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May 6, 2021 – The Debtors filed a First Amended Chapter 11 Plan of Reorganization and a related Disclosure Statement [Docket Nos. 333 and 334, respectively]. The Debtors have not filed blacklines to show changes to versions of the documents filed on April 30th, but there appear to be several changes as to the treatment of Class 2 (“Rollup Note Claims”) and Class 6 (“General Unsecured Claims”) which are highlighted in the summary table below.
In an May 7th filing, the Debtors did ultimately file blacklines of the Plan and Disclosure Statement [Docket No. 336]
In their April 30th filings, including an emergency motion (now granted) to use a scheduled May 11th hearing as an opportunity to have their Disclosure Statement approved, the Debtors make clear that they have one last chance at survival: the ability to acess up to $10.0mn of funding that may be available from the newly established Restaurant Revitalization Fund (the "RRF"). The Small Business Administration has been accepting applications to tap the $28.6bn RRF from May 3rd but has warned that the "RRF is underfunded, and is likely to run out of funds soon after the application process begins." The issue for the Debtors is that they believe the safer reading of existing (and unclear) SBA guidance is that access to the RRF will require them to have a confirmed Plan and that their path to Plan confirmation will need to be shorter than the "conventional confirmation timetable of at least 75 days."
In a declaration in support of approval of the Disclosure Statement [Docket No. 335], the Debtors’ CRO lay out the "life-threatening" challenges facing the Debtors and their need for a truncated Plan confirmation timetable: “The urgent need to apply promptly upon the opening of the application process presents a life-threatening challenge for the Debtors. Since the Debtors began formulating the Plan, the SBA issued guidance in the form of the Program Guide and the Sample Application. As described in the Motion, the SBA’s available guidance is not clear [The SBA clearly not understanding that the terms "approved" and "confirmed" are enormously important terms of art in the bankruptcy context]. The Sample Application asks whether the applicant is “Operating under an approved plan of reorganization under either a Chapter 11, Chapter 12 or Chapter 13 bankruptcy,” and adds that if so, the applicant is eligible. See Sample Application at p. 4. The Sample Application also states that if the applicant has “[f]iled for either a Chapter 11, Chapter 12 or Chapter 13 bankruptcy but no plan of reorganization has been approved (Applicant is not eligible).”
The Program Guide refers to whether the Debtors are 'operating under an approved (confirmed) plan of reorganization under a Chapter 11 bankruptcy.' FN3 See Program Guide at pp 4-5. However, at the April 13th public meeting with the Independent Restaurant Coalition, in the context of a discussion about the requirement that an applicant must not be “permanently closed,” but may be “temporarily closed,” Mr. Kelley stated, 'With respect to bankruptcy, if there’s been a liquidation, then that would be ‘permanently closed,’ you’re out. But if you’re working on your reorganization plan, you are in.' This statement appears at approximately 19:20 of the above-cited video. Considering all of the circumstances, I believe that to be able to answer the above-referenced question from the Sample Application, or a comparable question, on the 'live' application form in a manner that will not prompt denial of the Debtors’ application, the Debtors will need to have some form of conditional confirmation from the Bankruptcy Court of their Plan at the time when they submit their application, so that they can, in good faith, indicate that they are “operating under an approved plan of reorganization under either a Chapter 11, Chapter 12 or Chapter 13 bankruptcy.
Under a conventional confirmation timetable of at least 75 days, the RRF will very likely have run out of funds well before the Debtors reach the confirmation stage."
FN3: While the Program Guide adds the parenthetical “(confirmed)” following the word “approved,” the Sample Application uses only the word “approved” by itself and without elaboration, and makes no mention of the word “confirmed” or any variation thereof. To the best of my knowledge, the “live” application is identical to the Sample Application in this respect.
