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MW_NQ_10242013.pdf

MW_NQ_10242013.pdf

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MW_NQ_10242013.pdf
MW_NQ_10242013.pdf

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Published by: zerohedge on Oct 24, 2013
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MuddyWaters,LLC
www.muddywatersresearch.com
info@muddywatersresearch
DirectorofResearch:CarsonC.Block,Esq.
 Terms of Service:
By downloading from, or viewing material on, this website you agree to the following Terms of Service. You agree that use of Muddy Waters LLC’sresearch is at your own risk. In no event will you hold Muddy Waters LLC or any affiliated party liable for any direct or indirect trading losses caused byany information on this site. You further agree to do your own research and due diligence before making any investment decision with respect tosecurities covered herein. You represent to Muddy Waters that you have sufficient investment sophistication to critically assess the information,analysis and opinion on this site. You further agree that you will not communicate the contents of this report to any other person unless that personhas agreed to be bound by these same terms of service. If you download or receive the contents of this report as an agent for any other person, youare binding your principal to these same Terms of Service.
 You should assume that as of the publication date of our reports and research, Muddy Waters, LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients and/or investors and/or their clients and/or investorshas a short position in all stocks (and/or options, swaps, and other derivatives related to the stock) and bonds covered herein, and thereforestands to realize significant gains in the event that the price of either declines. We intend to continue transacting in the securities of issuerscovered on this site for an indefinite period after our first report, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation
.This is not an offer to sell or a solicitation of an offer to buy any security, nor shall Muddy Waters offer, sell or buy any security to or from any personthrough this site or reports on this site. Muddy Waters, LLC is not registered as an investment advisor in any jurisdiction.If you are in the United Kingdom, you confirm that you are accessing research and materials as or on behalf of: (a) an investment professional fallingwithin Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "FPO"); or (b) high net worth entity falling within Article 49 of the FPO.Our research and reports express our opinions, which we have based upon generally available information, field research, inferences and deductionsthrough our due diligence and analytical process. To the best of our ability and belief, all information contained herein is accurate and reliable, and hasbeen obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered hereinor who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented “as is,” without warranty of any kind, whether express or implied. Muddy Waters, LLC makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. Further, any report on this site contains a very largemeasure of analysis and opinion. All expressions of opinion are subject to change without notice, and Muddy Waters, LLC does not undertake toupdate or supplement any reports or any of the information, analysis and opinion contained in them.You agree that the information on this website is copyrighted, and you therefore agree not to distribute this information (whether the downloaded file,copies / images / reproductions, or the link to these files) in any manner other than by providing the following link:http://www.muddywatersresearch.com/research/. If you have obtained Muddy Waters research in any manner other than by download from that link,you may not read such research without going to that link and agreeing to the Terms of Service. You further agree that any dispute arising from your use of this report and / or the Muddy Waters Research website or viewing the material hereon shall be governed by the laws of the State of California,without regard to any conflict of law provisions. You knowingly and independently agree to submit to the personal and exclusive jurisdiction of thesuperior courts located within the State of California and waive your right to any other jurisdiction or applicable law, given that Muddy Waters, LLC hasoffices in California. The failure of Muddy Waters, LLC to exercise or enforce any right or provision of these Terms of Service shall not constitute awaiver of this right or provision. If any provision of these Terms of Service is found by a court of competent jurisdiction to be invalid, the partiesnevertheless agree that the court should endeavor to give effect to the parties’ intentions as reflected in the provision and rule that the other provisionsof these Terms of Service remain in full force and effect, in particular as to this governing law and jurisdiction provision. You agree that regardless of any statute or law to the contrary, any claim or cause of action arising out of or related to use of this website or the material herein must be filed withinone (1) year after such claim or cause of action arose or be forever barred.
Use of Muddy Waters reports is limited by the Terms of Service on its website, which are asfollows. To be authorized to access such reports, you must agree to these terms, regardless of whether you have downloaded its reports directly from this website or someone else hassupplied the report to you without authorization from Muddy Waters.
Page 1 of 81
 
