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Cosi, Inc. – Fast Casual Restaurant Chain Flattened (Again), Files Chapter 11 after Precipitous Drop in Legacy Business Sales, Intends to Reorganize Around Catering Business


February 24, 2020 − Privately-held Cosi, Inc. and six affiliated Debtors (“Cosi” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10417. The Debtors, a "fast-casual" restaurant famed for its "signature flat bread," are represented by Mark E Felger of Cozen O'Connor. Further board-authorized engagements include Omni Agent Solutions as claims agent. 

The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Gordon Food Service ($1.2mn disputed trade debt), (ii) US Foods ($170k trade debt) and (iii) Carlyle Baltimore Holdings LLC ($159k disputed debt).

For the Debtors, this is the second bankruptcy filing in under four years, having filed in the U.S. Bankruptcy Court in the District of Massachusetts in September 2106 (lead case 16-13704).

In a press release announcing the filing, the Debtors advised that “In order to complete its transformation, which involves the shedding of certain legacy costs, further business streamlining and, possibly, select location moves, Cosi has filed for reorganization under Chapter 11 of the Bankruptcy Code. Cosi expects to emerge from Chapter 11 as a stronger version of itself, with a greater focus on its burgeoning catering business." 

In their short and plucky press release, the optimistic "Chapter 22" filers further noted that Cosi "commenced a restructuring of its operations by closing thirty of its stores in December, 2019 and increasing its emphasis on catering, all to better align with current customer dining trends, further improve guest experiences and enhance its financial performance. 2020 has started well with increased sales in open in-store dining restaurants as well as the catering business."

Equity Holdings

  • Funds affiliated with AB Value Management LLC:  87.4%
  • MILFAM II L.P.: (12.5%). 

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 after, 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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The post Cosi, Inc. – Fast Casual Restaurant Chain Flattened (Again), Files Chapter 11 after Precipitous Drop in Legacy Business Sales, Intends to Reorganize Around Catering Business appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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