##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended April 2, 2007
 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.
  Delaware
    
    06-1393745(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1751 Lake Cook RoadDeerfield, Illinois
    
    60015(Address of principal executive offices)
    
    (Zip Code)
 (847) 597-8800
 þ o
  o þ o
 o þ




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##### 



COSI, INC.
 
 Page NumberPART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets  as of April 2, 2007 and January 1, 2007
    
    
    3Consolidated Statements of Operations  Three month periods ended April 2, 2007 and April 3, 2006
    
    
    4Consolidated Statement of Stockholders Equity  Three month period ended April 2, 2007
    
    
    5Consolidated Statements of Cash Flows  Three month periods ended April 2, 2007 and April 3, 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7-9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-20Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 1A.
    
    Risk Factors
    
    
    20Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 6.
    
    Exhibits
    
    
    21SIGNATURES
    
    
    22EXHIBIT INDEX
    
    
    23CERTIFICATIONS
    
    
    24-26302 Certification of Interim Chief Executive Officer302 Certification of Chief Financial OfficerSection 906 Certification
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Cosi, Inc.
 
 Consolidated Balance Sheets
 As of April 2, 2007 and January 1, 2007
 (dollars in thousands,
except share and per share data)
 April 2, 2007
    
    
    January 1, 2007(Unaudited)
    
    
    (Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,187.0
    
    
    $
    938.4Investments
    
    
    10,883.5
    
    
    
    18,961.5Accounts receivable, net
    
    
    1,245.1
    
    
    
    1,950.9Inventories
    
    
    982.0
    
    
    
    986.9Prepaid expenses and other current assets
    
    
    3,948.4
    
    
    
    4,032.8Total current assets
    
    
    20,246.0
    
    
    
    26,870.5Furniture and fixtures, equipment and leasehold improvements, net
    
    
    48,468.1
    
    
    
    46,007.5Intangibles, security deposits and other assets, net
    
    
    2,845.1
    
    
    
    2,879.1Total assets
    
    $
    71,559.2
    
    
    $
    75,757.1Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    3,158.3
    
    
    $
    4,898.1Accrued expenses
    
    
    9,544.9
    
    
    
    8,550.5Deferred franchise revenue
    
    
    1,232.5
    
    
    
    1,172.5Current portion of long-term debt
    
    
    17.0
    
    
    
    17.0Current portion of other long-term liabilities
    
    
    222.9
    
    
    
    519.9Total current liabilities
    
    
    14,175.6
    
    
    
    15,158.0Deferred franchise revenue
    
    
    2,630.0
    
    
    
    2,345.0Long-term debt, net of current portion
    
    
    82.8
    
    
    
    82.8Other long-term liabilities, net of current portion
    
    
    7,773.5
    
    
    
    7,540.0Total liabilities
    
    
    24,661.9
    
    
    
    25,125.8Commitments and contingenciesStockholders equity:Common stock  $.01 par value; 100,000,000 shares authorized,
39,856,593 and 39,910,114 shares issued, respectively
    
    
    398.6
    
    
    
    399.1Additional paid-in capital
    
    
    271,671.8
    
    
    
    271,200.3Treasury stock, 239,543 shares at cost
    
    
    (1,197.7
    )
    
    
    (1,197.7
    )Accumulated deficit
    
    
    (223,975.4
    )
    
    
    (219,770.4
    )Total stockholders equity
    
    
    46,897.3
    
    
    
    50,631.3Total liabilities and stockholders equity
    
    $
    71,559.2
    
    
    $
    75,757.1
 The accompanying notes are an integral part of these consolidated financial statements.
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Cosi, Inc.
 
 Consolidated Statements of Operations
 For the Three Month Period Ended April 2, 2007 and April 3, 2006
 (dollars in thousands, except per share data)
 Three Months EndedApril 2,
    
    
    April 3,2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Revenues:Restaurant net sales
    
    $
    31,658.4
    
    
    $
    29,457.7Franchise fees and royalties
    
    
    432.4
    
    
    
    187.3Total revenues
    
    
    32,090.8
    
    
    
    29,645.0Costs and expenses:Cost of food and beverage
    
    
    7,390.1
    
    
    
    6,975.1Labor and related benefits
    
    
    11,322.8
    
    
    
    9,876.8Occupancy and other operating expenses
    
    
    9,287.5
    
    
    
    7,463.228,000.4
    
    
    
    24,315.1General and administrative expenses
    
    
    5,929.3
    
    
    
    5,553.5Stock-based compensation expense
    
    
    51.4
    
    
    
