Buellton, California-based Figueroa Mountain Brewery has filed for Chapter 11 bankruptcy protection in order to take on new investment from New York-based private equity firm Creekstone LLC.
“This was obviously not the first choice by any means,” co-founder and CEO Jaime Dietenhofer told Brewbound.
According to the bankruptcy filing, Figueroa Mountain owes between 200 and 999 creditors between $1 million and $10 million. In 2018, Figueroa Mountain posted $8.4 million in sales, but recorded a net income loss of $3.4 million, according to the filing.
The COVID-19 pandemic has been difficult for breweries that derive significant revenue from their taprooms and on-premise sales, including Figueroa Mountain.
In California, where Figueroa Mountain operates six taprooms, Gov. Gavin Newsom restricted service at on-premise establishments early on in the pandemic and again over the summer when COVID-19 cases spiked in the state.
“We’ve been speaking to so many of our friends in the brewing industry and commiserating on the challenges that this has created, and what it poses, as far as kind of going forward,” Dietenhofer said. “No one truly knows what the future holds — as far as how the industry can or will react to the challenges — because I don’t think any industry knows that.”
Industry upending pandemic aside, Figueroa Mountain’s court filing details a troubled relationship with Boston-based private equity firm White Winston Select Asset Fund, from which Figueroa Mountain sought investment for operating capital after a construction project ran long and over budget.
In 2015, Figueroa Mountain secured a series of loans from Montecito Bank & Trust (MB&T) for $3.2 million to increase its capacity from 20,000 barrels to 110,000 barrels in order to supply a distribution deal with Pacific Beverage Company in three counties. Construction on the upgrades began, but the project “took twice as long and cost twice as much” as was planned, according to the court filing.
“The delays in the expansion (and cost overruns) put Fig Mountain in the worst possible position,” the document said. “It had a 110,000 barrel cost structure with a 20,000 barrel production capacity. Almost by definition, Fig Mountain could not operate profitably during this time.”
MB&T issued a default notice for the loan in January 2017 and the bank has allowed Figueroa Mountain to defer certain payments due to the pandemic.
With the expansion project still incomplete, Figueroa Mountain tapped local contractor Taylor Judkins to make an equity investment and become the project’s general contractor. He invested $2.5 million and owns 20% of the company, according to court documents.
Needing to sort out repayment of the MB&T loan, Dietenhofer sought investment from Todd Enright of White Winston to “negotiate a loan purchase agreement.” White Winston gave Figueroa Mountain a $750,000 bridge loan in July 2019, which Dietenhofer and his mother Judith Dietenhofer personally guaranteed. The bridge loan was not enough to meet the company’s financial needs and did not address the MB&T loan.
That same month, Figueroa Mountain co-founder James Dietenhofer, Jaime Dietenhofer’s father, died following a battle with non-Hodgkin’s lymphoma.
“In hindsight, I believe that Mr. Enright never intended to refinance the MB&T loan and never intended to supply sufficient operation capital to the company,” Dietenhofer said in the filing. “I think he was taking advantage of my grief and desperation to gain leverage over the company and force it into bankruptcy for his own purposes.”
Enright began consulting Figueroa Mountain on financial matters at the hourly rate of $695, and hired two more consultants: Magic Hat founder Alan Newman for marketing, and former Magic Hat general manager Steve Hood, who served as interim chief operating officer. Newman and Hood helped the Figueroa Mountain team “establish the amount of working capital necessary to get Fig Mountain to a break-even point.”
However, the bankruptcy filing alleges that White Winston forced Figueroa Mountain to submit all payments from wholesalers to a lockbox account at Boston Private, a bank in Boston. The brewery had to request withdrawals from the account to purchase raw materials, which White Winston often underfunded, the filing alleged.
“Almost immediately, this caused serious problems for operations,” the filing said. “Because it takes several weeks to brew beer, a lack of raw materials and the inability to plan hindered Fig Mountain’s ability to fulfill orders.”
In January 2020, Enright traveled to Buellton, California, and told Dietenhofer he wanted the company to file for bankruptcy. Dietenhofer refused to do so at the time. White Winston stopped funding the company’s operations and Newman and Hood departed, however, White Winston continued to exert control over Figueroa Mountain’s operating expenses, making it difficult for it to brew and ship beer, according to the filing.
“The company was in a downward spiral, and it fell further and further behind to its vendors and other creditors,” Dietenhofer wrote in the filing.
Judith Dietenhofer loaned the company $400,000 in January, which Enright insisted be rolled into White Winston’s loan balance, according to Dietenhofer’s filing. The company received $900,000 from the U.S. Small Business Administration’s Paycheck Protection Program, two-thirds of which White Winston “swept,” Dietenhofer added in the filing.
“Again, Fig Mountain found itself with no operating capital and at the mercy of White Winston,” he wrote.
White Winston filed a lawsuit against Figueroa Mountain on August 24, alleging breaches of contract against Figueroa Mountain and Jaime and Judith Dietenhofer as guarantors, and monetary obligations spread over three loan modifications totaling $10.5 million.
Requests for comment from White Winston were unreturned; messages sent to both e-mail addresses the firm listed on its website bounced back as undeliverable.
“Based on the company’s reconciliations, at no point has the actual out-of-pocket loan balance exceeded $900,000,” Figueroa Mountain wrote in its bankruptcy filing. “After it swept Fig Mountain’s PPP loan proceeds, White Winston had collected approximately $500,000 more than it had ever funded.”
Figueroa Mountain isn’t the only business to have a contentious relationship with White Winston. In 2018, protein powder maker MusclePharm filed a lawsuit against the firm. That case was dismissed by the Supreme Court of the State of Nevada due to a lack of jurisdiction.
In its bankruptcy filing, Figueroa Mountain has proposed a debtor in possession agreement with Creekstone, which would give the brewery a $1.4 million loan to use for operations and bankruptcy expenses. With the money, the brewery would install six 240-barrel fermentation tanks, which will help it ramp up production to meet wholesaler orders.
“The fact is, is we haven’t been able to produce the beer fast enough for a multitude of reasons and supply the full demand,” Dietenhofer told Brewbound. “And most would say, that’s a great problem to have, but it’s still a problem that we have to address.”
Completing the expansion project will allow Figueroa Mountain to produce 27,000 barrels in 2021.
“This was the option that we were led down after trying to exhaust all other opportunities,” Dietenhofer said. “The biggest thing for us was the opportunity for this new investment and to really get us to the next level, as far as capital expenditures and working capital, and that was unable to be done without this step.”
Dietenhofer described Creekstone as a collaborative partner who will allow the brewery to maintain control over creative direction and strategy.
“They want to be able to put that water on the plants and see it grow,” he said. “They’ve been successful in their other ventures, and they understand the challenges that are facing the industry, so they’re not under any guise that this is an industry that doesn’t have its challenges.”
Figueroa Mountain’s six taprooms will remain open, and the company’s president, former Reyes Beer Division craft category director Steve Almaraz, will focus on securing off-premise chain sales.
“Under the current structure, it wasn’t possible to operate our business plan and to execute,” Dietenhofer told Brewbound. “Normally distributors don’t wait around for you to just continue to short orders, but we’ve been very fortunate with our brand and our fan base and people who have been loyal to the brand.
“And thank god we have great brewers who make good liquid,” he continued. “There’s something there. We know we have a strong business model, but we need to make sure that that path is clear and remove those roadblocks.”