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Employee says Theranos bled money while Elizabeth Holmes raved to investors

While the government argued Theranos hemorrhaged money while its founder painted rosy pictures for investors, Elizabeth Holmes' lawyer said the money was being poured into research and development — a common practice for Silicon Valley startups.

(CN) — A former Theranos employee testified the blood-testing company was losing millions of dollars while CEO Elizabeth Holmes was talking up the company’s financial picture to investors on the second day of the high-profile trial of the fallen Silicon Valley star. 

Danise Yam, Theranos’s controller who managed the company’s finances from 2009 until 2015, confirmed the company had lost about $585 million by 2015 and only had about $429,000 in revenue during a period of time when it raised nearly $1 billion in various investments. In 2014, the company took in about $14,000 in revenue, according to internal financial documents. 

But Holmes' attorney Lance Wade made sure to note that revenue is different from cash and that much of the hundreds in millions in accumulated deficit the government pointed to was due to investments in the company’s technology. 

“A big reason for these operating losses is the significant investment in research and development, is that right?” Wade asked Yam. 

“Yes,” she replied matter of factly. 

Yam was concise in her answers and often said she didn’t recall specifics and refused to speculate regarding subjects outside her narrow realm of expertise. 

The testimony is important as the government’s main argument for fraud has to do with Holmes' representation of the company’s financial conditions to potential investors in 2013 and 2014, when it secured major contracts with Walgreens and Safeway and raised nearly $1 billion dollars by selling preferred shares. 

Wade likely foreshadowed the defense’s position when he asked if Yam was familiar with a document that indicated Theranos expected to make $140 million in revenue in 2014 and $990 million in 2015, although Yam said she was not familiar with the document and did not know who prepared it. 

Wade closed his cross-examination by asking Yam whether Holmes ever sold stock. 

“No,” Yam said. 

But under questions from Assistant U.S. Attorney Robert Leach, Yam did confirm Holmes was paid $200,000 in 2013 and 2014 and received a raise that doubled her salary to $400,000 in 2015. 

The government will have to prove that Holmes lied to investors to personally profit and while the fact she never sold stock could be troublesome for the prosecution, the government can argue she found other streams of revenue based on inflated claims of her company’s technological prowess — including the salary she paid to herself. 

Leach also asked Yam about contracts for a private plane company, but beyond recognizing the company Yam did not comment on how much Holmes or other executives spent on the service. 

In a short rebuttal, Leach asked Yam about the concept of deferred revenue, which is when Theranos received money for services it had not yet provided. Yam testified certain contracts could have been voided if the services in question were not rendered.

The prosecution also called Erika Cheung, a former lab associate who worked at Theranos for only six months beginning in October 2013 before she resigned as she became disillusioned with the company’s ability to deliver its ambitious mission. She graduated from the University of California, Berkeley, and immediately took a job at Theranos, dazzled by the ability to provide patients with cheap, quick and accessible blood testing and by Holmes herself. 

“I was starstruck,” Cheung said in describing her first meeting with Holmes. “She has a charisma to her. She is very articulate and has a strong conviction about her mission. She is one of the few female entrepreneurs to get unicorn status.”

But Cheung became disillusioned after the quality control issues began to arise with the blood testing performed on Edison, the small portable blood analyzer. 

“I left Theranos because I became uncomfortable with the processing of patient samples,” Cheung said. 

The former lab associate also testified that Edison 3.5 was only able to perform about 12 blood tests and only one test per sample at a given time. She said Theranos used modified machines developed by Siemens and other companies to perform other blood tests on the company’s “testing menu.”

The day ended before Cheung's cross-examination, but the defense tipped its hand regarding its plan during a sidebar when Wade discussed the fact that Cheung’s interview with Holmes was likely the longest interaction the two had during her six-month employment. 

“We object to detailing every issue that occurred in the lab and suggesting that’s imputable to our client,” he said. “She could be found guilty because of issues in the lab.”

Wade will more fully unveil his strategy Wednesday when the trial is scheduled to resume. 

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Categories / Business, Criminal, Securities, Technology, Trials

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