- Independent committee finds no evidence of fraudulent conduct by NQ Mobile.
- Analysts/Institutions/Hedge Funds discuss the importance of the independent report and what comes next.
- Record day: NQ Mobile achieves its biggest single day gain on record volume.
- NQ's annual report (20-F), will most likely be finished by the end of next week.
- NQ Mobile raises revenue forecasts for Q1 and Q2.
- FL Mobile's $425M valuation sets a floor for shares of NQ Mobile.
- FL Mobile's valuation shows investors just how undervalued NQ Mobile is right now.
- Do the recent press releases signal that the audit, internal investigation and 20-F report will be released shortly?
The last bullet point is one of the things that I wanted to focus on today. In my previous article, I mentioned that the writing seemed to be on the wall due to the way the press releases were put together and what was in them. I mean why else would a private equity firm invest any kind of money if there was any sign of fraudulent behavior.
Clearly things checked out as Bison Capital along with other major investors, purchased 5.88% of FL Mobile, giving the gaming company a valuation of $425M. At the close of yesterday's closing prices, FL Mobile still makes up more than 70% of NQ's total market cap, even though it contributes just 11% in total revenues. Adding in the cash on hand and that figures jumps to 90%. If that isn't a sign of shares being undervalued, then I don't know what is.
Of course as luck would have it, NQ Mobile released the results of its independent investigation the very next day. The investigation was conducted by an independent Committee and carried out by its independent counsel Shearman & Sterling LLP and Deloitte & Touche Financial Advisory Services Limited acting as forensic accountants (together, the "Investigation Team"). Below is a summary of some of the main points from the report.
Overview Of The Report
So before we get to the results, I just wanted to share with you about what exactly The Investigation Team went through and looked at. First, the team was led by partners in the United States who managed teams based in both the U.S. and China. The Investigation Team conducted a thorough and far-ranging investigation of NQ's business activities, transactions, interviews, financial records, etc., in response to the allegations made by Muddy Waters. Now without further ado, here is a quick overview from the report.
1) The Investigation Team verified (through bank confirmations, etc.), the Company's financial statements and the Company's cash transactions at multiple points in time.
2) The Team reviewed and examined financial information and records (such as principal financial documents, ledgers and vouchers, bank slips, invoices, contracts, etc.,) for any indications of fraudulent activity or improper financial reporting.
3) The Team conducted more than 50 interviews with top management throughout the world as well as other staff with professional responsibilities implicated in the Muddy Waters initial report and subsequent reports.
4) Investigated the Company's major business partners in China and overseas through site visits; in-person and telephone interviews with staff; review of the business partners' financial documentation; review of applicable contract terms and performance under the contract; and tests of product functionality, where appropriate.
5) Reviewed NQ's major acquisitions by analyzing the Company's purchase contracts and related transaction documents; review of the Company's related due diligence work product and valuation materials, including the targets' SAIC records and other documents bearing on the identities of parties to the transactions, and the targets' business models, and reviewing the revenues generated by the target companies after being acquired by NQ.
Highlights From The Report
The Investigation Team did not find any evidence that the Company had engaged in the fraudulent conduct alleged by Muddy Waters.
1) The Investigation Team determined that the Company's cash balances were verifiable and consistent with public disclosures. The Team did not find evidence that the Company's revenues were inconsistent with public disclosures.
3) The Team did not find any evidence that the Company made payments during the period under review except for legitimate business purposes to benefit the Company and its shareholders.
4) The Investigation Team found that the Company's past and present relationships with business partners in China and overseas (including Yidatong) serve legitimate commercial objectives, with regard to Yidatong in particular, the Company's revenues and cash flows from customers to carriers through Yidatong are verifiable and consistent with public disclosures.
5) The Investigation Team found that the Company's handling of its May 2011 IPO proceeds did not reflect any departures from market practice.
The Investigation Team has made a series of recommendations to further enhance the Company's internal controls, which the Company's Board of Directors has adopted and directed the Company's management to implement. The Company intends to take measures to enhance its internal controls in the immediate future and will strive to emerge from this process a stronger overall organization.
What Analysts And The Big Boys Are Saying
So after shares popped more than 30% after a long awaited report, what are analysts, institutions and hedge funds saying about the whole situation now? Below are quick excerpts from interviews posted by various media outlets.
Oberweis Asset Management "Great First Step";
Hopefully it's an indication that this has primarily been a manipulated campaign to smear mud at NQ." ... It takes a long time to defeat those types of campaigns, but this is a great first step. We'll continue to hold our investment in NQ."
Toro Investment Partners "Critics Silenced";
The idea that this report is some whitewash is pretty funny. ... How do the critics explain the fact that it was not the committee itself, but rather their service providers who did the nearly eight months of work to arrive at their own conclusions independently of anyone employed by the company?"
PNC Capital Advisors "Focus On The Booming Fundamentals";
Calvin Zhang, a money manager at PNC Capital Advisors, told Bloomberg that he is listening more to what the special committee and regular auditor PricewaterhouseCoopers are saying about NQ Mobile rather than to Muddy Waters.
Who do you trust? We have Shearman & Sterling, Deloitte & Touche and PWC on one side, and then Muddy Waters on the other. ... It's time to focus on the company's "booming business fundamentals."
Topeka Capital reiterates a Buy rating on NQ Mobile with a price target of $33;
NQ's recently released independent investigation showed a clean bill of health. ... it's time to refocus on fundamentals. ... We reiterate our Buy rating and $33 price target following the long-awaited release of the Special Committee's Independent Investigation. As NQ has emphatically maintained since the investigation began in late 2013, the independent committee did not find any evidence that the Company has engaged in fraudulent conduct. ... Now that the investigation results have been released, investors can refocus on the fundamentals. Recall that NQ recently raised guidance for 1Q14 revenues and guided 2Q revenues above consensus. At the same time, NQ announced a 5% outside investment in FL Mobile that values that business at nearly $500mm, suggesting the rest of NQ has only nominal value. We expect NQ to file the 20-F shortly and conduct a 1Q earnings call."
While yesterday was joyous day for many longs, there is still a lot of room for shares to run as well as other work that still needs to be filed.
Now that the independent investigative team has finished and issued its report, the next step is awaiting the annual report or 20-F. If NQ's auditor PricewaterhouseCoopers ("PwC"), signs off on the report, you can bet your bottom dollar that shares will most likely double or triple. You don't have to take my word for it as some notorious short sellers have openly admitted that a positive outcome would triple the price of shares.
So the next big question is, when is the 20-F going to come out? While nobody knows the answer to this question, there has been a lot of speculation going around of when the report will come out.
My take on the whole situation is this. While it would be nice to have the report come out sometime this week, I get the feeling that it will most likely be a week or so before it comes out. Here's why.
Now that the independent investigation has concluded, PwC most likely will need to review the results and double check everything once again. How much time could this take? Your guess is as good as mine. One thing I do know, is that today's report only reaffirms my belief in NQ Mobile and I believe the Company will receive a favorable audit (unqualified opinion) and outcome.
With so much information going around, investors should remember one very important thing. There is no exact timetable or requirement for the report to come out. It could come out tomorrow morning for all we know, or it could come out a month later. So just sit back, relax, and enjoy the show.
As always, I'm providing you with my track record and other particular stocks that I recommend. The link provided will show you all of my picks, how they have fared, and where I think they will be going in the near future. I think you will find my track record to be very impressive and useful.
Disclaimer: Investors are always reminded that before making any investment, you should do your own proper due diligence on any stock mentioned in this article. On that note, have a great day and as always, I look forward to hearing your thoughts or questions that you might have.