Monday
Nov232015

White Paper Highlights the Importance of an Alzheimer's Patent Filing 

The Promis Neurosciences team just published this white paper about ALS and Alzheimer's. We believe it highlights the importance of the novel target (epitope) patent filed by the company on November 9th. 

How many precision therapeutics are needed to treat a significant portion of patients with ALS and Alzheimer’s disease? 

ALS and misfolded SOD1

ProMIS has identified and patented (genus patent in USA), or has patents pending around the world, the epitope sites on misfolded SOD1 for ALS. SOD1 is 153 amino acids in length; the total number of epitopes, discovered using our proprietary methodology, on the misfolded forms of SOD1 is 8, of which two are not "active".

Therefore, we anticipate at most 6 precision therapeutic antibodies would be needed to cover ALS patients whose disease is related to misfolded SOD1.

We are actively seeking pharma collaboration to exploit this opportunity in ALS.

Alzheimer's and misfolded beta Amyloid 

Beta Amyloid, containing 43 amino acids, is a third the length of SOD1 and it too can only misfold in a limited number of ways. Using both ProMISTM and Collective Coordinates, the science team at ProMIS Neurosciences is zeroing in on identifying the maximum number of epitopes on misfolded beta Amyloid. Using these proprietary techniques our science team anticipates a total of about 8 different epitopes on misfolded strains of beta Amyloid, the first of which was submitted for patent protection on Nov.9, 2015 (and announced on Nov. 12, 2015). Having located the exact site of this first epitope, our science team is now identifying the exact location of each of the remaining seven epitopes, which upon confirmation shall also be submitted for patent protection.

Accordingly, it is anticipated that no more than 8 different therapeutic antibodies will be needed to treat the majority of Alzheimer's patients whose disease is related to misfolded beta Amyloid. In fact, we are reasonably confident the number of different precision therapeutics needed may be less than this as interestingly, the first epitope submitted for patent on Nov. 9th is common to at least two different misfolded strains of beta Amyloid.

Of interest: Promis Neurosciences Investment Thesis.

Michael Bigger. Follow me on Twitter and StockTwits. 

Friday
Nov132015

COSI Earnings Calls Notes

Q2 2015 Earnings Call August 13, 2015:

  • turnaround strategy at Cosi is on course and part of the key to this process has been the refresh initiative.

  • we are meeting or beating our expectations.

  • we are cash flow positive at the unit level.

  • We expected to see a 10% lift in comp store sales as a result of the refreshes, and we have. Now, we expect and we need to see a 40% flowthrough on those incremental sales, and we are seeing that flow-through.

  • we needed to be able to refresh a unit for between $20,000 and $150,000 and we are right on target.

  • So, we've now refreshed six units. We have seven that are currently in process and we have another 10 to 20 that will be done by year's end. All 55 that we are scheduled to complete will be done by first quarter of 2016.

  • we have enough cash on the balance sheet to do what we have planned

  • in 2016 our franchise growth will accelerate. We will get into double digits. The second is, come September we are going to start talking about how big this could become.

Q1 2015 Earnings Call May 14, 2015:

  • No current plans to raise additional funds

  • COGS & Labor Costs: Q1 was painful, it’s behind us.  I am very happy with the corrective trend line that we are seeing in Q2

  • Where we have deployed our refreshes, where we are operating at a high level, we are seeing double-digit comp store sales.

  • We have markets that are running behind.  These markets will turn.

  • “world-class” coffee.

  • Where we have deployed two of the three components to a refresh, we are seeing double-digit comp store sales.

  • We will open 1 corporate & seven franchise restaurants this year.

  • In September, we will lay out our franchise growth strategy.

  • When asked about first unveiling a flagship refreshed store, answer was June 1.

  • Entire system (55 stores) will be done by 1Q ‘16.

  • On course for cash flow breakeven by December 2015.

  • Come June: a series of coffee initiatives.

  • I’m excited with what I see.  I’m probably more excited today than I was a year ago.

Q4 2014: March 26, 2015:

  • Focus on cleaning up the brand, bringing clarity & establishing who we are.

  • Decrease menu by 25% while retaining 99% of our transactions.

  • Price increase in test restaurants with zero pushback.

  • New menu launch to deploy in 2Q.

  • Refreshes are underway

    • Image (facelift)

    • Speed (ease guest use) through technology

    • Reintroduce brand

  • by Q4: self-service kiosks begin to deploy.

  • Deploy cost control for COGS and labor

  • Cash flow positive by year end 2015.

