Solavei drowning in $63M of debt, files for bankruptcy
$49 is competitive, but no cheaper or more expensive than T-Mob itself, and T-Mob offer much better phones and phone choices. MetroPCS already offers similar no-contract monthly fees for nationwide service. AND it offers 4G, something T-Mob does NOT have (they have HSPA+ which is not 4G, even by Australian standards).
The question is does mobile telecom have this much margin to be sharing profit with the affiliates AND a decent corporate profit for itself?
-K. Chang, commenting on the BehindMLM Solavei Review (August 1st, 2012)
Solavei is one of those MLM companies I did an initial review on, and then it disappeared off my radar. That’s not necessarily a bad thing, as some might argue “no news is good news” when it comes to being featured on BehindMLM.
Launched in late 2012, Solavei seems to have had a decent enough run, but now the company finds itself in financial difficulty. With $63 million in financial liability hanging over their heads and an estimated annual gross-revenue of $65 million, Solvei has filed for Chapter 11 bankruptcy.
Naturally the first question that pops into one’s mind is “how did Solavei get to this point?” According to Richard White, General Counsel and Secretary of Solavei, a combination of poor initial business planning and overpaying affiliates are to blame.
In spite of its rapid growth and ability to generate substantial revenues, Solavei has encountered some financial challenges.
Solavei initially scaled its business infrastructure to support a larger network of members than was actually needed. In addition, vendor costs, in particular the cost of wholesale mobile services purchased from T-Mobile, exceeded expectations due to higher than anticipated customer usage.
The company was able to restructure many costs and vendor obligations, and in the summer of 2013, it reached agreement with its major service providers, including T-Mobile, on cost revisions that were better aligned with projected revenues.
It has also taken time and experimentation to properly structure the member commission model. The amount of commission payments owed to Solavei members for referrals and network building activities exceeded initial expectations and has required fine tuning as the business has grown.
Solavei had initially agreed to pay 50 percent of its gross profit to members in the form of commissions. However, as members found ways to maximize their commissions in ways not anticipated under the commission plan, the company was actually paying some 83 percent of its gross profits to members.
Solavei substantially revised the commission plan in March 2013 and again in January 2014, to bring its overall payout closer to the sustainable 50 percent level.
The combination of these issues have stressed the company’s working capital and liquidity as it works to recover from initial vendor costs and member commission structures that proved unsustainably high.
As a result of this stress on working capital and liquidity, the company finds it necessary to restructure its existing liabilities as it continues to grow its business. In order to effectuate that restructure, the company filed this case to utilize the breathing room and restructuring opportunities available in Chapter 11.
The initial poor planning with T-Mobile seems to have been resolved, leaving only the company’s commission payouts to affiliates. With that addressed in early 2014 however, it would seem Solavei believe they can push forward on a platform of stability.
Personally however I’m not entirely convinced. If Solavei was previously generating revenue by overpaying affiliates (to the point of unsustainability), then surely a 30% commission cut across the board is going to have some impact on their revenue generation going forward.
Let’s not forget Solavei are an MLM company that relies on its affiliate-base to drive new customers to their service and thus generate revenue.
And on the topic of revenue, I’m not entirely sure where White gets his “current” Solavei revenue figure from:
Solavei launched its first product, nationwide mobile phone service, approximately 18 months ago, in September 2012. Since that time, Solavei has signed up over 250,000 members and operates at a current annual revenue rate of approximately $65 million.
Solavei buys its mobile phone service on a wholesale basis from T-Mobile USA, Inc. and then sells it to its customers starting at $29 per month for unlimited voice and text service, and at $39 for unlimited voice, text and data service.
As of May 31, 2014, Solavei had approximately 101,500 active mobile customers
By my calculation 101,500 multiplied by $39 (best case scenario) multiplied by 12 months is $45 million. Affiliate membership to Solavei is free, so I’m not sure where White pulled the other $20 million from.
Page 148 of the 245 page Solavei bankruptcy filing reveals that the company generated
- $8.8 million in 2012
- $60.6 million in 2013 and
- $26.3 million in 2014 up to June 11th (projected $52.6 million for the year)
My calculations aside, White’s $65 million in revenue figure doesn’t match the actual bankruptcy filing.
