UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of July 2021

 

Commission File Number: 001-36206

 

BIT Mining Limited

 

Units 813 & 815, Level 8, Core F,

Cyberport 3, 100 Cyberport Road,

Hong Kong

(852) 2596 3068

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F x           Form 40-F ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes ¨           No x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

 

 

 

 

 

 

TABLE OF CONTENTS

 

SIGNATURE

EX-99.1

EX-99.2

EX-99.3

EX-99.4  

 

 

 

 

TABLE OF CONTENTS

 

Exhibit 99.1 – Loto Interactive Limited Audited Consolidated Financial Statements for the Two Years Ended 31 December 2019 and 2020

 

Exhibit 99.2 – Blockchain Alliance Technologies Limited Combined Financial Statements As of December 31, 2019 and 2020 and For the Years Then Ended

 

Exhibit 99.3 – Unaudited Pro Forma Combined Financial Information

 

Exhibit 99.4 – Risk Factors

 

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    BIT Mining Limited
     
     
    By:  

/s/ Xianfeng Yang

    Name:   Xianfeng Yang
    Title:   Chief Executive Officer

 

Date: July 30, 2021

 

 

 

Exhibit 99.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOTO INTERACTIVE LIMITED 

乐透互娱有限公司

 

 

 

AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ZHONGHUI ANDA CPA LIMITED 

中 匯 安 達 會 計 師 事 務 所 有 限 公 司

 

 

 

 

 

 

 

INDEPENDENT AUDITOR’S REPORT 

TO THE DIRECTORS OF LOTO INTERACTIVE LIMITED
(Incorporated in the Cayman Islands with limited liability)

 

OPINION

 

We have audited the consolidated financial statements of Loto Interactive Limited (the “Company”) and its subsidiaries (collectively referred to as the “ Group ” ) set out on pages 5 to 54, which comprise the consolidated statement of financial position as at 31 December 2019 and 2020, and the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the each two years ended 31 December 2020, and notes to the consolidated financial statements, including a summary of significant accounting policies.

 

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2019 and 2020, and of its consolidated financial performance and its consolidated cash flows for each of the two years ended 31 December 2019 and 2020 in accordance with International Financial Reporting Standards ( “ IFRSs ” ) issued by the International Accounting Standards Board (the “ IASB ” ) and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.

 

BASIS FOR OPINION

 

We conducted our audit in accordance with International Standards on Auditing ( “ISAs”) issued by the International Auditing and Assurance Standards Board ("IAASB"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics (“IESBA Code”), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

KEY AUDIT MATTERS

 

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current periods. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

Property, plant and equipment

 

Refer to note 16 to the consolidated financial statements.

 

The Group tested the amount of property, plant and equipment for impairment. This impairment test is significant to our audit because the balances of property, plant and equipment of approximately HK$164,520,000 and HK$263,269,000 as at 31 December 2019 and 2020 is material to the consolidated financial statements. In addition, the Group's impairment test involves application of judgement and is based on assumptions and estimates.

 

- 1 -

 

 

 

INDEPENDENT AUDITOR’S REPORT 

TO THE DIRECTORS OF LOTO INTERACTIVE LIMITED
(Incorporated in the Cayman Islands with limited liability)

 

Our audit procedures included, among others:

 

- Assessing the identification of the related cash generating units; 

- Assessing the arithmetical accuracy of the value-in-use calculations; 

- Comparing the actual cash flows with the cash flow projection; 

- Assessing the reasonableness of the key assumptions (including revenue growth, profit margins, terminal growth rates and discount rates); and 

- Checking input data to supporting evidence.

 

We consider that the Group's impairment test for property, plant and equipment is supported by the available evidence.

 

Goodwill

 

Refer to note 18 to the consolidated financial statements.

 

The Group is required to annually test the amount of goodwill for impairment. This annual impairment test is significant to our audit because the balances of goodwill of approximately HK$10,996,000 and HK$11,703,000 as at 31 December 2019 and 2020 is material to the consolidated financial statements. In addition, the Group’s impairment test involves application of judgement and is based on assumptions and estimates.

 

Our audit procedures included, among others:

 

- Assessing the identification of the related cash generating units; 

- Assessing the arithmetical accuracy of the value-in-use calculations; 

- Assessing the reasonableness of the key assumptions (including revenue growth, profit margins, terminal growth rates and discount rates); and 

- Checking input data to supporting evidence.

 

We consider that the Group’s impairment test for goodwill is supported by the available evidence.

 

Loan receivables

 

Refer to note 24 to the consolidated financial statements.

 

The Group tested the amount of loan receivables for impairment. This impairment test is significant to our audit because the balances of loan receviables of approximately HK$60,881,000 and HK$30,000,000 as at 31 December 2019 and 2020 is material to the consolidated financial statements. In addition, the Group's impairment test involves application of judgement and is based on estimates.

 

Our audit procedures included, among others:

 

- Assessing the Group's relationship and transaction history with the borrower; 

- Evaluating the Group's impairment assessment; 

- Assessing ageing of the debts; 

- Checking subsequent settlements from the borrowers; and 

- Assessing the disclosure of the Group's exposure to credit risk in the consolidated financial statements.

 

We consider that the Group's impairment test for loan receivables is supported by the available evidence.

 

- 2 -

 

 

 

INDEPENDENT AUDITOR’S REPORT 

TO THE DIRECTORS OF LOTO INTERACTIVE LIMITED
(Incorporated in the Cayman Islands with limited liability)

 

Trade receivables

 

Refer to note 25 to the consolidated financial statements.

 

The Group tested the amount of trade receivables for impairment. This impairment test is significant to our audit because the balances of trade receivables of approximately HK$19,949,000 as at 31 December 2019 is material to the consolidated financial statements. In addition, the Group’s impairment test involves application of judgement and is based on estimates.

 

Our audit procedures included, among others:

 

- Assessing the Group’s procedures on granting credit limits and credit periods to customers;

 

- Assessing the Group’s relationship and transaction history with the customers;

 

- Evaluating the Group’s impairment assessment;

 

- Assessing ageing of the debts;

 

- Assessing creditworthiness of the customers;

 

- Checking subsequent settlements from the customers; and

 

- Assessing the disclosure of the Group’s exposure to credit risk in the consolidated financial statements.

 

We consider that the Group’s impairment test for trade receivables is supported by the available evidence.

 

RESPONSIBILITIES OF DIRECTORS FOR THE CONSOLIDATED FINANCIAL STATEMENTS

 

The directors are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRSs issued by the IASB and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the consolidated financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

 

AUDITOR’S RESPONSIBILITY FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

- 3 -

 

 

 

INDEPENDENT AUDITOR’S REPORT 

TO THE DIRECTORS OF LOTO INTERACTIVE LIMITED
(Incorporated in the Cayman Islands with limited liability)

 

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:

 

- Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

 

- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.

 

- Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group ’ s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

 

- Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We communicate with Audit and Compliance Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provide Audit and Compliance Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate treats of safeguards applied.

 

From the matters communicated with Audit and Compliance Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor ’ s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

 

/s/ ZHONGHUI ANDA CPA Limited

Certified Public Accountants 

Wan Ho Yuen 

Audit Engagement Director 

Practising Certificate Number P04309

 

Hong Kong, 30 April 2021

 

- 4 -

 

 

LOTO INTERACTIVE LIMITED

 

 

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

    Notes   2019     2020  
        HK$'000     HK$'000  
REVENUE   8     64,556       382,955  
Cost of sales and service rendered         (51,237 )     (342,213 )
Gross profit         13,319       40,742  
Interest income         8,045       444  
Other income and gains   9     4,705       1,773  
Selling expenses         (1,098 )     (105 )
Administrative expenses         (46,819 )     (75,178 )
Impairment of trade and other receivables         -       (1,905 )
Other expenses         (2,344 )     (4,568 )
Share of losses of associates         (9,415 )     (1,112 )
Finance costs   10     (1,269 )     (448 )
LOSS BEFORE TAX         (34,876 )     (40,357 )
Income tax credit/(expense)   12     105       (2,898 )
LOSS FOR THE YEAR   13     (34,771 )     (43,255 )
OTHER COMPREHENSIVE INCOME                    
Other comprehensive (loss)/income for the year, net of tax:                    
Items that will not be reclassified to profit or loss:                    
Fair value changes of equity investments at fair value through other comprehensive income         (12,696 )     (83 )
          (12,696 )     (83 )
Items that may be reclassified to profit or loss:                    
Exchange differences on translation of foreign operations         1,572       16,727  
          1,572       16,727  
OTHER COMPREHENSIVE (LOSS)/INCOME FOR THE YEAR, NET OF TAX         (11,124 )     16,644  
TOTAL COMPREHENSIVE LOSS FOR THE YEAR         (45,895 )     (26,611 )
(LOSS)/PROFIT FOR THE YEAR ATTRIBUTABLE TO:                    
Owners of the Company         (33,618 )     (46,767 )
Non-controlling interests         (1,153 )     3,512  
          (34,771 )     (43,255 )
TOTAL COMPREHENSIVE (LOSS)/INCOME FOR THE YEAR ATTRIBUTABLE TO:                    
Owners of the Company         (44,678 )     (31,261 )
Non-controlling interests         (1,217 )     4,650  
          (45,895 )     (26,611 )
LOSS PER SHARE ATTRIBUTABLE TO OWNERS OF THE COMPANY (HK cents)   15                
— Basic and diluted         (10.66 )     (14.16 )

 

- 5 -

 

LOTO INTERACTIVE LIMITED

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

AS AT 31 DECEMBER 2019 AND 2020

 

 

    Notes   2019     2020  
        HK$'000     HK$'000  
NON-CURRENT ASSETS                    
Property, plant and equipment   16     164,520       263,269  
Right-of-use assets   17     4,537       6,409  
Goodwill   18     10,996       11,703  
Intangible assets   19     5,655       -  
Investments in associates   21     3,384       2,431  
Investment in a joint venture   22     -       -  
Equity investments at fair value through other comprehensive income   23     5,140       5,057  
Loan receivables   24     -       30,000  
          194,232       318,869  
CURRENT ASSETS                    
Loan receivables   24     60,881       -  
Trade receivables   25     19,949       8,400  
Prepayments, deposits and other receivables   26     41,823       83,018  
Cash and cash equivalents   27     95,030       44,252  
          217,683       135,670  
CURRENT LIABILITIES                    
Trade payables   28     24,300       4,611  
Accruals and other payables   29     24,720       25,734  
Lease liabilities   30     3,747       3,360  
Amount due to holding company   31     1       -  
Amount due to a related company   31     11,380       467  
Tax payable         3,297       7,421  
          67,445       41,593  
NET CURRENT ASSETS         150,238       94,077  
TOTAL ASSETS LESS CURRENT LIABILITIES         344,470       412,946  
NON-CURRENT LIABILITIES                    
Lease liabilities   30     692       3,236  
Deferred tax liabilities   32     1,031       -  
          1,723       3,236  
NET ASSETS         342,747       409,710  
EQUITY                    
Equity attributable to owners of the Company                    
Share capital   33     31,586       37,902  
Reserves   34     298,285       280,764  
          329,871       318,666  
Non-controlling interests         12,876       91,044  
TOTAL EQUITY         342,747       409,710  

 

The consolidated financial statements on pages 5 to 54 were approved and authorised for issue by the board of directors on 30 April 2021 and are signed on its behalf by:

 

Approved by: /s/ Yan Hao   /s/ Zhang Jing
  Yan Hao   Zhang Jing
  Director   Director

 

- 6 -

 

LOTO INTERACTIVE LIMITED

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020 

 

 

    Attributable to owners of the Company              
                                  Equity                          
                Share-based                 investment                 Non-        
    Issued     Share     payment     Other     Exchange     revaluation     Accumulated           controlling        
    capital     premium#     reserve#     reserve*#     reserve#     reserve#     losses#     Total     interests     Total equity  
    HK$'000     HK$'000     HK$'000     HK$'000     HK$'000     HK$'000     HK$'000     HK$'000     HK$'000     HK$'000  
At 1 January 2019     31,459       327,928       12,598       (5,255 )     2,056       126       (4,039 )     364,873       6,279       371,152  
Loss for the year     -       -       -       -       -       -       (33,618 )     (33,618 )     (1,153 )     (34,771 )
Other comprehensive income/(loss) for the year     -       -       -       -       1,636       (12,696 )     -       (11,060 )     (64 )     (11,124 )
Total comprehensive income/(loss) for the year     -        -       -       -       1,636       (12,696 )     (33,618 )     (44,678 )     (1,217 )     (45,895 )
                                                                                 
Issue of ordinary shares upon exercise of share options (Note 33(a))     127       1,266       -       -       -       -       -       1,393       -       1,393  
Equity-settled share-based payment expense (Note 35)     -       -       8,283       -       -       -       -       8,283       -       8,283  
Non-controlling interests arising from establishment of a new subsidiary     -       -       -       -       -       -       -       -       7,814       7,814  
                                                                                 
At 31 December 2019     31,586       329,194       20,881       (5,255 )     3,692       (12,570 )     (37,657 )     329,871       12,876       342,747  
At 1 January 2020     31,586       329,194       20,881       (5,255 )     3,692       (12,570 )     (37,657 )     329,871       12,876       342,747  
(Loss)/Profit for the year     -       -       -       -       -       -       (46,767 )     (46,767 )     3,512       (43,255 )
Other comprehensive income/(loss) for the year     -       -       -       -       15,589       (83 )     -       15,506       1,138       16,644  
Total comprehensive income/(loss) for the year     -        -       -       -       15,589       (83 )     (46,767 )     (31,261 )     4,650       (26,611 )
Issue of shares on placement (Note 33(c))     6,316       9,712       -       -       -       -       -       16,028       -       16,028  
Equity-settled share-based payment expense (Note 35)     -       -       4,028       -       -       -       -       4,028       -       4,028  
Cancellation of share option scheme     -       -       (15,539 )     -       -       -       15,539       -       -       -  
Non-controlling interests arising from increase in paid-up capital     -       -       -       -       -       -       -       -       78,895       78,895  
Loss on deregistration of subsidiaries     -       -       -       -       -       -       -       -       (5,377 )     (5,377 )
                                                                                 
At 31 December 2020     37,902       338,906       9,370       (5,255 )     19,281       (12,653 )     (68,885 )     318,666       91,044       409,710  

 

* Other reserve represents the difference between the adjustment to non-controlling interests and the consideration paid arising in equity transactions.

# These reserve accounts comprise the consolidated reserves in the consolidated statement of financial position.

 

- 7 -

 

LOTO INTERACTIVE LIMITED

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

    2019     2020  
    HK$'000     HK$'000  
CASH FLOWS FROM OPERATING ACTIVITIES                
Loss before tax     (34,876 )     (40,357 )
Adjustments for:                
Equity-settled share-based payment expense     8,283       4,028  
Depreciation     14,357       41,680  
Amortisation of intangible assets     1,063       5,667  
Depreciation of right-of-use assets     4,838       5,257  
Share of losses of associates     9,415       1,112  
Impairment of trade receivables     -       837  
Impairment of other receivables     -       1,068  
Interest income     (8,045 )     (444 )
Finance costs     1,269       448  
Loss on disposal of items of property, plant and equipment     19       -  
Rental concession     -       (833 )
Loss on deregistration of subsidiaries     -       (5,377 )
Operating cash flows before working capital changes     (3,677 )     13,086  
Change in trade receivables     12,511       10,712  
Change in prepayments, deposits and other receivables     (15,294 )     (42,263 )
Change in trade payables     (20,442 )     (19,689 )
Change in accruals and other payables     16,161       1,014  
Cash used in operating activities     (10,741 )     (37,140 )
Income taxes paid     (203 )     (33 )
Lease interest paid     (323 )     (295 )
Net cash flows used in operating activities     (11,267 )     (37,468 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Withdrawal of structured notes     50,371       -  
Purchase of property, plant and equipment     (176,131 )     (125,461 )
Proceeds from disposal of items of property, plant and equipment     948       -  
Purchase of intangible assets     (2,125 )     -  
Purchase of equity investments at fair value through other comprehensive income     (7,710 )     -  
Acquisition of subsidiaries     (11,646 )     -  
Interest received     4,859       444  
Repayment from loan receivables     44,503       60,881  
Grant of loan receivables     (11,163 )     (30,000 )
Net cash flows used in investing activities     (108,094 )     (94,136 )

 

- 8 -

 

LOTO INTERACTIVE LIMITED

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

    2019     2020  
    HK$'000     HK$'000  
CASH FLOWS FROM FINANCING ACTIVITIES                
Repayment to holding company     (38 )     (1 )
Advance from/(Repayment to) related parties     11,380       (10,913 )
Repayment of lease liabilities     (3,418 )     (4,130 )
Proceeds from issue of shares     -       16,423  
Share issue expenses paid     -       (395 )
Contributions from non-controlling shareholders     7,814       78,895  
Proceeds from exercise of share options     1,393       -  
Interest paid     (946 )     (153 )
                 
Net cash flows generated from financing activities     16,185       79,726  
NET DECREASE IN CASH AND CASH EQUIVALENTS     (103,176 )     (51,878 )
Cash and cash equivalents at beginning of year     198,221       95,030  
Net foreign exchange difference     (15 )     1,100  
                 
Cash and cash equivalents at end of year     95,030       44,252  
ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS                
Cash and bank balances     95,030       44,252  

 

- 9 -

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

1. GENERAL INFORMATION

 

Loto Interactive Limited (the "Company") is a public limited company incorporated in the Cayman Islands and its shares have been listed on the Growth Enterprise Market ("GEM") of the Stock Exchange of Hong Kong Limited (the "Stock Exchange") since 17 May 2002. The addresses of the registered office and principal place of business of the Company are disclosed in the corporate information section of the annual report.

