UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 28, 2016
OR
☐ 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
COSÌ, 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, Massachusetts 02108 |
(Address of principal executive offices) (Zip Code) |
(857) 415-5000
(Registrant's telephone number, including area code)
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 ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 shorter period that the registrant was required to submit and post such files). Yes ☒ 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ | Non-Accelerated filer ☐ | 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 ☐ No ☒
Number of shares of Common Stock, $.01 par value, outstanding at May 4, 2016, is 47,988,400.
COSI, INC.
For the three-month period ended March 28, 2016
PART I. FINANCIAL INFORMATION | Page Number | |
Item 1 | Financial Statements | |
Item 1. | Financial Statements | |
3 | ||
4 | ||
5 | ||
6 | ||
7-14 | ||
Item 2 | 15-22 | |
Item 3. | 23 | |
Item 4. | 23 | |
PART II. OTHER INFORMATION | ||
Item 1. | 24 | |
Item 1A. | 24 | |
Item 4. | 24 | |
Item 6. | 24 | |
25 | ||
26 | ||
CERTIFICATIONS |
PART I. FINANCIAL INFORMATION
Cosi, Inc.
(dollars in thousands, except per share amounts)
March 28, 2016 | December 28, 2015 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,200 | $ | 5,152 | ||||
Credit card receivables | 547 | 343 | ||||||
Accounts receivable, net of allowances of $41 and $223, respectively | 1,102 | 899 | ||||||
Inventories | 950 | 1,051 | ||||||
Prepaid expenses and other current assets | 1,362 | 1,335 | ||||||
Total current assets | 7,161 | 8,780 | ||||||
Furniture and fixtures, equipment and leasehold improvements, net | 10,942 | 11,892 | ||||||
Notes receivable, net of allowances $1,001, respectively | - | - | ||||||
Intangible assets, net | 2,337 | 2,642 | ||||||
Goodwill | 11,632 | 11,632 | ||||||
Restricted cash | - | 5,002 | ||||||
Other assets | 1,134 | 1,313 | ||||||
Total assets | $ | 33,206 | $ | 41,261 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,950 | $ | 1,564 | ||||
Accrued expenses | 5,945 | 6,920 | ||||||
Current portion of other long-term liabilities | 164 | 105 | ||||||
Current portion of long-term debt | - | 473 | ||||||
Total current liabilities | 8,059 | 9,062 | ||||||
Deferred franchise revenue | 1,754 | 1,726 | ||||||
Other long-term liabilities, net of current portion | 1,653 | 1,625 | ||||||
Long-term debt, net | 6,939 | 10,669 | ||||||
Deferred income tax | 412 | 327 | ||||||
Total liabilities | 18,817 | 23,409 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' equity: | ||||||||
Common stock - $.01 par value; 100,000,000 shares authorized, 47,803,961 and 47,972,150 shares issued, respectively | 478 | 479 | ||||||
Additional paid-in capital | 344,376 | 344,296 | ||||||
Treasury stock, 59,886 shares at cost | (1,198 | ) | (1,198 | ) | ||||
Accumulated deficit | (329,267 | ) | (325,725 | ) | ||||
Total stockholders' equity | 14,389 | 17,852 | ||||||
Total liabilities and stockholders' equity | $ | 33,206 | $ | 41,261 |
The accompanying notes are an intergral part of these consolidated financial statements.
Cosi, Inc.
(dollars in thousands, except per share data)
Three Months Ended | ||||||||
March 28, 2016 | March 30, 2015 | |||||||
Revenues: | ||||||||
Restaurant net sales | $ | 21,221 | $ | 17,207 | ||||
Franchise fees and royalties | 460 | 701 | ||||||
Total revenues | 21,681 | 17,908 | ||||||
Costs and expenses: | ||||||||
Cost of food and beverage | 5,655 | 4,844 | ||||||
Restaurant labor and related benefits | 8,004 | 7,097 | ||||||
Occupancy and other restaurant operating expenses | 7,487 | 6,637 | ||||||
21,146 | 18,578 | |||||||
General and administrative expenses | 2,290 | 2,617 | ||||||
Depreciation and amortization | 984 | 580 | ||||||
Provision for losses on asset impairments and disposals | 43 | - | ||||||
Closed store costs expense (income) | 103 | (39 | ) | |||||
Lease termination costs | 180 | 51 | ||||||
Loss on sale of assets | 197 | 18 | ||||||
Total costs and expenses | 24,943 | 21,805 | ||||||
Operating loss | (3,262 | ) | (3,897 | ) | ||||
Other income (expense): | ||||||||
Interest expense | (169 | ) | (256 | ) | ||||
Debt issuance and debt discount amortization | (165 | ) | (165 | ) | ||||
Other income | 139 | 3 | ||||||
Total other income (expense) | (195 | ) | (418 | ) | ||||
Net loss before income taxes | (3,457 | ) | (4,315 | ) | ||||
Provision for income tax expense | (85 | ) | - | |||||
Net loss | $ | (3,542 | ) | $ | (4,315 | ) | ||
Per Share Data: | ||||||||
Loss per share, basic and diluted | $ | (0.08 | ) | $ | (0.12 | ) | ||
Weighted average common shares outstanding, basic and diluted | 46,713,329 | 37,199,402 |
The accompanying notes are an integral part of these consolidated financial statements.
