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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the quarterly period ended July 2, 2012

OR

For the transition period from          to          

Commission File No. 000-50052

COSÌ, INC.

(Exact name of registrant as specified in its charter)

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 x  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 x  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):

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

Number of shares of Common Stock, $.01 par value, outstanding as of August 06, 2012: 73,121,519.

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COSI, INC.

Index to Form 10-Q

For the six-month period ended July 2, 2012

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Cosi, Inc.

Consolidated Balance Sheets

As of July 2, 2012 and January 2, 2012

(dollars in thousands)

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

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Cosi, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

For the Three and Six Month Periods Ended July 2, 2012 and June 27, 2011

(dollars in thousands, except share and per share data)

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 Six Months Ended July 2, 2012

(unaudited)

(dollars in thousands, except share data)

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Cosi, Inc.

Consolidated Statements of Cash Flows

For the Six-Month Periods Ended July 2, 2012 and June 27, 2011

(dollars in thousands)

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

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 January 2, 2012 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 and six-month periods ended July 2, 2012 and June 27, 2011 are not indicative of the results for the full fiscal year.

This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 2, 2012, 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 January 2, 2012.

Note 2 — Stock-Based Compensation Expense

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

As of July 2, 2012 and June 27, 2011, all compensation expenses related to stock options granted under the Company’s various incentive plans have been recognized in full. In addition, as of July 2, 2012, there was approximately $0.8 million of total unrecognized compensation expense related to restricted stock shares 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 2016.

In the six-months ended June 27, 2011, we granted and issued 98,000 restricted stock shares and 100,000 restricted stock units of our authorized but unissued common stock to key employees. The vesting of these grants occurs as follows: (i) 20% of the stock shares and stock units vested on the grant date, and (ii) an additional 20% of the stock

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COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

shares and stock units 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 for the grants made during that period, based on the closing price of our common stock on the date of the grants, was approximately $0.3 million. We did not grant any restricted stock shares to employees in the six months ended July 2, 2012. During the same period, we converted 365,000 previously issued restricted stock units into shares of our common stock.

In the six months ended July 2, 2012 and June 27, 2011, we issued 172,410 and 110,620 shares, respectively, of our restricted common stock to members of the Board of Directors pursuant to the 2005 Plan. These shares had an aggregate value of approximately $0.2 million and $0.1 million, respectively, and vested upon issuance.

Stock-based compensation expense relating to restricted stock grants of approximately $0.1 million is included in the accompanying consolidated statement of operations for each of the quarters ended July 2, 2012 and June 27, 2011. For the six months ended July 2, 2012 and June 27, 2011, the stock-based compensation expense relating to restricted stock grants is approximately $0.2 million and $0.3 million, respectively.

During the three months ended July 2, 2012, 8,300 shares of previously issued restricted common stock were forfeited. There were no forfeitures of restricted stock during the three months ended June 27, 2011. During the six months ended July 2, 2012 and June 27, 2011, 8,500 and 42,000 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 immaterial during the six-month period ended July 2, 2012 and approximately $0.1 million during the six-month period ended June 27, 2011. The accompanying consolidated statement of operations for the six months ended June 27, 2011 reflects the reversal of approximately $0.02 million of previously amortized costs related to these forfeited shares.

Note 3 — Earnings Per Share

Basic earnings per share is calculated by dividing the net income available to common shareholders by the weighted-average common shares outstanding during each period. Diluted earnings per share (“diluted EPS”) is calculated using income available to common shareholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include unvested stock and common stock related to stock options. Diluted EPS considers the impact of potentially dilutive securities except in periods when there is a net loss because the inclusion of these securities would have had an anti-dilutive effect. As of July 2, 2012 and June 27, 2011, there were, respectively, 1,180,950 and 188,800 unvested restricted shares of common stock outstanding and 157,834 and 447,228 out-of-the-money stock options to purchase shares of common stock. The unvested restricted shares of common stock meet the requirements for participating securities and, hence, 180,950 of them were included in the computation of diluted earnings per share for the period of net income only and not in the periods of net loss as the effect would have been anti-dilutive. Since the remaining 1,000,000 unvested restricted shares were contingently

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COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

issued, and are subject to certain market conditions, they were not included in the calculation of basic or diluted earnings per share in any of the periods presented. The outstanding stock options to purchase shares of common stock also meet the requirements of participating securities for purposes of calculating diluted EPS but were not included since they were out-of-the-money. There were no unvested restricted stock units as of July 2, 2012 and 255,000 as of June 27, 2011. The unvested restricted stock units do not meet the requirements for participating securities and were not included in the computation of basic and diluted earnings per share.

