Theranos’ Letter To Shareholders Shows The Company is actually On Its Deathbed

Theranos, the disgraced blood testing company, is actually in dire financial straits along with also may have to default on a $100 million loan, according to a letter to shareholders by its CEO Elizabeth Holmes that will was obtained by BuzzFeed News.

inside the note, sent to investors Tuesday, the embattled Theranos founder said that will the company had hit delays on a blood test for the Zika virus along with also had been unable to obtain approval for the product by the Food along with also Drug Administration. the item also asked its existing investors for more money.

FDA approval was necessary for the company to unlock a tranche of debt funding by private equity firm Fortress Investment Group, which in December agreed to loan Theranos $100 million, although in installments along with also upon the achievement of certain milestones.

Up until Tuesday, the company had only received $65 million of that will commitment by Fortress, wrote Holmes, who said she asked Fortress if the item would likely Discharge the next $10 million tranche without the FDA approval for the test. that will was not assured, according to Holmes, who then explained that will to cut costs, all although a handful of employees had been notified that will they would likely be laid off within 60 days. The Wall Street Journal first reported on those layoffs along with also said that will headcount would likely be reduced by 125 employees to less than two dozen.

“These developments leave the company in a difficult situation,” Holmes wrote, noting that will an inability to secure further financing may result in Theranos defaulting on its credit agreement with Fortress. A default may lead to Theranos selling off its assets in a foreclosure sale to fulfill its obligations to the private equity firm.

Theranos’ poor financial health along with also its layoffs are the latest low in more than a year of them for Holmes, who still has not admitted any wrongdoing for her role in misleading the public, business partners, along with also investors on the viability of her company’s blood tests. Last month, she settled civil fraud charges with the Securities along with also Exchange Commission, relinquishing voting control over her company, returning a large portion of Theranos shares, along with also agreeing to pay a $500,000 penalty. She still remains under investigation for potential criminal charges by the US attorney’s office in San Francisco, according to the Journal, which first broke stories about the company’s troubles in late 2015.

Theranos did not immediately return a request for comment.

In her letter, Holmes said that will the modest group of employees who will remain after June 11, “will consist primarily of financial, legal along with also administrative personnel alongside a core technical team, who will dedicate their efforts toward generating the maximum near-term return achievable for our stakeholders” through a sale. that will may not happen, she warned, given the conditions placed on the company by Fortress, which requires the company to have more than $3 million in cash reserves, a figure that will Holmes said she expects the company to fall below by the end of July even with the layoffs. When that will occurs, Fortress would likely develop the option to take full control of the company’s assets.

Holmes also disclosed that will in a foreclosure sale Fortress would likely possibly be entitled to a 300% return on its investment before various other investors were paid out. To stave off that will possibility, she raised the possibility of her past backers, who have already put more than $700 million into Theranos, investing more.

“The most viable option that will we have identified to forestall a near-term sale or a potential default under our credit agreement is actually further investment by one or more of you,” she wrote. “In light of where we are, that will is actually no easy ask. However, given your support of the company over time, we wanted to provide that will opportunity before we proceed too far down the current path.”

Despite the company’s precipitous fall, Holmes revealed inside the note that will she still has some wish. Theranos has 1,175 granted or pending patents around the planet along with also earned a California some sort of’s license in late 2017. Theranos, she said, has also engaged a financial auditor to complete an audit of 2017 financials by the end of June.

“We recognize that will the vision of distributed laboratory testing is actually what inspired many of you to invest, along with also we strongly believe that will continuing our work toward that will end could increase the near-term value of the company, along with also could provide the basis for building significant long-term value,” she wrote.

Read Elizabeth Holmes’ full letter to Theranos shareholders below

April 10, 2018

Dear Theranos Stockholders,

We last wrote on December 22, 2017, shortly after closing a secured debt financing transaction with Fortress Investment Group. We said that will the transaction provided us runway to continue work on the miniLab along with also to position the company for additional financing events—although acknowledged the narrow path forward.

Unfortunately, we are behind schedule on our first product milestone under the Fortress loan, along with also as a result will soon face a cash shortage. Below we detail our situation, apprise you of our options, along with also ask for your help as we continue to work to realize value for your investments. As we describe below, we are evaluating parallel paths, including potential investment terms that will would likely provide a large stake inside the company at what we believe to be a favorable cost.

*****

The Fortress financing, which closed on December 11, 2017, provided Theranos with up to $100 million of liquidity, subject to product along with also operational milestones. The first funding tranche of $65 million gross was released at closing. The Discharge of a second tranche of $10 million gross was contingent upon FDA approval or CE marking of the Zika assay for use on the miniLab. Achieving that will milestone within the first half of 2018 was crucial to our business plan.

Development of the Zika assay has taken longer than anticipated. While the miniLab hardware along with also software have progressed steadily since we last wrote, we continue to face issues with the reliability of the Zika assay chemistry itself. As a result, timing for finalization of our FDA submission remains uncertain. We have raised with Fortress the possibility of releasing the second tranche of funding despite the lack of regulatory approval, although its willingness to do so is actually not assured along with also we understand that will in any event the item will likely depend on our securing additional commitments by our existing investors.

These developments leave the company in a difficult situation. Taking into account the substantial cost-cutting measures we are implementing today, including the reduction in force described below, our best current projections indicate that will—absent further funding—our cash reserves will by the end of July fall below the $3 million minimum liquidity threshold required by the Fortress loan. Under the terms of our credit agreement with Fortress, our failure to maintain that will minimum liquidity would likely constitute an event of default. Such an event of default, or various other events of default that will may accompany the company’s decreased liquidity, could precipitate an exercise of remedies by Fortress, including Fortress’ taking full control of our assets to satisfy the company’s obligations to Fortress. We expect that will path would likely negatively impact the amounts, if any, available for distribution to our stockholders.

