Bitwise Industries files for Chapter 7 bankruptcy. What could it mean for employees, creditors?

Embattled Fresno technology company Bitwise Industries and several of its affiliated businesses have filed for bankruptcy in the wake of a financial collapse in late May.

Bitwise’s parent company, BW Industries Inc. filed the Chapter 7 bankruptcy petition Wednesday with the U.S. District bankruptcy court in Delaware, where the company was incorporated. A Chapter 7 bankruptcy is intended to liquidate a company’s assets in order to pay creditors.

In addition to BW Industries Inc., the filing notes four other associated cases: Bitwise Industries Inc.; BWRD LLC.; AlphaWorks Technologies LLC, and Bruce’s Bagels, Beverages and Bites LLC.

The petition was signed by interim Bitwise Industries President Ollen Douglass and board members Mitchell Kapor and Paula Pretlow.

Bitwise was founded in 2013 as a hub for training students in software coding and website design, technology services for local companies, and providing leased space to budding technology entrepreneurs and other businesses.

In recent years, the company’s co-founders and co-CEOs, Jake Soberal and Irma Olguin Jr., embarked on an ambitious program of expanding Bitwise’s geographic footprint – first within California to sites in Oakland, Merced and Bakersfield, and within the past two years to other states including Colorado, Illinois, New Mexico, New York, Ohio and Texas.

However, Bitwise was upended by financial upheaval even in the wake of announcing an $80 million venture capital infusion earlier this year, and on May 29 abruptly announced to its 900 employees nationwide – including about 400 in the Fresno area – that they were being furloughed immediately.

Within days of that announcement, Soberal and Olguin were terminated by the Bitwise board of directors.

Since May 29, the company has been beset with a litany of lawsuits in both state and federal courts, alleging violations of state and federal labor laws and fraudulent business practices. On June 14, Douglass notified Bitwise employees by email that their jobs were being permanently terminated in a mass layoff.

Court documents indicate that Bitwise estimates the number of secured and unsecured creditors to which it owes money at about 470.

The filings also report that the company has an estimated $253.6 million in assets, including tens of millions in what are described as “intercompany receivable” amounts owed by internal companies to BW Industries. That stacks up to liabilities estimated at $189.4 million.

But the court documents also name an array of other creditors for whom the amounts owed are stated as “undetermined.”

In a separate court document filed along with the bankruptcy petition Wednesday, Douglass reported to the court that an internal analysis of the company’s finances since May 28 revealed that the “books and records of the Company are substandard and materially incomplete” because of “substantial irregularities” in Bitwise’s accounting practices.

“The lack of organized and well-kept books and records, as well as obstacles resulting from an inability to access and verify certain financial information such as bank accounts, has hindered the Company’s ability” to make a true estimation of the amounts owed to some creditors.

An apparent scramble for 11th-hour cash

Some of the financial information contained in the bankruptcy documents suggests that for two months prior to the sudden furlough or layoff of all Bitwise employees, the company’s leadership was engaged in a scramble to round up cash to cover operating expenses or repay previous loans.

From early April through May 17, less than two weeks before the furlough announcement by Soberal and Olguin, Bitwise incurred more than $29.3 million in debt in the form of unsecured loans from various investors, including many in the Fresno area.

The court filings indicate that Bitwise owes more than $73.4 million in unsecured loans dating to 2020. That includes more than $20 million for which the internal financial analysis could not even determine who the creditor is.

Among the creditors is the city of Fresno, which had paid Bitwise $500,000 last year to develop a “digital empowerment center” to aid small businesses with technology issues to improve their opportunities for commerce.

That money was the first installment on a $1 million contract funded by the city’s share of federal COVID pandemic recovery funds. But the city canceled the rest of the Bitwise contract in the wake of the furlough and the company’s financial tumult.

Fresno Mayor Jerry Dyer said Bitwise had accounted for work using about $120,000 of the first payment. But he said Thursday that odds are slim for the city to recover the remaining $380,000.

“We’ll be in a long line with a lot of other people who are owed a lot more money than we are,” Dyer said. “Although we hate to lose any money, we’re fortunate that the amount wasn’t much more.”

Dyer added that as he scanned the list of creditors listed in the bankruptcy petition, “it was interesting. I knew some of the names, many of the names on there, friends who were investors.”

But the bankruptcy filing did not come as a surprise to the city; such a move had been anticipated, Dyer said. “I thought that was going to be coming sooner or later, and it came sooner,” he said. “I was shocked to see how many assets that Bitwise claimed. ... So it seems like there’s a lot of assets, but there’s a lot of liabilities as well.”

What is a Chapter 7 bankruptcy, anyway?

According to information from the federal court system, a Chapter 7 bankruptcy does not involve preparation of a repayment plan by a company, but instead provides for a bankruptcy trustee to gather and sell the debtor’s assets and use that money to pay creditors.

Bankruptcy law allows a company undergoing Chapter 7 to keep certain exempt assets, but all remaining assets will be liquidated.

In addition to the existence of a federal criminal investigation into Bitwise’s activities amid its financial collapse, the company also faces a slew of civil lawsuits by employees who allege violations of state and federal labor laws and from investors who claim that they were victims of fraud and bad-faith dealing by Bitwise and its leaders.

The criminal investigation won’t be affected by the bankruptcy filing, however, according to information from the Cornell University Law School.

But the civil cases may be put on hold. “Filing a petition under Chapter 7 ‘automatically stays’ (stops) most collection actions against the debtor or the debtor’s property,” according the the U.S. Courts website. “As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments.”