Note 4 — Asset Impairments

In accordance with FASB Accounting Standards Codification Topic 360 (ASC Topic 360), Property, Plant & Equipment, we evaluate possible impairments 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 period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.

We recorded asset impairment charges of approximately $0.1 million during the six months of fiscal 2011 related to one underperforming restaurant and none during the six months of fiscal 2012.

Note 5 — Lease Termination Costs

The lease termination costs incurred during the six months ended July 2, 2012 and June 27, 2011 were immaterial and relate to one closed location during the current quarter and to a subleased location during the 2011 second quarter. Future store closings, if any, resulting from our decision to close underperforming locations prior to their scheduled lease expiration dates may result in additional lease termination charges. 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. We recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan.

Note 6 — Contingencies

From time to time, we are a defendant in litigation arising in the ordinary course of our business.  As of the date of this report, there are no legal proceedings that would require accrual or disclosure under ASC 450.

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 July 2, 2012, we had net operating loss (“NOL”) carryforwards of approximately $208.8 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

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COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

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 rights offering that we filed during our first quarter of fiscal 2010 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. The purchase of shares of our common stock pursuant to the rights offering and private placement of common stock that we completed during the third quarter of fiscal 2012 may trigger an ownership change with respect to our common stock (see Note 8).

We 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.

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 — Rights Offering and Private Placement of Common Stock

On July 9, 2012, we completed a shareholders’ rights offering to our shareholders of record as of May 24, 2012. We issued a total of 19,661,844 shares of our $0.01 par value common stock at a subscription price of $0.65 per share. As part of the rights offering, our executive officers and outside directors purchased an aggregate of 2,534,323 shares of our $0.01 par value common stock, at a subscription price of $0.65 per share, through a private placement, based on the number of shares that would have been available to them had they executed their basic and oversubscription privilege in the rights offering. We received gross proceeds of approximately $12.8 million from the rights offering and the private placement of common stock which we intend to use for growth and general corporate purposes, which may include, but are not limited to, working capital and capital expenditures.

Note 9 — Other Events

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

On May 25, 2012, we received notice from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share required for continued inclusion on the Nasdaq Global Market under Nasdaq Listing Rule 5450(a)(1). The notification letter states that we will be afforded 180 calendar days, or until November 21, 2012, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of the Company’s common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of ten consecutive business days. We intend to actively monitor the bid price for our common stock between now and November 21, 2012, and will consider all available options to resolve the deficiency and regain compliance with the Nasdaq minimum bid price requirement.

Additionally, on June 15, 2012, we received notice from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, for the last 30 consecutive business days, the market value of the Company’s listed securities (“MVLS”) had closed below the minimum $50,000,000 required for continued listing on The Nasdaq Global Market under Nasdaq Listing Rule 5450(b)(2)(A). The notification letter states that the Company will be afforded 180 calendar days, or until December 12, 2012, to regain compliance with the minimum MVLS requirement. In order to

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COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

regain compliance, the Company must maintain a minimum MVLS of at least $50,000,000 for a minimum of ten consecutive business days.

On August 8, 2012, 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 the market value of listed securities deficiency. The notification letter states that for the 10 consecutive business days, from July 25, 2012 to August 7, 2012, the Company’s market value of listed securities has been $50,000,000 or greater.

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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  July 2, 2012 and June 27, 2011 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 2011 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:

As of July 2, 2012, there were 79 Company-owned and 54 franchised restaurants operating in 17 states, the District of Columbia, and the United Arab Emirates (“UAE”). During the six months ended July 2, 2012, we closed one Company-owned restaurant in Illinois. During the same period, one franchised restaurant opened in New Jersey and three closed, one of each in UAE, New Jersey, and Pennsylvania. Subsequent to the end of the second quarter of fiscal 2012, one franchised restaurant in Oklahoma  closed.

