10-K 1 h10035281x1_10k.htm FORM 10-K

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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 28, 2015

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.)
294 Washington Street, Suite 510, Boston, MA 02108
(Address and Zip Code of Principal Executive Offices)
 
(857) 415-5000
(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 ☒

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 ☒

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 ☒ 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 ☒ 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 ☒

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 ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ☒

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $72.5 million on June 29, 2015, 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.

47,810,211 shares of the registrant’s common stock were outstanding on March 21, 2016.

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 on May 18, 2016. 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 28, 2015.

TABLE OF CONTENTS

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, soups, appetizers, flatbread pizzas, Squagels®, breakfast wraps and other breakfast products, S’mores and other desserts, and a variety of house coffees and other espresso-based beverages, handcrafted specialty drinks, along with soft drinks, flavored teas, bottled beverages including premium still and sparkling waters, teas and, in some locations, beer and wine.

The Cosi® restaurant concept, whose name was inspired by Mozart’s famous opera, Così Fan Tutte, originated in Paris as a Parisian café. Today, Cosi is an innovative fast-casual dining concept with an intrinsic commitment to social responsibility, offering a constantly evolving mix of fresh, high-quality, forward-thinking culinary options at a good value. We continue to focus on all aspects of the business in order to achieve our goal for Cosi to become the preferred fast-casual dining concept nationally and then globally.

We understand how the guest sees Cosi and how the industry is evolving. 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. We 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 continue to focus on combinations of healthier alternatives and bold flavors: unique ingredient combinations that we believe appeal to our guests’ preferences for flavorful and nutritional food.

Our current customer base is comprised of multiple demographic segments: Urban Millennial Professionals, Urban Gen X Professionals, Suburban Millennial Mothers, Suburban Gen X Mothers, and Gen Z Students, among others. These demographic segments share similar consumer behavior motivators: Taste, Health, Natural, Global Food Influences, Convenience, Innovation, Brand Association, and Value. As a result we enjoy broad market appeal, which positions us well to grow transactions, sales, and market share. We continue to aggressively leverage and cultivate the loyalty of these multiple types of customers. We believe we are well positioned with the direction of the dining preferences of these demographic segments and the continued growth of the fast-casual segment.

We operate and develop in both urban and suburban markets. Both markets will continue to demand a dependable dining establishment with a comfortable environment offering a variety of healthful and classic food choices they can feel good about, consistently taste good, get prepared quickly, and are offered at a good value. We also operate and develop in educational institutions, airports, train stations, universities, and other venues that meet our operating and financial criteria.

Our facilities highlight relevant design elements reflecting the look and feel of a contemporary café with features such as communal tables, distinctive lighting treatments, chalk boards, and the use of more contemporary colors throughout the restaurant.

As of December 28, 2015, there were 110 Company-owned and franchised restaurants operating in 15 states, the District of Columbia, the United Arab Emirates (UAE), and Costa Rica.

We launched our franchising program in fiscal 2004 and seek to expand our franchise system by attracting highly-qualified franchisees. Key to this is the replicable and profitable restaurant model that lives within our portfolio. We are currently eligible to offer franchises in 47 states and the District of Columbia.

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, 294 Washington Street, Suite 510, Boston, Massachusetts 02108.

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Business Strategy

Our operating strategy is fully focused on the four cornerstones that will continue to lead us through the foundational change needed to set the stage for growth.

Driving Traffic

First, Cosi is driving traffic into our restaurants through brand initiatives and operational execution standards that are grounded on the concept of ease-of use. We know that delivering excellent quality food, at the speed at which the guest demands it, in a context that is not cumbersome, is fundamental to our competitive positioning and overall financial strength.

Generating Cash

Second, we are moving aggressively towards an economic and operating model that accelerates our current trajectory towards cash generation at both the restaurant and company levels.

Growing Franchise System

Third, we are relentlessly pursuing the development of our franchise system to continue fueling our momentum for growth, and lay a solid foundation for enduring long term growth.

Strengthening our Talent and Culture

Finally, we are strengthening our talent base and culture in alignment with our core values and commitment to building a great company. Cosi is committed to continually working to become an employer of choice by creating an energizing environment where our people can learn, grow, and lead through the execution of our vision.

Cosi® Product Offerings

We offer proprietary food and beverage products for four major dayparts — breakfast, lunch, snacking and dinner. Our food menu includes high-quality, made-to-order hot and cold sandwiches, hand-tossed salads, bowls, soups, appetizers, flatbread pizzas, Squagels®, breakfast wraps and other breakfast products, 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 and hand-crafted specialty drinks, soft drinks, flavored teas and bottled beverages, which include premium still and sparkling waters, and, in some locations, beer and wine. Core to the Cosi® menu is a commitment to healthier alternatives, including our Smart Fit and “lighter side” menu options. Smart Fit menu items are intended to help supplement a balanced diet and active lifestyle while our “lighter side” menu features lower-calorie versions of popular menu items. Currently, we offer beer and wine at a limited number of locations but expect to eliminate beer and wine offerings from all or most locations by year end. 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, afternoon snacking, and special events. 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 all Company-owned restaurants. 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 Squagels®, oatmeal, fresh fruit parfaits, egg white cups, and a variety of crave-able signature breakfast wraps and sandwiches. We enhance our guests’ dining options by offering “Cosi® Taste Two”, which allows them to create their own meal by combining two items of proportion from our offerings of unique sandwiches, fresh salads, soups, and flatbread pizzas; by offering the option for half-sized portions and provide our guests the opportunity to manage portion size and price accordingly; and, by an ongoing commitment to culinary innovation efforts.

People

On December 28, 2015, we had 79 Company-owned restaurants and 1,725 employees, of whom 53 served in administrative or executive capacities, 157 served as restaurant management employees and 1,515 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.

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Restaurant Operations

Management Structure. The restaurant operations team is built around regional districts led by Area Directors, who report to Regional Directors. The Regional Directors report directly to the VP of Operations. The Regional Directors and the Area Directors are responsible for all operations, and, with the Human Resources and Training teams, training, recruiting and employee relations 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 Area Directors 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 restaurant managers and Area Directors with performance reports that help them make staffing adjustments during the course of the week. All labor scheduling is approved by an Area Director 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 personnel, 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

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primarily through a national network that consists of some of the nation’s largest independent distributors. These primary suppliers and independent distributors have parallel facilities and systems to minimize the risk of any disruption of our supply chain. We do not utilize a commissary system. Our inventory control system allows each restaurant to place orders electronically with our master distributor and then transmits the invoices electronically to our accounts payable system.

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 80.0% of our food and paper products, primarily pursuant to pricing agreements that we negotiate directly with the suppliers. This agreement expires in December of 2020.

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 allowances based on purchases.

In April 2015, we entered into an agreement to purchase all contracted coffee products through a single supplier, Coffee Bean International (a division of Farmer Brothers). This is a three year agreement, expiring in 2018.

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 and fast-causal restaurant industries. 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 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”, COSÌ (& DESIGN)”, “SIMPLY GOOD TASTE”, “SQUAGELS”, “XANDO”, “SQUAGEL” and “TASTE TWO”.