    1,940.4Depreciation and amortization
    
    
    2,248.1
    
    
    
    1,832.1Restaurant pre-opening expenses
    
    
    270.1
    
    
    
    265.3Lease termination expense
    
    
    
    
    
    
    26.6Total costs and expenses
    
    
    36,499.3
    
    
    
    33,933.0Operating loss
    
    
    (4,408.5
    )
    
    
    (4,288.0
    )Interest income
    
    
    205.2
    
    
    
    361.7Interest expense
    
    
    (2.0
    )
    
    
    (2.3
    )Other income
    
    
    0.3
    
    
    
    0.3Net loss
    
    $
    (4,205.0
    )
    
    $
    (3,928.3
    )Per Share Data:Net loss per share, basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.10
    )Weighted average shares outstanding:
    
    
    38,571,150
    
    
    
    37,812,590
 The accompanying notes are an integral part of these consolidated financial statements.
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Cosi, Inc.
 
 Consolidated Statement of Stockholders Equity
For the Three Months Ended April 2, 2007
(unaudited)
(dollars in thousands, except share data)
 Common Stock
    
    
    Treasury StockAdditionalNumber of
    
    
    
    
    
    
    Paid In
    
    
    Number of
    
    
    
    
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Shares
    
    
    Amount
    
    
    Deficit
    
    
    TotalBalance, January 1, 2007
    
    
    39,910,114
    
    
    $
    399.1
    
    
    $
    271,200.3
    
    
    
    239,543
    
    
    $
    (1,197.7
    )
    
    $
    (219,770.4
    )
    
    $
    50,631.3Exercise of options
    
    
    164,030
    
    
    
    1.6
    
    
    
    413.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    414.9Net forfeiture of restricted stock
    
    
    (218,250
    )
    
    
    (2.2
    )
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    56.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56.1Exercise of warrants
    
    
    699
    
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,205.0
    )
    
    
    (4,205.0
    )Balance, April 2, 2007
    
    
    39,856,593
    
    
    $
    398.6
    
    
    $
    271,671.8
    
    
    
    239,543
    
    
    $
    (1,197.7
    )
    
    $
    (223,975.4
    )
    
    $
    46,897.3
 The accompanying notes are an integral part of these consolidated financial statements.
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Cosi, Inc.
 
 Consolidated
Statements of Cash FlowsFor the Three Month Periods Ended
April 2, 2007 and April 3, 2006
(dollars in thousands)
 April 2, 2007
    
    
    April 3, 2006(Unaudited)
    
    
    (Unaudited)Cash flows from operating activities:Net loss
    
    $
    (4,205.0
    )
    
    $
    (3,928.3
    )Adjustments to reconcile net loss to net cash (used in)
provided by operating activitiesDepreciation and amortization
    
    
    2,248.1
    
    
    
    1,832.1Non-cash portion of asset disposals
    
    
    
    
    
    
    17.4Recovery for bad debts
    
    
    
    
    
    
    2.0Stock-based compensation expense
    
    
    56.1
    
    
    
    1,954.1Changes in operating assets and liabilities:Accounts receivable
    
    
    705.9
    
    
    
    (896.0
    )Inventories
    
    
    4.9
    
    
    
    123.5Prepaid expenses and other current assets
    
    
    84.3
    
    
    
    512.5Other assets
    
    
    31.4
    
    
    
    205.4Accounts payable and accrued expenses
    
    
    (891.0
    )
    
    
    (1,163.2
    )Deferred franchise revenue
    
    
    345.0
    
    
    
    1,062.5Other liabilities
    
    
    (286.4
    )
    
    
    512.5Net cash (used in) provided by operating activities
    
    
    (1,906.8
    )
    
    
    234.5Cash flows from investing activities:Capital expenditures
    
    
    (4,340.1
    )
    
    
    (3,162.1
    )Purchase of investments
    
    
    (20,776.8
    )
    
    
    (66,232.9
    )Redemption of investments
    
    
    28,854.8
    
    
    
    72,241.4Net refunds (payment) of security deposits
    
    
    2.6
    
    
    
    (22.1
    )Net cash provided by investing activities
    
    
    3,740.5
    
    
    
    2,824.3Cash flows from financing activities:Net proceeds
from exercise of stock options
    
    
    414.9
    
    
    
    889.6Exercise of warrants
    
    
    
    
    
    
    16.4Principal payments on long-term debt
    
    
    
    
    
    
    (3.0
    )Net cash provided by financing activities
    
    
    414.9
    
    
    