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, breakfast wraps, Cosi® Squagels®, hot melts, flatbread pizzas, S’mores and other desserts, and a variety of coffees along with other soft drink beverages, bottled beverages including premium still and sparkling water, teas, alcoholic beverages, and other specialty coffees and beverages. Our restaurants offer lunch and afternoon coffee in a counter-service format, with most offering breakfast and/or dinner and dessert menus as well.

We are currently eligible to offer franchises in 46 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

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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

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

On May 25, 2012, we received notice from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share required for continued inclusion on the Nasdaq Global Market under Nasdaq Listing Rule 5450(a)(1). The notification letter states that we will be afforded 180 calendar days, or until November 21, 2012, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of the Company’s common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of ten consecutive business days. We intend to actively monitor the bid price for our common stock between now and November 21, 2012, and will consider all available options to resolve the deficiency and regain compliance with the Nasdaq minimum bid price requirement.

Additionally, on June 15, 2012, we received notice from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, for the last 30 consecutive business days, the market value of the Company’s listed securities (“MVLS”) had closed below the minimum $50,000,000 required for continued listing on The Nasdaq Global Market under Nasdaq Listing Rule 5450(b)(2)(A). The notification letter states that the Company will be afforded 180 calendar days, or until December 12, 2012, to regain compliance with the minimum MVLS requirement. In order to regain compliance, the Company must maintain a minimum MVLS of at least $50,000,000 for a minimum of ten consecutive business days.

On August 8, 2012, 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 the market value of listed securities deficiency. The notification letter states that for the 10 consecutive business days, from July 25, 2012 to August 7, 2012, the Company’s market value of listed securities has been $50,000,000 or greater.

Rights Offering and Private Placement of Common Stock

On July 9, 2012, we completed a shareholders’ rights offering to our shareholders of record as of May 24, 2012. We issued a total of 19,661,844 shares of our $0.01 par value common stock at a subscription price of $0.65 per share. As part of the rights offering, our executive officers and outside directors purchased an aggregate of 2,534,323 shares of our $0.01 par value common stock, at a subscription price of $0.65 per share, through a private placement, based on the number of shares that would have been available to them had they executed their basic and oversubscription privilege in the rights offering. We received gross proceeds of approximately $12.8 million from the rights offering and the private placement of common stock which we intend to use for growth and general corporate purposes, which may include, but are not limited to, working capital and capital expenditures.

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Critical Accounting Policies

Our discussion and analysis of our consolidated financial condition and results of operations is based upon the consolidated financial statements and notes to the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable and generally accepted for companies in the restaurant industry. We believe that the following addresses the more critical accounting policies used in the preparation of our consolidated financial statements and requires management’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. There have been no material changes in the application of our most critical accounting policies and estimates, judgments and assumptions during the second quarter of fiscal 2012.

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

Lease Termination Charges: ASC 420-10-30 Exit or Disposal Cost Obligations requires companies to recognize a liability for the costs associated with an exit or disposal activity when the liability is incurred, rather than at the time of a commitment to an exit or disposal plan. For all exit activities, we estimate our likely liability under contractual leases for restaurants that have been closed. Such estimates have affected the amount and timing of charges to operating results and are impacted by management’s judgments about the time it may take to find a suitable subtenant or assignee, or the terms under which a termination of the lease agreement may be negotiated with the landlord.

Accounting for Lease Obligations: In accordance with ASC 840-10-25 Leases, we recognize rent expense on a straight-line basis over the lease term commencing on the date we take possession. We include any rent escalations, rent abatements during the construction period and any other rent holidays in our straight-line rent expense calculation.

Landlord Allowances: In accordance with ASC 840-10-25 Leases, we record landlord allowances as deferred rent in other long-term liabilities on the consolidated balance sheets and amortize them on a straight-line basis over the term of the related leases.

Stock-Based Compensation Expense:  In accordance with ASC 718-10-25 Compensation — Stock Compensation we recognize stock-based compensation expense according to the fair value recognition provision, which generally requires, among other things, that all employee share-based compensation 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.

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Income Taxes: We have recorded a full valuation allowance to reduce our deferred tax assets that relate primarily to net operating loss carry-forwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carry-forwards based on the Company’s operating results. A positive adjustment to income will be recorded in future years if we determine that we could realize these deferred tax assets.

