How America's Most Inspirational Brand Sold Its Soul to the Devil
The Story of Chicken Soup for the Soul
Disclaimer: This article is based on original work carried out by Hindenburg Research in 2018. The stock price of $CSSE has gone up by over 500% since then. For this reason, I felt this story deserved an updated re-write. I have added quite a bit of new information. I hope you enjoy, and please check out the original article by Hindenburg.
Summary
“Chicken Soup for the Soul Entertainment” is not the same company as “Chicken Soup for the Soul,” which owns the nostalgic book series. While they have the same ownership, the entertainment company ($CSSE) is publicy traded and Chicken Soup for the Soul is still held privately.
Publicly-traded CSSE is a roll-up of failing media companies that have been cleverly re-valued to massively inflate CSSE’s aggregate assets and adjusted EBITDA, especially its content library.
The CEO of CSSE, Bill Rouhana, has a long history of alleged stock promotion, self-dealing, and fraud.
CSSE went public in 2017 based on highly questionable revenue from one large customer that was later “gifted” millions in CSSE stock.
CEO Bill Rouhana uses a complex web of private companies to siphon funds from the publicly-traded CSSE through management fees, license fees, interest payments, consulting agreements, etc…
Despite projections of rapid profitability growth from Rouhana, net income and operating income have been negative for the last nine quarters. Debt is mounting. Rapid revenue growth through acquisition is not sustainable.
Insiders, including Bill’s wife, are rapidly dumping shares.
Remember the old book series, Chicken Soup for the Soul?
Gallup estimates that 89% of Americans are familiar with the brand. To put that in perspective, about the same number are familiar with companies like Ford. It’s an iconic brand, one that brings many of us back to childhood.
It was started in 1993 by two motivational speakers, Jack Canfield and Mark Victor Hansen. What you may not know is that Jack and Mark sold the company in 2008. Since then, they have had little to no involvement with it.
The new owners were husband and wife team Bill Rouhana and Amy Newmark.
You might think that the new owners of this brand would be reputable honest folks with a passion for children’s education and creating “feel good” content. Unfortunately, a quick look at Bill and Amy’s history indicates otherwise.
In the late 80s, Bill was an executive at MCEG (Management Company Entertainment Group). The firm produced films with big actors like John Travolta and Bruce Willis, but still ended up filing for Bankruptcy in 1990.
This was shortly after Bill told the LA Times that MCEG was headed in the right direction, financially speaking.
In reality, it was alleged that Bill Rouhana “cooked the books'' to make MCEG look like it was on the right track. The CEO of the company, Jonathan Krane, explained this in detail in his autobiograhpical book on the film industry:
(Source: Art and Science of Moviemaking)
Jonathan Krane passed away in 2016. As far as I can tell, his claims were never investigated further and Bill was never charged.
Later on, Bill worked for Lancit Media, the company that produced the acclaimed children’s series, Reading Rainbow.
During his tenure, the company went public and raised money from public markets with the help of an investment bank, GKN Securities.
With the investment community speculating that Lancit could produce more successful children’s series, the stock soared. After it had risen nearly 500%, Bill sold hundreds of thousands of dollars worth of stock. (Source: SEC)
Shortly after that, holes appeared in the Lancit growth story. The company started to struggle. It began incurring massive losses, and ultimately failed as a public entity. While many lost out, Bill was able to put plenty of money in his own pocket before the company completely imploded.
I don’t know the extent of Bill’s role in taking the company public and promoting the stock.
GKN Securities would later have its SEC registration terminated due to 17 regulatory interventions.
Broadbandits, Starring Bill Rouhana
Bill and Amy started Winstar Communications in the early 90s. Much like Lancit Media, Winstar was considered to be a very promising young company. At the time, telecom technology was all the rage. Winstar capitalized on this hype with their IPO, and the stock soared accordingly.
In 1999, Fortune and LA Times reported that stakeholders were calling out Rouhana’s self-dealing. Specifically, that Winstar was allegedly purchasing “consulting services” from companies owned by Rouhana.
“In 1995 shareholders raised questions about Rouhana's compensation plan and various business transactions conducted with another company he owned… WinStar says it has cleaned up its act… WinStar has changed its compensation plan and terminated its contracts with businesses owned by Rouhana.” (source)
While Bill and the Winstar team claimed to be cleaning up their act, journalists were busy uncovering other problems at Winstar.