Q3 2014: November 13, 2014:

  • Period 10 [October]: first time Cosi has achieved positive comparable sales in over two years

  • So the 10 critical points have been deployed and we've seen tremendous traffic increases as a result of that

  • engaged David Montrose to develop 10 Cosis in Miami

  • Our catering business is lighting it up. I am very excited by the results we're seeing in our catering business in fourth quarter and we have something up our sleeve for 2015 that's going to be a game changer for what we all refer to as catering.

  • We see fourth quarter of 2015 coming in at about 10% to 12% store level cash flow.

  • As a total for the year, we have projected $2 million for the refreshes.

Q2 2014: August 14, 2014:

  • The senior team is in place.

  • While we are seeing multiple markets where we are seeing significant increases in comps, we haven't seen it everywhere.

  • we are seeing significant comp gains with the markets where we have what I will call early-adapters.

  • There are four key strategic initiatives that are in play right now.

    • The first is the continued deployment of that operating system.

    • The second is that we are right-sizing our menu.

    • The third area is physical plant root.

    • The fourth is a marketing strategy that we have had in test now for 60 days, that we are seeing significant gains where we have tested. That will continue to deploy, specifically in our suburban restaurants as the year continues.

Q1 2014: May 15, 2014:

  • We have also experienced sharp sales declines in three locations in the Philadelphia market where we tested various operational and menu initiatives.

  • you are going to watch a very talented team come together and take an aggressive position to move this forward. We are not going to sit back, take it slow, and see if we can slowly move this forward. This team is very focused on taking an aggressive position to correct the past trends.

  • merchandising focus where we have increased the number of items that we sell per location, we've increased the number of SKUs that we sell at the unit level, and we are seeing a sizable uptick in comp store sales where that initiative has been fully embraced.

  • making technology a competitive advantage. You are going to see that happen over the next 12 months.

  • We have a refresh project that will launch within 30 days. We'll have our first location up and running with this refresh in Manhattan

we'll be fine as we move through the balance of the year to be able to execute our plan, given the capital we have.





 

Tuesday
Nov102015

ProMIS Neurosciences Announces Third Quarter Results

Here are the few things I am focused on. I really like the fact the company has a very small burn rate and it is also in a good position to unlock the potential of its IP.

Press Release.

As at September 30, 2015, the Company had working capital of $1,019,456. These funds are expected to fund the operations of the Company into the second quarter of 2016. 

Outlook

The Companys priorities for the next year are to focus on identifying and developing precision medicine solutions for AD and ALS.

Regarding AD, the Company will continue to expand its Intellectual Property (IP) estate by identifying novel epitope targets on misfolded strains of proteins beta Amyloid and Tau. The Companys proprietary technique, ProMISTM, and potentially other complementary and proprietary computational methods under development, will be employed to identify and confirm such novel targets. Subsequent to identification of these targets and submission of initial IP claims, the Company will be in a position to enter the product development phase by elaborating and developing specific therapeutics and companion diagnostics aimed at these targets for Alzheimers disease.

Regarding ALS, and given the Companyrobust IP estate, in particular its ownership of the exclusive rights to thegenus patent relating to misfolded SOD1 in ALS, ProMIS Neurosciences is actively looking to achieve a collaborative development partnership in this field.

On Thursday, November 12, Bigger Capital will be hosting an investor dinner for an exclusive group of investors.  At the dinner, investors will have the opportunity to network and to meet management of ProMis Neurosciences.  ProMis is a development stage biotech company harnessing the power of precision medicine to conquer Alzheimer’s disease and ALS.

We believe ProMis could be an acquisition target for many big pharma companies in the likely event that it’s precision technology uncovers targets critical to treating Alzheimers’ and / or ALS.  At the current Enterprise Value of $8mm, we believe the risk / reward profile of acquiring this powerful technology is quite compelling.  

 If you are interested in learning more about this opportunity, please read our detailed investment thesis and join us on Thursday.  Space is limited. For logistics, please contact Michael Bigger, using the contact button located at the top of the blog page. 

of Interest: Promis Neurosciences Investment Thesis

Michael Bigger. Follow me on Twitter and StockTwits.

Disclaimer: Bigger Capital and related entities are long 14.3MM shares of PMN. ProMIS is in a re-launch mode and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. Take our opinions with a grain of salt. If you find yourself relying on our views to make an investment decision it means you definitely did not do your homework about this situation. Please do not rely on our views, instead use the information as a jumping off point to begin your own independent due diligence. 