 

The Company is an investment holding company. The principal activities of its subsidiaries are set out in note 20 to the consolidated financial statements.

 

In the opinion of the directors of the Company, as at 31 December 2019 and 2020, the substantial shareholder of the Company is BIT Mining Limited (formerly known as 500.com Limited) ("Holding Company"), which is incorporated in the Cayman Islands and listed on the New York Stock Exchange (stock code: WBAI).

 

2. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

 

In the current period, the Group has adopted all the new and revised International Financial Reporting Standards ("IFRSs") issued by the International Accounting Standards Board (the “IASB”) that are relevant to its operations and effective for its accounting year beginning on 1 January 2019. IFRSs comprise International Financial Reporting Standards ("IFRS"); International Accounting Standards (“IAS” ); and Interpretations. The adoption of these new and revised IFRSs did not result in substantial changes to the Group’s accounting policies and amounts reported for the current year and prior years.

 

3. SIGNIFICANT ACCOUNTING POLICIES

 

These consolidated financial statements have been prepared in accordance with IFRSs issued by the IASB, and the applicable disclosures required by the Hong Kong Companies Ordinance.

 

These consolidated financial statements have been prepared under the historical cost convention, as modified by investments which are carried at their fair values.

 

The preparation of consolidated financial statements in conformity with IFRSs requires the use of certain key assumptions and estimates. It also requires the directors to exercise its judgments in the process of applying the accounting policies. The areas where assumptions and estimates are significant to these consolidated financial statements, are disclosed in note 4 to the consolidated financial statements.

 

The significant accounting policies applied in the preparation of these consolidated financial statements are set out below.

 

(a) Consolidation

 

The consolidated financial statements include the financial statements of the Company and its subsidiaries made up to 31 December. Subsidiaries are entities over which the Group has control. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group has power over an entity when the Group has existing rights that give it the current ability to direct the relevant activities, i.e. activities that significantly affect the entity’s returns.

 

When assessing control, the Group considers its potential voting rights as well as potential voting rights held by other parties, to determine whether it has control. A potential voting right is considered only if the holder has the practical ability to exercise that right.

 

Subsidiaries are consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date the control ceases.

 

The gain or loss on the disposal of subsidiaries that results in a loss of control represents the difference between (i) the fair value of the consideration of the sale plus the fair value of any investment retained in that subsidiaries and (ii) the Company's share of the net assets of that subsidiaries plus any remaining goodwill relating to that subsidiaries and any related foreign currency translation reserve.

 

- 10 -

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

Intragroup transactions, balances and unrealised profits are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

Non-controlling interests represent the equity in subsidiaries not attributable, directly or indirectly, to the Company. Non-controlling interests are presented in the consolidated statement of financial position and consolidated statement of changes in equity within equity. Non-controlling interests are presented in the consolidated statement of profit or loss and other comprehensive income as an allocation of profit or loss and total comprehensive income for the year between the non-controlling shareholders and owners of the Company.

 

Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling shareholders even if this results in the non-controlling interests having a deficit balance.

 

Changes in the Company's ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (i.e. transactions with owners in their capacity as owners). The carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the Company.

 

(b) Business combination and goodwill

 

The acquisition method is used to account for the acquisition of a subsidiary in a business combination. The cost of acquisition is measured at the acquisition-date fair value of the assets given, equity instruments issued, liabilities incurred and contingent consideration. Acquisition-related costs are recognised as expenses in the periods in which the costs are incurred and the services are received. Identifiable assets and liabilities of the subsidiary in the acquisition are measured at their acquisition-date fair values.

 

The excess of the cost of acquisition over the Company’s share of the net fair value of the subsidiary’s identifiable assets and liabilities is recorded as goodwill. Any excess of the Company’s share of the net fair value of the identifiable assets and liabilities over the cost of acquisition is recognised in consolidated profit or loss as a gain on bargain purchase which is attributed to the Company.

 

In a business combination achieved in stages, the previously held equity interest in the subsidiary is remeasured at its acquisition-date fair value and the resulting gain or loss is recognised in consolidated profit or loss. The fair value is added to the cost of acquisition to calculate the goodwill.

 

If the changes in the value of the previously held equity interest in the subsidiary were recognised in other comprehensive income (for example, equity investments at fair value through other comprehensive income), the amount that was recognised in other comprehensive income is recognised on the same basis as would be required if the previously held equity interest were disposed of.

 

Goodwill is tested annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. Goodwill is measured at cost less accumulated impairment losses. The method of measuring impairment losses of goodwill is the same as that of other assets as stated in the accounting policy (v) below. Impairment losses of goodwill are recognised in consolidated profit or loss and are not subsequently reversed. Goodwill is allocated to cash-generating units that are expected to benefit from the synergies of the acquisition for the purpose of impairment testing.

 

The non-controlling interests in the subsidiary are initially measured at the non-controlling shareholders’ proportionate share of the net fair value of the subsidiary’s identifiable assets and liabilities at the acquisition date.

 

(c) Associates

 

Associates are entities over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of an entity but is not control or joint control over those policies. The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether the Group has significant influence. In assessing whether a potential voting right contributes to significant influence, the holder’s intention and financial ability to exercise or convert that right is not considered.

 

- 11 -

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

Investment in an associate is accounted for in the consolidated financial statements by the equity method and is initially recognised at cost. Identifiable assets and liabilities of the associate in an acquisition are measured at their fair values at the acquisition date. The excess of the cost of acquisition over the Group’ s share of the net fair value of the associate’ s identifiable assets and liabilities is recorded as goodwill. The goodwill is included in the carrying amount of the investment and is tested for impairment together with the investment at the end of each reporting period when there is objective evidence that the investment is impaired. Any excess of the Group’ s share of the net fair value of the identifiable assets and liabilities over the cost of acquisition is recognised in consolidated profit or loss.

 

The Group’s share of an associate’s post-acquisition profits or losses is recognised in consolidated profit or loss, and its share of the post-acquisition movements in reserves is recognised in the consolidated reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the Group resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.

 

The gain or loss on the disposal of an associate that results in a loss of significant influence represents the difference between (i) the fair value of the consideration of the sale plus the fair value of any investment retained in that associate and (ii) the Group’s share of the net assets of that associate plus any remaining goodwill relating to that associate and any related accumulated foreign currency translation reserve. If an investment in an associate becomes an investment in a joint venture, the Group continues to apply the equity method and does not remeasure the retained interest.

 

Unrealised profits on transactions between the Group and its associates are eliminated to the extent of the Group’ s interests in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

(d) Joint arrangements

 

A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Relevant activities are activities that significantly affect the returns of the arrangement. When assessing joint control, the Group considers its potential voting rights as well as potential voting rights held by other parties, to determine whether it has joint control. A potential voting right is considered only if the holder has the practical ability to exercise that right.

 

A joint arrangement is either a joint operation or a joint venture. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

 

In relation to its interest in a joint operation, the Group recognises in its consolidated financial statements, its assets, including its share of any assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the sale of its share of the output arising from the joint operation; its share of the revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly, in accordance with the IFRSs applicable to the particular assets, liabilities, revenues and expenses.

 

Investment in a joint venture is accounted for in the consolidated financial statements by the equity method and is initially recognised at cost. Identifiable assets and liabilities of the joint venture in an acquisition are measured at their fair values at the acquisition date. The excess of the cost of acquisition over the Group’s share of the net fair value of the joint venture’s identifiable assets and liabilities is recorded as goodwill. The goodwill is included in the carrying amount of the investment and is tested for impairment together with the investment at the end of each reporting period when there is objective evidence that the investment is impaired. Any excess of the Group’ s share of the net fair value of the identifiable assets and liabilities over the cost of acquisition is recognised in consolidated profit or loss.

 

- 12 -

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

The Group’s share of a joint venture’s post-acquisition profits or losses is recognised in consolidated profit or loss, and its share of the post-acquisition movements in reserves is recognised in the consolidated reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’ s share of losses in a joint venture equals or exceeds its interest in the joint venture, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint venture. If the joint venture subsequently reports profits, the Group resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.

 

The gain or loss on the disposal of a joint venture that results in a loss of joint control represents the difference between (i) the fair value of the consideration of the sale plus the fair value of any investment retained in that joint venture and (ii) the Group’s share of the net assets of that joint venture plus any remaining goodwill relating to that joint venture and any related accumulated foreign currency translation reserve. If an investment in a joint venture becomes an investment in an associate, the Group continues to apply the equity method and does not remeasure the retained interest.

 

Unrealised profits on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interests in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

(e) Foreign currency translation

 

(i) Functional and presentation currency

 

The consolidated financial statements are presented in Hong Kong dollars, which is the Company’s presentation currency. The functional currency of the Company is Renminbi. The directors consider that choosing Hong Kong dollars as the presentation currency best suits the needs of the shareholders and investors.

 

(ii) Transactions and balances in each entity's financial statements

 

Transactions in foreign currencies are translated into the functional currency on initial recognition using the exchange rates prevailing on the transaction dates. Monetary assets and liabilities in foreign currencies are translated at the exchange rates at the end of each reporting period. Gains and losses resulting from this translation policy are recognised in profit or loss.

 

Non-monetary items that are measured at fair values in foreign currencies are translated using the exchange rates at the dates when the fair values are determined.

 

When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss is recognised in other comprehensive income. When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss is recognised in profit or loss.

 

(iii) Translation on consolidation

 

The results and financial position of all the Group entities that have a functional currency different from the Company ’ s presentation currency are translated into the Company’s presentation currency as follows:

 

- Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;

 

- Income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the exchange rates on the transaction dates); and

 

- All resulting exchange differences are recognised in the foreign currency translation reserve.

 

On consolidation, exchange differences arising from the translation of the net investment in foreign entities and of borrowings are recognised in the foreign currency translation reserve. When a foreign operation is sold, such exchange differences are recognised in consolidated profit or loss as part of the gain or loss on disposal.

 

- 13 -

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

 

(f) Property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses.

 

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised in profit or loss during the period in which they are incurred.

 

Depreciation of property, plant and equipment is calculated at rates sufficient to write off their cost less their residual values over the estimated useful lives on a straight-line basis. The principal annual rate are as follows:

 

Leasehold improvement   20%  - 75%
Machinery and equipment   20%  - 33.33%
Furniture, fixtures and equipment   20%  - 50%
Motor vehicles   10%  - 20%

 

The residual values, useful lives and depreciation method are reviewed and adjusted, if appropriate, at the end of each reporting period.

 

Construction in progress represents plant and machinery pending installation, and is stated at cost less impairment losses. Depreciation begins when the relevant assets are available for use.

 

The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in profit or loss.

 

(g) Leases

 

The Group as lessee

 

Leases are recognised as right-of-use assets and corresponding lease liabilities when the leased assets are available for use by the Group. Right-of-use assets are stated at cost less accumulated depreciation and impairment losses. Depreciation of right-of-use assets is calculated at rates to write off their cost over the shorter of the asset’s useful life and the lease term on a straight-line basis. The principal annual rates are as follows:

 

Land use rights   50%
Land and buildings   33.33% - 58.53%

 

Right-of-use assets are measured at cost comprising the amount of the initial measurement of the lease liabilities, lease payments prepaid, initial direct costs and the restoration costs. Lease liabilities include the net present value of the lease payments discounted using the interest rate implicit in the lease if that rate can be determined, or otherwise the Group’s incremental borrowing rate. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the lease liability.

 

Payments associated with short-term leases and leases of low-value assets are recognised as expenses in profit or loss on a straight-line basis over the lease terms. Short-term leases are leases with an initial lease term of 12 months or less. Low-value assets are assets of value below US$ 5,000.

 

(h) Recognition and derecognition of financial instruments

 

Financial assets and financial liabilities are recognised in the statement of financial position when the Group becomes a party to the contractual provisions of the instruments.

  

- 14 -

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

Financial assets are derecognised when the contractual rights to receive cash flows from the assets expire; the Group transfers substantially all the risks and rewards of ownership of the assets; or the Group neither transfers nor retains substantially all the risks and rewards of ownership of the assets but has not retained control on the assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received is recognised in profit or loss.

 

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid is recognised in profit or loss.

 

(i) Financial assets

 

Financial assets are recognised and derecognised on a trade date basis where the purchase or sale of an asset is under a contract whose terms require delivery of the asset within the timeframe established by the market concerned, and are initially recognised at fair value, plus directly attributable transaction costs except in the case of investments at fair value through profit or loss. Transaction costs directly attributable to the acquisition of investments at fair value through profit or loss are recognised immediately in profit or loss.

 

Financial assets of the Group are classified under the following categories:

 

- Financial assets at amortised cost; and

 

- Equity investments at fair value through other comprehensive income;

 

(i)   Financial assets at amortised cost

 

Financial assets (including trade and other receivables) are classified under this category if they satisfy both of the following conditions:

 

- the assets are held within a business model whose objective is to hold assets in order to collect contractual cash; and

 

- the contractual terms of the assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

They are subsequently measured at amortised cost using the effective interest method less loss allowance for expected credit losses.

 

(ii)   Equity investments at fair value through other comprehensive income

 

On initial recognition, the Group can make an irrevocable election (on an instrument-by-instrument basis) to designate investments in equity instruments that are not held for trading as at fair value through other comprehensive income.

 

Equity investments at fair value through other comprehensive income are subsequently measured at fair value with gains and losses arising from changes in fair values recognised in other comprehensive income and accumulated in the equity investment revaluation reserve. On derecognition of an investment, the cumulative gains or losses previously accumulated in the equity investment revaluation reserve are not reclassified to profit or loss.

 

Dividends on these investments are recognised in profit or loss, unless the dividends clearly represent a recovery of part of the cost of the investment.

 

(j) Loss allowances for expected credit losses

 

The Group recognises loss allowances for expected credit losses on financial assets at amortised cost. Expected credit losses are the weighted average of credit losses with the respective risks of a default occurring as the weights.

 

At the end of each reporting period, the Group measures the loss allowance for a financial instrument at an amount equal to the expected credit losses that result from all possible default events over the expected life of that financial instrument ("lifetime expected credit losses") for trade receivables, or if the credit risk on that financial instrument has increased significantly since initial recognition.

- 15 -

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

If, at the end of the reporting period, the credit risk on a financial instrument (other than trade receivables) has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to the portion of lifetime expected credit losses that represents the expected credit losses that result from default events on that financial instrument that are possible within 12 months after the reporting period.

 

The amount of expected credit losses or reversal to adjust the loss allowance at the end of the reporting period to the required amount is recognised in profit or loss as an impairment gain or loss.

 

(k) Cash and cash equivalents

 

For the purpose of the statement of cash flows, cash and cash equivalents represent cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term highly liquid investments which are readily convertible into known amounts of cash and subject to an insignificant risk of change in value. Bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents.

 

(l) Financial liabilities and equity instruments

 

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument under IFRSs. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.

 

(m) Trade and other payables

 

Trade and other payables are stated initially at their fair value and subsequently measured at amortised cost using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost.

 

(n) Equity instruments

 

Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

 

(o) Revenue from contracts with customers

 

Revenue is measured based on the consideration specified in a contract with a customer with reference to the customary business practices and excludes amounts collected on behalf of third parties. For a contract where the period between the payment by the customer and the transfer of the promised product or service exceeds one year, the consideration is adjusted for the effect of a significant financing component.

 

The Group recognises revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Depending on the terms of a contract and the laws that apply to that contract, a performance obligation can be satisfied over time or at a point in time. A performance obligation is satisfied over time if:

 

- the customer simultaneously receives and consumes the benefits provided by the Group’s performance;

 

- the Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or

 

- the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

 

If a performance obligation is satisfied over time, revenue is recognised by reference to the progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognised at a point in time when the customer obtains control of the product or service.

 

(p) Other revenue

 

Interest income is recognised using the effective interest method.

