Just a few weeks after filing for Chapter 11 bankruptcy protection, Solavei CEO Ryan Wuerch said that the company is doing better than expected. "We're actually doing far better than we anticipated," he told FierceWireless, estimating that only around 5 percent of the company's customers know about its bankruptcy filing. "We've had very little attrition."
T-Mobile US (NYSE:TMUS) MVNO Solavei filed for Chapter 11 bankruptcy protection earlier this month, but said it will continue to operate normally while it restructures. The company launched service in the fall of 2012, and anticipates exiting bankruptcy later this year.
Solavei's bankruptcy filing, obtained by FierceWireless, offers a surprisingly candid view into the MVNO's business--which is rare, considering most U.S. MVNOs don't offer much information on their customer numbers and revenues. According to Solavei's bankruptcy filing, the company was founded in late 2011 around the concept of "social commerce." Specifically, Solavei pays a $5 referral commission each month for every subscriber a customer personally refers to Solavei, and this monthly commission continues for as long as the referred subscriber remains a Solavei customer. Under Wuerch's direction, the company has grown to 51 full-time employees and an annual revenue rate of $65 million. The company has signed up a total of over 250,000 customers to its service since it launched, and as of May 31 it counted 101,500 customers. Around 35,000 of those current customers have built networks that qualify for commissions.
And, in October, Solavei expanded its business further with its "Marketplace" service, which offers participants discounts on restaurants, coffee shops, clothing and other retail purchases. And that's not the end of the company's ambitions: "Solavei intends to introduce residential gas and electric service as its next consumer product and has been negotiating an entry to the energy sector with a person-to-person energy distribution company," the company wrote in its bankruptcy filing.
However: "In spite of its rapid growth and ability to generate substantial revenues, Solavei has encountered some financial challenges," the company wrote. "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."
Wuerch said Solavei initially built its business to handle millions of customers, but wasn't able to attract nearly that number.
Further, Solavei said that it initially aimed to pay around 50 percent of its gross profit to customers 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," the company wrote.
Although Solavei reworked its contract with T-Mobile in the summer of 2013, and it overhauled its commission structure in March of 2013 and again in January of 2014 to bring it closer to the 50 percent payout mark, those actions weren't enough. "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 company wrote.
Solavei said it owes Opus Bank $5 million and T-Mobile $16 million.
Wuerch said that the company's bankruptcy filing so far has been a "positive process." He said the company has a strong reorganization plan and is working through it with the participation of its lenders. But Solavei has lowered its revenue expectations for this year--"There could be some attrition," Wuerch noted. "We're taking a very conservative stance. … We're putting that into our forecast."
He said that the company continues to add members every day, and is still providing service and making commission payments. "We continue to grow," Wuerch said.
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