In 1995, Bloomberg News speculated that something was off, as noted in Om Malik’s book, Broadbandits, which covered telecom fraud in the 90s.
As it turns out, Bloomberg News was on to something. Some time later, after years of losses, Winstar collapsed into bankruptcy amidst fraud allegations.
Many of these allegations named Bill Rouhana specifically- alleging that he was lying to investors. He and other Winstar executives settled out of court for a combined $25,000,000.
Later on, the company that purchased Winstar’s assets out of bankruptcy examined the books. The executives confirmed that there had been “a lot of phony revenue”. It was said that the Winstar team had been inflating revenue by hundreds of millions of dollars.
All in, Winstar raised over $1B from investors. The company never generated a profit, but Bill still lined his pockets.
While Bill Rouhana has eluded criminal charges, it is clear he has a track record of profiting when shareholders lose. Often, he achieves this amidst allegations of fraud and self-dealing.
Chicken Soup for the Soul
In 2008, eight years after the collapse of Winstar, Bill and Amy bought Chicken Soup for the Soul (CSS, for short). Instead of taking the company public directly, they formed a subsidiary called Chicken Soup for the Soul Entertainment (CSSE) around 2014-15, which was then taken public in 2017.
The distinction can be confusing, but for the rest of this article, CSSE will refer to the publicly-traded Chicken Soup for the Soul Entertainment, and CSS will refer to the privately owned parent company, Chicken Soup for the Soul.
A Shady Start & Questionable Pre-IPO Revenue Figures
As part of the IPO process, Rouhana and his team had to disclose two years of historical financials for CSSE. Here is what they showed in their SEC filing:
With over $8 million in revenue and nearly $4 million in adjusted EBITDA, CSSE looked to be another promising young company. The IPO was successful and Rouhana was able to raise tens of millions of dollars in capital.
What was less clear to investors, although technically disclosed in footnotes, was that nearly all of the 2015 revenue and about half of 2016 revenue came from a single customer, a non-profit called the Boniuk Foundation.
Large revenue share from one customer is concerning for any business. What was more concerning about this situation was that Bill Rouhana was on the board of Boniuk, and he later “gifted” an estimated 3% of CSSE shares to Boniuk. Today, this stake would be valued somewhere between $15-20 million (if still held by Boniuk).
At a glance, it looks like Boniuk could have been compensated with CSSE stock in exchange for spending money with CSSE. While this cannot be proven, it is worthy of investigation. If any other company “gifted” its largest customer millions of dollars of stock, it would be suspect.
This circular relationship is alarmingly obvious and I believe it should be investigated, as the Boniuk revenue was largely the basis for CSSE’s successful IPO. If that revenue was falsely earned from an under-the-table stock trade, then it is very possible that CSSE would never have been able to go public in the first place.
In 2017, shortly after the IPO, Bill was interviewed at a conference and when asked about CSSE’s growth prospects, he had this to say about revenue and EBITDA projections.
“We started at $1.5mil in revenue, jumped to $8.1mil. We’re on track for $20mil this year. In the mid 30s next year. We went from no EBITDA to around $4mil in 2016. We should be close to $10 (million) this year. In 2018, probably another 50% increase in EBITDA. We’ve got a nice growth company, a highly profitable company. Good cash-flowing company as well.”
Unfortunately, Bill couldn’t have been more wrong.
As of this writing, net income and operating income have been negative for the last nine quarters. Cumulatively, CSSE has burned tens of millions of investor dollars, and seems to see higher losses each year.
Even with astronomical losses and mounting debt, the stock price of CSSE has risen sharply over the last few years. Many investors are participating in their high yield bonds. I can only assume these aren’t the same investors that purchased Winstar’s high yield bonds.
This success could be due to Rouhana’s hyper-promotional skill set, which he no doubt honed during his time at Winstar.
In 2020, CSSE published a press release roughly every three days (on average). Bill is on track to beat that in 2021. CSSE even pays for direct stock promotion, which you can see by reading the disclaimer at the end of promotional articles like this one.
Rampant Self-Dealing
Even though CSSE is not profitable, Bill has figured out how to funnel millions into his own privately owned companies and/or affiliates. This is exactly what Bloomberg News accused him of doing while at Winstar.