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

“COSÌ SANDWICH BAR”, “ARCTIC”, “SLIM LATTE”, “MOCHA KISS”, “COSÌ LIGHTER SIDE”, “COSÌ DUO TASTE TWO”, “HEARTH-BAKED DINNER”, “RELAX. CATERING BY COSÌ (& DESIGN)” and “(RECYCLING DESIGN)” are unregistered trademarks.

We have registered the trademark “COSÌ” in twenty-four 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 jurisdictions, “(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 five foreign jurisdictions; and “COSI (& SUN AND MOON DESIGN)” in one foreign jurisdiction.

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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 11 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. Fast casual and casual dining chains have been a particular focus. For example, New York City and a number of other jurisdictions around the U.S. adopted regulations requiring that chain restaurants include caloric or other nutritional information on their menu boards and on printed menus, or make other nutrition information available, which must be plainly visible to consumers at the point of ordering. Nationwide nutrition disclosure requirements included in the U.S. health care reform law will go into effect December 1, 2016, and we may in the future become subject to other initiatives in the area of nutrition disclosure or advertising. These nutrition disclosure requirements may 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 our business and results of operations.

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Item 1A.RISK FACTORS

Risks Related to Our Growth Strategy

During our operating history, we have been unable to achieve profitability.

In fiscal 2015, we incurred net losses of approximately $15.7 million, and, since we were formed, we have incurred net losses of approximately $325.8 million through the end of fiscal 2015, 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 financial results through December 28, 2015.

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 will 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 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 restaurants, attract new franchisees and expand franchise operations, 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;
obtaining financing, or obtaining financing on acceptable terms, 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;

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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 and operation 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 competition from the new restaurant, 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 one franchise locations in the United Arab Emirates. We also have an international license agreement with a licensee in Costa Rica who currently operates six franchised restaurants there and is exploring further expansion in other markets. 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

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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 in these countries, 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. 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 and maintain 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 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 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 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

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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.

If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.

We have recorded goodwill related to our acquisitions to date and a portion of the purchase price of any companies we acquire in the future may be allocated to acquired goodwill and other intangible assets. We may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or other intangibles. We review our amortizable intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. We test goodwill for impairment at annually. Factors that may constitute a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in our stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in the industry we operate. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which would negatively affect our results of operations.

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 general economic conditions, 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 foreign economic conditions.

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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, many sectors of the economy may be adversely impacted. During periods of economic downturn, continuing disruptions in the overall economy, including the impacts of high unemployment and financial market volatility and unpredictability, may cause a related reduction in consumer confidence, which could negatively affect customer traffic and sales throughout our industry. As a retailer that depends upon consumer discretionary spending, we could face a challenging fiscal year if our customers make fewer discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and falling home prices. Our restaurants 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 or dining out less frequently. If negative economic conditions persist for a long period of time or become pervasive, consumer changes to their discretionary spending behavior, including the frequency with which they dine out, could be more permanent. 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.

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 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. We have developed criteria to evaluate and screen prospective franchisees, and our franchisees are obligated to operate their restaurants according to certain guidelines. However, we do not control our franchisees. We cannot assure that our franchisees will adhere to our guidelines or that there will not be differences in product quality, operations, marketing or profitability. Additionally, 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 our 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.

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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 79 Company-owned restaurants in Northeastern, Midwest, and Mid-Atlantic states, of which 23 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 occurrences outside our control such as acts of terrorism, and natural disasters.

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 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.

Material changes in our average unit volumes could cause the profitability of the restaurant portfolio and the price of our common stock to fluctuate substantially.

Regulatory and Legal Risks

If we do not continue to meet the listing standards established by The NASDAQ Capital Market, the common stock may not remain listed for trading.

The NASDAQ Capital Market has established certain quantitative criteria and qualitative standards that companies must meet in order to remain listed for trading on these markets. We cannot guarantee that we will be able to maintain all necessary requirements for listing; therefore, we cannot guarantee that our common stock will remain listed for trading on The NASDAQ Capital Market or to the similar markets.

We are subject to the continued listing criteria of Nasdaq and our failure to satisfy these criteria may result in delisting of our common stock.

On November 24, 2015, we received notice from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share required for continued inclusion on the Nasdaq Global Market under Nasdaq Listing Rule 5550(a)(2). The notification letter stated that we would be afforded 180 calendar days, or until May 16, 2016, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of the Company’s common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of ten consecutive business days. The Company intends to actively monitor the bid price for its common stock between now and May 16, 2016, and will consider all available options to resolve the deficiency and regain compliance with the Nasdaq minimum bid price requirement. If we are unable to resolve the deficiency, our common stock could be delisted from Nasdaq, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our securities, reduced liquidity, decreased analyst coverage of our securities, and an inability for us to obtain additional financing to fund our operations.

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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 and other 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 be 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. As a result of this law, we may see an increase in health insurance that may 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. Fast-casual and casual dining chains have been a particular focus. For example, New York City and a number of other jurisdictions around the U.S. have adopted regulations requiring that chain restaurants include caloric or other nutritional information on their menu boards and on printed menus, or make other nutrition information available, which must be plainly visible to consumers at the point of ordering. Nationwide nutrition disclosure included in the U.S. health care reform law

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will go into effect December 1, 2016, and we may in the future become subject to other 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.

Privacy/Cybersecurity

We are required to collect and maintain personal information about our employees, and we collect information about customers as part of some of our marketing programs as well. The collection and use of such information is regulated at the federal and state levels, and by the European Union and its member states, and the regulatory environment related to information security and privacy is increasingly demanding. At the same time, we are relying increasingly on cloud computing and other technologies that result in third parties holding significant amounts of customer or employee information on our behalf. If the security and information systems of ours or of outsourced third-party providers we use to store or process such information are compromised or if we, or such third parties, otherwise fail to comply with these laws and regulations, we could face litigation and the imposition of penalties that could adversely affect our financial performance. Our reputation as a brand or as an employer could also be adversely affected from these types of security breaches or regulatory violations, which could impair our sales or ability to attract and keep qualified employees. We did not have any known cybersecurity issues during fiscal 2015.

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.

The effect of recent changes to U.S. healthcare laws may increase our healthcare costs and negatively impact our financial results.

We offer eligible full-time and part-time U.S. employees the opportunity to enroll in healthcare coverage subsidized by us. For various reasons, many of our eligible employees currently choose not to participate in our healthcare plans. However, under the comprehensive U.S. health care reform law enacted in 2010, the Affordable Care Act, changes that became effective in 2014, and especially the employer mandate and employer penalties that became effective January 1, 2015, may increase our labor costs significantly. Changes in the law that took effect in 2014, including the imposition of a penalty on individuals who do not obtain healthcare coverage, may result in employees who are currently eligible but elect not to participate in our healthcare plans increasingly finding it advantageous to do so, which may increase our healthcare costs in the future. In 2015, we adopted a qualifying plan under the Affordable Care Act for our full-time hourly employees, which may further increase our healthcare expenses. It is also possible that even in light of recent changes in the healthcare plans we offer, healthcare plans offered by other companies with which we compete for employees will make us less attractive to our current or potential employees. And, in any event, implementing the requirements of the Affordable Care Act has imposed some additional administrative costs on us, and those costs may increase over time. The costs and other effects of these new healthcare requirements cannot be determined with certainty, but they may have a material adverse effect on our financial and operating results.

