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"Who are you going to believe, me or your lying eyes?"
- Groucho Marx

Amidst earnings season, fretting over Fed tapering, the implementation of Obamacare, and a host of other things to get worked up about, the investment community has been treated to some entertaining financial theatre since October 24th. That day, noted short seller Carson Block's Muddy Waters unleashed a blistering attack on NQ Mobile (NYSE:NQ) calling it a fraud and "a zero". Entertaining, that is, unless you happened to be one of NQ's shareholders who watched in horror as the stock declined approximately 60% in an hour before recovering somewhat; shares are still down about 45% since October 23rd.

Both Muddy Waters and NQ (and its supporters) are rightly doing battle over the details of the allegations, with much of the focus to date on the company's cash balances and the accounting treatment thereof, and whether or not much of the company's revenue in China is "real".

One of the linchpins of Mr. Block's case is the assertion that Yidatong, a service provider / transaction processor through which the bulk of NQ's carrier revenue flows, is really a "shell company" controlled by NQ. NQ, of course, vigorously asserts that Yidatong is not a related party and all associated revenue is "real".

Much of the discussion focuses on Yidatong's principal and majority shareholder, Ms. Rong Xu, and her past tenure as an employee and/or consultant for NQ, who has provided several disclosures on the matter.

As the Yidatong issue and Ms. Xu's involvement with NQ go right to the to the heart of Carson Block's allegations, I decided to focus solely on the company's disclosures on this matter as a test of NQ's credibility in trying to handicap the situation from an investment standpoint.

Going back to NQ's May 4, 2011 IPO Prospectus , NQ discloses the following on Page 20:

"The principal shareholder of Yidatong was our consultant in 2006 and 2007 and received certain share options and consulting fees in connection with her services"

Here is a screen capture from the prospectus with the relevant sentence highlighted:

(click to enlarge)

Fast forward to July 2013. Apparently a firm or group named "J Capital" released a report titled "NQ: Not At Any Price". I have been unable to locate this report, however it did apparently prompt the company to issue a detailed response to allegations contained in that report. The company's written documented response can be found here. On the topic of Ms. Rong's tenure, NQ stated:

"Yes, in 2007, when NQ was a very small company, they did not have a good person running marketing. They asked XuRong to join as an advisor directing the marketing of the business. She was with NQ for less than 6 months before leaving and buying her interest in Yidatong."

Below is a screen capture of this section:

(click to enlarge)

I downloaded the PDF document from the link provided above and looked at the Document Properties. The Author is shown as Matt Mathison, NQ's VP Capital Markets. Screen capture below:

(click to enlarge)

Interestingly, Mr. Mathison's response does not exactly match up with the IPO prospectus. This discrepancy was noted in the October 24 Muddy Waters report.

On Friday October 25th company held a conference call to address the Muddy Waters report head on and took Q&A. When asked by Brian Chen, analyst at Clough Capital Partners to ask for more details on the relationship with Ms. Xu, Mr. Mathison stated the following:

"Yes. Absolutely, Brian. Appreciate your question. Yes. Xu Rong -- I can get you exact details. But she was an employee of NQ. In fact, on a previous short report that came out, I provided a very detailed look at her employment. I can give you the exact start date; end date. I can give you all the details that you want. If you just hold, I'll pull that up for -- if you want it right now. Just give me one moment.

So, Xu Rong became an NQ employee on September 1, 2006. She resigned from NQ on December 31, 2008. I know the report hinted at some large ownership position in NQ, which was not true."

The Thomson Reuters transcript can be found here, and below is a screen capture of the transcript:

(click to enlarge)

Muddy Waters noted this timing discrepancy (as well as the change from "consultant" to "employee") in its follow-up note on October 29 and has not commented further to my knowledge.

However, it seems that Mr. Mathison has been emailing frequent updates to interested shareholders in a continuing response to the allegations. I am not on the distribution list however they have been posted by others online. The most recent (November 2) response has been posted here. In this note from Mr. Mathison, he again wades in on the topic of Ms. Xu's arrangement:

"Ms. Xu Rong indeed worked as a consultant at NQ from the spring of 2007 until the end of that year. She then worked actively part-time as NQ's director of marketing from the end of December 2007 until August 2008. There is nothing revelatory or earth-shattering about a company working closely with and partnering with individuals who previously worked together. In fact, it is quite normal, expected and often optimal to work with partners that you have come to trust and appreciate. Further, and to restate, the relationship with Yidatong and NQ has been fully disclosed, fully vetted, and fully verified every step of the way. We have had many third parties, investors, and even reporters visit the Yidatong office in Beijing - which they share with Ms. Rong's other business 9Hcom (a PC gaming company she also owns)."

That would seem to be the fourth iteration of the answer to a seemingly simple question (the F-1 IPO filing plus 3 different answers provided by the VP Capital Markets).

Yesterday, Bloomberg authored an article entitled "NQ Mobile Sales Search Leads to Suburban Beijing Office," in which they write about their Nov. 1 visit to Ms. Ru's operation at the address provided by NQ.

It seems Ms. Xu provided the fifth version describing her tenure with NQ, in the quote from Bloomberg below:

"Xu said Yidatong is independent of NQ and there is no relationship besides the contract for mobile payment support. She said she worked for NQ for seven months in 2008."

Below is a screen capture from Bloomberg.com:

(click to enlarge)

How is it possible for the VP Capital Markets to come up with 3 different answers spanning several months, particularly with some amount of time to prepare before answering each and two of them actually given in writing? If Ms. Xu was an employee (Director of Marketing) for 7 months in 2008, why does the IPO prospectus only note her role as a consultant in 2006 and 2007 and not mention the 2008 period at all?

Maybe it's just me but I have a hard time reconciling all of these answers to the same basic question.

"Most consequential choices involve shades of gray, and some fog is often useful in getting things done."
- - Timothy Geithner

Source: NQ Mobile: 1 Question, 5 Answers?

Additional disclosure: This article reflects my personal views only. I have a very small speculative position in deep out-of-the-money NQ put options. All data and calculations presented are accurate to the best of my knowledge but have not been vetted, checked, proofread, or independently verified. This article should not be relied upon for any purpose other than for entertainment. I welcome comments and or corrections.