Behind the investigation of Amethyst Storage: the prepayment in the first year of listing surged by 2.5 times The market questions continued

Science and Technology Innovation Board Daily (Beijing, reporter Guo Hui) news, Amethyst Storage (688086. SH) recently issued an announcement that the company was investigated by the China Securities Regulatory Commission for suspected violations of laws and regulations on information disclosure.

The reporter of "Science and Technology Innovation Board Daily" noted that as early as the first inquiry letter was received after the listing of Amethyst Storage, the market discussed whether it was suspected of financial fraud. "Since the pilot registration system of the science and technology innovation board in 2019, accounting documents 'should be audited' have gradually become the basic requirements for information disclosure in the securities market, of which the responsibility of accountants is prominent," said a legal person, "the CSRC chose to file a case to investigate or show that it has a certain number of facts, but it is not appropriate to make a conclusion before the final results come out, and there are still many possibilities of violations of the letter."

The auditor's concerns have also been the focus of regulatory attention since then, one of which has been on the supplier side. After the listing of Amethyst Storage, it paid a large amount of advance payments to a number of suppliers in 2020, an overall increase of 250.50% over the previous year. Amethyst Storage's response shows that many of these suppliers are working together for the first time, and there are many project periods that have not progressed smoothly afterwards.

The second is in the downstream customer. Amethyst Storage immediately adjusted its business model after its listing, and then not only did the accounts receivable with an age of more than one year at the end of 2020 increase significantly compared with the previous year, but there were a number of participating companies in the arrears; at the same time, the business structure and revenue capacity also changed imperceptibly.

As early as 30 April 2021, the SSE issued an inquiry letter to Amethyst Storage on the audit institution's opinion, requesting it to make a supplementary disclosure. After that, the SSE also issued consecutive inquiry letters on the information disclosure in Amethyst Storage's 2020 annual report and the first half of 2021 financial report.

Large advance payments contain internal control and letter phimps

Amethyst Storage was listed in February 2020, and the company's 2020 annual report shows that the prepayment for that year was as high as 136 million yuan, which means that the prepayment in less than one year of listing increased by 252.50% year-on-year. It includes 78.2344 million yuan of technical development costs and 42.0719 million yuan of prepaid equipment.

Fong's accounting firm argued that Amethyst Storage did not provide sufficient information and information on the above-mentioned advance payments and the commercial reasons for the entrusted R&D transactions, and therefore could not obtain sufficient and appropriate audit evidence on the commercial substance of the above-mentioned advance payments, entrusted R&D expenses and operating costs.

From the perspective of regulatory inquiries, in the case of an unusual surge in advance payments, at the audit and credit compliance levels, companies need to clarify the commercial substance of cooperation with suppliers and exclude the existence of related relationships or special interest arrangements between the two parties.

In 2020, Amethyst Storage signed cooperation agreements with 9 software suppliers in order to participate in two government projects with Unicom and Telecom in "Orange Heart Online" and Guangmei Industrial Park Smart Park in Xinfeng County, Ganzhou City, Jiangxi Province. However, until March 2021, there was no clear progress on the above projects.

Therefore, according to Amethyst Storage, it decided to negotiate with 9 suppliers to terminate the contract and recover the payment. At the time when the negotiation was unsuccessful, Amethyst Storage selected and introduced two companies as new partners for the above-mentioned government projects, which was equivalent to finding the receivers of these 9 suppliers, and finally received refunds from suppliers.

Not only that, Amethyst Storage also prepaid more than 40 million equipment in the form of commercial paper at the end of 2020 - that is, two 100G second-hand production lines. Its procurement, formation and production, like the procurement of technology development, have not progressed smoothly.

Due to the internal decision-making process of the production line seller AVIC Yuming exceeding expectations, the equipment original manufacturer German SINGULUS was slowly affected by the epidemic, which together led to the delivery of 2 100G production lines lagging behind the contract.