Cosi, Inc.
Common Stock | Treasury Stock | |||||||||||||||||||||||||||
Number of Shares | Amount | Additional Paid In Capital | Shares of Treasury Stock | Amount Treasury Stock | Accumulated Deficit | Total | ||||||||||||||||||||||
Balance, December 28, 2015 | 47,972,150 | $ | 479 | $ | 344,296 | 59,886 | $ | (1,198 | ) | $ | (325,725 | ) | $ | 17,852 | ||||||||||||||
Issuance of restricted stock, net of forfeitures | 23,750 | - | - | - | - | |||||||||||||||||||||||
Forfeiture of common stock in connection with the Holdback Settlement | (191,939 | ) | (1 | ) | (123 | ) | - | - | - | (124 | ) | |||||||||||||||||
Stock-based compensation | - | - | 203 | - | - | - | 203 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (3,542 | ) | (3,542 | ) | |||||||||||||||||||
Balance, March 28, 2016 | 47,803,961 | $ | 478 | $ | 344,376 | 59,886 | $ | (1,198 | ) | $ | (329,267 | ) | $ | 14,389 |
The accompanying notes are an integral part of these consolidated financial statements.
Cosi, Inc.
(in thousands)
March 28, 2016 | March 30, 2015 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (3,542 | ) | $ | (4,315 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation and amortization | 984 | 580 | ||||||
Amortization of debt issuance and debt discount costs | 165 | 165 | ||||||
Loss on sale of assets | 197 | 18 | ||||||
Deferred income tax | 85 | - | ||||||
Non-cash portion of asset impairments and disposals | 43 | - | ||||||
Provision for bad debts | 3 | 76 | ||||||
Provision for lease termination reserve | 180 | 51 | ||||||
Non-cash gain on settlement of Holdback Agreement | (124 | ) | - | |||||
Stock-based compensation expense | 203 | 108 | ||||||
Interest expense paid in kind | - | 256 | ||||||
Changes in operating assets and liabilities, net of effect of acquisitions | ||||||||
Credit card receivables | (204 | ) | (917 | ) | ||||
Accounts receivable | (206 | ) | (287 | ) | ||||
Inventories | 101 | 92 | ||||||
Prepaid expenses and other current assets | (27 | ) | 250 | |||||
Other assets | 145 | (1 | ) | |||||
Accounts payable and accrued expenses | (591 | ) | (1,762 | ) | ||||
Deferred franchise revenue | 28 | (17 | ) | |||||
Other liabilities | (93 | ) | (247 | ) | ||||
Net cash used in operating activities | (2,653 | ) | (5,950 | ) | ||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (219 | ) | (1,225 | ) | ||||
Proceeds from sale of assets | 251 | - | ||||||
Net cash provided by (used in) investing activities | 32 | (1,225 | ) | |||||
Cash flows from financing activities: | ||||||||
Principal payments on long-term debt | (4,333 | ) | - | |||||
Return of excess restricted cash held in escrow account | 5,002 | - | ||||||
Net cash provided by financing activities | 669 | - | ||||||
Net decrease in cash and cash equivalents | (1,952 | ) | (7,175 | ) | ||||
Cash and cash equivalents, beginning of year | 5,152 | 21,053 | ||||||
Cash and cash equivalents, end of period | $ | 3,200 | $ | 13,878 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | - | $ | - | ||||
Corporate franchise and income taxes | $ | 34 | $ | 32 |
The accompanying notes are an integral part of these consolidated financial statements.
COSI, INC.
Note 1 - Basis of Presentation
We have prepared the accompanying unaudited consolidated financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, the financial statements reflect all adjustments that are necessary for a fair presentation of the results of operations for the periods shown. All such adjustments are of a normal recurring nature. In preparing financial statements in conformity with U.S. GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
As used in this quarterly report on Form 10-Q, unless the context requires otherwise, the terms “we,” “our,” “Company” or “Cosi” refer to Cosi, Inc. and its consolidated subsidiaries.
The balance sheet at December 28, 2015 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The results for the three-month periods ended March 28, 2016 and March 30, 2015 are not indicative of the results for the full fiscal year.
This Report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 28, 2015, as filed with the Securities and Exchange Commission (“SEC”).
There have been no material changes to our significant accounting policies and estimates from the information provided in Note 1 of our consolidated financial statements included in our Form 10-K for the fiscal year ended December 28, 2015.
We believe that our current cash and cash equivalents, expected cash flows from Company-owned restaurant operations, expected franchise fees and royalties, and additional opportunities potentially available for further overhead costs reductions not yet reflected as of March 28, 2016, will be sufficient to fund our cash requirements for working capital needs, the maintenance of our restaurants, and debt payments for the next twelve months. We do not anticipate new construction of Company-owned restaurants, material technology implementations, or additional large-scale remodels in 2016.
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 risk-adjusted scenarios and the associated contingencies related to each.
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 sell certain Company-owned locations to franchisees and/or other third parties, or take other actions necessitated by the impact of such unanticipated circumstances.