Bill has created a complex structure of affiliate businesses around CSSE- each of which extracts value from CSSE in a different way. There is Chicken Soup for the Soul, Chicken Soup for the Soul Productions, Chicken Soup for the Soul Pet Food, Crackle, Trema, etc… the list goes on. Employees and resources are shared across companies.
For an example of how confusing this is, look at the LinkedIn profile of one of Rouhana’s top executives, Chris Mitchell.
How can Chris be CFO of five separate companies at the same time- one of which is publicly-traded and has dealings with the others?
Chris is just one of many employees who appears to work at multiple CSS-affiliated companies. Another is Bill’s wife Amy, who was listed as an officer of CSSE, but who only lists CSS on her LinkedIn page. I also know from her interviews that her primary workload relates to CSS. Why then is she paid a salary from shareholder-owned CSSE?
For me, this could be a sign that Bill is using public shareholder money from CSSE to compensate employees who work for their privately-owned affiliates, including CSS.
Here is a summary of some of the transactions I could identify between the publicly-traded CSSE and the various private, Rouhana-owned companies.
2016
$405,932 paid from CSSE to CSS for “Management Fees”
$5,000,000 paid from CSSE to CSS for “License Agreement”
$3,000,000 paid from CSSE to A Plus for “Distribution Agreement”. At the time, A Plus was 75% owned by Rouhana.
$35,000 paid from CSSE to Low Profile Films, a company owned by Rouhana’s son
$100,000 paid from CSSE to One Last Thing, a company owned by Rouhana’s son
2017
5% of revenue, or $532,850, paid from CSSE to CSS for “Management Fees”
Another estimated ~$532,850 paid from CSSE to CSS for a “License Agreement”
8,600,568 CSSE shares issued to CSS Productions (owned by Rouhana)
159,432 CSSE shares issued to Trema, LLC (owned by Rouhana)
$4,700,000 zero-interest loan extended from CSSE to CSS (F-26)
2018
~$2,6000,000 from CSSE to CSS for “Management and License Fees”
~$330,875 in interest payments on a loan/credit line to an entity owned by Rouhana
2019
~$728,617 in interest payments on a loan/credit line to an unnamed entity owned by Rouhana
~$2,800,000 paid from CSSE to CSS for “Management Fees”
~$2,800,000 paid from CSSE to CSS for “License Fees”
~$7,642,432 zero-interest loan extended from CSSE to CSS (F-33)
2020
$3,300,000 paid from CSSE to CSS for “License Agreement”
$3,300,000 paid from CSSE to CSS for “Management Fees”
~$5,648,652 zero-interest loan extended from CSSE to CSS and/or affiliates.
One of the most egregious series of transactions is between CSSE, CSS, and Trema.
Trema, an LLC owned by Rouhana, provides financing to CSSE. Trema does not appear to have other business operations, and the address on file for the LLC is Rouhana’s $3.2mil home in Greenwich, CT.
Trema charges interest on this revolving line of credit. How this interest is negotiated is impossible to say since Rouhana owns both companies. I know that Rouhana has made hundreds of thousands of dollars over the years from this arrangement.
CSSE, on the other hand, provides zero-interest financing to Rouhana’s privately owned companies, such as CSS. SEC filings show that each year, there are millions loaned to Bill’s privately-owned affiliates, yet no interest is paid on these loans.
Why is the CEO of a publicly-traded company using shareholder funds to provide multi-million dollar zero-interest loans to privately-owned businesses that he owns?
Remember what Bloomberg News said about Bill during his Winstar days?
“Winstar’s cash has been used to enrich him and his associates through a series of less-than-arm’s-length transactions.”
Management fees, license fees, interest-free loans, interest payments, acquisition costs, stock issuance- the amount of money moving from the publicly-traded CSSE to Rouhana’s companies is astounding.
Shareholders rely on the leaders of a publicly-traded company to work in their best interest. How can Bill do that if he owns the companies that CSSE does business with?
Bill was accused of self-dealing at Winstar, and it is clear that he is doing something similar with CSSE. I see this as a major red flag that is worthy of more investigation by shareholders, the board, and regulators.
Massively Overvalued Assets & Content Library
When I discussed my preliminary research with analysts who cover the CSSE stock, I was told that one of CSSE’s greatest assets is its content library. I was told that no matter how shady Rouhana’s history is, the film library is a testament to the legitimacy, value, and stability of CSSE as a public company.
Nothing could be further from the truth.
