I decided to check with other companies and verfiy the claim made by the Muddy Waters and the Barrons article that Level 2 cash is extremely uncommon and is a sign of fraud. I decided to do that because I saw a post on yahoo boards of a person claiming that he was a CPA and that it was not so uncommon. I checked 20-F statement (Annual report) submitted to SEC from the following companies: NQ, QIHU, BIDU, YY, SOHU, PWRD, CYOU. Not all of them have identical business model but still they operate in the same industry. NQ's business model has esepecially very high resemblence to SOHU, CYOU and PWRD. And probably to a surprise of many: THESE 3 COMPANIES HAVE ZERO OR ALMOST NO LEVEL 1 CASH
I acquiered all this information from money.msn.com. You enter the stock symbol and on the left tab look for "SEC filings". And choose 20-F report. The search for "level 2" there. Here are the screens from their statements where they disclose their cash positions:
NQ
As you can see NQ has no level 1 cash. And Muddy Waters report claims that a company cannot function without level 1 cash as there is no cash for operational purposes such as workers salary, electricity bills, office rent and so on. There was also a Barron's article where the author claimed that reputable sources in Hong Kong confirmed that: "NQ Mobile did shoot itself in the foot: its cash was classified as level 2 assets, which is very, very rare."
Let's see if it is rare indeed. Here is a screenshot from SOHU's statement:
SOHU also has no level 1 cash. Next example is PWRD. The company has some LEVEL 1 cash. But it's only 1% of its total cash. 99% is LEVEL 2 cash.
And another one is CYOU. No LEVEL 1 cash at all:
So obviously the claim that Level 2 cash is "very, very rare" sounds very strange. As 3 other companies in the business of selling games and apps also have no level 1 cash. You either have to assume that they are fraudulent as well or the claim that it is not possible to function without level 1 cash is false. I personally think it is the latter.
To make the comparison complete not all the Chinese internet companies have no Level 1 cash assets. BIDU for example has mixed assets with LEVEL 1 and LEVEL 2 almost equally distributed:
QIHU reports all cash strictly as LEVEL 1 (the only company in the list that doesn't have LEVEL 2 assets):
There are some companies which do not even disclose what is what. Here is an example of YY. They did not provide any table just a discription:
