HQ Sustainable Maritime Industries: The Ex-Auditors Speak

| About: HQ Sustainable (HQSM)

I’ve noted my rollercoaster investment in HQ Sustainable Maritime Industries (HQS) several times. For those just joining us, this is (was?) a Chinese reverse takeover that had been in operation for around a decade, which (along with management, several directors, customers and a head office based in North America) gave me false hope. Unfortunately, we’ve seen two quarters go by without financial statements being filed, trading of the stock being halted, the resignation of both an audit committee member and the Canadian auditor, as well as the initiation of multiple class action lawsuits.

Two weeks ago I noted that, along with the auditor’s resignation, there was a conflict between the auditor and the company about the events surrounding their resignation. Recently, a new 8-K was filed that contained the auditor’s side of the story, with more detail than anyone has provided publicly to date.

On April 6, 2011, the Chairman of the Audit Committee resigned, citing his concerns about the Company’s management. After the resignation of the Chairman of the Audit Committee, the Company’s management became increasingly non-responsive, uncooperative and non-communicative with SLF. In fact, there had been little direct communication between the Company’s management and SLF from early April 2011 through SLF’s resignation on May 26, 2011.

The Company had been unwilling to provide SLF with information on a timely basis concerning the Company’s proposed plan of compliance to permit the Exchange to lift the trading suspension. In fact, the Company made a submission to the Exchange on May 2, 2011, which SLF was unaware of and did not have an opportunity to review in advance ....

Further, as discussed below, during the course of the FY2010 audit process and then at the time that the Company was working on its plan of compliance for the Exchange, the Company raised a purported issue concerning SLF’s licensing to perform audit services in the PRC. SLF tried to work in good faith with the Company’s management to resolve this issue, but had been frustrated and obstructed by the Company’s delay, non-responsiveness and lack of cooperation on this subject.

Additionally, the Company’s management had been delinquent in payment of the outstanding audit fees to SLF, even though such fees had been properly invoiced and approved for payment by the Audit Committee.

Here’s a direct link to the full letter. It is worth a read for anyone interested in the story. It appears that management was stonewalling the auditors and preventing them from direct access to the company’s customers and banks, both of which would be necessary in order to verify the accounts receivable and cash balances (which comprise 81.5% of total assets or 88% of equity according to the last filed statements). There’s only one reason a company would prevent verification.

Disclosure: I am long HQS.