The Theranos Story, ch. 43: Walgreens settles, $54 M in cash draining away

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2016/11/jacobs-well-texas-woe1.jpg” thumb_width=”150″ /]While your Editor was on leave last week, it appears that Theranos may have grasped the thorn of Walgreens Boots Alliance’s lawsuit and settled. The Wall Street Journal (subscriber access only, largely reported on Fox Business) reported that Theranos told investors of a tentative settlement with Walgreens for less than $30 million. 

Walgreens’ lawsuit, filed last year, was intended to recoup their $140 million investment in the company and store location payments. It surprised many observers that Walgreens would be content with 21 cents returned for every dollar of its investment, but since the original contribution took place over several years from 2010, much of this has likely been written down on Walgreens’ books as adjustments for bad debt. 

But this seeming win for Theranos further rips the veil off their dire financial situation. Theranos also told investors recently that it is down to $54 million in cash, according to the WSJ/Fox Business. This is much reduced from their last report of $150 million in March [ch. 41]. With a monthly burn of $10 million a month, this would leave $120-130 million if the March estimate was correct. Part of the settlements, including Walgreens, may be covered by insurance policies. However, what has transpired since then may further account for the discrepancy.

  • In May, Theranos settled with Partner Fund Management (PFM) for an undisclosed amount which WSJ sources estimated at $40-50 million. They sought to claw back their $96 million investment. (more…)

The Theranos Story, ch. 42: the 2-for-1 share offer to investors closes, clock ticks

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2017/04/The-big-dig.jpg” thumb_width=”150″ /]Is this a sincere and generous offer, or staving off the inevitable? Theranos reported this week that it closed its 2:1 new preferred share offer. This was offered only to C-1 and C-2 round investors, the 2014-2015 $600 million round which bought in at about $15-17/per share. The hold on this was released when Theranos settled with Partners Fund Management on 1 May for an undisclosed amount [TTA 2 May].

Theranos claimed that “Holders of more than 99 percent of the shares eligible for the transaction elected to participate. Participants received new shares of the Company’s preferred stock in exchange for their existing preferred stock.” By accepting the offer, they also released any potential claims against Theranos.  Release

Fortune mostly recaps previous events such as the CMS and Arizona settlements. One interesting snippet we missed: when the investor offer was first made in April, there were reports that Ms. Holmes owed her company $25 million, which would have been the exchange basis for the return of her shares. This Editor considers that company survival drove this un-Silicon Valley-like founder equity drain, but perhaps with favorable tax or financial outcomes for Ms. Holmes.

The company buys time, but where is their technology and how much is left in the bank? The clock ticks….  Our index of previous Theranos coverage is here.

Breaking-The Theranos Story, ch. 41: settling, not fighting, with Partners Fund on fraud

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2017/04/The-big-dig.jpg” thumb_width=”150″ /]Breaking News and Updated. Settled–but not settled? Theranos’ May Day celebration was an announcement of a settlement with investor Partner Fund Management (PFM) LP on their two lawsuits alleging investor fraud. PFM’s funds had invested $96.1 million in Theranos’ February 2014 funding round. The amount and terms of the settlement were, as usual, not disclosed.

PFM’s original filing in Delaware Chancery Court in October claiming fraud on various representations that Theranos had made, such as 98 percent reliability on its small sample Edison labs. The second filing in April [Ch. 40] temporarily blocked Theranos’ added equity offer to investors, an offer which had the important condition of blocking further legal action once accepted [Ch. 38]. PFM had powerful and damaging evidence on its side from 22 deposed former employees and directors to bolster its allegations of investor fraud, which was revealed in snippets from unsealed documents last week.

This settlement, according to reports, ends both court actions and permits Theranos to continue their equity offer to investors. According to Theranos, 99 percent of investors were willing to accept it, which neatly heads off additional legal actions. The offer to C-1 and C-2 investors expires 15 May. Theranos release.

Yet the depositions obtained in this case appear to have taken on a life of their own. Digging down into the WSJ report (not yet paywalled if you go in through the ‘What people are talking about’ right-hand sidebar on LinkedIn, or if you have a subscription) is the interesting tidbit that “Federal investigators have obtained depositions taken in the Partner Fund litigation, including those of former Theranos employees and directors, according to a person familiar with the matter.” The WSJ also filed to have the depositions unsealed on Monday (1 May), which an outside entity can request under the rules of the Delaware Chancery Court even after a case is closed.

