Muddy Waters’ allegation regarding NQ Mobile Inc (ADR) (NYSE:NQ) that its China revenue is fraudulent, here is NQ’s response.

NQ Mobile’s cash holdings are fabricated and falsified

  • NQ CASH HOLDINGS ARE REAL. CASH is the ultimate determinate of the health of a business and is the yardstick by which any business can be measured.
  • NQ has made public all of its bank account holdings, bank names, account numbers, and balances.
  • NQ will immediately take steps to obtain an independent validation of NQ CASH holdings.
  • NQ has a very strong balance sheet and will show details of its cash position to anyone wishing to do additional diligence.

NQ Mobile Inc (ADR) (NYSE:NQ) holds approximately US$280M in term deposits including ~US166M from the recent CB offering proceeds. Other cash accounts exist at various operating entities.

NQ mobile Muddy waters

  • The following are actual scanned copies of NQ Mobile Inc (ADR) (NYSE:NQ)’s actual bank deposit receipts and bank statement from the recent convertible bond offering proceeds.

NQ mobile actual bank deposites

Level 2 classification of NQ cash holdings is suspicious

  • Classification of cash and term deposits as Level 2 assets is consistent with US GAAP guidance of fair value measurement.
  • Level 1 – observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
  • Level 2 – other inputs that are directly or indirectly observable in the marketplace.
  • Level 3 – unobservable inputs which are supported by little or no market activity.
  • NQ Mobile Inc (ADR) (NYSE:NQ), based on this guidance, reclassified its cash and cash equivalents and term deposits from level 1 to level 2 in 2012 consistent with US GAAP. This approach had been adopted in 2011 so 2012 was the first year these rules would have been applied so the reclassification was warranted. This was clearly explained in the 2011 20F and did not change anything related to liquidity or operational efficiency.
  • For expert opinion on Level 2 cash classification and specifically China Accounting standards, please see the following post by Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management.

NQ Mobile responds to Muddy Waters