A Chinese website ifeng published a new article on NQ

[kshen]

Let me play Devil's advocate here.
The issue is, if they have an investor with Billions of Yuan, they could technically have gotten the money from him to wire to Standard Charter.

Most frauds get caught because in the end the money isn't there. The executives run off with it and it's spent. But if this guy has enormous wealth, he can technically inject artificial revenue in and then auditing wont turn out anything. Could be that their revenues don't match what they say in that case.

Again, just devil's advocate.

We know they are partners with the big name carriers and have preload deals. The likelihood isn't great but something to consider

[tradestar2012]

not likely. PWC would have seen that a long time ago. Wiring millions of dollars leaves a very very visible paper trail. Just like in the states, anytime you wire money, you are liable to getting taxed on it if you cannot prove that its existing funds vs. revenues.

Also, at the end of the day, shareholders would have a claim to that cash.

[SamAdams]

Saw a link posted to this article on Stocktwits:

http://finance.ifeng.com/business/special/ruigongsi11/index.shtml

It is in Chinese and I used the google traslator. A lot of the info is a rehash from MW report but there are a couple of new very interesting allegations.

The author claims that despite all the rebuttle Yidatong is related to NQ via a person known as Zhou Xu. He is called the "Ghost founder" in the article. This person came to rescue of Net Quin in 2007 when the company nearly went bankrupt. Henry Lin himself admitted many times that they had no brand recognition , no customers and were about to shut down. And here comes Zhou Xu - a mysterious angel investor - who managed to find financing from GSR and Atlantis venture funds and also took a large stake in the company himself. He was given a title of "founder" in the company. And since 2007 the story of NQ mobile made a 90 degrees turn. Revenues soared. And around the same time Yidatong appeared which became the main source of its revenue.

The author claims that Yidatong is a creation of Zhou Xu and he is its real owner. Xu Rong only acts as a facade. Xu Rong used to work for Zhou Xu in his other enterprises which were shut down (I didn't get why they were shut down... something about the change in regulations and some mentioning of corruption). Zhou Xu also has 22.9% stake in NQ Mobile. He tries to keep low profile. Ifeng looked through many pictures from NQ Mobile's events and couldn't find his picure. He does not hold any managerial positions and is just listes as a "founder".

The article makes a claim that Zhou Xu uses the company to increase his personal wealth. And since he is the owner of both Yidatong and NQ Mobile there is a conflict of interests. According to Ifeng after NQ Mobile went public Zhou Xu's personal wealth has dramatically increased (in 2011 to 6.4 bln yuan). I am not sure whether it was related to the share price going higher or maybe he sold some shares at IPO. Probably both.

So to sum it up the article insists that NQ Mobile and Yidatong are indeed related via its major shareholder Zhou Xu though the company denies any connection. I might have missed some details as the translation was sometimes hard to comprehend. Maybe some of our Chinese speakers would read it and share some more details.

I would like to know who this Zhou Xu guy is. Is he real? In my opinion this allegation is very serious and has not yet been properly refuted. While NQ's management showed the cash there is still no proof where it came from. Was this cash earned via their business? The say it came from Yidatong. Can Yidatong prove that it received the cash from end users by billing them? As it could be put there by Zhou Xu very easily.

What are your thoughts?

Vermut, I can't understand why you ask the questions you do in your last paragraph.  Yidatong is not a new issue for the company.  And yes they can prove where the cash came from.  The company and others have provided a very detailed explanation of the business.  First, Yidatong is not paid by end users.  End users pay China Mobile, for instance, who takes a % of the transaction and then forwards the rest to the application developer's (NQ) service provider (Yidatong).  YIdatong then takes thier % fee and remits the balance to NQ.  The company is providing access to documents that verifies this chain for investors.  The shorts have accomplished their mission when individuals start making assertions as you did which are totally unfounded.

[vermut]

Vermut, I can't understand why you ask the questions you do in your last paragraph.  Yidatong is not a new issue for the company.  And yes they can prove where the cash came from.  The company and others have provided a very detailed explanation of the business.  First, Yidatong is not paid by end users.  End users pay China Mobile, for instance, who takes a % of the transaction and then forwards the rest to the application developer's (NQ) service provider (Yidatong).  YIdatong then takes thier % fee and remits the balance to NQ.  The company is providing access to documents that verifies this chain for investors.  The shorts have accomplished their mission when individuals start making assertions as you did which are totally unfounded.