Despite settlements with PFM, the state of Arizona, and CMS, Theranos still faces a live investigation from the Securities and Exchange Commission (SEC) and the Justice Department (DOJ). There are also major lawsuits from Walgreens Boots seeking to recoup its $140 million investment (and remove the egg on their corporate face) and the Colman/Taubman-Dye suit in California. The latter action has the potential to become a much larger lawsuit, as the US District Court in Northern California has requested a show-cause from the plaintiffs on including third-party sellers (Lucas Venture Group, Celadon Technology Fund, SharePost) as defendants. It also personally charges Elizabeth Holmes and former CEO Ramesh ‘Sunny’ Balwani (ch. 39).

Time and money are running out–and with a Federal investigation in the mix, the future of Theranos still resembles our picture above.

  • In March, Theranos reported $150 million in cash holdings. With another settlement, how much is left in the bank?
  • That equity offer, expiring in two weeks, may be a moot maneuver. After investors do the math and look at the calendar, they may decide that legal action may be a better way of capturing whatever’s left, before it’s all gone or tied up in Chapter 11. Perhaps PFM is smart indeed in moving to settle early.
  • Federal investigations usually do not end happily, unless you are Mayor De Blasio of NYC. Who knows what high-powered maneuvering is going on behind the scenes to prevent Ms. Holmes’ black turtleneck from becoming orange? And where in the world is co-defendant ‘Sunny’ Balwani?

Additional coverage: TechCrunch, Bloomberg  Our index of Theranos coverage is here.

The Theranos Story, ch. 40: investor fraud revealed in equipment, fake demos, testing

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2017/04/The-big-dig.jpg” thumb_width=”150″ /]Theranos’ ‘Big Dig’ is larger than this German art installation representing a Hole to China. It was as smooth as the turf depicted. Set up some shell companies, buy equipment from Siemens, modify it to take the mini-samples for the Theranos Edison mini-lab–and run their customers’ blood tests on them. Get incentives from a credulous Arizona governor and legislature. Run fake tests for investors on this equipment. Promise $1 bn in 2014 gross profits. Then, when it all comes undone, tell the investors to take additional equity shares and not to sue, or else it’s Chapter 11. Oh yes, and settle with Arizona for nearly $5 million and CMS for $30,000 [Ch. 39].

The latest reveal in the Theranos Saga took place in busy Delaware Chancery Court in a lawsuit brought by investor Partner Fund Management (PFM) LP and two other associated funds, which invested over $96 million in 2014. The unsealed documents, part of the follow-up to a lawsuit originally filed in October 2016 [Ch. 21] and another filed this month to block the equity offer to investors, contain depositions from 22 former employees and (hold the presses) directors. The (paywalled) Wall Street Journal article revealed that Theranos bought commercial blood testing lab equipment from reputable companies including Siemens, modified them to take the miniature samples that Theranos collected, used them to conduct both customer testing and from the filing, “fake ‘demonstrations tests’ for prospective investors and business partners”. Theranos used a shell company, Protegic Procurement Company, to make the purchases. Former director Adm. Gary Roughead, USN (Ret.), was quoted as being unaware of the fact that there were “extensive commercial analyzers in use.”

Now it is not uncommon for competitors’ equipment to be used for reference purposes and testing, especially when the company still is in process for their regulatory approvals. However, the lawsuit claims that customer tests were run on these labs, and not for a limited time as Theranos claims. The demonstration test claims are even more damning as they show fraudulent intent to investors.

The other part of the PFM lawsuit alleges that Theranos investors, including them, were pressured to not sue and take the additional equity deal [Ch. 38] by an attorney representing Theranos, who suggested that the alternative was to seek Chapter 11 bankruptcy protection. “Theranos officials engineered the share offer in a way that would make it impossible for the funds to obtain “any recovery” as part of its bankruptcy filing.” The PFM filing to block was successful. On April 11, Theranos was stopped from going forward with the share-exchange plan, with that hearing scheduled for June 26, not ideal for a company which is buying time before the money runs out. Bloomberg

The ‘cherry on the fraud cake’ is Theranos’ wildly inflated projection of a $1 billion gross profit in 2014. Theranos, of course, states that “The suit is without merit, the assertions are baseless, and the plaintiff is engaging in revisionist history.” Is ‘fake news’ the next claim? Ars Technica, TechCrunch, Fortune, Engadget.

