CEO SUMMARY: It appears that the final chapter in what many call Silicon Valley’s biggest investor fraud will conclude this week. Theranos, Inc., the once high-flying lab testing company, is to be dissolved and its remaining cash and intellectual property will be distributed, according to CEO and General Counsel David Taylor. Meanwhile, Theranos founder Elizabeth Holmes and former COO Ramesh “Sunny” Balwani face federal criminal charges of wire fraud and conspiracy to commit wire fraud.
SOMETIME THIS WEEK, the blood-testing company Theranos Inc. will be dissolved. In an email to shareholders on Sept. 5, CEO and General Counsel David Taylor explained that the company had only about $5 million in cash on hand and would distribute this amount to its unsecured creditors.
Writing in The Wall Street Journalthat same day, reporter John Carreyrou explained that Theranos Inc., of Palo Alto, Calif., has been tainted by scandal and accused of perpetrating Silicon Valley’s biggest fraud.
“The big-name investors who poured money into Theranos will get nothing,” Carreyrou added. “All told, investors in Theranos have lost nearly $1 billion.”
The dissolution comes after federal prosecutors filed criminal charges in June against Elizabeth Holmes, the founder and Chairman of Theranos, and against Ramesh “Sunny” Balwani, the company’s former chief operating officer. Holmes and Balwani were each indicted on nine counts of wire fraud and two counts of conspiracy to commit wire fraud. (See TDR, June 18, 2018.)
If convicted, Holmes and Balwani could face prison sentences that would keep them behind bars for the rest of their lives and fines totaling $2.75 million each, the Associated Press reported. The two executives have denied the charges and face a criminal trial. Attorneys for Holmes and Balwani are scheduled to be in U.S. District Court in San Jose for a status conference before Judge Edward J. Davila on Oct. 1, Ars Technica reported.
The once high-flying Theranos is dissolving because the company breached a covenant governing a $65 million loan it received last year from Fortress Investment Group, a private-equity firm in New York, Carreyrou reported. “Under the loan terms, Fortress was entitled to foreclose upon the company’s assets if its cash fell beneath a certain threshold,” he wrote.
Two Dozen Employees
Most of the two dozen employees who remained at Theranos worked their last day on Aug. 31, Carreyrou reported. “Only Mr. Taylor and a handful of support staff remain on the payroll for a few more days,” he added.
On top of the $65 million that Theranos owes to Fortress, the company owes at least $60 million to its unsecured creditors, according to an email that Taylor wrote to investors on Sept. 5.
While pursuing a settlement with Fortress, Taylor explained that Theranos would enter into what’s called “an assignment for the benefit of creditors” under California law. Under an assignment, all assets of the company other than its intellectual property would be assigned to a third-party to be held in trust for the company’s creditors, he wrote. “We expect that the full assignment process may take approximately six to 12 months,” he added.
In his email to creditors, Taylor explained that the company’s cash was not nearly enough to pay all of its creditors in full. Therefore, there would be no distributions to shareholders, he added. After assets are assigned, the company would file a certificate of dissolution under Delaware law, he wrote.
Before reaching the decision to dissolve the company, Taylor explained in the email, Theranos had retained Jefferies Group LLC, an investment bank and financial services company in New York, to sell the company. Over four months, officials from the Jefferies Group contacted more than 80 potential buyers, 17 of which signed nondisclosure agreements.
“We assisted those parties with diligence and had numerous follow-on conversations,” Taylor wrote. “Unfortunately, none of those leads has materialized into a transaction. We are now out of time. Despite our careful cash management, we are in default under the Fortress credit facility.
“Fortress has the legal right to foreclose upon, and to sell or take ownership of, all of the company’s assets, including the company’s intellectual property (which is owned by a ‘special purpose subsidiary’ of the company),” he wrote.
In an effort to benefit investors, Taylor wrote, the company was negotiating a settlement with Fortress to allow the equity investors to acquire the company’s interests in the special purpose subsidiary and any intellectual property the subsidiary would retain, but Theranos would relinquish its rights to the remaining cash, subject to certain conditions.
Only $5 Million to Distribute
Under this settlement, Theranos would distribute the $5 million to unsecured creditors, rather than to Fortress, Taylor wrote. “We believe that this result would benefit the company’s creditors more than any other achievable one, including a bankruptcy, in which we believe no material assets would be available for distribution to creditors,” he added.
In closing the email, Taylor wrote, “On our current path, we intend later this week to seek the necessary board and shareholder consents for the Fortress settlement, the assignment, and the corporate dissolution, and, assuming consent, to proceed with those actions beginning next Monday, September 10. Following these actions, the company will send a letter to stockholders confirming that there will not be a liquidating distribution to stockholders, and providing a copy of the certificate of dissolution, for use for tax-loss purposes.”