Saturday
Oct242015

Alzheimer's, Light at the End of the Tunnel

This is a fifteen minutes webcast discussing exciting new research regarding the mechanisms driving Alzheimer's disease, pointing toward a future of early diagnosis and effective treatment. ProMIS Neurosciences Inc. is a development stage biotech company harnessing the power of precision medicine to conquer Alzheimer’s disease and ALS.

Michael Bigger. Follow me on Twitter and StockTwits.


Alzheimer's: Light at the End of the Tunnel (w/ Q&A) - ProMIS Neurosciences from ProMIS™ Neurosciences, Inc. on Vimeo.

 

 

 

Sunday
Oct112015

ProMIS Neurosciences Updated Investment Thesis

 "Harnessing the power of precision medicine to treat Alzheimer's and ALS"

 ProMIS!

This post was written by Michael Bigger in collaboration with Dr. Greg Kenausis. Kenausis' contribution is highlighted by using italics. With the permision of the company, we are including non-confidential slides for your review.

 

 

 

 

Ticker: PMN.TO

Stock Price: $.08 CDN

Market Cap: $9.3MM

Enterprise Value: $8MM

Debt: None.

NOLs: $28.5MM

Share Count: 153MM

$ symbol is used for USD unless CDN is stated.

 

Opportunity

ProMISTM Neurosciences, Inc. (PMN, Toronto Stock Exchange), is a development stage biotech company that discovers and develops precision medicine solutions for early detection and effective treatment of neurodegenerative diseases, in particular Alzheimer’s disease (AD) and amyotrophic lateral sclerosis (ALS). A precision medicine solution includes both a drug and a diagnostic to select patients most likely to respond. The market size for drugs to treat Alzheimer’s alone has been estimated at up to $20 billion per year.

The enterprise value of ProMISTM  of $8MM is very low and could in returns of up to 5 times or even greater given the company's strategic technology and intellectual property. Never in my life have I seen a situation with such enormous potential and catalysts already at work to realize the potential trade at such low valuation. 

The Science and Intellectual Property (Source: Company and Dr. Kenausis)

The Company’s scientific foundation is centered on the growing knowledge base relating to diseases characterized by the presence of abnormal, misfolded proteins. Numerous diseases exhibit protein misfolding, among them certain cancers, and several neurodegenerative diseases, such as Alzheimer's disease, amyotrophic lateral sclerosis (ALS) and Parkinson’s disease (PD).

Recent published evidence indicates that for a given misfolded protein there exist multiple prion-like strains, each strain representing a specific target against which therapeutics can be developed. Accordingly, as its primary objective, the Company will focus on the discovery and development of precision therapeutics supported by companion diagnostics directed against the several strains of beta-amyloid (Aβ) in Alzheimer’s.

Historically, Alzheimer’s disease (AD) has been a frustratingly stubborn pathology for modern medicine to tackle. It is already a huge market and demographic trends indicate strong growth ahead for that market. To date, no genuinely effective therapies have been developed. The difficulties start with merely diagnosing that a patient has the disease. Until not too long ago, it was necessary to conduct a post mortem histological examination of brain tissue to confirm for certain whether a patient had AD. Of late, some progress has been made on this front, but physicians still need to conduct an array of evaluations, many of which are inevitably prone to reporting, analysis and interpretation error (e.g. family history, cognitive testing, etc.). Some advances have also been made recently involving the use of MRI and PET for AD diagnosis, but these techniques remain developmental and early-stage. The point is that diagnosing the presence and type of AD remains indirect and tricky.

In AD patients, certain proteins found in brain cells (i.e. beta amyloid and tau proteins) form unusual aggregates, and they have long been known as symptoms and potentially agents of AD. The presence of these malfunctioning proteins is an indicator of AD and would therefore be a useful target for a diagnostic application as well as for therapeutic applications. 

Why is a diagnostic of AD so important for developing successful therapies? 

For one thing, without effective diagnostics of AD, it obviously becomes very difficult to prove any novel treatment approach because ill-defined clinical study patient populations will invariably obfuscate any effect that a therapy may or may not have. Furthermore, AD may turn out to consist of an array of different types of the disease, like cancer, with each type responding optimally to different therapies. In any case, the development of a successful diagnostic would likely greatly facilitate the development an optimal target for potential therapies. 

The pharma industry has been attempting to target these errant proteins in hopes of stopping the disease progression or even reversing it. Big pharmaceutical companies like Roche, Pfizer, Eli Lilly and Johnson and Johnson did their best to come up with treatments based on an immunotherapy approach. That is, they developed antibodies or antibody-like molecules that, once administered, would help to destroy and clear these errant proteins. Until late last year, all clinical trials failed. However, at the end of last year, Biogen finally showed that such a therapeutic approach can produce a sizable benefit to AD patients. 