The supplier of the production line is Zhongjie Weiye, who has previously established a cooperative relationship with Amethyst Storage. However, Amethyst Storage disclosed that during the period, it also handled the import and export affairs and contract signing work of Shengli Machinery, Guangdong Deli and other companies, and the relevant payments were paid by Zhongjie Weiye. At present, Amethyst Storage has paid a 65% advance payment for one of the 100G second-hand production lines according to the agreement, and the other 100G second-hand production line has only paid a partial advance payment.

According to Amethyst Storage, the 9 suppliers involved in the technology development advance payment of 78.2344 million yuan at the end of 2020 are all first-time cooperation, and there are multiple related relationships among the 9 suppliers. Three of these companies, Anhui Baoxin, Anhui Xunhu and Anhui Renhao, have carried out large transactions with Amethyst Storage for the first time, and have jumped to the top five suppliers of Amethyst Storage Software in their 2020 financial reports.

It is worth noting that the technology development fees of the above-mentioned 9 suppliers in advance and the prepaid equipment for the new production line are paid in full to the suppliers in the form of commercial paper. Among them, the balance of bills payable for technology development fees at the end of 2020 is 111 million yuan.

Amethyst Storage admitted that in addition to the smooth progress of the project, another reason why the company chose to terminate the contract with 9 suppliers was that the acceptance draft corresponding to the above-mentioned procurement advance payment was about to expire. That is to say, after prepaying the technical development costs, Amethyst Storage once fell into the dilemma of project stagnation and difficulty in obtaining project sales revenue, and acceptance bills were about to expire.

In the reply to the inquiry, Amethyst Storage admitted that in the implementation of the internal control system of the above-mentioned advance payment, the company had certain weak defects, including: the approval of the advance payment was not linked to the progress of the project or the procurement progress was appropriately balanced, resulting in a large prepayment.

A number of operating data changes suddenly

Since 2019, the amethyst storage business model has gradually explored mixed reform with local high-quality state-owned enterprises, and expanded local government disaster preparedness center projects by way of equity participation or holding. Under this model, Amethyst Storage's customers have changed from previous system integrators, third-party data center operators, telecom operators, end customers, etc., to shareholding companies or related parties, selling optical storage devices and solutions to them.

In 2020 alone, Amethyst Storage added three participating companies and customers, and in the first half of 2021, it developed a number of data center projects in Yunnan, Shijiazhuang, Shenzhen-Shantou and Haikou. As its business continues to grow and requires the continuous expansion of new customer bases, it is likely that the future business of the participating companies will be further expanded.

Among the customers of Amethyst Storage, there are also multiple related cases in which multiple customers are directly or indirectly held by the same shareholder. Haikou Ruihua Yuanxing Technology Co., Ltd. is the second largest customer of Amethyst Storage in 2020. According to the industrial and commercial information, Guangzhou Dahao Enterprise Management Co., Ltd. indirectly holds a certain equity interest in it, and also directly or indirectly holds a certain equity in 4 amethyst storage participating companies such as Shulian Zichen, Amethyst Tianzhong, Dadi Amethyst and Zhonghong Amethyst.

It is worth noting that at the end of 2020, three of the top ten debtors of accounts receivable are related parties of Amethyst Storage, including the above-mentioned Shulian Zichen and Amethyst Tianzhong.

Amethyst Storage's 2020 annual report shows that the book balance of accounts receivable at the end of the period was 684 million yuan, and the balance of bad debt provision was 64.8598 million yuan. Among them, the balance of accounts receivable with an age of more than one year was 283 million yuan, accounting for 41.40%, a substantial increase over the previous year. The 2021 semi-annual report further shows that the large amount of receivables of Amethyst Storage to the participating companies and related parties at the end of the period has not been recovered. In the third round of inquiries issued by the SSE, it asked it to explain whether the participating companies had the ability to repay their receivables.

With the adjustment of Amethyst Storage's post-listing business model, its business structure and revenue capacity have also undergone significant changes.