Its not just the SBA that is fudging the approved/confirmed distinction, with the Debtors asking for "some form of conditional confirmation" from the Court fully aware that even with an accelerated timetable they cannot get the Plan confirmed in the two weeks they believe they have left. The Debtors provide: "if ‘word on the street’ is correct, the Debtors have a mere two weeks to be in a position to check the box certifying that they are ‘operating under an approved plan of reorganization…"
The Debtors' motion to approve the Disclosure Statement reads: “The Debtors commenced these cases in February, 2020 and had a sound business plan to restructure their affairs and be in a position to emerge from chapter 11 within a matter of months. Those best laid plans vanished just four weeks into the case when the once-in-a generation pandemic thrust the world into a lockdown. The lockdown caused the Debtors’ revenues to plummet by as much as 80% literally overnight.
The Debtors thought they found a life-line in the Paycheck Protection Program, only to find the door to this program closed to those most in need of the funding – chapter 11 debtors. The Debtors then proceeded to cut every conceivable expense and seek financing or capital infusions from innumerable sources. While the effort to shave expenses was quite successful, the combination of a sustained erosion in revenues and an inability to line up any debt or capital source has put the Debtors on the brink of conversion and liquidation under chapter 7. Conversion of these cases would certainly result in no recovery for any creditor, save the DIP Lender.
Recently, Congress has established the Restaurant Revitalization Fund as part of the recently approved stimulus package. Unlike the PPP loan program that provided that anyone ‘involved in a bankruptcy’ need not apply, this grant program provides that any debtor ‘operating under an approved chapter 11 plan’ is eligible. This program is set to open in early May, and it has been reported from credible sources that the funding is inadequate, such that applicants who do not submit their applications as soon as the window for applications opens will not be approved for the grant. Under the Debtors’ calculations, they would be entitled to approximately $10 million under the RRF program. This amount, combined with other limited sources of revenue, would be adequate to fund and confirm a plan of reorganization.
However, the problem facing the Debtors is ‘time.’ A typical plan confirmation process takes a minimum of 75 days. The Debtors do not have 75 days, and if ‘word on the street’ is correct, the Debtors have a mere two weeks to be in a position to check the box certifying that they are ‘operating under an approved plan of reorganization,’ or they will be shut out of the life-line for the second time in the past 12 months. If the Debtors are not able to participate in this program, they believe they will have no choice but to convert the cases to chapter 7. This will result in loss of jobs, and no recovery for anyone but the DIP Lender (and the DIP Lender will take a significant haircut).
Out of other options, the Debtors are filing this motion to seek an expedited hearing to conditionally approve their disclosure statement and conditionally confirm their plan of reorganization on May 11th. The Debtors would then apply for their grant, and schedule a hearing in late June or early July after a reasonable solicitation period to approve their disclosure statement and confirm their plan on a final basis. The Debtors have had discussions with their largest pre-petition secured creditors, their DIP Lender, and their largest unsecured creditor, and they believe that these primary stakeholders will support the relief requested herein and confirmation of the plan. The Debtors believe that they will be able to meet all of the conditions to confirm their plan, and they will be able to confirm and go effective on their plan, if, and only if, they are able to obtain the grant. This is Cosi’s last gasp to survive a pandemic that has been the cause of death for hundreds of restaurants.”
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):
- Class 1 (“Existing Secured Lender Claims”) is impaired and entitled to vote on the Plan. Holders of Existing Secured Lender Claims…shall receive one hundred percent (100%) of the New Common Stock, subject to dilution by any future issuance of New Common Stock.
- Class 2 (“Rollup Note Claims”) is impaired and entitled to vote on the Plan. Following the Effective Date and the Debtors’ and/or Reorganized Debtors’ receipt of a sufficient portion of the RRF Grant to enable them to make all distributions required under Article III of the Plan to all members of Classes 2, 5, and 6, each Holder of a Rollup Note Claim, in full and final satisfaction, release, settlement, and discharge of such Rollup Note Claim, shall receive payment in Cash in the amount of twenty percent (20%) of such Rollup Note Claim, payable as follows: fifteen and one half percent (15.5%) on the sixtieth (60th) day following the Effective Date, and four and one half percent (4.5%) on the first anniversary of the Effective Date, except to the extent that a Holder of a Rollup Note Claim has agreed to less favorable treatment or has been paid previously. Notwithstanding the foregoing, in the event that Class 6 votes to accept the Plan under section 1126 of the Bankruptcy Code and the Plan becomes Effective, the Holders of Class 2 Claims shall waive, and shall be deemed to have waived, any distribution or other recovery of any kind on account of their Class 2 Claims.