Note 2 - Acquisitions
Hearthstone Merger
On April 1, 2015, Cosi, Inc. (the “Company”) completed the 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”). The operations of Hearthstone have been included in the Company’s consolidated financial statements from the date of acquisition.
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” or “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 fiscal 2015 consolidated balance sheet. On December 31, 2015, the Company paid off the balance of the FFCC Notes, in the amount of approximately $4.3 million using the funds in the control account. The excess funds in the control account, in the amount of approximately $0.7 million, were returned to the Company, net of $40,000 in prepayment fees.
The Company accounted for this transaction in accordance with Accounting Standards Codification (“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 (in thousands):
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 expenses in the consolidated statement of operations and comprehensive loss.
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 April 1, 2015) between the Company and the owners of Associates.
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 in final settlement of the A/P Amounts, and the Company agreed to waive and release Mr. Dourney from any obligation to retain, or indemnify the Company for, the A/P Amounts. The Company recorded a gain on settlement of Holdback Agreement of $0.1 million in other income on the Consolidated Statements of Operations.
Other intangible assets, net, excluding goodwill, are being amortized on a straight-line basis over their estimated lives, and were comprised of the following at April 1, 2015 (in thousands):
Identified Intangible Asset | Estimated Lives Useful Life (Years) | Gross Carrying Amount | |||
Net favorable leases | 2 to 5 years | $ | 500 | ||
Reacquired franchise rights (old locations) | 4 years | 1,500 | |||
Reacquired franchise rights (new locations) | 10 years | 1,100 | |||
$ | 3,100 |
The unaudited pro forma restaurant net sales for Cosi, as if the Hearthstone Merger occurred on December 29, 2014, were $21.0 million for the three-months ended March 30, 2015. The Company has not disclosed the net loss or net loss per share due to the impractical nature of obtaining that information.
For the three months-ended March 28, 2016, approximately $4.2 million of restaurant net sales from the franchise restaurants acquired in the Merger, is included in the Company’s consolidated statement of operations.
Note 3 - Long-Term Debt
FFCC Notes
On April 1, 2015, the Company completed the 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”). Refer to our Annual Report on Form 10-K for the year ended December 28, 2015 for more information on the Merger.
In connection with the Merger of Hearthstone, the Company acquired certain debt obligations of Partners known as the FFCC Notes. The “FFCC Notes” collectively refers to the Secured Promissory Notes dated on or about May 9, 2013, made by Partners, as borrower, in favor of First Franchise Capital Corporation (“FFCC”), as lender, in the original aggregate principal amount of $5.4 million. The FFCC Notes originally had a term of 60 months, commencing on June 10, 2013, and accrued interest on the outstanding balance at the rate of 5.93%. Payments of principal and interest of $60,000 were due monthly with one balloon payment of $3.2 million originally due June 10, 2018. Under each of the FFCC Notes, a late fee equal to 10.0% of the amount past due was assessed on any late payments, reduced to 5.0% on any amount paid after the maturity date. The FFCC Notes were secured by all of the assets of Partners, including, without limitation, the Hearthstone restaurants it operates. The FFCC Notes could be prepaid with a prepayment fee of 1.0% of the outstanding principal balance.
In connection with the Merger, the Company agreed to guarantee the obligations of Partners under the FFCC Notes and the related loan documents (the “Loan Documents”) previously entered into by Partners with FFCC. Additionally, the Company and FFCC entered into a Master Amendment to the Loan Documents modifying and amending certain terms of the Loan Documents. Accordingly, the Company entered into a Guaranty in favor of FFCC (“Guaranty”) pursuant to which the Company placed $5.0 million in a control account as cash collateral to secure the Company’s obligations under the Guaranty, which was been classified as restricted cash on the Consolidated Balance Sheet.
On December 31, 2015, the Company paid off the balance of the FFCC Notes, in the amount of approximately $4.3 million using the funds in the control account. The excess funds in the control account, in the amount of approximately $0.7 million, were returned to the Company, net of $40,000 in prepayment fees.
Note 4 - Related Party Transactions
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 Partners, 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 April 1, 2015) between the Company and the owners of Associates.
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 “Holdback 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 in final settlement of the A/P Amounts, and the Company agreed to waive and release Mr. Dourney from any obligation to retain, or indemnify the Company for, the A/P Amounts. The Company recorded a gain on settlement of Holdback Agreement of $0.1 million in other income on the Consolidated Statements of Operations.
