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The Cloud of Uncertainty Thickens Over MiMedx As Auditor Quits

Ernst & Young resigned as MiMedx's outside auditor after advising the company that the internal controls necessary for MiMedx to develop reliable financial statements do not exist.

Mike Matson, a medtech analyst at Needham & Co., said the recent MiMedx news has signaled that the business is deteriorating and he does not see a clear path toward recovery.

The hits just keep coming for MiMedx Group this year. Ernst & Young (EY), the firm hired to audit the company's financial statements for the past two years, has resigned after advising the company that the internal controls necessary for MiMedx to develop reliable financial statements do not exist.

EY told MiMedx that the firm is unable to rely on representations from the current interim CEO and interim CFO because they, in turn, would have needed to rely on representations from certain legacy management personnel still in positions that could affect what is reflected in the company's books and records.

In February, MiMedx postponed the release of its financial results and the filing of its Form 10-K for 2017 and reported that independent legal and accounting advisors were investigating allegations regarding the company's sales and distribution practices. That investigation eventually led to the resignations of CEO Petit and COO Bill Taylor, as well as the resignations of former CFO Michael Senken, and former corporate controller and treasurer John Cranston. The company also drew the unwanted attention of both the Securities and Exchange Commission and the Department of Justice.

Later, the company's board announced that these four separations were to be treated as terminations "for cause," and that the former executives would have to forfeit equity and incentive awards they received in connection with their resignations.

"I am extremely disappointed by the company's decision and by the manner in which it was reached," Taylor said in a statement his attorney's office shared with MD+DI in September. "The investigators conducted an unfair investigation that has needlessly damaged employee morale, productivity, and shareholder value."

Petit's comment in the same statement suggests that while he is no longer CEO or a board member, he isn't yet giving up all ties with MiMedx. "I now look forward to joining our shareholders in initiatives that will refocus the company and its fiduciaries on getting back to efficient and effective business management," he said.

Bill Weinreb, an attorney at New York-based law firm Quinn Emanuel, said Petit and Taylor are victims of an "unfortunate practice" among public companies facing government investigations into alleged malfeasance. According to Weinreb, this is the standard playbook among companies in this position: "identify purported 'wrongdoers' among top management,  dismiss them without severance, and then argue that the 'problem' has been fixed and there is nothing more for the government to do."

In the MiMedx case, Weinreb said, the company effectively accused, tried, and convicted Petit and Taylor of "unspecified inappropriate conduct" without first giving them notice of the supposed charges or a fair and meaningful opportunity to respond.

"Given its ongoing audit investigation and restatement process, the company is having a difficult time recruiting a permanent CEO," Mike Matson, an analyst at Needham & Co., said in a research note after the firm suspended its rating of MiMedx due to the EY resignation and "a further reduction of visibility" into the company's financials.

Matson also noted that payers are eliminating coverage for certain MiMedx products, which has materially impacted revenue.

MiMedx also recently announced that it will eliminate about 240 full-time positions, which is about 24% of its total workforce. Roughly 120 of these positions will be within the company's sales organization and the company's current management said the restructuring could result in material cost savings beginning in the first quarter of 2019.

The company also eliminated its chief commercialization officer position and promoted Mark Landy to executive vice president and chief strategy officer. Other management changes include the promotion of David Mason Jr., MD, to chief medical officer, and John Marris to senior vice president of marketing and business development.

"We believe the recent news has signaled that the business is deteriorating and we do not see a clear path towards recovery," Matson said.

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