With Operating Expenses Reduced, Soul of the South's Future Unclear

With Operating Expenses Reduced, Soul of the South's Future Unclear
Doug McHenry, CEO of Soul of the South, a TV network based in Little Rock. The company is attempting to turn around operations despite legal and financial struggles. (Karen E. Segrave)

Soul of the South is attempting to turn its operations around amid a host of legal and financial issues facing the company.

The fledgling television network is the subject of at least two lawsuits in federal court and has been notified it owes $250,000 on a loan from the state. But at least one board member says he is hopeful that good things are in the works.

Soul of the South, launched in 2013, with financial backing from the Arkansas Economic Development Commission and the Arkansas Development Finance Authority now totaling about $1.75 million. The company and its related entities have also received a $1.5 million loan from Arkansas Capital Corp. and more than $10 million from community development entities.

A spokesman for AEDC said last week that the agency is speaking with the company to work out a payment plan on a $250,000 Quick Action Closing Fund loan from December. The company will also present employment figures at the end of the month as part of a review of another $500,000 awarded by the agency. But SOS will benefit from an agreement that allows four years for certain employment levels to be met.

CEO Doug McHenry provided a status update to the board in a meeting earlier this month, including details on reducing expenses and maintaining revenue that were not publicly disclosed. McHenry declined to comment on the board’s discussions, but said he had no plans to file for bankruptcy or to wind down operations. He said the company employs 37 people — about the same as in March — and has increased gross revenue 130 percent since February.

“Last month, June, the company generated its highest gross revenue in its history. In May the company posted its first operating profit in its history and realized an operating profit in June as well. Operating expenses have been reduced over 500% since the beginning of the year,” McHenry said in an emailed response to questions sent by Arkansas Business.

SOS Emails

Email exchanges to and from the two state agencies that have funded the company provide a brief history of some of the issues its management has faced in recent months.

The messages, released to Arkansas Business under a Freedom of Information Act request, show uncertainty and confusion about the state of the operations, as well as an attempt to remove the general partner and questions about the future.

In a March 5 “status report” from McHenry to several board members, he wrote that the company was “besieged by a confluence of forces which present both jeopardy and opportunity.”

“Financially the company is in difficulty. It has or will run out of cash this week (current cash position is approx., $5,200.) and is unable to meet certain basic obligations such as the mortgage on its building and other debt obligations,” he wrote.

Around the same time McHenry laid off about a quarter of the company’s employees and told Arkansas Business that he was trying to raise money to stay afloat. In his status report to the board members, he noted that while he had been forced to make cuts, the company had its best revenue-producing period in January, totaling $84,000.

But less than a month later, the board met again and discussed “winding down” operations without making a decision.

That same week, the AEDC began circulating a proposed statement to release to the media if Soul of the South was forced to close.

“We are disappointed to learn that Soul of the South has discontinued their operations and will evaluate legal and financial remedies to try and recoup our expenditures with this company,” the statement read.

A new strategy also appeared to emerge shortly after the meeting. Emails from that time show a plan to remove the general partner, S.O.S Media Holdings, which Secretary Bill Campbell wrote in an April 2 email owed the company for its partnership interest. The message ended up in the inbox of Brad Henry, the vice president for development finance at the Arkansas Development Finance Authority, who serves on the board.

About a month later, McHenry emailed a group of attorneys, economic development officials and others involved in the company, stating that the “cure period” mentioned by Campbell in the April 2 email had expired and encouraged a discussion about “what comes next.”

“In my opinion as you may know ADFA and the other Entities (AEDC and ACC) have in effect veto power over what comes next because of their ‘Special Limited Partner’ status or position of creditor and the size of their financial interest,” McHenry wrote.

McHenry wrote that “whatever new structure is decided upon must balance the interest of transparency, attractiveness to new investors and the interest of current stake holders.”

Henry said in an interview that the company has not yet changed its structure and declined to comment on efforts to remove the general partner.

Christopher Clark, one of the company’s founders and an original investor, said in an interview that he has sent notices to the board protesting the restructuring. He called the plan “not legal,” based on the agreements that were used to secure funding for the company’s launch.

In a July 1 email to Henry at ADFA, Tom Dalton, the Innovate Arkansas director who holds the other ADFA seat on the company board, forwarded an email from Clark requesting a special shareholders meeting. He noted that the email was followed up by another director’s resignation from the board.

“Brad, is this the beginning of the legal battle?” Dalton wrote.

Dalton did not return messages seeking comment last week.

Earlier this month another founder and early investor, Frank Mercado-Valdes of New York, wrote to the board opposing restructuring the company.

“I trust you will guide yourself in accordance with the law and contemplate the consequences of this ill-advised and illegal path,” he wrote.

Pending Litigation

Besides a potential legal challenge if the company chooses to restructure, Soul of the South is also the subject of a programming contract dispute in Illinois and a recent filing out of New York.

Earlier this month, one of the company’s earliest investors filed a lawsuit against the company and its original CEO, alleging the misuse of his funds.

James Evans, a New York lawyer, claims that the company’s first CEO, Edwin Avent, accepted a total investment of $250,000 from him between December 2011 and March 2012, but misled him regarding the use of the funds and then commingled the money in an account for another company Avent owned. Evans is seeking to recoup his investment, as well as damages for breach of contract, breach of fiduciary duty, negligent misrepresentation, fraud and conversion.

Avent said in an interview that he had not heard about the lawsuit and declined to comment when he was provided with a copy.

McHenry, the CEO of Soul of the South, also declined to comment on the case.

In the Illinois lawsuit, KM LPTV of Chicago-13 LLC, the licensee of WOCK-CD, claims that Soul of the South still owes $1.89 million on a programming contract. Soul of the South has argued that the contract terms cited by the Chicago company are not the terms it agreed to. That case is pending.

The Path Forward

Henry said in an interview that he felt Soul of the South was trending in a good direction. He declined to say if the company had picked up any new business, but pointed out that operational expenses had been slashed.

“The company is stabilizing and seems to be on a positive path going forward,” Henry said.

But Brad Henry said the company still has a long way to go before operations are completely turned around. He said an agreement has to be worked out with the AEDC over the $250,000 loan and that McHenry has set some short-term goals for the next six to eight weeks.

“Positive is obviously a relative term. It was nice to have some, what I would consider, not negative news from the company,” Henry said.

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