The Theranos Story, ch. 56: Bye, bye Theranos…but the litigation continues (updated)

[grow_thumb image=”https://telecareaware.com/wp-content/uploads/2018/07/Rock-1-crop-2.jpg” thumb_width=”150″ /]No more blood in this rock. Really. Theranos, according to a report by John Carreyrou in the Wall Street Journal (unfortunately paywalled) is dissolving. An email to shareholders by (short-lived) Chief Executive David Taylor informed them that the company will cease to exist soon, and that whatever remaining cash will be distributed to unsecured creditors in coming months. The email also added that Theranos made overtures to more than 80 potential buyers through Jefferies Group, but despite 17 NDA’s signed, none succeeded. 

The dissolution process will start on Monday, pending approval by the board and shareholders. 

The shareholders’ letter is available here (PDF) including the rationale on dissolution versus bankruptcy.

Over $60 million was owed to unsecured creditors but there was evidently only $5 million (net of expenses and fees) left in the kitty to distribute, which may be enough to buy lunch or copies of ‘Bad Blood’ for most. That is because Fortress Investment Group now has full control of the assets and intellectual property. Part of Japan’s SoftBank Group, Fortress invested $65 million in Theranos in December 2017 of a possible $100 million, collateralized by the patent portfolio. [TTA 28 Dec 17] At the time of the Holmes/Balwani indictments by the DOJ in June (nine counts of wire fraud and two counts of conspiracy), reports indicated that Theranos would shutter by the end of July.

The few remaining employees were reportedly given notice last Friday. The website is offline. No one from Theranos is speaking to media. This Editor wonders what the shareholders from the $600 million funding round [TTA 18 May 17] will do with their doubled shares–presumably, use the paper as firestarter in their fireplaces this winter along with their printed selfies with Ms. Holmes. (Fear not, they will be receiving a copy of the certificate of dissolution to give to their accountant and IRS.) 

At the time of the Fortress investment, this Editor wrote:

Our takeaway is that the IP is worth far more than the company and that is what has been bought. SoftBank would dearly like another entree into Silicon Valley for their tech portfolio and can use that IP, if not at Theranos, elsewhere. For Fortress, which has $36.1 billion in assets under management and now backed by SoftBank, $100 million is pocket change with a smidge of lint.

One wonders what SoftBank and Fortress will be doing with that IP.

Theranos will not be leaving the headlines soon, as the June indictment of Holmes and Balwani (who was pushed out by Holmes in 2016) and the sidelights produced by their ‘Tainted Love’ will provide schadenfreude for many months.

Reports: Reuters, CNBC (video-Squawk Box), USA Today, TechCrunch  Our 55 chapters chronicling the slow-motion crash of Theranos can be accessed here.

The Theranos Story, ch. 50: DOJ indicts Holmes, Balwani for fraud (updated)

[grow_thumb image=”https://telecareaware.com/wp-content/uploads/2016/11/jacobs-well-texas-woe1.jpg” thumb_width=”150″ /]The other shoe drops into this bottomless well. If Elizabeth Holmes and Sunny Balwani thought that the March SEC action [TTA 15 Mar] would be it, they were misinformed. Today, the Department of Justice, US Attorney’s Office for the Northern District of California, charged them with two counts of conspiracy to commit wire fraud and nine counts of wire fraud. According to CNBC, they were arraigned in US District Court in San Jose Friday morning. Both were released on $500,000 bond each and ordered to surrender their passports. Holmes’ parents appeared with her in court.

If found guilty, both Ms. Holmes and Mr. Balwani face up to 20 years in prison, plus $250,000 in fines and clawing back of investor funds. 

“Wire fraud” in US law is fraud that is enabled and takes place over phone lines or involves electronic communications. By appearing online, making phone calls, emailing materials such as marketing materials, statements to the media, financial statements, models, and other information, Ms. Holmes and Mr. Balwani defrauded potential investors. Patients and doctors were defrauded by ads and other types of solicitations to use Theranos’ blood testing services at Walgreens, despite the fact that they knew the test results were unreliable.

Both Ms. Holmes and Mr. Balwani will have plenty of time to explain their sincere belief that their test devices and methods would be validated with time…but they had to, in Silicon Valley parlance, fake it till they made it. Indictments of this type take about two years to conclude, especially if they are big (as a formerly $9 bn valued company is) and tangled. Ms. Holmes will undoubtedly release statements on how she is being martyred like Saint Joan, how this doesn’t happen to men in Silicon Valley, and that they are allowed to fail but she can’t. Perhaps she was under the spell of the 19 years-her-senior Svengali Balwani. (Minus the Jobsian black turtlenecks, one anticipates her next choice of wardrobe. Sackcloth tied with a rope? Chain mail?)

