MiMedx Reeling Under Fraud Allegations

We can only imagine what work life is like these days at MiMedx.

Allegations of channel stuffing and fraudulent billing have been building against MiMedx Group, Inc. for almost two years.

Initially it was former employees who were making these allegations. Then a group of Wall Street’s short sellers piled in. But when the audit committee of MiMedx’s board of directors looked into the allegations, they issued the following announcements and fired the following senior executives:

• Six years of audited financial statements were inaccurate and needed to be restated. Literally, said the audit committee, nothing the company had stated in press releases, investor presentations or any other public utterance was to be relied upon. Here’s a link to the SEC filing which contains the Audit Committee announcement.
• The reason the company’s financial statements were wrong, they said, was because of certain sales and distribution practices at two distributors and MiMedx’s inadequate internal accounting practices and controls.
• MiMedx’s chief financial officer, Michael Senken, was fired on June 6, 2018.
• At the board’s insistence, MiMedx’s chief executive officer, Pete Petit, resigned effective June 30, 2018.
• At the board’s insistence, MiMedx’s president and chief operating officer, Bill Taylor, resigned effective June 30, 2018.

Since then MiMedx hired David Coles from Alvarez and Marsal Holdings, LLC, a firm best known for its work with troubled companies, to serve as interim chief executive officer for a $200,000 monthly retainer.

Nasdaq has also notified the company that it intends to delist the stock since it no longer meets Nasdaq’s listing qualifications.

The Fraud Allegations

A group of short selling investors, most notably Viceroy Research, Aurelias Value and Citron Research have been claiming that MiMedx is guilty of channel stuffing. The short sellers are also alleging that MiMedx is being investigated by federal law enforcement agencies and lied to shareholders to cover up these activities and the resulting regulatory investigations.

Before this past June’s financial restatements and executive firings, MiMedx’s disputatious CEO Pete Petit engaged in hand-to-hand combat with the short sellers, refuting their allegations and initiating legal action against some of the more vocal and public short sellers.

Channel stuffing, which is a major accounting and legal “no-no”, is where a company books inventory sitting at its distributors as sales—when they are not. It’s a form of fraud.

In addition to allegations of channel stuffing, the short sellers posted on various websites legal documents which purported to contain evidence of insurance billing fraud. The short sellers also claim to have turned their evidence over to the authorities.

MiMedx, under its former CEO Pete Petit, adamantly maintained that none of these allegations were true.

In February, however, the company announced that it was indeed under investigation by the U.S. Department of Justice.

Then MiMedx announced that it was unable to file either its 2017 nor its Q1 2018 financial results in a timely manner with the SEC.

MiMedx’s market value collapsed from $1.9 billion before February to $910 million before the audit committee announcement on June 6. Today the company trades at around $500 million.

What was odd was the way in which the then beleaguered (now former) CEO, Pete Petit, responded to the mounting evidence that his public statements were suspect.

Petit posted a “short selling commentary” on the MiMedx website in 2017 where he tried to refute the short seller allegations. In those commentaries he called out Mark Cohodes, one of the most famous short sellers on Wall Street.

In fact, however, Cohodes had never said a word about MiMedx.

So, the famous short seller started to investigate MiMedX. Today, he is probably the most virulent short seller against both CEO Petit and the company.

Here’s how Cohodes characterizes his animus toward Parker (Pete) Petit and MiMedx on a video he posted on YouTube:

“Parker, I’m a 57-year-old man. You decide to drag me into this by mentioning me on your website when I didn’t know who the hell you were or what your company did. But I didn’t appreciate it. And there is no greater motivation in my life than disrespect….You then accused me of being in a wolf pack or a cabal. I don’t operate with a wolf pack or a cabal. A wolf pack or a cabal would never want me. I am focused on exposing this. I am in discussions and have forwarded this (the information he developed) to regulators and will turn over information to the independent investigators, criminal and regulatory authorities as long as sources are protected because MiMedx has a history and a process of ruining people’s lives. I’m agitated, I’m focused and I will not stop.”

For Mark Cohodes this campaign against Pete Petit and MiMedx is personal.

Here’s a link to Mark Cohodes’s YouTube commentary about Petit and MiMedx.

Cohodes is claiming that MiMedx’s revenues are overstated by 70% and that the company had paid kickbacks to doctors out of selling, general and administrative expenses.

Cohodes maintains that he would never have gotten involved in this fight were it not for Petit’s pre-emptive attack against him.

At this past JP Morgan healthcare conference, Cohodes showed up and confronted Petit in front of a room full of institutional investors.

It’s important to note that much of the short seller allegations come from a three-year-old litigation between two former sales reps and MiMedx. The former reps are claiming that at the end of each quarter MiMedx sent its products to VA hospitals where MiMedx’s sales reps control the inventory and, the lawsuits allege, MiMedx parked millions of dollars of product and claimed that they were sales. Channel stuffing, in other words.

MiMedx argues that it conducted an internal audit back when those allegations first surfaced and found that they had no merit. MiMedx even claimed that one of those sales reps retracted his allegations.

Then, last year, the Wall Street Journal reported that MiMedx had made payments to some 20 different doctors.

The ArthroCare Parallels

We think we’ve seen this play before. It looks a lot like ArthroCare Corporation.

Here’s a side-by-side comparison of the ArthroCare and MiMedx cases.

Source: RRY Publications LLC

What’s Next?

In the case of ArthroCare, five years after the allegations of channel stuffing first emerged, the company was entirely recovered and growing as fast as it ever had before. In 2014 Smith & Nephew paid $1.7 billion to buy this fine company. It was the legacy of Michael Baker and his team that they built such a great firm. It was also their legacy that in their hubris they destroyed themselves.

For a paltry $53 million revenue overstatement—just 4% of the sales over those three years—CEO Michael Baker and his colleagues bought themselves serious jail time and cost their owners about $900 million in lost value.

Such a waste.

Pete Petit and his senior executives are in a special kind of hell right now and if these allegations prove to be accurate in any material way, then for what will likely turn out to be a very small revenue change, they will have cost their shareholders a massive amount of lost wealth and earned themselves the same kind of Greek tragedy that the ArthroCare Team experienced.

MiMedx, the company, will be fine. I predict, like ArthroCare, it will emerge even stronger.