Less than two years after the launch of Soul of the South — backed by nearly $2 million awarded by the state — the television network is struggling to pay its bills, laying off employees and fighting at least one lawsuit.
CEO Doug McHenry says the Little Rock company is racing to raise money from other sources, despite an additional $250,000 grant from the state in December and a $125,000 private loan from a Memphis businessman in January. He said he needs another $250,000-$500,000 to see the station through the next three or four months.
“The way I look at it, is I’ve got to raise it now. If I can’t raise the critical working capital that I need within the next month or so, I’m facing some critical decisions,” McHenry said in an interview last week.
At the same time, the company is shrinking its reach by reducing the number of affiliates airing its programming from 30 to around 21 and reducing its ambitious 24-hour schedule. In Little Rock, the network is only available on a subchannel of KMYA that remains unavailable to cable viewers.
The leadership of the network has also changed in the past 22 months with the departure of former state Supreme Court Justice Richard Mays, who was chairman of the board, and the original CEO, Edwin Avent.
Two other founders — Frank Mercado-Valdes and Christopher Clark — are also no longer involved in the network.
A project that was envisioned to create 150 jobs in Arkansas now has about 36 employees at its offices, the former Equity Broadcasting building at 1 Shackleford Drive. It remains to be seen whether state money invested in Soul of the South will eventually generate the jobs anticipated in the original paperwork.
Soul of the South announced a round of funding by the state and private investors to much fanfare in April 2013. In total, the company said it had raised more than $10 million.
Mays said at the time that 150 jobs would be created when the network launched the following month. Larry Morton, the former CEO of Equity Broadcasting Co. and a consultant for SOS, predicted the company would have a “substantial impact” on how news was received in the South.
“To me, it’s a wonderful opportunity. It’s a minority-owned business controlled by African-Americans and it’s a chance to highlight a lot of the good things from the South,” Morton said.
Soul of the South was launched in part with funding cobbled together by the Arkansas Development Finance Authority and Arkansas Economic Development Commission.
AEDC made $750,000 in grants and loans to the company, the most recent in December.
Danny Games, who was named interim executive director of the AEDC when Gov. Asa Hutchinson took office in January, issued the following statement:
“As the state’s lead economic development organization, the Arkansas Economic Development Commission (AEDC) is tasked with attracting and pursuing economic development projects that will provide jobs, investment and revenue for our state and communities. AEDC’s evaluations of projects include business growth plans, financials and associated risks, including performance, clawback and security provisions. Although atypical, when introduced to the state in 2013, this project (Soul of the South) presented some risk but also upside that we still hope to be realized by the company, city and state. Going forward, we will continue to evaluate prospective projects pursuant to the economic development and financial interests of Arkansas.”
AEDC awarded a $500,000 grant to the company in December 2013 through the Quick Action Closing Fund. Under the agreement, the company must reimburse the state if certain hiring goals are not met.
Bill Campbell, the company’s secretary, said the agreement requires Soul of the South to create about 115 jobs within four years. If the company is unable to reach that number, AEDC would make a claim on the company’s building at 1 Shackleford Drive, which is owned by a subsidiary.
According to Pulaski County real estate records, Soul of the Soul or its subsidiaries have also secured a $1.5 million loan from Arkansas Capital Corp., a $6.5 million loan from Heartland Renaissance Fund Sub XIX LLC and a $3.9 million loan from Pacesetter CDE XII LLC of Southlake, Texas.
AEDC followed the $500,000 grant by issuing a $250,000 loan last December. That loan comes due in June.
Brad Henry, the vice president for development finance for ADFA, serves on Soul of the South’s board. He said ADFA invested $1 million in federal economic stimulus money in the station. The authority was attracted to a “significant employment opportunity” presented by the network with wages above the state average, said Henry, who joined ADFA months after the original deal.
“We saw an opportunity primarily to support a company that was looking to enhance the television industry in Little Rock ... That’s always been a big part of the economy of Little Rock, and we thought that there was potential that they could build off that,” Henry said.
Henry said that ADFA reviews the financial and economic development potential of a company, the management team, market opportunity, and who the other investors are and how much capital is sourced from the private sector when making an investment. But there are always risks, he said.
“When we look at investing in an early-stage company, obviously we go into it understanding that there is a significant risk in investing in startup companies. There’s just a lot of risk there because you don’t know what will happen, but we understand that. We try to gauge that risk,” Henry said.
McHenry, the network’s CEO, said he has instituted changes to try to right the course of the fledgling network. He said he instituted layoffs in recent weeks — cutting about a quarter of the network’s staff — to reduce overhead, but hopes to eventually hire the employees back.
In hindsight, McHenry said, it appeared the network didn’t have enough money to carry out its vision of being a national presence.
