Bad Blood: The Story of Theranos

As long time readers of this blog know, Theranos is a company I've been covering since my very first post over two years ago. I'd been somewhat familiar with them since around 2013/14 - living in Silicon Valley and knowing many people in the biotech business there had always been rumors floating around as to exaggerated results and occasionally even faked demos. They were such an extreme example of what I've seen in startups over the last ~20 years they were a perfect vehicle for my blog to help highlight what was going on. 

The Wall Street Journal's John Carreyrou had reported 'questionable practices' at the company at the end of 2015, and despite heavy handed legal threats and constant denials by Theranos, things quickly started to unravel for the company and it's expected that the company will be bankrupt this summer, with possible criminal charges for the CEO, Elizabeth Holmes, to follow. Carreyrou has now written a book about Theranos called "Bad Blood", and covers the company's founding through to the present day. It was originally scheduled to be released later this year, but brought forward several months due to the impending bankruptcy of the company.

While I have followed Theranos closely, and know the facts of what's been happening better than most not directly involved, this is still a fantastic book that I both enjoyed and learned a few new things from. Despite it being a complex story of technology and finance, Carreyrou breaks it down in a straightforward way that anyone can follow, regardless of background. No need to understand tech or funding mechanisms - as long as you know what cheating, lying, and bullying are then you'll follow along without a problem. It's also Silicon Valley in a nutshell, and on almost every page there was something that reminded me of my own personal experience in startups, or those of close friends. I'd highly recommend it to anyone with even a passing interest in the story.

What I came away with was not what I was expecting though. I had thought that Holmes, and to a lesser extent, her boyfriend and company President/COO Sunny Balwani, would be the villains of the book, and the central characters it was built around. In the end, the memorable characters for me were the many employees who tried, over a period of nearly ten years, to draw attention to the fraud and dangerous actions of Theranos, even in the face of significant costs, both personal and financial. Many of them have suffered tremendous stress, such as through huge legal bills in the case of Tyler Schultz, or the death of a spouse through suicide in the case of Rochelle Gibbons. Despite threats of a lawsuit and being followed by private investigators, Erika Cheung wrote a complaint to the federal government that initiated lab inspections, shutdowns, and reports that sped the demise of the company. They didn't do it for profit, or because it was fun, or that they had an axe to grind, but because they knew what was going on was wrong, and someone needed to do something. Were it not for them, we'd be finding out about Theranos years later when people were dying through misdiagnosis and either lack of treatment, or incorrect treatment.

Even more frustrating was reading that those with the power to have done something failed to do so despite more than adequate evidence to do so. In 2008 the Theranos Board of Directors was warned of what was going on by both the head of marketing and the general counsel, yet something that would otherwise have had the CEO removed resulted in the removal of the whistleblowers instead. Many Board members of startups fail to take their jobs seriously, thinking it a once-a-quarter paid trip to California, and an important sounding line on their resume. Ultimately, they do have a fiduciary responsibility to the shareholders of the company, and I hope some of them see legal consequences for their actions - though I'm not holding my breath. Until that happens, I don't see the lack of oversight changing soon.

Senior management of both Safeway and Walgreens should also be ashamed of themselves - even when warned by their own due diligence consultant that something was very wrong with Theranos, Walgreens listened to Holmes and essentially had him removed. In any other deal I've ever been part of, should the person performing the due diligence be denied basic information and access then that would have been the end of the deal. Safeway spent $350 million doing up their stores with fancy "wellness centers" that were supposed to have been for Theranos - notice those nice wooden offices next to the pharmacies in your Safeway? That's what they were built for. They ignored the suspicions of their own chief medical officer and went on with the deal anyway.

Tech and business journalists also share some of the blame - like in too many cases, they simply accept the word of the company as to the state of their product and business, and fail to ask even basic questions. I've pointed out repeatedly on this blog how tech journalists are used in a 'whitewashing' of company PR, even when many experts are available to quickly debunk the most ridiculous of claims. It wasn't until Carreyrou came along that the serious questions were asked. Journalism like that doesn't come cheap though, and is a reason I subscribe to the WSJ, and I'd encourage you to do so as well.

Time and again the warning signs were there, and were raised by 'coal face employees' at all these organizations, only to be ignored by those at the top. Everyone looked at the glowing endorsements by the big names like Henry Kissinger or James Mattis, while ignoring the stream of people who knew what was going on and leaving their jobs in droves. Something I've always felt is that if you really want to know what's going on at a company, don't speak to the executive team or board, speak to the senior employees who actually make everything run - and if you can't speak to them because they keep quitting, then that's a huge red flag right there.

