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Theranos by the numbers: Do forecasts show fraud or failure?

Prosecutors and defense attorneys argued over what Theranos' lofty revenue projections meant as the Elizabeth Holmes trial continued in San Jose.

Elizabeth Holmes and her mother leave the courthouse in San Jose.

Elizabeth Holmes and her mother leave the courthouse in San Jose on Tuesday, Sept. 14, 2021.

Photo: Biz Carson/Protocol

Theranos inflated its revenue projections when, behind the scenes, insiders knew the startup had widening losses and dwindling revenue, prosecutors argued on the second day of the Elizabeth Holmes trial.

The testimony was the first glance under the hood of Theranos, a blood-testing company which once promised to revolutionize the detection of disease. Holmes, its former CEO, is standing trial for wire fraud and conspiracy to commit wire fraud in San Jose.

One of the prosecution's key arguments is that Theranos wildly inflated its revenue projections to attract investors. As its first witness, the government called former Theranos controller So Han Spivey, who also goes by Danise Yam, and walked through spreadsheet after spreadsheet of the company's historic financials.

Her testimony painted a picture of a company that saw its cash dwindling as revenues shrank, with a few particularly tense moments in 2009 and 2013 as it burned millions of dollars a week. But the company buoyed its balance sheet by attracting around $945 million from investors — investors whom, the government contends, Holmes misled as she pitched them.

The loftiest revenue projections appeared in a mysterious document that Spivey said she had no hand in preparing. Without offering the jury specifics on the document's origins, prosecutors suggested the financial forecasts were something investors had seen. The document showed Theranos expected to generate $140 million in revenue in 2014 and $990 million in 2015.

"Do you have any idea where that number came from?" Assistant U.S. Attorney Robert Leach asked Spivey. "No," she replied.

The forecast of nearly a billion dollars in revenue was higher than what Holmes presented to an outside firm which prepared a 409A valuation, an assessment of the fair-market value of the company's stock for compensation purposes. The numbers Spivey said she received from Holmes had previously forecasted $50 million in 2013, $90 million in 2014 and $112 million in 2015. In another email, Holmes confirmed forecasts of $100 million in revenue in 2015, rising to $500 million in subsequent years.

Defense attorneys for Elizabeth Holmes leave the courthouse in San Jose on Tuesday, Sept. 14, 2021.Photo: Biz Carson/Protocol

Defense attorneys countered that much of the discrepancy came from Theranos' deferred revenue.

Theranos' actual revenue had fallen from $1.4 million in 2010 to $518,000 in 2011 and down to zero in 2012 and 2013. At the time, its losses also grew from $16.2 million in 2010 to nearly $57 million by 2012. By 2013, Theranos was burning roughly $2 million a week, Spivey said.

Holmes' lawyers argued that the losses were normal for a Silicon Valley startup who was spending heavily on R&D and had signed plenty of revenue-generating contracts with companies like Merck and Pfizer.

The prosecution, meanwhile, pressed Spivey on the company's spending, attempting to paint a portrait of corporate excess, but didn't extract many details from the former controller.

Spivey couldn't recall how much Theranos had spent on private jets, but confirmed that Holmes did fly private. She also said that Holmes had been paid $200,000 a year from 2010 to 2014 before her salary increased to $400,000 in 2015.

A more insightful witness into the company's culture will be whistleblower Erika Cheung, who worked in Theranos' clinical and R&D labs. She began her testimony Tuesday describing how she wanted to work for a charismatic Holmes but found a secretive work environment where employees were told to keep Theranos off their LinkedIn profiles.

See Protocol's in-depth coverage of the Theranos trial for more.

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