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

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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.

We hold significant amounts of illiquid assets and may have to dispose of them on unfavorable terms.

As of the end of fiscal 2015 we had approximately $11.9 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 effect 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.

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We have a new management team that does not have proven success with the Company.

Our new Chief Financial Officer, Secretary and Treasurer and Vice President of Operations joined the Company on May 11, 2015 and September 30, 2015, respectively. These new members of management have limited experience with us, and we cannot assure you that they will fully integrate themselves into our business or that they will effectively manage our business affairs. Our failure to assimilate the new members of management, the failure of the new members of management to perform effectively, or the loss of any of new members of management could have a material adverse effect on our business, financial condition and results of operations.

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, dinner, and snack), 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 80% of our food and paper products under an agreement which expires in December 2020. 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, beef, fresh produce, and dairy and dairy-related products, have experienced significant

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fluctuations in the recent past. These types of increases could have an adverse effect on us during fiscal 2016 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 factors like additional taxes, or requirements to incur additional employee benefits costs, including the requirements of the Patient Protection and Affordable Care Act, or the Affordable Care Act, (discussed further under “Regulatory and Legal Risks The effect of recent changes to U.S. healthcare laws may increase our healthcare costs and negatively impact our financial results,”), as well as competition, increased minimum wage requirements, paid sick leave or other paid leave or vacation accrual mandates, and any changes in our restaurant staffing structure 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 2015 fiscal year and that remain unresolved.

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Item 2.PROPERTIES

Our principal corporate offices are currently located at 294 Washington Street, Suite 510, Boston, Massachusetts 02108. The lease for our corporate offices expires in May 2019. We believe the offices are adequate to accommodate our 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 28, 2015:

Street Address
City, State
Date Opened/Acquired
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
4250 Fairfax Drive
Arlington, VA
June-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
1801 N. Lynn Street
Arlington, VA
November-05
50 Yorktown Plaza
Elkins Park, PA
April-06
424 West Swedesford Road
Berwyn, PA
June-06
100 South Charles
Baltimore, MD
July-06
3503 Fairfax Drive, Suite 200
Arlington, VA
November-06
2955 Market St.
Philadelphia, PA
July-07
2011 Crystal Drive, Suite 100
Arlington, VA
May-08
4077 Fenlon Street
Columbus, OH
June-13
104 Pheasant Run
Newtown, PA
February-14
2880 Center Valley Parkway
Center Valley, PA
February-14
9177 Reisterstown Road
Owings Mills, MD
August-14
4301 Dearborn Circle
Mt. Laurel, NJ
April-15
111 E. Main St.
Newark, DE
April-15
360 Essex St., Ste C
Hackensack, NJ
June-15
6181 Old Dobbin Lane, Ste 200
Columbia, MD
Aug-15
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
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

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Street Address
City, State
Date Opened/Acquired
37652 Twelve Mile Road
Farmington Hills, MI
December-02
233 North Michigan Avenue
Chicago, IL
December-02
33 N Dearborn Street
Chicago, IL
June-05
1740 Sherman Avenue
Evanston, IL
September-05
8310 Greenway Boulevard, #106
Middleton, 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
259 Erie Street
Chicago, IL
December-14
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
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 Street
New York, NY
April-07
230 Tresser Blvd. Ste 005
Stamford, CT
November-07
133 Federal St.
Boston, MA
April-15
53 State St.
Boston, MA
April-15
14 Milk St.
Boston, MA
April-15
2 South Station, Ste #182
Boston, MA
April-15
200 Terminal B
Boston, MA
April-15
200 Terminal B, Pier A
Boston, MA
April-15
290 Main St.
Boston, MA
April-15
280 School St D135
Boston, MA
April-15
125 High St, Ste A0101
Boston, MA
April-15
2421 Cranberry Highway, Ste 336
Boston, MA
April-15
500 Terminal E
Boston, MA
April-15
2 Seaport Lane
Boston, MA
April-15
399 Boylston St.
Boston, MA
April-15
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.

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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 $.91on March 17, 2016.

Stock Purchase Agreement

On April 10, 2015, we entered into a Stock Purchase Agreement (the “2015 Purchase Agreement”) with Trishield Special Situations Master Fund Ltd., which is a fund managed by Trishield Capital Management LLC, a fund managed by Janus Capital Management, LLC (“Janus”), LKCM Micro-Cap Partnership L.P. and LKCM Private Discipline Master Fund, SPC, both of which are managed by Luther King Capital Management, Goose Hill Capital LLC, Bigger Capital Fund, LP, and Kenneth Vaughan (each, a “Purchaser” and collectively, the “Purchasers”), under which the Company sold to the Purchasers, and the Purchasers purchased from the Company, an aggregate of 7,160,766 unregistered shares of the Company’s common stock, par value of $.01 per share, at a purchase price of $2.16 per share, for aggregate gross proceeds of approximately $15.5 million, and issuance costs of $0.2 million (the “2015 Private Placement Transaction”). The closing of the 2015 Private Placement Transaction occurred on April 10, 2015.

The Company relied on the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933 based in part on the representations made by the Purchasers, including the representations with respect to each Purchaser’s status as an accredited investor, as such term is defined in Rule 501(a) under the Securities Act, and the investment intent of each Purchaser with respect to the shares of common stock acquired by such Purchaser pursuant to the 2015 Purchase Agreement.

Concurrently with entering into the 2015 Purchase Agreement, the Company and the Purchasers entered into a Registration Rights Agreement dated April 10, 2015 (“Registration Rights Agreement”), pursuant to which the Company agreed to file a registration statement within 30 days, subject to certain delays or extensions of time, covering the shares of the Company’s common stock, acquired by each of the Purchasers, as well as unregistered shares previously acquired by one of the Purchasers from the Company in the previously-disclosed private placement transaction closed on August 22, 2014. The shares covered by the Registration Rights Agreement were registered under a registration statement effective June 2, 2015.

The Company had also granted registration rights to other investors in the Company’s securities that were substantially equivalent to those granted under the Registration Rights Agreement, including the shares issued in 2014 to each of MILFAM and Lloyd I. Miller Trust C, as well as the shares issued on April 1, 2015, to the owners upon completion of the previously-announced Merger. These shares were registered under the registration statement effective June 2, 2015.

The Company had also granted substantially equivalent registration rights to the AB Entities for shares issued in 2014 upon exercise of $.01 warrants that were acquired by the AB Entities in connection with the previously-disclosed Senior Secured Promissory Notes issued by the Company to the AB Entities on May 20, 2014.These shares were sold under an exemption from registration and are not covered by the registration statement effective June 2, 2015.