A gold rush is now underway to develop the most effective antibodies that would target these errant proteins, particularly beta amyloid. This is where ProMISTM Neurosciences with its proprietary ProMISTM technology has a big opportunity. ProMISTM is a statistical thermodynamic algorithm that predicts how proteins degenerate into their diseased (misfolded) forms and thereby provides a model of all the potential target regions of the protein (i.e. epitopes) against which an antibody can be designed and produced. This approach would allow to develop a specific therapeutic antibody and its related companion diagnostic, i.e. a precision medicine solution. 

The ProMISTM technology works and has been validated previously on many cancer types and neurodegenerative diseases such as Creutzfeldt-Jakob disease. Of course, ProMISTM is not the only method of identifying epitopes, and the race to find such AD epitopes is very competitive and includes many pharma companies with formidable resources at their disposal. ProMISTM does however appear to have the advantage of being a theoretical and rational approach to epitope identification while almost all other approaches are more trial-and-error/hit-or-miss. 

Based primarily on the research discoveries in Dr. Cashman’s lab, the Company has exclusive access to critical IP and proprietary know-how in the field. The Company’s patent estate consists of eight patent families issued or pending. ProMISTM utilizes its computational discovery platform, ProMIS, to predict novel targets known as Disease Specific Epitopes (DSEs) on the molecular surface of misfolded proteins. ProMISTM owns the exclusive rights to the Genus patent relating to misfolded SOD1 in ALS, and currently has a preclinical monoclonal antibody therapeutic directed against this target. 

In addition, Dr. Cashman’s lab just received a $1MM CDN grant for new discoveries which could augment the value of ProMISTM intellectual property portfolio without diluting shareholders.

History, Re-Launch, New Strategic Direction (Source: management) 

ProMISTM was an unfocused company under the tutelage of the last CEO. While building a very valuable portfolio of intellectual property since becoming public in 2008, the company ran out of cash in 2015. 

In July 2015, a new management team came on board, the company successfully raised US $2.0MM, and the Board was reconstituted. 

The four-member senior management team includes Dr. Neil Cashman, the Company’s current Chief Scientific Officer and Steven Plotkin, the company's current Chief Physics Officer. In addition, two pharmaceutical industry veterans and biotech entrepreneurs, with over 60 years’ cumulative experience in key aspects of drug development and commercialization have joined the team: Eugene Williams as Executive Chairman and Dr. Elliot Goldstein as Chief Executive Officer. 

I had several discussions with the management team and I am very impressed by their candor and their vision for ProMISTM. I furthermore take confidence in the commitment of the Board to represent what is best for shareholders based on the relationship formed through previous experience in similar situations with Director Johannes Minho Roth.   

 

 

 

 The Investment Case 

The near term investment case for ProMISTM really relies on the company successfully securing the rights to AD epitopes that it discovers. With such IP, the company or just its epitope related IP would likely be a very desirable and strategically important acquisition target of many big pharma companies. Ideally, a bidding war would erupt driving the valuation to levels orders of magnitude greater than where it stands today. The time frame for this to develop would likely be in the range of one to three years if all goes well. 

 

 

 

Risks 

ProMISTM is an early stage biotech company. The risk that the company doesn't deliver on its opportunity is highly elevated. The stock could very well trade to zero. 

The company will require a significant amount of capital to cross the finish line. The ProMIS team must achieve significant accomplishments along the way and management must communicate its vision in a narrative that keeps investors excited about the opportunity for further investment. 

 

 

 

Of Interest: Promis NeuroSciences One-Pager.

Michael Bigger. Follow me on Twitter and StockTwits.

Disclaimer: Bigger Capital and related entities are long 14.3MM shares of PMN. ProMIS is in a re-launch mode and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. Take our opinions with a grain of salt. If you find yourself relying on our views to make an investment decision it means you definitely did not do your homework about this situation. Please do not rely on our views, instead use the information as a jumping off point to begin your own independent due diligence. 

Sunday
Oct042015

Breakthrough in Understanding Neurodegenerative Diseases

On September 29, the American Neurological Association held its annual meeting in Chicago. This year's Presidential Symposium addressed the question: How Many Neurodegenerative Diseases are Caused by Prions? (A prion is a protein that can fold in multiple, structurally distinct ways, at least one of which is transmissible to other prion proteins (Source: Wikipedia).) The role of the Symposium was to give an overview of the breadth of neurogenerative diseases caused by misfolded, prion-like proteins. 