- 16 -

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

(q) Employee benefits

 

(i) Employee leave entitlements

 

Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the end of the reporting period.

 

Employee entitlements to sick leave and maternity leave are not recognised until the time of leave.

 

(ii) Pension obligations

 

The Group contributes to defined contribution retirement schemes which are available to all employees. Contributions to the schemes by the Group and employees are calculated as a percentage of employees’ basic salaries. The retirement benefit scheme cost charged to profit or loss represents contributions payable by the Group to the funds.

 

(iii) Termination benefits

 

Termination benefits are recognised at the earlier of the dates when the Group can no longer withdraw the offer of those benefits and when the Group recognises restructuring costs and involves the payment of termination benefits.

 

(r)  Share-based payments

 

The Group issues equity-settled share-based payments to certain directors, employees and consultants.

 

Equity-settled share-based payments to directors and employees are measured at the fair value (excluding the effect of non market-based vesting conditions) of the equity instruments at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’ s estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions.

 

Equity-settled share-based payments to consultants are measured at the fair value of the services rendered or if the fair value of the services rendered cannot be reliably measured, at the fair value of the equity instruments granted. The fair value is measured at the date the Group receives the services and is recognised as an expense.

 

(s) Taxation

 

Income tax represents the sum of the current tax and deferred tax.

 

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit recognised in profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

 

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences, unused tax losses or unused tax credits can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

 

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

 

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

- 17 -

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is recognised in profit or loss, except when it relates to items recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity.

 

The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

 

(t) Segment reporting

 

Operating segments and the amounts of each segment item reported in the financial statements are identified from the financial information provided regularly to the Group’s most senior executive management for the purpose of allocating resources and assessing the performance of the Group’s various lines of business.

 

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of productions processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.

 

(u) Related parties

 

A related party is a person or entity that is related to the Group.

 

(a) A person or a close member of that person’s family is related to the Group if that person:

 

(i) has control or joint control over the Group;

(ii) has significant influence over the Group; or

(iii) is a member of the key management personnel of the Company or of a parent of the Company.

 

(b) An entity is related to the Group (reporting entity) if any of the following conditions applies:

 

(i) The entity and the Company are members of the same group (which means that each parent, subsidiaries and fellow subsidiaries is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

(iii) Both entities are joint ventures of the same third party.

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

(v) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group. If the Group is itself such a plan, the sponsoring employers are also related to the Group.

(vi) The entity is controlled or jointly controlled by a person identified in (a).

(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

(viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the Company or to a parent of the Company.

 

- 18 -

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

(v) Impairment of assets

 

At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets except goodwill, investments and receivables to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of any impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs.

 

Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

 

(w) Provisions and contingent liabilities

 

Provisions are recognised for liabilities of uncertain timing or amount when the Group has a present legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

 

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow is remote.

 

(x) Events after the reporting period

 

Events after the reporting period that provide additional information about the Group’s position at the end of the reporting period or those that indicate the going concern assumption is not appropriate are adjusting events and are reflected in the financial statements. Events after the reporting period that are not adjusting events are disclosed in the notes to the financial statements when material.

 

4. KEY ESTIMATES

 

Key sources of estimation uncertainty

 

The key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

 

(a) Impairment of property, plant and equipment

 

Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets exceeds its recoverable amount. The recoverable amount is determined with reference to the present value of estimated future cash flows. Where the future cash flows are less than expected or there are unfavourable events and change in facts and circumstance which result in revision of future estimate cash flows, a material impairment loss may arise.

 

- 19 -

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

(b) Impairment of goodwill

 

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating unit to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. The carrying amounts of goodwill at 31 December 2019 and 2020 were approximately HK$10,996,000 and HK$11,703,000 respectively.

 

(c) Impairment of loan receivables

 

The Group makes impairment loss for loan receivables based on assessments of the recoverability of the loan receivables, including the current creditworthiness and the past collection history of each borrower. Impairments arise where events or changes in circumstances indicate that the balances may not be collectible. The identification of impairment loss requires the use of judgement and estimates. Where the actual result is different from the original estimate, such difference will impact the carrying value of the loan receivables and impairment loss expenses in the year in which such estimate has been changed.

 

(d) Property, plant and equipment and depreciation

 

The Group determines the estimated useful lives, residual values and related depreciation charges for the Group’s property, plant and equipment. This estimate is based on the historical experience of the actual useful lives and residual values of property, plant and equipment of similar nature and functions. The Group will revise the depreciation charge where useful lives and residual values are different to those previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.

 

5. FINANCIAL RISK MANAGEMENT

 

The Group’s activities expose it to a variety of financial risks: foreign currency risk, credit risk, liquidity risk, interest rate risk and price risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

 

(a) Foreign currency risk

 

The Group has minimal exposure to foreign currency risk as most of its business transactions, assets and liabilities are principally denominated in the functional currencies of the Group entities. The Group currently does not have a foreign currency hedging policy in respect of foreign currency transactions, assets and liabilities. The Group will monitor its foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise.

 

(b) Credit risk

 

At 31 December 2019 and 2020, the Group’s maximum exposure to credit risk which will cause a financial loss to the Group due to failure to the perform an obligation by the counterparties arise from the carrying amounts of the respective recognised financial assets as stated in the consolidated statement of financial position.

 

In order to minimise credit risk, the directors have delegated a team to be responsible for the determination of credit limits, credit approvals and other monitoring procedures. In addition, the directors review the recoverable amount of each individual trade debt regularly to ensure that adequate impairment losses are recognised for irrecoverable debts. In this regard, the directors consider that the Group’s credit risk is significantly reduced.

 

The Group has concentration of credit risk as 89.5% and 91.3% respectively of the Group's trade receivables are due from the Group's three customers and one customer which operate in the PRC as at 31 Decemeber 2019 and 2020. The principal activities of the Group are mainly provision of big data centre services and use of storage places. In repect of these customers, given their good repayment history, the directors of the Company consider that the credit risk associated with the balances of the customers is low.

 

- 20 -

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

The Group also has concentration of credit risk as 82% of the Group's loan receivables is a loan granted to an independent third party which is secured by a personal guarantee and a collateral of 95% of the entire equity interests in another company as at 31 December 2019, and has concentration of credit risk as 100% of the Group's loan receivables is a loan granted to an independent third party which is secured by a personal guarantee and a collateral of a property in PRC as at 31 December 2020. In view of the counterparties never fail to make contractual payments, the directors of the Company consider that the credit risk associated with the balance of loan receivable is low.

 

The Group considers whether there has been a significant increase in credit risk of financial assets on an ongoing basis throughout each reporting period by comparing the risk of a default occurring as at the reporting date with the risk of default as at the date of initial recognition. It considers available reasonable and supportive forwarding-looking information. Especially the following information is used:

 

- internal credit rating;

- actual or expected significant adverse changes in business, financial or economic conditions that are expected to cause a significant change to the borrower’s ability to meet its obligations;

- significant changes in the value of the collateral or in the quality of guarantees or credit enhancements; and

- significant changes in the expected performance and behaviour of the borrower, including changes in the payment status of borrowers.

 

A significant increase in credit risk is presumed if a debtor is more than 30 days past due in making a contractual payment. A default on a financial asset is when the counterparty fails to make contractual payments within 60 days of when they fall due.

 

Financial assets are written off when there is no reasonable expectation of recovery, such as a debtor failing to engage in a repayment plan with the Group. The Group normally categorises a loan or receivable for write off when a debtor fails to make contractual payments greater than 360 days past due. Where loans or receivables have been written off, the Group, if practicable and economical, continues to engage in enforcement activity to attempt to recover the receivable due.

 

The Group uses two categories for non-trade loan receivable which reflect their credit risk and how the loan loss provision is determined for each of the categories. In calculating the expected credit loss rates, the Group considers historical loss rates for each category and adjusts for forward looking data.

 

Category Definition Loss provision
Performing Low risk of default and strong capacity to pay 12 month expected losses
Non-performing Significant increase in credit risk Lifetime expected losses

 

All of these loans are considered to have low risk and under the ‘Performing’ category because they have a low risk of default and have strong ability to meet their obligations.

 

(c)  Liquidity risk

 

The Group’s policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash to meet its liquidity requirements in the short and longer term.

 

The maturity analysis, based on undiscounted cash flows, of the Group’s financial liabilities is as follows:

 

    Less than 1        
At 31 December 2019   year     Total  
    HK$'000     HK$'000  
Trade payables     24,300       24,300  
Accruals and other payables     24,720       24,720  
Amount due to holding company     1       1  
Amount due to a fellow subsidiary     11,380       11,380  
                 
      60,401       60,401  

 

- 21 -

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

    Less than 1        
At 31 December 2020   year     Total  
    HK$'000     HK$'000  
Trade payables     4,611       4,611  
Accruals and other payables     25,734       25,734  
Amount due to a related company     467       467  
                 
      30,812       30,812  

 

(d) Interest rate risk

 

The management of the Group considered that the overall interest rate risk is not significant as the fluctuation of the interest rates on bank balance is considered minimal. Accordingly, no sensitivity analysis is prepared and presented.

 

(e) Price risk

 

The Group ’ s equity investments at fair value through other comprehensive income are measured at fair value at the end of each reporting period. Therefore, the Group is exposed to equity security price risk. The directors manage this exposure by maintaining a portfolio of investments with difference risk profiles.

 

At 31 December 2019 and 2020, if the share prices of the investments increase/decrease by 10%, the equity investment revaluation reserve would have been approximately HK$514,000 and HK$506,000 higher/lower, arising as a result of the fair value gain/loss of the investments.

 

(f) Categories of financial instruments at 31 December 2019 and 2020

 

    2019     2020  
    HK$'000     HK$'000  
Financial assets:                
Equity investments at fair value through other comprehensive income     5,140       5,057  
Financial assets at amortised cost:                
Loan receivables     60,881       30,000  
Trade receivables     19,949       8,400  
Financial assets included in prepayments, deposits and other receivables     30,656       34,114  
Cash and cash equivalents     95,030       44,252  
                 
Total     211,656       121,823  
Financial liabilities:                
Financial liabilities at amortised cost:                
Trade payables     24,300       4,611  
Financial liabilities included in accruals and other payables     24,720       25,734  
Amount due to the holding company     1       -  
Amount due to a related company     11,380       467  
                 
Total     60,401       30,812  

 

(g) Fair value

 

Except as disclosed in note 23 to the consolidated financial statements, the carrying amounts of the Group ’ s financial assets and financial liabilities as reflected in the consolidated statement of financial position approximate their respective fair values.

 

- 22 -

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

6. FAIR VALUE MEASUREMENTS

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following disclosures of fair value measurements use a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value:

 

Level 1 inputs: quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group can access at the measurement date.

 

Level 2 inputs: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3 inputs: unobservable inputs for the asset or liability.

 

The Group’s policy is to recognise transfers into and transfers out of any of the three levels as of the date of the event or change in circumstances that caused the transfer.

 

(a) Disclosures of level in fair value hierarchy at 31 December 2019 and 2020:

 

    Fair value measurements
using:
    2019  
    Level 1     Total  
    HK$'000     HK$'000  
Description                
Recurring fair value measurements:                
Equity investments at fair value through other comprehensive income Listed securities in United States of America ("US")     5,140       5,140  
                 
Total recurring fair value measurements     5,140       5,140  

 

    Fair value measurements
using:
    2020  
    Level 1     Total  
    HK$'000     HK$'000  
Description                
Recurring fair value measurements:                
Equity investments at fair value through other comprehensive income Listed securities in US     5,057       5,057  
                 
Total recurring fair value measurements     5,057       5,057  

 

The total gains/losses recognised in other comprehensive income are presented in fair value changes of equity investments at fair value through other comprehensive income in the statement of profit or loss and other comprehensive income.

 

7. OPERATING SEGMENT INFORMATION

 

(a) Reportable segments

 

The chief operating decision-maker has been identified as the board of directors. The board of directors reviews the Group ’ s internal reporting in order to assess performance and allocate resources. The Group determines its operating segments based on the reports reviewed by the chief operating decision-maker that are used to make strategic decisions.

 

- 23 -

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

The Group has four and three reportable segments respectively for the year ended 31 December 2019 and 2020. The segments are managed separately as each business segment offers different products and requires different business strategies. The following summary describes the operations in each of the Group’s reportable segments:

 

- Provision of big data centre services ("Big Data Centre Services")

- Distribution of mobile gaming ("Online Game Business")

- Money lending business ("Money Lending Business")

- Trading of lottery terminals and parts and provision of services and solutions for the distribution of lottery products ("Lottery Business")#

 

#In the opinion of the directors, Lottery Business was no longer a reportable segment of the Group in 2020 since both the performance and the resources allocated were minimal to the Group.

 

The accounting policies of the operating segments are the same as those described in note 3 to the consolidated financial statements. Segment profits or losses do not include dividend income, and gains or losses from investments and derivative instruments. Segment assets do not include amounts due from related parties, investments and derivative instruments. Segment liabilities do not include convertible loans and derivative instruments. Segment non-current assets do not include financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts.

 

(i) Information about reportable segment profit or loss, assets and liabilities:

 

    Big Data           Money              
    Centre     Online Game     Lending     Lottery        
Year ended 31 December 2019   Services     Business     Business     Business     Total  
    HK$'000     HK$'000     HK$'000     HK$'000     HK$'000  
Revenue from external customers     62,425       2,020       -       111       64,556  
Segment profit/(loss)     6,637       (1,571 )     (45 )     (2,593 )     2,428  
Depreciation     11,641       59       -       4       11,704  
Additions to segment non-current assets     175,383       -       -       188       175,571  
As at 31 December 2019                                        
Segment assets     286,668       673       1,460       4,216       293,017  
Segment liabilities     (56,206 )     (933 )     -       (936 )     (58,075 )

 

    Big Data           Money        
    Centre     Online Game     Lending        
Year ended 31 December 2020   Services     Business     Business     Total  
    HK$'000     HK$'000     HK$'000     HK$'000  
Revenue from external customers     379,658       1,017       2,250       382,925  
Segment loss     (4,766 )     (982 )     (203 )     (5,951 )
Depreciation     39,087       49       -       39,136  
Additions to segment non-current assets     121,661       -       -       121,661  
As at 31 December 2020                                
Segment assets     350,053       756       32,258       383,067  
Segment liabilities     (29,310 )     (2,085 )     -       (31,395 )

 

- 24 -

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

(ii) Reconciliations of reportable segment revenue, profit or loss, assets and liabilities:

 

    2019     2020  
    HK$'000     HK$'000  
Revenue            
Total revenue of reportable segments     64,556       382,925  
Other revenue     -       30  
Consolidated revenue     64,556       382,955  
Profit or loss                
Total profit/(loss) of reportable segment     2,428       (5,951 )
Other income/(loss)     2,087       (2,866 )
Unallocated amounts:                
Share of losses of associates     (9,415 )     (1,112 )
Equity-settled share-based payment expense     (8,283 )     (4,028 )
Salaries and other benefits     (11,139 )     (14,046 )
Depreciation     (2,653 )     (2,544 )
Depreciation charge of right-of-use assets     (4,599 )     (4,641 )
Legal and consultation fee     (2,302 )     (2,264 )
Impairment of trade receivables     -       (837 )
Impairment of other receivables     -       (1,068 )
Donation     (1,000 )     (1,000 )
Consolidated loss before tax for the year     (34,876 )     (40,357 )
Assets                
Total assets of reportable segments     293,017       383,067  
Other assets     8,102       17,597  
Unallocated amounts:                
Property, plant and equipment     3,579       4,837  
Right-of-use assets     3,258       5,497  
Investments in associates     3,384       2,431  
Equity investments at fair value through other comprehensive income     5,140       5,057  
Cash and cash equivalents     44,977       19,866  
Prepayments     740       16,187  
Loan receivables     49,718       -  
Consolidated total assets     411,915       454,539  
Liabilities                
Total liabilities of reportable segments     (58,075 )     (31,395 )
Other liabilities     (2,136 )     (2,078 )
Unallocated amounts:                
Amount due to a shareholder of a joint venture     (2,334 )     (2,334 )
Tax payable     (3,278 )     (3,278 )
Lease liabilities     (3,345 )     (5,744 )
Consolidated total liabilities     (69,168 )     (44,829 )

 

(b) Geographical information

 

The Group's operations are carried out in the PRC and revenue from external customers based on the location of goods and services delivered is derived from the PRC.