In the first half of 2021, for example, the composition of Amethyst Storage's technology solution business decreased from 63.88% in the same period of the previous year to 13.78%, mainly due to the seasonal factors, project characteristics, customer development and other factors in the enterprise market business. In 2020, Amethyst Storage announced that due to customized services to enterprise customers, there are certain differences in the pricing of products and services mined from different projects, and the gross profit margin of the technology solution business has dropped by 10.74% compared with the previous year.

The change in a number of operating indicators finally ushered in a big dive in Amethyst Storage's 2021 performance. On January 29, 2022, Amethyst Storage released a performance forecast saying that it expects to achieve a net profit attributable to shareholders of listed companies in 2021 of 6.5 million yuan to 9.75 million yuan, which will decrease by 97.2764 million yuan to 94.0264 million yuan compared with the same period last year.

In addition, the doubts about Amethyst Storage customers are that its fourth largest customer in 2020, Guangdong Weilan Data Information Co., Ltd., is located on different floors of the same office building as Guangzhou Amethyst Storage Technology Co., Ltd., a subsidiary of Amethyst Storage. In 2019, Amethyst Storage sold more than 50 million yuan of storage devices to Azure Data and its subsidiary Beidou Education.

Last year, more than 40 listed companies in A-share were investigated for letter phi"

According to the data of Star Mine, more than 40 A-share listed companies in 2021 were investigated by the CSRC for letter violations, and most of the cases are still in the investigation stage, and there is still no conclusion.

However, the 2020 case handling situation released by the CSRC shows that there were 84 new cases of letter violations in 2020, and the investigation showed that a total of 33 of them involved financial fraud. In the information note, the CSRC emphasized that the financial fraud of A-share listed companies shows such a trend: first, the area of the case is extended to the IPO, continuous information disclosure, mergers and acquisitions and restructuring, and secondly, the motives for fraud and the means of fraud are more complicated, and there is a mixture of financial fraud and illegal guarantees.

A number of industry experts interviewed by the "Science and Technology Innovation Board Daily" reporter believe that the amethyst storage case is full of doubts, first of all, it is to pay the full advance payment for the first time with a number of suppliers. Lu Xiaohui, an expert at whale platform think tank, partner of Heheng Consulting and certified public accountant, said that this is obviously not in line with business logic, "usually only part of the advance payment should be paid, and then paid in batches according to the progress, especially for the first cooperation should be more cautious."

Liu Siqi, a young scholar at the University of Manchester, said that under the premise that there is a risk of uncertainty in the supplier contract, the advance payment of prepaid technology development fees and prepaid equipment may have the behavior of lending funds to related suppliers, which may harm the interests of minority shareholders.

In addition to exposing the problems existing in the internal control of enterprises, Ma Baobao, an expert at whale platform think tank and a lawyer at Xi'an Hongrui Law Firm, introduced that the surge in advance payment is generally also a manifestation of a company's credit level and even a decline in its operating ability, and the actual situation of an enterprise in the upstream and downstream of the industry is usually more accurate.

After the change in business model, AME STORAGE's downstream customers have added a number of new shareholding companies, and the above transactions do not constitute related party transactions under the rules according to the circumstances listed in Chapter 15.1 (14) of the Shanghai Stock Exchange Rules that constitute related parties of the listed company. Amethyst Storage said it only chose to list its participating company customers as other related parties in its 2020 annual report from a prudent point of view under accounting standards.

Ma Baobao said that the purpose of expanding local government projects in the form of shareholding companies is usually to solve the problems that are limited by the scale and reputation of enterprises, and are at a disadvantage in government project bidding, so enterprises will choose to provide technology and share in a company, binding with resource parties.

However, Certified Public Accountant Lu Xiaohui believes that the actual operational ability and payment ability of the related party as a customer in the incident are doubtful, and there is also the suspicion of fictitious income through related parties, which will become the focus of the CSRC's investigation.

"For investors, many initiatives are already 'Minglei' signals." Lu Xiaohui said that according to the new delisting regulations, from the perspective of financial indicators - two consecutive years of losses and revenues of less than 100 million, Amethyst Storage does not meet the delisting requirements, but if the investigation finds financial fraud, according to the severity, it may still trigger the delisting.