Is Pete Bringing a Gun to the MiMedx Knife Fight?

Just as the two other sides were girding for a bloody fight over three board seats in a court-ordered June 17 MiMedx stockholder meeting, ousted 79-year old CEO/board chairman Parker Petit on May 21 filed a new proxy statement seeking to force a second election for another three seats in July, potentially giving him a majority on the board.

We’d previously reported that Petit was running with two mates for three board of directors’ seats which were to have been elected in the delayed 2018 meeting.

His new filing proposed to force the company to hold a July 25 election of three more board members, and to repeal every board decision from October 3, 2018 through then. October 3 was the date on which the board approved new bylaws to fight off a takeover—a move which some say was principally aimed at him.

A document at his personal website indicates that he believes his old boys’ network will put him back in the chairman’s seat:

“[M]any of the larger shareholders of MiMedx are individuals that have known each other for almost ten years…[and] have brought numerous other shareholders to the Company…approximately 50% of our shareholders fall into that category. In addition, there is an investment firm, Okumus Management, that owns approximately 10% of the Company…I expect that as many as 70% of the shareholders will reject the Company’s candidates and vote instead for alternative candidates nominated by shareholders [and] install some new executive managers…”

The stockholder meeting or meetings are only the beginning of a perilous future for MiMedx. Five potentially big events await.

But First, To Recap

Initially, former MiMedx employees had alleged that the company was engaged in channel stuffing of its amniotic tissue derived allografts. A group of Wall Street’s short sellers used those allegations and documents from the subsequent lawsuit to attack MiMedx stock. But when the company’s board of directors looked into the allegations, they announced the following shocking decisions:

• They directed their auditors to restate six years of financial statements because, in their own words, those statements were inaccurate and could not be relied upon by investors. Here’s a link to the SEC filing.
• According to MiMedx board, the financial statements were wrong 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.

Short selling investors, notably Viceroy Research, Aurelias Value and Citron Research, alleged that MiMedx was being investigated by federal law enforcement agencies and had lied to shareholders.

Before his forced resignation, 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.

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 or its Q1 2018 financial results in a timely manner with the SEC.

MiMedx’s market value collapsed from $1.9 billion before February 2017 to $910 million before the audit committee announcement on June 6, ,2018. Today the company’s market value is around $350 million.

Since OTW’s April 15th Story About MiMedX

Here’s what’s happened since we last checked in on the MiMedx brawl:

• The current board had also been seeking to delay the stockholder meeting. On May 15, the Florida court denied its plea for a stay. The board has appealed, but no date has been announced to hear it.The company wanted the delay while it completed a restatement of financials back to 2012 under Petit’s management; the audit was triggered by allegations of “channel stuffing” (shipping products not ordered and booking them as revenue). Other allegations have also emerged: bribery of federal buyers and alleged price-gouging during his reign as CEO.

• Petit has said that if there were any irregularities, they were minor and were done by rogue employees, not under management direction. His group is not alone in pursuing the three board seats.
• On May 7, Prescience Point Capital Management LLC named three candidates for the three board seats.
  • Prescience Point also said it had raised its stake in MiMedx from 7.3% in April to 9.98%, just under the 10% stake which would trigger a so-called “poison pill” which the post-Petit board created. A Wall Street Journal news report on November 7 theorized that “Mr. Petit may be the potential acquirer the rights offering aims to thwart.”
  • Prescience Point’s proposed directors differ starkly from Petit’s. Both of Petit’s choices are lawyers (one is also an accountant) with no prior experience either managing or directing a medical or health care company. One is a corporate tax lawyer with expertise in “complex civil litigation and commercial matters…including multi-forum litigation and risk related management,” according to Petit proxy statements. The other has experience in “tax matters related to M&A and other strategic initiatives [and] has also negotiated settlements with the Internal Revenue Service…”
  • In contrast, three of Prescience Point’s four nominees (it has argued that one seat up for election in 2019 should also be filled at the June stockholder meeting) have experience building pharmaceutical, biotech, and medical device companies. Their bios are in this announcement.
• On May 15, MiMedx said in an email to us, “The MiMedx Board has not yet announced its slate of directors,” but the company does plan to have its own candidates.
• Another big new stockholder lurks silently. An investment fund, MAK Capital One of New York City, reported on April 18 that it owned 5.2% of MiMedx as of April 9. MAK didn’t respond to our query asking about its intentions.
• On May 9, MiMedx announce that it had replaced its interim CEO, David Coles, whose expertise was helping stressed companies, with Timothy R. Wright, effective May 13. Wright has 30+ years’ experience as an executive in the pharmaceutical, biotech and medical devices industries. MiMedx said.
• The fact that Wright is replacing Coles before both the financial restatements and the stockholder meeting might be interpreted as a board effort to counter arguments made by both the Petit and Prescience Point groups that the company needs new, strong strategic leadership. The company said:

“We are confident that Tim’s business, operations, sales and scientific acumen make him the right person to lead MiMedx forward on a trajectory of ethical and sustained growth. Furthermore, Tim’s experience working with companies that operate in a regulated space is directly relevant to our business going forward.”