 

- 25

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

The following is an analysis of the non-current assets, analysed by the geographical area in which the assets are located: 

 

    2019     2020  
      HK$'000       HK$'000  
Non-current assets, excluding financial assets                
The PRC except Hong Kong     182,255       273,479  
Hong Kong     6,812       10,318  
British Virgin Island ("BVI")     25       15  
      189,092       283,812  

 

(c) Information about major customers

 

Revenue from major customers, each of whom amounted to 10% or more of the total revenue, is set out below:

 

    2019     2020  
      HK$'000       HK$'000  
Customer A     N/A#       73,407  
Customer B     N/A#       63,167  
Customer C     21,250       56,243  
Customer D     N/A#       42,455  
Customer E     11,624       N/A*  
Customer F     7,889       N/A*  
      40,763       235,272  

 

All the revenue are generated from Big Data Centre Services segment. 

 

#Revenue from customer A, B and D were less than 10% of the Group's revenue for the year ended 31 December 2019.

 

*Revenue from customer E and F were less than 10% of the Group's revenue for the year ended 31 December 2020.

 

8.     REVENUE

 

    2019     2020  
    HK$'000     HK$'000  
Provision of services and solutions for the distribution of lottery products     111       30  
Distribution of mobile gaming     2,020       1,017  
Provision of big data centre services     62,425       379,658  
Revenue from contracts with customers                
      64,556       380,705  
Interest income     -       2,250  
Total revenue     64,556       382,955  

 

- 26

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

Disaggregation of revenue from contracts with customers:

 

    Big Data                    
    Centre     Online Game     Lottery     2019  
Segments   Services     Business     Business     Total  
    HK$'000     HK$'000     HK$'000     HK$'000  
Geographical markets                                
The PRC     62,425       2,020       111       64,556  
Major products/service                                
Provision of big data centre services     62,425       -       -       62,425  
Distribution of mobile gaming     -       2,020       -       2,020  
Provision of services and solutions for the distribution of lottery products     -       -       111       111  
      62,425       2,020       111       64,556  
Timing of revenue recognition                                
At a point in time     -       2,020       111       2,131  
Over time     62,425       -       -       62,425  
      62,425       2,020       111       64,556  

 

    Big Data                    
    Centre     Online Game     Lottery     2020  
Segments   Services     Business     Business     Total  
    HK$'000     HK$'000     HK$'000     HK$'000  
Geographical markets                        
The PRC     379,658       1,017       30       380,705  
Major products/service                                
Provision of big data centre services     379,658       -       -       379,658  
Distribution of mobile gaming     -       1,017       -       1,017  
Provision of services and solutions for the distribution of lottery products     -       -       30       30  
      379,658       1,017       30       380,705  
Timing of revenue recognition                                
At a point in time     -       1,017       30       1,047  
Over time     379,658       -       -       379,658  
      379,658       1,017       30       380,705  

 

Big Data Centre Services

 

The Group operates big data centres (the "Big Data Centres") in People's Republic of China, providing data analysis, storage services and ancillary administrative and consulting services.

 

Revenue generated from the Big Data Centres consists of services fees and/or rental income charged on the users for provision of big data centre services and use of storage places.

 

Services income is rendered and there is no unfulfilled obligation that could affect the customer’s acceptance of the service.

 

Online Game Business

 

The Group is in cooperation with various reputable companies in the online game industry to distribute online mobile games.

 

Revenue is recognised when the control of the goods is transferred to customers.

 

- 27

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

Lottery Business

 

The Group sells lottery terminals and parts to the customers. Sales are recognised when control of the products has transferred, being when the products are delivered to a customer, there is no unfulfilled obligation that could affect the customer ’s acceptance of the products and the customer has obtained legal titles to the products.

 

Sales to customers are normally made with credit terms of 60 days. For new customers, deposits or cash on delivery may be required. Deposits received are recognised as a contract liability.

 

A receivable is recognised when the products are delivered to the customers as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.

 

9. OTHER INCOME AND GAINS 

 

    2019     2020  
    HK$'000      HK$'000  
Gain on bargain purchase     1,074       -  
Waiver of consideration payables     2,233       -  
Net exchange gains     1,098       -  
Rental concession     -       833  
Wage subsidies from employment support scheme     -       756  
Others     300       184  
      4,705       1,773  

 

10. FINANCE COSTS 

 

    2019     2020  
    HK$'000      HK$'000  
Lease interests     323       295  
Interests on other borrowings     682       -  
Interests on amount due to a related company     264       153  
      1,269       448  

 

11. DIRECTORS', CHIEF EXECUTIVE'S AND FIVE HIGHEST PAID INDIVIDUAL EMOLUMENTS

 

(a) DIRECTORS' AND CHIEF EXECUTIVE'S EMOLUMENTS

 

Directors’ and chief executive’s remuneration for the year, disclosed pursuant to section 383(1)(a), (b), (c) and (f) of the Hong Kong Companies Ordinance and Part 2 of the Companies (Disclosure of Information about Benefits of Directors) Regulation, is as follows:

 

    2019     2020  
      HK$'000        HK$'000  
Fees     1,750       1,750  
Other emoluments                
Salaries, allowances and benefits in kind     2,650       2,708  
Bonus     282       21  
Pension scheme contributions     31       34  
Equity-settled share-based payment expense     4,501       2,519  
      9,214       7,032  

 

- 28

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

The emoluments of each director and the chief executive, on a named basis, are set out below: 

 

    For the year ended 31 December 2019  
          Salaries,                 Equity-settled        
          allowances           Pension     share-based        
          and benefits           scheme     payment     Total  
    Fees    

in kind

    Bonus#     contributions     expense     emoluments  
    HK$'000     HK$'000     HK$'000     HK$'000      HK$'000     HK$'000  
Independent non-executive directors:                                                
Dr. Lu Haitian     250       -       -       -       107       357  
Mr. Yan Hao     250       -       -       -       107       357  
Mr. Lin Sen     250       -       -       -       107       357  
      750       -       -       -       321       1,071  
Executive directors:                                                
Ms. Huang Lilan2     250       250       82       13       536       1,131  
      250       250       82       13       536       1,131  
Non-executive directors:                                                
Mr. Pan Zhengming3     250       -       -       -       322       572  
Mr. Yuan Qiang     250       -       -       -       1,661       1,911  
      500       -       -       -       1,983       2,483  
Chief executive:                                                
Mr. Wang Bingzhong5     250       2,400       200       18       1,661       4,529  
      250       2,400       200       18       1,661       4,529  
      1,750       2,650       282       31       4,501       9,214  

 

    For the year ended 31 December 2020  
          Salaries,                 Equity-settled        
          allowances           Pension     share-based        
          and benefits           scheme     payment     Total  
    Fees     in kind     Bonus#     contributions     expense     emoluments  
    HK$'000     HK$'000     HK$'000     HK$'000     HK$'000     HK$'000  
Independent non-executive directors:                                                
Dr. Lu Haitian     250       -       -       -       47       297  
Mr. Lin Sen     250       -       -       -       47       297  
Mr. Huang Jian1     -       -       -       -       16       16  
      500       -       -       -       110       610  
Executive directors:                                                
Ms. Huang Lilan2     250       250       21       13       234       768  
      250       250       21       13       234       768  
Non-executive directors:                                                
Mr. Pan Zhengming3     -       -       -       -       94       94  
Mr. Yuan Qiang     250       -       -       -       724       974  
Ms. Zhang Jing4     250       -       -       -       354       604  
      500       -       -       -       1,172       1,672  
Chief executive:                                                
Mr. Wang Bingzhong5     250       1,958       -       15       724       2,947  
Mr. Yan Hao6     250       500       -       6       279       1,035  
      500       2,458       -       21       1,003       3,982  
      1,750       2,708       21       34       2,519       7,032  

- 29

 

 

LOTO INTERACTIVE LIMITED

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

There were no other emoluments payable to the independent non-executive directors during these two years.

 

#The bonus is approved by the Remuneration Committee, having regard to the individual’s contribution to the Group.

 

Notes:

 

1. Appointed on 7 August 2020.

2. Included in remuneration packages under the position of chief financial officer of the Company for the year ended 31 December 2020.

3. Resigned on 2 January 2020.

4. Appointed on 2 January 2020.

5. Resigned on 31 October 2020.

6. Resigned as independent non-executive director on 7 August 2020, appointed as executive director and chief executive officer on 1 September 2020.

 

12. INCOME TAX

 

No provision for Hong Kong profits tax has been made as the Hong Kong subsidiaries did not generate any assessable profits arising in Hong Kong during these two years.

 

Pursuant to the PRC Corporate Income Tax Law effective on 1 January 2008, the PRC subsidiaries are subject to corporate income tax ("CIT") at a statutory rate of 25% on their respective taxable income for the year ended 31 December 2019 and 2020. Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates.

 

    2019     2020  
    HK$'000     HK$'000  
Current - Mainland China                
Charge for the year     19       3,937  
Deferred tax (note 32)     (124 )     (1,039 )
                 
Total tax (credit)/expense for the year     (105 )     2,898  

 

The reconciliation between the income tax (credit)/expense and the product of profit before tax multiplied by the statutory rates for the countries (or jurisdictions) is as follows:

 

    2019     2020  
    HK$'000     HK$'000  
Loss before tax     (34,876 )     (40,357 )
Tax at the weighted average tax rate of 16.5% to 25%     (6,118 )     (6,586 )
One-off tax deduction     (75 )     -  
Loss attributable to a joint venture and associates     2,354       278  
Tax effect of income that is not taxable     (2,325 )     (875 )
Tax effect of expenses that are not deductible     1,627       2,241  
Tax effect of tax losses not recognised     4,432       7,840  
                 
Income tax (credit)/expense     (105 )     2,898  

 

At 31 December 2019 and 2020, the Group had unused tax losses of HK$267,546,000 and HK$312,258,000 available to offset against future taxable profits. No deferred tax asset has been recognised in respect of unused tax losses due to the unpredictability of future profit streams.

 

- 30 -

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

As at 31 December 2019 and 2020, included in unrecognised tax losses are losses of HK$53,494,000 and HK$42,586,000 respectively that are allowed to be carried forward and utilised against the taxable income of subsequent years. The loss carryforward period cannot exceed 5 years and expires between 2020 and 2025. Other losses of HK$214,052,000 and HK$269,672,000 respectively as at 31 December 2019 and 2020 may be carried forward indefinitely.

 

At 31 December 2019 and 2020, no deferred tax has been recognised for withholding taxes that would be payable on the unremitted earnings that are subject to withholding taxes of the Group’s subsidiary established in Mainland China. In the opinion of the directors, it is not probable that these subsidiaries will distribute such earnings in the foreseeable future.

 

13. LOSS FOR THE YEAR

 

The Group’s loss for the year is arrived at after charging/(crediting):

 

    Notes     2019     2020  
        HK$'000     HK$'000  
Auditors’ remuneration             650       720  
Cost of sales and service rendered             51,237       342,213  
Staff costs (including directors’ remuneration):                        
Salaries and other benefits             14,363       27,271  
Bonus             904       1,851  
Pension scheme contributions             742       522  
Equity-settled share option expense             8,283       4,028  
                         
              24,292       33,672  
Depreciation (included in cost of sales and service rendered)             11,427       38,513  
Depreciation             2,930       3,167  
Depreciation charge of right-of-use assets     17       4,838       5,257  
Loss on disposal of items of property, plant and equipment             19       -  
Net exchange (gains)/losses             (1,098 )     1,339  
Impairment of investments in associates             -       1,047  
Impairment of trade receivables     25       -       837  
Impairment of other receivables     26       -       1,068  
                         

14. DIVIDEND

 

The Directors do not recommend the payment of any dividend for each of the years ended 31 December 2019 and 2020.

 

15. LOSS PER SHARE

 

The calculation of the basic earnings per share amount is based on the loss for the year attributable to ordinary equity holders of the Company and the weighted average number of ordinary shares of approximately 315,513,000 and HK$330,357,000 respectively in issue during the year ended 31 December 2019 and 2020.

 

No adjustment has been made to the basic loss per share amounts presented for the year ended 31 December 2019 and 2020 in respect of a dilution as the impact of the share options outstanding had an anti-dilutive effect on the basic loss per share amounts presented.

 

  The calculation of the basic and diluted earnings per share is based on the following:            
               
      2019     2020  
        HK$'000       HK$'000  
  Loss                
  Loss for the purpose of calculating basic and diluted earnings per share     (33,618 )     (46,767 )

- 31 -

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

    2019     2020  
      '000       '000  
Number of shares                
Weighted average number of ordinary shares in issue during the year for the purposes of the basic and diluted loss per share       
315,513
 
 
   
330,357
 
 
                 

16. PROPERTY, PLANT AND EQUIPMENT

                                     
                Machinery     Furniture,              
    Construction     Leasehold     and     fixtures and     Motor        
    in progress     improvements     equipment     equipment     vehicles     Total  
      HK$'000       HK$'000       HK$'000       HK$'000       HK$'000       HK$'000  
As at 31 December 2019                                                
COST:                                                
At 1 January 2019     -       5,850       4,514       318       1,984       12,666  
Additions     72,105       791       101,795       193       1,247       176,131  
Acquisition of subsidiaries     -       -       -       17       93       110  
Disposal     -       -       (390 )     (47 )     (784 )     (1,221 )
Exchange realignment     (1,269 )     (13 )     (1,795 )     (3 )     (10 )     (3,090 )
                                                 
At 31 December 2019     70,836       6,628       104,124       478       2,530       184,596  
                                                 
ACCUMULATED DEPRECIATION:                                                
At 1 January 2019     -       1,709       4,176       141       154       6,180  
Provided during the year     -       2,439       11,649       60       209       14,357  
Disposal     -       -       (99 )     (37 )     (118 )     (254 )
Exchange realignment     -       (1 )     (206 )     -       -       (207 )
                                                 
At 31 December 2019     -       4,147       15,520       164       245       20,076  
                                                 
CARRYING AMOUNT:                                                
At 31 December 2019     70,836       2,481       88,604       314       2,285       164,520  
                                                 

                Machinery     Furniture,              
    Construction     Leasehold     and     fixtures and     Motor        
    in progress     improvements     equipment     equipment     vehicles     Total  
      HK$'000       HK$'000       HK$'000       HK$'000       HK$'000       HK$'000  
As at 31 December 2020                                                
COST:                                                
At 1 January 2020     70,836       6,628       104,124       478       2,530       184,596  
Additions     117,270       4,332       3,567       187       105       125,461  
Transfer     (188,387 )     6,192       182,195       -       -       -  
Exchange realignment     580       427       16,813       29       49       17,898  
                                                 
At 31 December 2020     299       17,579       306,699       694       2,684       327,955  
                                                 
ACCUMULATED DEPRECIATION:                                                
At 1 January 2020     -       4,147       15,520       164       245       20,076  
Provided during the year     -       3,310       37,949       182       239       41,680  
Exchange realignment     -       63       2,856       8       3       2,930  
                                                 
At 31 December 2020     -       7,520       56,325       354       487       64,686  
                                                 
CARRYING AMOUNT:                                                
At 31 December 2020     299       10,059       250,374       340       2,197       263,269  

- 32 -

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

17. LEASES AND RIGHT-OF-USE ASSETS

 

Disclosures of lease-related items:

 

    2019     2020  
      HK$'000       HK$'000  
At 31 December:                
Right-of-use assets                
-   Land use rights     235       112  
-   Land and buildings     4,302       6,297  
      4,537       6,409  
Lease commitments of short-term leases     112       14  

 

The maturity analysis, based on undiscounted cash flows, of the Group’s lease liabilities is as follows:

 

-   Less than 1 year     3,854       3,610  
-   Between 1 and 2 years     477       2,916  
-   Between 2 and 5 years     238       400  
      4,569       6,926  
                 

    2019     2020  
      HK$'000       HK$'000  
Year ended 31 December:                
Depreciation charge of right-of-use assets                
-   Land use rights     26       132  
-   Land and buildings     4,812       5,125  
      4,838       5,257  
Lease interests     323       295  
Expenses related to short-term leases     1,143       32  
Expenses related to leases of low-value assets that are not short-term leases     18       -  
Total cash outflow for leases     4,902       4,457  
Additions to right-of-use assets     9,371       7,081  

 

The Group leases various land use rights and land and buildings. Lease agreements are typically made for fixed periods of 2 to 3 years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants and the leased assets may not be used as security for borrowing purposes.

 

- 33 -

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

18. GOODWILL

       
    HK$'000  
Cost      
At 1 January 2019   -  
Arising on acquisition of a subsidiary     10,948  
Exchange realignment     48  
         
At 31 December 2019 and 1 January 2020     10,996  
Exchange realignment     707  
         
At 31 December 2020     11,703  
Carrying amount        
At 31 December 2019     10,996  
At 31 December 2020     11,703  
         

Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (“CGUs”) that are expected to benefit from that business combination. The carrying amount of goodwill had been allocated as follows:

 

    2019     2020  
      HK$'000       HK$'000  
Provision of big data service:                
Sichuan Lecaiyuntian Internet Technology Co., Ltd *  ("Sichuan Lecaiyuntian")     10,996       11,703  
                 

* The company registered as limited liability company under PRC law and the English name is for identification only.

