A Nefarious Quandary: The NQ Saga

As a writer of an investment newsletter that focuses on aggressive growth stocks, I found NQ Mobile (NQ) back when its name was NetQuin Mobile. The stock was about $10 and it hit on my screener looking for high Zacks Rank stocks that has posted good growth numbers and are expected to grow further.

The concept of a company that is providing mobile security for your smartphone was a relatively nascent one, and I felt that a little more investigation was warranted. I sent over an email to investor relations asking to set up a time to speak to answer some basic questions.

My First Red Flag

Now I don't think of myself as a market mover, but Home Run Investor does have around 5,000 subscribers, so it was not as if I just some random investor. We tend to move stocks we add to Home Run Investor, and we aim to hold them for 6-18 months.

I was very surprised to learn that the CFO would be calling me, not someone from investor relations. As a former equity research analyst, I know that the CFO has a lot of his plate, but when someone is asking rudimentary questions about the business that duty should be off loaded to IR or someone else... unless...

Needless to say the call with the CFO did not go so well, mostly because I was so stunned to be speaking with him. At that time I was told that basically all the mobile security subscribers were a) in China b) on Android phones. They believed they would have US penetration in about a year or so and didn't expect the product to get onto the iPhone as it is a closed eco-system.

I passed on adding NQ to Home Run Investor, and after a short time, I was pretty happy about the decision as the stock tumbled from $10 to $8. The feeling quickly turned as the stock recovered to $12 and then to $16. The next time I saw it, NQ was approaching $25 and the leaves here in the Midwest were changing color and getting ready to fall.

Muddy Waters

On October 24, 2013 Muddy Waters released an 81 page research report declaring the stock a Strong Sell and putting a price target of

The company held a conference call to address the accusations made by Muddy Waters, and I listened to that call. One phrase that was repeated time and time again was still translating after management was asked a question, suggesting at that time that the Co-CEO in Dallas was simply unable to answer numerous questions. To institutional investors, this was clearly a sign that Muddy Waters had found something, just what it was took time to actually get your arms around. Reputation Wreckage

Following the research report and conference call, NQ decided that it would engage a law firm to do an investigation. The law firm engaged Deloitte Touche to provide forensic analysis. This report was designed to clear the air and clean the soiled reputation of NQ mobile following the attack.

In the following year, there were numerous developments to this story.

I wrote NQ Mobile as the Bear of the Day on January 14.

A telling post from the NQ Mobile IR blog in which was titled The Facts Will Speak for Themselves

NQ said it would buy stock, then didn't buy stock, then later claimed it had a 10b5-1 program that would allow it to buy stock.

A major advertiser of the stated 1,000 was Mercedes Benz, but when I contacted them they thought advertising in China via a gaming platform seemed a bit off.

The company said that it would complete the 20F (the Chinese version of a 10-K) on time, and didn't.

The Company sold a minority interest in FL Mobile to Bison Capital for $15M and another $10M from other investors at a pre-money valuation of $400M. At the time, the value of all of NQ was less than $400M.

Released results of Special Committee's Independent Investigation and states no fraud was found despite the fact that there was missing information from many devices and that management was unable to provide a credible explanation for what the investigation team observed.

The company sold a minority interest in NationSky () to Beijing Guorun Guizhen Venture Capital Center (:LP) for $18M at a pre-money valuation of $500M. They expect to sell another $12M or 2.3% to other investors within the next two months, but there was no word on any other stake being sold.

On June 12, the company stated that PwC had not resigned () and hints at selling a stake in its enterprise business (which is basically a re-selling venture).

The Chair of the Audit Committee stepped down on July 6 for personal reasons and then five days later also resigns from the board of WuXi PharmaTech (WX)

I thought I smelled something coming right after that...

This was quickly followed up with the dismissal of PricewaterhouseCooper Zhong Tian as its auditor and the subsequent hiring of Marcum Bernstein Pinchuk on July 18.

By the end of the month the stock was back near $7, and the company released this bombshell of a buyout offer from the same Bison Capital that was buying $15M worth of FL Mobile.

On August 15, the company announced the CFO, KB Teo was leaving for family reasons effective Friday, August 22.