I believe that Rouhana has intentionally and cleverly over-valued CSSE’s assets over the years. I believe these assets now appear valuable when stacked on top of each other, but in reality, it is all a house of cards.
The two largest film libraries, featured on CSSE’s recent investor deck, are from the Screen Media and Sonar Entertainment acquisitions.
Screen Media
On November 3rd, 2017, CSSE acquired Screen Media for ~$5.1mil in cash and stock.
After the acquisition, CSSE had a “third party” value the Screen Media assets, and the valuation came back at ~$31.4mil.
CSSE booked the difference as a non-cash gain, significantly boosting the value of their assets.
I find the new valuation concerning, especially considering Screen Media’s financial position prior to acquisition. In the year before CSSE bought it, Screen Media had YoY declining revenues, less than $300k in cash, and $40mil+ in liabilities.
In 2017, the year it was acquired, Screen Media had a net loss ~$1mil. This goes contrary to CSSE’s investor presentation, where they claimed Screen Media was projected to do $5mil+ EBITDA for the full year 2017. I believe this was deceptive for shareholders.
If Screen Media’s assets were truly worth $30mil+, why did the owners sell for ~$5mil? I believe that the simplest explanation is most likely to be correct- the Screen Media assets simply weren’t worth $31.4mil, and the valuation was nonsense.
I would like to know who the third party appraiser was, and what their methodology was for valuing Screen Media. I would also like to know how the CSSE team came up with projections of $5mil+ in EBITDA for Screen Media’s 2017 full year.
Sonar Entertainment
On May 24th, 2021, CSSE purchased Sonar Entertainment.
In the year prior to acquisition, Sonar had an operating loss of over $36mil and a net loss of over $109mil. Its total liabilities exceeded $775mil and it had a little over $1mil in cash on hand. It was unable to produce any profit from its assets.
CSSE paid an initial purchase price of $18.9mil for these assets, and later had a third party appraiser re-value the acquisition at $53.8mil.
How a company with such horrible financials could be so favorably valued is a mystery to me. I believe that this valuation is nonsense.
A quick look at CSSE’s other acquisitions (A Plus, Pivotshare, Truli, Filmrise, etc…) indicates that CSSE is simply a roll-up of failing media companies. Almost every acquisition is of a company with massive liabilities, declining revenues, and on the brink of insolvency.
Insiders Are Getting Out
One of CSSE’s strongest advocates and largest shareholders is Greenhaven Road Capital. Perhaps Greenhaven is seeing the same red flags that I’ve highlighted, because they have sold 45%+ of their holdings since August.
Bill Rouhana’s wife, Amy Newmark, started unloading shares this last May. As of this writing, she has taken $1mil+ off the table.
Scott Seaton, CSSE’s Chairman, sold the majority of his holdings in June (over $3mil).
On June 22nd, CPE (the holding company for Sony Entertainment), filed paperwork to sell 100% of its Series A Preferred Stock- over 1.5 million shares.
Conclusion
CSSE is a roll-up of failing media companies run by an executive with a history of self-dealing, fraud allegations, and monumental failures.
The company has already funneled millions from investors to Rouhana’s privately-owned companies. Shareholders of the publicly-traded CSSE have no stake in Bill's other companies.
While claiming to be an innovative tech company and comparing itself to Netflix, CSSE is actually reliant on an ad-based model which has been largely abandoned by the world’s leading streaming companies. It’s mobile apps have some of the worst reviews of the industry. The companies it has acquired have been on the brink of insolvency.
While these acquisitions allow CSSE to continue to grow revenue, profitability is elusive. Instead of the rapidly growing EBITDA that Bill projected in his 2017 interview, CSSE is seeing mounting losses- as much as $9,193,381 in the most recent quarterly filing.
Fake innovation, revenue growth by acquisition, self-dealing, stock promotion- it seems obvious that Bill and Amy are running the same playbook they ran at Winstar, but with more finesse. After all, this isn’t their first rodeo.
With just ~$25mil in cash, $86mil in liabilities, a -$9mil+ loss last quarter, and rapid insider selling, I see CSSE as completely uninvestable and going to zero.
DISCLAIMER:
I sometimes write about publicly-traded companies. I am not a financial advisor and I hold no financial registrations. You should never use my research as due-diligence or investment advice. My research is for entertainment only. I am not responsible for investment losses. I do actively invest, and you should assume I may have long/short positions in the companies I write about. I am not responsible for your losses.