TelexFree’s 2013 profit-loss doesn’t add up
A profit & loss statement recently filed in the US state of Alabama provides some insight into the financials of TelexFree.
Marked as an exhibit of an “application for interexchange authority”, the statement reveals that for the year 2013, TelexFree took in $689 million USD from their affiliates.
Affiliate commissions and other expenses ran up a liability of $652 million, leaving TelexFree with a “net income” of $36 million.
On paper that sounds great… until you consider TelexFree’s business model.
TelexFree’s profit & loss statement doesn’t explicitly clarify how much of the $689 million they took in was AdCentral investment positions. If we are generous though and peg this figure at 50% (and anybody in TelexFree knows I’m being extremely generous here), that means a total of $344 million revenue was raised.
Divide that by $299 and you wind up with a total of 1.1 million AdCentral positions being generated in 2013.
Paying out $20 a week for 52 weeks, this would result in a cumulative liability of $1.14 billion dollars.
Now even if we ignore every commission except AdCentral ROIs, and attribute TelexFree’s entire commission payouts ($622 million) to AdCentral ROIs, that still leaves a deficit liability of $518 million going into 2014. And remember, we’ve totally discounted any other commission payouts.
Why TelexFree abruptly rushed to change the mechanics of the existing AdCentral investment positions affiliates held should be glaringly obvious at this point; and it doesn’t take a genius to realise the probability of TelexFree meeting their AdCentral ROI liabilities for 2014 is next to nil.
Not withstanding all the additional AdCentral positions invested in during 2014, and the fact that the company pays out other commissions (additional liabilities), as is typical of Ponzi schemes, the returns owed to affiliates would have easily topped 1 billion in 2014, with the company taking in substantially lower than this amount as opposed to 2013.
Assuming a high-level of re-investment (which any honest TelexFree affiliate will tell you is part of every affiliate investor’s “strategy”), liabilities takeoff far beyond that of real money being pumped in at the bottom.
Someone over at TelexFree must have crunched the numbers and hit the panic button. And that’s why the last few weeks have been the way they have.
Short of Zeek Rewards in the few weeks prior to their SEC shutdown, I haven’t seen such a poor roll out of compensation plan changes and lack of affiliate communication.
In light of their financials laid out bare for all to see (and calculate the utter impossibility that they’ll be able to meet their AdCentral ROI liabilities in 2014), no doubt TelexFree will be rather unhappy about the information being made public.
In their Alabama filing, the company requested confidentiality from the Public Service Commission and asked that they file the profit & loss statement “under seal” – a request the commission ignored.
As it is TelexFree’s banking services are under strain, with many affiliates reporting that non-US affiliates were unable to withdraw funds held by TelexFree. With TelexFree’s website going down over the last few hours, even those in the US had trouble attempting to withdraw their money.
Some of the confusion seems to stem from TelexFree’s ever-changing withdrawal rules, which apparently now require new affiliate contracts and VOIP packages to be placed under an affiliate. Why old accounts can’t be counted towards withdrawal qualification is unclear, however by requiring new accounts to be used, TelexFree do effectively recoup some of the money they’ve already paid out to affiliates (who are able to spend virtual TelexCredits to fund the required accounts).
Meanwhile over in Brazil judicial decisions continue to go against TelexFree.
I’ve lost count of exactly how many appeals TelexFree have filed in Brazil (it’s well over twenty at this stage), but their latest appeal (the second against their rejected bankruptcy protection application) has also been rejected.
The original appeal was an attempt to cast doubt on the trial that led to a Judge in Espirito Santo denying TelexFree’s bankruptcy protection request back in September of last year. TelexFree filed an appeal against the decision, but it was also denied because TelexFree’s business registration fell short of the two-year required minimum.
In this recently filed second appeal, TelexFree argued that the trial that led to the initial decision was “defective”. Unlike Carlos Costa’s YouTube rants however, if you’re going to argue something in court you need actual evidence to back up your assertions.
And this is where TelexFree failed, with Judge William Couto Gonçalves observing:
(TelexFree) did not show evidence of defects in the trial, but (rather a) dissatisfaction with the decision.
Being unhappy with a decision alone is not grounds for an appeal against a decision to be granted, and so Gonçalves and “other members of council” voted to deny TelexFree’s appeal.
A second ruling went against TelexFree late last week, with a Judge in the 2nd Civil Court of Rio Branco granting the State Attorney’s appeal. The appeal was filed in objection to an earlier ruling that held the state of Acre responsible for footing a R$500,000 bill for “expert testimony”.
TelexFree had initially been ordered to front the money, but argued they were unable to due to their assets being frozen. This appeal was granted, however due to Brazilian law deeming Public Prosecutors exempt from paying costs in civil cases, this meant the financial burden fell back to the state.
Last week the State Attorney’s Office successfully argued that the state of Acre was not entered in as an official part in the case, nor were they given a chance to respond or provide any input before the initial appeal was granted.
The decision is currently preliminary, with TelexFree able to appeal the decision if they wish. This would seem unlikely however, as Carlos Costa recently appeared in a YouTube video and said the company was willing to pay the R$500,000 fee.
This is likely due to the fallacy of TelexFree arguing that they were unable to pay R$500,000 due to their assets being frozen, but then having Costa appear in a YouTube video to make a big deal about how quickly TelexFree recently paid a R$70,000,000 tax fine.
The notion that the company can pay one fine but not another, like the mathematics behind their 2013 profit & loss statement, doesn’t add up and would likely fail if presented as an appeal against last Friday’s decision.
Finally I’m also hearing rumblings of a new TelexFree-branded debit card on the horizon that is being touted as an ewallet replacement. Details at this stage are sketchy, but it does raise the question of whether or not there might be problems between TelexFree and their current payment processor, iPayout.
With TelexFree currently under SEC investigation, iPayout are no doubt well aware they are facing the prospect of becoming collateral damage should the agency decide to shut TelexFree down and file charges.
Despite the company taking in $689 million from affiliates and paying out $622 million to earlier investors last year alone, whether the SEC take any action against TelexFree remains to be seen.
Footnote: TelexFree’s 2013 profit & loss statement can be viewed over at Patrick Pretty, who were first to report on the filing (link is in the third paragraph from the bottom).