Hearthstone Merger

On April 1, 2015, Cosi, Inc. (the “Company”) completed the previously-announced merger of Hearthstone Associates, LLC (“Associates”) with and into a wholly-owned subsidiary of the Company, with Associates continuing as the surviving entity (the “Merger”). Upon completion of the Merger, Associates became a wholly-owned subsidiary of the Company, and Hearthstone Partners, LLC (“Partners”), a wholly-owned subsidiary of Associates, became an indirect wholly-owned subsidiary of the Company. As a result of this acquisition, the Company acquired 13 franchise restaurants from Associates and Partners (“Hearthstone”).

On March 31, 2015, in connection with the Membership Agreement, as amended, among the owners of Associates, the Company and Associates entered into Amendment No. 1 to the previously disclosed Election to Cause Merger Agreement, pursuant to which the parties confirmed the allocation of the shares to be issued to the owners of Associates upon completion of the Merger. As consideration for the Merger, an aggregate of 1,790,993 shares (fair

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value of approximately $4.7 million at closing) of the Company’s common stock, $.01 par value, were distributed to the owners of Associates. The shares were fully vested upon issuance and were not restricted. The shares were unregistered when issued and subsequently registered under a registration statement effective June 2, 2015.

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

On November 24, 2015, we received notice from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share required for continued inclusion on the Nasdaq Global Market under Nasdaq Listing Rule 5550(a)(2). The notification letter stated that we would be afforded 180 calendar days, or until May 16, 2016, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of the Company’s common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of ten consecutive business days. The Company intends to actively monitor the bid price for its common stock between now and May 16, 2016, and will consider all available options to resolve the deficiency and regain compliance with the Nasdaq minimum bid price requirement.

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 2015 and 2014 as reported by Nasdaq.

 
Fiscal 2015
Fiscal 2014
Fiscal Quarter
High
Low
High
Low
First Quarter
$
2.81
 
$
1.59
 
$
1.70
 
$
0.99
 
Second Quarter
$
2.78
 
$
1.96
 
$
1.31
 
$
1.04
 
Third Quarter
$
2.01
 
$
0.98
 
$
2.43
 
$
1.11
 
Fourth Quarter
$
1.07
 
$
0.38
 
$
2.25
 
$
1.55
 

Stockholders

The number of our registered common stockholders of record as of March 7, 2016 was 73. 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.

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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 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 2015 fiscal year on December 28, 2015. 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 common stock, (ii) the stocks comprising The Nasdaq Composite Index, and (iii) stocks comprising the Standard & Poor’s Small Cap 600 Index.


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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 and selected balance sheet data for fiscal years 2015 and 2014 are derived from our audited consolidated financial statements that are included in this report. The selected statement of operations data and selected balance sheet data for fiscal years 2013, 2012 and 2011, 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
 
2015
2014
2013
2012
2011
 
(in thousands, except per share data)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant net sales
$
87,867
 
$
74,905
 
$
83,338
 
$
94,757
 
$
98,920
 
Franchise fees and royalties
 
2,023
 
 
2,853
 
 
2,989
 
 
3,195
 
 
3,215
 
Total revenues
 
89,890
 
 
77,758
 
 
86,327
 
 
97,952
 
 
102,135
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
23,489
 
 
20,078
 
 
20,736
 
 
22,171
 
 
22,902
 
Restaurant labor and related benefits
 
33,168
 
 
29,046
 
 
32,379
 
 
34,165
 
 
36,068
 
Occupancy and other restaurant operating expenses
 
31,815
 
 
27,720
 
 
28,971
 
 
30,337
 
 
31,330
 
 
 
88,472
 
 
76,844
 
 
82,086
 
 
86,673
 
 
90,300
 
General and administrative expenses
 
11,972
 
 
12,359
 
 
11,746
 
 
11,641
 
 
13,824
 
Depreciation and amortization
 
3,200
 
 
2,394
 
 
2,724
 
 
3,613
 
 
4,230
 
Restaurant pre-opening expenses
 
6
 
 
15
 
 
29
 
 
 
 
 
Provision for losses on asset impairments and disposals
 
1,344
 
 
346
 
 
1,122
 
 
424
 
 
431
 
Closed store costs
 
126
 
 
172
 
 
124
 
 
117
 
 
61
 
Lease termination costs
 
286
 
 
1,468
 
 
57
 
 
(13
)
 
22
 
Gain on sales of assets
 
 
 
(50
)
 
(34
)
 
 
 
(149
)
Total costs and expenses
 
105,406
 
 
93,548
 
 
97,854
 
 
102,455
 
 
108,719
 
Operating loss
 
(15,516
)
 
(15,790
)
 
(11,527
)
 
(4,503
)
 
(6,584
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(1,029
)
 
(471
)
 
 
 
 
 
(1
)
Debt issuance and debt discount amortization expense
 
(658
)
 
(446
)
 
 
 
 
 
 
Other income
 
40
 
 
82
 
 
83
 
 
62
 
 
46
 
Total other income (expense)
 
(1,647
)
 
(835
)
 
83
 
 
62
 
 
45
 
Benefit from income tax
 
1,508
 
 
 
 
 
 
 
 
 
Net loss and comprehensive loss
$
(15,655
)
$
(16,625
)
$
(11,444
)
$
(4,441
)
$
(6,539
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per share data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss per share, basic and diluted
$
(0.36
)
$
(0.82
)
$
(0.64
)
$
(0.29
)
$
(0.51
)
Weighted average shares used in computing net loss per share - basic and diluted
 
44,094
 
 
20,272
 
 
17,994
 
 
15,208
 
 
12,842
 

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Fiscal Year
 
2015
2014
2013
2012
2011
 
(in thousands, except per share data)
Selected Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,152
 
$
21,053
 
$
5,614
 
$
14,903
 
$
6,600
 
Total assets
$
41,261
 
$
33,431
 
$
18,603
 
$
31,193
 
$
24,705
 
Total stockholders' equity
$
17,852
 
$
12,371
 
$
2,719
 
$
14,035
 
$
5,518
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected Consolidated Statement of Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
$
(14,319
)
$
(14,047
)
$
(7,294
)
$
(2,955
)
$
(1,318
)
Net cash used in investing activities
$
(5,019
)
$
(1,808
)
$
(2,102
)
$
(1,409
)
$
(1,767
)
Net cash provided by financing activities
$
3,437
 
$
31,294
 
$
 
$
12,559
 
$
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected Operating Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company-owned restaurants open at the end of the fiscal year
 
79
 
 
64
 
 
70
 
 
75
 
 
80
 

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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 28, 2015 and December 29, 2014 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
 
2015
2014
 
Company-
Owned
Franchise
Total
Company-
Owned
Franchise
Total
Restaurants at beginning of period
 
64
 
 
47
 
 
111
 
 
70
 
 
52
 
 
122
 
Company-owned sold to franchisee
 
0
 
 
0
 
 
0
 
 
0
 
 
0
 
 
0
 
Franchised restaurants converted to Company-owned
 
17
 
 
17
 
 
0
 
 
3
 
 
3
 
 
0
 
New restaurants opened
 
0
 
 
5
 
 
5
 
 
1
 
 
2
 
 
3
 
Restaurants permanently closed
 
2
 
 
4
 
 
6
 
 
10
 
 
4
 
 
14
 
Restaurants at end of period
 
79
 
 
31
 
 
110
 
 
64
 
 
47
 
 
111
 

As of December 28, 2015, there were 79 Company-owned and 31 franchised Cosi® restaurants operating in 15 states, the District of Columbia, the United Arab Emirates, and Costa Rica. During fiscal 2015, we closed two Company-owned restaurants, one in Wisconsin, and one in New York, and four franchised restaurants, one in Delaware, one at Boston Logan Airport, and two in California. During the same period, we converted seventeen franchised restaurants to Company-owned, thirteen Hearthstone units in Boston, two in New Jersey and one each in Delaware and Maryland. Five franchised restaurants opened, two in Costa Rica and one each in Boston, Virginia, and Washington DC.