Note 5 - Stock-Based Compensation
Restricted Stock Awards
The following table summarizes the status of the Company’s non-vested restricted stock awards, (in thousands):
Market-Based Vesting: | For the Three-Month Period Ending | |||||||||||||||
March 28, 2016 | March 30, 2015 | |||||||||||||||
Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Non-vested at beginning of year | 484 | 1.50 | 617 | 1.09 | ||||||||||||
Granted | 15 | 0.54 | - | |||||||||||||
Vested | - | (213 | ) | - | ||||||||||||
Forfeited | (3 | ) | (100 | ) | - | |||||||||||
Non-vested at end of quarter | 496 | 1.32 | 304 | 1.32 | ||||||||||||
Service-Based Vesting: | ||||||||||||||||
Non-vested at beginning of year | 697 | 1.62 | 624 | 1.09 | ||||||||||||
Granted | 15 | 0.54 | - | |||||||||||||
Vested | (200 | ) | (34 | ) | ||||||||||||
Forfeited | (3 | ) | ||||||||||||||
Non-vested at end of quarter | 509 | 1.62 | 590 | 1.62 | ||||||||||||
Board of Directors Vesting: | ||||||||||||||||
Granted | - | 6 | ||||||||||||||
Vested | - | (6 | ) | |||||||||||||
Total Awards: | ||||||||||||||||
Non-vested at beginning of year | 1,181 | 1.57 | 1,241 | 1.09 | ||||||||||||
Granted | 30 | 0.54 | 6 | |||||||||||||
Vested | (200 | ) | (253 | ) | ||||||||||||
Forfeited | (6 | ) | (100 | ) | ||||||||||||
Non-vested at end of quarter | 1,005 | 1.57 | 894 | 1.59 |
The fair value of restricted stock awards is based on the closing price of our common stock on the grant date. The total intrinsic value of restricted shares vested during the three months ended March 28, 2016 and March 30, 2015 was $1.0 million and $3.3 million, respectively. At March 28, 2016, unrecognized compensation expense related to restricted stock grants expected to vest totaled $1.2 million and will be recognized over a weighted average period of 2.8 years and is recorded in general and administrative expenses in our consolidated statements of operations.
For the shares issued during the three months ended March 28, 2016 and March 30, 2015, 50% of each grant vests over time (“Service-Vested Shares”) and 50% of each grant vests upon achievement of certain stock price targets (“Market-Based Shares”), subject to the following vesting schedules:
(a) | The Service-Vested Shares will vest in four equal installments, with 25% vesting on each of the first, second, third and fourth anniversaries of the Date of Award, provided that the grantee remains in the continuous employ of the Company through each such vesting date. |
The Market-Based Shares will vest in four equal installments, provided that (a) the grantee remains in the continuous employ of the Company from and after the Date of Award and through the defined vesting dates, and (b) specified escalating price targets for the Company’s common stock are achieved for at least 30 consecutive trading days. During the three-month period ended March 28, 2016, an immaterial amount and value of previously issued restricted stock was forfeited. During the three-month period ended March 30, 2015, previously issued shares of restricted common stock of approximately 0.1 million were forfeited with a value of $0.1 million based on the closing price of our common stock on the date of the grant. During the three months ended March 30, 2015, 213,000 market-based restricted shares vested in February 2015. There we no market-based restricted shares that vested in three months-ended March 28, 2016.
Stock Option Activity
Number of Options | Weighted Average Fair Value | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
(in years) | (in thousands) | |||||||||||||||
Outstanding as of December 28, 2015 | 6,463 | 3.62 | 1.2 | - | ||||||||||||
Granted | - | - | ||||||||||||||
Exercised | - | - | ||||||||||||||
Cancelled/Expired | (213 | ) | - | - | ||||||||||||
Outstanding as of March 28, 2016 | 6,250 | 2.80 | 1.2 | - | ||||||||||||
Exercisable as of March 28, 2016 | 5,000 | 2.80 | 1.2 | - |
There were 6,250 outstanding, out-of-the-money stock options as of March 28, 2016 with exercise prices ranging from $2.80- $27.76. No stock options were exercised during any of the fiscal years presented. As of the end of March 28, 2016, the outstanding stock options had no intrinsic value as they were all out-of-the-money.
As of March 28, 2016, there was an immaterial amount of total unrecognized compensation cost related to stock option arrangements granted under the Company’s plans, which is expected to be recognized over a weighted average period of 2.0 years.
Compensation Expense
In accordance with ASC 718-10-25, Compensation – Stock Compensation, we recognize stock-based compensation expense according to the fair value recognition provision which generally requires, among other things, that all employee share-based compensation is measured using a fair value method and that all the resulting compensation expense is recognized in the consolidated financial statements. In accordance with the standard, our stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the award, which is the vesting term. As a result, we recognized stock compensation expense, net of forfeitures, of approximately $0.2 million and $0.1 million during the three months ended March 28, 2016 and March 30, 2015, respectively, within the general and administrative expense in the accompanying Statements of Operations. 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 the grant.
Note 6 – Income Taxes
Provision for income tax expense was $85.0 thousand and $0.0 for the three months ending March 28, 2016 and March 30, 2015 respectively. We project to record a tax provision of $150.0 thousand for the year ending January 2, 2017 related to the amortization of tax deductible goodwill, which generates a deferred tax liability that cannot be offset by net operating losses or other deferred tax assets since its reversal is considered indefinite in nature.
Note 7 -Commitments and Contingencies
Commitments
As of March 28, 2016, we are committed under lease agreements expiring through 2027 for occupancy of our retail restaurants and for office space at the following minimum annual rentals (in thousands):
Fiscal Year | Amount | |||
2016 | $ | 8,715 | ||
2017 | 8,997 | |||
2018 | 6,840 | |||
2019 | 5,755 | |||
2020 and Thereafter | 16,414 | |||
$ | 46,721 |
Amounts shown are net of approximately $0.1 million of sublease rental income under non‑cancelable subleases. Rental expense for the three months-ended March 28, 2016 and March 30, 2015 totaled $3.3 million and $2.8 million, respectively. Certain lease agreements have renewal options ranging from three years to five years. In addition, certain leases obligate us to pay additional rent if restaurant sales reach certain minimum levels (percentage rent). Amounts incurred under these additional rent provisions and agreements were immaterial for the three months ended March 28, 2016 and March 30, 2015.
