Theranos CEO Elizabeth Holmes warned investors that the company risks defaulting on a loan following delays to its Zika virus assay, BuzzFeed News reported. The embattled executive wants investors to save Theranos from the prospect of running dangerously low on cash by the end of July.
Writing to investors, Holmes laid out how Fortress Investment Group loaned Theranos $65 million late last year. At the same time, the private equity group offered to provide another $10 million if the company won regulatory clearance to market a Zika assay in the U.S. or Europe. Theranos needed to hit that milestone in the first half of 2018 to make its business plan work—and that looks unlikely.
The upshot is Holmes expects Theranos’ cash reserves to dip below $3 million around the end of July. That is significant as the terms of the Fortress loan include a $3 million minimum liquidity threshold. If Theranos falls below the threshold, it will default on the loan.
Fortress could then take full control of Theranos. This could reduce the amount Theranos is able to distribute to shareholders. In some scenarios, Fortress could oversee a foreclosure sale of Thermos, or otherwise monetize its assets, and take out a three-times return on its investment. That would leave the investors who put more than $700 million into Theranos to divvy up scraps, at best.
Faced with the threat of a bad investment getting worse, Holmes hopes investors will pump more money into Theranos to see it through the cash crunch. Investors can take a “large stake” in Theranos at a “favorable price,” Holmes said. Holmes acknowledges “this is no easy ask.”
Holmes has been forced to go cap in hand to investors by yet more R&D difficulties. Theranos is hoping to bounce back by developing a Zika assay that runs on its miniLab device. However, the team continues “to face issues with the reliability of the Zika assay chemistry,” Holmes said. The ongoing difficulties mean Theranos doesn’t know when the assay will be ready to submit to the FDA.
With Theranos running out of cash and time, Holmes is laying off most of the company’s staff. The only people spared from the ax are financial, legal and administrative staff, plus the core of the technical team. This team is working to get Theranos’ assets to the point somebody might buy them.