Boston area brew-your-own beer and brewpub Hopsters lost its bid to prevent a court-appointed trustee from converting its Chapter 11 bankruptcy filing to Chapter 7 liquidation during a hearing Thursday in U.S. Bankruptcy Court in the District of Massachusetts.
Hopsters, which had raised around $3.5 million from crowdfunding sources, in addition to traditional investment and debt sources, filed for Chapter 11 bankruptcy protection on September 3, which would allow it to restructure its debts and continue operations.
However, the court appointed Stephen Darr of Boston-based Huron Consulting Services as the case’s trustee on September 18. On November 11, Darr filed a motion to convert the filing to Chapter 7, which provides for the liquidation of the business instead of reorganization.
“It has not been an easy year, it’s not easy to see a business that at one point was profitable close down and cease operations,” Judge Janet E. Bostwick said while delivering her ruling in a teleconferenced hearing Thursday.
“It’s not easy for those who have been running the business, for those who are equity holders,” she continued. “But bankruptcy is not an endless opportunity. It comes with rules and requirements.”
Darr assumed control of Hopsters’ operations on October 27 from Lee and Karen Cooper and shut down Hopsters’ locations in Newton and Boston’s Seaport neighborhood. Darr reviewed Cooper’s updated business plans, but concluded that “the debtor is still unable to demonstrate an ability to generate sufficient funds to pay all operating expenses as they accrue,” according to the November 11 filing in which Darr proposed converting to Chapter 7.
Both Darr in his filing and Bostwick during the hearing pointed to Cooper’s unauthorized use of cash collateral and pre-petition wages during the proceedings as cause for concern.
In a motion Wednesday to reinstate Cooper as debtor-in-possession filed by his attorney John McAuliffe, Cooper acknowledged he “made serious missteps with respect to failure to seek authorization for use of cash collateral and paying prepetition wages without court authorization.”
Bottom Lines
In a Chapter 7 bankruptcy filing, a company’s assets are liquidated to pay back creditors — secured creditors receive first priority, followed by unsecured creditors. Creditors may not be fully compensated. If money is left over, preferred investors are compensated, followed by common shareholders, which is often an unlikely outcome.
According to a 2018 capitalization table, four investor groups hold preferred stock units: Series A-1, Series A-3 and two rounds of WeFunder investors.
Karen Cooper, Lee Cooper’s wife, owns all the common units of stock and the business is filed under her name with the Massachusetts Secretary of the Commonwealth’s corporations division. However, all bankruptcy filings have been in Lee Cooper’s name and his LinkedIn page lists him as the owner of the business.
A balance sheet from September submitted to the court shows that the company owes $1.5 million in long-term liabilities (loans from banks, individuals and the U.S. Small Business Administration, auto loans), $241,359.09 in credit card liabilities, and $90,175.29 in current liabilities (sales tax, excise tax, payable gift cards, etc.). Hopsters’ assets as of September 2 were -$470,793.18.
Hopsters’ liabilities include $1.42 million owed to secured creditors, including lender Rockland Trust Bank, which holds both an initial loan of $783,757 and a pair of government backed loans related to COVID-19: a Paycheck Protection Program loan of $372,815 and an Economic Injury Disaster Loan for which the U.S. Small Business Administration is owed $150,000.
The company also owed at least $3,468 to creditors with priority unsecured claims, and $816,468 to creditors with non-priority unsecured claims.
The company’s largest unsecured creditors include American Express, which is owed $177,561 on two credit cards (the September balance sheet filed with the court shows a $192,372.85 balance with American Express); NFLSRE 51 Sleeper, the landlord of Hopsters’ Boston location, which is owed $245,000 in past rent (described as “disputed” on Hopsters’ Form 204, which lists creditors); and Prime Realty Trust, the landlord of Hopsters’ Newton location, which is owed $51,000 in rent, according to court filings.
Hopsters closed from mid-March until June 2020. Pursuant to Massachusetts’ eviction moratorium, the company did not pay rent in either location between March 15 and July 15. However, the moratorium ended on October 17.