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, soups, appetizers, flatbread pizzas, Squagels®, breakfast wraps and other breakfast products, S’mores and other desserts, and a variety of house coffees and other espresso-based beverages, handcrafted specialty drinks, along with soft drink, flavored teas, bottled beverages, including premium still and sparkling waters, and, in some location, alcoholic 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.

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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 2015.

Long-Lived Assets: Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, & Equipment (“ASC Topic 360”), 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. We also evaluate the recent performance and trends for locations which may potentially be impaired. If management determines the current trends or initiatives will make an impact on the results we factor this into the calculation. Restaurants are not considered for impairment during the period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.We closely monitor the performance of these restaurants against the expected future financial results accordingly. Once a conclusive trend is reasonably identified, projections are revised as appropriate.

Business Combinations: In accordance with ASC 805-10, Business Combinations (“ASC 805-10”), we use the purchase method of accounting for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values. ASC 805-10 also specifies criteria if an intangible asset does not arise from contractual or other legal rights, it shall be recognized as an asset apart from goodwill only if it is separable, that is, it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.

Goodwill: In accordance with ASC Topic 350, Goodwill and Other Intangible Assets (“ASC Topic 350”), goodwill, representing the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired and accounted for under the purchase method, acquired in business combinations is assigned to the reporting units that are expected to benefit from the synergies of the combination as of the acquisitions date. Under this standard, goodwill is not amortized. Goodwill impairment testing involves a two-step process. The Company first compares the fair value of the reporting unit to its respective carrying amount, including goodwill, to assess whether potential goodwill impairment exists. The estimated fair value is determined based on market capitalization as the Company feels that this is the best indicator of fair value due to the Company being reported as a single reporting unit. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the reporting unit’s carrying amount exceeds its fair value, the Company would perform the second step of the goodwill impairment test to measure the potential impairment loss amount by comparing the implied fair value of goodwill with its carrying amount. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of its assets and liabilities and assigning the excess amount to goodwill. If the implied fair value of goodwill is less than its carrying amount, an, impairment loss is recognized for difference between the carrying amount of goodwill and its implied fair value.

We review goodwill at the reporting unit level on an annual basis at the end of the fourth fiscal quarter of each year, or more frequently if events and circumstances indicate that the asset might be impaired. The Company has concluded that although individual Company restaurants qualify as individual operating components, the Company meets the

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criteria within ASC 350-20-35-1 and aggregates components into a single reporting unit. We determined the components can be aggregated due to the similar economic characteristics of each store. We performed our annual impairment analysis in December 2015 and determined that there was no impairment of goodwill.

Indefinite Intangible Assets: Indefinite intangible assets consists of trademarks and liquor licenses. In accordance with ASC Topic 350, other indefinite intangible assets are not amortized. The Company performs an impairment test on an annual basis at the end of the fourth fiscal quarter of each year, or more frequently if events and circumstances indicate that the asset might be impaired. ASC Topic 350 requires that the fair value of indefinite-lived purchased intangible assets be estimated and compared to the carrying value. We recognize an impairment loss when the estimated fair value of the indefinite-lived purchased intangible assets is less than the carrying value. As of December 28, 2015, the Company determined that there was no impairment.

Intangible Assets: The Company uses assumptions in establishing the initial carrying value, fair value and estimated lives of its intangible assets. The criteria used for these assumptions include management’s estimate of the asset’s continuing ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset, as well as the strategic significance of any identifiable intangible asset in our business objectives. If assets are considered impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Useful lives and related amortization expense are based on an estimate of the period that the assets will generate revenues or otherwise be used by us. Factors that would influence the likelihood of a material change in our reported results include significant changes in the asset’s ability to generate positive cash flow, a significant decline in the economic and competitive environment on which the asset depends and significant changes in the our strategic business objectives.

Intangible assets consist of net favorable leases and reacquired franchise rights, and are stated at cost less accumulated amortization. Intangible assets with a finite life are amortized using the straight-line method over their estimated useful lives, which range from two to ten years.

The Company periodically reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable or that the useful lives of those assets are no longer appropriate. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. No impairment of our intangible assets was recorded as no change in circumstances indicated that the carrying value of the assets was not recoverable during the year ended December 28, 2015.

Lease Termination Charges: ASC 420-10-30, Exit or Disposal Cost Obligations (“ASC 840-10-30”), 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 (“ASC 840-10-25”), 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, 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 (“ASC 718-10-25”), which requires employee stock based payments to be accounted for under the fair value method. Under this method, the Company is required to record compensation cost based on the estimated fair value for stock-based awards granted over the requisite service periods for the individual awards, which generally equals the vesting periods. The Company uses the straight-line amortization method for recognizing stock-based compensation expense. 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.

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Income Taxes: In accordance with ASC 740, Accounting for Income Taxes (“ASC 740”), 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. Gift card breakage is followed in accordance with the unclaimed property laws under the state of Delaware.

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. We also remove restaurants that have been closed and relocated from the comparable restaurant base and treat the new location as a non-comparable location until it meets the definition of a comparable unit. At fiscal years ended December 28, 2015 and December 29, 2014, there were 60 restaurants in our comparable restaurant base for both years.

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 as general and administrative expenses are generally more fixed in nature and do not vary directly with the number of restaurants we operate. Stock-based compensation expense includes the charges related to recognizing the fair value of stock options and restricted stock as compensation for awards to certain key employees and non-employee directors, except for the costs related to stock-based compensation for restaurant employees, which are included in restaurant labor and related benefits. General and administrative expenses also include other non-infrastructure related expenses and reserves such as bad debt expense.

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

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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.

Business Combinations

Hearthstone Merger. On April 1, 2015, Cosi, Inc. (the “Company”) completed the previously-announced merger of Hearthstone Associates, LLC (“Associates”) with and into a wholly-owned subsidiary of the Company, with Associates surviving as a wholly-owned subsidiary of the Company (the “Merger”). As a result of the Merger, Hearthstone Partners, LLC (“Partners”), a wholly-owned subsidiary of Associates, became an indirect subsidiary of the Company. The Merger resulted in the Company acquiring 13 franchise restaurants from Associates and Partners (“Hearthstone”).

On March 31, 2015, in connection with the Membership Agreement, as amended, among the owners of Associates, the Company and Associates entered into Amendment No. 1 to the previously disclosed Election to Cause Merger Agreement, pursuant to which the parties confirmed the allocation of the shares to be issued to the owners of Associates upon completion of the Merger. As consideration for the Merger, an aggregate of 1,790,993 shares (fair value of approximately $4.7 million at closing) of the Company’s common stock, $.01 par value, were distributed to the owners of Associates. The shares were fully vested upon issuance and were not restricted. The shares were unregistered when issued and subsequently registered under a registration statement effective June 2, 2015.

