There is an old saying that it is hard to kill a restaurant company and Cosi is living proof of that! 


I have been analyzing the restaurant industry for twenty years now and I have witnessed only a few other companies that have destroyed more shareholder value than Cosi.  Investing in a small capitalization company, particularly a restaurant company, you are really investing in management and management’s ability to grow and create shareholder value.


With the current Board and interim CEO being pressured by the Blum Growth Fund to make significant changes to the management and operating structure it was interesting to dive into the company latest addition to the company’s Board.


On October 24th, Stephen F. Edwards was appointed to the company's Board of Directors.  Naturally you would think that the Board would be interested in adding some one to the Board that has a keen insight into operating a restaurant company.  That being said, why not wait till you find the new CEO and let him or her appoint people to the Board that will be helpful to the new turnaround effort?


I believe that there could be another motive behind the appointment, like trying to find a buyer for the company.

After doing a little digging it appears that the “good old boy network” is alive and well on the Cosi Board.  It appears that two of Cosi’s Board members brought in a friend to help sell the company.  


I come to that conclusion by looking at the proxy for Champps.  Two current Board members of Cosi (Michael O’Donnel and Karl Okamoto) were involved with Chammps at the time it was taken private and the new Board member Stephen F. Edwards was involved with  F&H Acquisition Company, which bought Champps.  At the time that Chammps was sold, the CEO was Michael P. O’Donnell and Karl Okamoto was a member of the Board.


I would suggest that while Stephen F. Edwards may have knowledge of the restaurant industry, he does not bring to the board the operational knowledge the company so desperately needs.  He may be a great investment banker, but I do not think that selling the company is in the best interests of shareholders given that much shareholder value has been destroyed of late and, given the potential of the brand, it could be regained with interest under the right leadership. 


If my reasoning is correct here, and the current leadership is angling the company toward a sale, I would not accept less than $2 per share for my stake. 


I do not know Mark Demilio and have never engaged in a conversation with him, if I did here are some of the questions I would ask him about this move and other outstanding issues. 

  1. Why did the company feel the need to appoint a new member to the Board? 
  2. Why did you wait until October 28th to make the announcement when Stephen Edwards was appointed on October 24th?
  3. What are Mr. Edwards’s qualifications that will help the company move on from the desperate financial condition?
  4. Any progress on finding a new CEO?
  5. What qualifications are you hoping to find in the new CEO?
  6. Have you engaged Mr. Blum on his plan for the company?
  7. What is your plan for the company?
  8. Why are the company's sales trends underperforming the category?
  9. Have you seen the results from the Blum Growth fund survey?
  10. Do you believe that you have shareholder support as Chairman of the Board?
  11. Do you think you can survive a proxy fight?
  12. What are thoughts about the next capital raise for the company?


I get a lot of questions why I spend time on Cosi.  The easy answer a year ago was that I saw an opportunity for investors to make money.  That is still the case today, but now it might be more appropriate to make sure people don’t lose money on a company that could be headed for bankruptcy. 


In the past I have had numerous dialogs with the previous CEO Jim Hyatt and know of several board members of the company.   I have a lot of respect for them and their knowledge of the industry and I also have faith in their integrity.  


Nevertheless, the current situation at Cosi is deeply disconcerting.


Why is there no sense of urgency in getting the right CEO in place?  While it’s not politically correct for the interim CEO and Board to acknowledge publically that Cosi is in desperate financial shape, the reality is clear for all to see and time is running out.  The current situation seems to be completely dysfunctional and it appears that management might have other intentions besides pursuing a focused turnaround plan.


According to the Blum Growth Fund survey (available here) management needs to go.  As you can see, there are only 2 respondents that do not want to see a new CEO and Board of Directors him and his plan enacted.  70 of those that replied to the survey do want a new CEO and Board of Directors.  If the survey is an accurate representation of shareholder sentiment, it would seem that Mr. Demilio would have his work cut out for him in a proxy fight.  Unfortunately, it would appear that the company cannot wait until June to see what the results of a proxy fight would be. 


By then, the company will have burned through its cash and will be headed for Chapter 11.



Howard Penney

Managing Director


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