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 long-term liabilities, net of current portion” in the accompanying consolidated balance sheets, and were immaterial for the three months ended March 28, 2016 and March 30, 2015, 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 the three months ended March 28, 2016 and March 30, 2015 are immaterial landlord allowances.
As of March 28, 2016, the Company had approximately $0.2 million in standby letters of credit, which were provided as security deposits for certain of our 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.
Purchase Commitments
We have agreements with some of the nation’s largest food, paper, and beverage manufacturers in the industry. This enables us to provide our restaurants with high quality proprietary food products and non-food items at competitive prices. We source and negotiate prices directly with these suppliers and distribute these products to our restaurants primarily through a national network that consists of some of the nation’s largest independent distributors. 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. 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.
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.
Self‑Insurance
We have a self-insured group health insurance plan. We are responsible for all covered claims to a maximum limit of $100,000 per participant and an additional aggregating maximum limit of $50,000 for the plan year. Benefits paid in excess of these limits are reimbursed to the plan under our stop-loss policy. In addition, we have an aggregate stop-loss policy whereby our liability for total claims submitted cannot exceed a pre-determined dollar factor based upon, among other things, past years’ claims experience, actual claims paid, the number of plan participants and monthly accumulated aggregate deductibles. We did not exceed this pre-determined maximum during fiscal 2015. For our 2016 plan year, this pre-determined dollar amount is $1.1 million. The balance in the self-insurance reserve account as of March 28, 2016 was approximately $0.2 million.
Litigation
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 that require accrual or disclosure.
Note 8 - Other
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.
The following discussion and analysis of our financial condition and results of operations for the three-month periods ended March 28, 2016 and March 30, 2015, should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and the notes to those statements that are in our 2015 Annual Report on Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” below and elsewhere in this Quarterly Report.
Business Overview
System-wide restaurants:
For the Three-Month Period Ended | ||||||||||||||||||||||||
March 28, 2016 | March 30, 2015 | |||||||||||||||||||||||
Company- Owned | Franchise | Total | Company- Owned | Franchise | Total | |||||||||||||||||||
Restaurants at beginning of period | 79 | 31 | 110 | 64 | 47 | 111 | ||||||||||||||||||
New restaurants opened | - | - | - | - | 2 | 2 | ||||||||||||||||||
Restaurants permanently closed | 3 | - | 3 | 1 | - | 1 | ||||||||||||||||||
Restaurants at end of period | 76 | 31 | 107 | 63 | 49 | 112 |
As of March 28, 2016, there were 76 Company-owned and 31 franchise-owned restaurants operating in 15 states, the District of Columbia, the United Arab Emirates, and Costa Rica. During the three-month period ended March 28, 2016, we closed three Company-owned restaurants in New York, NY, Mt. Kisco, NY, and Columbus, OH.
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 drinks, flavored teas, bottled beverages, including premium still and sparkling waters, and, in some locations, 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 development model into our strategy will position us to maximize the market potential for the Cosi® brand and concept consistent with our available capital.
Critical Accounting Policies
A description of our critical accounting policies is provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 28, 2015. Our critical accounting policies have not changed since the filing of our Annual Report on Form 10-K for the year ended December 28, 2015.
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation- Stock Compensation (Topic 718). The guidance changes how companies account for certain aspects of share- based payments to employees. Entities will be required to recognize income tax effects of awards in the income statement when the awards vest or are settled. The guidance also allows an employer to repurchase more of an employee's shares than it can today for tax withholding purposes providing for withholding at the employee's maximum rate as opposed to the minimum rate without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The updated guidance is effective for annual periods beginning after December 15, 2017, and is applicable to the Company in fiscal 2018. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial position and results of operations.