In connection with the Merger, and as a condition of obtaining the consent of Partners’ lender, the Company agreed to guaranty the obligations of Partners under certain loan documents previously entered into by Partners with First Franchise Capital Corporation (“Lender”).

The Company accounted for this transaction in accordance with ASC 805, Business Combinations (“ASC 805”), by allocating the purchase price to the assets purchased and liabilities assumed based upon their preliminary estimated fair values as of the date of the acquisition, which were determined in conjunction with an independent third party valuation, as follows:

Accounts receivable
$
348
 
Inventory
 
134
 
Prepaid expenses and other current assets
 
226
 
Property and equipment
 
3,857
 
Intangible assets
 
3,100
 
Goodwill
 
11,435
 
Other long term assets
 
154
 
Total assets
 
19,254
 
   
 
 
 
Accounts payable
 
1,156
 
Accrued expenses
 
777
 
Long-term debt
 
10,821
 
Deferred tax liability
 
1,835
 
Total liabilities
 
14,589
 
Purchase price
$
4,665
 

The Company has allocated the cost to its identifiable tangible and intangible assets and liabilities, with the remaining amount classified as goodwill. Fair value of intangible assets was determined using a combination of the income approach and the cost approach. The resulting goodwill is derived from the expected value of the acquired franchise locations and management know-how. The total amount of goodwill that is expected to be deductible for tax purposes is $3.2 million. The Company incurred indirect transaction costs related to the acquisition of approximately $0.2 million through April 1, 2015, and these costs are included in general and administrative expense in the accompanying consolidated statement of operations and comprehensive loss.

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Management is responsible for the valuation of net assets acquired and considered a number of factors, including valuations and appraisals, when estimating the fair values and estimated useful lives of acquired assets and liabilities assumed.

As part of the Merger, the Company entered into an Indemnification and Holdback Agreement with our Chief Executive Officer (“CEO”), who was also the principal owner of Associates. Pursuant to this agreement, the CEO agreed to indemnify the Company for certain liabilities, including accounts payable and other obligations (the “A/P Amounts”) owed to third parties for goods and services received by Associates or its subsidiaries, which were past due as of the closing of the Merger or were otherwise not in compliance with the provisions of the previously disclosed Election to Cause Merger Agreement, dated as of March 18, 2014, as amended by Amendment No. 1 dated as of April 1, 2015, between the Company and the holders party thereto.

Pursuant to the Holdback Agreement, the parties agreed that, until resolution of the retained liabilities, the Company would hold in escrow a portion of the shares (“Holdback Shares”) that would otherwise have been distributed to Mr. Dourney upon consummation of the Merger. For the A/P Amounts, the Company held back 191,939 shares of the Company’s common stock (the “A/P Holdback Shares”).

On February 26, 2016, the Company and Mr. Dourney entered into an Agreement (the “Agreement”) to resolve the A/P Amounts. Pursuant to the Agreement, Mr. Dourney forfeited, and the Company agreed to accept, the A/P Holdback Shares, and the Company agreed to waive and release Mr. Dourney from any obligation to retain, or indemnify the Company for, the A/P Amounts.

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
 
2015
2014
Revenues:
 
 
 
 
 
 
Restaurant net sales
 
97.7
%
 
96.3
%
Franchise fees and royalties
 
2.3
 
 
3.7
 
Total revenue
 
100.0
 
 
100.0
 
Cost and expenses:
 
 
 
 
 
 
Cost of food and beverage (1)
 
26.7
 
 
26.8
 
Restaurant labor and related benefits (1)
 
37.7
 
 
38.8
 
Occupancy and other restaurant operating expenses (1)
 
36.2
 
 
37.0
 
 
 
100.6
 
 
102.6
 
General and administrative expenses
 
13.3
 
 
15.9
 
Depreciation and amortization
 
3.6
 
 
3.1
 
Provision for losses on asset impairments and disposals
 
1.5
 
 
0.4
 
Closed store costs
 
0.1
 
 
0.2
 
Lease termination costs
 
0.3
 
 
1.9
 
Gain on sale of assets
 
 
 
(0.1
)
Total costs and expenses
 
117.3
 
 
120.3
 
Operating loss
 
(17.3
)
 
(20.3
)
 
 
 
 
 
 
 
Interest expense
 
(1.1
)
 
(0.6
)
Debt issuance and debt discount amortization
 
(0.7
)
 
(0.6
)
Other income
 
 
 
0.1
 
Total other expense
 
(1.8
)
 
(1.1
)
Net loss before income taxes
 
(19.1
)
 
(21.4
)
Benefit from income tax
 
1.7
 
 
 
Net loss and comprehensive loss
 
(17.4
)
 
(21.4
)
(1)Expressed as a pecentage of restaurant net sales versus all other items expressed as a percentage of total revenue.

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Fiscal Year 2015 (52 weeks) compared to Fiscal Year 2014 (52 weeks)

Restaurant Net Sales

 
Restaurant Net Sales
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
87,867
 
 
97.7
%
Fiscal 2014
$
74,905
 
 
96.3
%

Restaurant net sales increased 17.3%, or approximately $13.0 million, during fiscal 2015, as compared to fiscal 2014. This increase was the result of incremental net sales of $13.4 million from the 13 Hearthstone restaurants added to the corporate portfolio, $1.0 million from the comparable restaurant base and $3.5 million from the non-comparable restaurant base, offset by net sales decreases of $5.0 million from closed restaurants. The increase in comparable restaurant net sales was the result of approximately 0.3% increase in transactions and approximately 1.3% increase in average check.

Franchise Fees and Royalties

 
Franchise Fees and Royalties
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
2,023
 
 
2.3
%
Fiscal 2014
$
2,853
 
 
3.7
%

Franchise Fees and Royalties: Franchise fees and royalties decreased 1.4% or approximately $0.8 million in fiscal 2015 as compared to fiscal 2014 due to the Company’s acquisition of four franchise restaurants from Franchisees and the Hearthstone merger which resulted in the conversion of 13 Hearthstone franchise restaurants to Company-owned restaurants, partially offset by the opening of five new franchise restaurants.

Costs and Expenses

 
Cost of Food and Beverage
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
23,489
 
 
26.7
%
Fiscal 2014
$
20,078
 
 
26.8
%

Cost of food and beverage: Cost of food and beverages, as a percentage of restaurant net sales, for fiscal 2015, decreased by 0.1% when compared to fiscal 2014. This decrease was primarily the result of operational improvements and stability in the costs of certain contracted commodities.

 
Restaurant Labor and
Related Benefits
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
33,168
 
 
37.7
%
Fiscal 2014
$
29,046
 
 
38.8
%

Restaurant labor and related benefits: Restaurant labor and related benefits, as a percentage of restaurant net sales, for fiscal 2015, decreased by 1.1% when compared to fiscal 2014. The decrease was due to the lower cost of medical insurance related benefits and efficiencies generated by the prior phase of operational initiatives, offset by the investments in staffing and training required to drive future efficiencies, productivity, and overall guest experience.

