What happened
Shares of NQ Mobile (NYSE: NQ) have plunged today, down by 20% as of 2:40 p.m. EST, after a negative report was published on Seeking Alpha by user Rota Fortunae. The article alleges that the company has made undisclosed transfers of subsidiaries to its Chairman Wenyong Shi, and sets a price target of $0.
So what
After repeated efforts to divest its FL Mobile subsidiary, NQ completed the sale in December to Tongfang, but the author believes that Tongfang "is controlled by NQ insiders and therefore NQ sold FL Mobile and Showself to insiders." The article extensively cites business records and other regulatory filings to support the allegation, which would be troubling as it could expose public shareholders of NQ to significant risk.
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Additionally, Tongfang may not have sufficient cash on hand to cover the cost of the $500 million deal. One previous attempt to sell FL Mobile had attracted scrutiny from the SEC.
Now what
Meanwhile, NQ has $220 million in convertible debt coming due later this year, but the author believes NQ may have trouble meeting this obligation since its accounting of cash may be questionable. Some of what NQ considers cash and cash equivalents may in fact be short-term debt that is relatively illiquid.
Also of potential concern is that the convertible debt was issued as a way to refinance prior debt obligations, but at a much higher interest rate of 8%. NQ chose to refinance this debt at higher rates instead of paying it off with cash on hand, potentially supporting the thesis that NQ's cash is tied up. The author discloses holding a short position, and Rosen Law Firm has announced a class-action lawsuit to investigate the allegations.