 

The recoverable amounts of the CGUs are determined on the basis of their fair value less costs of disposal using discounted cash flow method. The key assumptions for the discounted cash flow method are those regarding the discount rates, growth rates and budgeted gross margin and revenue during the period. The Group estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. The growth rates are based on long-term average economic growth rate of the geographical area in which the businesses of the CGUs operate. Budgeted gross margin and revenue are based on past practices and expectations on market development.

 

As at 31 December 2019 and 2020, the Group prepares cash flow forecasts derived from the most recent financial budgets approved by the directors for the next five years with the residual period using the growth rate of 0% and 0% respectively. These rates do not exceed the average long-term growth rate for the relevant markets.

 

As at 31 December 2019 and 2020, the rate used to discount the forecast cash flows from the Group’s provision of big data service is 21.6% and 21.1% respectively.

 

- 34 -

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

19.   INTANGIBLE ASSETS

 

          Data analysis        
          system        
    Lease benefit     (purchased)     Total  
    HK$'000     HK$'000     HK$'000  
COST:                        
At 1 January 2019     -       -       -  
Additions     -       2,125       2,125  
Acquisition of subsidiaries     4,598       -       4,598  
Exchange realignment     14       (37 )     (23 )
                         
At 31 December 2019 and 1 January 2020     4,612       2,088       6,700  
                         
Exchange realignment     6       134       140  
                         
At 31 December 2020     4,618       2,222       6,840  
                         
ACCUMULATED AMORTISATION:                        
At 1 January 2019     -       -       -  
Amortisation for the year     496       567       1,063  
Exchange realignment     (9 )     (9 )     (18 )
                         
At 31 December 2019 and 1 January 2020     487       558       1,045  
                         
Amortisation for the year     4,125       1,542       5,667  
Exchange realignment     6       122       128  
                         
At 31 December 2020     4,618       2,222       6,840  
                       
CARRYING AMOUNT:                        
At 31 December 2019     4,125       1,530       5,655  
At 31 December 2020     -       -       -  

 

The Group’s data analysis system is acquired for supporting the Big data service business.

 

The lease benefit was arisen from acquisition of subsidiaries.

 

- 35 -

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

20. SUBSIDIARIES

 

Particulars of the subsidiaries at the end of the reporting period are as follows:

 

              Percentage of equity      
    Place of   Registered share     interests attributable to      
    incorporation/   capital/     the Company     Principal
Company name   registration   issued ordinary     2019     2020     activities
Directly held:                                
Brighten Express Limited   Hong Kong     HK$1       100 %     100 %   Investment holding
                                 
Rising Move International Limited   BVI     US$100       100 %     100 %   Investment holding
                                 
Interactive Lab Limited   BVI     US$100       100 %     100 %   Exploring cutting-edge technologies and applications
Indirectly held:                                
                               
Precious Success Holdings Limited   BVI     US$200       51 %     51 %   Investment holding
                                 
PAL Development Limited   Hong Kong     HK$250,000,000       51 %     51 %   Investment holding
                                 
Global Score Asia Limited   BVI     US$20,000       100 %     100 %   Investment holding
                                 
Trade Express Services Inc.   BVI     US$20,000       100 %     100 %   Investment holding
                                 
Rise Accord Holdings Limited   BVI     US$100       100 %     100 %   Investment holding
                                 
China Excellent Net Technology Investment Limited   Hong Kong     HK$3,194,581       95 %     95 %   Provision of services for distribution of mobile lottery products
                                 
PAL (Beijing) Information Technology Limited*%   PRC     Nil       51 %     0 %   Provision of management services for distribution of lottery products
                                 
Beijing Hua Ying Feng Cai Technology Limited*%   PRC     Nil       51 %     0 %   Provision of management services for distribution of lottery products
                                 
Beijing Huancai Information Technology Limited*% ("Beijing Huancai")   PRC     Nil       52.5 %     0 %   Provision of services for distribution of mobile lottery products
                                 
Hong Kong Interactive Lab Limited   Hong Kong     HK$1       100 %     100 %   Exploring cutting-edge technologies and applications
                                 
Virtual Asset Ratings Limited   BVI     US$50,000       51 %     51 %   Exploring cutting-edge technologies and applications

- 36 -

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

Loto Interactive Information Technology (Shenzhen) Limited*^("Loto Shenzhen")   PRC   RMB200,000,000/ RMB147,996,271     100 %     100 %   Investment holding
                             
Shenzhen Lewanwuxian Information Technology Co., Ltd.*# ("Shenzhen Lewanwuxian")   PRC   RMB10,000,000/ RMB5,100,000     51 %     51 %   Operating online games
                             
Beijing Lewanwuxian Information Technology Co., Ltd.*   PRC   RMB10,000,000/ RMB Nil     51 %     51 %   Distribution of online games
                             
Zhejiang Keyinghuancai Information Technology Co., Ltd.*   PRC   RMB10,000,000/ RMB Nil     100 %     100 %   Developing online games
                             
Chengdu Keying Interactive Information Technology Limited*   PRC   RMB10,000,000/ RMB Nil     100 %     100 %   Providing data analysis, storage services and ancillary administrative and consulting services
                             
Chengdu Yilaike Technology Co., Ltd.* ("Chengdu Yilaike")   PRC   RMB10,000,000/ RMB50,000     100 %     100 %   Providing data analysis, storage services and ancillary administrative and consulting services
                             
Ganzi Changhe Hydropower Consumption Service Co., Ltd* ("Ganzi Changhe Hydropower")   PRC   RMB180,000,000/ RMB150,000,000     91.6 %     51 %   Providing data analysis, storage services and ancillary administrative and consulting services
                             
Sichuan Lecaiyuntian @   PRC   RMB60,000,000/ RMB Nil     100 %     100 %   Providing data analysis, storage services and ancillary administrative and consulting services
                             
Interactive Medical Lab Limited   BVI   US$100     100 %     100 %   Investment holding
                             
Interactive Medical Lab   Delaware   US$100     100 %     100 %   Investment holding
                             
Might Winner Limited   Hong Kong   HK $1     100 %     100 %   Investment holding
                             
H.K CB. Cute Technology Co.,   Hong Kong   HK $10,000     100 %     100 %   Investment holding
                             
Shenzhen Quanjing Financial Leasing Co., Ltd *   PRC   RMB 20,000,000/ RMB Nil     100 %     100 %   Investment holding

 * The companies registered as limited liability companies under PRC law and the English name is for identification only. 

^ Loto Shenzhen was established in the PRC with limited liability on 14 December 2017. The registered capital of Loto Shenzhen is RMB200,000,000 of RMB147,996,271 has been paid by the Group as at 31 December 2019 and 2020. 

#Shenzhen Lewanwuxian was established in the PRC with limited liability on 14 December 2017. The registered capital of Shenzhen Lewanwuxian is RMB10,000,000 of RMB5,100,000 has been paid by the Group as at 31 December 2019 and 2020. 

@Sichuan Lecaiyuntian was established in the PRC with limited liability on 21 February 2019. The registered capital of Sichuan Lecaiyuntian is RMB60,000,000 of Nil has been paid by the Group as at 31 December 2019 and 2020. 

%These companies were deregistered in the current year. 

- 37 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

The following table shows information of subsidiaries that have non-controlling interests ("NCI") material to the Group. The summarised financial information represents amounts before inter-company eliminations.

 

Name   Beijing
Huancai
    Ganzi Changhe Hydropower  
    2019     2019     2020  
Principal place of business/country of incorporation     PRC       PRC       PRC  
% of ownership interests/voting rights held by NCI     47.5 %     8.4 %     49 %
      HK$'000       HK$'000       HK$'000  
                         
At 31 December:                        
Non-current assets     -       88       180,654  
Current assets     6,966       94,618       27,845  
Current liabilities     (3,639 )     (2,713 )     (22,128 )
                         
Net assets     3,327       91,993       186,371  
Accumulated NCI     1,580       7,727       91,322  
                         
Year ended 31 December:                        
Revenue     -       -       164,208  
Total expenses     (876 )     (1,244 )     (155,292 )
(Loss)/Profit for the year     (2,080 )     (1,244 )     8,916  
Total comprehensive (loss)/income     (2,080 )     (1,244 )     8,916  
(Loss)/Profit allocated to NCI     (988 )     (104 )     3,678  
Net cash generated from/(used in) operating activities     5,421       (87,572 )     22,886  
Net cash generated from/(used in) investing activities     113       (88 )     (117,602 )
Net cash generated from financing activities     -       93,215       89,157  
Effect of foreign exchange rate changes, net     (245 )     22       (310 )
Net increase/(decrease) in cash and cash equivalents     5,289       5,577       (5,869 )

 

- 38 -

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

21. INVESTMENTS IN ASSOCIATES

    2019     2020  
      HK$'000       HK$'000  
Unlisted investments                
Share of net assets     4,111       4,308  
Goodwill     6,990       1,282  
      11,101       5,590  
Impairment losses     (7,717 )     (3,159 )
      3,384       2,431  

 

Particulars of the associates at the end of the reporting period are as follows:

 

   

Place of
incorporation/

  Percentage of equity interests
attributable to the Company
     
Company name   registration   2019     2020     Principal activities
ChariLot Company Limited ("ChariLot")   Hong Kong     40 %     40 %   Investment holding and provision of services for the distribution of lottery products
                         
Guangzhou Sentai Information Technology Co., Ltd.* ("Guangzhou Sentai")   PRC     20 %     20 %   Self-media

* The companies registered as limited liability companies under PRC law and the English name is for identification only.

 

Guangzhou Sentai is a company mainly engaged in operating a self-media called 世 链 财 经 (www.shilian.com) providing updated blockchain information.

 

The following table shows information of associates that are material to the Group. These associates are accounted for in the consolidated financial statements using the equity method. The summarised financial information presented is based on the IFRS financial statements of the associates.

 

Name   Guangzhou Sentai  
    2019     2020  
Principal place of business/country of incorporation     PRC/PRC       PRC/PRC  
                 
Principal activities     Self-media  
                 
% ownership interests/voting rights held by the Group     20%/20%  

 

At 31 December:     HK$'000       HK$'000  
Non-current assets     20,308       21,616  
Current assets     5,891       6,392  
Current liabilities     (5,644 )     (6,470 )
                 
Net assets     20,555       21,538  
Group's share of net assets     4,111       4,308  
Goodwill     1,203       1,282  
Impairment losses     (1,930 )     (3,159 )
                 
Group's share of carrying amount of interest     3,384       2,431  

- 39 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

Year ended 31 December:            
Revenue     1,912       1,797  
Loss from continuing operations     (741 )     (341 )
Total comprehensive loss     (741 )     (341 )

 

The Group has discontinued the recognition of its share of losses of the associate ChariLot because of the share of losses of the associate exceeded the Group's interest in the associate and the Group has no obligation to take up further losses. The amounts of the Group's unrecognised share of losses of the associate for the year and cumulatively, are as follows:

 

    2019     2020  
    HK$'000     HK$'000  
Unrecognised share of losses of an associate for the year     -       -  
Accumulated unrecognised share of losses of an associate     (290 )     (290 )

 

22.   INVESTMENT IN A JOINT VENTURE

 

Particulars of the Group’s joint venture is as follows:              

 

    Place of       Proportion of ownership     Proportion of voting rights      
    incorporation   Class of   interest held by the Group     held by the Group     Principal
Company name   and operation   shares held   2019     2020     2019     2020     activities
PALTECH Company Limited   Hong Kong   Ordinary     60 %     60 %     60 %     60 %   Inactive

 

The following table illustrates the aggregate financial information of the Group’s joint venture that is not individually material:  

 

    2019     2020  
    HK$'000     HK$'000  
Cumulative unrecognised share of total comprehensive loss of joint venture     (210 )     (210 )

 

23. EQUITY INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME        

 

    2019     2020  
    HK$'000     HK$'000  
Equity security, at fair value                
Listed outside Hong Kong – company A     5,140       5,057  
Analysed as:                
Non-current assets     5,140       5,057  

 

The above investments are intended to be held for the medium to long-term. Designation of these investments as equity investments at fair value through other comprehensive income can avoid the volatility of the fair value changes of these investments to the profit or loss.

 

- 40 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

24. LOAN RECEIVABLES

 

(a) Brighten Topper Limited

 

On 3 April 2020, the Company granted a loan (the "Loan A") to an independent third party, Brighten Topper Limited ("Brighten Topper"), in the principal amount of HK$30,000,000 at the interest rate of 10% per annum for a term of two years. The interest for the first twelve months (being HK$3,000,000) shall be paid by Brighten Topper on or before 2 April 2021. The Loan A was guaranteed by Ms. Li Xue ("Ms. Li"), a director and sole beneficial owner of Brighten Topper and was secured by a property in PRC held by Ms. Li and any rights and interests derived thereof.

 

In the opinion of the directors, as at 31 December 2020, the fair value of the collateral approximated to RMB40,085,000 (equivalent to approximately HK$47,627,000). The Group seeks to maintain strict monitoring over the loan receivable and the financial performance of Brighten Topper. Overdue balances will be regularly reviewed by senior management.

 

(b) Yourich Inc Limited

 

On 18 October 2017, the Company granted a loan (the "Loan B") to an independent third party, Yourich Inc Limited (the "Yourich Inc"), in the principal amount of HK$99,000,000 at the interest rate of 6% per annum for a term of two years. The interest for the first twelve months (being HK$5,940,000) shall be paid by Yourich Inc on the drawdown date and made out of and deducted from the proceeds of the principal of the Loan B. The Loan B was guaranteed by Ms. Liu He ("Ms. Liu"), a director and sole beneficial owner of Yourich Inc and was secured by 95% of the entire equity interests in Artix Investment Co., Ltd. (the "Target") held by Ms. Liu and any rights and interests derived thereof.

 

The principal amount of the Loan B together with all accrued and unpaid interests shall be repayable in full upon expiry of two years after the drawdown date. Yourich Inc may prepay the principal amount of the Loan B in full at any time before the maturity date together with corresponding interest accrued. However, if the principal amount of the Loan B is prepaid before the expiry of the first twelve months after the drawdown date, the interest paid for the first twelve months shall not be returned to the Yourich Inc.

 

As at 31 December 2019, the loan receivable of approximately HK49,718,000 was still outstanding.

 

During the year ended 31 December 2020, the loan receivable was fully repaid.

 

(c) Shenzhen Chipchain Technologies Co., Ltd.

 

As at 19 June 2019, the Group entered into a convertible note arrangement (the "Convertible Note Agreement") with Shenzhen Chipchain Technologies Co., Ltd. (the "Convertible Note Issuer"), pursuant to which the Group agreed to grant to the Convertible Note Issuer a convertible note (the "Convertible Note") in the principal amount of RMB10,000,000 (equivalent to approximately HK$11,163,000) at an interest rate of 8% per annum for a term of six (6) months, during which the Group is entitled to convert the Convertible Note into 3.33% of the equity interest in the Convertible Note Issuer (the "Conversion").

 

As at maturity date, the Group did not exercise the right of Conversion and the Convertible Note was subsequently classified under loan receivable. As at 31 December 2019, the loan receivable of the Convertible Note Issuer was at the amount of approximately HK$11,163,000.

 

During the year ended 31 December 2020, the loan receivable in relation to the Convertible Note was fully repaid.

 

25.  TRADE RECEIVABLES      

 

    2019     2020  
    HK$'000     HK$'000  
Trade receivables     19,949       9,237  
Less: impairment of trade receivables     -       (837 )
      19,949       8,400  

 

- 41 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

An aging analysis of the trade receivables as at the end of the reporting period, based on the invoice date and net of provisions, is as follows:

 

    2019     2020  
    HK$'000     HK$'000  
Within 30 days     18,994       7,250  
31 days to 90 days     117       1,124  
91 days to 180 days     -       4  
181 days to 365 days     1       17  
Over 1 year     837       5  
                 
      19,949       8,400  

 

Reconciliation of loss allowance for trade receivables:      

 

    2019     2020  
    HK$'000     HK$'000  
At 1 January     -       -  
Increase in loss allowance for the year     -       837  
At 31 December     -       837  

 

The Group’s trading terms with its customers are usually on credit, in some instances where payment in advance is required. The credit period is generally two months for two major customers. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management. The Group does not hold any collateral or other credit enhancements over its trade receivable balances.

 

The Group applies the simplified approach under IFRS 9 to provide for expected credit losses using the lifetime expected loss provision for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The expected credit losses also incorporate forward looking information.

