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Chicken Soup accused of financial mismanagement
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Redbox’s parent company is shutting down as its former chief executive faces accusations that he mismanaged the business and failed to pay workers who were denied health care benefits.
A Delaware bankruptcy judge said Wednesday he would appoint a trustee to investigate whether money meant to pay employees was misappropriated. Chicken Soup for the Soul Entertainment’s bankruptcy, which began as a Chapter 11 case, will be converted to a Chapter 7 liquidation of its assets as its creditors refuse to continue financing the company any longer amid allegations of mismanagement and “bad faith” conduct by former Chief Executive William Rouhana, who controls about 80 percent of the company’s stock and is accused of misusing funds.
“1,000 people are about to lose their jobs,” Judge Thomas Horan said, “and they won’t even be paid for the work they did.”
Company lawyers said money taken from workers’ paychecks that was meant to cover their health benefits may have been directed elsewhere.
“I find that frankly disgusting,” responded Horan, who noted that the allegations have not been proven, according to audio of the hearing. An investigation of the company led by a trustee will follow.
Rouhana denied the allegations.
Chicken Soup for the Soul Entertainment Inc.’s businesses will be sold, including its 24,000 DVD rental kiosks and its streaming platform, its lawyer, Richard Pachulski, said. The liquidation marks a disastrous end to its 2022 purchase of Redbox, for which it incurred an estimated $360 million in debt. Shortly before filing for bankruptcy, Rouhana’s controlling shareholders fired all of the company’s directors and terminated a group tasked with monetizing the business’s assets, reportedly to cement his power, according to lead lender HPS Investment Partners.
When a company files for bankruptcy, all of its assets are placed in an estate. A court-appointed trustee manages these assets to ensure that their value is maximized for creditors. This prevents the bankrupt entity from selling assets and paying creditors at its discretion or not at all.
Chicken Soup for the Soul Entertainment initially sought Chapter 11 bankruptcy, which would allow it to continue running its business while submitting a plan to reorganize the company. This was met with opposition from HPS.
In court filings, HPS has argued that financial mismanagement has reached the point that a liquidation is needed to recover creditors and pay employees, who lost medical benefits last month when the company lost payroll. It said there is a “credible basis to hold Mr. Rouhana personally liable for the misuse” of funds and lost employee wages.
In 2023, Chicken Soup for the Soul Entertainment reported approximately $636 million in net losses, with nearly $53 million in losses in the first quarter of 2024. Its outstanding debt likely far exceeds the value of its current assets, even before accounting for the cash it sought for reorganization.
“There is no way to continue paying employees — to pay any bills,” Horan said.
After acquiring Redbox last year, Rouhana said the company is poised to see a greater return on its investment due to the return of theatrical titles.
“It’s like the floodgates have opened,” he said.
The company has cut costs, deferred executive bonuses to tie them to free cash flow expectations and licensed $8 million worth of content. As part of its strategy to revitalize the business, it planned to cut its content spending in 2023, targeting $19 million in content costs in 2023, and sell certain assets that are not core to its strategy to reduce its debt load. The stock plunged more than 30% last year after it reported widening losses in the fourth quarter.