Agreed. I'm assuming Mr. Khan prevailed in this matter. Hopefully, they will now give him full reign to run NQ.
It is unlikely NQ will be able to purchase its full buyback allocation at current prices if the shares continue to rise. Pursuant to SEC regs. (see below) there is a daily volume limit on share repurchase. NQ did alluded to block transactions in their press release, and they can purchase additional shares in block trades once per week. Either way, it will be a significant number of shares, but it will be phased in over time at different share prices.
Volume: the aggregate purchases on any given day must not exceed 25 percent of the purchased security’s ADTV. “Block”8 trades typically will be included in computing a security’s ADTV. However, once per week, “in lieu of purchasing under the 25 percent of ADTV limit for that day,”9 a company or its affiliated purchasers may make one block trade of its shares without regard to the volume limit, provided that it does not make any other Rule 10b-18 purchases on the same day. Purchases made pursuant to this block trade exception will not be included in computing a security’s ADTV for purposes of Rule 10b-18 volume limits; and
Agreed. These guys need a fully loaded six shooter for the number of times they shoot themselves in the foot. I hope the rumors on the meeting are true, and the boys in China have seen the light.
If the deal is still only in the MOU stage, it should not be that difficult. If a merger agreement is completed, the agreement will list events that will allow cancellation. Most agreements also require the canceling party to pay compensation, unless there is a breach by the non canceling party. Definitely more difficult to cancel once a merger agreement is executed.
As regards the ride up of TK shares, the parties involved better have a good explanation for their actions if regulators come calling. That said, Chinese merger targets often ride up a day or two before deal announcement, and I have never seen any investigations by Chinese regulators. Of course it still taints NQ's image.
I've seen this scenario several times at Chinese companies that went public in the U.S. They love access to U.S. capital markets, but they still want to run the company like they are private (i.e. friends and family deals, minimal disclosure, etc). This is pretty normal practice in China, but not for U.S. listed companies. You would think even the founders and friends would have learned something from the past year, but apparently not.
You look at Khan's resume, MIT, Andersen Consulting, Samsung, Citigroup, he is a pretty bright guy. It is hard to believe he would push for the Tack deal knowing the consequences in the market of an opaque deal and no buyback. Therefore, I suspect this was not his idea. If he resigns, shareholders are toast, at least outside shareholders, even more so then the current situation.
After the last few days it may become apparent to even the pro Tack wing the benefits of the MOU either needs to be explained in great detail, which frankly I think would be hard to do; or the deal needs to be scrapped. At this point NQ is so unpredictable, it is anyone's guess on their next move.
My theory on current NQ management is that there is a power struggle between Omar Khan and the founders. My guess is that Khan was originally asked to join NQ because it gave NQ credibility with Western markets and as a NYSE listed company. However, founders wanted to retain power in the founders and their allies. This was fine when the stock was trading above $20 and everyone was in the money. Then 2014 occurred and Khan realized change had to come to NQ, but the founders were and are reluctant to change. You notice on the cc. that Khan and Mathison were doing the presentation until they got to the Tack merger which they turned over to Shi to explain. With Khan's experience at Samsung, he had to know the market's reaction to this type of deal. Khan also emphasized NQ's commitment to the buyout, but I'm not sure the founders are still committed to this approach.
NQ also has gone through a string of management changes and board changes geared to making the company more independent of the founders and their allies. These I suspect were pushed by Khan. At this point, Khan realizes NQ can't afford to have him resign, and he appears ready to move for more changes that are akin to Western style structure and management. As Tack demonstrates, this will not be easy, but the fate of NQ hangs in the balance of this struggle. Just a theory, but it does explain a lot of the recent events at NQ.
Interesting article. I don't think it is the rm vehicle that has the market scratching their heads, although I would have chosen a different vehicle in view of NQ's past year. I think the choice of RM vehicle, Tack Fiori, is the problem. I've looked at Tack's F.S. from every angle, and they do not see how Tack can support the $570mm -$630mm valuation discussed in NQ's press release. If NQ meant to say we are make this valuation only for the purpose of allocating a % of ownership between NQ and Tack shareholders and it does not reflect actual value, then they should have said that. However, that is not what they said. It leaves the market with the impression that NQ actually believes this valuation and that the valuation will somehow materialize at the close of the transaction. At best they look foolish, and at worse deceptive. After 2014, neither status is the one they want.
