Muddy Waters: NQ’s Top Ten Lies Since Friday

Muddy Waters, LLC

October 29, 2013

Reiterating price target <$1

NQ’s Top Ten Lies Since Friday

Muddy Waters noted numerous lies and deceptions in NQ’s responses to our October 24, 2013 report. This report lists the ten most egregious falsehoods we noted from the October 25th conference call, and Co-CEO Omar Khan’s television interviews that same day with Fox Business News and Bloomberg.Lie # 1: Xu Rong was a consultant who worked at NQ for about six months before she

joined Yidatong in 2007.

This is an enormous lie because it goes to the heart of our conclusion that NQ’s largest customer

is really NQ, dressed up in a shell company called Yidatong (“YDT”) that is nominally 75%

owned by Xu Rong.

NQ wrote the below on July 31, 2013 (emphasis added):

“How did Xu Rong come to own Yidatong?

In 2007 she bought 75% of Yidatong.

Did Xu Rong work at NQ?

Yes, in 2007, when NQ was a very small company, they did not have a good person

running marketing. They asked Xu Rong to join as an advisor directing the marketing

of the business. She was with NQ for less than six months before leaving and buying

her interest in Yidatong.”

That was a repeat of a lie dating back at least as far as NQ’s prospectus:

“The principal shareholder of Yidatong was our consultant in 2006 and 2007 and

received certain share options and consulting fees in connection with her services. In

addition, we provided Yidatong with an interest-free advance in order to fund Yidatong’s

short-term liquidity needs and to further cultivate our long-term commercial relationship

with Yidatong.”1

On the conference call, NQ was forced to admit it had lied about her departure date after we had

showed she was still with the company in 2008. Note that Matt Mathison is now referring to her

as an “employee”, rather than a “consultant”.

Matt Mathison on conference call: “Yes, Xu Rong, I can get you the exact details, but she

was an employee of NQ. In fact, on a previous short report that came out, I provided a

very detailed look at her employment. I can give you the exact start date, end date. I can

1 NQ IPO Prospectus, May 4, 2011, p. 20

Page 3 of 11

give you all the details that you want. If you just hold, I’ll pull that up for you, if you

want it right now. Just give me a moment.

So, Xu Rong became an employee on September 1, 2006. She resigned from NQ on

December 31, 2008. I know the report hinted at some large ownership in NQ, which was

not true…. But when she left NQ, she became a majority owner of Yidatong and owned

75% of that business now.”

NQ was completely unrepentant about being caught in its prior lie – even when two investors

asked for explanations on the call. No explanation was given. Note that there is another lie

nested in Matt Mathison’s response on the call – the new claim that Xu Rong did not become a

majority owner of Yidatong until after December 31, 2008.

As we showed in our report, Ms. Xu became the Executive Director of YDT in February 2006,

so YDT was clearly a related party during that time period. It is highly likely that she was an

owner of YDT as of February 2006; however, YDT was an undisclosed related party at those

times (and later, as we showed in our report).

Lie #2: YDT’s provision of NQ’s contact information to China Mobile does not mean NQ

and YDT are the same company.

NQ was extremely sloppy in concealing that YDT is actually NQ. In our report, we noted

numerous instances in which YDT provided NQ contact information to carriers and various

Chinese government agencies (including MIIT). YDT even uses NQ’s email server. NQ further

lied about this on the conference call.

Matt Mathison on conference call: “One factor of the business that the report shows clear

lack of knowledge about is related to the relationships between the content partner and

service provider. NQ has a very deep and good relationship with Shenzhen and Shanghai

carriers. As one of the biggest content partners for Yidatong as clearly disclosed, NQ is

required to be notified when there are customer complaints. In order to better facilitate

customer support via those channels we leave our contact information with the carriers, in

addition to Yidatong.”

In reality:

• The MW report provides examples of NQ’s contact information being provided in place

of, not in addition to Yidatong’s. The first was noted in the report on pp. 14-15. One

such example from China Mobile’s list of service providers is below. 2 Those numbers

are NQ’s, and are the only numbers shown for YDT.


Page 4 of 11

• NQ’s attempt to explain away this inconvenient listing with a carrier does not address

several problems, including that in Yidatong’s Shanghai SAIC filing (the corporate

registration) the contact person provided has an NQ email address (Netqin was NQ’s

former name).

Lie #3: YDT’s SAIC financials, which show revenue that is a fraction of what would be

required for NQ to generate $20.2 million in revenue through YDT, are reported net of

payments to NQ.