 

The American Neurological Association invited Dr. Neil Cashman, Professor at the University of British Columbia and Promis Neurosciences' Chief Scientific Officer, to join the Presidential Symposium together with Drs. Robert H. Brown, Jr., University of Massachusetts Medical School, and Henry Paulson, University of Michigan Health System. Fellow faculty members included: Drs. John Collinge, UCL Institute of Neurology, Mark Diamond, University of Texas Southwestern and J. Paul Taylor, St. Jude Children’s Research Hospital.

The panel overwhelmingly agreed on the role of prions in many neurodegenerative diseases such as Amyotrophic Lateral Sclerosis (ALS, or Lou Gehrig's disease), Alzheimer's Disease (AD), among several others. A strong consensus emerged that proteins misfold in multiple ways creating different strains that propagate causing these diseases. In the case of AD, Beta Amyloid and Tau proteins are the suspected culprits.

Such consensus of the experts in the field is new and was reached after many studies and hard work of the experts, based on newly gained scientific findings.  Over the past 10 years, Dr. Neil Cashman has been at the forefront of developing and promoting this hypothesis, which the ANA President acknowledged by congratulating Dr. Cashman at the annual meeting to much applause.

Promis Neurosciences (PMN.TO), led by Dr. Cashman, has staked its strategy on the belief that precision medicine -which includes a diagnostic to identify a specific strain of misfolded Beta Amyloid in Alzheimer's and the corresponding therapeutic- has the most potential for treating patients with AD.

This is where ProMISTM Neurosciences with its proprietary ProMISTM technology has a big opportunity. ProMISTM is a statistical thermodynamic algorithm that predicts how proteins degenerate into their diseased (misfolded) forms and thereby provides a model of all the potential target regions of the protein (i.e. epitopes) against which an antibody can be designed and produced. This approach would allow to develop a specific therapeutic antibody and its related companion diagnostic, i.e. a precision medicine solution. 

The ProMISTM technology works and has been validated previously on many cancer types and neurodegenerative diseases such as Creutzfeldt-Jakob disease. Of course, ProMISTM is not the only method of identifying epitopes, and the race to find such AD epitopes is very competitive and includes many pharma companies with formidable resources at their disposal. ProMISTM does however appear to have the advantage of being a theoretical and rational approach to epitope identification while almost all other approaches are more trial-and-error/hit-or-miss. 

Of interest: Promis Neurosciences Investment Thesis

This post was written by Michael Bigger in collaboration with Dr. Greg Kenausis. Kenausis' contribution is highlighted by using italics. 

Disclaimer: Bigger Capital and related entities are long 14.3MM shares of PMN. ProMIS is in a re-launch mode and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. Take our opinions with a grain of salt. If you find yourself relying on our views to make an investment decision it means you definitely did not do your homework about this situation. Please do not rely on our views, instead use the information as a jumping off point to begin your own independent due diligence.

Saturday
Oct032015

Investment Thesis: Crocs and its Inconsistencies

No! This post is not about my Crocs Investment Thesis. The company published a 114 pages Presentation on September 30 containing almost everything you need to know about Crocs ($CROX). Like the classic clog, some people will like $CROX as an investment, others will hate it, and most will remain neutral. I included the presentation at the bottom of this post.

This post is about the inconsistencies I uncovered after attending the Crocs Investor Day. On September 30, $CROX guided Q3 revenues lower by $10MM due to the impact of $4MM in foreign exchange (FX) erosion and $6MM of shipment holds in China.

The company also announced that it bought back $30MM of stock in Q3 compared to $23MM in Q2. Isn't this a bit aggressive considering management had visibility into a reduced performance throughout the quarter? The FX and China issues didn't arise the morning of the Investor Day.

On August 5th, Greg Ribatt, Crocs' CEO, bought $150,000 of stock, increasing his position to 701,087 shares and on August 24th, Andrew Reese, President and COO, purchased $44,000 of stock, increasing his position to 504,523 shares. Ribatt and Reese have been aggressive buyers throughout the year.

It will be a worthwhile pursuit to monitor the stock purchase activities during Q4. Unfortunately, investors will have visibility into repurchase activities only well into 2016. Management might hold back purchasing stock for their own accounts and let the company take advantage of much lower stock prices following the reduced guidance without alerting the market with Insider Form 4 filings. 

Of Interest: Crocs Investor Day - Spring Summer 2016


Michael Bigger. Follow me on Twitter and StockTwits. I own a large position in Crocs since 2009. Take my opinions about the company with a grain of salt.