Any one of these updates to the story should be enough to make an investor take pause and re-think their investment in NQ. There are, after all, thousands of other fish in the sea. The real problem is that this many issues for one company almost emboldens the blind shareholder base that things just might work out.

Repair The Wrongs

It wouldn't be fair of me to just point out the red flags that should have turned investors away from this stock. So let's go over the announcement that have been made over the last few months.

NQ Live the provides homescreen animation, music recognition, music news feeds, music tracks, and music partner promotion for the Sprint Harmon Kardon edition phone.

Going back to its security roots, NQ announced a deal with Brightstar 20:20 the blog post doesn't mention if NQ is reselling another parties enterprise security solution or if this is the same product offered to retail users. NQ did not respond to multiple requests for more information on this and other topics.

The company then signed up A Wireless, a point of purchase Verizon Wireless Premium Retailer to offer a bundle of NQ services.

Then NQ signed China Unicom to a deal positioning its music radar service on their network. This is a similar product to Shazam or even SoundHound.

Most recently, the company announced a deal with China Telecom for its vLife technology to China Telecom's E Surfing product. NQ will provide wallpapers, lock screen wallpapers and galleries.

Many point to these deals as the company doing a little diversification of businesses and product lines. Others would says that 'wallpapers' and being a fourth or fifth tier player in music recognition software won't really move the needle. That said, it is important to incorporate how the company has done very little to further its core position of a mobile security provider with more than 100 million subscribers.

The Battle For Legitimacy

Among the many issues NQ has, credibility is one that they are trying to address in the market. How does a company prove that they are real when there are so many red flags and a short seller suggesting that you are a massive fraud? NQ is making the most of a recent technology purchase to help with that.

On August 1, Dell (DELL) published a case study on a recent purchase made by NQ Mobile. Some people take things like this at face value, but I tend to ask a few more questions than most. Why was NQ Mobile selected by Dell? Was there any compensation or consideration paid by NQ to Dell to be featured? These are simple and even basic questions and if the goal of NQ Mobile is to provide transparency, then why not answer them?

I contacted Dell and asked them to speak in more depth with me about the NQ Mobile purchase and case study. I asked NQ Mobile to speak with me regarding this case study. They both opted not to speak with me, in a move that clearly states that the amount of transparency surrounding this case study is limited.

When I posed those same questions on StockTwits, I was summarily dismissed as someone that has no concept of how the business or technology works. Yet the question remains, just because it is not a normal business practice, why would DELL and NQ not want to speak further or answer those simple questions. A NO goes a long way, but a non-reply speaks a little louder.

Amazon Too

Another case study involving NQ Mobile can be found on the Amazon site. I contacted them to find out more information as well and they would only tell me that the case study was published in November of 2013 - just after the Muddy Waters attack hit the fan.

This gave me another question. Why is NQ using both Amazon Web Services and enough physical servers from Dell to warrant a case study? Seems a bit counter intuitive, doesn't it? Are the web services simply not good enough or would another case study be capable of pulling in more credibility?

Again I expect to be told how I just don't understand the technology involved, but when this idea is brought to the company and told that this article was coming, why not attempt to correct it? It seems these case studies provide more questions than answers.

Rumors Of A Buyout

Very recently, there have been rumors of another buyout offer coming for NQ. Ironically, it is at the same price as the Bison non-binding offer of $9.80 per share that wasn't able to lift the stock over $8. The thing that I have noticed is that the rumors surrounding NQ tend to be fairly accurate, just sometimes lacking in key essential details.

The Bison offer of $9.80 was rumored to be coming, but the lack of NQ to even hire an Investment Banker to shop the deal was more than telling of the intentions of management. But the rumors have come around again for a second time and they are noting that China Rock Capital and Toro - two institutions that have major positions in the company - are involved in the deal. Time will tell if there is a deal... but wouldn't they just be buyers of the stock in the open market up to the buyout price if they were for real?

Conclusion

The story of NQ Mobile has been absolutely crazy over the last year or so. As the company battled a short seller research firm they told investors they would buy shares, but didn't. They said a 10b-5 plan was in placed (that would allow for blind buys) but there were other mitigating circumstances. They said they would file the 20F on time and didn't. They said that PwC was not resigning and then fired them. They said they had a buyout offer and didn't even try to sell the company. If there was ever a stock to have no position in, this would be it.

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Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

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