    903.0Net increase in cash and cash equivalents
    
    
    2,248.6
    
    
    
    3,961.8Cash and cash equivalents, beginning of period
    
    
    938.4
    
    
    
    1,952.3Cash and cash equivalents, end of period
    
    $
    3,187.0
    
    
    $
    5,914.1Supplemental disclosures of cash flow information:Cash paid for:Interest
    
    $
    
    
    
    $
    2.3Corporate franchise and income taxes
    
    $
    70.3
    
    
    $
    112.3
 The accompanying notes are an integral part of these consolidated financial statements.
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COSI, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1  Basis of Presentation
      Note 2  Stock-Based Compensation
  For the Three Months Ended(in thousands)April 2, 2007
    
    
    April 3, 2006Stock option compensation expense
    
    $
    118.2
    
    
    $
    273.9Restricted stock compensation (benefit) expense
    
    
    (62.1
    )
    
    
    1,680.2Total non-cash stock compensation expense
    
    
    56.1
    
    
    
    1,954.1Non-cash compensation included in labor and related benefits
    
    
    4.7
    
    
    
    13.7Separately captioned stock compensation expense
    
    $
    51.4
    
    
    $
    1,940.4
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COSI, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
    NOTE 3  Warrants
   NOTE 4  Earnings Per Share
  8




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COSI, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
 NOTE 5  Lease Termination Costs
   NOTE 6  Contingencies
  NOTE 7  Income Taxes
 Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109
    9




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Item 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
for the fiscal quarters ended April 2, 2007 and April 3, 2006 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 2006 Annual Report on Form 10-K . Our
discussion contains forward-looking statements based upon current expectations that involve
risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual
results and the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those set forth
under Cautionary Note Regarding Forward-Looking Statements below and elsewhere in this
Quarterly Report.
 OVERVIEW
  For the Three Months Ended
    
    For the Three Months EndedApril 2, 2007
    
    April 3, 2006Company-
    
    
    
    
    
    
    
    
    
    Company-Owned
    
    Franchise
    
    Total
    
    Owned
    
    Franchise
    
    TotalRestaurants at beginning of period
    
    
    110
    
    
    
    13
    
    
    
    123
    
    
    
    96
    (a)
    
    
    5
    
    
    
    101New restaurants opened
    
    
    3
    
    
    
    6
    
    
    
    9
    
    
    
    2
    
    
    
    
    
    
    
    2Restaurants permanently closed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Restaurants at end of period
    
    
    113
    
    
    
    19
    
    
    
    132
    
    
    
    94
    (a)
    
    
    5
    
    
    
    99
 
 (a)
    
    Includes two company-owned locations that were closed in October of 2005 as
a result of Hurricane Wilma.During the fourth quarter of fiscal 2006, one location
was re-opened and one location was permanently closed.     10




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RECENT DEVELOPMENTS
  CRITICAL ACCOUNTING POLICIES
   Long Lived Assets Accounting for
the Impairment or Disposal of Long Lived Assets
 Lease Termination Charges Accounting
for Costs Associated with Exit or Disposal Activities
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Stock-based Compensation Share-Based Payment Accounting for Stock-Based Compensation
  Expected dividend yield
    
    
    0
    %Expected stock price volatility
    
    
    68
    %Average risk-free interest rate
    
    
    3.79
    %Average expected life of options
    
    5.0 years
  Accounting for Lease Obligations: Accounting for Operating Leases with Scheduled Rent Increases
 Landlord Allowances Issues Relating to Accounting for Leases
 Income Taxes
 12




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Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109
     Restaurant Net Sales.
 Franchise Fees and Royalties.
 Gift Card Sales
    Cost of Food and Beverage.
 Restaurant Labor and Related Benefits.
 Occupancy and Other Restaurant Operating Expenses.
 13




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General and Administrative Expenses.
 Stock-based Compensation Expense.
 Depreciation and Amortization.
 Restaurant Pre-opening Expenses.
 14




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RESULTS OF OPERATIONS
  Three Months EndedApril 2,
    
    April 3,2007
    
    2006Revenues:Restaurant net sales
    
    
    98.7
    %
    
    
    99.4
    %Franchise fees and royalties
    
    
    1.3
    
    
    
    0.6Total revenue
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of food and beverage (1)
    
    
    23.3
    
    
    
    23.7Restaurant labor and related benefits (1)
    
    
    35.8
    
    
    
    33.5Occupancy and other restaurant operating expenses (1)
    
    
    29.3
    
    
    