According to a brief filed October 27 to support an emergency motion to allow Hopsters to use cash collateral, “Hopsters never missed a rent payment until March 2020.”
Cooper’s Plan
In Cooper’s petition to be reinstated, he included a new business plan that called for the cessation of operations at the Boston Seaport location, reopening for lunch at the Newton location, an emphasis on beer-to-go sales in Newton and distribution sales, and a seasonal beer garden in 2021.
Projections for monthly sales included $15,600 in food and drinks at the Newton location, $7,000 in retail can sales, $15,000 in wholesale sales, and between $18,000 and $22,000 in sales at a seasonal beer garden from May through October. Hopsters operated a seasonal beer garden four years ago at the Boston Public Market.
The line item for the kettles that Hopsters rents out to patrons to brew their own beer, the company’s most notable point of differentiation among Boston’s crowded craft beer industry, shows no projected income.
“These projections are rosy,” Judge Bostwick said during Thursday’s hearing. “They have no basis on their assumptions, and they haven’t been tested.”
Projected expenses for the repayment of loans, bankruptcy administrative costs and other banking fees total $7,846. The plan estimated a cumulative net profit of $2,381 in January 2021 that increases to $25,336.50 in October 2021.
The plan also included the return of three vehicles: a 2017 Mercedes-Benz M2CAA6, a 2016 Range Rover and a 2015 Toyota Sienna.
With the petition to be reinstated, Cooper included a letter from Robert W. Luiso, Hopsters’ second largest shareholder. In it, Luiso, who is a VP at financial services firm State Street Global Advisors, stressed his willingness to offer guidance to the company in reorganization and expressed optimism about “a return to some normalcy.”
Judge Bostwick wasn’t swayed.
“It paints a rosy pic of the pandemic and the virus, but fails to take into account the real world,” she said of the plan and letter.
Crowdfunding Plays
Bostwick’s ruling effectively ended the long-range vision espoused by Hopsters, one that was sold to a broad set of individual investors. The company has twice raised funds on crowd investment platform WeFunder, raising $2.2 million from 860 investors in 2018 for a proposed expansion to Philadelphia and $1.3 million in 2017 from 713 WeFunder investors for its second location in Boston’s Seaport District.
At the time of its June 2018 fundraising round for a planned national expansion, Hopsters’ stated goal was 16 brew-your-own-beer locations by 2022, beginning with Philadelphia and Stamford, Connecticut, in 2019. Neither expansion project came to fruition.
References to the Philadelphia expansion project have since been scrubbed from the page, although Hopsters’ WeFunder page still bears the headline “nationally expanding brewery/restaurant featuring brew-your-own-beer experience.”
Hopsters’ goal of expanding to Philadelphia may always have been a longshot, as the company said the project would “likely require additional financing in excess of the proceeds from the Offering in order to perform operations over the lifetime of the Company.”
On WeFunder’s frequently asked questions page, the platform advises potential investors to “only invest what you can afford to lose.”
“If you can’t afford to lose every dollar you invest on Wefunder, the answer is no,” WeFunder cautions. “If you can’t afford to wait 7+ years for a return, the answer is also no.”
Requests for comment from WeFunder were unreturned as of press time.
Several investors have taken to social media platforms to criticize management of the company and the lack of communication about the bankruptcy proceedings.
For his part, Lee Cooper told Brewbound that Hopsters intends to reform the company and acquire the Newton location:
“Hopsters Brewery fought the good fight and took one for the team, keeping people safe by closing for 4 months while the virus was raging. However, after nine months of restrictions and no government assistance, Hopsters LLC was forced to liquidate by its creditors and a bankruptcy court that was ill prepared to deal with small businesses and COVID challenges. Hopsters brewery will however [be] reorganized under a new entity, purchase the Newton brewery for pennies on the dollar, sign a new lease and will be back in business once the Chapter 7 liquidation runs it[s] course.
“This is America, and thankfully people who work hard and have grit will always have the opportunity to get back in the saddle and pursue their dreams,” he continued. “Thanks to the tens of thousands of people that increased their knowledge of beer by brewing with us and thanks to our staff who made that possible.”