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Summary

  • NQ Mobile is quickly losing its thin support that popped in after the special committee conducted their investigation.
  • The company remains sans audit, a crucial benchmark for the company's legitimacy.
  • NQ investors risk total loss and the security should be avoided at this point in time.

I've been checking in and writing a little bit about the curious case of NQ Mobile (NYSE:NQ) and why investors money would be better spent elsewhere. As I'm penning this piece on Wednesday morning, I'm watching NQ give back most of its gains over the last week, and mow down bids to print new lows of the day around $8.49.

Since doing so, I've been treated to the obligatory barrage of Tweets and comments explaining to me, in careful terms, that I'm an idiot and there's absolutely no reason to worry about NQ Mobile.

Except, there is.

I went back and read Muddy Waters' original research report again over the last couple of days. Despite the massive evidence that the Yidatong relationship is clearly abnormal at best, I found myself actually laughing out loud at some of the items unearthed during the report. NQ and Yidatong sharing the same mail server?

(click to enlarge - source muddywaters.com/research)

I mean, come on. I'm sure that happens between clients and companies all the time.

Let's just pretend that NQ's relationship with Yidatong is all good and well. There's still too many red flags to get involved with here.

NQ Mobile might be one of the most red flag laden stocks I've read about in a while. While their recent Special Independent Investigation supposedly exonerated the company last week, the news from that was only enough to give the stock a small hiccup upward:

(click to enlarge)

The stock shot up as much as 27% on June 4th, as you can see in the chart above. The day of the news, Seeking Alpha reported:

  • The special committee investigating Muddy Waters' fraud allegations against NQ Mobile found NQ's cash balances "were verifiable and consistent with public disclosures," and uncovered no evidence its revenues were "inconsistent with public disclosures."
  • The committee also declares NQ's past/present relationships with business partners (inc. Yidatong) "serve legitimate commercial objectives," and that its M&A activity followed due diligence.
  • It did uncover "some lax internal controls and informal business practices" at NQ prior to its May '11 IPO, but doesn't view them as a reflection of fraud. The committee "has made a series of recommendations to further enhance the Company's internal controls," which the board has adopted.
  • Shares have soared for the second time in a week. They jumped last Friday after NQ issued strong guidance, and disclosed an FL Mobile investment that could pave the way for an IPO.

As you can see, the stock is already back on its way down.

With regard to the cash balances - it never really was a question of whether the cash was there for me. The cash is there, and has been moved around quite a bit to try and show investors that its real. The real question, if you ask me, is how the cash was attained - not whether or not its sitting in a bank somewhere.

Muddy Waters penned a response of their own to this press release, claiming that NQ's special committee results were eerily similar to those of Sino-Forest - which, as most everyone knows, has since gone bankrupt.

(click to enlarge)

You can read Muddy Waters full response to the Special Committee audit here.

The facts are that the market continues to look for the one item that can somewhat exonerate the company - the financial audit. Even though, as I've said in the past, this is also not a tool that exonerates a company 100%.

I even went as far as to say that the financial audit could be a lose/lose situation for NQ in my previous article:

Ipso facto, this is why an audit is a lose/lose for NQ. Let's identify the two possible outcomes for NQ's audit:

1. The audit opinion comes back clean, the stock will likely rally under false pretenses, but we know nothing new about whether or not NQ's business model is intrinsically sound. (This is similar to the company's response of moving cash to a new bank account to prove they have it - the allegations aren't that theydon't have the cash, it's the means by which they acquired it - a case study in smoke and mirrors.)

2. The audit is held up, for one reason or another, which is what would seem to be the case right now. Either a going concern is issued or the auditors take issue with items (or, worse, the auditors potentially resign). This would likely spell disaster for NQ's long investors for both the short, and the long term.

Until we get an audit or news from the auditors - that there either needs to be restatements (or worse), this stock is going to continue to simply trade on speculation. And, today, it seems investors are speculating that $9 is too high of a value for a company with such questions around it.

If NQ proves to be legitimate, it's likely a two or three bagger from here, but buying at these levels carries with it the continued risk of total loss.

NQ continues to be "avoid at all costs".

Best of luck to all investors.

Also from QTR: NQ Mobile's Audit is a Dangerous Lose/Lose Situation

Source: NQ Mobile Stock Slammed As Truth Lingers