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

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

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.)

1751 Lake Cook Road
Deerfield, Illinois 60015
(Address of principal executive offices) (Zip Code)

(847) 597-8800
(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 þ No o

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 o No o

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 o		Accelerated filer o		Non-Accelerated filer o		Smaller reporting company þ

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

Number of shares of Common Stock, $.01 par value, outstanding at May 4, 2010: 51,551,201

 

 

COSI, INC.

Index to Form 10-Q
For the three month period ended March 29, 2010

		Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets — as of March 29, 2010 and December 28, 2009			3
Consolidated Statements of Operations — Three month periods ended March 29, 2010 and March 30, 2009			4
Consolidated Statement of Stockholders’ Equity — Three month period ended March 29, 2010			5
Consolidated Statements of Cash Flows — Three month periods ended March 29, 2010 and March 30, 2009			6
Notes to Condensed Consolidated Financial Statements			7-11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk			26
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 6. Exhibits			27
SIGNATURES			28
EXHIBIT INDEX			29
CERTIFICATIONS			30-32
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

Cosi, Inc.

		March 29, 2010				December 28, 2009
		(Unaudited)				(Note 1)
Assets
Current assets:
Cash and cash equivalents		$	7,052			$	4,079
Accounts receivable, net			669				560
Inventories			934				967
Prepaid expenses and other current assets			1,616				2,136
Total current assets			10,271				7,742
Furniture and fixtures, equipment and leasehold improvements, net			20,842				22,100
Intangibles, security deposits and other assets, net			1,618				1,728
Total assets		$	32,731			$	31,570
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	3,219			$	3,079
Accrued expenses			9,021				9,628
Deferred franchise revenue			53				44
Current portion of other long-term liabilities			506				588
Total current liabilities			12,799				13,339
Deferred franchise revenue			2,494				2,563
Other long-term liabilities, net of current portion			6,035				6,343
Total liabilities			21,328				22,245
Commitments and contingencies
Stockholders’ equity:
Common stock — $.01 par value; 100,000,000 shares authorized, 51,551,201 and 40,862,474 shares issued, respectively			516				409
Additional paid-in capital			283,019				277,994
Treasury stock, 239,543 shares at cost			(1,198	)			(1,198	)
Accumulated deficit			(270,934	)			(267,880	)
Total stockholders’ equity			11,403				9,325
Total liabilities and stockholders’ equity		$	32,731			$	31,570

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

Cosi, Inc.

		Three Months Ended
		March 29,				March 30,
		2010				2009
		(Unaudited)				(Unaudited)
Revenues:
Restaurant net sales		$	27,074			$	28,124
Franchise fees and royalties			525				542
Total revenues			27,599				28,666
Costs and expenses:
Cost of food and beverage			6,329				6,237
Restaurant labor and related benefits			10,664				10,744
Occupancy and other restaurant operating expenses			9,044				8,967
			26,037				25,948
General and administrative expenses			3,321				3,834
Depreciation and amortization			1,380				1,964
Restaurant pre-opening expenses			—				4
Closed store costs			—				43
Lease termination expense			1				202
Gain on sale of assets			(87	)			—
Total costs and expenses			30,652				31,995
Operating loss			(3,053	)			(3,329	)
Interest income			—				1
Interest expense			(1	)			(1	)
Other income			—				3
Net loss		$	(3,054	)		$	(3,326	)
Per Share Data:
Loss per share, basic and diluted		$	(0.06	)		$	(0.08	)
Weighted average shares outstanding:			48,982,134				40,261,278

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

Cosi, Inc.

(unaudited)
(dollars in thousands, except share data)

		Common Stock												Treasury Stock
										Additional
		Number of								Paid In				Number of								Accumulated
		Shares				Amount				Capital				Shares				Amount				Deficit				Total
Balance, December 28, 2009			40,862,474			$	409			$	277,994				239,543			$	(1,198	)		$	(267,880	)		$	9,325
Issuance of common stock (1)			10,451,677				105				4,790																4,895
Net issuance of restricted stock			(1,200	)			2				(2	)															—
Stock-based compensation			238,250								237																237
Net loss																							(3,054	)			(3,054	)
Balance, March 29, 2010			51,551,201			$	516			$	283,019				239,543			$	(1,198	)		$	(270,934	)		$	11,403

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

Cosi, Inc.

		March 29,				March 30,
		2010				2009
		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net loss		$	(3,054	)		$	(3,326	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization			1,380				1,964
Gain on sale of assets			(87	)			—
Provision for bad debts			10				57
Stock-based compensation expense			237				294
Changes in operating assets and liabilities:
Accounts receivable			(119	)			215
Inventories			33				99
Prepaid expenses and other current assets			520				397
Other assets			26				41
Accounts payable and accrued expenses			(467	)			(205	)
Deferred franchise revenue			(60	)			(56	)
Lease termination reserve			(154	)			—
Other long-term liabilities			(236	)			(378	)
Net cash used in operating activities			(1,971	)			(898	)
Cash flows from investing activities:
Capital expenditures			(122	)			(115	)
Proceeds from sale of assets			171				—
Net cash provided by (used in) investing activities			49				(115	)
Cash flows from financing activities:
Proceeds from issuance of common stock			5,226				—
Common stock issuance costs			(331	)
Net cash provided by financing activities			4,895				—
Net increase (decrease) in cash and cash equivalents			2,973				(1,013	)
Cash and cash equivalents, beginning of period			4,079				5,589
Cash and cash equivalents, end of period		$	7,052			$	4,576
Supplemental disclosure of cash flow information:
Cash paid for:
Corporate franchise and income taxes		$	115			$	107

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

COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation

We have prepared the accompanying unaudited condensed 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, 2009 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 29, 2010 and March 30, 2009 are not indicative of the results for the full fiscal year.

