Bloomberg News/
MiMedx Group, Inc. played a version of, “Can you top that?” on Monday, when the troubled biopharmaceutical company installed an interim CEO and a new board chairman following the latest wave of executive departures.
The company’s stock tumbled 38% on the news, sending it to its lowest level since September, 2013.
The company appointed Charles R. Evans, previously the company’s lead independent director, as chairman of the board, replacing Parker H. “Pete” Petit who resigned as board chairman and chief executive. It named David Coles to serve as interim CEO, according to a press release.
Chief operating officer William C. “Bill” Taylor also resigned his role and left the board.
The news follows the dramatic announcement on June 7 that the company’s CFO and its controller/treasurer would exit after MiMedx said it would restate more than five years of financial statements, for the period stretching from 2012 through 2016, and the first three quarters of 2017. All communications and financial information, it said at the time, with respect to the fourth quarter of 2017 and the first quarter of 2018 “should no longer be relied upon,” the company said. It withdrew all prior guidance for 2018.
“A financial restatement of this magnitude is a significant red flag in respect to a company’s accounting quality.”
That’s four times more periods reviewed than the average, signaling a substantial and long-standing problem, research firm Audit Analytics wrote in its analysis of the announcement.
“A financial restatement of this magnitude is a significant red flag in respect to a company’s accounting quality,” Audit Analytics wrote in early June.
Coles is taking the assignment on an interim basis, while continuing to act as a Managing Director with Alvarez & Marsal, a global professional services firm that advises and provides turnaround and restructuring services to companies, including providing interim management.
Coles served as the CFO, principal accounting officer, treasurer and controller at Lehman Brothers Holdings, Inc. from September 2008 to February 2009. He worked for Arthur Andersen & Co. in the U.K. and New York before joining Alvarez & Marsal in 1996.
In describing the actions already taken to “promote accountability and strengthen oversight” MiMedx said it had retained “a leading, operationally focused finance and accounting consultancy firm to provide interim leadership for the chief accounting officer, corporate controller and other financial roles.”
Coles’ appointment seems to be part of a larger engagement for Alvarez & Marsal to provide interim staffing to a company that is suddenly bereft of senior management.
A MiMedx spokesman said the company is not providing any information about the consultant at this time. David Coles did not respond to a request for comment about the extent of his firm’s engagement with MiMedx.
An internal investigation initiated in March of 2017 and led by the Audit Committee of the company’s board continues. The Securities and Exchange Commission subpoenaed the company last fall and MiMedx is continuing to provide documents in response to the subpoena. The U.S. Department of Justice is conducting a parallel investigation.
MiMedx said it does not intend to provide additional updates on the investigations until they are concluded or it determines that further disclosures are “appropriate or necessary.”
The warning signs that the company’s troubles would not be over soon came well before June 2018, however.
In August of 2017 the company fired Cherry Bekaert LLP, its independent registered public accounting firm for the periods now being restated, and hired Ernst & Young LLP after a competitive tender.
Troubled smaller companies don’t often move from the 25th largest accounting firm in the U.S. with $160 million in revenues to one of the four largest global firms with $31.4 billion in revenue. Of 167 companies that disclosed material accounting restatements since Jan. 1, 2017, 62 also had auditor changes. But only 5 of those companies changed from a non-Big 4 firm to one of the largest in the world—EY, KPMG, PwC, or Deloitte— according to data provided by Audit Analytics.
A spokesman for EY declined to comment on its work for MiMedx.
That change followed a March 2017 disclosure that two former employees had filed a lawsuit alleging, among other things, fraudulent business practices related to revenue recognition, including allegations of channel-stuffing.
Channel-stuffing is a way to inflate sales and earnings figures by deliberately shipping distributors and retailers more products than they are able to sell to an end consumer.
The internal investigation, “confirmed there is no credible evidence of any wrongdoing on behalf of members of MiMedx management,” the company said.
In May of 2017 the SEC, in an unusual move, asked for a summary of the investigation findings via a public comment letter on its annual filing.
The company also disclosed a material weakness in its internal controls related to tax accounting for 2016.
Needham analyst Mike Matson reiterated his hold rating on the stock, citing a range of risks including, “slowing revenue growth due to management turmoil, the dollar amounts of the restatements, a potential delisting, the SEC/DOJ investigations, the ongoing internal Audit Committee investigation, and the potential for MDXG to need to raise capital.
“For what it’s worth, the press release noted that MDXG has no debt and has sufficient liquidity to fund all of its operational needs and investments,” Matson wrote in a note.
MiMedx shares have fallen 69% in 2018, while the S&P 500 has gained 1.2%.