Shares of Chicken Soup for the Soul Entertainment (CSSE) fell as much as 9% yesterday, after an anonymous research report on SeekingAlpha.com questioned the television programmer's earnings quality. By the close, the stock had narrowed its day's loss to 3%, finishing at $7.84 a share. Barron's had mentioned the company yesterday as one of the small firms that came public under relaxed rules set by the U.S. Securities and Exchange Commission, known as Regulation A+ (" Most Mini-IPOs Fail the Market Test," Feb. 13, 2018). The company raised $30 million in August 2017, at $12 a share.
Yesterday's SeekingAlpha piece appeared under the byline of Hindenburg Investment Research, an unidentified "activist investor" that says it has shorted Chicken Soup's stock. One of the report's critiques of Chicken Soup Entertainment -- which is a spinoff of the publisher of several hundred inspirational books -- is that a hunk of the little company's pre-IPO revenue came from a charity that's connected to chief executive William Rouhana. Specifically, Chicken Soup Entertainment got 95% of its 2015 revenue and 46% of its 2016 revenue from the Boniuk Foundation, a charity established by the family of the wealthy Houston eye surgeon Milton Boniuk.
Rouhana told Barron's that the eye doctor contacted Rouhana's publishing company several years back and they've collaborated on anti-bullying books and school programs. Boniuk's charity sponsored a Chicken Soup TV series and put Rouhana on its advisory board. Rouhana, in turn, gave the charity shares in 2015 that now represent about 3% of the outstanding stock in Chicken Soup Entertainment. Needless to say, the charity's investment has benefited from the revenues it contributed to Chicken Soup Entertainment's income statement.
The production company had additional sponsors last year, said Rouhana. "They are one small part of our overall company," he said, of the foundation, "and we are one tiny part of their overall activities."
Rouhana bristled at the short report's scrutiny of the Boniuk family's foundation, which promotes religious tolerance and anti-bullying programs. "These are very good people," Rouhana said, "and they are spending half of their life's fortune on these kinds of activities."
A second concern raised in the Hindenburg note was Chicken Soup Entertainment's plan to report an accounting gain in its December-quarter results from its purchase of a film library in November. The company paid about $5 million for assets that its appraiser values at more than $31 million, so Chicken Soup expects to book $22.2 million as a "gain on bargain purchase." Rouhana told Barron's that the accounting treatment is what's required under Generally Accepted Accounting Principles, and notes that the acquired titles generated $5 million in cash flow last year.
Shares of Chicken Soup for the Soul Entertainment have risen 0.6% to $7.89 at 10:17 a.m. today.
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