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https://www.fwdforensics.com/securities/ds-healthcare-delisting/

Audit Pains Push DS Healthcare Toward Delisting


Posted By: Justin Hibbard September 28, 2016



DS Healthcare Group, Inc. (NASDAQ: DSKX) got word last Wednesday that the NASDAQ stock market plans to delist its stock, which hasn’t budged from $0.67 since the exchange halted trading in the shares on April 4. CEO Daniel Khesin has been struggling since then to turn around the troubled company, albeit through some unconventional means. But the turnaround hit a snag in August when the beauty products manufacturer fired its auditor, MaloneBailey, LLP, after just three months on the job.
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The company replaced MaloneBailey with BF Borgers CPA P.C.–its third auditor this year. The new auditor is racing to finish procedures on DS Healthcare’s 2015 financials so the company can file its 2015 10-K, which was due to the Securities and Exchange Commission (SEC) in April. In May, the company reached an agreement with NASDAQ to file the tardy 10-K by October 11 to avoid delisting. But the exchange scotched the deal after the listee warned that its latest change of auditors could cause further delays.
The delinquent filer says that it will still meet the October 11 deadline and that it will appeal NASDAQ’s decision. NASDAQ is expected to hold a hearing on the matter before November 5.
DS Healthcare picks a winner
The company hired MaloneBailey in May after its previous auditor, Marcum, LLP, said it would have to expand the scope of its audit to address allegations that Khesin had overseen improper revenue recognition and stock issuance. After an epic battle between Khesin and the board, Khesin emerged as the only remaining board member in May. Faced with delisting, he wasn’t about to authorize an expanded audit that could further delay the 10-K. Hence MaloneBailey.
But unbeknown to Khesin, MaloneBailey was knee-deep in its own drama. On the same day DS Healthcare disclosed its change of auditors, the SEC announced settled administrative proceedings against the CPA firm. During a 2011 audit of penny-stock issuer Left Behind Games, Inc., MaloneBailey had identified circular sham transactions and revenue recognition problems, the SEC said. Yet somehow, Left Behind Games issued a 10-K full of lies and an unqualified audit opinion. Without admitting or denying anything, MaloneBailey agreed to pay $160,000, retain an independent consultant, and accept a censure.
When DS Healthcare announced it was ditching its new auditor after only three months, it stressed that “there were no disagreements between the Company and MaloneBailey on any matter of accounting principles or practices, financial statement disclosure, auditing scope or procedures.” Why the breakup then? The new board of directors had “reviewed the audit time and costs and made a determination that BF Borgers is a better long term independent registered accounting firm for the Company,” DS Healthcare said.
The gloves come off
In a letter to the SEC the following week, MaloneBailey said it agreed with its former client’s version of events except for one detail: the attorney investigating the allegations against Khesin was not independent. The auditor said it had told DS Healthcare’s new board that without an independent investigator, it may not be able to issue an unqualified opinion.
The company responded by saying that it had told MaloneBailey its investigator was not independent at the outset of the audit. Furthermore, it said MaloneBailey violated the SEC’s order by not disclosing the settled administrative proceeding to its new client. It added that the auditor never intended to complete the audit on time and requested a new independent investigation just to draw out the engagement.
Despite all that, the company still stressed that it had no disagreements with MaloneBailey on accounting, financial statements, or auditing.
Wolves at the door
If DS Healthcare prevails in its appeal to NASDAQ, it will still face several legal battles, including a shareholder class action. In a lawsuit filed in May, PhotoMedex, Inc. (NASDAQ: PHMD) claims the struggling company intentionally covered up its financial woes when it struck a deal to buy two of PhotoMedex’s subsidiaries in February for $48 million. DS Healthcare has countersued PhotoMedex for allegedly welching on the deal.
Separately, DS Healthcare’s former North American sales manager, Kevin McRoberts, sued the company in June for allegedly terminating his three-year employment agreement six months after he was hired. McRoberts says a senior executive told him the company could no longer afford his compensation.
Last week, a commercial landlord in North Carolina recorded a default judgment against DS Healthcare in Broward County, Florida for $73,908 in unpaid rent. Recording the judgment in the county where the company is headquartered could make it easier for the landlord to collect the debt–unless DS Healthcare files for bankruptcy.
 

Justin Hibbard, MAcc, CFE
Justin Hibbard is a forensic accountant specializing in economic damages and anti-fraud matters. He regularly serves clients in litigation and internal investigations. Previously, he was an auditor at Ernst & Young, LLP and a journalist at BusinessWeek



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