My first post on Theranos concluded with the quote below, and time has only strengthened my opinion:

"To be blunt - technology has gone beyond the capacity for most people to be able to comprehend, even some otherwise very intelligent and educated ones. That deluge of information 'overloads' most people and they fall back on the simplest of solutions - they look for authority figures who have already made decisions for them, or rely on the 'wisdom of crowds' and simply go along with the majority. Actual reasoning shuts down, and following that the idea that someone as smart and educated as you could have got it wrong just can't be entertained (or in the case of existing investors, ever acknowledged).

Something needs to change in how billions of dollars of funding, much originating from retirement funds, is distributed. The system is setup to reward certain behaviours, and good stewardship of this money, and the efficient application of efforts of thousands of workers to benefit our society, in my opinion are not among them. 

Theranos, and others like it, were simply inevitable and the symptom of a much deeper problem."

Theranos is all the flaws of Silicon Valley VC and startup culture bundled together and then cranked up to 11. Lives were ruined and even lost, over a billion dollars spent, and has it even changed anything? Even when federal agencies were admonishing the company for its practices ("massive fraud"), a VC complained publicly that was just the business model of every startup they'd been involved in. How many people have to die before some realize that funding a dating app is not the same as medical devices, and that lives are on the line? We'll see what criminal charges are forthcoming, but in the end the story of Theranos is just that of many Silicon Valley startups, "fake it 'til you make it", they just pushed it too far and got caught.

Powercast and Ossia

This blog spends a lot of time covering Energous, the RF based at-distance wireless power company, as in my opinion it's such a good example of how to manipulate the press, public, and markets with not much more than great PR and a willingness to be 'flexible with the truth'. In their own little world there's some competition from other companies essentially doing the same thing, in a technical sense. The most prominent of these are Ossia and Powercast.

I've been asked a few times about these companies and why I don't really cover them, and the basic reasons are these - they've not been blatantly lying about technical capabilities (to date, read on for some concerns), deliberately creating multiple product lines to confuse media and consumers, or funneling money from the general public straight into the pockets of the executives. There have been enough questions though that I wanted to clarify who these companies are, what they offer, and the (minor) technical differences between them and Energous.

Powercast

Powercast have been in operation since 2003, and have had an at-distance RF based wireless power system available and FCC approved since 2010. Like Energous they operate in the ~913MHz band, and the physics involved is essentially identical. They have a number of patents in the area. You can actually buy development kits to test them out, their website has detailed technical datasheets on all products, a simple but realistic spreadsheet for calculating actual power that can be delivered. The datasheets make it clear that they should be useful for wireless sensors and low power electronics, and never mention phones, tablets, TVs, cars, or any of the other ridiculous items other wireless power companies talk about. They don't spout techno-babble about "energy pockets" that they can't deliver on (like Energous' demonstrated inability to accurately focus in their FCC Part 18 filing).

The two product lines for receivers state up to 100 mW for the short range (over 2 days to charge a phone), and 10 mW for the long range (nearly 3 weeks for a phone), and that's maximum. More realistic is 1/10th of that, and that's reflected in the Powercast descriptions of 'microWatt to low milliWatt' levels. Powercast products are FCC Part 15 approved, which is the same rules under which your WiFi router operates - yes, it's that kind of power level we're talking about here. Could they get FCC Part 18 'unlimited power' certification? Yes, I think they could, and they might up their power output by a factor of 2 before all sorts of other safety limitations kick in. In practical terms Part 18 would buy them limited benefits with a number of restrictions, though clearly from the Energous buzz around their Part 18 approval it's worth a lot marketing wise.

So what does Energous have that Powercast doesn't? In my opinion basically nothing, except a marketing department willing to push the boundaries of truth, and an FCC Chairman willing to use his public position to promote a private company. Powercast appear to me to be a genuine engineering company, following all the rules and regulations, that has a product that you can buy, and are completely upfront and clear as to the technical capabilities and limitations. 

They may not have a desperately useful consumer-level product, but that's not to say it does not have its application. With regards to phones, if someone like Apple had wanted to, they could easily have made an offer that Powercast couldn't turn down and incorporate this tech into their equipment. But they didn't, and is a firm and clear datapoint that RF wireless charging isn't really viable in the consumer space. Powercast's website lists a number of design wins that may well have specific demands that make the technology appropriate for that case. I can see it being used in industrial settings, charging large numbers of extremely low power sensors in awkward to reach locations. They mention RFID on their site, and it seems like a good fit for those conditions. Use of this technology may also grow as the number of "Internet of Things" devices increase.