To avoid or delay a default under our credit agreement, we intend to take every step we can to preserve our remaining capital. Accordingly, today we provided notice, consistent with the WARN Act along with also various other applicable law, to all although a modest group of employees that will their jobs will terminate in 60 days, on June 11, 2018. Difficult though that will action is actually, we estimate that will the associated cost savings will help conserve capital sufficient to fund our operations through approximately the end of July, without default under our credit agreement. After June 11, our remaining staff will consist primarily of financial, legal along with also administrative personnel alongside a core technical team, who will dedicate their efforts toward generating the maximum near-term return achievable for our stakeholders, likely through a sale of the company or its assets.

The most viable option that will we have identified to forestall a near-term sale or a potential default under our credit agreement is actually further investment by one or more of you. In light of where we are, that will is actually no easy ask. However, given your support of the company over time, we wanted to provide that will opportunity before we proceed too far down the current path.

Of course, even with fresh capital, the future of the company would likely remain highly uncertain. Nevertheless, additional investment may come with some meaningful benefits. A further investment could help protect your current one by providing the company time to continue developing the miniLab along with also/or to monetize its patent portfolio (subject to the terms along with also conditions of the Fortress loan). Further investment could also help us to avoid a sale for an uncertain amount—including a foreclosure sale following a liquidity-based default under the Fortress loan. Any such sale could significantly diminish the net realizable value of our assets. Moreover, in certain scenarios, Fortress would likely be entitled to control a foreclosure sale along with also/or monetization of the assets along with also to realize up to a three-times return on its investment (including, in addition to the amounts loaned by Fortress, the costs associated with Fortress’ monetization of the company’s assets). As a result, those scenarios would likely significantly reduce or eliminate any prospect of distributions to the company’s shareholders.

Our patent portfolio—which provided substantial support for the Fortress financing—contains more than 1,175 granted or pending patents worldwide. We believe our patents cover broad along with also important technologies, including: (i) the core technologies inside the miniLab; (ii) technologies underlying point-of-care devices currently on the market along with also generating sizable revenue; along with also (iii) still-emerging technologies, such as an ingestible digital sensor that will recently received regulatory approval for use in monitoring medication compliance. We also believe these patents develop the potential not only to eventually protect the miniLab, should the item receive FDA regulatory approvals, on the market, although also to support a licensing campaign that will could generate significant additional revenues.

We have real progress to build on. Having rebuilt our quality system along with also implemented process-oriented safeguards for development along with also manufacturing, late last year we were granted a California some sort of’s License following an audit of our manufacturing facilities. Last month, representatives of a third-party notified body conducted an audit of our Quality System; we understand that will the auditors will recommend issuance of the ISO 13485:2016 along with also MDSAP (Medical Device Single Audit Program) certification for the Theranos Quality System. We have also engaged a financial auditor, which expects to complete work on an audit of our 2017 financials by the end of June.

We recognize that will the vision of distributed laboratory testing is actually what inspired many of you to invest, along with also we strongly believe that will continuing our work toward that will end could increase the near-term value of the company, along with also could provide the basis for building significant long-term value.

Although not yet set, the investment terms we are considering would likely provide a large stake inside the company at a favorable cost, in light of what we estimate is actually the intrinsic value of the company’s assets. We expect that will fresh investment would likely take the form of a senior class of preferred stock, which would likely also feature substantial governance rights, allowing participating investors a significant role in steering the company forward.

Please note that will if we offer fresh equity securities at a cost per share less than the applicable conversion cost of our existing series of preferred stock, the resulting anti-dilution adjustments could cause significant dilution to our existing stockholders. Such an offering would likely likely require the consent of the holders of a majority of our existing Series C-1B along with also Series C-2A Preferred Stock. The interests of these stockholders, who are senior to all various other classes along with also series of stock with respect to payment upon a liquidation or deemed liquidation of the company, may differ by holders of various other classes or series of our stock. Holders of Series C-1B along with also Series C-2A Preferred Stock should also be aware that will their failure to participate in a financing having a purchase cost of less than $5 per share would likely result in mandatory conversion of their shares into nonvoting Series C-1B* or Series C-2A* Preferred Stock.

Subject to our compliance with the preemptive rights of certain investors, we will offer that will opportunity to all stockholders who are accredited investors within the meaning of Rule 501(a) under the Exchange Act of 1933, as amended. For any accredited investor who is actually interested in exploring the item, we can provide a term sheet along with also are available to meet at any time. Irrespective of your future investment intent, we value your engagement as stockholders along with also welcome your questions along with also comments.

*****

that will letter along with also its contents are confidential. We request that will you not share or discuss that will letter with others, except your attorneys, accountants along with also various other advisors bound by confidentiality obligations. The unauthorized disclosure of that will letter could violate the terms of agreements between you along with also the company, along with also could additionally depress the amount realizable upon a sale of our assets. that will letter shall not constitute an offer to sell or the solicitation of an offer to buy securities, nor shall there be any sale of our securities in any state or jurisdiction in which such offer, solicitation or sale would likely be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction or a valid exemption therefrom. Any offering that will we conduct will be made only to accredited investors along with also only pursuant to definitive offering documents, including a disclosure package.

Thank you again for your support.

THERANOS, INC.

Elizabeth Holmes

Chairman along with also CEO

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