 

          Less than 1                                
          month past     1-3 months     3-6 months     6-12 months     Over 1 year        
    Current     due     past due     past due     past due     past due     Total  
    HK$'000     HK$'000     HK$'000     HK$'000     HK$'000     HK$'000     HK$'000  
At 31 December 2019                                                        
Weighted average                                                        
expected loss rate     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %        
Receivable amount     18,906       88       117       -       1       837       19,949  
Loss allowance     -       -       -       -       -       -       -  
At 31 December 2020                                                        
Weighted average                                                        
expected loss rate     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     100.00 %        
Receivable amount     8,287       87       4       17       5       837       9,237  
Loss allowance     -       -       -       -       -       837       837  

 

- 42 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

26.  PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES        

 

    Notes   2019     2020  
      HK$'000     HK$'000  
Other receivables         3,139       2,436  
Other receivable from a shareholder of a subsidiary   (i)     -       15,549  
Other tax assets         9,741       24,264  
Interest receivables         3,186       -  
Deposits for the construction in progress         11,163       -  
Utility deposits         12,782       16,254  
Other deposits         386       943  
Prepayments   (ii)     1,426       24,640  
                     
          41,823       84,086  
Impairment of other receivables         -       (1,068 )
                     
          41,823       83,018  

 

Notes:

 

(i) As of the report date, the balance was fully settled.
(ii) As of the report date, the amount of approximately HK$15,502,000 was refunded due to the cancellation of the purchase order as at 31 December 2020.

 

The movement in the impairment of other receivables are as follows:        

 

    2019     2020  
    HK$'000     HK$'000  
At 1 January     -       -  
Impairment losses recognised     -       1,068  
At 31 December     -       1,068  

 

27.  CASH AND CASH EQUIVALENTS        

 

    2019     2020  
    HK$'000     HK$'000  
Cash and cash equivalents     95,030       44,252  
Cash and cash equivalents denominated in:                
USD     31,392       19,688  
RMB (Note)     45,532       19,983  
HK$     18,106       4,581  
                 
      95,030       44,252  

 

Note: Conversion of RMB into foreign currencies is subject to the PRC’s Foreign Exchange Control Regulations.

 

- 43 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

28. TRADE PAYABLES

 

The aging analysis of trade payables, based on the date of receipt of goods, is as follows:

 

    2019     2020  
    HK$'000     HK$'000  
Within 30 days     23,793       1,057  
31 to 90 days     122       2,702  
91 to 180 days     385       194  
181 to 365 days     -       63  
Over 1 year     -       595  
                 
      24,300       4,611  

 

  The average credit period on purchases of goods is 60 days.                  

 

29. ACCRUALS AND OTHER PAYABLES                  

 

    2019     2020  
    HK$'000     HK$'000  
Other payables     3,423       3,697  
Construction cost payables     -       5,025  
Amount due to a shareholder of a joint venture     2,334       2,334  
Deposit received from customers     17,996       12,091  
Accruals     967       2,587  
                 
      24,720       25,734  

 

30. LEASE LIABILITIES                  

 

    Lease payments     Present value of lease payments  
    2019     2020     2019     2020  
    HK$'000     HK$'000     HK$'000     HK$'000  
Within one year     3,854       3,610       3,747       3,360  
In the second to fifth years, inclusive     715       3,316       692       3,236  
                                 
      4,569       6,926                  
Less: Future finance charges     (130 )     (330 )                
                                 
Present value of lease liabilities     4,439       6,596       4,439       6,596  
Less: Amount due for settlement within 12 months (shown under current liabilities)                   (3,747 )     (3,360 )
Amount due for settlement after 12 months                     692       3,236  

 

At 31 December 2019 and 2020, the average effective borrowing rate was 5.4% and 5.3% respectively. Interest rates are fixed at the contract dates and thus expose the Group to fair value interest rate risk.

 

31.

AMOUNT DUE TO HOLDING COMPANY/A RELATED COMPANY

 

The advances are unsecured, interest-free and repayable on demand.

 

- 44 -

 

  

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

32. DEFERRED TAX LIABILITIES          
             
  The movements in deferred tax liabilities are as follows:          

 

    Fair value        
    adjustments        
    arising from        
    acquisition of        
    subsidiaries     Total  
    HK$'000     HK$'000  
At 1 January 2019     -       -  
Acquisition of subsidiaries     1,150       1,150  
Credited to profit or loss     (124 )     (124 )
Exchange realignment     5       5  
                 
At 31 December 2019 and 1 January 2020     1,031       1,031  
Credited to profit or loss     (1,039 )     (1,039 )
Exchange realignment     8       8  
At 31 December 2020     -       -  

 

33. SHARE CAPITAL          

 

    2019     2020  
    HK$'000     HK$'000  
Authorised                
550,000,000 ordinary shares of HK$0.1 each     55,000       55,000  
      2019       2020  
      HK$'000       HK$'000  
Issued and fully paid:                
315,859,983 and 379,023,983 ordinary shares respectively of HK$0.1 each     31,586       37,902  
A summary of movements in the Company’s share capital is as follows:                

 

    Number of     Share Capital  
    shares in issue     HK$'000  
At 1 January 2019     3,145,935,836       31,459  
Share options exercised (Note (a))     12,664,000       127  
At 31 December 2019 and 1 January 2020                
      3,158,599,836       31,586  
Share consolidation (Note (b))     (2,842,739,853 )     -  
Placing of new shares (Note (c))     63,164,000       6,316  
At 31 December 2020     379,023,983       37,902  

 

- 45 -

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

Note:

 

(a) In 2019, the subscription rights attaching to 12,664,000 share options were exercised at the subscription price of HK$0.11 per share, resulting in the issue of 12,664,000 new shares of HK$0.01 each, for a total cash consideration, before expenses, of approximately HK$1,393,000.

 

Details of the Company’s share option scheme and the share options issued under the scheme are included in note 35 to the financial statements.

 

(b) A share consolidation has taken place on 28 May 2020. that every ten issued and unissued existing shares of HK$0.01 each in the share capital of the Company has been consolidated into one consolidated share of HK$0.1 each in the share capital of the Company.

 

(c) A placing has taken place on 9 October 2020. A total of 63,164,000 placing shares have been placed at the placing price of HK$0.26 per placing share. The gross proceeds and net proceeds from the placing amounted to approximately HK$16,423,000 and HK$16,028,000, respectively.

 

34. RESERVES

 

(a) Group

 

The amounts of the Group’s reserves and movements therein are presented in the consolidated statement of profit or loss and other comprehensive income and consolidated statement of changes in equity.

 

(b) Company

 

                Equity              
          Share-based     investment              
    Share     payment     revaluation     Accumulated        
    premium     reserve     reserve     losses     Total  
    HK$'000     HK$'000     HK$'000     HK$'000     HK$'000  
At 1 January 2019     327,928       12,598       -       (4,797 )     335,729  
Loss for the year     -       -       -       (31,547 )     (31,547 )
Issue of ordinary shares upon exercise of                                        
share options     1,266       -       -       -       1,266  
Equity-settled share-based payment expense     -       8,283       -       -       8,283  
Fair value changes of equity investments at                                        
fair value through other comprehensive income     -       -       (2,570 )     -       (2,570 )
                                         
At 31 December 2019 and 1 January 2020     329,194       20,881       (2,570 )     (36,344 )     311,161  
Loss for the year     -       -       -       (30,512 )     (30,512 )
Issue of ordinary shares upon exercise of                                        
share options     9,712       -       -       -       9,712  
Equity-settled share-based payment expense     -       4,028       -       -       4,028  
Cancellation of share option     -       (15,539 )     -       15,539       -  
Fair value changes of equity investments at                                        
fair value through other comprehensive income     -       -       (83 )     -       (83 )
At 31 December 2020     338,906       9,370       (2,653 )     (51,317 )     294,306  

 

- 46 -

  

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

(c) Nature and purpose of reserves

 

(i) Share premium account

 

Under the Companies Law of the Cayman Islands, the funds in the share premium account of the Company are distributable to the shareholders of the Company provided that immediately following the date on which the dividend is proposed to be distributed, the Company will be in a position to pay off its debts as they fall due in the ordinary course of business.

 

(ii) Share-based payment reserve

 

The share-based payment reserve represents the fair value of the actual or estimated number of unexercised share options granted to employees and consultants of the Group recognised in accordance with the accounting policy adopted for equity-settled share-based payments in note 3 to the consolidated financial statements.

 

(iii) Exchange reserve

 

The exchange reserve comprises all foreign exchange differences arising from the translation of the consolidated financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 3 to the consolidated financial statements.

 

35. SHARE-BASED PAYMENTS

 

The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations and to encourage the participants to work towards enhancing the value of the Company and its shares for the benefit of the Company and its shareholders as a whole.

 

The share option scheme which was adopted by the shareholders of the Company on 20 April 2002 expired on 20 April 2012 (the "Old Share Option Scheme"). Following the expiry of the Old Share Option Scheme, the shareholders of the Company adopted a new share option scheme on 18 May 2012 (the "2012 Share Option Scheme"). Under the 2012 Share Option Scheme, the directors of the Company may, at their discretion, grant to any participants share options to subscribe for the Company’s shares, subject to the terms and conditions stipulated therein. Notwithstanding the expiry of the Old Share Option Scheme, the share options which had been granted during the life of the Old Share Option Scheme shall continue to be valid and exercisable in accordance with their terms of issue.

 

On 17 August 2017, the board of directors resolved that (i) the cancellation of an aggregate of 3,408,599 share options granted but not exercised under the Old Share Option Scheme; and (ii) the cancellation of an aggregate of 113,042,871 share options granted but not exercised under the 2012 Share Option Scheme, subject to the written consent of the option holders to cancel their respective share options ("Resolution").

 

The following is a summary of the principal terms of the 2012 Share Option Scheme:

 

(a) Purpose of the schemes

 

The purpose of the 2012 Share Option Scheme is to provide incentives and rewards to eligible participants for their contribution to the Group and to attract, retain and motivate high-caliber eligible participants to work towards enhancing the value of the Company and its shares for the benefit of the Company and its shareholders as a whole.

 

(b) Participants of the schemes

 

The participants of the 2012 Share Option Scheme shall be (1) any full time or part time employees of the Group (including any executive or non-executive directors of the Company or any of its subsidiaries) and (2) any suppliers, consultants, agents and advisers.

 

- 47 -

  

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

(c) Total number of shares available for issue under the schemes

 

The total number of shares which may be issued upon exercise of all share options to be granted under the 2012 Share Option Scheme and any other schemes of the Company must not in aggregate exceed 10% of the shares in issue on the respective dates of approval of each of the schemes. The 10% limit may be refreshed with the approval by ordinary resolution of the Company’s shareholders.

 

The maximum number of shares which may be issued upon exercise of all outstanding share options granted and yet to be exercised under the 2012 Share Option Scheme and any other schemes of the Company must not exceed 30% of the shares in issue from time to time.

 

(d) Maximum entitlement of each participant under the schemes

 

The total number of shares issued and to be issued upon exercise of the share options granted or to be granted to each participant (including exercised, cancelled and outstanding options) in any twelve-month period must not exceed 1% of the shares in issue unless the same is approved by the Company’s shareholders in general meeting.

 

In addition, for any grant of share options to a substantial shareholder and/or an independent non-executive director of the Company or any of their respective associates, and where the total number of the shares issued and to be issued upon exercise of all options granted or to be granted to such person in any twelve-month period exceed 0.1% of the shares in issue and with an aggregate value in excess of HK$5 million, then the proposed grant is also subject to the approval of the Company’s shareholders in general meetings.

 

(e) The period within which the shares must be taken up under an option

 

The period during which an option may be exercised is determined by the board of directors at its absolute discretion, save that such period shall not be longer than 10 years from the date of grant.

 

(f) The minimum period for which an option must be held before it can be exercised

 

As determined by the board of directors upon the grant of an option.

 

(g) The amount payable on acceptance of an option and the period within which payments shall be made

 

Under the 2012 Share Option Scheme, the acceptance of an offer of the grant of the share options must be made within 28 days from the date of grant and HK$1.00 is payable on acceptance of the grant of options.

 

(h) The basis of determining the exercise price

 

The exercise price is determined by the board of directors which shall be at least the highest of (i) the closing price of the shares as stated in the Stock Exchange’s daily quotations sheet on the date when an option is offered; (ii) a price being the average of the closing prices of the shares as stated in the Stock Exchange’s daily quotations sheets for the five business days immediately preceding the date on which an option is offered; and (iii) the nominal value of the share.

 

(i) The remaining life of the scheme

 

The 2012 Share Option Scheme shall be valid and effective for a period of ten years from the date of adoption until 17 May 2022.

 

- 48 -

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

The 2012 Share Option Scheme

 

Movements of the share options under the 2012 Share Option Scheme during the year ended 31 December 2019 and 2020 are set out below:

 

                            Outstanding at           Share                                         Share price at        
Category of   Outstanding at     Granted during     Reclassified     Exercise during     31.12.2019 &     Reclassified on     consolidation on     Cancelled during     Granted during     Reclassified on     Lapsed during     Outstanding at     Date of grant of     date of grant of     Exercise price of  
participants   1.1.2019     the year     during the year     the year     1.1.2020     2.1.20205     28.5.2020     the year6     the year     1.9.20207     on 23.11.20208     31.12.2020     share options     share options9     share options9  
                                                                                  HK$     HK$  
Director1     84,000,000       -       -       -       84,000,000       (5,000,000 )     (71,100,000 )     (7,900,000 )     -       -       -       -       05.01.2018       1.87       2.00  
Director2     -       84,000,000       -       -       84,000,000       (1,332,000 )     (74,401,200 )     -       -       -       -       8,266,800       01.04.2019       1.10       1.10  
Director3     -       -       -       -       -       -       -       -       10,900,000       3,100,000       -       14,000,000       10.08.2020       0.26       0.26  
                                                                                                                         
Sub-total:     84,000,000       84,000,000       -       -       168,000,000       (6,332,000 )     (145,501,200 )     (7,900,000 )     10,900,000       3,100,000       -       22,266,800                          
Employees1     1,800,000       -       300,000       -       2,100,000       -       (1,890,000 )     (210,000 )     -       -       -       -       05.01.2018       1.87       2.00  
Employees2     -       800,000       300,000       -       1,100,000       -       (990,000 )     -       -       -       -       110,000       01.04.2019       1.10       1.10  
Employees3     -       -       -       -       -       -       -       -       900,000       -       -       900,000       10.08.2020       0.26       0.26  
                                                                                                                         
Sub-total:     1,800,000       800,000       600,000       -       3,200,000       -       (2,880,000 )     (210,000 )     900,000       -       -       1,010,000                          
Others1     67,600,000       -       (300,000 )     -       67,300,000       5,000,000       (65,070,000 )     (6,830,000 )     -       -       -       400,000       05.01.2018       1.87       2.00  
Others2     -       70,300,000       (300,000 )     (12,664,000 )     57,336,000       1,332,000       (52,801,200 )     -       -       -       (600,000 )     5,266,800       01.04.2019       1.10       1.10  
Others3     -       -       -       -       -       -       -       -       13,660,000       (3,100,000 )     (600,000 )     9,960,000       10.08.2020       0.26       0.26  
                                                                                                                         
Sub-total:     67,600,000       70,300,000       (600,000 )     (12,664,000 )     124,636,000       6,332,000       (117,871,200 )     (6,830,000 )     13,660,000       (3,100,000 )     (1,200,000 )     15,626,800                          
Total:     153,400,000       155,100,000       -       (12,664,000 )     295,836,000       -       (266,252,400 )     (14,940,000 )     25,460,000       -       (1,200,000 )     38,903,600                          
Weighted average                                                                                                                        
exercise price                                                                                                                        
(HK$)     0.20       0.11               0.11       0.16                       2.00       0.26               0.68       0.57                          
Share options                                                                                                                        
exercisable     51,108,000                               141,228,000                                                       17,344,800                          

 

1 The share options granted on 5 January 2018 are divided into 3 tranches exercisable from 5 January 2018, 5 January 2019 and 5 January 2020 respectively to 4 January 2028.

 

2 The share options granted on 1 April 2019 are divided into 3 tranches exercisable from 1 April 2019, 1 April 2020 and 1 April 2021 respectively to 31 March 2029.

 

3 The share options granted on 10 August 2020 are divided into 3 tranches exercisable from 10 August 2020, 10 August 2021 and 10 August 2022 respectively to 9 August 2030.

 

4 The category “Others” represents consultants of the Group. Consultants are individuals who rendered consultancy services in respect of the business development to the Group without receiving any compensation.

 

The Group granted share options to them for recognising their services similar to those rendered by employees of the Group.

 

5 To better reflect Mr. Pan Zhengming’s resignation as non-executive director on 2 January 2020, and Ms. Zhang Jing's appointment as non-executive director on 2 January 2020, the type of participant has been reclassified from directors to others, and from others to directors respectively.

