On May 15, the extension ended for NQ Mobile's (NYSE: NQ) 20-F filing. Investors have been waiting patiently for the auditor's report confirming that the company's business practices conform to accepted accounting principles, which should appear in the company's 20-F filing. By itself, the late filing should not present a substantial problem but if accounting controls are the source of the delay, the company could be delisted from the NYSE causing another leg down for the share price.
Prior to the open on May 15, NQ issued a press release stating that it needs additional time to complete its end of year financial statements. Now the company runs the risk of receiving a delisting notice. According to NYSE's "Listed Company Manual," factors which may lead to a company's delisting include: 1) Unsatisfactory financial conditions and 2) an audit opinion that is anything other than Unqualified.
On March 13, we published an article titled: "NQ's Earnings Matter Less Than the Auditor Report" and received very negative feedback from highlighting the risks associated with this investment. The problem in this situation is that confidence is more important than product quality. If a basic level of trust in the management team and accounting discipline is not present, professional investors cannot own the shares.
Best case: restatement, worst case: delisting
The best case scenario at this point is that the company files its 20-F with a restatement of the prior year's earnings and wipes the slate clean. Depending on how severe the impact is on profitability, shares could sell off or they could rally sensing the bad news is over. However, If the 20-F does not receive an unqualified opinion, the exchange could begin the delisting process which would shift the company's shares to either the OTC bulletin board or the Pink Sheets. This is viewed as the first step in a Chapter 11 bankruptcy and few institutional investors would continue to hold their shares. Under the second scenario, it is very likely that there would be another substantial sell off even from the current depressed level.
What is an audit opinion?
An audit opinion is expressed on audited financial statements by a reputable independent accounting expert. According to the AICPA, an audit opinion is a statement "that generally accepted accounting principles have been followed, that they have been applied on a basis consistent with that used the preceding year."
Types of audit opinions:
Within the audit opinion, there are four key terms that describe the status of the company's accounting controls:
- Unqualified opinion -- The unqualified opinion has no reservations concerning the financial statements. This is also known as a clean opinion meaning that the financial statements appear to be presented fairly.
- Qualified opinion -- This means that the auditor has taken exception to certain current-period accounting applications or is unable to establish the potential outcome of a material uncertainty.
- Disclaimer opinion -- This is a special type of audit report that should be issued when the auditor permits his or her name to be associated with financial statements that were not examined in accordance with generally accepted auditing standards.
- Adverse opinion -- This is a type of audit opinion, which states that the financial statements do not fairly present the financial position, results of operations, and changes in financial position, in conformity with generally accepted accounting principles.
Sequence of events:
October 24, 2013 -- Muddy Waters initiated coverage of NQ Mobile with a strong sell rating accusing the company of accounting fraud.
November 1, 2013 -- NQ Mobile announced that the firms of Shearman & Sterling and Deloitte & Touche would be retained to perform an independent review and assist the company on legal and forensic accounting issues.
April 30 -- the company provided a status report on independent investigation of short-seller allegations saying "The Investigation Team has thus far found no evidence that the Company engaged in the fraudulent conduct".
Even though the auditors did not find any fraudulent conduct, NQ was not prepared to file its 20-F for 2013 in the four-month timeframe that was required. Instead, the firm filing a NT-20F requesting an additional 15 days to file. That would be today but since Chinese markets are closed, it is not expected to make the revised deadline.
May 15 -- NQ announced that it needed additional time to complete its 20-F and would miss its deadline.