 
Occupancy and Other Restaurant
Operating Expenses
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
31,815
 
 
36.2
%
Fiscal 2014
$
27,720
 
 
37.0
%

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Occupancy and other restaurant operating expenses: Occupancy and other restaurant operating expenses, as a percentage of restaurant net sales, for fiscal 2015, decreased by .8% compared to fiscal 2014. The decrease is a result of newly acquired restaurants with higher sales volumes and lower fixed costs.

 
General and Administrative
Expenses
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
11,972
 
 
13.3
%
Fiscal 2014
$
12,359
 
 
15.9
%

General and Administrative Expenses: The Company reduced its general and administrative expenses by approximately $0.5 million in fiscal 2015 compared to fiscal 2014. The decrease was the result of savings generated by the relocation of the corporate headquarters from Chicago, Illinois to a smaller space in Boston, Massachusetts, and the savings in overhead expenses in the second half of fiscal 2015, mostly offset by non-recurring costs associated with the turnover in the Chief Financial Officer role, the legal and other professional costs associated with the Merger of Hearthstone Associates, and the non-cash costs related to executive stock compensation and bad debt reserves related to notes receivable.

 
Depreciation and Amortization
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
3,200
 
 
3.6
%
Fiscal 2014
$
2,394
 
 
3.1
%

Depreciation and amortization: The depreciation and amortization expense, as a percentage of total revenues, in fiscal 2015 increased by 0.5% compared to fiscal 2014. The increase is due the amortization related to intangible assets as well as a higher depreciation of assets as a result of the Merger.

 
Provision for Losses on Asset
Impairments and Disposals
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
1,344
 
 
1.5
%
Fiscal 2014
$
346
 
 
0.4
%

Provision for losses on asset impairments and disposals: In fiscal 2015 and 2014, we recorded an impairment loss of approximately $1.3 and $0.3 million, respectively as a result of portfolio rebalancing efforts which consists of exiting and / or considering exiting our most unprofitable Company-owned restaurants and impairing all related assets.

 
Closed Store Costs
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
126
 
 
0.1
%
Fiscal 2014
$
172
 
 
0.2
%

Closed store costs: In fiscal 2015 and 2014, closed store costs related to the closing of four and ten Company-owned restaurants, respectively, resulting from the ongoing assessment and optimization of our restaurant portfolio.

 
Lease Termination Costs
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
286
 
 
0.3
%
Fiscal 2014
$
1,468
 
 
1.9
%

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Lease termination costs: Lease termination costs in fiscal 2015 related to rent payments from an underperforming closed location in dispute with the landlord over the early termination of the lease, and a settlement payment to resolve litigation with a former landlord. In fiscal 2014, lease termination costs of approximately $1.5 million related to the closing of ten Company-owned restaurants due to the continued assessment and optimization of our restaurant portfolio.

 
Gain on Sale of Assets
 
(in thousands)
as a % of total
revenues
Fiscal 2015
 
 
 
0.1
%
Fiscal 2014
$
( 50
)
 
-0.1
%

Gain on sale of assets: The gain on sale of assets in fiscal 2014 is related to the sale of one liquor license. There were no sale of assets in fiscal 2015.

 
Interest, Net
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
1,029
 
 
1.1
%
Fiscal 2014
$
470
 
 
0.6
%

Interest, Net: Net Interest expense in fiscal 2015 increased by approximately $0.6 million compared to fiscal 2014. The increase relates to interest on the senior secured promissory notes issued during fiscal 2014, as well as debt acquired upon completion of the Merger, which occurred on April 1, 2015.

 
Debt Issuance and Debt
Discount Amortization
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
658
 
 
0.7
%
Fiscal 2014
$
446
 
 
0.6
%

Debt issuance and discount amortization: Debt issuance and debt discount amortization in fiscal 2015 and 2014 related to the amortization associated with the discount on the senior secured promissory notes issued during Quarter 2 in fiscal 2014.

 
Benefit from income tax
 
(in thousands)
as a % of total
revenues
Fiscal 2015
$
1,508
 
 
1.7
%
Fiscal 2014
$
0
 
 
0.0
%

Benefit from income tax: The tax benefit recorded in the year ended December 28 2015, is primarily related to the reversal of our valuation allowance against the Hearthstone deferred tax liabilities recorded in purchase accounting, partially offset by the income tax expense related to the amortization of goodwill for tax purposes for which there is no corresponding book deduction. The goodwill amortization results in a deferred tax liability, the reversal of which cannot be forecasted, and therefore, cannot be used as a source of income to support the realizability of our deferred tax assets.

Liquidity and Capital Resources

On April 1, 2015, upon completion of the Merger, we acquired, through Associates and Partners approximately $11.0 million of indebtedness (“Indebtedness”). As a condition of obtaining the consent to the Merger of Partners’ lender, the Company agreed to certain amendments to, and to guaranty the obligations of Partners under, those certain loan documents (the “Loan Documents”) previously entered into by Partners with First Franchise Capital Corporation (“FFCC”), as previously disclosed in the Company’s filings with the SEC. Pursuant to the Guaranty in

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favor of FFCC, the Company placed $5.0 million in a control account as cash collateral to secure the Company’s obligations under the Guaranty, which has been classified as restricted cash on the consolidated balance, which was paid in full on December 31, 2015. Approximately $5.8 million of the Indebtedness was paid off shortly following the closing of the merger.

On April 10, 2015, we entered into a Stock Purchase Agreement with Trishield Special Situations Master Fund Ltd., which is managed by Trishield Capital Management LLC, a fund managed by Janus Capital Management, LLC (“Janus”), LKCM Micro-Cap Partnership L.P. and LKCM Private Discipline Master Fund, SPC, both of which are managed by Luther King Capital Management, Goose Hill Capital LLC, Bigger Capital Fund, LP, and Kenneth Vaughan (collectively, the “Purchasers”), under which the Company sold to the Purchasers, and the Purchasers purchased from the Company, an aggregate of 7,160,766 unregistered shares of the Company’s common stock, par value of $.01 per share, at a purchase price of $2.16 per share, for aggregate gross proceeds of $15.5 million (the “2015 Private Placement Transaction”), and costs of $0.2 million. The closing of the 2015 Private Placement transaction occurred on April 10, 2015.

Cash and cash equivalents were approximately $5.2 million on December 28, 2015, compared with $21.1 million on December 29, 2014. We had negative working capital of approximately $0.3 million on December 28, 2015, compared with positive working capital of approximately $13.2 million on December 29, 2014. The $13.5 million decrease in working capital is the net effect of the proceeds raised from the 2015 Private Placement Transaction completed during Q2 2015, offset by debt repayments of principal, capital improvements, cash collateralization securing a loan payable, and funding our operating loss, net of depreciation and other non-cash expenses. Our primary requirements for cash in 2016 will be for sustaining the steady-state of our operations, including funding working capital needs and maintenance of our existing facilities.