RESULTS OF OPERATIONS
Our operating results for the three-month periods ended March 28, 2016 and March 30, 2015, expressed as a percentage of total revenues (except where otherwise noted), were as follows:
Three Months Ended | ||||||||
March 28, 2016 | March 30, 2015 | |||||||
Revenues: | ||||||||
Restaurant net sales | 97.9 | % | 96.1 | % | ||||
Franchise fees and royalties | 2.1 | 3.9 | ||||||
Total revenues | 100.0 | 100.0 | ||||||
Cost and expenses: | ||||||||
Cost of food and beverage (1) | 26.6 | 28.2 | ||||||
Restaurant labor and related benefits (1) | 37.7 | 41.2 | ||||||
Occupancy and other restaurant operating expenses (1) | 35.3 | 38.6 | ||||||
99.6 | 108.0 | |||||||
General and administrative expenses | 10.6 | 14.6 | ||||||
Depreciation and amortization | 4.5 | 3.2 | ||||||
Provision for losses on asset impairments and disposals | 0.2 | - | ||||||
Closed store costs expense (income) | 0.5 | (0.2 | ) | |||||
Lease termination costs | 0.8 | 0.3 | ||||||
Loss on sale of fixed assets | 0.9 | 0.1 | ||||||
Total costs and expnese | 115.0 | 121.8 | ||||||
Operating loss | (15.0 | ) | (21.8 | ) | ||||
Other income (expense): | ||||||||
Interest expense | (0.8 | ) | (1.4 | ) | ||||
Debt issuance and debt discount amortization | (0.8 | ) | (0.9 | ) | ||||
Other income | 0.6 | - | ||||||
Total other expense | (0.9 | ) | (2.3 | ) | ||||
Net loss before income tax | (15.9 | ) | (24.1 | ) | ||||
Income tax expense | (0.4 | ) | - | |||||
Net loss | (16.3 | )% | (24.1 | )% |
(1) | Expressed as a percentage of restaurant net sales versus all other items expressed as a percentage of total revenues. |
Restaurant Net Sales
Restaurant Net Sales | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three-months ended March 28, 2016 | $ | 21,221 | 97.9 | % | ||||
Three-months ended March 30, 2015 | $ | 17,207 | 96.1 | % |
Restaurant net sales. Restaurant net sales increased 23.3% or approximately $4.0 million, during the three-month period ended March 28, 2016. This was comprised of an increase in net sales in our comparable restaurant base of 1.5%, or approximately $0.2 million, a decrease in net sales of approximately $1.2 million related to restaurants closed during and subsequent to the three-month period ended March 30, 2015, and a net increase in sales of approximately $5.0 million from 17 new or acquired restaurants. The increase in comparable restaurant net sales consisted of a 4.7% decrease in traffic and a 6.2% increase in average check.
Franchise Fees and Royalties
Franchise Fees and Royalties | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three-months ended March 28, 2016 | $ | 460 | 2.1 | % | ||||
Three-months ended March 30, 2015 | $ | 701 | 3.9 | % |
Franchise fees and royalties. In the three-month period ended March 28, 2016, franchise fees and royalties decreased 34%, or approximately $0.2 million. This was due to the acquisition of the Hearthstone restaurants, the conversion of four restaurants from Franchise to Corporate, and the closure of three Franchise locations. This was partially offset by the opening of three Franchise locations.
Costs and Expenses
Cost of Food and Beverage | ||||||||
(in thousands) | as a % of restaurant net sales | |||||||
Three-months ended March 28, 2016 | $ | 5,655 | 26.6 | % | ||||
Three-months ended March 30, 2015 | $ | 4,844 | 28.2 | % |
Cost of food and beverage. The cost of food and beverage as a percentage of restaurant net sales for the three-month period ended March 28, 2016, decreased by 1.6%. 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 restaurant net sales | |||||||
Three-months ended March 28, 2016 | $ | 8,004 | 37.7 | % | ||||
Three-months ended March 30, 2015 | $ | 7,097 | 41.2 | % |
Restaurant labor and related benefits. Restaurant labor and related benefits as a percentage of sales for the three-month period ended March 28, 2016, decreased by 3.5%. The decrease was due to the concerted efforts on hourly scheduling and manager configurations as well as other productivity initiatives.
Occupancy and Other Restaurant Operating Expenses | ||||||||
(in thousands) | as a % of restaurant net sales | |||||||
Three-months ended March 28, 2016 | $ | 7,487 | 35.3 | % | ||||
Three-months ended March 30, 2015 | $ | 6,637 | 38.6 | % |
Occupancy and other restaurant operating expenses. Occupancy and other restaurant expenses, as a percentage of sales, for the three-month period ended March 28, 2016 decreased by 3.3% compared to the same period last year. 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 | |||||||
Three-months ended March 28, 2016 | $ | 2,290 | 10.6 | % | ||||
Three-months ended March 30, 2015 | $ | 2,617 | 14.6 | % |
General and Administrative Expenses: General and administrative expenses decreased by approximately $0.3 million for the three-month period ended March 28, 2016 compared to the same period last year. The decrease was the result of costs incurred in the three-month period ended March 30, 2015 related to legal and professional fees associated with the Merger of Hearthstone Associates, and costs related to the turnover in the Chief Financial Officer’s role, as well as savings in payroll associated with reduction of headcount in the corporate office during the three months ended December 28, 2015.
Depreciation and Amortization | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three-months ended March 28, 2016 | $ | 984 | 4.5 | % | ||||
Three-months ended March 30, 2015 | $ | 580 | 3.2 | % |
Depreciation and amortization. Depreciation and amortization expense during the three-month period ended March 28, 2016, increased by 1.3% compared to the same period last year. The increase is due to the amortization related to intangible assets as well as a higher depreciation of assets as a result of the Hearthstone Merger.
Closed Store Costs Expense (Income) | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three-months ended March 28, 2016 | $ | 103 | 0.5 | % | ||||
Three-months ended March 30, 2015 | $ | (39 | ) | (0.2 | %) |
Closed store costs expense (income): Closed store costs increased by $0.1 million in the three-month period ended March 28, 2016, compared to the same period last year. The increase is a result of the expenses incurred for miscellaneous costs associated with the closure of three Company-owned restaurants in the three-month period ended March 28, 2016.