 

6 14,940,000 share options granted to the options holders were cancelled in accordance with the terms of the share option scheme adopted by the Group on 18 May 2012.

 

7 To better reflect Mr. Yan Hao's appointment as independent non-executive director and chief executive officer on 1 September 2020, the type of participant has been reclassified from others to directors.

 

8 Mr. Pan Zhengming’s appointment as consultant has been terminated on 23 November 2020. 1,200,000 outstanding share options granted to him were lapsed on the same date.

 

9 The share price at date of grant of share options and the exercise price of share options have ebeen adjusted to reflect the Share Consolidation.

 

- 49 -

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

The fair values of share options granted in 2020 were calculated using the Binomial Tree model. The inputs into the model are as follows:

 

    2019     2020  
Weighted average share price (HK$)     1.10       0.26  
Weighted average exercise price (HK$)     1.10       0.26  
Expected volatility     75.86 %     87.11 %
Risk free rate     1.40 %     0.27 %
Expected dividend yield     0.00 %     0.00 %

 

The total fair values of the share options granted in 2019 and 2020 were at amount of approximately HK$7,914,000 and HK$4,014,000 respectively. During the year ended 31 December 2019 and 2020, an amount of approximately HK$8,283,000 and HK$4,028,000 respectively were recognised as equity-settled share option expense.

 

The Group recognised equity-settled share-based payment expenses at a total of HK$8,283,000 and HK$4,028,000 respectively, included in which of HK$Nil was recognised immediately as accelerated vesting due to the cancellation of share options for the year ended 31 December 2019 and 2020 in relation to share options granted by the Company in the prior years.

 

During the year ended 31 December 2019, none of the share options were lapsed due to termination of a consultant and none of the share options were cancelled under the 2012 Share Option Scheme.

 

During the year ended 31 December 2020, 1,200,000 of the share options were lapsed due to termination of a consultant and 14,940,000 of the share options were cancelled under the 2012 Share Option Scheme.

 

36. NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS

 

(a) Acquisition of subsidiaries

 

(i) On 5 March 2019, the Group obtained control of Chengdu Yilaike by acquiring the 100% issued share capital of Chengdu Yilaike for a total consideration of RMB1 which is comprised of a cash consideration RMB1. Chengdu Yilaike was engaged in Big Data Centre Services during the year of acquisition. The acquisition is for the purpose of expanding Group ’ s contribution in big data service markets and the anticipated future operating synergies from the combination.

 

The fair value of the identifiable assets and liabilities of Chengdu Yilaike acquired as at its date of acquisition is as follows:

 

Net assets acquired:   HK$'000  
Prepayments, deposits and other receivables     702  
Bank and cash balances     82  
Trade and other payables     (645 )
Other tax assets     935  
      1,074  
Gain on bargain purchase     (1,074 )
      -  
Satisfied by:        
         
Cash (in RMB1)     -  
         
Total consideration transferred     -  
         
Net cash inflow arising on acquisition:        
Cash consideration paid (in RMB1)     -  
Cash and cash equivalents acquired     (82 )
      (82 )

- 50 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

Chengdu Yilaike contributed approximately Nil and HK$1,749,000 to the Group’s revenue and loss for the year respectively for the period between the date of acquisition and the end of year 2019.

 

If the acquisition had been completed on 1 January 2019, total Group revenue for the year ended 31 December 2019 would have been HK$69,074,000, and loss for the year ended 31 December 2019 would have been HK$32,686,000. The proforma information is for illustrative purposes only and is not necessarily an indication of the revenue and results of operations of the Group that actually would have been achieved had the acquisition been completed on 1 January 2019, nor is intended to be a projection of future results.

 

(ii) On 22 November 2019, the Group obtained control of Sichuan Lecaiyuntian by acquiring the 100% issued share capital of Sichuan Lecaiyuntian for a total consideration of RMB13,426,000 which is comprised of a cash consideration approximately RMB13,426,000. Sichuan Lecaiyuntian was engaged in Big Data Centre Services during the year of acquisition. The acquisition is for the purpose of expanding Group's contribution in big data service markets and the anticipated future operating synergies from the combination.

 

The fair value of the identifiable assets and liabilities of Sichuan Lecaiyuntian acquired as at its date of acquisition is as follows:

 

Net assets acquired:   HK$'000  
Property, plant and equipment     110  
Intangible assets     4,598  
Trade receivables     23,187  
Prepayments, deposits and other receivables     11,423  
Bank and cash balances     3,195  
Trade and other payables     (37,185 )
Current tax liabilities     (203 )
Deferred tax liabilities     (1,150 )
         
      3,975  
Goodwill     10,948  
         
      14,923  
Satisfied by:        
Cash     14,923  
         
Total consideration transferred     14,923  
Net cash outflow arising on acquisition:        
Cash consideration paid     14,923  
Cash and cash equivalents acquired     (3,195 )
      11,728  

 

The goodwill arising on the acquisition of Sichuan Lecaiyuntian is attributable to the anticipated profitability of the distribution of the Group’s services in the big data services markets and the anticipated future operating synergies from the combination.

 

Sichuan Lecaiyuntian contributed approximately HK$32,723,000 and HK$2,890,000 to the Group’s revenue and profit for the year respectively for the period between the date of acquisition and the end of year 2019.

 

If the acquisition had been completed on 1 January 2019, total Group revenue for the year ended 31 December 2019 would have been HK$173,573,000, and loss for the year ended 31 December 2019 would have been HK$28,526,000. The proforma information is for illustrative purposes only and is not necessarily an indication of the revenue and results of operations of the Group that actually would have been achieved had the acquisition been completed on 1 January 2019, nor is intended to be a projection of future results.

 

- 51 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

(b) Changes in liabilities arising from financing activities

 

The following table shows the Group’s changes in liabilities arising from financing activities during the year:

 

                      Total  
                      liabilities  
          Amount due     Amount due     from  
    Lease     to a related     to holding     financing  
    liabilities     company     company     activities  
    HK$'000     HK$'000     HK$'000     HK$'000  
At 1 January 2019     -       -       39       39  
Change in cash flows     (3,741 )     11,380       (38 )     7,601  
Non-cash changes                                
- impact of first adoption of IFRS 16     7,857       -       -       7,857  
- Interest charges     323       -       -       323  
                                 
At 31 December 2019 and 1 January 2020     4,439       11,380       1       15,820  
Change in cash flows     (4,425 )     (10,913 )     (1 )     (15,339 )
Non-cash changes                                
- additions     7,081       -       -       7,081  
- interest charges     295       -       -       295  
- rental concession     (833 )     -       -       (833 )
- exchange differences     39       -       -       39  
                                 
At 31 December 2020     6,596       467       -       7,063  

 

37. CAPITAL COMMITMENTS

 

The Group’s capital commitments at the end of the reporting period are as follows:

 

    2019     2020  
    HK$'000     HK$'000  
Property, plant and equipment Contracted, but not provided for     75,788       33  

 

38. RELATED PARTY TRANSACTIONS

 

(a) Compensation of key management personnel of the Group:

 

    2019     2020  
    HK$'000     HK$'000  
Fees, salaries, allowances, bonus and benefits in kind     4,682       4,479  
Pension scheme contributions     31       34  
Equity-settled share-based payment expense     4,501       2,519  
      9,214       7,032  

 

Further details of directors’ and chief executive’s emoluments are included in note 11 to the consolidated financial statements.

 

- 52 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

39.  STATEMENT OF FINANCIAL POSITION OF THE COMPANY    

 

    2019     2020  
    HK$'000     HK$'000  
NON-CURRENT ASSETS                
Property, plant and equipment     3,554       4,821  
Investments in subsidiaries     2       2  
Right-of-use assets     3,258       5,497  
Equity investments at fair value through other comprehensive income     5,140       5,057  
                 
      11,954       15,377  
CURRENT ASSETS                
Loan receivables     49,718       -  
Prepayments, deposits and other receivables     5,209       2,640  
Amount due from subsidiaries     246,994       327,350  
Cash and cash equivalents     42,802       19,248  
                 
      344,723       349,238  
CURRENT LIABILITIES                
Accruals and other payables     1,617       1,171  
Lease liabilities     3,345       2,760  
Amount due to subsidiaries     8,967       25,030  
Amount due to holding company     1       -  
Amount due to related parties     -       462  
                 
      13,930       29,423  
NET CURRENT ASSETS     330,793       319,815  
TOTAL ASSETS LESS CURRENT LIABILITIES     342,747       335,192  
NON-CURRENT LIABILITIES                
Lease liabilities     -       2,984  
      -       2,984  
NET ASSETS     342,747       332,208  
EQUITY                
Share capital     31,586       37,902  
Reserves     311,161       294,306  
                 
TOTAL EQUITY     342,747       332,208  

 

- 53 -

 

 

LOTO INTERACTIVE LIMITED 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWO YEARS ENDED 31 DECEMBER 2019 AND 2020

 

 

 

40. EVENTS AFTER THE END OF THE REPORTING PERIOD

 

(a) On 12 January 2021, the Group and a shareholder (the “JV Partner”) of a non-wholly owned subsidiary (“JV Company”), holding 49% of the equity interest in the JV Company, entered into a repurchase agreement, pursuant to which the JV Partner shall repurchase the shares of the JV Company held by the Group at the total repurchase price in the amount of US$2 million.

 

(b) On 28 January 2021, the Group and Holding Company entered into a subscription agreement, pursuant to which Holding Company has agreed to subscribe for, and the Company has conditionally agreed to allot and issue an aggregate of 169,354,839 shares (the “Subscription Share”) at the price of HK$0.62 per Subscription Share.

 

(c) On 28 January 2021, the Group and two parties (the “Seller”), who hold 49% equity interest of Ganzi Changhe Hydropower, entered into an acquisition agreement (the “Acquisition Agreement”), pursuant to which the Group has agreed to purchase and the Sellers have conditionally agreed to sell the 49% equity interest of Ganzi Changhe Hydropower for a cash consideration of RMB88.2 million (equivalent to approximately HK$105.8 million) in accordance with the terms and conditions of the Acquisition Agreement.

 

41. APPROVAL OF FINANCIAL STATEMENTS

 

These consolidated financial statements were approved and authorised for issue by the board of directors of the Company on 30 April 2021.

 

- 54 -

 

Exhibit 99.2

 

Blockchain Alliance Technologies Limited

 

Combined Financial Statements

 

As of December 31, 2019 and 2020 and For the Years Then Ended

 

Index
 
  Pages
   
Independent Auditor’s Report 2
   
Combined Statements of Financial Position 3
   
Combined Statements of Profit/(Loss) and Other Comprehensive Income/(Loss) 4
   
Combined Statements of Changes in Net Parent Investment 5
   
Combined Statements of Cash Flows 6
   
Notes to Combined Financial Statements 7-16

 

Page 1

 

INDEPENDENT AUDITOR’S REPORT

 

Board of Directors and Shareholders

BIT Mining Limited

 

Report on the Financial Statements

 

We have audited the accompanying combined financial statements of Blockchain Alliance Technologies Limited and its subsidiaries, which comprise the combined balance sheets as of December 31, 2020 and 2019, and the related combined statements of profit/(loss) and other comprehensive income/(loss), changes in net parent investment, and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Blockchain Alliance Technologies Limited and its subsidiaries as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

/s/ Malonebailey LLP

Houston, Texas

July 30, 2021

 

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Combined Statements of Financial Position

(Amounts in U.S. Dollars)

 

    As of
January 1,
2019
    As of
December 31,
2019
    As of
December 31,
2020
 
Assets                        
Cryptocurrencies   $ 7,719,451     $ 10,132,917     $ 9,516,569  
Other receivables     47,442       36,126       116,195  
Total Current Assets     7,766,893       10,169,043       9,632,764  
                         
Intangible assets     696,191       696,191       696,191  
Total Assets   $ 8,463,084     $ 10,865,234     $ 10,328,955  
                         
Liabilities and Net Parent Investment                        
Current Liabilities                        
Trade payable   $ 4,218,692     $ 5,879,917     $ 5,836,954  
Trade payable – related party     629,869       300,728       531,189  
Other payable and accruals     13,257       93,238       3,183,830  
Total Current Liabilities     4,861,818       6,273,883       9,551,973  
                         
Total Liabilities     4,861,818       6,273,883       9,551,973  
                         
Net Parent Investment                        
Net parent investment     3,601,266       4,591,351       776,982  
Total Net Parent Investment     3,601,266       4,591,351       776,982  
                         
Total Liabilities and Net Parent Investment   $ 8,463,084     $ 10,865,234     $ 10,328,955  

 

The accompanying notes are an integral part of these combined financial statements

 

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Combined Statements of Profit (Loss) and Other Comprehensive Income (Loss)

(Amounts in U.S. Dollars)

 

    For the Years Ended December 31,  
    2019     2020  
Revenues   $ 1,131,041,156     $ 1,250,250,601  
Cost of revenues     1,119,678,303       1,263,951,414  
Gross Profit / (Loss)     11,362,853       (13,700,813 )
                 
Selling expenses     (1,134,982 )     (1,545,514 )
General and administrative expenses     (4,585,686 )     (4,620,284 )
Impairment loss of cryptocurrencies     (1,289,980 )     (172,055 )
Net gain on disposal of cryptocurrencies     3,068,431       1,852,725  
Other operating loss     (46,875 )     (6,954 )
                 
Profit / (Loss) Before Income Tax     7,373,761       (18,192,895 )
                 
Income tax expense     -       -  
Net Profit / (Loss)     7,373,761       (18,192,895 )
                 
Other comprehensive income     -       -  
                 
Total Comprehensive Income/ (Loss)   $ 7,373,761     $ (18,192,895 )

 

The accompanying notes are an integral part of these combined financial statements

 

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Combined Statements of Changes in Net Parent Investment

(Amounts in U.S. Dollars)

 

    Total Net Parent Investment  
Balance, January 1, 2019   $ 3,601,266  
Profit for the year     7,373,761  
Net distribution to parent     (6,383,676 )
Balance, December 31, 2019   $ 4,591,351  
Loss for the year     (18,192,895 )
Net contribution from parent     14,378,526  
Balance, December 31, 2020   $ 776,982  

 

The accompanying notes are an integral part of these combined financial statements

 

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Combined Statements of Cash Flows

(Amounts in U.S. Dollars)

 

    For the Years Ended December 31,  
    2019     2020  
CASH FLOWS FROM OPERATING ACTIVITIES                
Profit/(loss) for the year   $ 7,373,761     $ (18,192,895 )
Adjustments for:                
Revenue recognized on acceptance of cryptocurrencies     (962,217,021 )     (825,621,240 )
Impairment loss of cryptocurrencies     1,289,980       172,055  
Gain on disposal of cryptocurrencies     (3,068,431 )     (1,852,725 )
Changes in non-cash working capital items:                
Other receivables     11,316       (80,069 )
Trade payable     885,704,023       776,007,022  
Trade payable – related party     62,875,991       58,215,447  
Other payable and accruals     79,981       271,820  
CASH USED IN OPERATING ACTIVITIES     (7,950,400 )     (11,080,585 )
                 
CASH FLOWS FROM FINANCING ACTIVITY                
Net contribution from parent     7,950,400       11,080,585  
CASH PROVIDED BY FINANCING ACTIVITY     7,950,400       11,080,585  
                 
NET CHANGE IN CASH     -       -  
                 
CASH AT BEGINNING OF YEAR     -       -  
CASH AT END OF YEAR   $ -     $ -  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

               
Cash paid for interest   $ -     $ -  
Cash paid for income taxes   $ -     $ -  

  

The accompanying notes are an integral part of these combined financial statements

 

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1. Nature of Operations

 

Blockchain Alliance Technologies Limited (the "Company") was incorporated under the law of British Virgin Islands (“BVI”) on March 11, 2020 under the name of “Bitmain Group Limited”, which was changed to the current name on February 19, 2021. The Company is a holding company. The Company and its subsidiaries (together, the “Group”) principally operates a cryptocurrency mining pool under the brand of BTC.com after the reorganization completed on April 15, 2021 (the “Reorganization”).

 

Through the Reorganization, Bitdeer Technologies Holding Company (“Bitdeer”) transferred the entire mining pool business and ownership of and registration right to the domain name btc.com (the “Transferred Business”), which was previously operated as part of Straitdeer Pte. Ltd. (formerly, Bitmaintech Pte. Ltd.) and its subsidiaries, subsidiaries of Bitdeer, to Blockchain Alliance HK Limited, wholly-owned subsidiary of the Company, and its wholly-owned subsidiary Beijing Guixinyanghang Technologies Limited, a Company incorporated under the Laws of the People’s Republic of China (“PRC”). After the Reorganization, Blockchain Alliance Technologies Holding Company (“Blockchain Alliance Holding”), a Cayman Island company and the 100% shareholder of the Company, was held by the group of shareholders of Bitdeer. The Reorganization is a transaction among entities under common control. As a result, the transaction is accounted for as if it occurred during the earliest period presented.

