.
COSI, INC.

Notes to Consolidated Financial Statements

For the Fiscal Years Ended December 30, 2013, December 31, 2012, and January 2, 2012
 
1. Organization and Summary of Significant Accounting Policies
 
Organization
 
Cosi, Inc., a Delaware corporation, owns, operates, and franchises fast-casual dining restaurants which sell high-quality, made-to-order sandwiches, salads, bowls, and coffees along with a variety of other soft drink beverages, teas, baked goods and alcoholic beverages. As of December 30, 2013, there were 70 Company-owned and 52 franchised restaurants operating in 16 states, the District of Columbia, the United Arab Emirates (UAE), and Costa Rica.
 
Fiscal Year
 
Our fiscal year ends on the Monday closest to December 31. Fiscal years ended December 30, 2013, December 31, 2012, January 2, 2012 are referred to as fiscal 2013, 2012, and 2011, respectively. Each of fiscal years 2013 and 2012 included 52 weeks while fiscal year 2011 included 53 weeks.
 
Basis of Presentation
 
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
 
Cash and Cash Equivalents
 
We consider all short-term investments with a maturity of three months or less from the date of purchase to be cash equivalents.
 
Concentration of Credit Risks
 
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash deposits. We place our cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions. Balances of cash deposits may, at times, exceed FDIC insured limits. We have never experienced losses related to these balances.
 
Our accounts receivable consist principally of trade or “house” accounts representing corporate customers and amounts due from franchisees. We have established credit procedures and analyses to control the granting of credit to customers. Credit card transactions at the Company’s restaurants are processed by a single service provider.
Accounts Receivable
 
Trade accounts receivable are stated at net realizable value. The Company maintains a reserve for potential uncollectible accounts based on historical trends and known current factors impacting the Company’s customers or franchisees.
 
Inventories
 
Inventories are stated at the lower of cost, determined using a weighted average valuation method that approximates the first-in, first-out method, or market, and consist principally of food, beverage, liquor, packaging and related food supplies.
 
Furniture and Fixtures, Equipment and Leasehold Improvements
 
Furniture and fixtures, equipment and leasehold improvements are stated at cost. Depreciation of furniture and fixtures and equipment is computed using the straight‑line method over estimated useful lives that range from two to ten years. Leasehold improvements are amortized using the straight‑line method over the shorter of their estimated useful lives or the term of the related leases.
 
Upon retirement or sale, the cost of assets disposed of and their related accumulated depreciation are removed from the accounts. Any resulting gain or loss is credited or charged to operations. Maintenance and repairs are charged to expense when incurred, while betterments are capitalized.
 
Long-Lived Assets
 
Impairment losses are recorded on long‑lived assets on a restaurant-by-restaurant basis whenever impairment factors are determined to be present. We consider a consistent 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 original lease term, and then determine the impairment charge based on discounted cash flows for the same period.
 
In accordance with the provisions of the impairment or disposal subsections of ASC 360-10, Property, Plant & Equipment, long-lived assets held and used with a carrying amount of $2.2 million were written down to their fair value of $1.2 million, resulting in asset impairment and disposal charges of $1.0 million which were included in earnings for fiscal 2013. We considered all relevant valuation techniques that could be obtained without undue cost and effort, and concluded that the discounted cash flow approach continued to provide the most relevant and reliable means by which to determine fair value of the long-lived assets held and used.
Long-lived assets held and used
 
Total value at end of period
   
Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Gains
(Losses)
 
 
 
(in thousands)
 
December 30, 2013
 
$
1,219
   
$
-
   
$
-
   
$
1,219
   
$
(1,005
)
 
 
$
1,219
   
$
-
   
$
-
   
$
1,219
   
$