How ‘precarious’ are Jawbone’s finances?

January 28, 2015, 5:59 PM UTC
Inside The 2015 Consumer Electronics Show
Hosain Rahman, chief executive officer of Jawbone Inc., speaks at a news conference during the 2015 Consumer Electronics Show (CES) in Las Vegas, Nevada, U.S., on Monday, Jan. 5, 2015. This year's CES will be packed with a wide array of gadgets such as drones, connected cars, a range of smart home technology designed to make everyday life more convenient and quantum dot televisions, which promise better color and lower electricity use in giant screens. Photographer: Michael Nagle/Bloomberg via Getty Images
Photograph by Michael Nagle — Bloomberg/Getty Images

In August the global contract manufacturer Flextronics filed a little-noticed breach of contract lawsuit against Jawbone, the fitness tracker maker. The suit came and went quickly, appearing on the docket of a Santa Clara, Calif. county court house for precisely one day. Jawbone says the suit was settled. Flextronics declined to comment at all.

Neither side has much to gain from the suit receiving widespread attention. Flextronics wants to collect money from its customers. Jawbone—referenced in the suit by its legal name, AliphCom—wants to project the image of a vibrant startup.

Jawbone is far from a success. It’s the central theme of a feature story in the current issue of Fortune, “Jawbone: The trials of a 16-year-old can’t-miss startup.” The company has been plagued by execution problems, including the delay of its newest fitness bracelet, the UP3.

The company says nothing about its finances, other than to acknowledge that it doesn’t make money. Yet last summer Flextronics seemed to think Jawbone’s financial condition was downright lousy. “Jawbone has materially (and repeatedly) breached the terms of a clear and unambiguous contract … to the extent of over $20 million in goods received but not paid for,” the suit alleges. Flextronics said in its suit that it was concerned about being unable to collect what Jawbone owed it “due to Jawbone’s admitted precarious financial condition.” In another section of the suit Flextronics alleges that according to “statements made by Jawbone representatives, Jawbone’s financial condition is perilous and currently insufficient to pay its debts.”

One reason why Jawbone, a company with hundreds of millions of dollars of revenue, is having trouble paying its debts is that it isn’t profitable. What’s more, it has had trouble raising additional funding, despite having collected more than $400 million in debt and equity over the course of its 16-year existence. As previously reported, Jawbone agreed with financial firm Rizvi Traverse early last year to an investment round of $250 million. Yet over the course of 2014 not all the investment materialized. According to the Flextronics suit, in late June Jawbone agreed to a five-month payment plan with Flextronics. “Jawbone advised Flextronics that it would be receiving additional funding that would assure Jawbone’s ability to make the payments,” the suit says.

According to the suit, Jawbone again failed to make a payment deadline, prompting the suit, which was promptly settled. Jawbone, surprised the lawsuit documents were publicly available, issued the following statement: “The fact that the lawsuit was so quickly dismissed after it was filed shows that this business dispute was really more of a miscommunication between two partners.” According to multiple sources, Jawbone repeatedly has been late on payments to various vendors over the course of its corporate history.

Miscommunication or not, Jawbone continues to raise money. As of mid-January, it had received commitments of $169 million of the original $250 million it expected to collect in early 2014, according to a source knowledgeable about its fundraising. Jawbone did have enough cash to buy hedge fund Fortress Investment Group out of $20 million in debt in that Fortress had issued in 2013. Neither Jawbone nor Fortress would say why Fortress exited investment months after making it.

Flextronics v. AliphCom dba Jawbone