In my opinion, Powercast should be commended for sticking to an honest approach to their business in the face of what must be incredibly frustrating marketing and publicity from Energous. Like many engineering led companies that focus on delivering a product and not on marketing hype, their approach probably gives them a good business but fails to deliver them the riches that the less scrupulous get. The price of a conscience?

Ossia

Ossia have been going since about 2008 and are still privately held, having raised at least $25 million from industry and Venture Capital groups including Intel. Their technology, which they brand 'Cota', is also RF based, but this time at 2.4 GHz, same as some WiFi routers. Their founder/CTO writes blog posts and technical white papers available from their website, but they are exceptionally light and free from any real information with which to analyze their products in detail. There are no products, datasheets, or evaluation kits of Ossia technology that I am aware of. (Update, In June 2019 Ossia received FCC Part 18 Approval for a system.)

Their choice of 2.4 GHz results in a smaller wavelength than the 900 MHz band (around 12.5 cm vs 33 cm), so in theory can lead to greater control over small focal zones and beamforming. At best the focus will be at least a phone sized sphere in any practical situation, but it's better than the beachball sized 'pocket' Energous have. By creating a large phased array of many small transmitters, and sending the right signal to each, a beam could be steered with reasonable precision - their 'ceiling tile' size array (pictured above, from here) could have 10 by 10 emitters each spaced at half a wavelength, and according to this article is closer to 16 by 16, so 1/3 wavelength spacing.

Larger arrays mean greater control, I covered some of the maths behind this here. Ossia claim this allows them to be much more precise in targeting the receiver, and 'bounce' signals around the room so that direct line of sight isn't needed. The image below from Ossia shows this in operation, with the receiver sending out a location signal about 100 times a second. This is a pretty well known engineering technique, sometimes called time-reversal, so under the right conditions it will work. It does not, however, reduce the size of the smallest possible focal zone, remove safety limits, or increase the amount of power legally transmittable.

Under Part 15 rules, Ossia can still only transmit as much power as Powercast, which means the entire system is just a more precise way of delivering microWatts to low milliWatts and leaves phone charging as an impossibility. Much of Ossia marketing material in the last few years has made it clear they're looking at similar low power situations as Powercast. Their statements are sometimes questionable, for example that 2.4 GHz is 'safer' than 5.8 GHz, can allow more precise targetting, and won't interfere with WiFi. I wonder if they'd say the same now that Energous have moved from 5.8 GHz to 913 MHz?

What about Part 18 and 'unlimited power'? There's no reason that Ossia can't do this, and once again will be limited not by transmit power, but the various safety restrictions, which like Powercast means perhaps a factor of two increase in power delivered. Why haven't Ossia done this, as it's not a complex set of tests to go through? While the FCC have not made specific statements on this, it seems they are unwilling to give Part 18 certification on wireless power devices in the 2.4 and 5.8 GHz ranges. Energous started at 5.8 GHz, but rapidly moved to 913 MHz when they repeatedly failed to get FCC approval in 2017, skipping 2.4 GHz entirely (there are limited frequency bands that are available in Part 18). 

One school of thought is that the FCC isn't allowing Part 18 at 2.4/5.8 as they are the main WiFi bands, and that communications will suffer interference, so the options left are 913 MHz and ~25 GHz. Another is that the FCC isn't allowing 'unbounded' energy above a certain level - that you need control of that region of power, a peak with clearly defined edges. This would mean charging would have to happen within the near field, or at best at the near/far field boundary. No matter what your technology, that is set by the laws of physics - basically your frequency and size of transmitter are all that matter. Bigger transmitters are less practical but will allow you to push that boundary out further. Higher frequencies lead to more precise control over the beam and spot due to the smaller wavelength, as well as more transmitting elements in the same space leading to precision.

While Ossia have been playing by the rules and not putting out highly misleading marketing, I've been disturbed by some of their recent press. This article looked at both Ossia and Energous, and reached the usual level of in-depth analysis by a tech journalist that I'm used to (i.e. none). At first, Ossia demonstrate a transmitter with 10 Watts of output power - that's clearly well beyond Part 15 limits, and matches the 10 Watts of the Energous Part 18 transmitter.

"The maximum range is somewhere around 30 feet, but at that distance you can only receive a very small amount of power. Within 6 feet of the transmitter, you’ll get somewhere around 1 watt from the 10 watts being transmitted. At longer distances, you might expect 100 or perhaps 200 milliwatts, which isn’t enough to charge up a smartphone, though it can slow down the discharge."

