This Cogentix investor conflict is atypical

The boardroom conflict at Cogentix Medical doesn't really resemble the typical campaign of an activist investor, in part because the unhappy shareholder here is not a 30-year-old hedge fund manager but a legendary entrepreneur in the medical-device industry.

The other thing that's odd about this one is that the disgruntled investor, Lewis C. Pell, doesn't seem to have much of a case against management.

It is true that he's been involved almost a year and hasn't made money yet. Given that he had already been involved for more than 25 years in one of the struggling little companies that formed Cogentix, though, one would think he might be a little more patient.

Formed from a merger of Minnetonka-based Uroplasty with the little company Pell served as chairman, called Vision-Sciences, Cogentix has yet to celebrate its first birthday. When the deal was announced, CEO Rob Kill told investors to expect the new company to get to about $50 million in revenue in its first full year.

Based on results for the first three quarters, the company would about hit $50 million if its last quarter showed no growth at all. "And each quarter we've been growing," Kill said. "So yeah, I'd say we're on track."

Kill did not direct any personal criticism at Pell, who joined the board of Cogentix with the merger. Kill did acknowledge that having Pell make sure his criticism became public, via a letter attached to a regulatory filing, surprised him.

Pell's letter laying out a case for change was addressed to the board. He didn't respond to a voice message left at his business in suburban New York, but in his letter he said he was "deeply disappointed" by the "empty vision" of the management team and board of directors.

That's certainly accurate enough, with the stock closing the day of the merger at $1.75 per share while earlier this week it traded for $1.03 per share.

Pell must be aware that it's been a disappointing year for investors almost across the board in small device makers. The median return over the last year in device companies of less than $100 million in market capitalization was a loss of nearly 35 percent, according to data from the information service FactSet.

Pell also seems to know what makes a good deal, with a career in medical devices that brings to mind the Minnesota serial entrepreneur Manuel Villafana.

Now in his 70s, Pell's biographical sketch on the website of another device company explained that he's been the lead investor or co-founder of 24 medical-device manufacturers, including eight sold for a collective net gain of $1.6 billion.

One was bought by the big device maker C.R. Bard, one went to Johnson & Johnson and another was acquired by Boston Scientific. Fridley-based Medtronic bought two.

More than 25 years later, Vision-Sciences still hadn't gone to a big industry consolidator like Medtronic or C.R. Bard. In fact it was going nowhere.

Its last annual filing with the Securities and Exchange Commission before the merger summarized the situation neatly in just one sentence: "We have incurred substantial operating losses since our inception and there can be no assurance that we will ever achieve or sustain a profitable level of operations in the future."

It was Pell who kept the company funded, loaning Vision-Sciences more than $20 million in the form of convertible notes.

Meanwhile, back in Minnesota, Uroplasty essentially had the same basic problem as Vision-Sciences. It had created product lines just popular enough with customers to have a business but not popular enough to let the business make any money, at least not after paying for corporate overhead and a direct sales force.

Getting more products for Uroplasty's 44-person U.S. sales force to sell was one of the main reasons for bringing the companies together. The sales reps would be both more efficient as well as more important with customers, who would have more reason to agree to a meeting.

As to how it's unfolded, "all you have to do is look at the results for the last quarter," Kill said. "Neither company was growing at the rate that it's growing now. And that's what we said, that we would grow the combined company faster than either one would as a stand-alone company."

In the quarter that ended in December, the most recently reported, sales increased 18 percent compared with the combined revenue total of the two companies for the same period a year earlier.

The company also generated cash operating income, which excludes the noncash expenses like depreciation as well as costs related to the merger, of nearly $600,000. That might not seem like a lot, but Kill pointed out that neither company had ever before generated a cash operating profit.

To Wayzata money manager Richard W. Perkins, a shareholder and early investor in Uroplasty, this all looks like Kill has made a lot of progress. Perkins said he's just as puzzled by the complaints in Pell's letter as Kill said he was.

Pell still has his board seat and remains the holder of $28.5 million of notes and about 7 percent of Cogentix's stock. It's far from clear, with a minority stock position, that he has a next step. Perkins said that's fine with him.