Solavei, a multi-level marketing company offering mobile services, has filed for Chapter 11 bankruptcy, citing $63 million in financial liabilities. The filing comes despite an estimated annual gross revenue of $65 million, signaling deep financial distress for the company launched in late 2012.
The company's $49 monthly mobile plan was priced similarly to T-Mobile's direct offerings, which provided better phone selections. MetroPCS also offered comparable no-contract fees for nationwide service, often with 4G technology that Solavei's network, based on T-Mobile's HSPA+, did not match. This raised questions about the mobile telecom sector's margin capacity to support both affiliate profit-sharing and corporate profitability.
Richard White, Solavei's General Counsel and Secretary, attributed the financial difficulties to poor initial business planning and excessive affiliate payouts. Solavei initially built its infrastructure to support a larger network of members than it ultimately attracted. Vendor costs, particularly for wholesale mobile services from T-Mobile, exceeded projections due to higher than anticipated customer usage.
The company restructured many costs and vendor obligations. By summer 2013, Solavei reached agreements with major service providers, including T-Mobile, on cost revisions aligned with projected revenues.
Solavei also struggled to properly structure its member commission model. The company initially committed to paying 50 percent of its gross profit to members for referrals and network building. However, members found ways to maximize their commissions beyond initial expectations, pushing the actual payout to approximately 83 percent of gross profits.
Solavei revised its commission plan in March 2013 and again in January 2014. These adjustments aimed to bring the overall payout closer to the sustainable 50 percent level. The combined impact of these issues strained the company's working capital and liquidity, hindering its recovery from initially high vendor costs and an unsustainable member commission structure.