A deep look at Punch Bowl Social’s long year

The eatertainment chain’s bankruptcy filing revealed a dispute with its lender that dated back to last year.
Photograph courtesy of Punch Bowl Social Chicago

Late on Monday, the eatertainment chain Punch Bowl Social filed for Chapter 11 bankruptcy protection, citing the pandemic and a public foreclosure of the chain by its lender, CrowdOut Capital, to which it owes $20 million.

On Tuesday, Punch Bowl Social itself released an unusual statement that put the filing into question. “The company had no advance knowledge in regards to this filing by two former executives. We are unsure at this time is the filing is even legal …”

The bankruptcy filing, and the statement, reveal a behind-the-scenes tug-of-war between the company’s former executives and the lender, CrowdOut, which took control of the chain and its operations back in August. In a bankruptcy court hearing on Wednesday, an attorney for CrowdOut said the lender was “surprised” by the filing and wasn’t informed of it beforehand—which explains the Tuesday statement.

The two sides as of press time were still discussing financing to get the company through the bankruptcy process. An agreement was expected on Wednesday.

That tug-of-war has been going on for some time. Court documents revealed issues between Punch Bowl and its lender that date back to last year, after the chain closed one of its locations, and long before anyone had heard of the coronavirus.

At the outset of 2020, Punch Bowl was widely viewed as an up-and-coming restaurant concept that had a unique way of attracting younger consumers who enjoyed its food over games of ping pong and shuffleboard. It was the exception to the rule that consumers were shifting aggressively to takeout.

In 2018, the company borrowed $20 million from CrowdOut, an Austin, Tex.-based investment firm that specializes in loans to mid-market companies. The next year, Punch Bowl surprisingly received up to $140 million in investment from Cracker Barrel, the family dining chain not otherwise known for investing in growth companies.

Cracker Barrel said it felt Punch Bowl would get to 100 locations. At its peak, the chain operated 20.

The first indication of trouble came last year, when Punch Bowl closed a smaller, easier-to-develop location in Fort Worth, Tex., after just four months. “We continue to believe that PBS has significant growth potential, and I think it’s positioned to become a leader in the segment,” Cracker Barrel CEO said in November 2019, when the company told investors of the closure, according to a transcript on the financial services site Sentieo.

Behind the scenes, however, CrowdOut declared Punch Bowl in default of its loan based on a financial covenant, or a financial requirement in its loan. In January, Cracker Barrel agreed to spend $3.5 million to settle the issue, according to court filings.

The pandemic threw a far bigger wrench into the works.

News of the coronavirus and its spread in the U.S. grew in early March. On March 15 states began closing dining rooms. For a restaurant chain built almost entirely on the idea of young customers eating inside and playing games, the pandemic was a nightmare.

On March 16, CrowdOut called its loan. Cracker Barrel opted not to rescue the company and instead wrote off $133 million, the value of its investment. At the time, Cracker Barrel owned 59% of Punch Bowl Social, but 49% of the voting interest.

Punch Bowl is structured with a holding company on top of another holding company. Robert Thompson, who founded the chain, owns part of PBS HoldCo LLC, which owns all of the stock in another company called Punch Bowl Social Inc., and that in turn owns PBS Brand Co LLC, which is the company that owns all of the interest in the restaurants—currently numbering 11. Two of those restaurants remain open.

PBS Brand Co. is the company that technically owes the $20 million. And in August CrowdOut took control of that company, placing John Haywood as CEO while Thompson left to focus on his own restaurant incubator. Haywood until May had been the CEO of Souplantation and Sweet Tomatoes, the buffet chain that closed up shop in the wake of the state shutdowns of dine-in service. According to a filing, CrowdOut said it has been providing funding for Punch Bowl since April.

At the time, Crowd Out started working with PJ Solomon to market the company. Court documents show there was interest from Sortis Holdings, an investment firm that earlier this year acquired Sustainable Restaurant Group, the owner of Bamboo Sushi.

Those discussions did not yield a deal, according to court documents, and earlier this month CrowdOut moved to fully foreclose on Punch Bowl Social.

Which brings us to this week’s filing. Two former executives who are on the board of PBS HoldCo, Robert LeBoeuf and Stacy Galligan, put the company into bankruptcy, having secured financing to get the company through the bankruptcy process. But the CrowdOut-hired executives running the chain did not know about it before the filing.

According to court documents, Punch Bowl Social has a $10 million Paycheck Protection Program loan. The filing initially indicated that all three of its remaining three restaurants were to be closed, but two—in Austin, Tex., and in Atlanta, remain open.

Much remains uncertain about the bankruptcy—it’s possible CrowdOut still gets to own the chain. But it’s also possible the company reorganizes its debts and makes its way through the pandemic.

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