NQ Mobile reported paying $34.4mm in cash and $45.5mm in restricted stock to acquire Tianjin HuaYong Wireless Technology, Ltd. (vLife).

Analyzing Management

• Float was reported to have been raised by 3,900,000 so this is obviously the number of shares paid for vLife
• Share price used for acquisition was $11.66 considering they paid $45.5mm in stock with 3.9mm shares.
• Either management thought their shares were overvalued at $11.66 or they made an acquisition in stock while their shares were undervalued (either way that's not smart).

Analyzing Valuation

• vLife Live Wallpaper only has 100,000-200,000 downloads on the Android Store.
• vLife Live Wallpaper has very few downloads (less than 100,000) on the few Chinese app stores I looked at.
• Their website is ranked 15,087,379 via Alexa so they have very little web presence (app can be installed from their website, which is why I included this).
• Because most Chinese users go through a variety of app stores, rather than Google Play, let's assume my numbers are way off and they actually have 5,000,000 downloads.
• vLife Live Wallpaper is always on and is a free application, so we can probably gauge advertising revenue generated to that of social media.
• Facebook makes $6.40 in annual advertising revenue per user.
• Assuming that vLife Live Wallpaper can generate the same advertising revenue per user as Facebook (unlikely) then they would still only generate $32,000,000 in revenue annually.
• Even with 100% margins, being generous in estimates of user downloads, and being generous in estimates of advertising revenue per user, they would still make less than half of what NQ paid.

Now obviously my numbers could be completely wrong. They could have far more users and far higher advertising revenue per user, but I think my estimates are fairly accurate. There is no way to know with certainty until NQ releases that information. However, even if the valuation is fantastic, why are they paying with stock when it's valued so low? Assuming share prices reach pre Muddy Waters levels of $25.90 then the value of their acquisition in stock alone would be a whopping $101,010,000. I understand that vLife was an integral part of the development of NQ Live, but I simply don't see the value of this acquisition. Anyone that knows all of the Chinese app stores, or at least a majority of the large ones, feel free to research a more accurate number of users.

Note: I certainly think it was a smart acquisition to integrate the original creators of the NQ Live concept, it will be a great addition. My only concern is the valuation and the decision to use stock while it was so ridiculously cheap. Hopefully we can realize the benefits of this acquisition in the future but, until then, I don't see how such an expensive acquisition will reach the bottom line any time soon.

Thanks for that. Difficult to assess, jury still out, I would say. You're talking of the (considerable, needless to say) cost side. Here is the possible upside of vLife (from the CC)

• we have already announced partnerships and pre-load relationships with Sprint, China Telecom, VTE, and numerous other manufacturers. Since we announced NQ Live, we are excited to share with you today that we have already exceeded 8 million monthly active users, with daily active user accounts exceeding 2 million.
• Even in this early stage, NQ Live has been shipped on more than 35 million devices, and the rollout will accelerate in the second half of this year.
• the number of monthly active users on our NQ Live platform will reach 60 million users next year
• we have a strong pipeline of still unannounced channel and content partners

60M users seems like a fairly big deal, but I have no way to put a number on that.

Tradestar, thanks for the clarification, but wouldn't NQ have had to report all reasons for the share dilution? Correct me if I'm wrong, but wasn't the only reason reported the vLife acquisition? This is how I came up with the number - reported stock value paid divided by share dilution reported. Assuming that they will report even more shares paid in the 10-F, then the average stock price for the acquisition would be even lower, unless they clarify that some of the dilution was for another reason. However, it's possible that in their 10-F they clarify the exact number of stock used which may differ from the dilution, so until then there is no way to know for certainty what the strike price on the acquisition is. I am a little confused on what you are referring to when you say that there is no way to know how much cash was paid though, considering they specifically state that they paid $34.4mm in cash on the 7-F (possibly over the course of multiple quarters, but that's still the exact price reported).

I would also ask for clarification on whether or not the acquisition of vLife was necessary for NQ Live. Considering NQ Live was finished prior to FQ3 and the acquisition was not reported until FQ4, it would seem that it was not necessary to move forward on NQ Live, but rather used to improve on the technology. Assuming the acquisition was required for, perhaps, legal reasons to sell the technology, then the amount paid would make a whole lot more sense, as NQ Live is certainly proving to be far more profitable than vLife ever was. However, if the acquisition was not necessary to use the technology, then I believe they overpaid by quite a lot given vLife profitability. As mentioned in my original post, this is entirely based on estimates, and we can't know for sure until we see the 10-F is filed, so hopefully that will provide more clarity on the situation. Thank you to admin, harry, and tradestar for the feedback.

'Fundy_' pid='41948' datel Wrote:

Tradestar, thanks for the clarification, but wouldn't NQ have had to report all reasons for the share dilution? Correct me if I'm wrong, but wasn't the only reason reported the vLife acquisition? This is how I came up with the number - reported stock value paid divided by share dilution reported. Assuming that they will report even more shares paid in the 10-F, then the average stock price for the acquisition would be even lower, unless they clarify that some of the dilution was for another reason. However, it's possible that in their 10-F they clarify the exact number of stock used which may differ from the dilution, so until then there is no way to know for certainty what the strike price on the acquisition is. I am a little confused on what you are referring to when you say that there is no way to know how much cash was paid though, considering they specifically state that they paid $34.4mm in cash on the 7-F (possibly over the course of multiple quarters, but that's still the exact price reported).

I would also ask for clarification on whether or not the acquisition of vLife was necessary for NQ Live. Considering NQ Live was finished prior to FQ3 and the acquisition was not reported until FQ4, it would seem that it was not necessary to move forward on NQ Live, but rather used to improve on the technology. Assuming the acquisition was required for, perhaps, legal reasons to sell the technology, then the amount paid would make a whole lot more sense, as NQ Live is certainly proving to be far more profitable than vLife ever was. However, if the acquisition was not necessary to use the technology, then I believe they overpaid by quite a lot given vLife profitability. As mentioned in my original post, this is entirely based on estimates, and we can't know for sure until we see the 10-F is filed, so hopefully that will provide more clarity on the situation. Thank you to admin, harry, and tradestar for the feedback.

I may be mistaken, but I do not believe they need to report shares that have not vested or hit their earn out targets. Otherwise, you would have a substantially larger diluted share count. The 20F, when its releasesd, will have various scehdules that go into detail the acquisitions and terms for all their material acquisitions.

Regarding the cash for the acquisitions,w hatever cash that goes out, has to show up on the statement of cash flows. NQ may have "paid" $35M in cash, but that does not mean they have actually spent $35M, yet. As soon as cash goes out the door, thats when you see it appear on the cash flow statement and affect the balance sheet. In this case, because there is not enough detail on the acquisition terms, its not clear if the cash paid is on an earn out structure or if it has already been paid in chunks (ie some in 4q13, some in 1q14, some in 2q14... etc). So again, speculating on the transaction, at this point in time, is fraught with a lot of assumptions and guesses.