When Will MiMedx Release Its Sales and Earnings?

It has now been more than two years since the company released audited annual sales and earnings figures.

Here’s a quick review of what’s been released so far—and, remember, these sales numbers are supposed to be restated.

2012: $27.1 million
2013: $59.2 million
2014: $118.2 million
2015: $187.3 million
2016: $245.0 million
2017: $324 million (preliminary, announced 12/13/17)
2018: $383 million to $387 million (projected on 12/13/2017)

The feds: what will the VA, DOD, SEC, and Justice Department do?

There’s no way to guess what the impact of the federal probes might be, but here are some possibilities:

The Securities and Exchange Commission (SEC): Its bailiwick is protecting investors from dangerous or illegal financial practices or fraud, by requiring full and accurate financial statement disclosure by companies who’ve sold stock to the investors. If a company is found to have cooked the books, the SEC can levy massive fines, bar individuals from a company or industry, order executives to disgorge stock for the benefit of victimized stockholders, issue injunctions, and issue undertakings—orders directing future conduct, such as forcing a company to hire a compliance consultant. This October 3, 2018 speech by Steven Peiken, the co-director of the Division of Enforcement, discusses the SEC’s favorite options.

The Department of Veterans Affairs (VA) and Department of Defense (DOD): Their investigations could be equally or more painful. In 2015, the last year for which MiMedx provided breakdowns, 26% of its revenue, some $50 million, came from government entities.

“MiMedx’s relationship with government facilities appears now to be in flux. A $2.1 billion VA contract awarded to 21 makers of biologic implants announced in early October didn’t include MiMedx,” said a November 5 Wall Street Journal article.

In addition, current management told us on May 15: “MiMedx has also undertaken a comprehensive review of its historical VA sales and has recorded an obligation of $8 million in connection with a potential issue that it self-disclosed to the VA concerning the eligibility of one of its products for inclusion in the Company’s Federal Supply Schedule contract.”

The VA and DOD can ban a company from future contracts. They can do worse, turning serious cases over to the Justice Department. This page links to details of what Justice has done to violators of VA rules; prison terms and fines up into the tens of millions of dollars are common outcomes.

MiMedx Stockholder Lawsuits

On May 1, a 324-page amended complaint was filed in one of four class-action lawsuits we found through a Google search. The lawsuit first filed February 2, 2018 by the Carpenters Pension Fund of Illinois against MiMedix, Petit, three other company executives, and the company’s auditor Cherry Bekaert (Case No. 1:18-cv-00830-WMR, Northern District of Georgia) alleges many violations of federal securities laws in detail.

One of many alleged channel-stuffing incidents described in the shareholder lawsuit is a story about shipping unordered shoebox-sized packages of the company’s most expensive, infrequently used skin grafts, which cost $6,700 each. In the lawsuit, this activity was characterized as the “Limb Salvage Initiative”.

“Between March 22 and March 31, 2016, the Company sent 7×7 cm EpiFix grafts to 20 VA hospitals across the country, representing approximately $2 million to $2.4 million of excess product,” most of which was still on VA shelves but unpurchased as of November 2016, the lawsuit alleges.

“For years, the Company had been stuffing customer shelves with far more product than they could use. As of late 2017, MiMedx inventory dating back to 2013 still remained on VA shelves,” the lawsuit alleges. “MiMedx employees were physically running out of room at VAs to stuff additional products.”

Cornerstone Research, which keeps a database of stockholder class-action lawsuits, says that median class-action stockholder settlements nationwide equaled 6% of “simplified tiered damages”* in 2018, and have averaged 5.1% from 2009 on.

*A measure of potential shareholder losses based on the dollar value of a defendant’s stock price movements on specific dates” – Cornerstone.

From its peak to low, MiMedx stock lost more than $1.88 billion in value. However, the total loss for calculating damages would likely be less.

What’s Next?

There’s a lot of value in this firm and now, in addition to former CEO Pete Petit, a group of Wall Street vulture capitalists have descended to pick at MiMedx’s bones.

Can Pete force his way back in?

Are there more shoes to drop from the Department of Justice, SEC or other agencies?

Will investors ever get reliable financial statements?

How badly has MiMedx’s core business been affected by all of this drama?

Stay tuned, for sure.