Since they don't have Part 18 approval, that device needed to have a clear notice that it was not FCC approved and is not available for sale. I wonder if they had it and the journalist simply failed to notice? I also find their numbers disturbingly high - remember Energous transmits 10 Watts to get 30 mW at 90 centimeters, are Ossia really getting 33 times the power at twice the distance? That implies some massive directionality and antenna gain, and regions of space between transmitter and receiver going well over safety limits like SAR and MPE.

They then go on to talk about safety:

“We have established that this technology achieves the same level of safety as Wi-Fi and Bluetooth, so there is no issue with exposing people.”

This is bordering on deliberately misleading, having talked about the power levels with a non-approved device, (which seem to be vastly beyond anything realistic even under Part 18), to then go on to talk about safety numbers from WiFi type equipment of Part 15. Poor journalism may be to blame here, but I don't see Ossia rushing to correct it. I've refrained from talking about Ossia too much as they had not been making outrageous claims, or deliberately confusing the press and consumers by talking about two very different products in subsequent sentences, and allowing the listener/reader to assume they are the same. If they keep this up, in all fairness to Energous, I'll need to start covering them in the same way. Ossia, please don't make me do that, I've little enough time as it is to write...

Summary

There are at least two other RF based wireless power companies out there besides Energous. One of them has had an approved device on the market for years, but has minimal traction in the consumer market. The other seems to be trying a more technically sophisticated version of the same thing, but are now watching Energous getting away with very misleading marketing. Both are limited by the laws of physics, and safety rules, that mean powering phones or any other sizeable devices is out of reach. Despite that, tech journalists will continue to publish puff pieces on how wireless power for phone charging is just around the corner.

I can't blame companies who follow the law from trying to get favourable coverage. The tech press, however, need to wake up to the fact that they are now reporting on products and markets that directly affect our health and safety. Despite high profile cases like Theranos, it seems to be business as usual. The usual cursory coverage and regurgitation of company PR doesn't cut it in these situations, this isn't the latest iPhone or a dating app, and they need to step it up before something hurts more than investors wallets.

More Energous Updates - Now trickle charging, 10Q shows a 9 month runway, FCC Chair promotion

A few brief Energous updates. There was a new article from Rhodri Marsden covering the technology area, and it was reasonably skeptical. The most interesting part for me was this quote from the Energous CEO:

Steve Rizzone, chief executive of Energous, responds by alluding to the lifestyle change mentioned by Bladen of Chargifi. “Mobile distance charging will not, for the foreseeable future, have charging power comparable to a wall socket,” he says. “But if you are continually topping off your mobile devices, you do not need to enable the same amount of power because charging happens continuously.”

So main points from here are 1) an admission they will not hit the multi-Watt charging rates and 2) that they are moving their public position to the "trickle charge" model where you don't charge the phone up, just try to halt or slow down the rate of battery decline. That's a pretty significant admission from a $500m market cap company - that everything they built the company on won't be happening "for the foreseeable future". A rational market would have seen a major price decline for their shares but for WATT, nothing. It's another indication this company's value is irrational - though that's not to say there won't be a lot of ups and downs, and money to be made and lost, before it finally hits zero.

Taking a look at the trickle charging claim - the FCC Part 18 data shows that maximum charge rate for a phone is around 100 mW at 50 cm from the transmitter, down to 30 mW at 90 cm. Ignoring RF to DC conversion loss, if you held your phone at exactly 50 cm away, square on to the transmitter, and didn't move it, you would extend the battery life from about 10 hours to 12 hours. At 90 centimeters you may add around 30 minutes if you are lucky. Don't hold it with your hand at the back of the phone though, or at an angle, you'll lose charging. This is me being nice to them with the numbers, realistically it makes no noticeable difference at all. Alternatively you could plug it in or place on a Qi charge pad and get back to 100% in an hour or so.

10Q

On the finances front, the 10Q was out for Energous, and it's not looking pretty for them. They had about $45m in the bank as of the end of March this year, with about $13.5m in per-quarter run rate. If that holds, they're out of cash in January, and by their own admission there are no significant products or revenue in that timeframe. Let's see how they either cut their expenses or persuade people to buy a few more tens of millions of dollars "worth" of stock.

Ajit Pai - Again

Once again the Chairman of the FCC, Ajit Pai, promoted Energous using the official FCC account. A reminder to everyone, this is a disgusting abuse of a public position for the private gain of his personal friends, and that's what we know about.