Certain amounts in the March 31, 2009 consolidated statement of operations have been reclassified to conform to the March 30, 2010 presentation.

This Report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 28, 2009, 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, 2009.

Note 2 — Stock-Based Compensation Expense

A summary of non-cash, stock-based compensation expense is as follows:

		For the Three Months Ended
		(in thousands)
		March 29,				March 30,
		2010				2009
Stock option compensation expense		$	1			$	14
Restricted stock compensation expense, net of forfeitures			236				280
Total non-cash, stock-based compensation expense, net of forfeitures		$	237			$	294

As of March 29, 2010, there is no remaining unrecognized compensation expense related to stock options granted under the Company’s various incentive plans. As of March 29, 2010, there was approximately $0.8 million of total unrecognized compensation expense related to restricted stock shares and units granted under the Cosi, Inc. 2005 Omnibus Long-Term Incentive Plan (the “2005 Plan”). The expense related to these grants is being recognized on a straight-line basis from the date of each grant through fiscal 2014.

COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

During the first quarter of fiscal 2010, pursuant to the 2005 Plan and in accordance with the terms and conditions prescribed by the Compensation Committee of our Board of Directors, we granted and issued 238,250 restricted stock shares and 200,000 restricted stock units to key employees. The vesting of these shares and stock units will occur as follows: (i) 20% of the stock shares and stock units vested on the grant date, and (ii) an additional 20% of the stock shares and stock units will vest on each anniversary of the grant date provided that at each such date the employee continues to be employed by the Company. The value of the shares and the stock units for the grants made during the first quarter of fiscal 2010, based on the closing price of our common stock on the date of the grants, was approximately $0.4 million. There were no issuances for restricted stock shares, restricted stock units, or stock options during the first quarter of fiscal 2009.

Stock-based compensation expense, net of forfeitures, relating to grants for restricted stock shares and restricted stock units of approximately $0.2 million and $0.3 million is included in the accompanying consolidated statement of operations for the quarters ended March 29, 2010 and March 30, 2009, respectively.

During the first quarter of fiscal 2010 and fiscal 2009, 1,200 and 2,000 shares, respectively, of previously issued restricted common stock were forfeited. The value of the forfeited shares, based on the closing price of our common stock on the date of the grants, was approximately $0.01 million and $0.02 million, respectively. The accompanying consolidated statement of operations for the three month periods ended March 29, 2010 reflects the reversal of approximately $0.01 million of previously amortized costs related to these forfeited shares during the first quarter of fiscal 2010.

Note 3 — Earnings Per Share

Basic and diluted loss per common share is calculated by dividing the net loss by the weighted average common shares outstanding during the period. As of March 29, 2010, there were 247,600 unvested restricted shares of common stock outstanding and there were no stock options that were in-the-money. As of March 30, 2009, there were 130,200 unvested restricted shares of common stock outstanding and there were no stock options that were in-the-money. The unvested restricted shares meet the requirements for participating securities but were not included in the computation of basic and diluted earnings per share because we incurred a net loss in all periods presented and, hence, the impact would be anti-dilutive. At March 29, 2010 and at March 30, 2009 there were, respectively, 270,000 and 265,000 unvested restricted stock units. The unvested stock units do not meet the requirements for participating securities and were not included in the computation of basic and diluted earnings per share. Out-of-the-money stock options were not included in the computation of basic and diluted earnings per share because we incurred a net loss in all periods presented and, hence, the impact would be anti-dilutive. Out-of-the-money stock options to purchase an aggregate of 590,521 and 700,633 shares of common stock were outstanding at March 29, 2010 and March 30, 2009, respectively.

Note 4 — Asset impairments

In accordance with FASB Accounting Standards Codification Topic 360 (ASC Topic 360), (formerly SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”), we evaluate possible impairment at the individual restaurant level periodically and record an impairment loss whenever we determine impairment factors are present. We consider a history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the same period.

COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

Restaurants are not considered for impairment during the period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.

We did not record any asset impairments during the first quarter of fiscals 2010 and 2009.

Note 5 — Lease Termination Costs

During the first quarter of fiscal 2010 we incurred lease termination costs of less than $0.01 million. During the first quarter of fiscal 2009, we recorded a lease termination charge of approximately $0.2 million related to an underperforming location in the Midwest region where we reached a lease termination agreement with the landlord. As of March 29, 2010, the remaining balance of this lease termination commitment was approximately $0.1 million.

Future store closings, if any, may result in additional lease termination charges. The incurrence of additional lease termination costs will be dependent on our ability to improve operations in those restaurants. If unsuccessful, lease termination costs will be determined through negotiating acceptable terms with our landlords to terminate the leases for those restaurants, or on our ability to locate sub-tenants or assignees for the leases at those locations.

Note 6 — Contingencies

From time to time, we are a defendant in litigation arising in the ordinary course of our business, including but not limited to claims resulting from “slip and fall” accidents, claims under federal and state laws governing access to public accommodations or other federal and state laws applicable to our business operations, employment-related claims, property damages, claims from guests alleging illness, injury or other food quality, health or operational concerns, and enforcement of intellectual property rights.

Note 7 — Income Taxes

We have recorded a full valuation allowance to reduce our deferred tax assets related primarily to net operating loss carryforwards. 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 carryforwards, 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.

