WSJ: Theranos launched share authorization boosting value to more than $10B

Theranos' Palo Alto, CA, headquarters--Courtesy of Theranos

Theranos is facing a firestorm of criticism, with recent reports calling the company's business into question and the FDA issuing documents that lambasted the company for potential design and manufacturing flaws with its proprietary testing device. Now, the company is dealing with more pushback after a new report shows that Theranos authorized shares that would boost its value to more than $10 billion.

The Palo Alto, CA-based company filed an amendment to its certificate of incorporation in Delaware on Oct. 12 saying that the executive committee of the company's board adopted resolutions establishing 10.9 million new "Series C-3" shares at $20 a share--$3 a share more than in Theranos' previous funding round, or an 18% markup, according to a regulatory filing seen by The Wall Street Journal. The document, which was signed by CEO Elizabeth Holmes, calls into question the company's previous statements that it has raised over $400 million in funding, setting its market value at around $9 billion.

Unsurprisingly Holmes is keeping quiet about the authorization. The filing in question "didn't have anything to do with financing or attempted financing," Holmes said at a conference last week, as quoted by the WSJ. The share authoriziation was meant to "reclassify" some shares from a previous class of stock called "C-2" to prevent "excess shares" from getting into "secondary markets," she added. Theranos wanted to hold onto its "small shareholder base" and "didn't want shares stuck under a past round that is closed out," she said.

Theranos CEO Elizabeth Holmes

But the C-2 shares that the company was reclassifying were never issued, a Theranos spokesman told the newspaper on Wednesday. The spokesman did not elaborate on how shares that had not been issued could get into secondary markets.

Theranos' tactics seem clear to some legal experts. "It looks fairly plain vanilla to me," Robert Borghese, a professor of legal studies at the University of Pennsylvania's Wharton School, told the WSJ about the share authorization. "I'm not seeing anything here that suggests this is anything other than a straight additional fundraising round."

The news cast an even darker cloud over Theranos, which is dealing with the aftermath of WSJ reports that showed potential kinks in the company's testing business. One article said that Theranos only ran a small fraction of its tests on its proprietary testing device at the end of 2014. Another report showed that the company stopped collecting tiny vials of blood drawn from finger pricks for all but one of its more than 200 tests after the FDA dropped by for a surprise visit in August and September.

More details about those visits came to light this week after the agency released two Form 483s, citing the company for violations tied to its testing device. The agency called the "nanotainers" manufactured and used by the company to collect samples an "uncleared medical device" and told Theranos it must have the tools officially approved before use. Regulators also cited Theranos for quality issues stemming from a Sept. 16 inspection of its Newark, CA, manufacturing plant.

Issues surrounding its technology have been enough to scare off one of Theranos' partners. Earlier this week, Walgreens Boots Alliance ($WBA) froze its partnership with the company, saying it would hold off on opening additional Theranos "wellness centers" at its stores in Arizona and California. "We're trying to figure out where we are and what we do going forward. We need to understand the truth," a Walgreens official said at the time.

Meanwhile, Theranos is working hard to pick up the pieces. The company said this week that it would publish data to validate its tests' accuracy and reliability. Theranos also laid out some board changes, planning to shrink its 12-member board of directors to 5 people and separate it out into a "governing board," The New York Times reports. All members of the old board, including former U.S. cabinet members Henry Kissinger and George Shultz, will comprise a newly formed board of counselors. The company also formed another, as-of-yet unnamed board to dole out medical advice.

- read the WSJ story (sub. req.)
- here's the NYT story (sub. req.)

Special Reports: Top women in medical devices 2014 - Elizabeth Holmes, Theranos | Top 10 Medical Device Venture Capital Deals of 2010 - Theranos

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