Expect the doors to shut soon. Fortress Investment Group, which loaned Theranos $65 million (of a reported $100 million) in December 2017, was reportedly coming for the assets (as they are wont to do) by the end of July, according to the Wall Street Journal and other sources. 

Ms. Holmes is–finally–removed as CEO. Theranos announced that David Taylor, the company’s general counsel, has been appointed CEO as well as general counsel, while Ms. Holmes will remain as founder and board chair. None of this is reflected on their website. In fact, Mr. Taylor is nowhere to be found on the website’s leadership page. 

The estimable John Carreyrou, who broke the story in the WSJ and is the author of Bad Blood [TTA 13 June], on The Street’s Technically Speaking podcast at 06:00 shared this insight on how Theranos got away with bad tests. While both FDA and CMS highly regulate lab testing and the machines that perform them, neither actively police “lab-developed tests, which refer to tests fashioned with their own methods and devices” for blood testing. Basically, according to Mr. Carreyrou, Holmes and Balwani, our Bonnie and Clyde, “drove a truck right thru that loophole and took advantage of it.” Far beyond B&C, $1 bn of investors’ money is the Federal Reserve of banks.

On the indictment: WSJ, CNBC. The Northern District release on the indictment is here. Another essay by Mr. Carreyrou published 18 May is available to those who can get past the paywall. Hat tip to Bill Oravecz of WTO Consultants.

Updated: For additional coverage of what’s next in the legal vein for Holmes and Balwani, see the NY Times on potential defense strategies for the duo, including that they truly believed what they were saying to investors was true and they were bamboozled like everyone else, ‘materiality’–that investors didn’t use the statements as a basis for investing, and ‘prove it’. Will they take a plea deal? Stay tuned. 

The Theranos Story, ch. 45: a ‘Christmas present’ $100 million loan from Fortress averts bankruptcy (updated 8 Jan)

[grow_thumb image=”https://telecareaware.com/wp-content/uploads/2016/11/jacobs-well-texas-woe1.jpg” thumb_width=”150″ /]A present or a Trojan Horse? Revealed on Christmas Eve by the intrepid John Carreyrou of the Wall Street Journal (paywalled) is Theranos’ securing of a $100 million loan from Fortress Investment Group LLC. This Editor notes the word ‘loan’, and loans come with conditions. Mr. Carreyrou revealed that according to an email sent by (unbelievably still in place) CEO Elizabeth Holmes on Friday 22 December and reviewed by the WSJ, it is “subject to achieving certain product and operational milestones.” 

As our Readers know, with the Walgreens Boots settlement in August, cash on hand from June was about $54 million with a burn rate of $10 million per month [TTA 3 Aug]. Technically, Theranos was out of funds by December. This Editor thought the next article on Theranos would be an obituary issued from their warehouse in Newark, California. Updated: As of 8 Jan, there is no announcement on the Theranos website or comment to press.

According to the article, Fortress specializes in distressed investments. “The loan from Fortress is collateralized by Theranos’s patent portfolio and the deal grants Fortress warrants for 4% of the company’s equity, Ms. Holmes told investors in her email. She said she anticipated the loan would provide Theranos “sufficient liquidity through 2018” which is quite a fan dance.

Interestingly, Japan’s SoftBank Group completed its acquisition of Fortress yesterday (release). 

Our takeaway is that the IP is worth far more than the company and that is what has been bought. SoftBank would dearly like another entree into Silicon Valley for their tech portfolio and can use that IP, if not at Theranos, elsewhere. For Fortress, which has $36.1 billion in assets under management and now backed by SoftBank, $100 million is pocket change with a smidge of lint. Remaining investors also have likely written down the value on their investment. It’s a bit of a tweak on the expected denouement, but do not bet on Theranos and Ms. Holmes rising like phoenixes from the ashes of their Edison lab equipment.

Updated: Theranos’ last words on their website tout their accepted/presented publications and posters, but there is no further word on Theranos’ actual sale of Zika virus detection technology or the much-touted miniLab. It’s all a far cry from the palmy days three years ago of co-marketing with Walgreens and Ms. Holmes headlining Forbes, Fortune, and dozens of healthcare conferences and accumulating nearly a billion in funding as The Greatest Thing Since Sliced Bread.

Prediction for 2018: Ms. Holmes will be removed and replaced, then the company will be reorganized and/or renamed.

Full WSJ article on Yahoo! Finance. CNBC. Gizmodo. Our prior chapters on the Theranos Story are here