As of December 28, 2009, we had net operating loss (“NOL”) carryforwards of approximately $187.5 million for U.S. federal income tax purposes. Under the Internal Revenue Code, an “ownership change” with respect to a corporation can significantly limit the amount of pre-ownership change NOLs and certain other tax assets that the corporation may utilize after the ownership change to offset future taxable income, possibly reducing the amount of cash available to the corporation to satisfy its obligations. An ownership change generally would occur if the aggregate stock ownership of holders of at least 5% of our stock increases by more than 50 percentage points over the preceding three year period. We do not believe that the recent rights offering (see Note 9) has triggered an ownership change. In addition, a limitation would not have an impact on our consolidated financial statements as we have recorded a valuation allowance for the entire amount of our deferred tax assets.

COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

We have adopted ASC 740-10, Income Taxes, which prescribes a comprehensive financial statement model of how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns. The standard requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on the effective date. Initial recognition amounts would have been reported as a cumulative effect of a change in accounting principle.

No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carryforwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions has been recorded.

Should the Company need to accrue interest or penalties on uncertain tax positions, it would recognize the interest as interest expense and the penalties as a general and administrative expense.

Due to our unexpired NOLs, Cosi could be subject to IRS income tax examination for the tax year 1996 and all subsequent years. We could also be subject to state income tax examinations in certain states where we have unexpired NOLs.

Note 8 — New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Update No. 2010-06 (“ASU 2010-06”), which provides updated guidance on disclosure requirements under Accounting Standards Codification (“ASC”) 820 Fair Value Measurements and Disclosures (formerly SFAS 157, “Fair Value Measures”). We have adopted ASU 2010-06 as of January 25, 2010. The adoption did not have a significant impact on the Company’s consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a significant impact on our consolidated financial statements upon adoption.

Note 9 — Rights Offering and Private Placement of Common Stock

On January 6, 2010, we completed a shareholders’ rights offering to our shareholders of record as of November 9, 2009. We issued a total of 10,000,000 shares of our $0.01 par value common stock at a subscription price of $0.50 per share. In conjunction with the rights offering, our executive officers and outside directors purchased an aggregate 451,677 shares of our $0.01 par value common stock, at a subscription price of $0.50 per share, through a private placement. We received, in the aggregate, net proceeds of approximately $4.9 million from the rights offering and the private placement of common stock.

Note 10 — Subsequent Events

Sale of Assets

On April 27, 2010, we completed the sale of thirteen restaurants and related assets in the Washington, D.C. market to Capitol C Restaurants LLC (“Capitol C”) for $8.35 million. The sale was made pursuant to an Asset Purchase and Sale Agreement dated April 27, 2010, by and among the Company, Cosi Sandwich Bar, Inc., a wholly-owned subsidiary of the Company, Capitol C and Capitol C Holdings LLC (“Holdings”), the parent company of Capitol C. Under the terms of the Asset Purchase and Sale Agreement, $6.4 million of the purchase price was paid in cash at closing, $1.35 million is to be paid pursuant to a three-year promissory note and the balance of $0.6 million is being held in escrow subject to the satisfaction of certain conditions. The restaurants will be operated under franchise agreements between the Company and Capitol C, and Holdings has entered into a development agreement to open six additional Cosi restaurants in the District of Columbia area.

COSI INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

As a result of this sale, we will dispose of approximately $3.3 million in net furniture and fixtures, equipment and leasehold improvements, and recognize a gain on the sale of assets of approximately $5.0 million during the second quarter of fiscal 2010. In addition, our current accounts receivable and non-current note receivable will increase by $0.2 million and $1.75 million, respectively, due to the $1.35 million promissory note and the $0.6 million held in escrow.

Our 2009 net restaurant sales from the thirteen restaurants sold were approximately $18.7 million with related restaurant level operating costs and expenses of approximately $16.0 million. Additionally, there was $1.4 million of depreciation and amortization associated with these restaurants and $0.9 million of general and administrative costs. Had the sale of these restaurants occurred on the first day of our fiscal 2009, and assuming these restaurants generated the same level of sales when operated by Capitol C, the franchise royalty income recognized from these thirteen restaurants would have been approximately $0.9 million for fiscal 2009. This would have resulted in a reduction in our fiscal 2009 net loss of approximately $0.6 million.

The pro forma financial statements which were previously filed by the Company with the SEC on a Current Report on Form 8-K on April 30, 2010 are hereby incorporated by reference.

Regaining Compliance with NASDAQ Listing Standards

On April 27, 2010 we received notice from the Listing Qualifications Department of The NASDAQ Stock Market that we have regained compliance with the NASDAQ Listing Standards by curing our bid price and stockholders’ equity deficiencies. As of April 21, 2010, the bid price of our common stock had closed above the $1.00 minimum requirement for a period of 10 consecutive trading days. Additionally, based on total shares outstanding of 51,551,201, our common stock has exceeded the alternative minimum $50 million market value of listed securities requirement as required by Listing Rule 5450(b)(2)(A). We now meet all continued listing standards for the NASDAQ Global Market. As a result, we were removed from the hearings process and the scheduled hearing before the NASDAQ Hearings Panel was cancelled.

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 March 29, 2010 and March 30, 2009 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 2009 Annual Report on Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” below and elsewhere in this Quarterly Report.