“When this network launched, I would make the argument that it didn’t have adequate financial resources to compete with other networks, given the fact that those three components — enough money, distribution and programming — weren’t all covered by the initial capital that it raised,” McHenry said.
He said he wanted to change the focus to one or two markets (likely Washington and Baltimore) where he would try to make a profit, not pay distribution fees in other markets and only provide about three to four hours of programming until the company has the resources to grow.
McHenry also said he is in the process of longer term fundraising, but noted that there was no time to spare to gather at least $250,000.
“I think there is so much potential here; I believe in it so much. I think that we thought of another way that is viable and doesn’t have the burn or require the kind of capital resources that that other vision had, and now it’s just about trying to find an investor or two that will believe in this new direction that will help us see it through,” McHenry said.
The network has tried a variety of ideas to raise money and look for ways to buoy its financial position.
Campbell said one of those ideas was to apply for a New Market Tax Credit, which he said generated about $500,000 in cash.
The network also entertained the idea of selling to Red Alert Media Matrix Inc. of Atlanta. (Arkansas Business readers may recall that Red Alert was the same company that offered to buy the photo archiving and sports memorabilia business once operated by John Rogers of North Little Rock.)
But that deal, which Campbell said was orchestrated by Mays, fell apart and Mays later resigned.
Mays did not return several phone messages seeking comment.
One thing that might seem confusing to industry outsiders is why Soul of the South’s programming isn’t available on the cable channel run by a station it partially owns.
That station, KMYA, was sold last May to a company called I Square Media, which shares offices with Soul of the South, for $1.9 million. The deal included a “Local Marketing Agreement” that was filed with the Federal Communications Commission and states that Soul of the South Television “will have a 10-year exclusive affiliation on the primary channel of the Station.”
I Square’s ownership structure consists of a 90 percent stake held by Rebel Media LLC of Stuttgart and a 10 percent stake held by SSN Funding LP. (S.O.S. Media Holdings Inc., which does business as Soul of the South, is the general partner of SSN Funding LP.)
Rebel Media’s ownership is made up of three Soul of the South board members: Chairman Ladly Abraham and Mangaraju Chakka, both of Little Rock, and Shashwat Goyal of Stuttgart.
The seller of the station was KMYA LLC, a business partially owned by Morton’s family. Morton’s company purchased the station, a former Equity Media Co. property, for $1 million in 2011, according to FCC documents.
Morton said in an interview that he knew he could have gotten more for the station but had made a verbal commitment to sell the station to Soul of the South. When the network could not come up with the money, he sold it to I Square for close to the same price, he said.
Morton said that from an owner’s perspective, it would be “foolish” to air Soul of the South on the primary channel, because it isn’t as popular as MeTV, the classic television network that currently airs on KMYA.
McHenry agreed that more revenue could be generated from keeping MeTV on the full-power station and SOS on the subchannel. He claimed the bigger issue is not being able to get cable operators to carry the subchannel that broadcasts SOS programming.
Abraham, the board chairman, said the decision not to show Soul of the South on the primary channel, despite the Local Marketing Agreement, was also influenced by the network’s instability.
“KMYA already had a contract with MeTV that I Square decided to keep in order to just continue to be financially viable. There isn’t any one thing, there’s a whole host of things that result in decisions [that are] made ... Everything done through KMYA, for KMYA, through and for SSN — everything was done so that the entire venture would be successful,” Abraham said.
Abraham, like many others involved in the company, said he was still hopeful that Soul of the South could turn things around and become profitable.
“If you were to ask me even six months ago, I would have told you that it was probably not going to be likely that we would survive,” Abraham said. “We continue to survive and we continue to sort of, in a way, make the necessary cuts where cuts had to be made and in the end do what it takes to make the whole venture successful.”
Soul of the South is facing litigation as well as cash-flow problems.
In December, a Chicago television station filed a complaint, which was amended in January, alleging that SOS, its owners and related entities breached a contract to lease broadcasting time for the network’s programming.
KM LPTV of Chicago-13 LLC, the licensee of WOCK-CD, claims that Soul of the South has only paid $258,767 on its contract and still owes $1.89 million. In its defense, Soul of the South says the contract terms cited by KM LPTV are not the terms it agreed to.
The Chicago company also alleges that Soul of the South interfered with the agreement by creating other entities to block, move or transfer assets away from the company.
KM LPTV has an unlikely witness. Frank Mercado-Valdes, one of the founders of Soul of the South, wrote in a sworn affidavit that the “officers and/or former officers” of the companies interfered with the contract “to avoid [S.O.S. Media] from meeting its payment obligations to KM LPTV under the contract.”
He wrote that the officers “would simply file bankruptcy to avoid having to pay” but also “utilized the Contract with KM LPTV to raise funds from outside sources and in turn placed those funds in entities they controlled.”
Soul of the South’s attorney argued that there was no factual support to those claims.