More troubles may be ahead for Marietta-based MiMedx, even after the ouster of top leaders and layoffs of hundreds of employees.
The company remains in such turmoil that its external auditor, trying to assemble an accurate financial picture, couldn't get enough straight answers to do its job, a new federal filing reveals.
That is among the reasons the auditor, Big 4 accounting firm Ernst & Young, resigned last week, according to an 8-K form filed with U.S. Securities and Exchange Commission.
“Internal controls necessary for the company to develop reliable financial statements do not exist,” Ernst & Young told MiMedx, according to the filing.
The 8-K form describes an auditor and its client clashing as the auditor tried to reconcile years of disputed earnings reports. A forensic accountant who examined the document for The Atlanta Journal-Constitution said some of the language points to allegations of possible securities fraud.
Other experts said the auditor's resignation doesn't bode well for a company that last week announced layoffs of nearly a quarter of its workforce.
“This is bad news for the company,” Georgia State University law school professor Jessica Cino, a former white collar criminal defense attorney, told the AJC in an email. “It’s sort of like the Titanic hitting the iceberg. The problems are far worse underneath the surface and (Ernst & Young) wasn’t going to put its name on the line for this.”
Public companies such as MiMedx must file reports known as Form 8-Ks with the SEC about major events that may be important to shareholders. The departure of an auditor is one such event. Ernst & Young declined to comment for this story, but a letter attached to the 8-K said the firm agrees with its contents.
In a statement Monday, MiMedx said the resignation doesn't impact the company's ability to serve customers and pointed back to plans announced last week by interim CEO David Coles to "preserve and drive long-term shareholder value."
“The realignment program we announced last Wednesday is expected to improve our company’s profitability and liquidity and, therefore, financial flexibility,” the statement said. “We remain fully focused on continuing to deliver our products and support healthcare providers and the patients they serve.”
Once a Wall Street darling, MiMedx has been rocked by allegations of inflated earnings and improper sales practices. The company sells regenerative injections and wound coverings derived from human placental tissue, which are used in orthopedic treatments and on burn victims, among other uses.
Before layoffs were announced, the company employed roughly 950 people, more than half of them based in Georgia. Its then-chairman and CEO, Parker "Pete" Petit, was a colorful and politically-connected fixture of Atlanta's business community, serving as Donald Trump's campaign finance chairman in Georgia, with buildings at Georgia Tech and Georgia State named after him, as well as the new Georgia State football field at the old Turner Field.
Last year Fortune magazine dubbed MiMedx a “designer of a kind of modern medical alchemy,” ranking it the fifth-fastest growing public company, ahead of Facebook Inc. and Amazon.com. MiMedx’s reported revenues last year topped $300 million.
But former employees alleged that sales figures were a ruse, accusing the company in lawsuits of over-shipping its products to U.S. Department of Veterans Affairs hospitals, a tactic known as "channel stuffing." The company has fallen under scrutiny by several federal agencies, including the Department of Justice, the SEC, the VA and the Food and Drug Administration. Health care workers accused of improprieties involving MiMedx have been indicted or forced out of VA hospitals across the country.
Company shares have also plummeted, falling from nearly $18 at the start of the year to about $1.25 now. In a separate SEC filing late last week, the investment firm BlackRock disclosed that it now owns only 1,851 shares of the company. Back in January, it reported owning 13.6 million shares.
In June, MiMedx agreed to walk back five years of financial statements, which it has never reissued, and later ousted its top executives "for cause," including Petit. A news release said Petit and others — the ex-COO, the ex-CFO and a former controller/treasurer — "engaged in, among other things, conduct detrimental to the business or reputation of the company."
Last month, MiMedx was de-listed by Nasdaq.
Such developments could indicate the company lacks “the cash flow and true business operations to even be sustainable,” said David Sawyer, a forensic accountant and financial crimes investigator. “If they’re laying off a quarter of their workforce, and they’ve overstated their financial statements in the past, it paints a very grim and bleak outlook.”
Sawyer said the latest 8-K MiMedx filed could explain why the SEC has been investigating for more than a year. The document describes a clash with former MiMedx managers over “revenue recognition under certain distributor contracts.”
“When I see the word ‘revenue recognition,’ as a certified fraud examiner and a CPA, that tells me that they’ve been over-stating their revenue,” said Sawyer, who is on the Fraud and Forensic Advisory Task Force for the Georgia Society of CPAs. “Because the revenue and the financial statements are materially misstated, and because it is a publicly traded company, it indicates that there is a risk for securities fraud there.”
The 8-K describes a litany of frustrations that experts say would leave an auditor with no other choice but to resign. Under general professional standards, as well as SEC rules, auditors are ethically obligated to back out of a job if a client isn’t being forthcoming.
Part of the problem appears to be managers still on staff who are tied to past problems. Auditors couldn’t rely on statements from the interim CEO or interim CFO because they got their information from “certain legacy management personnel still in positions that could affect what is reflected in the company’s books and records,” the 8-K says.
Also, Ernst & Young had told the company that the scope of its audit needed to expand significantly because of allegations of inappropriate financial reporting, noncompliance with laws and regulations and a lack of internal controls. The 8-K says the firm hadn’t completed this expanded work.
Jim Wanserski, founder of the consulting group Wanserski & Associates, said it could be that MiMedx didn’t want to pay for an expanded audit, or it didn’t want to cooperate, or couldn’t cooperate because its financial records are too compromised.
“There could be kind of a Paul Harvey ‘rest of the story,’” said Wanserski, who has served as CEO for under-performing companies that came under federal scrutiny. “But ultimately, I think (Ernst & Young) decided that, well, without doing it, we don’t see a way to get comfortable.”
MIMEDX UNDER SCRUTINY
The external audit by Ernst & Young was just one effort to get to the bottom of allegations swirling around MiMedx. The company has also attracted scrutiny from an alphabet soup of federal agencies: the Department of Justice, the Securities and Exchange Commission, Veterans Affairs and the Food and Drug Administration.
The company’s audit committee is conducting an internal investigation, as well.
The FDA has questioned whether some of MiMedx’ products qualify as drugs and biologicals and were being sold without proper approval. DOJ and the VA have probed relationships between the company and health care workers who pushed company products.
In May, three South Carolina VA workers were indicted on federal health care fraud charges, accused of excessive use of MiMedx products on veterans after accepting gift cards, meals and other inducements from a company representative. Two of the three workers were also charged with accepting bribes.
In September, the Minneapolis VA parted ways with four podiatrists and a dermatologist over improprieties with the company’s products. A spokesman said the VA proposed terminating all five, but each opted to resign or retire.
WHY IT MATTERS
Until this year, MiMedx had been a local biopharma company on the rise. But then former employees and short sellers alleged wrongdoing and inflated revenues, and both federal and internal investigations backed up many of their claims. Now the company’s stock prices have plummeted, 240 people are out of their jobs during the holidays, and experts see signs of possible securities fraud and looming bankruptcy.
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