Net cash used in operating activities during fiscal 2015 and fiscal 2014 was approximately $14.3 and $14.0 million, respectively. The increase is a result of concerted efforts to reduce accounts payable and accrued expenses by paying down vendor accounts.

Net cash used in investing activities was approximately $5.0 million and $1.8 million during fiscal 2015 and fiscal 2014, respectively. During fiscal 2015, we invested $4.8 million in capital expenditures relating to the maintenance and development of Company-owned restaurants, upgrades to our point-of-sale system, and the upkeep of our restaurants.

Net cash provided by financing activities during fiscal 2015 and fiscal 2014 was approximately $3.4 million and approximately $31.3 million, respectively. During fiscal 2015, we raised approximately $15.2 million of net proceeds from the 2015 Private Placement Transaction, repaid approximately $6.8 million of long-term indebtedness and collateralized $5.0 million of cash associated with the FFCC Notes acquired upon completion of the Merger. During fiscal 2014, we raised $19.7 million from a shareholder rights offering, $7.5 million from the proceeds of long-term debt and $4.8 million from stock purchase agreements, offset by $0.4 million of issuance costs of long-term debt and stock warrants.

On December 31, 2015, the Company paid off the balance of the FFCC Indebtedness, in the amount of approximately $4.4 million using the funds in the restricted control account. The excess funds in the control account, in the net amount of approximately $0.6 million, were returned to the Company.

Regarding the notes receivable, as of December 28, 2015, the last 13 quarterly payments of $62,500 each were not received as scheduled in accordance with the terms of the Subordinated Secured Promissory Note associated with the sale of restaurants to a franchisee in 2010. As of December 28, 2015, the Company has fully reserved the balance of $1.1 million against that Subordinated Secured Promissory Note. Based on recent discussions with the franchisee, the Company continues to pursue collection.

We believe that our current cash and cash equivalents, expected cash flows from Company-owned restaurant operations, expected franchise fees and royalties, and expected reductions in general and administrative expenses, not yet reflected as of December 28, 2015, will be sufficient to fund our cash requirements for working capital needs, and the maintenance of our restaurants and debt obligations through the first quarter of 2017. We have two debt obligations, MILFAM Note with a $5.0 million principal balance due on April 14, 2017 and AB Note with $2.5 million principal balance due on May 20, 2017.

Our conclusion is based on the Company’s projected sources of cash from operating results derived from a sensitivity analysis that projects varying levels of consumer demand, sources of cash, and uses of cash analyzed through multiple

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risk-adjusted scenarios and the associated contingencies related to each. In analyzing our uses of cash from capital projects for the twelve-months period ended December 28, 2015, 75.0% were related to the construction of three Company-owned restaurants, the implementation of a new POS system, and large-scale remodels in select restaurants. We do not anticipate new construction of Company-owned restaurants, material technology implementations, or additional large-scale capital projects in fiscal 2016. Also, the Company executed additional reductions totaling $2.8 million on an annualized basis in general and administrative expenses in November 2015, which immediately reduced uses of cash related to overhead requirements on a monthly basis. Moreover, the Company has continued to realize sustained improvements to the restaurants’ operating and economic model and the associated reductions in cash burn from the restaurant portfolio. As part of this strategy we are considering a number of additional initiatives, as needed, to ensure the profitability of our portfolio, including divesting of unprofitable units. Finally, we are relentlessly pursuing the development of our franchise system. As part of this strategy, we are evaluating the sale of a restaurant or a group of restaurants to serve as a base for new franchisees looking to develop Cosi® in certain markets.

If our Company-owned restaurants do not generate the cash flow levels that we expect, if new franchise restaurants do not open according to expectations, if we do not generate the franchise fees and royalties that we currently expect, or if we experience other unforeseen circumstances, we may have to effect further reductions in general and administrative expenses, seek to more aggressively exit unprofitable locations, sell certain Company-owned locations to third parties, and/or take other actions necessitated by the impact of such unanticipated circumstances.

We have entered into agreements that create contractual obligations. These obligations will have an impact on future liquidity and capital resources. The table below presents a summary of these obligations as of December 28, 2015:

 
Payments Due by Period
(in thousands)
Description
Total
Obligations
Due
2016
Due
2017
Due
2018
Due
2019
2020 and
Thereafter
Operating leases (1)
 
50,437
 
 
11,911
 
 
9,055
 
 
6,956
 
 
5,870
 
 
16,645
 
Long-term debt (2)
 
13,273
 
 
1,392
 
 
8,442
 
 
3,439
 
 
 
 
 
Other long-term liabilities (3)
 
205
 
 
205
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total contractual cash obligations
$
63,915
 
$
13,508
 
$
17,497
 
$
10,395
 
$
5,870
 
$
16,645
 
(1)Amounts shown are net of an aggregate $0.07 million of sub-lease rental income due under non-cancelable subleases and include accrued contractual lease increases of approximately $1.3 million, which are included in other long-term liabilities in the accompanying consolidated balance sheet at December 28, 2015.

We are obligated under non-cancelable operating leases for our restaurants and our administrative offices. Lease terms are generally ten years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance and common area and other operating costs. Some restaurant leases provide for contingent rental payments which are not included in the above table.

(2)Represents principal and interest in relation to the FFCC notes, MILFAM and AB Notes.
(3)Amounts shown are related to contractual obligations for lease termination agreements. These obligations are non-interest bearing and are included in other liabilities in the accompanying consolidated balance sheets.

Certain of our lease agreements provide for scheduled rent increases during the lease term or for rental payments to commence at a date other than the date of initial occupancy. Rent expense is recognized on a straight-line basis over the term of the lease from the date we take possession. Our obligation with respect to these scheduled rent increases has been included as a component in other “Other long-term liabilities, net of current portion” in the accompanying consolidated balance sheets, and totaled approximately $1.3 million and $1.1 million for fiscal 2015 and 2014, respectively.

Certain of our leases also provide for landlord contributions to offset a portion of the cost of our leasehold improvements. These allowances are recorded as deferred liabilities and amortized on a straight-line basis as a reduction to rent expense over the term of the related leases. Included in other liabilities in the accompanying consolidated balance sheets for fiscal 2015 and 2014 are landlord allowances of approximately $0.1 million and $0.2 million in each year.

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As of December 28, 2015 and December 29, 2014, the Company had approximately $0.2 million each year in standby letters of credit, which were provided as security deposits for certain of the lease obligations. The letters of credit are fully secured by cash deposits or marketable securities held in accounts at the issuing banks and are not available for withdrawal by the Company. These amounts are included as a component of “Other Assets” in the accompanying consolidated balance sheets.

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 2015 and 2014 include results for 13 weeks. The unaudited selected quarterly results for fiscal 2015 and 2014 are shown below:

 
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
 
(dollars in thousands, except share data)
Fiscal 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
17,908
 
$
24,449
 
$
23,517
 
$
24,016
 
Total costs and expenses
$
22,203
 
$
28,323
 
$
27,334
 
$
26,229
 
Provision for losses on impairments
$
18
 
$
 
$
94
 
$
1,344
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(4,313
)
$
(3,874
)
$
(3,911
)
$
(3,557
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted loss per share:
$
(0.12