The tax implications of this deal may ultimately prove positive for NQ. However, tax implications should only be one component of a corporate decision, and not the most significant component, on a major move of this nature. Apple, GE, IBM, etc. could certainly do a deal of this nature and no one would blink, because they are Apple, GE and IBM. NQ is none of those, and just coming off a lost year in which they spent millions of dollars and countless hours to regain credibility and transparency. After all that work, you do an obtuse transaction and postpone the long await share buyback and management's pledge to directly purchase shares for their own account. You then cavalierly announce this during the conference call with minimal explanation and rationale for the transaction. I do not see how this deal advances Mr. Khan's pledge to earn shareholder trust and restore corporate credibility. In fact, it moves the needle in the other direction. There are many vehicles such as Tack to utilize somewhere down the road to do this deal. On the NQ priority list, I would place this in fourth or fifth place behind share buyback, management purchase of shares, margin expansion and positive net income. If they will not reverse this transaction, they should at least come out with a press release Monday morning explaining the timing of the deal, the choice of Tack, tax benefits, if any, and why this form of asset monetization trumps all others.
Management/Founders have enough % ownership of NQ to effectively block any hostile takeover. Management itself may at some point wish to take NQ private. However, whether you believe the Bison bid was real or fabricated, the legal record reads that management turned down a bid at $9.80 a share within the past year. Therefore, it would be hard for management in the near term to take the company private at a price well below $9.80.
I wrote them yesterday to explain the rationale behind the share buyback moratorium. Typically, when the merger agreement is released, which should be any day now, management is no longer in possession of material non public information. Even if they are being conservative on this front, the proxy release should be the last date restricting share buyback as referenced above. I don't know if they will respond, but it should be an interesting explanation if they do.
At this point, all shareholders, and hopefully some of the larger ones, should put the heat on NQ management. You can't start your cc. professing credibility and transparency as goals as Omar Khan did, and then trot out a transaction such as this one with minimal explanation.
Legally speaking, it is typically the quickest path to effectuating a separate legal entity for FL. However, that benefit is outweighed by the costs. Reverse mergers, especially Chinese reverse merger, carry a stigma due to the several failed NYSE/Nasdaq listings of China companies that entered the market via reverse mergers. I would assume NQ or its advisors at S&S, DT or Marcum would be aware of this issue and tell NQ that in view of everything that has happened to your company in the past year you might want to think twice about using this vehicle.
Perhaps they did and NQ went forward anyway. If that is the case, at least explain in detail the rationale behind the transaction. Tack appears to be closing its retail outlets and seeking an e-commerce platform for retail. Also they recently acquired China Education Media. Are there synergies between these business and NQ, or is Tack merely a shell? Can't tell because no one discussed this during the cc. Similarly, explain why this needed to be done immediately, thus curbing, again, the share buyback and management share purchase. Also explain why the buyback is curbed until closing of the FL. deal. Upon release of the proxy for this deal, which be definition must contain all material non-public information to be approved, NQ no longer harbors any inside information which keeps it from buybacks. Suffice to say the optics of this transaction are just terrible, and the costs, without further explanation, appear to outweigh the benefits.
I would have liked to sit in on the board meeting when they decided this deal. O.K. boys we just completed the exhaustive audits, fraud audits and re audits and now we can move forward on FL. We can:
1. Spin off FL and give Bison a piece commensurate with their investment.
2. We can IPO FL.
3. With everything that went on this year maybe we should wait and just return Bison's money and tackle FL next year.
4. We can do a reverse merger with a H.K. company that has B.V. of around $100mm but a market cap of $5.2BB and bring the stigma of this company and the reverse merger process in general upon our newly clean company. Oh and by the way, if we choose this option, we can't buy back any shares for 4 to 6 months.
The board and management need some serious adult supervision if they believe #4 is the best option available for FL. Lord knows what they will do with Nation Sky, but it will be tough to top FL for sheer lunacy.