OVERVIEW

System wide restaurants:

		For the Three Months Ended
		March 29, 2010												March 30, 2009
		Company-												Company-
		Owned				Franchise				Total				Owned				Franchise				Total
Restaurants at beginning of period			99				46				145				101				50				151
New restaurants opened			—				—				—				—				1				1
Restaurants permanently closed			—				2				2				4				3				7
Restaurants at end of period			99				44				143				97				48				145

As of March 29, 2010 there were 99 Company-owned and 44 franchised premium convenience restaurants operating in 18 states, the District of Columbia, and the United Arab Emirates (UAE). Subsequent to the first quarter of fiscal 2010, we sold thirteen company-owned restaurants in the District of Columbia to a franchisee (see Note 10). Subsequent to this sale, there are 86 Company-owned and 57 franchised premium convenience restaurants. During the first quarter of fiscal 2010, we closed two franchised restaurants, one in Minnesota and one in the UAE. During the first quarter of fiscal 2009, one new franchised restaurant opened in the UAE. In addition, during the first quarter of fiscal 2009, we closed four underperforming Company-owned and three franchised restaurants, of which three were in the Chicago area, two were in Pennsylvania, and two were in New Jersey.

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 sandwiches, freshly-tossed salads, Cosi bagels, hot melts, flatbread pizzas, S’mores and other desserts, and a variety of coffees along with other soft drink beverages, bottled beverages including premium still and sparkling water, teas, alcoholic beverages, and other specialty coffees. 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 operate our Company-owned restaurants in two formats: Cosi and Cosi Downtown. Cosi Downtown restaurants, which are located in nonresidential central business districts, close for the day in the early evening, while Cosi restaurants offer dinner and dessert in a casual dining atmosphere.

We are currently eligible to offer franchises in 47 states and the District of Columbia. We offer franchises to area developers and individual franchise operators. The initial franchise fee, payable to us, for both an area developer and an individual franchise operator, is $40,000 for the first restaurant and $35,000 for each additional restaurant.

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

We believe that incorporating a franchising and area developer model into our strategy will position us to maximize the market potential for the Cosi^® brand and concept consistent with our available capital and we expect that Company-owned restaurants (restaurants that we own as opposed to franchised restaurants) will always be an important part of our new restaurant growth.

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

Recent Developments

Sale of Assets

On April 27, 2010, we completed the sale of thirteen restaurants and related assets in the Washington, D.C. market to Capitol C Restaurants LLC (“Capitol C”) for $8.35 million. The sale was made pursuant to an Asset Purchase and Sale Agreement dated April 27, 2010, by and among the Company, Cosi Sandwich Bar, Inc., a wholly-owned subsidiary of the Company, Capitol C and Capitol C Holdings LLC (“Holdings”), the parent company of Capitol C. Under the terms of the Asset Purchase and Sale Agreement, $6.4 million of the purchase price was paid in cash at closing, $1.35 million is to be paid pursuant to a three-year promissory note and the balance of $0.6 million is being held in escrow subject to the satisfaction of certain conditions. The restaurants will be operated under franchise agreements between the Company and Capitol C, and Holdings has entered into a development agreement to open six additional Cosi restaurants in the District of Columbia area.

As a result of this sale, we will dispose of approximately $3.3 million in net furniture and fixtures, equipment and leasehold improvements, and recognize a gain on the sale of assets of approximately $5.0 million during the second quarter of fiscal 2010. In addition, our current accounts receivable and non-current note receivable will increase by $0.2 million and $1.75 million, respectively, due to the $1.35 million promissory note and the $0.6 million held in escrow.

Our 2009 net restaurant sales from the thirteen restaurants sold were approximately $18.7 million with related restaurant level operating costs and expenses of approximately $16.0 million. Additionally, there was $1.4 million of depreciation and amortization associated with these restaurants and $0.9 million of general and administrative costs. Had the sale of these restaurants occurred on the first day of our fiscal 2009, and assuming these restaurants generated the same level of sales when operated by Capitol C, the franchise royalty income recognized from these thirteen restaurants would have been approximately $0.9 million for fiscal 2009. This would have resulted in a reduction in our fiscal 2009 net loss of approximately $0.6 million.

The pro forma financial statements which were previously filed by the Company with the SEC on a Current Report on Form 8-K on April 30, 2010 are hereby incorporated by reference.

Regaining Compliance with NASDAQ Listing Standards

On April 27, 2010 we received notice from the Listing Qualifications Department of The NASDAQ Stock Market that we have regained compliance with the NASDAQ Listing Standards by curing our bid price and stockholders’ equity deficiencies. As of April 21, 2010, the bid price of our common stock had closed above the $1.00 minimum requirement for a period of 10 consecutive trading days. Additionally, based on total shares outstanding of 51,551,201, our common stock has exceeded the alternative minimum $50 million market value of listed securities requirement as required by Listing Rule 5450(b)(2)(A). We now meet all continued listing standards for the NASDAQ Global Market. As a result, we were removed from the hearings process and the scheduled hearing before the NASDAQ Hearings Panel was cancelled.

CRITICAL ACCOUNTING POLICIES

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires the appropriate application of certain accounting policies, many of which require us to make estimates 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. Actual results may differ from those estimates.

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 require 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.

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

Lease Termination Charges: ASC 820-30 Exit or Disposal Cost Obligations requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the end 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 840-25 Leases, we recognize rent expense on a straight-line basis over the lease term commencing on the date we take possession. We include any rent escalations, rent abatements during the construction period and any other rent holidays in our straight-line rent expense calculation.

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

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

We measure the estimated fair value of our granted stock options using a Black-Scholes pricing model and of our restricted stock based on the fair market value of a share of registered stock on the date of grant. The weighted average fair values of the stock options granted through 2005, the last time we issued stock options, were determined using the Black-Scholes option-pricing model.