Revenue

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

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

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

COMPARABLE RESTAURANT SALES

In calculating comparable restaurant sales, we include a restaurant in the comparable restaurant base after it has been in operation for 15 full months. We remove from the comparable restaurant base for the period any restaurant that is temporarily shut down for remodeling during that period. As of July 2, 2012 and June 27, 2011, there were 79 and 81 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.

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RESULTS OF OPERATIONS

Our operating results for the three and six-month periods ended July 2, 2012 and June 27, 2011, expressed as a percentage of total revenues (except where otherwise noted), were as follows:

(1) These are expressed as a percentage of restaurant net sales versus all other items expressed as a percentage of total revenues

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Restaurant Net Sales

Restaurant net sales: Restaurant net sales decreased 3.0%, or approximately $0.8 million, in the three months ended July 2, 2012, as compared to the same period in fiscal 2011, due to an approximately $0.5 million decrease in net restaurant sales related to Company-owned restaurants closed during and after the second quarter of fiscal 2011, as well as an approximately $0.3 million, or 1.3%, decrease in net sales in our comparable restaurant base. The decrease in comparable restaurant net sales was comprised of 2.1% decrease in traffic, partially offset by a 0.8% increase in average check price.

In the six months ended July 2, 2012, restaurant net sales increased 0.3%, or approximately $0.1 million, as compared to the six months ended June 27, 2011, due to an increase of approximately $1.1 million, or 2.2%, in net sales in our comparable restaurant base, partially offset by a decrease of approximately $1.0 million in net sales related to Company-owned restaurant closed during and after the first quarter of fiscal 2011. The 2.2% increase in comparable restaurant net sales was comprised of 1.7% increase in traffic and 0.5% increase in average check price.

Franchise Fees and Royalties

Franchise fees and royalties: In the three and six months ended July 2, 2012, franchise fees and royalties increased by 25.8% and 16.8%, respectively, or approximately $0.2 million in each of the periods, as compared to the three and six months ended June 27, 2011. The increase is due primarily to the franchise fees recognized during the second quarter of fiscal 2012 resulting from two cancelled area development agreements, as well as to the higher royalties resulting from an increase in comparable franchise restaurant net sales in the six months ended July 2, 2012.

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Costs and Expenses

Cost of food and beverage: The increase in cost of food and beverage, as a percentage of restaurant net sales, during the three and six months ended July 2, 2012, is due primarily to higher costs of certain commodities, including poultry, the impact on total menu mix of an increase in sales of breakfast daypart items and salads which carry a higher cost of goods as a percentage of net sales, and the impact of a one-time vendor incentive received during fiscal 2011, partially offset by the favorable impact of menu price increases.

Restaurant labor and related benefits: The decrease in restaurant labor and related benefits, as a percentage of restaurant net sales, is due primarily to savings realized from better deployment of labor hours during peak and non-peak hours of operation, as well as savings on certain healthcare related benefits, partially offset by the unfavorable impact on labor of the decrease in comparable net restaurant sales during the second quarter of fiscal 2012.

Occupancy and other restaurant operating expenses: The increase in occupancy and other restaurant operating expenses in the three months ended July 2, 2012, as a percentage of restaurant net sales, is due primarily to the unfavorable effect on fixed operating expenses of the decrease in comparable net restaurant sales, the increase in

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paper and packaging costs resulting from higher costs for resin-based packaging, the higher credit card fees resulting from greater usage and an increase in rates, and higher fixed occupancy-related costs.

The decrease in occupancy and other restaurant operating expenses in the six months ended July 2, 2012, as a percentage of restaurant net sales, is due primarily to the leveraging effect on fixed operating expenses of the increase in comparable net restaurant sales, partially offset by the increase in paper and packaging costs resulting from both a year-over-year increase in catering sales as a percentage of total sales and the higher costs for resin-based packaging, the higher credit card fees resulting from greater usage and an increase in rates, and the higher costs for repairs and maintenance of existing Company-owned restaurants.

General and administrative expenses: The decrease in general and administrative expenses in the three and six months ended July 2, 2012 of approximately $0.5 million and $0.7 million, respectively, is due primarily to lower third-party professional fees and lower costs for marketing materials and advertising media expense, partially offset by the cost of certain relocation expenses in connection with the CEO appointment.