Thanks to the @Energous team for taking the time to show me the demo! Look forward to seeing the future of wireless charging unfold. (And always a bonus to see the one and only @MartyMobile.) @McDowellTweet https://t.co/OixmfxJzPn

— Ajit Pai (@AjitPaiFCC) April 13, 2018

I took a little time to browse through Ajit Pai's Twitter feed and didn't see any other companies that got the benefit of his promotion.Did I miss any? I wonder what makes them so special to warrant this attention?

Webinar on Ultrasound in Public Places

For those who may be interested, the Acoustical Society of America will host a webinar on "Ultrasound and High Frequency Sound in Air in Public and Work Places: Applications‚ Devices and Effects" tomorrow, Wed May 9th 2018, 11:25 to 11:45am Pacific Time. If interested, the link to register is:

https://register.gotowebinar.com/register/32291947178648578

I have no participation in this, just listing as a PSA.

Theranos Updates - Loan defaults, layoffs, bankruptcy, and mega-rich families burning half a billion dollars.

Last month Theranos were back in the news, barely a few weeks after being admonished by the SEC for using lies and exaggeration to raise over $700 million from investors, this time for the CEO to announce that they were running out of cash and would likely have to close by the end of July. Approximately 100 employees will be let go in early June, leaving less than 25 who will most likely oversee a winding down of the company.

Theranos received a funding round last December, with a $100 million loan from Fortress Investment Group, which had many had been shocked to hear given the widespread knowledge of the company's difficulties. In my December article I pointed out things likely weren't as they seemed at first, and this was simply a predatory loan made in the knowledge that Theranos would in fact default, and that the lender would then take ownership of the company assets at firesale prices.

"So Fortress have arranged a deal where they don't have to put the full amount in up-front, but are still ahead of any other investor, get to own the only valuable part of the company if it goes wrong (the IP), and get discounted stock in the company if it, through some miracle, succeeds. With the right milestones and triggers, this could be a deal where Fortress win no matter what happens, and may actually come out better should Theranos fail. I wonder if Fortress have essentially arranged a deal to make sure that all the good parts are gone by the time everyone else reaches the bankruptcy auction.

Why would Theranos take such a deal? Well, because they have to choice - it's this or bankruptcy."

Well I'm feeling pretty smug right now, as that's exactly what looks to have happened. According to a letter Holmes wrote to shareholders (included at the bottom of this post, from Buzzfeed), despite having received $65 million from Fortress in December, they're about to miss a deadline for FDA approval on a device which will result in them not receiving the next tranche of $10 million. Most significantly though, should Theranos' bank balance drop below $3 million, they are in default of the terms of the Fortress loan, and the company predicts that will happen in July. According to Holmes:

Fortress would be entitled to control a foreclosure sale and/or monetization of the assets and to realize up to a three-times return on its investment (including, in addition to the amounts loaned by Fortress, the costs associated with Fortress’ monetization of the company’s assets). 

So Fortress get three times what they loaned, including whatever legal costs they have in extracting this money. A factor of three on the loan plus costs means they won't just get most of the company, they'll get all of it.

That $65 million gets Fortress around 1,175 patents (granted and applications) in the biotech space. They can sell them, licence them out, or use them to sue other successful biotech companies for payment. Given some large patent infringement payouts can result in 9 figure cheques, a single win like that will result in a great payday for Fortress.

It may not have even cost Fortress $65 million. I do wonder if they invested saying something like "This money cannot be used for legal expenses. It must be kept separate from all other cash and used only for salaries, facilities, and equipment." Knowing that Theranos had legal troubles they may have wanted to ensure the cash was not spent on that, and then set a stipulation that if the "other cash" account dropped below $3 million, the company essentially became theirs - regardless of how much of the investment was left. $65 million gone in basically 6 months, for a company of 125 people, is a monster burn rate. Even at a fully burdened cost of $400,000 per employee that's 'only' $25 million spent in 6 months. Facilities etc can be expensive, but not $40 million worth. In that case, Fortress would be owed $195 million (3*$65m), take the ~$40 million out the bank account that remains, then start picking the best $155 million of assets left (pretty much everything else) - making the cost of the whole company $25 million. Or maybe I'm just thinking too hard and Fortress didn't care, and just let them burn through it all with legal fees, thinking $65m was still a bargain.

Regardless, barring a miracle, Theranos are headed for default on their loan, and will end up being fully owned by Fortress. TheCEO amusingly asks for further investment to stave this off, but with the SEC judgement, and a skeleton staff, it's not going to happen. It will be interesting to see how Elizabeth Holmes does without the company to pay bills for her, such as for bodyguards, and with a likely criminal lawsuit coming. 