Our report anticipated the lie that YDT’s financial statements show net revenue, as opposed to

gross. NQ was hoping that investors would not read the report clearly enough to read the proof

that the sales number is a gross number.

NQ management during Q&A on conference call: “Yidatong reports net revenues

associated to a portion that would be earned by them for their services, and not the gross

amount that is being passed to the carriers on behalf of the developers like NQ”.

There are three ways of knowing that NQ is lying:

Page 5 of 11

1) China SPs are required to pay Business Tax (i.e. the form of sales tax applicable to

YDT’s services) on gross sales. YDT’s SAIC file shows that it paid Business Tax

commensurate with gross sales of only $2.9 million.

2) YDT’s A/P balance was $3.4 million at the end of 2012. Regardless of net or gross

revenue recognition, the A/P balance on YDT’s books should match the $9.3 million A/R

NQ reported from YDT at the end of 2012.

3) PRC GAAP mandates that YDT report its gross revenue, not net. The applicable

standard is Accounting Standards for Enterprises No. 14 – Revenues



Lie #4: NQ’s second and third largest customers are UMPay and Info2Cell, respectively.

NQ was asked to provide the names of its second and third-largest customers from the 2012 20-

F, which accounted for 11% and 8% of revenue, respectively. NQ had to translate the question

to Chairman Lin and then translate his response. Note that Mr. Khan did not know the answer,

which further evidences that he is at best clueless about much of NQ’s operations.

Chairman Lin via Gavin Kim stated that NQ’s second and third largest customers are

“UNPay” and “Info2Cell”.

We assume that Mr. Kim meant UMPay, which is the SP that China Mobile jointly owns, and is

the same SP we saw for all China Mobile SIMs we tried.3 Info2Cell is an international processor

for carrier payments.4

It is clear that NQ, which has always been reluctant to disclose this information, and seemed to

do so only because an investor put it on the spot on the conference call, lied about its second and

third largest customers. Based on NQ’s own disclosures, its second and third largest customers

could not be UM Pay or Info2Cell. NQ had to lie on the fly, and made a mistake.

NQ disclosed that a total of 30.4% of 2012 revenue “were collected from wireless carriers and

mobile payment service providers”, which is $27.9 million.5 Purported revenue from YDT was

$20.2 million. China Mobile accounted for $1.8 million in 2012.6 There is therefore only $5.9

million allocable to carriers or mobile payment service providers. The second largest 2012

source would have accounted for $10.1 (11% of total net revenue) million by itself, which means

it is too large to fit into this category. The third largest 2012 source would have accounted for

$7.3 million (8% of total net revenue), which means it is also too large to fit into this category.

NQ was forced to quickly lie about the identities of its second and third largest customers, and it

stated the impossible.



5 NQ 2012 20-F, p. 63.

6 In the F-1/A-7 p. F-23, NQ discloses that Client “A” is China Mobile. From there, one can track China Mobile

through the 2011 and 2012 20-Fs.

Page 6 of 11

Lie #5: Muddy Waters believes there are no problems with NQ’s SAIC financials.

On pp. 32-33 and in Appendix B of our initial report, we describe in detail the numerous signs of

fraud present in NQ’s various SAIC financial statements, including those of recently acquired

companies FL Mobile and NationSky. Matt Mathison attempted to revise very recent history.

Matt Mathison on conference call: “[Muddy Waters] said that NQ’s SAIC filings match

appropriately with US GAAP. So I don’t think there’s anything to address there.”

Matt Mathison should have known that what he said about our discussion of NQ’s financials was

not accurate.

Lie # 6: Chinese companies commonly classify all cash as Level 2 assets.

KB Teo on conference call: “Actually this practice of classifying some assets as Level 2.

It’s actually – had been adopted by quite a number of Chinese companies listed in the

U.S. from our perspective…a number of other companies have also adopted Level 2….

Mainly those are Perfect World, Sina, and Sohu.”

Barron’s exposed this statement as being false. A Hong Kong-based accounting professor

Barron’s consulted refuted this statement with respect to PWRD, SINA, SOHU, and QIHU

(which NQ also cited as an example of classifying all cash as Level 2). Management made false

statements because it is still unable to explain why all of its cash was classified as Level 2.7,8

Lie #7: NQ’s payment portal works fine.

NQ rejected our statement that we had attempted to use its payment portal 59 times – all without

success. If NQ’s payment portal is now functioning, it is solely because NQ is trying to salvage

its fraud.