 

Crocs 2015 Investor Day Presentation

 

Thursday
Oct012015

Crocs Investor Day - Spring Summer 16 Line 

I attended the Crocs Investor Day held in Boston on September 30, 2015. Here are some images of some of the products that will be introduced by Crocs for Spring Summer 2016.

The stock sold off hard on the announcement that the company reduced revenue guidance for Q4 because of FX headwinds and the hold back of $6MM in orders to some suppliers in China.

According to Piper Jaffray, the stock is now dead money in the short run. As far as we are concerned, we believe in the long term potential of the Crocs brand and we are staying put.

Michael Bigger. Follow me on Twitter and StockTwits.

 

 

 

 

 

 

 

 

Tuesday
Aug252015

One of our Readers Rants about COSI (Unedited)

Rant of the Day 
 
I admire RJ's enthusiasm and passion and would much like him to succeed in a turnaround for Cosi but whether or not they survive is dependent on creating a simple, streamlined and fantastic menu with amazing food. It's not about the store refreshes. Foodies are attracted to great food. If Cosi has the courage to focus and clip the menu by another 50% as well as the culinary ability to create one or two additional phenomenal, home run selling items, the company turns around.  If not, it doesn't.  AUVs will change only if the menu changes drastically and new customers arrive and repeat.
 
This roll out push for coffee and new Beets Bowls? Seriously, that's the reboot?  Reality check: No one gives a rat's ass about Beets Bowls...the masses certainly don't.  Beets to the average customer are a turnoff.  Beets is a word they'd rather not hear.  
To create amazing food you have to spend the money for the vision. Cosi needs to hire a top tier creative chef from fine dining. Grant them stock to create incredible and addictive food. Chipotle hired Nate Appleman a few years back. It was a great hire.
 
The Cosi message as it is today: "We're a cafeteria!! We sell everything!"  Salads! Soups! Pizza! Bowls! Coffee! Mac and Cheese! Sandwiches! Chili!  Kitchen Sink! Look at our enormous menu!  We magically do everything amazingly well!"  Great except the menu is so huge any one item gets lost in marketing, so the experience is customer potluck and most of it is mediocre and it all takes away from Cosi being able to establish an identity. Now take another step and imagine being a Cosi employee behind the counter trying to navigate that gigantic logistical menu/employee nightmare. Would that be fun to work with everyday?  Paid minimally to prepare and stay on top of 100 different food item combinations? 
 
Cosi has an identity problem with its (stuck in the 80s) all over the place menu. Too much of it either looks or tastes like cafeteria food or both.  And Cosi has a brand appeal issue.  First thing out of the gate, everyday, Cosi sells a breakfast sandwich which they call a "Squagel". It's a Cosi brand name and the name is a joke. Does Cosi believe 'happening' millennials or anyone else alive in New York City or Chicago or paid Cosi employees want to say the word "Squagel", read it, hear it or even have it anywhere near in their brains every morning?  "Squagel" is a moronic, made up word with an imaginably poor Q Score and is a failed cutesy attempt at 1980s faux branding. It serves no purpose in 2015. And ANYTIME you walk into ANY Cosi you see the "Squagel" on the menu.  Shoot me now or Kill the "Squagel" name yesterday, it's incredibly unappealing.  But outside of that... Hey, great breakfast sandwich!
 
Cosi needs five go-to dishes that people customers think about and crave while they're not at Cosi. Focus, market and build around the top 20% of sales and drop the bottom 80%.  Get rid of everything that doesn't have the possibility to be a top five item seller.  
 
Start with the ovens. They are a great and highly underutilized asset. It is a no-brainer for Cosi to utilize their beautiful, focal point COSI OVENS to actually PREPARE the food and bake other things besides that ONE decades old concept bread. Cosi chefs currently look bored and half the time as just standing around. Give them foods to create. Currently, even when a customer asks for a TBM (great but this too could have a better name) sandwich to be heated up, the helper tosses it into a backroom aluminum oven...Really?  Why?  Where is the ceremony in that? Where is the pride? Where is the fun?  Cosi has gorgeous fire ovens. Why let them sit there? USE THEM. Bake other things. Try out different breads.
 
It's about THE FOOD and it's about THE STAFF.  That's coming from someone who travels for work and eats all over the country ...expensive restaurants and amazing hole in the wall dives. A little homework for RJ: Travel and see who's doing it amazingly well: go spend an hour at Chipotle's new Pizzeria Locale in Kansas City, sit at the counter and watch the chefs at Curate in Asheville, sit at the bar and watch the oven magic done at Mozza in Los Angeles.  Eat from those kitchens. Witness the branding at those places. Watch, learn and borrow from the best. Look at the menus. Look at what the employees are wearing, listen to how the customers are being treated. For RJ, time spent doing this would reward him a thousand-fold.
 