An Idiot and Their Money are Soon Parted

So who are the investors that Fortress jumped ahead of in their deal? Who put in the $700 million that got the company to this point? The Wall Street Journal recently published a list of major investors in Theranos, and it's now clear that the company was funded mostly by individual family investment vehicles, not traditional VC. Key investors were:

• Walton Family $150 million
• Rupert Murdoch $125 million
• DeVos Family $100 million
• Cox Family $100 million

So nearly half-a-billion dollars from four family investment groups, and they will probably see nothing back. (Murdoch already got out for a grand total of $4 million, a 97% loss). Pretty stunning, that. Now I'm going to bet on how much due diligence these companies did before investing, and I'm going with a number near zero. It was widely reported in March that when Theranos claimed revenues of over $100 million to investors, no audited accounts were provided, and investors failed to call a single supposed customer - and the actual revenue was $100,000. That's pretty basic due diligence that even the technically illiterate can understand. Think about the scrutiny you get when you go to the bank for a loan, and then realize that for $475 million no-one even picked up a phone and asked for a reference or a bank statement.

As for technical due diligence, they could have found a few well qualified scientists and executives in this area, and paid them a few thousand dollars each for technical and business evaluations. Total cost, less than 1% of the investment, but nope they couldn't do that either.

I've got no sympathy for them, they deserved to lose that money through their own carelessness - it's just frustrating that there are so many genuinely great companies out there that could work wonders on just a few million. That ~$500 million could have funded >100 hardware startups to a prototype/proof point, and made some genuinely useful advances - but the people that run those types of companies don't lie like Holmes, or exaggerate their technology, just to get a cheque signed (or, as in Holmes case, have well connected parents).

One bright side for Silicon Valley VCs, they can now say "See, wasn't us!", they really weren't the ones funding most of this decade's biggest fraud.

We'll definitely be hearing more about Theranos in the coming months, with the June layoffs, the July default, the inevitable bankruptcy and the possible criminal charges, but next up is John Carreyrou's book "Bad Blood". He's the WSJ journalist who broke the Theranos story, and his book is a history of the company, and will be out in two weeks (May 21st). My copy is on order, and looking forward to it. I fully expect a tale of insanity, greed, selfishness, and stupidity, and I'll review it as soon as I read it.

Holmes' Letter to Theranos Shareholders

April 10, 2018

Dear Theranos Stockholders,

We last wrote on December 22, 2017, shortly after closing a secured debt financing transaction with Fortress Investment Group. We said that the transaction provided us runway to continue work on the miniLab and to position the company for additional financing events—but acknowledged the narrow path forward.

Unfortunately, we are behind schedule on our first product milestone under the Fortress loan, and as a result will soon face a cash shortage. Below we detail our situation, apprise you of our options, and ask for your help as we continue to work to realize value for your investments. As we describe below, we are evaluating parallel paths, including potential investment terms that would provide a large stake in the company at what we believe to be a favorable price.

*****

The Fortress financing, which closed on December 11, 2017, provided Theranos with up to $100 million of liquidity, subject to product and operational milestones. The first funding tranche of $65 million gross was released at closing. The release of a second tranche of $10 million gross was contingent upon FDA approval or CE marking of the Zika assay for use on the miniLab. Achieving that milestone within the first half of 2018 was crucial to our business plan.

Development of the Zika assay has taken longer than anticipated. While the miniLab hardware and software have progressed steadily since we last wrote, we continue to face issues with the reliability of the Zika assay chemistry itself. As a result, timing for finalization of our FDA submission remains uncertain. We have raised with Fortress the possibility of releasing the second tranche of funding despite the lack of regulatory approval, but its willingness to do so is not assured and we understand that in any event it will likely depend on our securing additional commitments from our existing investors.

These developments leave the company in a difficult situation. Taking into account the substantial cost-cutting measures we are implementing today, including the reduction in force described below, our best current projections indicate that—absent further funding—our cash reserves will by the end of July fall below the $3 million minimum liquidity threshold required by the Fortress loan. Under the terms of our credit agreement with Fortress, our failure to maintain this minimum liquidity would constitute an event of default. Such an event of default, or other events of default that may accompany the company’s decreased liquidity, could precipitate an exercise of remedies by Fortress, including Fortress’ taking full control of our assets to satisfy the company’s obligations to Fortress. We expect that path would negatively impact the amounts, if any, available for distribution to our stockholders.