We estimate stock option forfeitures in calculating the expense relating to stock-based compensation. The expected volatility is based on an average of the historical volatility of the Company’s stock, the implied volatility of market options, peer company volatility, and other factors. The average expected life represents the period of time that stock option grants are expected to be outstanding and is derived from historical terms and other factors. The risk-free interest rate is based on the rate of U.S. Treasury zero-coupon issues with remaining term equal to the expected life of stock option grants.

Income Taxes: We have recorded a full valuation allowance to reduce our deferred tax assets that relate primarily to net operating loss carryforwards. 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 carryforwards 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.

We have adopted the provisions of ASC 740-10 Income Taxes beginning in fiscal 2007. No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carryforwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions has been recorded.

REVENUE

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

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

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

COMPARABLE RESTAURANT SALES

In calculating comparable restaurant sales, we include a restaurant in the comparable restaurant base after it has been in operation for 15 full months. We remove from the comparable restaurant base any restaurant that is temporarily shut down for remodeling for a complete period in the period that it is shut down. At March 29, 2010 and March 30, 2009, there were 97 and 96 restaurants in our comparable restaurant base, respectively.

COSTS AND EXPENSES

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

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

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

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

Depreciation and Amortization. Depreciation and amortization principally relates to restaurant assets. We use the straight-line method of depreciation.

Restaurant Pre-opening Expenses. Restaurant pre-opening expenses are expensed as incurred and include the costs of recruiting, hiring and training the initial restaurant work force, travel, the cost of food and labor used during the period before opening, the cost of initial quantities of supplies and other direct costs related to the opening or remodeling of a restaurant. Pre-opening expenses also include rent expense recognized on a straight-line basis from the date we take possession through the period of construction, renovation and fixturing prior to opening the restaurant.

RESULTS OF OPERATIONS

Our operating results for the three month periods ended March 29, 2010 and March 30, 2009, expressed as a percentage of total revenues (except where otherwise noted), were as follows:

		Three Months Ended
		March 29,				March 30,
		2010				2009
Revenues:
Restaurant net sales			98.1	%			98.1	%
Franchise fees and royalties			1.9				1.9
Total revenues			100.0				100.0
Cost and expenses:
Cost of food and beverage (1)			23.4				22.2
Restaurant labor and related benefits (1)			39.4				38.2
Occupancy and other restaurant operating expenses (1)			33.4				31.9
			96.2				92.3
General and administrative expenses			12.0				13.4
Depreciation and amortization			5.0				6.9
Restaurant pre-opening expenses			—				—
Closed store costs			—				0.2
Lease termination expense			—				0.7
Gain on sale of asssets			(0.3	)			—
Total costs and expenses			111.1				111.6
Operating loss			(11.1	)			(11.6	)
Interest income			—				—
Interest expense			—				—
Other income			—				—
Net loss			(11.1	)%			(11.6	)%

Restaurant Net Sales

		Restaurant net sales
						as a % of total
		(in thousands)				revenues
Quarter ended March 29, 2010		$	27,074				98.1	%
Quarter ended March 30, 2009		$	28,124				98.1	%

Restaurant net sales. Restaurant net sales decreased 3.7%, or approximately $1.1 million, during the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009. This was due primarily to the decrease of 4.3%, or approximately $1.2 million, in net sales in our comparable restaurant base and $0.3 million in net sales related to Company-owned restaurants closed during and subsequent to the first quarter of fiscal 2009, partially offset by $0.5 million of net sales at new restaurants not yet in their sixteenth month of operation as of March 29, 2010. Comparable net sales for the quarter were adversely impacted in the month of February by severe winter weather across the mid-atlantic and northeast regions where we have a high concentration of Company-owned restaurants. For comparable restaurants, during the first quarter of fiscal 2010, our average guest check increased 1.3% and our transaction count decreased 5.6% compared to the first quarter of fiscal 2009. The increase in average check was largely due to higher catering sales in the quarter as compared to the prior year.

Franchise Fees and Royalties

		Franchise fees and royalties
						as a % of total
		(in thousands)				revenues
Quarter ended March 29, 2010		$	525				1.9	%
Quarter ended March 30, 2009		$	542				1.9	%

Franchise fees and royalties. Franchise fees and royalties decreased by 3.1%, or approximately $0.02 million, to approximately $0.5 million in the first quarter of fiscal 2010, as compared to the first quarter of fiscal 2009, due primarily to a $0.01 million decrease in franchise fees resulting from no franchise restaurant openings during the fiscal 2010 first quarter as compared to one franchise restaurant opening during the prior year quarter as well as approximately $0.01 million decrease in royalties resulting from lower franchise sales due in part to fewer franchise restaurants in operation during the first quarter of 2010 as compared to the prior year quarter.

Costs and Expenses

		Cost of food and beverage
						as a % of restaurant
		(in thousands)				net sales
Quarter ended March 29, 2010		$	6,329				23.4	%
Quarter ended March 30, 2009		$	6,237				22.2	%

Cost of food and beverage. The increase in the cost of food and beverage as a percentage of restaurant net sales during the first quarter of fiscal 2010 as compared to the comparable prior year period is due primarily to the impact on menu mix of certain new products and limited time offerings which had a higher than average cost for the product category.

		Restaurant labor and related benefits
						as a % of restaurant
		(in thousands)				net sales
Quarter ended March 29, 2010		$	10,664				39.4	%
Quarter ended March 30, 2009		$	10,744				38.2	%

Restaurant labor and related benefits. The increase in restaurant labor and related benefits as a percentage of restaurant net sales during the first quarter of fiscal 2010, as compared to the first quarter of fiscal 2009, is due primarily to the deleveraging effect on our fixed manager salaries and hourly labor of the decrease in comparable restaurant net sales primarily related to the severe winter weather experienced in some of our markets during February 2010 as well as the impact of higher state unemployment taxes.