Gavin Kim on conference call: “During our test, we’re able to successfully subscribe to

our service using Alipay on exactly the website that Muddy Waters referred to.”





Page 7 of 11

We have video of all 59 unsuccessful payment attempts, which we intend to share with the SEC.

Alipay customer service was unable to pay through NQ’s payment portal.

Our attempts to pay through Alipay caught NQ in another lie. NQ has listed Alipay as a


However, Alipay denied having any cooperation with NQ. The call transcript follows.

MW: 我在你们的一个合作商买东西但是




I was trying to buy something from one of

your vendors and every time I try to pay it

is not successful. So I want to check to see

if this is really one of your vendors.

[Alipay Customer Service requests Alipay account details, etc.]

Alipay: 你这边现在需要我们查询什么东西


What is it that you are asking us to check?





I want to check, that is, its your, its an

outside vendor, its not on Taobao, it’s a

completely independent company.

Alipay: 那我们这边要通过你的支付宝的账



We need to go through your Alipay

account to check, only this way can we

check the other parties details.

[Alipay Customer Service requests Alipay account details again, asks whether purchase order

was issued, etc.]

Alipay: 你们这边有没有下订单? So you do you have a purchase order?

MW: 我这边不是下订单的形式。我就是在




I’m not using a purchase order, I’m on their

website, following their payment process

step by step, or can you just help me to

check their website?

Alipay: 网站的话,我们。。。 Website? We…

MW: 你记一下 Please note it, its

Alipay: 是pay 吗? Its “pay”?

9 NQ_Mobile_Investor_Presentation_20130528, p. 13

Page 8 of 11

MW: 对,pay。 Yes, “pay”.

Alipay: 然后呢? and afterwards?

[MW provides exact website to Alipay Customer Service。 Alipay Customer Service spends

sometime looking into her computer]

Alipay: 不好意思小姐,这个帐户,哦,这


Miss, I’m sorry, this account, um, this

company is not one of our partnering


MW: 能看到什么?那个网站是显示网秦


What do you see? Is the website showing

it is NetQin’s?

Alipay: 网站啊? Website?

MW: 对网站名字,是网秦吗? Right, the website, is it NetQin’s?

Alipay: 我这边查不到网站,前面有三个w的


I cannot find the website, are there three

w’s in the front?

MW: 前面没有,是http://pay. Not in the front, the front is http://pay.

Alipay: 哦,网秦,


Oh, NetQin, I see it. NetQin is not one of


MW: 哦,不是合作商户,是吗? Oh, its not one of your partnering

merchants, is that right?

Alipay: 这个不是合作商户。 Its not one of our partnering merchants.

MW: 但是,就是能看到你们的logo上面,




But, it’s just that you can see your logo on

their page, you click “purchase packages”

then go in, just pick one of the items, and

then next you can see your logo on the


Alipay: 那一个logo啊? Which logo?

MW: 就是你们支付宝的logo,你看你已经



Your Alipay logo, did you already click

through? Afterwards you pick “purchase

package”, “buy a package”

Alipay: 这个应该是他们自己的网站,不是


This is the company’s own website, it is not

part of our business.

MW: 哦,对,我知道,这个跟你们一点




Oh, yes, I know, this issue has nothing to

do with you, just can you follow along with

me, just click through these two steps, that

is “purchase a package” and “buy now”?

Alipay: 我这边点了,但没有任何反应。 I clicked it, but I don’t see any result.

MW: 没反应,然后拉到最后,就是出现




No result? Than go to the end, when you

get to a lot of online banking payment and

other payment options, then you can see

your Alipay. They are not your vendor but

they have your logo on their site?

Page 9 of 11

Alipay: 啊,那么应该不是我们这边呢。确实



Ah, they shouldn’t be one of ours, although

this is our “Alipay”, but this is not one of

our accounts.

MW: 所以说我用一个支付宝肯定是没法


Then that’s to say using Alipay absolutely

will not work to make a payment, they are

not one of your partnering merchants?

Alipay: 那是的。 That right.

MW: 哦,我知道,谢谢。 Oh. I understand. Thank you.

Lie #8: NQ Antivirus 7.0 is not Scare Ware.

NQ lied about AV 7.0 and its false virus discovery messages. The fact is that NQ’s 3-15 DNA

permeates everything it does (as DNA has a tendency to do). NQ is attempting to trick

consumers into thinking its product is useful.