Once again, the answer is streamline, deliver hospitality, hire a tier one chef from fine dining and create great food. Give the customers a simple list to choose from, remember, talk about and crave. At the same time, make the employees' job easier and Cosi a better place to work at. That's it.
 
Chipotle gets this.  KISS.  Keep it simple, Stupid.  They are concentrating on what works.  They make it easy for their customers and their employees.  Simple, clean, brilliant. And they have gigantic loyalty. They are doing the same thing with their Asian and pizza concepts they're launching. They're currently opening 200 stores per year. What they are doing is working.
 
Steve Ells, the CEO of Chipotle, said something great on their last quarterly conference call, "Our clients know what we serve, we keep it simple, there is no need to add items to the menu just to add items to the menu. New items are also a hassle for our employees."  
 
The latest Chipotle quarterly conference call is worth a listen for anyone interested in restaurants.  RJ should listen to it as well. It's all delivering great food, hospitality, incredible employee morale and keeping it simple:
 
 
PS - Tossing the customer carrots in a little white plastic baggie with black letters? Sure, it's healthy but everything about that makes the customer feel like they're back in grade school opening mommy's bag lunch.  It's not professional and comes across as amateur.
 
PPS - Michael, take a look at this picture of yours from Twitter- it's the panel wall at the Cosi in Plainview. All those framed photos are a metaphor for Cosi's current clutter problem and it's disservice to  employees.  Look at that wall!  Think about it....Who is going to keep that glass and those frames clean, smudge and dust free everyday?  This is an employee headache. Poor design concept. And name one great restaurant that has photos of their food on their wall. Hate food photos.
Monday
Aug242015

COSI’s Investment Thesis Unfolding at a Slower Pace

Two weeks ago COSI reported earnings for 2Q 2015. We remain bullish on the turnaround story, and we have been adding to our long position at current prices. But...

Our thesis, which we started building about a year ago, hinges on the ability of the current CEO and former franchisee RJ Dourney to turn around the aging stores and make the company profitable again. You can read our latest, detailed thesis here. With each earnings report, we get information to assess the progress relative to our targets. Key takeaways are as follows: 

  • Revenues are increasing slowly at existing stores, and costs are showing signs of improvements.

  • The store refresh has begun, with 6 stores complete to date. Another 10-20 are targeted for 2H15, with the balance (55 total stores) scheduled by end of 1Q16.

  • Cash may not be sufficient to guarantee management’s claim that no additional capital is needed in the next 12 months.

  • Management remains positive on the results and the progress to date. 

In the 2Q earnings report and conference call, there were a few key points: 

First, top-line revenues were $24mm, a 20% increase over the prior year period ($20mm). The increase represents $5.3mm contribution from Hearthstone, offset by a $1.7mm decrease in revenues from stores closed since last year, plus an increase in revenues from existing stores of about $0.7mm. Revenues are increasing at existing stores, although the pace is not as rapid as we wanted to see. 

Second, COSI recognized positive cash flow at the store level system-wide. Specifically, stores made an average profit of 1.6% of revenues. Diving deeper, here is a breakdown of costs in 2Q 2015 compared to both 2Q 2014 -also positive cash flow without Hearthstone- and sequentially to 1Q 2015 -a dismal performance. We were expecting a much bigger improvement. 

 

COSI 2Q 2014

 

 

COSI 1Q 2015

 

 

COSI 2Q 2015

Revenue

$20

 

 

$17.207

 

 

$24.027

 

Food Costs

5.122

25.61%

 

4.844

28.15%

 

6.514

27.11%

Labor

7.432

37.16%

 

7.097

41.24%

 

8.558

35.62%

Occupancy

7.078

35.39%

 

6.637

38.57%

 

8.532

35.51%

Gross Profit

$0.368

1.84%

 

$-1.371

-7.97%

 

$0.423

1.76%

  • We note an increase in food costs as a % of revenues relative to last year. We think this represents an increase in the quality of the food, which we hope will translate to customer loyalty and better pricing power down the road. 

  • We see a fairly significant decrease in labor costs, which the team tells us is due partially to an increase in labor efficiency and partially to a decrease in the cost of medical benefits. Our stated target is 30% of revenues, so there is still plenty of room for improvement. We expect this number to decline as labor efficiencies work their way through the system, although we note the potential for risk in this area if New York passes a minimum wage increase. 

