I don't know the owner personally, nor have I ever tried the product but all that I have read about the product was that it was great. Personal financial mismanagement notwithstanding, the situation is clear: Money was taken from customers in good faith for goods/services that were promised by contract and never delivered. This is theft. Plain and simple.
Sole proprietorship allows him to file bankruptcy for HIS protection. Unless someone intervenes, his creditors (customers) will see no return. Also, unless someone intervenes, upon emerging from bankruptcy, he can sell intellectual property rights to his business to some other interested party for X dollars. Customers who paid in partially or in full for a product never received should work with the court to obtain a lien against the sale of any intellectual property as recompense if they cannot get a refund directly.
You never want to see someone end up in a bad situation due to their own fault or circumstances beyond their control. But the occurrence NEVER washes them clean of their responsibility to the people that have been taken advantage of. If, at the time of placing the order, customers were told "By the way, you may not actually get the product you are purchasing", NO ONE would have placed an order or deposit.
Any time of I have seen a business fold and a mea culpa letter is published, the explanation always revolves around the sad story with some apologies thrown in. The "My dog ate the lunch explanation" exists purely to make to you feel sorry for the author. This is a BUSINESS transaction. Nothing personal. No feelings involved.
To Ed's post above, the most talented designers are typically the WORST businessmen. I think it would be wonderful for the owner (and his family) and the customers if he was able to find an interested party to pick up the ball and make things right for all involved.