I think I probably missed this part. Has Yidatong also disclosed its sources of income? I remember NQ Mobile in its report provided scans of documents proving that it received the revenue from Yidatong. But has Yidatong also presented documents that all of the cash it transfered to NQ Mobile had been received from China Mobile?

In other words the company does indeed provide access to the documents showing that this share of revenue was received from Yidatong. But are there any disclosed documents or has any third party checked that all of the money that Yidatong channels to NQ Mobile is received from mobile operators and is not injected by some wealthy individual just to show to the auditors?

[tradestar2012]

If there is a wealthy individual injecting $$, why would that person want to perpetuate a fraud and risk the chance of discovery and resulting eventual fall out to his/her other enterprises? Why would that individual want to risk not being able to get that cash back? Remember, the cash is at HSBC and Standard Charter. If there is fraud, my guess is those assets would be frozen. They are UK banks after all.

[Haggerston]

If there is a wealthy individual injecting $$, why would that person want to perpetuate a fraud and risk the chance of discovery and resulting eventual fall out to his/her other enterprises? Why would that individual want to risk not being able to get that cash back? Remember, the cash is at HSBC and Standard Charter. If there is fraud, my guess is those assets would be frozen. They are UK banks after all.

Great point Tradestar2012. Accounts with any sign of fraud are generally frozen immediately - look at our own accounts any we lose a debit card.

[vermut]

If there is a wealthy individual injecting $$, why would that person want to perpetuate a fraud and risk the chance of discovery and resulting eventual fall out to his/her other enterprises? Why would that individual want to risk not being able to get that cash back? Remember, the cash is at HSBC and Standard Charter. If there is fraud, my guess is those assets would be frozen. They are UK banks after all.

Good points. That is my thinking as well. I was just wondering if it would be such an unrealistic scenario when someone injected the money to show now. And when and if the dust settles will take it all back. And the company might then say that these accounts were never intended as permanent and were just for this special occasion and that the money is back in CIB.

The reason I am asking is that I lived and did business in South East Asia for several years (mainly Thailand and Malaysia) and believe me it is a very widespread practice there. When you need to present a proof of funds which you lack (for example if you want to win some kind of tender for a job) there are wealthy individuals who can put the cash into your account for several days. You get the documents. And after that they pull it back.

It may sound unrealistic for people living in North America. But in Asia its very common.

[tradestar2012]

I'm sure its very common. But thats why putting the funds in a UK bank in HK gives me significant comfort. Its not like they parked the cash in the Bank of Tradestar Xinjiang branch.

I think we can put the cash controversy to bed. Its not a controversy. The money is there, the sources are easy to verify. No wealthy individual wants to be associated with fraud or risk having their assets seized. No secondary party wants to inject money into NQ as they would have to report to mr. taxman at the end of the year that is was a "loan" vs revenues or sales.

If there were real problems with the cash, PWC's or MS / DB's auditor would have said something by now. They've had a full 2 weeks to do even more research on the cash source. By all appearances, NQ is proceeding forward with 3Q announcements on 11/12/13.

[tradestar2012]

One last thing. If NQ were really trying to perpetuate fraud or play shell games with cash, they would have done the max size of a convertible offering. The $172.5M convert was the MINIMUM size they could do and still get MS & DB to participate on and potentially get research coverage on. If they really wanted to push the envelope and fleece investors, they could have done a larger convert, ie. +$200.

To make things even EASIER. They could have just done a small equity offering and would not have had to answer to MS&DB and still gotten some cash from shareholders with few restrictions (convertible debt has certain covenants that restrict use and leverage).

[tacitusk]

 To make things even EASIER. They could have just done a small equity offering and would not have had to answer to MS&DB and still gotten some cash from shareholders with few restrictions (convertible debt has certain covenants that restrict use and leverage).

Well to be fair they did try that in Spring of 2012.