    25.388.4
    
    
    
    82.5General and administrative expenses
    
    
    18.5
    
    
    
    18.7Stock-based compensation expense
    
    
    0.2
    
    
    
    6.5Depreciation and amortization
    
    
    7.0
    
    
    
    6.2Restaurant pre-opening expenses
    
    
    0.8
    
    
    
    0.9Lease termination expense
    
    
    
    
    
    
    0.1Total costs and expenses
    
    
    113.7
    
    
    
    114.5Operating loss
    
    
    (13.7
    )
    
    
    (14.5
    )Other income:Interest income
    
    
    0.6
    
    
    
    1.2Net loss
    
    
    (13.1
    )%
    
    
    (13.3
    )%
 
 (1)
    
    As a percentage of restaurant net sales Restaurant Net Sales
  Franchise Fees and Royalties
  15




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Costs and Expenses
 Cost of food and Beverage
 Restaurant Labor and Related Benefits.
 Occupancy and Other Restaurant Operating Expenses
 General and Administrative Costs
 Stock-based Compensation Expense. Share-Based Payment, .
 Depreciation and Amortization
 Restaurant Pre-opening Expenses
 16




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Lease termination expense
 Interest income and expense
 LIQUIDITY AND CAPITAL RESOURCES
       17




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Contractual Obligations
    
    Payments Due by Period (in thousands)Due 2ndtrough 4th
    
    
    Due Fiscal
    
    
    Due FiscalTotal
    
    
    Quarter of
    
    
    2008 trough
    
    
    2010 trough
    
    
    Due AfterDescription
    
    Obligations
    
    
    Fiscal 2007
    
    
    Fiscal 2009
    
    
    Fiscal 2011
    
    
    Fiscal 2011Long Term Debt (1)
    
    $
    125.0
    
    
    $
    25.0
    
    
    $
    50.0
    
    
    $
    50.0
    
    
    $
    Operating Leases (2) (3)
    
    
    92,164.3
    
    
    
    11,765.6
    
    
    
    29,163.4
    
    
    
    23,864.6
    
    
    
    27,370.7Purchase obligations (4)
    
    
    1,747.0
    
    
    
    1,747.0
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    94,036.3
    
    
    $
    13,537.6
    
    
    $
    29,213.4
    
    
    $
    23,914.6
    
    
    $
    27,370.7
 
 (1)
    
    Amounts shown include aggregate scheduled interest payments of $0.03 million.(2)
    
    Amounts shown are net of an aggregate $0.7 million of sub-lease rental income
due under non-cancelable subleases.(3)
    
    Includes approximately an aggregate $0.5 million of obligations on leases for
restaurants that have been closed as of April 2, 2007.(4)
    
    Primarily contractual obligations related to new restaurant construction.  PURCHASE COMMITMENTS
    18




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CAUTIONARY NOTE REGARDING 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 mad cow
disease and avian influenza or bird flu;
    
    competition in our markets, both in our 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;
    
    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 existing restaurants;
    
    our ability to generate positive cash flow from existing and new restaurants;
    
    fluctuations in our quarterly results due to seasonality;
    
    increased government regulation and our ability to secure required governmental approvals and permits;
    
    our ability to create customer awareness of our restaurants in new markets;
    
    the reliability of our customer and market studies;
    
    cost effective and timely planning, design and build-out of new restaurants;
    
    our ability to recruit, train and retain qualified corporate and restaurant personnel and management;
    
    market saturation due to new restaurant openings;
    
    inadequate protection of our intellectual property;
    
    adverse weather conditions which impact customer traffic at our restaurants; and
    
    adverse economic conditions.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4. Controls and Procedures
   
 Part II. OTHER INFORMATION
 
 Item 1: LEGAL PROCEEDINGS
  
 Item 1A: RISK FACTORS
  20




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Item 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  (a) Exercise of Warrants
  
 Item 6: EXHIBITS
 (a)
    
    Exhibits:
 Exhibit Number
    
    DescriptionExhibit 31.1
    
    Certification of the Interim 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.
 21




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SIGNATURES
  COSI, INC.Date: May 10, 2007
    By:
    /s/ ROBERT MERRITTRobert MerrittInterim Chief Executive Officer,
President and DirectorDate: May 10, 2007
    By:
    /s/ WILLIAM KOZIELWilliam KozielChief Financial Officer (chief
accounting officer)
Treasurer and Secretary 22




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EXHIBIT INDEX
 Exhibit 31.1
    
    Certification of the Interim 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.
 23