NQ choice to monetize FL via a reverse merger with Tack Fiori is a poor vehicle for monetization. Tack appears to be an investment firm that owns a retail clothing business and educational software business in China. The clothing business appears in run-off, and the software business has nominal value. Therefore, Tack is essentially a shell. However, when you look up their financials, it shows a market cap of over $5BB, but a book value of approximately $100mm. When the transaction is completed, NQ will own most of Tack since they are being paid in shares valued at around $600mm. However, with BV of around $100mm, this leads to questions about the $600mm valuation of FL Mobile. The upside of the transaction for NQ is they continue to control FL, they get to keep Bison's $18mm and they have control over the $100mm+ in cash on Tack's balance sheet.
The downside of this transaction, greater than upside, is that NQ is engaging in a reverse merger with a Chinese company with a questionable valuation of FL. Reverse mergers both in the U.S. & China have a long history of being the backbone of frauds and scams. While I do not think that is the case here, after all NQ has been through on the fraud side, they are pretty tone deaf executing a transaction of this nature as opposed to an IPO or spin off of FL mobile. Probably the bigger issue in near term price per share is another delay in the share buyback program. NQ has promised a robust share buyback North of $30mm for several quarters. With almost $300mm in cash on the balance sheet, I expect shareholders were expecting an announcement of an even bigger buy back, say in the $50mm-$100mm range. This delay is brutal in the near term for long investors. My experience with Chinese short targets is that they only way you reverse a negative pps is via a large buyback or the announcement of a management buyout or other acquisition. Without the buyback, and with another questionable transaction, in the near term, pps will flounder
I agree the geopolitical concerns are not being given adequate weight by the market. Putin's background is KGB. He certainly knows how to engage in covert operations. He is not the only regime with problems. The Iranians need oil at $130 ppb to balance their budget and Venezuela needs $117 to balance. The stability of these two regimes are certainly impacted by ppb. ISIS is training in Western Libya and they declared force majeure on two key oil ports yesterday. The Saudis have opened pandora's box with driving prices this low. They certainly can endure the price pain longer than most, but unintended consequences could impact the Middle East before long.
The conference call will be more important than actually earnings. NQ only guided on 2014 revenue back in April and May, with no guidance on income, as follows:
1Q. $75mm to $76mm
2Q. $83mm to $84 mm
3Q. No guidance
Full year 2014 $320mm to $325mm.
The also expected $5mm to$8mm of extraordinary expenses in Q1 and expect similar charges for 2Q and 3Q. They also have several acquisitions which phased in over 2014. I suspect this is why they did not guide on income. Unless there is a gross discrepancy high or low on the revenue side, with 3 quarters of reports and several extraordinary items and acquisitions, these results, high or low, are probably not indicative of where NQ is headed.
I expect on the cc, NQ will discuss 2015 guidance, plans for FL Mobile and Nationsky, the share repurchase plan, managements purchase of shares, the retention of a new CFO, management structure going forward in view of the many changes since the last CC., changes in internal controls recommended in the DT report and any other changes in corporate governance and monetization of the various assets acquired in 2013 and 2014. At least I hope they will address all of the above. I've learned to expect surprises with NQ.
My theory from watching the options action on NQ for some time is these are mostly pure longs, perhaps some verticals (I recall a pretty big $5/$12 spread), that have been accumulating these positions for several months. I think some longs expected the NQ earnings saga to be wrapped up a while back after the 20-F and Q1-Q3 issued shortly thereafter, and took Dec. positions in anticipation of those events believing they would have plenty of time to digest the data. As it turned out, NQ has been slower with this data than most anticipated and now these options are down to a one day event next Friday.
Hard to predict pricing next week. I can't recall when a company reported three quarters of earnings at one time, plus I assume updated guidance for 2015. Additionally, earnings will be complicated by one time charges for audit, legal and forensic work, additional share count, acquisitions the past year, share buy back plans, management changes, etc. The good news, once you sort through all of this, is that substantive data to measure NQ will finally be released, and presumably NQ will now be back on a normal reporting schedule.