Debt wise, as at the time of their bankruptcy filing Solavei owe
- $16 million to T-Mobile under a “wholesale supply agreement”
- $14.7 million to parties to provided the company with financing
- $3.9 million for “call center services” (disputed)
- $2.6 million for “software development contractor services” (disputed)
- $8.53 million for “business consulting services”
- $946,814 for “cell phone hardware”
- $899,211 for “network services”
- $559,000 for “legal services”
- $448,000 for “revenue management services”
T-Mobile appear on Solvei’s list of “creditos holding secured claims” for $21.7 milion, but I’m not sure if that’s in addition to the $16 million above or if it’s a portion of the same total figure.
After filing for bankruptcy, Solavei was quick to communicate with their affiliates and the general public. A press-release dated June 11th (the same day the bankruptcy was filed) reads,
SEATTLE (June 11, 2014) – Social commerce network leader Solavei, which rewards members for socially recommending mobile phone service for their friends and family, today announced a financial restructuring facilitated by the filing of a voluntary Chapter 11 petition to better position the company for continued growth and expansion.
Solavei will operate normally during the reorganization process, with all services continuing uninterrupted and member compensation paid according to regular schedules.
The company filed its voluntary petition in the U.S. Bankruptcy Court for the Western District of Washington with the intent of restructuring debt in line with operating income and more accurately align costs and infrastructure needs.
“We believe the actions taken today will give Solavei the flexibility it needs to better serve our significant member base in a high growth and rapidly changing market,” said Solavei CEO Ryan Wuerch.
“Solavei members and employees will notice no changes in service or operations as we work with our vendors and investors to refine the social commerce platform and model we pioneered. Solavei will emerge from this process equipped to continue our growth with strong operations, a better cost structure, and opportunity for our members.”
The bits in bold are strongly emphasized in the press-release itself, appearing as the second header in the original document:
Additionally, a FAQ at the bottom of the press-release advises:
How does the filing affect operations?
We will continue to operate business as usual.
Will there be interruptions to my services?
No, all services, including mobile, will continue without any interruptions.
Will compensation continue to be paid?
Yes, we will continue to pay full compensation uninterrupted on our regular monthly schedule.
This however is in stark contrast to a declaration in support of Solavei’s First Day Motions by CFO Allyn Hebner. In her declaration, Hebner writes
Solavei’s cash management system is essential to its business operations. Requiring Solavei to establish a new cash management system would cause significant delay and produce substantial disruptions of Solavei’s business, particularly when Solavei is already subject to the usual operational adjustments attendant to a Chapter 11 filing.
Maintenance of Solavei’s Bank Accounts, checks and cash management system is also essential to Solavei’s ability to fund its existing payroll which is critical to Solavei’s efforts to reorganize.
Any disruption in the means by which Solavei manages its financial affairs and satisfies its ordinary course post-petition obligations would jeopardize Solavei’s reorganization from the outset.
To that effect, Solavei has filed
- an Emergency Motion for Order Authorizing Solavei to 1) Continue Use of Existing Cash Management System and Prepetition Business Banking Accounts and Checks and 2) Honor Prepetition Referral Program and
- an Emergency Motion for Order: (1) Authorizing Use of Cash Collateral and Granting Adequate Protection Therefor Pursuant to Sections 361 and 363 of the Bankruptcy Code, and (2) Setting a Final Hearing
An “Ex Parte ORDER Shortening Time and Limiting Notice as to Hearing on Emergency Motions” was included with the second filing, which means Solavei are keen to get the matter heard as quickly as possible.
As set forth in the Emergency Motions and the Declarations of Allyn P. Hebner and Richard A. White, in support of the same, (Solavei) requires use of cash collateral in order to operate and also may suffer significant disruption (if) it is unable to maintain its existing cash management system and bank accounts and obtain interim approval of adequate assurance to utilities.
A hearing date has been set for 2pm today (13th of June US time), meaning at present, the future of Solavei is far from certain.
Meanwhile you’ve got Solavei already running around reassuring affiliates and the general public that everything is absolutely fine. Again, given that Solavei haven’t actually been granted any of their First Day Motions, I thought this was rather disingenuous.
I’m not a bankruptcy lawyer and can’t comment as to the probability of the court granting Solavei’s requests, but I do know that making definitive statement regarding commission payouts, when there’s even the slightest chance of a court decision not going your way, isn’t the smartest of moves.
Stay tuned for an update on the Solavei hearing later today (or early next week if the court records aren’t updated before the weekend).
Update 14th June 2014 – The hearing took place with a resulting proposed order sent to the Judge’s chambers for signing.