		Occupancy and other restaurant
		operating expenses
						as a % of restaurant
		(in thousands)				net sales
Quarter ended March 29, 2010		$	9,044				33.4	%
Quarter ended March 30, 2009		$	8,967				31.9	%

Occupancy and other restaurant operating expenses. The increase in occupancy and other restaurant operating expenses, as a percentage of sales, during the first quarter of fiscal 2010, as compared to the first quarter of fiscal 2009, is due primarily to the deleveraging of occupancy costs against decreased sales at our comparable restaurant base and higher costs in the first quarter of 2010 as compared to the first quarter of 2009 for repairs and maintenance of the restaurants.

		General and administrative expenses
						as a % of total
		(in thousands)				revenues
Quarter ended March 30, 2010		$	3,321				12.0	%
Quarter ended March 30, 2009		$	3,834				13.4	%

General and administrative expenses. The decrease in general and administrative costs during the first quarter of fiscal 2010, as compared to the first quarter of fiscal 2009, is due to labor savings resulting from administrative workforce reductions that occurred during fiscal 2009, higher board fees during the first quarter of fiscal 2009 associated with the work of the special committee for reviewing strategic alternatives, lower legal costs, lower costs for third-party information technology services and lower stock-based compensation costs.

		Depreciation and amortization
						as a % of total
		(in thousands)				revenues
Quarter ended March 29, 2010		$	1,380				5.0	%
Quarter ended March 30, 2009		$	1,964				6.9	%

Depreciation and amortization. The lower depreciation and amortization costs during the first quarter of fiscal 2010, as compared to the first quarter of fiscal 2009 is due primarily to the impact of impairments recorded during and subsequent to the first quarter of fiscal 2009 as well as the continued depreciation and amortization of our comparable restaurant base.

		Restaurant pre-opening expenses
						as a % of total
		(in thousands)				revenues
Quarter ended March 29, 2010		$	—				0.0	%
Quarter ended March 30, 2009		$	4				0.0	%

Restaurant pre-opening expenses. We did not incur any restaurant pre-opening expenses during the first quarter of fiscal 2010. The restaurant pre-opening expenses during the first quarter of fiscal 2009 were related to the conversion of one franchise restaurant in Minnesota to a Company-owned restaurant subsequent to the first quarter of fiscal 2009.

		Closed store costs
						as a % of total
		(in thousands)				revenues
Quarter ended March 29, 2010		$	—				0.0	%
Quarter ended March 30, 2009		$	43				0.2	%

Closed store costs. We did not incur any closed store costs during the first quarter of fiscal 2010. The closed store costs for the three-month period ended March 30, 2009, are related to three underperforming locations where we negotiated early exit agreements with the landlords and closed those locations during the first quarter of fiscal 2009 and one underperforming location that closed at the expiration of the operating lease also during the first quarter of fiscal 2009.

		Lease termination expense
						as a % of total
		(in thousands)				revenues
Quarter ended March 29, 2010		$	1				0.0	%
Quarter ended March 30, 2009		$	202				0.7	%

Lease termination expense. The lease termination charge during the first quarter of fiscal 2010 was not material. The lease termination charge during the first quarter of fiscal 2009 is related to an underperforming location in the Midwest region where we reached an early exit agreement with the landlord.

		Gain on sale of assets
						as a % of total
		(in thousands)				revenues
Quarter ended March 29, 2010		$	87				0.3	%
Quarter ended March 30, 2009		$	—				0.0	%

Gain on Sale of Assets. The gain recognized during the first quarter of fiscal 2010 is related to the sale of a liquor license.

		Net loss
						as a % of total
		(in thousands)				revenues
Quarter ended March 29, 2010		$	(3,054	)			(11.1	%)
Quarter ended March 30, 2009		$	(3,326	)			(11.6	%)

Net loss. The approximately $0.3 million decrease in our net loss during the first quarter of fiscal 2010, as compared to the first quarter of fiscal 2009, is due primarily to a $0.5 million decrease in general and administrative expenses as well as $0.6 million decrease in depreciation expense, partially offset by lower restaurant operating margins resulting from the decrease in net sales in our comparable restaurant base.

Subsequent event. On April 27, 2010, pursuant to an Asset Purchase and Sale Agreement, the Company completed the sale of thirteen restaurants and related assets in the Washington, D.C. market to Capitol C for $8.35 million. Under the terms of this agreement, $6.4 million of the purchase price was paid in cash at closing, $1.35 million is to be paid pursuant to a three-year promissory note and the balance of $0.6 million is being held in escrow subject to the satisfaction of certain conditions.

As a result of this sale, we will dispose of approximately $3.3 million in net furniture and fixtures, equipment and leasehold improvements, and recognize a gain on the sale of assets of approximately $5.0 million during the second quarter of fiscal 2010. In addition, our current accounts receivable and non-current note receivable will increase by $0.2 million and $1.75 million, respectively, due to the $1.35 million promissory note and the $0.6 million held in escrow.