 
 .
NQisamassivefraud.Webelieveitisa“Zero”.Atleast72%ofNQ’spurported2012Chinasecurityrevenueisfictitious.NQ’slargestcustomerbyfarisreallyNQ.OurresearchestimatesthatNQ’srealmarketshareinChinaisonlyabout1.5%,versustheapproximately55%itreports.WeestimatethatitsChinapayinguserbaseislessthan250,000,versusthesixmillionNQclaims.
NQ’sAntivirus7.0isunsafeforsaletoconsumers,andweconsiderittobespywarethatmakesusers’phonesvulnerabletocyberattack.NQmakesaweakattempttoprotectusers’privatedataasit’suploadedthroughtheChinesegovernment’sfirewalltoNQ’sserver.PhonesarevulnerabletoMITMattacksbecauseNQfailstoadheretobasicsecurityprotocols.MWengagedtop-flightsecuritysoftwareengineerstoanalyzethisproduct.
NQ’spurportedinternationalrevenueof$36.5millionislikelylessrealthanitsPRCrevenue.NQclaimstogenerateinternationalrevenueinobscuremarkets,andthroughmysteriouscounterpartiesthatseemtoseldompay.
NQ’sfutureisasbleakasitspast.TherecentpivottoadvertisingandgamingismerelyanattempttochangetoafraudthatNQhopeswillbelessobvious.NQcannotmonetizeusersthatitdoesnothave.
NQ’sacquisitionsarehighlylikelytobecorrupt.
NQ’scashbalancesarehighlylikelytonotbereal.InNQ’s201220-F,PwCclassifiedallcashandtermdepositsasLevel2assets(slightlyhardtovalue),whichisthefirsttimewehaveseenthis.NQ’spurportedmovementsofcashfromitsIPOalmostcertainlydidnotoccurduetoPRCFXcontrols.Wethereforebelievethetermdepositsarelikelyforgeries.
 
Company:
NQMobileInc.
Ticker:
NQ
Industry:
MobileSecurity
Thesis:
StrongSell
ReportDate:
October24,2013
TargetPrice:
<$1
StockPrice:
$22.88
MarketCap:
$1.1Billion
Float:
31.1Million
 AvgVolume:
4.9Million
Page 2 of 81
 
NQ Mobile: China Fraud 2.0
 NQ is a massive fraud. We believe it is a “Zero”. At least 72% of NQ’s purported Chinasecurity revenue is fictitious. NQ’s largest customer by far is really NQ. Its real business withcarriers and SPs is a fraction of what NQ purports. NQ’s online payment portal does not work – it is cosmetic only, designed to make investors think that NQ is a real company. NQ’s prepaidcard channel is a bad joke. We estimate that NQ’s real market share in China is about 1.5%,versus the approximately 55% it purports. We estimate that NQ’s paying China user base is lessthan 250,000, versus the approximately six million it purports. This fraud and the undisclosedrelated party transactions amount to securities fraud. We have already provided the SEC withinformation concerning NQ. NQ’s Antivirus 7.0 is unsafe for sale to consumers, and we consider it to be spyware. Weengaged a group of top-tier specialized software engineers to dive deeply into the application’scode. The engineers found that the application creates serious vulnerabilities, making users’ phones prone to data compromise and cyber attack by hackers or the Chinese government. Inother words, users phones are much more susceptible to compromise or attack with AV 7.0 thanwith nothing at all. NQ’s applications send far more data than necessary to its server in China.This data includes information on all URLs a user visits and location information (among other sensitive items). The uploaded data is not sent securely (let alone in accordance with industrystandards), despite passing through the Chinese government’s firewall, which is believed to viewand store all passing data. NQ sends this data to a third party analytics firm in China.Downloads are even less secure. The application does not require signature, making the phonehighly vulnerable to third parties uploading malware. Our engineers successfully staged such anattack. After their analysis, the engineers speculated that these vulnerabilities could be deliberate because the techniques vary so widely from industry standards. NQ’s purported international revenue is even more questionable than its PRC revenue. Aleading Android analytics provider estimates that NQ’s global annual app revenue is well unde$1.0 million. NQ generates de minimis revenue in the United States. The agreements NQ hasannounced with various US partners seem to have resulted in attachment rates of only 2% to 3%. NQ’s purported days sales outstanding (“DSO”) from are 198 days– much of which supposedlycomes international revenue. Even in the most emerging of markets, NQ should be getting paidin 30 to 45 days. NQ’s involvement with Telefónica is massively exaggerated. It is one of 3,000developers on Telefonica’s Blue Via platform. No developer has ever been expelled from the platform. NQ’s future is as bleak as its past. Its expansion into gaming and advertising is merely anattempt to prolong the fraud. NQ’s lies about its security app market share have worn very thin,and the Company is trying to hide the ball by switching emphases. Co-CEO Omar Khan offersthe clearest explanation of why NQ’s expansion will fail. If NQ were really a “platform” thathad the lowest user acquisition costs in the world, as Mr. Khan claims, then there could be astrategic basis for the expansion. In reality, NQ’s acquisition costs are closer to being the highestin the world, and it should not be called a “platform” with a straight face. This is merely a wayto claim to be in a business in which NQ hopes its fraud will be less obvious.
Page 3 of 81

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