To avoid or delay a default under our credit agreement, we intend to take every step we can to preserve our remaining capital. Accordingly, today we provided notice, consistent with the WARN Act and other applicable law, to all but a small group of employees that their jobs will terminate in 60 days, on June 11, 2018. Difficult though that action is, we estimate that the associated cost savings will help conserve capital sufficient to fund our operations through approximately the end of July, without default under our credit agreement. After June 11, our remaining staff 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, likely through a sale of the company or its assets.

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. 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.

Of course, even with new capital, the future of the company would remain highly uncertain. Nevertheless, additional investment may come with some meaningful benefits. A further investment could help protect your current one by providing the company time to continue developing the miniLab and/or to monetize its patent portfolio (subject to the terms and conditions of the Fortress loan). Further investment could also help us to avoid a sale for an uncertain amount—including a foreclosure sale following a liquidity-based default under the Fortress loan. Any such sale could significantly diminish the net realizable value of our assets. Moreover, in certain scenarios, Fortress would be entitled to control a foreclosure sale and/or monetization of the assets and to realize up to a three-times return on its investment (including, in addition to the amounts loaned by Fortress, the costs associated with Fortress’ monetization of the company’s assets). As a result, those scenarios would significantly reduce or eliminate any prospect of distributions to the company’s shareholders.

Our patent portfolio—which provided substantial support for the Fortress financing—contains more than 1,175 granted or pending patents worldwide. We believe our patents cover broad and important technologies, including: (i) the core technologies in the miniLab; (ii) technologies underlying point-of-care devices currently on the market and generating sizable revenue; and (iii) still-emerging technologies, such as an ingestible digital sensor that recently received regulatory approval for use in monitoring medication compliance. We also believe these patents have the potential not only to eventually protect the miniLab, should it receive FDA regulatory approvals, on the market, but also to support a licensing campaign that could generate significant additional revenues.

We have real progress to build on. Having rebuilt our quality system and implemented process-oriented safeguards for development and manufacturing, late last year we were granted a California Manufacturer’s License following an audit of our manufacturing facilities. Last month, representatives of a third-party notified body conducted an audit of our Quality System; we understand that the auditors will recommend issuance of the ISO 13485:2016 and MDSAP (Medical Device Single Audit Program) certification for the Theranos Quality System. We have also engaged a financial auditor, which expects to complete work on an audit of our 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.

Although not yet set, the investment terms we are considering would provide a large stake in the company at a favorable price, in light of what we estimate is the intrinsic value of the company’s assets. We expect that new investment would take the form of a senior class of preferred stock, which would also feature substantial governance rights, allowing participating investors a significant role in steering the company forward.

Please note that if we offer new equity securities at a price per share less than the applicable conversion price of our existing series of preferred stock, the resulting anti-dilution adjustments could cause significant dilution to our existing stockholders. Such an offering would likely require the consent of the holders of a majority of our existing Series C-1B and Series C-2A Preferred Stock. The interests of these stockholders, who are senior to all other classes and series of stock with respect to payment upon a liquidation or deemed liquidation of the company, may differ from holders of other classes or series of our stock. Holders of Series C-1B and Series C-2A Preferred Stock should also be aware that their failure to participate in a financing having a purchase price of less than $5 per share would result in mandatory conversion of their shares into nonvoting Series C-1B* or Series C-2A* Preferred Stock.

Subject to our compliance with the preemptive rights of certain investors, we will offer this opportunity to all stockholders who are accredited investors within the meaning of Rule 501(a) under the Exchange Act of 1933, as amended. For any accredited investor who is interested in exploring it, we can provide a term sheet and are available to meet at any time. Irrespective of your future investment intent, we value your engagement as stockholders and welcome your questions and comments.

*****

This letter and its contents are confidential. We request that you not share or discuss this letter with others, except your attorneys, accountants and other advisors bound by confidentiality obligations. The unauthorized disclosure of this letter could violate the terms of agreements between you and the company, and could additionally depress the amount realizable upon a sale of our assets. This letter shall not constitute an offer to sell or the solicitation of an offer to buy securities, nor shall there be any sale of our securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction or a valid exemption therefrom. Any offering that we conduct will be made only to accredited investors and only pursuant to definitive offering documents, including a disclosure package.

Thank you again for your support.

THERANOS, INC.

Elizabeth Holmes

Chairman and CEO

Energous Updates

A few updates on Energous happenings from the last week or so. First up, Chris Brown of Aristides Capital gave a presentation at a conference, "Kase Learning: The Art, Pain and Opportunity of Short Selling".


