Business Context and Reporting Period
This Form 6-K filing by China Internet Nationwide Financial Services Inc. (CIFS) covers the month of April 2018. The document announces the completion of an independent investigation by a Special Committee of the Board of Directors regarding allegations made in a December 20, 2017 report by Muddy Waters LLC. CIFS is a financial advisory services company headquartered in Beijing, providing commercial payment, loan, and financing advisory services to small-to-medium enterprises.
Key Financial Metrics
The filing text does not provide specific numerical values for revenue, profit, cash flow, margins, debt, or liquidity for the reporting period. The document focuses on the qualitative verification of past financial reporting rather than presenting new financial statements.
Material Changes and Investigation Findings
The Special Committee investigated eight major allegations and reported the following findings:
- Revenue Consistency: No material inconsistency was found between gross revenue in the Company's books and records and revenue reported in SEC filings. However, the Company admitted to underreporting revenue to the PRC's State Administration of Industry & Commerce (SAIC).
- Loan Verification: Loans to specific borrowers (Beijing Ailirui, Xiamen Jingsu, Fujian Jin Xin, and Cai Long Ge) were verified as real, repaid with interest, and not involving "sham" parties.
- Transaction Verification: Transactions with Xiamen Beiruichen and Xiamen Luye were verified, and relevant revenue was correctly reported in SEC filings.
- Acquisition Validity: The acquisition of Beijing Anytrust Science & Technology Co. Ltd ("Anytrust") was deemed valid. The use of an intermediary was to conceal the Company's public status to avoid price inflation.
- Subsidiary Revenue: Significant 2016 revenue for Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd. was verified as resulting from contract transfers from its parent company to benefit from preferential tax treatments.
- Profit Margins: The Company's 2016 net profit margins were compared to two other NASDAQ-listed PRC financial services companies to establish plausibility.
- Business Divestiture: The former wealth products (P2P) business was sold to a third party approximately two years prior to the IPO; the Company did not mislead investors regarding this.
- Licensing and Structure: The Internet Content Provider (ICP) license was verified, and the Variable Interest Entity (VIE) structure was confirmed as consistent with the Company's strategy for restricted foreign ownership sectors.
Outlook, Management Commentary, and Risks
Management stated that the investigation was tailored to the specific allegations and is not equivalent to an independent audit. In response to the findings, the Company plans to implement measures to improve operations, compliance, and internal controls. These measures include enhanced corporate policies for acquisitions and a requirement to reconcile reports filed with the SAIC against those filed with the SEC. The filing includes standard forward-looking statement disclaimers regarding risks and uncertainties that could cause actual results to differ from expectations.
Key Facts for Investor Verification
- Verify the extent of revenue underreporting to the PRC's SAIC versus SEC filings.
- Confirm the implementation timeline for the new internal controls regarding SAIC/SEC reconciliation.
- Review the specific terms of the Anytrust acquisition to understand the intermediary fee structure.
- Assess the impact of the tax-driven contract transfers on the Kashgar SYX subsidiary's financial history.
- Monitor future filings for any updates on the Company's compliance status with Chinese regulatory bodies.