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



In the note, sent to investors Tuesday, the embattled Theranos founder said that the company had hit delays on a blood test for the Zika virus and had been unable to obtain approval for the product from the Food and Drug Administration. It also asked its existing investors for more money.

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

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

“These developments leave the company in a difficult situation,” Holmes wrote, noting that 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 and 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, and investors on the viability of her company’s blood tests. Last month, she settled civil fraud charges with the Securities and Exchange Commission, relinquishing voting control over her company, returning a large portion of Theranos shares, and 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 the small group of employees who will remain after June 11, “will consist primarily of financial, legal and 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 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 Holmes said she expects the company to fall below by the end of July even with the layoffs. When that occurs, Fortress would have the option to take full control of the company’s assets.

Holmes also disclosed that in a foreclosure sale Fortress would possibly be entitled to a 300% return on its investment before other investors were paid out. To stave off that 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 we have identified to forestall a near-term sale or a potential default under our credit agreement is further investment by one or more of you,” she wrote. “In light of where we are, this is no easy ask. However, given your support of the company over the years, we wanted to provide this opportunity before we proceed too far down the current path.”

Despite the company’s precipitous fall, Holmes revealed in the note that she still has some hope. Theranos has 1,175 granted or pending patents around the world and earned a California manufacturer’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 the vision of distributed laboratory testing is what inspired many of you to invest, and we strongly believe that continuing our work toward that end could increase the near-term value of the company, and could provide the basis for building significant long-term value,” she wrote.

Read Elizabeth Holmes’ full letter to Theranos shareholders below