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Welcome to Lowpass! This week: Redbox goes belly-up.

Redbox goes out with a bang 

“We had entered into an unbelievable forest fire.”

That’s how Richard Pachulski, a lawyer who was recently brought on by Redbox’s corporate parent Chicken Soup for the Soul Entertainment to represent the company in its bankruptcy case, described his experience during a case status conference Wednesday. “I have seen a lot, but I had not quite seen this before,” he added.

Pachulski had planned to address the court that day to give an update on efforts to sell off assets and salvage the company. Instead, he had learned just hours earlier that there was no way forward for the company, leading him to drop a bombshell: Pachulski asked the court to convert the case from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy, effectively paving the way for shutting down the company and liquidating its assets.

“There is no means to continue to pay employees, pay any bills, otherwise finance this case. It is hopelessly insolvent,” responded United States bankruptcy Judge Thomas Horan, adding: “Given the fact that there may also be at least the possibility of misappropriation of funds that were held in trust for employees, there is more than ample reason why this case should be converted. So I am going to grant the motion.”

The roughly one-hour hearing was as bonkers as the past couple of months have been for Redbox, Chicken Soup and its employees. I’ve been following Redbox’s rapidly accelerating downward spiral since early spring, and first wrote about it in this newsletter in March. Back then, it became apparent that Chicken Soup was running out of money, had stopped paying bills, and had been sued by key business partners like NBCUniversal and CVS.

In June, the company’s decline further accelerated, and I covered for The Verge how it blew up a legal settlement with NBCUniversal, its cars fleet was about to get repossessed, and it filed for bankruptcy after failing to make payroll. 

During all of this time, I was talking to Redbox employees, who told me horror stories about losing health insurance, not being able to get oil changes for their cars, and at times not even being able to fill up their gas tanks because corporate credit cards didn’t work. All of this resulted in a feature-length story about Redbox’s unraveling for The Verge that also looks at the impact the pandemic had on Redbox, upheaval inside the company, and more. Go read it if you haven’t yet. I promise it will make your head spin.

But it turns out that we’re not done with holy sh*t moments yet. During Wednesday’s hearing, it was revealed that:

• Chicken Soup for the Soul Entertainment failed to pay payroll taxes for 9 months.

• It also didn’t pay for health insurance for 2.5 months, but kept deducting employee health insurance contributions from paychecks – until those paychecks stopped coming altogether in mid-June.

• After filing for bankruptcy, the company raised some money from its lender to cover paychecks and reinstate health insurance – but it didn’t raise enough to actually meet these obligations, resulting in its workforce still being uninsured.

Employees had actually brought up the health insurance deductions with me before, and one of them even sent me their pay stub that clearly showed a deduction being made during a time when Chicken Soup did not pay for health insurance. However, the company promised in June to retroactively reinstate coverage. Had it kept those employee contributions in an escrow account for that purpose, everything would have been … well, not fine exactly, because people still lost coverage, but at least legally sound.

Turns out there was no such account. Chicken Soup for the Soul Entertainment had just $25,000 in the bank when it filed for bankruptcy, Pachulski revealed Wednesday.

The company also kept deducting 401k contributions from paychecks, and that money is allegedly MIA as well. Asked whether Chicken Soup actually paid those employee contributions into the respective retirement accounts as it was supposed to, Pachulski responded: “I would be shocked if they were properly dealt with.”

“If that’s the case, I find it sickening, frankly, that money was taken from the paychecks from these people, and not put it where it belonged,” judge Horan said Wednesday. “It’s incredibly disturbing.”

“The massive mismanagement … this is beyond the pale of anything I have seen,” agreed  Pachulski. “I think what has been done here is criminal, to be very frank.”

Which begs the question: How is it possible for a publicly-traded company to behave this way? Pachulski strongly suggested Wednesday that it all came down to former CEO Bill Rouhana, who also held a controlling stake in the company.

“Mister Rouhanna kept it so close to his vest that nobody really had any information,” Pachulski said, adding later that even the company’s board did not know about Chicken Soup not paying any payroll taxes for nine months. “The trainwreck we all witnessed, Mister Rouhana kept that from everybody,” he said. “It’s kind of incomprehensible how all that happened.”

To be fair: It appears that there was no path forward for Redbox even under a restructuring bankruptcy, with Pachulski telling the court that the entity’s payroll was higher than its current earnings. “We were going to have to shut down the Redbox entity and terminate the employees,” he said. The plan was to retain only between 100 and 150 out of over 1000 employees, primarily in other parts of the company.

However, employees might have at least gotten their final pay under such circumstances. Now, they’re left with nothing, except rage at the former leadership. “Everyone’s goal is to take Bill [Rouhana] down,” one employee told me Wednesday.

On Thursday, employees were told during a town hall meeting that they do still not have health insurance, and should sign up for ACA coverage. Speakers professed that they did not know about many financial details, but hoped that 401k contributions would get reimbursed eventually. However, they also expressed doubts that employees would ultimately get all of their owed money back. On a recoding of the call I listened to, Chicken Soup for the Soul Entertainment’s distribution EVP David Fannon said: “We’re all unsecured creditors to the company now. It is what it is.”

“I really feel for these employees,” Judge Horan said Wednesday. “It’s unacceptable. They deserve a lot better.”

Pachulski agreed: “To say that this is one of the most horrific experiences of my career is a massive understatement.”

What else

Vision Pro sales below 100,000 units this quarter. That’s according to IDC, which estimates that Apple won’t surpass 500,000 headset sales this year.

YouTube Shorts get TikTok-style voiceovers. Other additions include auto-captions and Minecraft effects.

Sonos to launch new soundbar powered by Mayht’s speaker tech. The Verge’s Chris Welch has the scoop on a new high-end soundbar that will rely on innovative transducer technology from Mayht, a company Sonos had acquired in 2022.

Spotify adds comment section to podcasts. What could possibly go wrong?

Matthew Ball interviews Meta CTO Andrew Bosworth. An interesting deep dive on Meta’s work in AR and VR.

That’s it

I just got back from a family vacation and had originally planned to take an extra day to put this newsletter together. Redbox had other plans, I guess. Anyway, one of the things I discovered and immediately fell in love with during my vacation is coffee milk. Delicious. Now, where can I get some in the Bay Area?

Thanks for reading, have a great weekend during your weekend this weekend!