Our 2009 net restaurant sales from the thirteen restaurants sold were approximately $18.7 million with related restaurant level operating costs and expenses of approximately $16.0 million. Additionally, there was $1.4 million of depreciation and amortization associated with these restaurants and $0.9 million of general and administrative costs. Had the sale of these restaurants occurred on the first day of our fiscal 2009, and assuming these restaurants generated the same level of sales when operated by Capitol C, the franchise royalty income recognized from these thirteen restaurants would have been approximately $0.9 million for fiscal 2009. This would have resulted in a reduction in our fiscal 2009 net loss of approximately $0.6 million.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were approximately $7.1 million on March 29, 2010, compared with $4.1 million on December 28, 2009. We had negative working capital of ($2.5) million on March 29, 2010, compared with negative working capital of ($5.6) million as of December 28, 2009. The increase in working capital as of the first quarter of fiscal 2010 is primarily due to the net proceeds of $4.9 million received from our rights offering (see Note 9), partially offset by the funding of the operating loss for the period. Our principal requirements for cash in 2010 will be for working capital needs and routine maintenance of our existing restaurants.

Net cash used in operating activities during the three-month period ended March 29, 2010, was approximately $2.0 million compared with $0.9 million of net cash used in operating activities in the three month period ended March 30, 2009. The increase in cash used in operating activities during the first quarter of fiscal 2010 was the result of a higher year-over-year operating loss net of depreciation expense and the payment of certain lease termination and legal settlement obligations.

Total cash provided by investing activities was approximately $0.05 million compared to total cash used in investing activities of $0.1 million during the first quarter of fiscal 2009. The year-over-year increase in cash provided from investing activities is due to the proceeds of the sale of a liquor license partially offset by capital expenditures primarily for maintenance of existing Company-owned restaurants.

Cash provided by financing activities of approximately $4.9 million during the first quarter of fiscal 2010 is from proceeds associated with the shareholder rights offering and the private placement of shares to our executive officers and outside directors (see Note 9).

We do not have any current plans to open additional Company-owned restaurants during the remainder of fiscal 2010. However, we will continue to seek out and assess opportunities to develop new Company-owned locations in existing markets. We do expect to incur capital maintenance costs on existing Company-owned restaurants during fiscal 2010. As we currently have no credit facility or available line of credit, we expect to fund any required capital maintenance costs on existing Company-owned locations or required capital for new restaurant development, if any, from cash and cash equivalents on hand, including the cash proceeds from the sale of thirteen Company-owned restaurants in the District of Columbia, which was successfully completed subsequent to the end of the first quarter of fiscal 2010 (see Note 10), expected cash flows generated by existing Company-owned restaurants, and expected franchise fees and royalties.

We believe that our current cash and cash equivalents, the proceeds from the completed rights offering, the proceeds from the sales of the thirteen Company-owned restaurants in the District of Columbia, and the expected cash flows from Company-owned restaurant operations and expected franchise fees and royalties will be sufficient to fund our cash requirements for working capital needs and maintenance of existing restaurant locations for the next twelve months and for new Company-owned restaurant development, if any. Our conclusion is based on our expected performance for fiscal 2010 and includes a sensitivity analysis that projects varying levels of decline in consumer demand. The range of levels selected was based on our reasonable expectation of demand given the seasonality of our historical performance and the potential impact the current economic environment may have on consumer spending. In analyzing our capital cash outlays during the first quarters of fiscal 2010 and fiscal 2009, 70.6% and 59.1%, respectively, of our capital expenditures were spent on repair and maintenance costs associated with existing Company-owned locations. We currently do not expect significant levels of cash outlays for capital expenditures during the remainder of fiscal 2010.

If our Company-owned restaurants do not generate the cash flow levels that we expect, if new franchised restaurants do not open according to our expectations, if we do not generate the franchise fees and royalties that we currently expect, if we incur significant unanticipated cash requirements beyond our normal liquidity needs, or if we experience other unforeseen circumstances then, in order to fund our cash requirements, we may have to cease new Company-owned restaurant development efforts and may have to effect further labor reductions in general and administrative support functions, seek to sell certain Company-owned locations to franchisees and/or other third parties, seek other sources of financing or take other actions necessitated by the impact of such unanticipated circumstances.

There can be no assurance that we will be able to obtain such financing or sell Company-owned locations to franchisees or other third parties or that we will be able to do so in a timely manner and on acceptable terms to meet our requirements. Given the continued instability in the credit and financial markets, it may be difficult for the Company to obtain additional financing and for franchisees to obtain the financing necessary to open restaurants or to acquire Company-owned locations. An inability to access additional sources of liquidity to fund our cash needs could materially adversely affect our financial condition and results of operations.

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 March 29, 2010:

		Payments Due by Period
		(in thousands)
										Due				Due				Due
		Total				Due				Fiscal 2011				Fiscal 2013				After
Description		Obligations				Fiscal 2010				to Fiscal 2012				to Fiscal 2014				Fiscal 2014
Long-term debt (1)		$	50			$	25			$	25			$	—			$	—
Operating leases (2)			72,742				12,050				29,313				19,562				11,817
Other long-term liabilities (3)			869				315				554				—				—
Total contractual cash obligations		$	73,661			$	12,390			$	29,892			$	19,562			$	11,817

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.

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 respective leases from the date we take possession. Our obligation with respect to these scheduled rent increases has been presented as a long-term liability in other liabilities in the accompanying consolidated balance sheets and totaled $4.3 million and $4.4 million as of the end of the first quarter of fiscal 2010 and 2009, 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 long-term liabilities in the accompanying consolidated balance sheets for the first quarter of fiscal 2010 and 2009 were landlord allowances of $1.2 million and $1.4 million, respectively.

As of March 29, 2010, the Company had outstanding approximately $0.2 million 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 “Intangibles, Security Deposits and Other Assets” in the accompanying consolidated balance sheets.

In fiscal 2001, we entered into a settlement agreement involving a trademark dispute. The settlement agreement requires us to make annual payments of approximately $0.03 million through 2011. The estimated present value of those future payments is included in other liabilities in the accompanying consolidated balance sheets.

