Orthofix CFO Mark Heggestad resigned due to "personal circumstances" amid controversy as the company works to update financial statements from the past few years that were based on wrong numbers.
"I want to emphasize the decision to resign was strictly due to personal circumstances," Mr. Heggestad said. "I have received complete support from the Board and the leadership of the company."
The company delayed releasing second quarter financial reports for 2014 until they were able to adjust their calculations. Originally, the company hoped to have the financial statements revised and released by the end of September, but the final report hasn't appeared yet. The company advised not to rely on previous filings from 2011 through March 2014.
Ultimately, Orthofix's historical method of accounting for uncollected patient co-pay and self-pay amounts was inaccurate. The company accounted for these revenue adjustments as bad debt instead of contra-revenue. The change is expected to reduce net sales and sales and marketing expense by about these amounts:
• 2011: $6 million
• 2012: $9 million
• 2013: $2 million
• 2014 first quarter: $3 million
The change also impacts certain debt revenue, intercompany profit in inventory and continuing operations. Currently, Orthofix's outside auditors are examining their updated amended filings drafts. But, there are still issues with certain inventory reserve amounts related to the spine fixation devices held as consignment inventory.
This year, the company initiated additional procedures to physically count inventory on consignment with distributors and hospital customers as part of their internal control remediation activities, which commenced after a significant deficiency in inventory control was identified. The spine fixation inventory in the field had a gross aggregate carrying value of around $25 million as of June 30.
However, the degree of variance in sampling data leads Orthofix leaders and outside auditors to believe there is substantially more inventory in the field that will need to be counted. The process data gathering and reconciliation process is expected to take several weeks.
Now, the second quarter financial reports will be delayed even further and third quarter financial results will likely also be delayed. The initial waiver for their 2014 Second Quarter Form 10-Q went through Sept. 30, and the company is in the process of seeking a further waiver. Nasdaq Hearings Panel proceedings related to the second quarter report delay are scheduled for Oct. 2, but Orthofix plans to ask for an extension to focus on the restatement process.
In the meantime, the company reported expected second quarter 2014 net sales are at $101.4 million with spinal fixation net sales at $20.4 million. Cash and restricted cash balance is reported as $25.9 million.
While Mr. Heggestad will return to his home in Minnesota full-time, Orthofix chief accounting officer Doug Rice will assume responsibilities as interim CFO with Mr. Heggestad's assistance during the transition. Mr. Rice joined Orthofix in early September, previously serving as senior vice president and CFO of private equity-backed optometric and dental network provider Smile Source.