Business Context and Reporting Period
Company: China Internet Nationwide Financial Services Inc. (CIFS)
Filing Type: Form 6-K (Unaudited Financial Results)
Reporting Period: Six months ended June 30, 2018
Filing Date: September 17, 2018
CIFS operates as a financial services provider in China, offering intermediary bank loan advisory, commercial payment advisory, international corporate financing, and factoring services. The company is actively transitioning from a traditional financial service provider to a FinTech company through the acquisition of Beijing Anytrust Science & Technology Co., Ltd. and significant investments in big data and artificial intelligence.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Revenue | $11,419,246 | $7,973,214 |
| Gross Profit | $11,040,370 | $7,790,700 |
| Gross Margin | 97% | 98% |
| Operating Income | $3,308,373 | $7,152,545 |
| Operating Margin | 29.0% | 89.7% |
| Net Income | $6,850,140 | $8,239,154 |
| EPS (Basic & Diluted) | $0.31 | $0.41 |
| Cash and Cash Equivalents | $16,300,063 | $27,165,262 |
| Net Cash Used by Operations | ($5,952,280) | $11,602,701 |
| Total Assets | $79,876,829 | $79,203,411 |
| Total Liabilities | $2,845,715 | $8,087,635 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 43% year-over-year, driven primarily by a 163% surge in intermediary bank loan advisory services ($5.43M vs $2.07M) and a 51% increase in international corporate financing advisory services.
- Operating Expense Surge: Total operating expenses increased 1,112% to $7.73M.
- General & Administrative (G&A): Increased 793% to $5.46M due to staffing costs (headcount rose from 32 to 183), new office rentals, and a one-time $1.70M consulting fee for an internal investigation following a Muddy Waters report in December 2017.
- R&D Expenses: Increased from $0 to $1.57M as the company invested in its FinTech division and acquired Anytrust.
- Selling & Marketing: Increased 2,540% to $694k to enhance brand image.
- Profitability Decline: Despite revenue growth, Net Income decreased 17% to $6.85M, and Operating Income dropped 54% to $3.31M due to the significant rise in operating expenses.
- Cash Flow Reversal: The company shifted from generating $11.6M in operating cash flow in 2017 to using $5.95M in 2018, largely due to increased operational spending and investments.
- Interest Income: Interest income from loans to third parties increased 126% to $3.28M, contributing significantly to net income.
Guidance, Outlook, and Risks
- Strategic Pivot: Management is committed to transforming into a FinTech company. Key initiatives include the "Anyinfo" big data platform, the "Intelligent Research Platform" (IRP), and the "Hurley Sea" supply chain financing system.
- Future Investments: The company expects to continue making substantial investments in new technologies and IT professionals to support FinTech product development.
- Dividend Restrictions: PRC laws and regulations restrict the ability of the company's PRC subsidiaries and VIEs to transfer net assets to the parent company in the form of dividends, loans, or advances. Dividends can only be paid from retained earnings determined under PRC GAAP, and 10% of after-tax profit must be appropriated to a statutory reserve fund.
- Forward-Looking Statements: The filing contains forward-looking statements regarding future results and strategy. Actual results may differ materially due to risks described in the company's Annual Report on Form 20-F.
Investor Verification Checklist
- Expense Sustainability: Verify if the 793% increase in G&A expenses (specifically the $1.7M investigation fee and new office rentals) represents a one-time cost or a new baseline for ongoing operations.
- FinTech ROI: Assess the timeline for monetization of the $1.57M R&D investment and the newly launched FinTech platforms (Anyinfo, IRP, Hurley Sea).
- Cash Burn Rate: Monitor the reversal in operating cash flow from positive to negative ($5.95M used) and its impact on the $16.3M cash balance.
- Revenue Concentration: Note that 47.6% of revenue came from intermediary bank loan advisory services to only 15 customers; verify the stability of these client relationships.
- Dividend Policy: Confirm the practical ability to repatriate profits from PRC subsidiaries given the statutory reserve requirements and regulatory restrictions.