For clarity, the "I" is not SHU admin but a fund manager whose ID we're not disclosing for privacy issues.

I spent 1 ½ hours at the NQ Dallas HQ with the NQ Co-CEO, Omar Khan, and the head of IR/Capital Markets, Matt Mathison, on Friday along with managers from a substantial private fund (also clients of Aberdeen).

I came away with positive impressions.  The CEO was calm, confident and candid.   All of us have met with Omar and his team before.  The NQ team were understandably tired from a 24/7 defense effort but the morale seemed high.

Facts and Observations:

• Re: relationship with Yidatong, the payment collection intermediary that Muddy Waters Research (“MWR&rdquo claims is a shell organization operated by NQ.  The CEO provided a detailed description of the way payments flow from consumers to mobile carriers to independent service providers such as Yidatong and finally to the Company.  NQ supports the description of the accounting between the entities in the cash cycle that was provided in a comprehensive reporting by Toro Investment Partners on Seeking Alpha on Wednesday Oct. 30 (the link is here).  Without getting into all the details, our collective consensus is Yidatong is not a fraudulent enterprise and that there is a legitimate accounting of the cash flows and subsequent revenue accounting at NQ.  Numerous investors have already visited Yidatong’s offices following NQ’s disclosure of the office address and contact information.  He stated Bloomberg took a camera crew to the Yidatong offices on Thursday. He is not sure if or when Bloomberg will air their video.
• Re: level of due diligence and verification efforts to disprove Muddy Waters claims.  Omar noted that the NQ Board’s independent committee has engaged Sherman & Sterling, a prominent global law firm with a large presence in China.  Sherman & Sterling has engaged Deloitte & Touche Financial Advisory Services Ltd as forensic accountants to assist in the review of all of the Muddy Waters allegations.  This is significant professional horsepower in addition to the Company’s current counsel Skadden & Arps, who represented the Company in its IPO, and PwC who has also been the Company’s auditor since the IPO in 2011.  It is noteworthy that NQ was able to do an IPO in 2011 with reputable underwriters and prominent counsel and accountants in light of the number of fraudulent Chinese reverse merger deals that were uncovered in 2010 and 2011.  Omar pointed out that contrary to claims by MWR, none of the 5 Chinese companies that have gone public by way of a formally underwritten IPO like NQ have been proven to be fraudulent.  In addition, none of the previously cases of fraudulent Chinese companies had been through a due diligence process as was just completed by Morgan Stanley and Deutsche Bank and their counsel in relation to the $172.5 million convertible note offering.
• Re: disputed market share and customer counts  Omar explained that the bulk of their customers come from preloaded apps on smartphones.  These apps are often “white labeled”.  The consumer rarely knows who the app developer is since the consumer doesn’t personally download the app from an app store.  Omar also explained that NQ is the only company that breaks our active and paying users in order to reduce the distortion that is inherent in the counting of “registered users”.  NQ and the other mobile security providers (i.e. Qihu) record a registered user once the user activates their phone or downloads the app.  Very often the user is double counted when he buys a new phone. 
• Re: cash verification is proceeding  as the term deposits are transferred to Standard Chartered Bank.  Both Morgan Stanley and Deutsche Bank as well as other investors have verified the cash balances in China.
• Re: Clarification of NQ partners.  Lenovo has confirmed to Bloomberg that NQ is a supplier.  Lenovo is the #2 smartphone OEM in China.  The other major handset OEMs declined comment.  Omar stated he wasn’t surprised that the OEMs are reticent stating that is standard procedure given his prior history as an executive with an OEM.

Additional color from a prior co-worker at both Samsung and Motorola Mobility.

I have discussed the situation at NQ with a former C-Level executive at Samsung and Motorola.  Omar and Gavin Kim, the Chief Commercial Officer at NQ, worked with and for this executive respectively.  The executive stated that it is inconceivable that Omar and Gavin would be unaware of fraudulent practices in the recording of revenue or registration of users of NQ software given their deep relationships within Samsung, a major partner with NQ.  Samsung is a pre-load partner and recently chose NQ’s Music Radar software to be the audio search platform for the Samsung smart watch.  The executive echoed comments by Omar that Omar knows the way things work in mobile payments and services and that the basic business practices in China of carriers using intermediaries such as Yidatong to distribute subscriber payments to software vendors and app developers is common in the U.S. and Europe.  He pointed out Omar and Gavin are experienced executives in the global mobile community.  They know counterparties in the major OEMs in China and elsewhere from being competitors with them.  He believes they both would have left immediately and been able to have been hired quickly if they had any hint that NQ was a house of cards.  He stated that both executives are truthful and of high integrity. 

Note – Gavin was Samsung Mobile’s VP of Content, Services and Enterprise Business. In addition, Conrad Edwards, the NQ Chief Experience Officer in charge of global marketing, also came from Samsung Mobile.  He also led experience engineering and interactive media at Motorola Mobility.  It seems unlikely that these men would be naïve and complicit in propagation of ineffective software and services.  Recall that Samsung is the leading global seller of smartphones.  Samsung sold 2.6X more smartphones in 3Q than Apple. (see BusinessKorea article)

Bottom Line:  NQ seems to be gaining facts in its favor.  This has been reflected in the stock price rallying 45% from Monday’s low close of $8.80 to Friday’s close of $12.78.  The stock fluctuated on Friday from a high of $15.85 to a low of $12.50 as there were dueling interviews on Bloomberg TV with Mr. Block of Muddy Waters and Omar.  Trading volume remains very high but has slowed as the panic is subsiding.  The likely news flow will be more cash deposits in Standard Chartered, a positive earnings report on November 12, possible updates from the analysts with coverage as they complete additional verifications and more potentially impactful Bloomberg interviews.  We remain watchful for profit preservation. The stock is up 112% from our start price.