- Class 3 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 4 (“Non-Tax Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 5 (“Convenience Class Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 6 (“General Unsecured”) is impaired and entitled to vote on the Plan. Following the Effective Date and the Debtors’ and/or Reorganized Debtors’ receipt of a sufficient portion of the RRF Grant to enable them to make all distributions required under this Article III of the Plan to all members of Classes 5 and 6, each Holder of an Allowed General Unsecured Claim, in full and final satisfaction, release, settlement, and discharge of such Allowed General Unsecured Claim, shall receive payment in Cash in the amount of twenty percent (20%) of such Allowed General Unsecured Claim, payable as follows: fifteen and one half percent (15.5%) on the sixtieth (60th) day following the Effective Date, and four and one half percent (4.5%) (the “Anniversary Component”) on the first anniversary of the Effective Date.
- Class 7 (“Intercompany Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 8 (“Old Common Stock”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 9 (“Subsidiary Equity Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
The Disclosure Statement [Docket No. 328] attached the following exhibits:
- Exhibit A: Plan (Separately filed at [Docket no. 326])
- Exhibit B: Disclosure Statement Approval Order (To be filed)
- Exhibit C: Prepetition Organizational Chart
- Exhibit D: Liquidation Analysis
- Exhibit E: Projections (To be filed)
Proposed Key Dates
- Voting Deadline: June 21, 2021
- Final Disclosure Statement/Plan Objection Deadline: June 21, 2021
- Confirmation Hearing Date: June 30, 2021
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Declaration”), Vicki Baue, Cosi's Vice President and General Counsel, detailed the events leading to Cosi’s Chapter 11 filing, a recounting which effectively acknowledges the death of the Debtors' legacy "customer facing locations" and urges stakeholders to see the Debtors as "blessed to find themselves with an already successful and growing catering business."
Blessings, however come in many disguises, and this one certainly gets dressed up, with the Declaration characterizing the growth of the catering business as something near miraculous, although the numbers may suggest more mundane growth. The Declaration notes that in 2010 catering sales contributed $6.9mn in net annual sales, a figure that rises to the current $10.0mn after the Debtors' "transformation." The Declaration prefers to characterize the contribution of the catering business in a more flattering light, noting that over the 10-year period the percentage of sales contributed by the catering business rose from 6.5% to greater than 50%; this happening in a period when revenue derived from the Debtors' customer facing locations dropped from $100.0mn to just $10.0mn. But why focus on an ugly denominator when one can focus on a palatable numerator? The Declaration sums up how we should view the Debtors' cozy future with: "Cosi's continued focus on its catering business as the driver of its business should yield increased profits while also following consumer trends away from in-store dining and toward off premises delivered dining….This is not…a typical 'Chapter 22' case, in which a debtor attempts to accomplish the same objectives as in an initial chapter 11 case or to liquidate its assets. The Company's old business model does not work any longer. The Company is already seeing, however, that its new business model, revolving around its catering business, does work. These Chapter 11 Cases are intended to allow the new Cosi to maximize the value in this healthy and growing business for the benefit of the Company's stakeholders."
The "Old Business Model"
The Declaration does provide some insight into the decline of the Debtors' legacy business, although even this is a somewhat rushed attempt to brush over the (second) death of that legacy business in favor of a focus on the Debtors' (second) rebirth as a catering company. Before eventually acknowledging macro-level factors (eg shifting consumer preferences, higher labor costs, unfavorable lease terms ands increased competition…including from online platforms) which have faced numerous other restaurant chains as they edged towards (and into) bankruptcy, the Declaration places a significant weight as to its demise on the death of Lloyd I Miller III, a principal at Milfam, a lender (and thanks to the first Chapter 11) reluctant sponsor which subsequently withdrew support and left the Debtors underfunded, and (although only briefly discussed) the impact of its falling out with its former principal supplier, (now its current, largest unsecured creditor) Gordon Food Services.