Options are priced based on both intrinsic and extrinsic value. Intrinsic value is simply the amount the stock is currently trading over the strike price. In your example, based on the current price of NQ, the $5 call has $.13 intrinsic value and the $7 and $10 have no intrinsic value. Extrinsic value is a premium that reflects implied volatility of an option, time left to option expiration, interest rates, dividend if any and option type. That is why the Dec $7 calls still have a value around $.10 even though they are far out of the money at this time. Implied volatility typically rises around key events dates such as earnings. The I.V. on NQ is through the roof at 160% for the $5.
Next Friday will be a very interesting day for DEC 14 option holders. This is option expiration day for these calls. With an earnings conference call on Thursday after market close, if you are long these calls, the price of the stock must be in the money on the close of trading on Friday. In your example, if NQ closes at $4.95 on Friday, all the calls above are worthless. If NQ closes at $6.50 on Friday, the $5 calls will be worth $1.50 as the owner of the call has the write to buy NQ at $5. The $7 and $10 are worthless.
SD does have a book value over $3, but this is based on the valuation of by far its largest asset:
Property, plant and equipment, net $ 5,541,819 as of 6/30/2014 SD's last 10 Q.
The key issue is the new valuation of this asset if oil stays at $60pbb for an extended period of time. At this point, I don't think anyone, including SD, has the answer to that question. Folks can run various models at different pbb, but until the price of oil stabilizes, no one really knows the BV of SD. SD acknowledges this issue in their F.S. as listed below. Clearly SD's assets have value, and allocation of resources to NG versus oil, reduced capex other cost cutting can impact this valuation, but at this point an acquirer would be taking a significant risk on the price of oil and SD's ability to profitably extract that oil at a profit.
" Future declines in oil, natural gas and NGL prices, without other mitigating circumstances, could result in additional losses of future net revenues, including losses attributable to quantities that cannot be economically produced at lower prices, which could cause the Company to record additional write-downs of capitalized costs of its oil and natural gas properties and non-cash charges against future earnings. The amount of such future write-downs and non-cash charges could be substantial"
The Russians are a target, but the real target is OPEC. For years, OPEC members other than the Saudi's have cheated on production quotas set by the cartel. It is a running joke in OPEC. In fact, when production quotas were left the same in November, it was estimated production would fall 300,000 bpd because the members agreed they would actually adhere to the quota (how long that will last is anyone's guess). In the past, when other OPEC members flooded the market with oil, they could always call the Saudi's to cut back production to stabilize prices. However, with the rise of shale and U.S. production, the Saudis are worried about market share and are tired of bailing out other OPEC members who have never adhered to agreed quotas.
OPEC needed some discipline and the Saudis are the only ones big enough to crack the whip. The Saudi's will wait until other cartel members come to them with hat in hand and agree to real production cuts shared by all members. The Saudis also spoke with Mexico and Russia prior to the November meeting, but no production deals could be reached with either country. At that point the Saudis released it would take some pain to bring members and non-member government controlled production to the table. If they reduced U.S. shale production in the process so much the better for the Saudis, but that is not their main target. Everyone will eventually come back to the table, but at that point the Saudis will be holding all the Aces.
Several hurdles need to be crossed before anyone takes a look at SD:
1. The SEC expense timing issue needs to be resolved. Based on the press release on this matter, I suspect it will be resolved with minimal impact to SD. However, timing is an issue as you are dealing with a governmental entity not known for is speed in resolutions.
2. Oil prices need to bottom and stabilize for an extended period
3. The party(s) buying SD, assuming a purchase price around $4 per share, would need to determine if SD is worth $5BB in cash, or some combination of cash or shares worth $5BB, if it is a current operating company. SD's debt is due immediately upon the closure of any acquisition. This is in SD's debt covenants. Therefore, anyone buying SD has to pay more in debt extinguishment then they will likely pay for all outstanding shares. Of course, they get SD's assets unencumbered in return, but that is a pretty big bet on the value of these assets.
4. SD shareholders, many of whom have a basis well above $4, would need to be amicable to taking a loss on SD, albeit a much smaller lose than current share price, in exchange for their shares. The larger shareholders of SD might be inclined to pursue this deal if they end up owning a piece of SD after privitization. However, if a publically traded third party buys SD, assuming a cash and share deal or 100% share deal, shareholders would need to analyze the prospects of the new owner of SD to determine future value.
Bottom line, I suspect no one is willing to jump into the acquisition pool anytime soon.