  • Headline occupancy costs are slightly higher, although we are told there was a 1.5% decrease in direct occupancy costs, offset by a larger increase in “other” costs lumped in this bucket (including credit card fees and equipment for the coffee program). Our target here is 20%, but we expect much of the improvement to come from spreading these fixed costs over a larger revenue base. 

Turning now to progress on the refresh. 6 stores have been refreshed to date. On the call, RJ explicitly said he is seeing a 10% increase in sales already in those locations, with 40% flow through at a cost of $20k to $150k per store. The plan is to complete another 10 to 20 units by year end, with all stores slated for refresh done by March ‘16. 

There are a lot of moving parts making the forecasting of financials (already always hard to do) even harder. We have Hearthstone impacting total revenue, store count changing, refreshed stores impacting growth, and “non-refresh” organic growth. Since we want to be able to measure progress on a baseline when the 3Q report comes out, we developed the following baseline 3Q numbers:

 

Item

$mm or %

2014 3Q Revenue, actual:

18.6

+ Hearthstone

5.3

- Closed Stores

-1.7

Base Comparison Revenue

22.2

 

 

% of stores refreshed (6/78):

7.69%

Growth on Refresh:

10%

Expected Refresh Growth:

0.2

 

 

Organic Growth:

1%

Expected Organic Growth:

0.2

 

 

Total Growth:

0.4

Total Revenue:

22.6

 

 

 

Target 3Q 2015

 

 

 

 

Revenue

 

22.6

 

Food Costs (fixed in %)

 

6.1

27%

Labor (fixed in %)

 

7.9

35%

Occupancy (fixed in $)

 

8.5

37.8%

 

 

 

 

Gross Profit

 

0.0

0.21%

 

Essentially, we are looking for COSI to be flat to marginally profitable on a four wall basis in the third quarter.

Finally, we turn to liquidity. Key takeaway is that the cash position is good at $13.9mm, but it may not be sufficient. 

  • $13.9mm as of June 30 plus $5 million in restricted cash.

  • $8.4mm cash burn, 3 quarters at current cash burn rates, until end of March which is when RJ said the refresh would be done

  • $3.7mm to refresh all the remaining 49 stores (55 total - 6 done) at $20k to $150k, $75k average

  • That leaves a budget of just $1.8mm for a marketing campaign and or slippage in those forecasts. Without including restricted cash, it is tight. Which means that unless the refresh is sufficient to drive growth of 10% or more they may need to raise capital.

Management remains extremely positive on the outlook for sales and the results of the refresh. I have yet to meet (thankfully) the management team with a negative attitude, but we are cognizant that RJ and team have access to the numbers for the first month and a half of Q3. At this point, we have confidence that the right team is in place. But that being said, here is a timeline of management’s expectations over the last year and a half and the reality:

Cosi’s Statements

  • Spring 2014: “We know how to fix it, we know what needs to be done.”

  • Spring 2015: “Will be cash flow positive by Q4 2015”

  • Spring 2015: “We will implement new streamlined menu Boards”

  • Spring 2015: “New York City refreshes will be completed by second week of July”

  • Summer 2015: “We will not need to raise capital in the next 12 months.”

 

Reality 

  • Q2 earnings should have shown improvement at the unit level without the refreshes and without the Hearthstone contribution based on “We know how to fix it”.

  • On the Q2 Call, it became obvious that Cosi won’t be cashflow positive in Q4.

  • New Menu Boards were introduced in May and June but the were overcrowded and very hard to read. New menu boards have arrived on August 18 and they look much better. Finally!

  • We toured the NYC locations during the second week of July and we were disappointed with the refresh cadence in NYC.

  • There is no certainty and we doubt that the performance improvement will be sufficient to cover the cash needed up to the first half of 2016.

While disappointed, we know that this is the nature of a turnaround. It takes time and it is usually much slower than what is represented by management. It is just the way it is. We are happy to participate in the early part of a turnaround because we view our role as an agent for change and welcome our participation in catalyzing the situation. Early participation gives us a front row seat for learning about how management thinks at time zero which is essential to benchmark progress against our thesis.

Now, the ball is clearly in the management team’s court and they must execute. We need to see propagation of the Hearthstone metrics through the entire system in addition to the benefit of the refreshes. It is that simple.

P.S. We welcome COSI's Directors and management recent stock purchases.

Jennifer Galperin. Follow me on Twitter and Stocktwits.

Michael Bigger. Follow me on Twitter and StockTwits