THE GIST
On April 6, San Diego-based Modern Times announced that one of its lending banks had initiated litigation that will likely result in the brewery being placed into financial receivership. It’s the latest and most significant setback for the struggling company after leadership shared in February it was seeking a buyer for the brewery and coffee business. If placed into a receivership, a bank will appoint an individual to be the “receiver” or financial decision-maker for the company until it can be sold or liquidated.
In the weeks since Modern Times announced it would close four of its eight taprooms and lay off 73 people, no buyer emerged to bring the company into solvency. Modern Times is the 48th largest craft brewery in the U.S. by production volume, according to 2021 data under the definition of “craft” used by the trade group Brewers Association.
A sale appears to be the only option for the brewery to settle its debt burden. According to an investor notice analyzed by Brewbound, Modern Times’ debt to California Bank & Trust totals $12.9 million from three loans taken in 2019. Modern Times also borrowed $8 million via three loans from Live Oak Bank in 2019. Interest rates on these six loans range from 3.75% to 6.75%. This is the same year during which Modern Times, in advance of a crowdfunding raise, valued itself at $264 million.
The best hope now for Modern Times is that it will be sold as a “going concern,” increasing the likelihood that the buyer would retain the brewery’s staff and brands. If the receiver instead liquidated the company, staff would be laid off and assets sold to cover debts. It’s unlikely the sale price would cover the full costs of these debts, particularly if the company is sold piecemeal.
WHY IT MATTERS
The question ahead for the company is whether the bank’s appointed receiver, who is commonly an attorney, accountant, or expert in a particular business field, is able to sell Modern Times as a “going concern” (an operating business) or must instead liquidate the company and sell its assets piecemeal.
The latter would have especially dire consequences for participants in the brewery’s Employee Stock Ownership Program (ESOP), which owns 30% of Modern Times.
“The members of the ESOP are at real serious risk of losing their investment,” says Thomas Fawkes, a partner at Tucker Ellis law firm’s Chicago office. “The only way that they’re going to recover anything is if the receiver is able to sell the business at a sufficient sum to pay back secured creditors and trade creditors. They’re at the bottom of the stack.”
(Want to learn more about ESOPs? Read about them in part one and two of a 2018 series.)
Fawkes says receivers typically take anywhere from six to nine months to become acquainted with a business and to find an interested buyer. The fact that a lending bank has appointed a receiver indicates it doesn’t feel Modern Times can secure this buyer itself. (Modern Times did not return a request for an interview with CEO Jen Briggs by press time.)
“On one hand, it’s a vote of no confidence in management, but perhaps it’s a vote of confidence in the overall value of the assets,” Fawkes says. “The lender must at least think there is a chance that this can be sold as a going concern.”
Here are the two areas in which this applies to Modern Times:
Management: Briggs was named Modern Times’ interim CEO in October and officially took over the role in January after former CEO Jacob McKean stepped down amid reports Modern Times fostered a hostile work environment. Briggs said in February that she only became aware of the full scope of the brewery’s financial woes as she gained more access to documents in November and December. The debt loads, Briggs said, stemmed from years of taproom and distribution expansion that weren’t actually supported by growing revenues. In a blog post announcing taproom closures in February, Modern Times vowed to leave behind the “unanchored optimism of the past.”
Assets: Modern Times’ assets include equipment, beer and coffee products, furniture and fixing, transportation vehicles, etc. Fawkes says these are unlikely to be sold for enough money to cover outstanding debt.
“The piecemeal assets are worth practically nothing—you can sell the brewing system on the secondary market but it’s not going to command anything close to what was paid for it,” he notes. “Selling an operating business is going to gather more than selling the assets piecemeal.”
The potential for Modern Times’ liquidation would have been unthinkable just a few years ago, when the brewery was rapidly expanding its brewing and coffee roasting operations, and outwardly appeared to be a shining star of the fast-growing Southern California beer scene.
As part of a crowdfunding raise three years ago, the brewery valued itself at $264 million, a figure that now appears overconfident. Briggs characterized that valuation as part of a period of heady confidence in the U.S. craft beer industry, an “echo of the Ballast Point era” in which that San Diego brewery sold to Constellation Brands for $1 billion in 2015.
The crowdfunding raise came during Modern Times’ most successful year, when it produced 70,300 barrels of beer, according to BA data. Last year, that production fell -9% for a decline of 6,632 barrels. Likely within months, a receivership will decide whether there is still enough shine left to save Modern TImes, or whether it will be sold for parts.
Words by Kate Bernot