Why the Debtors lost the support of Milfam and were unable to find replacement funding such that the "customer experience" was badly damaged…or why the Debtors fell out with their main supplier (in hindsight a "disruptive and a monumental event") is not discussed. The Declaration states: "
The Debtors emerged from the 2017 Chapter 11 Cases on May 10, 2017. Almost immediately thereafter, however, the Debtors experienced several challenges – some of which were unique to them, and others of which are common to the restaurant industry. These challenges combined to lead the Debtors to where they are today – blessed to find themselves with an already successful and growing catering business, but one that is burdened by the costs associated with their historically predominant business model of operating restaurants.
In early 2018, however, Mr. Miller died and Milfam thereafter decided to cease all of its funding support to the Company and sought to extricate itself from its investment in Cosi [Lloyd I Miller III was a principal at stakeholder Milfam which prior to the Debtors' first bankruptcy held 66% of Cosi' s indebtedness; and, after that bankruptcy, held a 50% equity position in Cosi in addition to a continued 66% position in respect of debt].
As a result, much of the year 2018 for the Company revolved around negotiating the terms of its divorce from Milfam following the death of Mr. Miller, and dealing with the turmoil and disruption caused by this event. The divorce finally occurred in December 2018 when the AB entities purchased all of Milfam's interest in Rollup Notes and its interest in LIMAB, as well as substantially all of the equity in Cosi formerly owned by Milfam. Due to the sudden and severe reduction in available funding to the Company, the Company had no choice but to curtail its expenses by reducing its cost of goods and labor expenses.
Managing supply cost meant narrowing Cosi's menu offerings and changing a significant number of ingredients and products, while managing labor costs through a streamlined staffing model meant that the customer experience was changed and customer throughput at a Cosi restaurant during its busy dining periods was decreased. The end result was fewer customers than the Company anticipated when it emerged from the 2017 Chapter 11 Cases.
At the same time, the Company's relationship with its broad line supplier, Gordon Food Services, terminated, and U.S. Foods was brought in as the new broad line supplier. A change in broad line supplier is disruptive and a monumental event for a restaurant business, and this only increased the challenges the Company faced in 2018.
In 2019, although the challenges of 2018 were weathered, the Debtors' cash flow available for operations and for debt service continued to be negatively affected by overall economic conditions within the ‘fast-casual restaurant’ industry, which in turn negatively affected sales and restaurant-level profits. Among these factors were (and are) shifting consumer tastes and preferences, growth in labor and commodity costs, and unfavorable lease terms. In addition, the proliferation of other fast casual and quick-service restaurants as well as online delivery platforms have created new competition for the Debtors' potential 'in-store' customers. These negative factors required the Debtors to make additional significant borrowings under the Exit Credit Agreement from LIMAB (which was now owned 100% by the AB Funds) during calendar year 2019.
About the Debtors
According to the Debtors: "Cosi is an international fast-casual restaurant. Cosi is recognized for its signature flatbread made from a generations-old recipe and a part of many Cosi favorites. Così offerings include breakfast, lunch, dinner, snacks and other desserts and catering.
Menu items are made using fresh ingredients and distinctive sauces and spreads to create “craveable” dishes. The Cosi menu features made-to-order sandwiches, hand-tossed salads, melts, bowls, soups, bagels, breakfast sandwiches and other breakfast products, flatbread pizzas, snacks and desserts. Guests can also enjoy handcrafted beverages, coffee and coffee-based-based and a variety of other beverages. Cosi offers a diverse catering menu that includes the restaurant favorites and specialty offerings.
Così® restaurants are located in urban and suburban settings, traditional and non-traditional locations, including retail spaces, office buildings, universities, hospitals, and more, and are designed to be welcoming and comfortable with an eclectic environment, based on the original Così® restaurant still operating in Paris, France. Così® partners create a welcoming environment where guests are invited to relax and enjoy great food.
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