Provision for losses on asset impairments and disposals | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three months ended March 28, 2016 | $ | 43 | 0.2 | % | ||||
Three months ended March 30, 2015 | $ | - | 0.0 | % |
Provision for losses on asset impairments and disposals: The provision for losses on asset impairments and disposals is related to the disposal of assets during the three-month period ended March 28, 2016.
Lease Termination Costs | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three-months ended March 28, 2016 | $ | 180 | 0.8 | % | ||||
Three-months ended March 30, 2015 | $ | 51 | 0.3 | % |
Lease termination costs. The lease termination costs in each of the three-month periods ended March 28, 2016 and March 30, 2015, are costs related to locations closed during the quarter as well as costs related to a closed location where we are in a dispute with the landlord over early termination of the lease at an underperforming location.
Loss on sale of assets | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three-months ended March 28, 2016 | $ | 197 | 9.0 | % | ||||
Three-months ended March 30, 2015 | $ | 18 | 1.0 | % |
Loss on sale of assets. The loss on sale of assets in the three-month periods ended March 28, 2016 and March 30, 2015, relates to sale of assets from store closures, respectively.
Interest Expense | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three-months ended March 28, 2016 | $ | 169 | -0.8 | % | ||||
Three-months ended March 30, 2015 | $ | 256 | -1.4 | % |
Interest Expense: Interest expense in the three-month period ended March 28, 2016 decreased as a result of the lower principal balance of debt outstanding compared to the same period last year.
Debt Issuance and Debt Discount Amortization | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three-months ended March 28, 2016 | $ | 165 | -0.8 | % | ||||
Three months ended March 30, 2015 | $ | 165 | -0.9 | % |
Debt issuance and debt discount amortization: Debt issuance and debt discount amortization in the three-month periods ended March 28, 2016 and March 30, 2015, respectively, related to the amortization associated with the discount on the senior secured promissory notes issued during Quarter 2 in fiscal 2014.
Other Income | ||||||||
(in thousands) | as a % of total revenues | |||||||
Three-months ended March 28, 2016 | $ | 139 | 6.0 | % | ||||
Three months ended March 30, 2015 | $ | 3 | 0.0 | % |
Other Income: Other income is the result of the Holdback transaction settled on February 26, 2016.
Liquidity and Capital Resources
Cash and cash equivalents were $3.2 million on March 28, 2016, compared with approximately $5.2 million on December 28, 2015. We had negative working capital of approximately $0.9 million on March 28, 2016, compared with negative working capital of approximately $0.3 million on December 28, 2015. The $0.6 million decrease in working capital is the net effect of funding our operating loss, net of depreciation and other non-cash expenses offset by the release of funds in the restricted cash control account related to the indebtedness under the FFCC Notes. 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 the three-month periods ended March 28, 2016, and March 30, 2015, was approximately $2.7 million and $6.0 million, respectively. The decrease in net cash used in operating activities was the result of concerted efforts to realize operating margin improvements, the ongoing re-engineering of the restaurant’s economic model, the closure of underperforming restaurants, executing a well-controlled restaurant facilities maintenance plan, and managing lower general and administrative costs resulting from the restructuring of the support center.
Cash provided by investing activities was approximately $0.03 million and $1.2 million in the three-month periods ended March 28, 2016 and March 30, 2015, respectively. In the three-month period ended March 28, 2016, we invested $0.22 million in capital expenditures relating to maintenance of existing Company-owned restaurants and received $0.25 in proceeds from the sale of assets relating to a closed restaurant.
Net cash provided by financing activities was $0.7 million during the three-month period ended March 28, 2016. On December 31, 2015, the Company paid off the balance of the FFCC Notes, in the amount of approximately $4.4 million using the funds in the restricted cash control account. The excess funds in the restricted cash control account, in the amount of approximately $0.7 million, were returned to the Company, net of $0.04 million in early payoff fees.
We believe that our current cash and cash equivalents, expected cash flows from Company-owned restaurant operations, expected franchise fees and royalties, and additional opportunities potentially available for further overhead costs reductions not yet reflected as of March 28, 2016, will be sufficient to fund our cash requirements for working capital needs, the maintenance of our restaurants, and debt payments for the next twelve months. We do not anticipate new construction of Company-owned restaurants, material technology implementations, or additional large-scale remodels in 2016.
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 risk-adjusted scenarios and the associated contingencies related to each.
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 sell certain Company-owned locations to franchisees and/or other third parties, or take other actions necessitated by the impact of such unanticipated circumstances.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained or incorporated by reference in this Form 10-Q or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are subject to risks and uncertainties, including, without limitation, those described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2015. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially and adversely affected, and the trading price of our common stock could decline. We do not undertake to publicly update or revise our forward-looking statements even if our future changes make it clear that any projected results expressed or implied therein will not be realized.