Rest assured that there are many other chapters to come, as the lawsuits continue, including one for $140 million by Walgreens Boots, and the Colman/Taubman-Dye suit in California. Our Theranos and related articles are indexed here.

The Theranos Story, ch. 29: Blame the scientists! Bring on the lawyers!

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2016/11/jacobs-well-texas-woe1.jpg” thumb_width=”150″ /]It was the fault of the scientists and the investors! That is the speculation of Quora poster Drew Smith, a former R&D director at biotech firms MicroPhage and SomaLogic. It was a round robin of founder/CEO Elizabeth Holmes’ all-too-rosy forecasts and scientists not wanting to toss a wet wool blanket on the fun by telling her what she didn’t want to hear. Mr Smith, from where his experience lies, believes that the scientists discarded the testing with bad results, passing on only the good even if flawed, in a delusional circle that ultimately went pear-shaped. Then there were the investors, who didn’t apply the usual Deep Discount to the Big Hype that all entrepreneurs weave around the Revolutionary Whatevers, for whatever reason. On this, Mr Smith doesn’t speculate. It must have been those wide-screen blue eyes, black turtlenecks, and nanotainers that kept them mesmerized. Theranos wouldn’t be the first company that failed because they believed their own press releases and pictures! Forbes  Hat tip to reader Bill Oravecz of Stone Health Innovations and WTO Associates.

And the law firms multiply. Continuing to fight Theranos’ many lawsuits in multiple courts are a bevy of Big Law firms. In Chapter 26, Boies Schiller exited, stage left, and Wilmer Hale (formally Wilmer Cutler Pickering Hale and Dorr) entered. Wilmer Hale is representing Theranos in the California class action lawsuit described in Chapter 27 and what we’ve deduced is the Partner Fund Management lawsuit filed in Delaware (Chapter 21). Here’s where Santa unloads his jolly pack of toys for the Law Boys. Cooley LLP (32nd on The American Lawyer’s 2016 Am Law 200 ranking) is busy representing Ms Holmes, who has been separately sued by Partner Fund Management, and defending an Arizona lawsuit (Chapter 22). And on deck for Theranos in the Walgreens action, also in Delaware? (Chapter 23) Newcomer Wilkinson Walsh + Eskovitz, founded earlier this year by top trial lawyers from larger firms. All those billable hours add up to gold in their stockings, coal in Theranos’. Law.com

See here for the 28 previous TTA chapters in this Continuing, Consistently Amazing Saga.

Categories: Latest News, Opinion, and Soapbox.

The Theranos Story, ch. 21: the denouement of tears, fears and lawsuits

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2015/11/upside-down-duck.jpg” thumb_width=”150″ /]Finally, Theranos sinks its labs, Wellness Centers…and 340 employees. Since founder/CEO/controlling shareholder Elizabeth Holmes has been banned by CMS from running any labs for the next two years, shutting ’em down makes total sense in terms of saving her job. (Of course, if you are one of those fired employees in Arizona, California or Pennsylvania, it doesn’t. But hey, you may be worth more than Ms Holmes!) What she’s betting what is left of the company on is the miniLab, which hasn’t exactly come heartily out of the gate. It was Gimlet Eyed at the AACC annual meeting in Philadelphia, then shortly thereafter she withdrew from FDA review a Zika test using the miniLab due to lack of a patient-safety protocol approved by an institutional review board. (Tsk, tsk–Ed.)

Now the news of a lawsuit by a major investor will, in its process, reveal more of the Bubble That Was Theranos and possibly put the banana peel under the pivot. Investors sank over $800 million into the company, and one of them, Partner Fund Management, wants its $96 million back like Lee Marvin as Walker in Point Blank. According to the Wall Street Journal, which originally wielded the needle, the charges are that they and other funds were lured in by fraudulent claims and various misrepresentations of the Edison technology and its effectiveness–in other words, that they had labs and tests that actually worked. The SEC continues to investigate, including subpoenaing Partner and possibly other investors.  ABC News, Wall Street Journal (search on title ‘Major Investor Sues Theranos’ if you hit the paywall), Gizmodo 30 Aug, 11 Oct (a wonderfully Gimlety take by Eve Peyser), and a series of acid flashbacks in Forbes

See here for the 20 previous TTA chapters.