MIMEDX GROUP, INC. (NASDAQ:MDXG) Files An 8-K Regulation FD Disclosure

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MIMEDX GROUP, INC. (NASDAQ:MDXG) Files An 8-K Regulation FD Disclosure

MIMEDX GROUP, INC. (NASDAQ:MDXG) Files An 8-K Regulation FD Disclosure
Item 7.01

On May 23, 2019, MiMedx Group, Inc. (the “Company” or “MiMedx”) issued a press release announcing the conclusion of the investigation of the Audit Committee (the “Audit Committee”) of the board of directors of the Company (the “Board”). A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated by reference herein.

As announced on February 20, 2018, the Audit Committee retained King & Spalding LLP (“King & Spalding”) as counsel to the Audit Committee to assist in conducting an independent investigation into current and prior-period matters relating to allegations regarding certain sales and distribution practices at the Company and certain other matters (the “Investigation”). Following its engagement by the Audit Committee, King & Spalding retained KPMG LLP (“KPMG”) to assist with the Investigation.

Scope of the Investigation

The Investigation focused primarily on the following areas: (1) the Company’s revenue recognition practices; (2) revenue management activities; (3) actions taken against whistleblowers; (4) tone set by former senior management; and (5) Anti-Kickback Statute and related allegations.

In connection with the Investigation, King & Spalding and KPMG have reviewed over 1.5 million documents to date, including, but not limited to, emails, text exchanges and other electronic and hard-copy records. In addition, they reviewed significant amounts of data housed in the Company’s accounting, customer relationship management, inventory and other systems. They also have reviewed over 2,750 hours of video derived from a secret video surveillance system installed at the direction of Parker H. “Pete” Petit, the Company’s former Chairman and Chief Executive Officer, as well as telephonic recordings captured without the consent of all conversation participants.

King & Spalding and KPMG have interviewed over 85 witnesses to date, many of them multiple times.

The Audit Committee has held 84 meetings during the course of the Investigation. The Investigation is now complete, subject to concluding one final interview related to the Company’s course of dealing with a distributor and the Company’s new independent auditor, when selected, confirming its satisfaction with the adequacy of the Investigation.

Findings of the Investigation

As a result of the Investigation and based upon their review and assessment of the evidence, King & Spalding and KPMG made a number of findings, which were presented to and accepted and adopted by the Audit Committee. The evidence includes, but is not limited to, the following:

Non-Reliance on Financial Statements

First, the Investigation revealed accounting irregularities regarding the recognition of revenue under generally accepted accounting principles (“GAAP”). The Audit Committee, with the concurrence of management, concluded that the Company’s previously issued consolidated financial statements and financial information relating to each of the fiscal years ended December 31, 2012, 2013, 2014, 2015 and 2016 and each of the interim periods within such years, along with the unaudited condensed consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017, June 30, 2017 and September 30, 2017, would need to be restated. The determination of the need to restate was based on the findings as of June 2018 presented to the Audit Committee, which were primarily focused on the accounting treatment afforded to the sales and distribution practices with respect to two distributors. The evidence demonstrated that former members of senior management employed certain implicit arrangements, which resulted in a course of dealing that superseded the explicit terms of the contracts, and that the Company improperly recognized revenue from these two distributors.

2

Former Members of Management Disregarded Revenue Recognition Rules under Generally Accepted Accounting Principles

Second, the Investigation found evidence that demonstrated, among other things, that former members of senior management, including Mr. Petit, the Company’s former Chief Operating Officer, William C. Taylor, the Company’s former Chief Financial Officer, Michael J. Senken, and the Company’s former Controller, John Cranston, were aware of the Company’s course of dealing with its largest distributor and that this course of dealing was inconsistent with the explicit terms of the contract. Former members of senior management were also aware that this course of dealing included detailed procedures, established as early as 2012, to determine when the distributor would pay for the Company’s products.

In connection with these procedures, the distributor sent the Company a daily written report listing each tissue that the distributor’s customer had just purchased from the distributor and for which the customer would soon be paying the distributor. Each week the distributor would remit scheduled payments to the Company for only those tissues that the distributor’s customer had previously purchased. The Company tracked and monitored these daily reports and reconciled the payments that the Company received from the distributor to the tissues purchased by the distributor’s customers (compiled from the daily reports).