Gavin Kim on conference call: “Next I’ll turn my attention to Virus Broadcast data. The

report claims that NQ is attempting to trick users by sharing the latest two viruses

reported in a feature called Virus Broadcast. Unfortunately, the report simply does not

understand what the function is intended to do. To be clear, on installation, NQ Mobile

Security 7.0 preinstalls a virus database on the device. With that installation, NQ also

prepackages the latest Virus Broadcast feed which is for informational purposes as well.

Packaging this with the installation file avoids then for the user to have to separately

download another file after install. This is a free service for users to see what the latest

viruses are that have been recorded in our database globally. It is not specific to any

particular users’ device. So on installation, Virus Broadcast will the show the user the

latest two viruses in the Virus Broadcast at the point of installation. After the database is

updated, the Virus Broadcast will update as well with the latest information.”

When a user installs NQ, the app immediately tells the user that NQ just discovered two new

viruses on the exact date of installation. However, its app has been broadcasting this message to

users for months, giving them the impression that NQ’s virus analysis lab is always catching new

viruses, and updating (paying) apps in real time. As we discussed in our report on pp. 44-45, the

only reports on the internet of these two viruses are from NQ press releases, leading us to

strongly suspect that they are not real.

Page 10 of 11

Lie # 9: NQ is not responsible for enormously overstating its market share.

On the call, NQ fumbled quite a bit when challenged about our survey results that show it has

only 1.4% market share. However, it clearly tried to distance itself from the huge overstatements

of market share. We do not believe NQ can evade liability for these statements – it is clear to us

that NQ deliberately materially misrepresented market share to investors, regardless of whether

the estimates came from third parties that NQ engaged.

Gavin Kim on conference call: “Now going back to your earlier question about market

shares, currently, our company don’t make independent assessment of our market share.

In fact, we never disclosed a single report that’s coming from the company on our market


In NQ’s prospectus, it cited a Frost & Sullivan study (that we are confident NQ paid for) as

evidence that it had 67% market share at the time it went public. On its Q2 2013 conference call,

management stated that NQ’s market share of the China mobile security marketplace was

approximately 53%.

It turns out that our 1.4% market share results were pulled from three cities (one Tier 1, one Tier

3, and one Tier 4) in NQ’s best markets. On the conference call, NQ’s Chairman Lin revealed

NQ’s strongest provincial markets: Guangdong, Jiangsu, Henan, and Zhejiang. We surveyed

Shenzhen in Guangdong, and Ningbo and Huzhou in Zhejiang. We believe the previous market

share misstatements alone are possibly 10b-5 violations.

Omar Khan seemed unable to identify these markets, so Chairman Lin spoke through a

translator. Once again, Mr. Khan showed that he has no command of NQ’s core operations.

Lie # 10: NQ does not own the trademark infringing domains, such as

On the call, NQ lied about not owning the six domains we identified as infringing the trademarks

of Apple, Vodafone, NTT, HTC, Samsung, and Nokia. This is a clear lie.

Gavin Kim on conference call: “Next, I’ll return my attention to black hat search engine

optimization. NQ unequivocally refutes the allegations filed in the report that NQ owns

the domain addresses referenced in the report. NQ will share our complete list of domain

addresses that NQ owns and uses in our business globally to those who would like to

conduct their own due diligence on our business. The natural question that may be asked

then is what is for owners of these domain names to redirect traffic to NQ? It is our

hypothesis that individuals or companies are interested in selling these domain names to

NQ after demonstrating that they are successfully delivering page views.”

We are comfortable that NQ owns those domains for three reasons.

Page 11 of 11

1. Five of the six domains were registered by the same Beijing-based registrar: Hichina

Zhicheng Technology Ltd. This is the same registrar NQ used for its website for the

anonymous calling cards (unaddressed in the call), (Hichina is

located in the same district of Beijing as NQ.) The person who registered the domains

listed the same postal code as NQ.

2. As a security company, it would be unusual for NQ to not scan for redirects and identify


3. NQ would never be permitted to buy trademark infringing domains from someone trying

to sell them. A company that is really trying to be respected in the mobile world would

immediately notify Samsung (or whichever company) of the sale offer, and provide all

information it has related to the domain owner. This process would actually be triggered

by a routine scan that found the redirects.

A final thought for the class action attorneys. As you investigate NQ, it might be worthwhile

to also look at Wedge Partners, Matt Mathison, Toro Investment Partners, and “Treasure Hunter”

( handle).__

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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