Listed below are just some of the factors that would impact our forward looking statements:
· | the cost of our principal food products and supply and delivery shortages or interruptions; |
· | labor shortages or increased labor costs; |
· | changes in demographic trends and consumer tastes and preferences, including changes resulting from concerns over nutritional or safety aspects of beef, poultry, produce or other foods or the effects of food-borne illnesses, such as E.coli, “mad cow disease” and avian influenza or “bird flu;” |
· | competition in our markets, both in our existing business and locating suitable restaurant sites; |
· | our operation and execution in new and existing markets; |
· | expansion into new markets, including foreign countries; |
· | our ability to attract and retain qualified franchisees and our franchisees’ ability to open restaurants on a timely basis; |
· | our ability to locate suitable restaurant sites in new and existing markets and negotiate acceptable lease terms; |
· | the rate of our internal growth, and our ability to generate increased revenue from our new and existing restaurants; |
· | our ability to generate positive cash flow from existing and new restaurants; |
· | increased government regulation and our ability to secure required governmental approvals and permits; |
· | our ability to create customer awareness of our restaurants in new markets; |
· | the reliability of our customer and market studies; |
· | cost effective and timely planning, design and build-out of new restaurants; |
· | our ability to recruit, train and retain qualified corporate and restaurant personnel and management; |
· | market saturation due to new restaurant openings; |
· | inadequate protection of our intellectual property; |
· | our ability to obtain additional capital and financing; |
· | adverse weather conditions, which impact customer traffic at our restaurants; and |
· | adverse economic conditions. |
The words “believe,” “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive,” “project” or similar words, or the negatives of these words, identify forward‑looking statements. We qualify any forward‑looking statements entirely by these cautionary factors.
Interest Rate Risk
We do not have interest rate risk on our debt, as this rate is a fixed percentage. Our market risk exposures are related to our cash and interest that we may pay on debt. We have no derivative financial commodity instruments. We invest our excess cash in investment grade, highly liquid, short-term investments. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations. During the three-month period ended March 28, 2016, we held no short-term investments and, as a result, a hypothetical one percentage point interest change from those in effect would not have resulted in a fluctuation of interest income. In the three-month period ended March 28, 2016, and three-month period ended March 30, 2015, interest income was immaterial.
Commodity Risk
We are exposed to commodity price risks. Many of the ingredients we use to prepare our food, as well as our packaging materials, are commodities or ingredients that are affected by the price of other commodities, exchange rates, foreign demand, weather, production, availability, and other factors outside our control. Some of these commodities are purchased under agreements in effect for periods ranging from one month to one year, usually at fixed prices. As a result, we are subject to commodity risk that current market prices may be below our contractual prices. We also purchase certain ingredients at spot prices, as well as prices that are based on specific formulas related to key components within the commodity category, which could adversely affect our operating result in periods of rising commodity or ingredient prices if we choose, for competitive or other reasons, not to increase menu prices at the same rate at which ingredient costs increase, or if menu price increases result in customer resistance. During the three-month period ended March 28, 2016, and three-month period ended March 30, 2015, we did not utilize derivative instruments in managing commodity risk.
Foreign Currency Risk
As of the three-month period ended March 28, 2016, all of our transactions are conducted, and our accounts denominated, in U.S. dollars. Accordingly, we are not exposed to foreign currency risk.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the fiscal year covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 28, 2016, to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
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 that would require accrual or disclosure under ASC 450. We cannot predict with certainty the outcome of any litigation or the potential for future litigation. Regardless of the outcome of any particular litigation and the merits of any particular claim, litigation can have a material adverse impact on our company due to, among other reasons, any injunctive relief granted, which could inhibit our ability to operate our business, amounts paid as damages or in settlement of any such matter, diversion of management resources and defense costs.
In addition to the other information set forth in this report, the factors discussed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for our 2015 fiscal year could materially affect the Company’s business, financial condition or operating results. There have been no material changes in our risk factors since our Annual Report on Form 10-K for the year ended December 28, 2015.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
Not applicable.
(a) | Exhibits: |
Exhibit Number | Description |
Exhibit 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
Exhibit 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
Exhibit 32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | The following financial information, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of March 28, 2016 and December 28, 2015, (ii) Consolidated Statements of Operations for the three-month periods ended March 28, 2016 and March 30, 2015, (iii) Statement of Stockholders’ Equity for the three-month periods ended March 28, 2016 and March 30, 2015 (iv) Consolidated Statements of Cash Flows for the three-month periods ended March 28, 2016 and March 30, 2015, and (v) Notes to Consolidated Financial Statements. In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
COSI, INC. | |||
Date: May 12, 2016 | By: /s/ RJ DOURNEY | ||
RJ Dourney | |||
President, | |||
Chief Executive Officer, and | |||
Director | |||
Date: May 12, 2016 | By: /s/ MIGUEL ROSSY-DONOVAN | ||
Miguel Rossy-Donovan | |||
Chief Financial Officer (chief accounting officer) | |||
Treasurer and Secretary |
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | The following financial information, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of March 28, 2016 and December 28, 2015, (ii) Consolidated Statements of Operations for the three-month periods ended March 28, 2016 and March 30, 2015, (iii) Statement of Stockholders’ Equity for the three-month periods ended March 28, 2016 and March 30, 2015 (iv) Consolidated Statements of Cash Flows for the three-month periods ended March 28, 2016 and March 30, 2015, and (v) Notes to Consolidated Financial Statements. In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings. |
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