Weekly summaries of this reconciliation process were distributed to various Company personnel, including members of the Finance and Accounting group. This reconciliation process demonstrated that payment by the distributor to the Company was predicated on purchases made by the distributor’s customer. This payment process, which was housed outside the Company’s Finance and Accounting group and not disclosed to the Company’s financial statement auditors, was a key fact in determining that the Company’s revenue recognition was improper under GAAP and that the Company needed to restate its financials, as described above.

The evidence further demonstrated that these executives were aware of the proper revenue recognition rules not later than January 2016 and were likewise aware that the course of dealing affected the way in which the Company should have properly recognized revenue.

Other Revenue Management Activities at the Company

Third, the Investigation uncovered other conduct that appears to have been designed to manipulate the timing and recognition of revenue. This conduct included:

As a result of these and related activities, the Company recognized revenues in the wrong accounting periods, and in certain instances, improperly recognized revenue altogether. In certain of the situations outlined above, the timing and improper recognition of revenue allowed the Company to meet its published guidance. Absent these apparent revenue management activities, the Company’s results would have fallen short of guidance in these periods.

3

Material Misstatements and Omissions to Several Key Stakeholders and Regulators

Fourth, the Investigation found that the evidence demonstrated that after questions began to be raised regarding the Company’s accounting practices, Messrs. Petit, Taylor, Senken and Cranston made material misstatements and omissions about the Company’s course of dealing with its largest distributor, as well as the Company’s corresponding revenue recognition practices, to a number of key stakeholders and regulators, including the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the “SEC”), the Board, the Audit Committee and the Company’s outside auditors. These included:

Actions Taken Against Whistleblowers

Further, the Investigation determined that the evidence demonstrated that Messrs. Petit and Taylor engaged in a pattern of taking action against employees who raised concerns about the Company’s practices, without conducting a thorough investigation of those concerns. Instead, Messrs. Petit and Taylor focused on disputing the employees’ allegations and on seeking to discredit or find wrongdoing by the persons raising the concerns that would justify re-assignment, discipline or termination. For example, after certain employees made allegations of improper accounting practices in late 2016, Mr. Petit directed and oversaw an internal investigation dubbed “Project Snow White” that focused on potential wrongdoing by these employees, rather than the merits of their allegations. As part of Project Snow White, the secret video surveillance system referenced above was installed at Mr. Petit’s direction to record interviews that he, Mr. Taylor and other former members of management conducted of certain employees and those employee’s discussions amongst themselves without those employees’ knowledge or consent. The evidence showed that Mr. Petit directed that certain employees, whom he and other former members of senior management perceived to hold loyalty to an employee who had raised concerns about the Company’s practices, be terminated.

4

Tone Set by Former Senior Management

Finally, the Investigation found that based on former members of senior management’s involvement in the findings outlined above, the evidence demonstrated that these individuals set an inappropriate “tone at the top.” The evidence identified a recurrent trend in which former senior management emphasized short-term business goals over compliance and ethics, was not receptive to employee concerns and failed to respond appropriately to compliance issues. In particular, the Investigation’s findings on poor tone set by former senior management included evidence demonstrating:

Anti-Kickback Statute and Related Allegations

Since September 2018, the Audit Committee has devoted significant time to investigating, with the assistance of King & Spalding and KPMG, allegations that the Anti-Kickback Statute may have been violated by the Company in its relationships with various physicians, customers and distributors. These efforts have included the analysis of certain specific customer relationships, the review of the conduct of the Company’s sales team’s management and the evaluation of the adequacy and effectiveness of the Company’s compliance controls.

As part of these efforts, King & Spalding and KPMG have performed targeted data analytics of financial and other data related to the Company’s customer base, reviewed email and other records and conducted numerous interviews. Among other things, King & Spalding and KPMG have examined more than 80 physician and customer relationships in detail and have conducted over 40 interviews of current and former company personnel in connection with these relationships, some on multiple occasions.

Through this process, the Investigation has identified certain customer accounts that present potential compliance risks and warrant additional review. This additional work will be undertaken by Company counsel in consultation with management to determine the Company’s legal risk, including whether any loss contingencies should be recognized or disclosed under GAAP.