It is the best presentation covering everything that is wrong about Energous I have seen, and neatly summarizes a bunch of what I have been saying in this blog, in a way a lay person can understand. According to their SeekingAlpha page, Aristides Capital manage about $83 million in investments. Here are the "Take Home Messages" from this 34 page work of art:

"The people who do publicity and media relations for Energous have done an utterly brilliant job selling vaporware. Congratulations, Ajit Pai and others.

The “advance” upon which Energous was founded, “the pocket of RF energy,” is a fabrication, a “dazzle them with BS” way of saying “constructive interference,” and doesn’t solve any issues. The reasons we don’t transmit large amounts of RF through the air for power—safety limitations, equipment cost and size, and poor efficiency—are the same as they have been for decades.

Energous is a fraud, one which is burning a lot of cash and will run out of money. The company has no chance of making a commercially successful product. We expect the stock will go to $0."

A link to the full presentation is here.

I added the bold above as I'm glad to see more people covering the what I said in my second post on this blog, over two years ago: "In theory, it can be done in limited cases, but in practice cost and efficiency issues will likely render it impractical." 

So many of the individual pages of this presentation cover topics I have often spent hundreds of words to try to get across in posts, so it's a lesson for me in how to be succinct and effective in this area. I won't repeat them all but a few memorable quotes:

Energous Corporation: a worthless equity hyped to $500 million

CEO who lies bigly and often

#FAKENEWS – false & unskeptical media coverage

If you tell the same big lie often enough, many people will believe it

and my personal favorite as an engineer:

Very small numbers add together to make other very small numbers

CNBC covered this and asked the company for a response:

"Energous did not immediately respond to a request for comment."

Download the presentation and read it for yourself, I'm not doing it justice here.

Speaking of "Unskeptical Media Coverage"
There was also a new wireless power article "When will your phone charge wirelessly in your pocket? We asked an expert" on Digital Trends. It focused on Energous and Ossia, with a brief mention of Powercast, so was aimed squarely at the RF at-distance wireless charging market. I was interested to see the analysis from independent experts and a balanced and reasonable piece on the practical issues surrounding this tech. You're going to be amazed by who the experts are:

• Hatam Zeine - Founder and CTO of Ossia
• Gordon Bell - VP Marketing of Energous
• Mark Hopgood - Snr Director Marketing/Strategy at Dialog Semiconductor (Energous Partner/Investor)

aaaaaand that's it. Every single person interviewed has a financial incentive to promote this technology, they are completely biased. Not even a token attempt here to speak to a university professor of electrical engineering, or get a counter viewpoint. Spend a few minutes Googling Energous and you'll find plenty of stories out there on the less savory side of at least Energous. Of course I'm pretty biased since I'm one of those drawing attention to that. Is this a puff piece that's essentially PR for the companies, or is it actually an attempt to inform the reader? If the former, it achieved that goal splendidly, if it's the latter then it's a major fail.

Now I've been harsh on tech journalists covering this topic in the past, and while it's not the ass-kiss fest that David Pogue exemplifies, or the embarrassingly weak coverage from Tom's Guide where they got the wool pulled over their eyes on what they were showing,  this is still another company PR piece masquerading as tech journalism. I'm not sure the author even realizes he's being used by these companies to whitewash their PR and give it a veneer of authenticity.

I was about to take apart the rest of the article, but in the end realized it's just more of the same of what I've written on other journalists. Instead I'll just make this one point - whenever I talk to journalists about Energous, I'm either asked if I have a financial interest or conflict of interest. When I post online I always get someone replying that I'm just a short-seller looking to make money, or am upset I'm losing money shorting the stock despite my repeated statements that I have no position on the company - I even had someone who owns a wireless power company demand that I declare my financial interests because I was, unlike him, clearly biased. Why do I get more scrutiny about my motivations than someone who is doing it for the money? Only answer I can think of - when someone isn't doing something for money, it confuses people. The idea that you're doing it simply "because it's the right thing to do" is utterly alien and therefore suspicious.

Energous' Financials
It was also time for Energous' quarterly financial results, and once again there were no surprises here - it's still a ~$500m company with $25,000 in quarterly services revenue and no sales. With cash in the bank and the current burn rate, they have 9, at best 12, months of operation left before further fundraising is needed. All talk of product delivery and profitability was once again pushed out into the future, as seems to happen every time. By their own admission, they can't get to revenue before they run out of money, let alone to enough sales to break even. No mention of Myant dropping WattUp from their Skiin product, you'd think given the big deal they made of that product announcement a few months ago that it would be important for investors to be told about that. A transcript of the earnings call can be found here. Oh, and they're also awarding themselves millions of dollars in equity because they're doing such a fantastic job.