NQ Mobile (NQ) recently responded to a Muddy Waters’ research report dated Jul 7, 2014. The company cited a report from an independent investigation to defend itself against the allegations of Muddy waters. Shares of NQ Mobile were up 6.8% (28 cents) following the investigation.
This investigation was conducted by a Special Committee comprising four of its independent directors along with two renowned firms, Shearman & Sterling LLP and Deloitte & Touche Financial Advisory Services Limited. The aim of the investigation was to determine whether NQ Mobile had resorted to any unfair means or not.
The results of the aforesaid investigation were revealed to the public soon after it was over. Per the investigation, NQ Mobile had submitted all material information within the stipulated timeframe as well as in full compliance with all Securities and Exchange Commission (SEC.TO) regulations. Hence, the Committee concluded that no fraudulent practice had been adopted by NQ Mobile.
Muddy Waters, LLC is a pioneer in the field of investment research. It conducts research on business fraud, accounting fraud and other fundamental problems. It also engages in short selling activities.
In Oct 2013, Muddy Waters had accused NQ Mobile of being a “massive fraud” with at least 72.0% of its 2012 China security revenue fictitiously coming from a shell company called Yidatong, which was actually owned by NQ itself.
Moreover, NQ’s Antivirus 7.0 was termed to be spyware by the investment research firm. Additionally, Muddy Waters had accused the company of flaunting an inflated cash balances just to gain the confidence of investors. Following this report, NQ Mobile had almost faced a share trading blackout and even threatened to sue Muddy Waters.
On Jul 7, 2014 Muddy Waters again issued a report in which alongwith the prior charges; it also accused NQ Mobile of concealing important information from public including the stepping down of the head of the company’s audit committee, Ying Han due to personal issues not related to NQ Mobile in any way.
NQ Mobile responded to these accusations by conducting the aforementioned investigation. We believe that the results of the investigation are a major positive for NQ Mobile as it will help the company to regain the confidence of its shareholders, going forward.
NQ Mobile reported mixed fourth-quarter results. The company’s better-than-expected user growth in FL Mobile’s gaming platform and new game launches remain the growth catalysts. The company’s associations with Sprint and Samsung are positives.
However, the company’s margins are adversely impacted by higher expenses and higher contribution of low-margin businesses. Moreover, competition from Autodesk Inc. (ADSK), Cadence Design (CDNS) and Citrix Systems Inc. (CTXS) remains a major headwind, going forward.