Remediation

Termination of Executives

Each of Messrs. Petit, Taylor, Senken and Cranston departed the Company in June 2018. In September 2018, following a review of evidence uncovered in the Investigation, the Board retroactively determined that their terminations of employment should be considered “for cause” within the definition of the MiMedx Group, Inc. Assumed 2006 Stock Incentive Plan (the “Plan”) and the MiMedx Group, Inc. 2016 Equity and Cash Incentive Plan (together with the 2006 Plan, the “Plans”). In addition, the Board determined that action would be taken to recover compensation previously paid to such executives to the Plans and the Company’s Compensation Recoupment Policy, based upon the final results of the Company’s restatement of its previously issued consolidated financial statements and financial information. Executives and employees hired to replace such executives have received appropriate training on revenue recognition and sales practices. The Company expects there to be additional departures in connection with the Investigation.

5

Restatement of Financial Statements

In addition, on June 6, 2018, the Audit Committee, with concurrence from management of the Company, concluded that the Company’s previously issued consolidated financial statements and financial information relating to each of the fiscal years ended December 31, 2012, 2013, 2014, 2015 and 2016 and each of the interim periods within such years, along with the unaudited condensed consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017, June 30, 2017 and September 30, 2017, should be restated, and therefore, such consolidated financial statements and other financial information, any press releases, investor presentations or other communications related thereto should no longer be relied upon. Additionally, as a result of the foregoing, the Audit Committee concluded that all communications and financial information with respect to the fourth quarter of 2017 and the first quarter of 2018 should no longer be relied upon, and the Company withdrew all prior financial guidance issued for 2018. The Company is working diligently, with a new management team and the assistance of counsel and other advisors to implement the restatement of its previously issued consolidated financial statements and financial information.

The Company’s auditor, Ernst & Young LLP, resigned from the engagement to audit the Company’s consolidated financial statements for the year ended December 31, 2017 citing a number of factors, some of which were related to the findings of the Investigation.

The Company is working diligently to retain an independent auditor and regain compliance with the Company’s reporting obligations under applicable securities laws. The Audit Committee and management have interviewed firms as part of the selection process and have been told that either they could not complete their acceptance process until it was known whether Mr. Petit were to be elected to the Board, or if they did complete the acceptance process, they would have to reassess their decision to continue with the engagement. Therefore, the Company believes that if Mr. Petit were to be elected to the Board or if Mr. Petit were to be re-hired in any management capacity, there would be a very high risk that the Company could not engage a new auditor or any previously engaged auditor would resign.

Enhancing Internal Controls Over Financial Reporting

In addition, the Company has implemented plans to address the internal control weaknesses revealed by the Investigation, including (i) augmentation of the Company’s finance and accounting staff with additional personnel and evaluation of the Company’s personnel in key finance and accounting positions, (ii) documentation of key policies and internal control procedures for significant accounting areas with an emphasis on revenue recognition issues and (iii) implementation of these enhanced policies and control procedures, including implementation of corrective processes to define, remediate and enhance internal procedures for business health and sustainability, improved processes and controls to monitor sales practices, authorize credits and returns and recognize revenue, and remediated and enhanced Sarbanes-Oxley Act controls. The Company has also made substantial progress in taking steps to improve the overall state of the Company’s business culture, including hiring of a Chief Compliance Officer, establishing an independent compliance department reporting to the Board, creating an Ethics and Compliance Committee at the Board level and hiring a VP of Internal Audit to develop an internal audit function. Current management believes these efforts will effectively remediate the identified internal control weaknesses.

(d) Exhibits

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MIMEDX GROUP, INC. Exhibit
EX-99.1 2 d753725dex991.htm EX-99.1 EX-99.1 Exhibit 99.1 MiMedx Announces Conclusion of Audit Committee’s Independent Investigation Investigation Revealed Extensive Misconduct by Former Senior Management MARIETTA,…
To view the full exhibit click here

About MIMEDX GROUP, INC. (NASDAQ:MDXG)

MiMedx Group, Inc. (MiMedx) is an integrated developer, processor and marketer of regenerative biomaterial products and bioimplants processed from human amniotic membrane and other birth tissues and human skin and bone. The Company operates in the Regenerative Biomaterials business segment, which includes the development, processing and marketing of regenerative biomaterial products and bioimplants processed from human amniotic membrane and other birth tissues in the wound care, surgical, sports medicine, ophthalmic and dental market categories. Its biomaterial platform technologies are AmnioFix, EpiFix, OrthoFlo, Physio, AlloBurn, and CollaFix. AmnioFix and EpiFix are its tissue technologies processed from human amniotic membrane derived from donated placentas. The Company processes the human amniotic membrane utilizing its PURION Process, to produce an implant. MiMedx is the supplier of amniotic tissue, having supplied over 500,000 allografts.