The chief executive officer of Theranos, Elizabeth Holmes, has issued a warning to the company’s investors that the company is in danger of a loan default as a result of delays to Zika virus assay. Holmes is hoping that investors will choose to rescue the company and avoid have Theranos suffer a cash crunch by the end of July.Holmes gave investors a written account of a $65 million loan the company received from Fortress Investment group a little less than a year ago. Fortress also offered another $10 million to Theranos providing that the company successfully gained a clearance for the marketing of a Zika virus assay in either the United States or Europe. Theranos would need to have gained the clearance in the first half of the current year in order for their business plan to pan out but that does not look likely at this time.A major concern for Holmes is that she expects the cash reserves for Theranos to be less than $3 million in July which is problematic due to a clause in the company’s loan contract with Fortress to maintain a $3 million liquidity level.
The loan goes into default if Theranos does not maintain this $3 million threshold.In the event of default, Fortress Investment Group could choose to take over Theranos which would negatively affect the amount of return that could be distributed to shareholders. One projected scenario would be for Fortress to oversee a sale of Theranos. This would put investors in a quandary as they would be left to divide what is left of the sale to recoup some of their $700 million in investments.Faced with the very real possibility of a bad investment becoming considerably worse, Holmes is optimistic that investors will see the wisdom of providing Theranos with the needed funds to avert a cash crunch. Holmes knows that what she is asking of investors is not easy for them to stomach but says they now have a chance to secure a major stake in the company at a buyer’s price. Holmes has responded to the pending cash crunch by attempting to cut expenses and has had to lay off non-essential staff. Only personnel involved with the legal, administrative, and financial teams, along with the central pieces of the technology staff are guaranteed to keep their jobs.
About Fortress Investment Group
Fortress Investment Group is a management firm specializing in global investments. The company provides clients with a wide-range of expertise in investment strategies including credit, equity from private sources, liquid markets, private equity, and asset management services.Learn More.