During fiscal 2008, we entered into a settlement agreement involving a claim from a former employee. The settlement agreement requires us to pay $0.3 million in an initial payment during the first quarter of fiscal 2009 and another $1.0 million in the aggregate in non-interest bearing monthly installments thereafter through 2012. The amount of this settlement is included in other liabilities in the accompanying consolidated balance sheets.

During fiscal 2009, we entered into a settlement agreement involving a customer claim alleging damages under the American with Disabilities Act with regard to access at our restaurants. The settlement requires us to pay $0.08 million in the aggregate in non-interest bearing quarterly installments commencing in fiscal 2010 through fiscal 2012. The amount of this settlement is included in other liabilities in the accompanying consolidated first quarter of 2010 balance sheets.

PURCHASE COMMITMENTS

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 78% of our food and paper products, primarily under pricing agreements that we negotiate directly with the suppliers. This agreement expires in November 2010 and we have issued a request for proposal to Distribution Marketing Advantage and other distribution organizations. We expect to complete the review and evaluation of proposals during the second quarter of fiscal 2010.

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. Although we are eligible to receive additional amounts under the agreement if certain purchase levels are achieved, no additional amounts have been received or recorded as of March 29, 2010. During the fourth quarter of fiscal 2009 we amended the marketing agreement with the Coca-Cola Company to include additional products and higher per unit amounts against the marketing allowance.

We purchase all contracted coffee products through a single supplier, Coffee Bean International, Inc. (“Coffee Bean International”). In the event of a business interruption, Coffee Bean International is required to utilize the services of a third-party roaster to fulfill its obligations. If the services of a third-party roaster are used, Coffee Bean International will guarantee that the product fulfillment standards stated in our contract will remain in effect throughout such business interruption period. This agreement expires in June 2010 and we have issued a request for a proposal to Coffee Bean International and other coffee suppliers. We intend to conclude the review and evaluation of proposals prior to the expiration of the current contract.

Self-Insurance

We have a self-insured group health insurance plan. We are responsible for all covered claims to a maximum liability of $100,000 per participant during a plan year. Benefits paid in excess of $100,000 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. For our 2010 plan year, this pre-determined dollar amount is $2.5 million.

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, 2009. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially and adversely affected, and the trading price of our common stock could decline. We do not undertake to publicly update or revise our forward-looking statements even if our future changes make it clear that any projected results expressed or implied therein will not be realized.

Listed below are just some of the factors that would impact our forward looking statements:

•		the cost of our principal food products and supply and delivery shortages or interruptions;
•		labor shortages or increased labor costs;

•

changes in demographic trends and consumer tastes and preferences, including changes resulting from concerns over nutritional or safety aspects of beef, poultry, produce or other foods or the effects of food-borne illnesses, such as E.coli, “mad cow disease” and avian influenza or “bird flu;”

•

competition in our markets, both in our existing business and locating suitable restaurant sites;

•

our operation and execution in new and existing markets;

•

expansion into new markets, including foreign countries;

•

our ability to attract and retain qualified franchisees and our franchisees’ ability to open restaurants on a timely basis;

•

our ability to locate suitable restaurant sites in new and existing markets and negotiate acceptable lease terms;

•

the rate of our internal growth, and our ability to generate increased revenue from our new and existing restaurants;

•

our ability to generate positive cash flow from existing and new restaurants;

•

fluctuations in our quarterly results due to seasonality;

•

increased government regulation and our ability to secure required governmental approvals and permits;

•

our ability to create customer awareness of our restaurants in new markets;

•

the reliability of our customer and market studies;

•

cost effective and timely planning, design and build-out of new restaurants;

•

our ability to recruit, train and retain qualified corporate and restaurant personnel and management;

•

market saturation due to new restaurant openings;

•

inadequate protection of our intellectual property;

•

our ability to obtain additional capital and financing;

•

adverse weather conditions, which impact customer traffic at our restaurants; and

•

adverse economic conditions.

The words “believe,” “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive,” “project” or similar words, or the negatives of these words, identify forward-looking statements. We qualify any forward-looking statements entirely by these cautionary factors.

Item 3.		Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our market risk exposures are related to our cash and cash equivalents 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 first quarter of fiscal 2010 we held no short-term investments and, as a result, a hypothetical one percentage point interest change from those in effect during the first quarter of fiscal 2010 would not have resulted in a fluctuation of interest income. In the first quarter of fiscals 2010 and 2009, interest income was not material.

Foreign Currency Risk

As of first quarter of fiscal 2010, all of our transactions are conducted, and our accounts denominated, in U.S. dollars. Accordingly, we are not exposed to foreign currency risk.

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 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.

Item 4.		Controls and Procedures

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 first fiscal quarter 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

Item 1:		LEGAL PROCEEDINGS

From time to time, we are a defendant in litigation arising in the ordinary course of our business, including but not limited to, claims resulting from “slip and fall” accidents, claims under federal and state laws governing access to public accommodations or other federal and state laws applicable to our business operations, employment-related claims, property damages, claims from guests alleging illness, injury or other food quality, health or operational concerns, and enforcement of intellectual property rights.

Item 1A:		RISK FACTORS

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 2009 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, 2009.

Item 6:		EXHIBITS

(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.

SIGNATURES

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 13, 2010		By:		/s/ JAMES HYATT   James Hyatt
				President,
				Chief Executive Officer, and Director
Date: May 13, 2010		By:		/s/ WILLIAM KOZIEL   William Koziel
				Chief Financial Officer (chief accounting officer)
				Treasurer and Secretary

EXHIBIT INDEX

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.