At medical tech firm Uroplasty Inc., things are going from bad to worse.
The Minnetonka firm's CEO resigned in April. And Friday the company placed Chief Financial Officer Mahedi Jiwani on administrative leave and delayed filing its 10-K annual report to the Securities and Exchange Commission pending "a review of its internal control over financial reporting."
The news caused Uroplasty's stock to drop sharply. It closed at $2.22 a share, down 26 cents, or 10.5 percent.
Friday's bad news followed last month's financial disappointment, when the Minnetonka manufacturer of urinary dysfunction products reported a fiscal 2012 loss of $3.3 million, or 16 cents a share, on revenue of $22.4 million.
During a conference call with analysts last month, interim CEO Robert Kill said the fourth-quarter results "were disappointing and reflect poor execution on our part." Kill replaced CEO David Kaysen, who resigned.
The company said in a statement Friday that its decision to put its CFO on administrative leave followed the discovery of financial issues during a review of employee expense reimbursements after the end of its fiscal year in March.
Initially Uroplasty officials believed the issues weren't likely to have a material impact on its financial statements. But then the company discovered there were issues with "the recognition of orders and the payment of sales commissions at the end of fiscal quarters," the firm said in a statement.
Bad timing
"Based upon facts available, the company does not currently believe that a material revision of its previously released earnings is likely," the statement said. "However, the review of internal control issues has not been completed and the company is unable at this time to fully assess the potential impact on its financial statements."
Uroplasty's troubles come at a bad time, said Jack Militello, a management professor and director of the health care MBA program at the University of St. Thomas. That's because even the appearance of ethical lapses damages a company's reputation with investors, making it harder for a firm such as Uroplasty to deal with the medical device pricing pressures that lie just ahead, he said.
Those pressures are building because small medical device companies face increasing competition from start-ups; the costs of complying with Food and Drug Administration rules, and an impending tax on medical devices to help pay for the Affordable Care Act, Militello said. The tax, whose magnitude hasn't been determined yet, could be particularly hurtful to small medical device companies, he said.
"Can the Uroplasty ship be righted? Here are the things weighing against it: They don't have a lot of time given that the health care law changes are coming, that repairing a business culture is more difficult than just changing a CEO, and that the stock is down because investors don't trust the company's financial numbers," he said.
But there are also reasons to believe management can succeed, Militello said.
"Let's assume that mistakes were made, but that the board has done the right thing," Militello said. "That would put a vote of confidence on the side of the organization and would steady investors. The interim CEO then has time to work on the company's culture, prestige and message. Then the answer about whether he's been successful comes six months from now."
Steve Alexander • 612-673-4553