 

On February 16, 2021, BIT Mining Ltd. (“BIT”) entered into a share exchange agreement, which was further amended on April 15, 2021, with Blockchain Alliance Holding, pursuant to which, BIT agreed to issue an aggregate of 44,353,435 Class A ordinary shares to Blockchain Alliance Holding in exchange for the entire outstanding share capital of the Company. BIT and Blockchain Alliance Holding also agreed that, in the twelve-month period from April 1, 2021 to March 31, 2022, if the Transferred Business records net operating profit, BIT shall issue additional Class A ordinary shares to Blockchain Alliance Holding at par value and a maximum of 22,176,718 additional Class A ordinary shares shall be issuable. If the Transferred Business records net operating loss, BIT shall be entitled to repurchase certain Class A ordinary shares held by Blockchain Alliance Holding at par value and a maximum of 4,435,344 Class A ordinary shares shall be subject to such repurchase arrangement.

 

On April 15, 2021, the first closing of the transactions contemplated by the share exchange agreement was completed and the entire mining pool business operated under BTC.com have been transferred to BIT.

 

2. Summary of Significant Accounting Policies

 

a. Basis of Presentation and Principles of Combination

 

The accompanying Combined Financial Statements are for the Transferred Business that was transferred to the Group during the Reorganization mentioned in Note 1. Stand-alone financial statements have not historically been prepared for the Transferred Business. The Combined Financial Statements are prepared in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Standards Interpretations Committee (“IFRIC”). The Combined Financial Statements, except for the combined statements of cash flows, are prepared on the accrual basis. The measurement basis used is historical cost, except for certain accounts which are measured using the basis mentioned in the relevant notes herein.

 

In accordance with IFRS, certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates upon subsequent resolution of identified matters. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Combined Financial Statements are disclosed in Note 3.

 

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Transactions between the combined companies and the balances and unrealized gains or losses arising from intra-group transactions have been eliminated in the preparation of the Combined Financial Statements.

 

These are the first financial statements of the Group prepared in accordance with IFRS. The Group applied IFRS 1 “First-time Adoption of International Financial Reporting Standards” (“IFRS 1”) in preparing these financial statements. Since the Group has not previously prepared any financial statements, no reconciliations from previous GAAP to IFRS are required. The same accounting policies have been applied during the 2019 and 2020 financial periods.

 

Basis of Carve-out

 

The Combined Financial Statements of the Transferred Business include all assets and liabilities that have been determined to be directly attributable to Transferred Business. All transactions between the Transferred Business and Bitdeer have been included as related party transactions in these Combined Financial Statements and considered to be effectively settled at the time the transaction is recorded. The total net effect of the settlement of these transactions is reflected within net parent investment in the combined statements of financial position. Such transactions, except for those conducted in the form of cryptocurrencies, are presented in the combined statements of cash flows as financing activity.

 

The Combined Financial Statements of the Transferred Business also include all revenues and costs directly attributable to the Transferred Business. These include costs charged to the Transferred Business by Bitdeer for certain supporting functions and services in the normal course of business. These costs have been allocated on a basis considered reasonable by management using either specific identification or proportional allocations based on headcount or other reasonable methods of allocation. Income tax expense was estimated based on statutory tax rate, adjusted as appropriate for the effects of known non-taxable and non-deductible items reported in the combined statements of profit (loss) and other comprehensive income (loss) as described above. However, the Combined Financial Statements of the Transferred Business may not reflect the actual costs that would have been incurred and may not be indicative of the Transferred Business’s combined results, financial position, and cash flows had it operated as a separate, stand-alone entity during the periods presented.

 

Cost Allocations

 

The Combined Financial Statements of the Transferred Business include general corporate expenses of Bitdeer that have been allocated to the Transferred Business for certain support functions provided on a centralized basis, such as accounting and finance, treasury, audit, legal, information technology, human resources, facilities, employee benefits and compensation, and research and development (“R&D”) activities. These costs have been allocated on a basis considered reasonable by management using either specific identification or proportional allocations based on headcount or other reasonable methods of allocation. The net expenses resulted from the cost allocations were immaterial in the years ended December 31, 2019 and 2020.

 

Net Parent Investment

 

The Transferred Business did not comprise a separate legal entity or group of entities during the years ended December 31, 2019 and 2020. Therefore, it is not meaningful to present share capital or an analysis of reserves. Changes in net assets attributed to Bitdeer are presented separately in the combined statements of changes in net parent investment through the line item “net contribution from / (distribution to) parent”.

 

b. Presentation and Functional Currency

 

Items included in the Combined Financial Statements are measured using the currency of the primary economic environment in which the Group operates (“the functional currency”). During the years ended December 31, 2019 and 2020, the primary operations of the Group were conducted in Singapore and US dollar (“$”) was considered as the functional currency. The Combined Financial Statements were presented in US dollar unless otherwise stated.

 

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c. Revenue Recognition

 

The Group operates its mining pool, BTC.com, to enable providers of computing power (“pool participants”) to participate in crypto-mining activities in an efficient manner in the blockchain network, in exchange for a fee (“pool operator fee”) for its coordination efforts as the pool operator. The Group receives all the mining rewards, and then allocates mining rewards to each pool participant net of the pool operator fees based on the sharing mechanism predetermined. The mining rewards include the block rewards and the transaction verification fees related to the transactions included in the block.

 

The Group recognizes mining pool revenue by analogy to IFRS 15 “Revenue from contracts with customers”. Income is classified by the Group as revenue when it arises from the provision of services in the ordinary course of the business. Revenue is recognized when control over service is transferred to the customer, at the amount of promised consideration to which the Group is expected to be entitled, excluding those amounts collected on behalf of third parties. Revenue excludes value added tax or other sales taxes and is after deduction of trade discount, if any.

 

Mining pool revenue is recognized by applying the following five steps:

 

1)        Identify the contract with the customer

2)        Identify the performance obligations in the contract

3)        Determine the transaction price

4)        Allocate the transaction price to the performance obligations in the contract

5)        Recognize revenue when, or as, the performance obligation is satisfied

 

The Group makes an analogy to IFRS 15 and treats the blockchain network as the “customers” for the purposes of IFRS 15 with which the Company contracts with under “whitepaper”, or general rules of the network. Providing computing power in cryptocurrency transaction verification services is an output of the Group’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Group’s contracts with the blockchain network. The transaction consideration the Group receives, if any, is noncash consideration, which the Group measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Group has earned the award from the blockchain network. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the Group successfully places a block and receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.

 

Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt.

 

Gross basis revenue

 

The Group recognizes the mining pool revenue on a gross basis. It coordinates all the computing power within the mining pool, delivers such aggregated computing power to the blockchain network, collects centrally all mining rewards and distributes them in accordance with the predetermined sharing mechanisms. The Group has control over the pool participants’ computing power. Although the pool participants can enter and exit the pool at will and deploy whatever qualifying types of mining machines, during the mining process, the Group dictates the tasks and the participants’ mining machines merely follow the allocation prescribed by the Group. As a result, the Group is primarily responsible for fulfilling the promise to provide the specified service. Further, under existing sharing mechanisms, the Group is exposed to the risk that actual block rewards may differ from expected rewards, therefore, bears the inventory risk before the specified service has been transferred to a customer.

 

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Since there are currently no accounting standards under IFRS or alternative accounting framework that specifically address cryptocurrencies, management has exercised significant judgment in determining the appropriate accounting treatment for cryptocurrencies held or recognized as revenues. In the event authoritative guidance is enacted by the IASB or IFRIC, the Group may be required to change its policies, which could have an effect on the Group’s financial position and results from operations.

 

d. Cost of Revenues

 

Cost of revenues consists primarily of the mining rewards allocated to each pool participant in exchange for their computing power contributed to the mining pool. The mining rewards allocated to the pool participants include both the block rewards as well as the transaction verification fees related to the transactions included in the block, depending on the sharing mechanism chosen by individual pool participants. Cost of revenue also consists of other direct costs related to providing the mining pool service such as server fees and labor for maintaining the mining pool service.

 

e. Cryptocurrencies

 

Cryptocurrencies consist of cryptocurrency denominated assets and are included in current assets. The Group accounts for the cryptocurrencies primarily received from operation of the mining pool as intangible assets with indefinite useful life in its statements of financial position. The Group adopts the cost model to account for its cryptocurrencies and reviews their impairment at each reporting date in accordance with IAS 38 “Intangible assets”. The Group accounts for cryptocurrencies at cost, instead of revaluing cryptocurrencies at their fair value on each reporting date, because the latter model is subject to inherent and substantial volatility in the value of cryptocurrencies from time to time.

 

Cryptocurrencies are carried at the spot rate they were earned at. Cost is calculated using the weighted average method. Gains or losses arising from the disposal of cryptocurrencies are determined as the difference between the fair value and the carrying amount of the cryptocurrencies and are recognized in the statements of profit or loss on the date of disposal. The fair value is determined using the daily open price from level 2 price aggregator websites.

 

At each reporting date, the Group reviews the carrying amounts of its cryptocurrencies to determine whether there is any indication that those cryptocurrencies have suffered an impairment loss. A cryptocurrency’s carrying amount is written down immediately to its fair value if the carrying amount is greater than its fair value. The impairment loss is reversed and the carrying amount of a cryptocurrency is increased when the fair value increased, but not above the amount that it would have been without the prior impairment loss.

 

f. Income Taxes

 

The Group’s operations have historically been included in the income tax filings of Bitdeer. The provision for income taxes in the Group’s Combined Financial Statements is based on a separate return methodology using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of the Group’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted. Current and deferred taxes are recognized in profit or loss except to the extent that it relates to items recognized directly in equity or other comprehensive income.

 

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Current tax is recognized and measured at the amount expected to be recovered from or payable to the taxation authorities based on the income tax rates enacted or substantively enacted at the end of the reporting period and includes any adjustment to taxes payable in respect of previous years.

 

Deferred tax is recognized on any temporary differences between the carrying amounts of assets and liabilities in the Combined Financial Statements and the corresponding tax bases used in the computation of taxable earnings. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized and the liability is settled.

 

Deferred tax assets are recognized to the extent future recovery is probable. At each reporting period end, deferred tax assets are reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.

 

Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Group reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made.

 

g. New Standards and Interpretations Not Yet Adopted

 

Certain new accounting standards and interpretations have been published that are not mandatory for the reporting periods presented and have not been early adopted by the Group. These standards are not expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions.

 

3. Significant Accounting Estimates and Judgments

 

In preparing these Combined Financial Statements, management has made judgements and estimates that affect the application of the Business’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis.

 

Carve-out financial statements

 

The carve-out adjustments required the Group to perform certain allocations and estimates which were based on the judgments and assumptions of the management. These carve-out adjustments involved subjective judgments as to the determination of reasonable methods of allocation.

 

In particular, the Group estimated and assumed the allocation of assets and liabilities, revenues and costs, as presented in Note 2.

 

The Group applied the foregoing methods, assumptions, judgments and estimates on a consistent basis for all of the periods presented in the Combined Financial Statements. It is possible that other companies, given the same information, may have reached different reasonable conclusions.

 

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Cryptocurrencies accounting

 

The Group accounts for the cryptocurrencies primarily received from operation of the mining pool as intangible assets with indefinite useful life in its statements of financial position. The indefinite-lived judgment is because, at the time of assessment, there is no foreseeable limit to the period over which such assets are expected to generate cash flows. Cryptocurrencies are carried at the spot rate they were earned at and reviewed for impairment at each reporting date. The cryptocurrency market is still a new market and is highly volatile; historical prices are not necessarily indicative of future value; a significant change in the market prices for cryptocurrencies would have a significant impact on the Group’s earnings and financial position. Fair value is determined by taking the daily open price from level 2 price aggregator websites.

 

Impairment of cryptocurrencies

 

The Group evaluates the cryptocurrencies every reporting period to determine whether there are any indications of impairment. If any such indication exists, which is often judgmental, a formal estimate of recoverable amount is performed and an impairment loss is recognized to the extent that the carrying amount exceeds the recoverable amount. The recoverable amount is measured at the higher of fair value less costs to sell and value in use. The evaluation for indications of impairment includes consideration of both external and internal sources of information, including such factors as the relationship between mining rewards and the required computing power, cryptocurrency prices, technological changes and industry environment.

 

The estimates and assumptions are subject to risk and uncertainty; hence, there is the possibility that changes in circumstances will alter these projections, which may impact the recoverable amount of the cryptocurrencies. In such circumstances some or all of the carrying value of the assets may be further impaired or the impairment reversed with the impact recorded in profit and loss.

 

Taxation

 

The determination of the Company’s tax expense for the period and deferred tax assets and liabilities involves significant estimation and judgement by management. In determining these amounts, management interprets tax legislation primarily in Singapore and makes estimates of the expected timing of the reversal of deferred tax assets and liabilities. The taxation authorities may interpret legislation differently. These differences may affect the final amount of taxes. The Company provides for such differences where known based on management’s best estimate of the probable outcome of these matters.

 

Page 12

 

4. Cryptocurrencies

 

The amounts represented the cryptocurrencies held by the Group as of December 31, 2019 and 2020. The continuity of cryptocurrencies was as follows:

 

    December 31, 2019     December 31, 2020  
    $     $  
Cost:                
Beginning balances     11,182,765       11,422,897  
Cryptocurrencies mined     962,217,021       825,621,240  
Cryptocurrencies distributed to pool participants     (946,189,874 )     (831,513,351 )
Net cryptocurrencies received from/(distributed to) parent     (14,334,076 )     3,297,941  
Deposit received     -       2,818,772  
Others     (1,452,939 )     (1,958,822 )
Ending balances     11,422,897       9,688,677  
                 
Impairment:                
Beginning balances     (3,463,314 )     (1,289,980 )
Addition     (1,289,980 )     (172,055 )
Disposals     3,463,314       1,289,927  
                 
Ending balances     (1,289,980 )     (172,108 )
                 
Net book value:                
Beginning balances     7,719,451       10,132,917  
Ending balances     10,132,917       9,516,569  

 

5. Related Party Transactions

 

The Group has, from time to time, distributed cryptocurrencies earned from the operation of the mining pool to Bitdeer, the parent before the Reorganization. Bitdeer also distributed cryptocurrencies to the Group to support the operation of the mining pool and settled payables related to operating expenses on behalf of the Group. During the years ended December 31, 2019 and 2020, the Group has made distribution to Bitdeer and received contribution from Bitdeer in form of cryptocurrencies in the amount of $14,334,076 and $3,297,941, respectively. In addition, Bitdeer has settled payables on behalf of the Group in the amount of $7,950,400 and $11,080,585 for the years ended December 31, 2019 and 2020, respectively. The transactions were included in the combined statements of changes in net parent investment through the line item “net contribution from / (distribution to) parent”.

 

During the years ended December 31, 2019 and 2020, Bitdeer, as a pool participant, contributed computing power to the mining pool of the Company in exchange for the mining rewards in the amount of $62,875,991 and $58,215,447, respectively, which were included in cost of revenues. The balance of trade payable to related party was $300,728 and $531,189 as of December 31, 2019 and 2020, respectively, which represents the mining rewards payable to the related party.

 

During the years ended December 31, 2019 and 2020, a portion of the Group’s cryptocurrencies was held under custody of a related party under common control. Further see Note 8.

 

Key management personnel remuneration

 

Under IAS 24 “Related parties”, remuneration paid to key management personnel must be disclosed. Since the Group has not had a separate management team during the periods presented the following table presents the share of employee benefits of Bitdeer’s key management allocated to the Group and recognized in the Combined Financial Statements. The share of key management remuneration benefits attributable to the Group was determined using an allocation key based on the time spent on the operation.

 

Page 13

 

Key management remuneration allocated to the Group is as follows:

 

    For the years ended December 31,  
    2019     2020  
Salary expense and bonus   $ 188,895     $ 575,976  

 

6. Concentration of Suppliers

 

For the years ended December 31, 2019 and 2020, suppliers accounted for 10% of more of the Group’s costs were as follows:

 

    For the years ended December 31,  
Supplier   2019     2020  
A     15 %     32 %
B     -       11 %

 

7. Income Taxes

 

Singapore

 

The Group primarily operated in Singapore. According to Singapore's tax regulations, there is no corporate income tax obligations when the entities obtain cryptocurrencies from mining or during the period of holding of cryptocurrencies with fair value of cryptocurrencies fluctuates. Under the current regulations, profits tax in Singapore is generally assessed at the rate of 17% of taxable income. As there is no taxable income in fiscal years 2019 and 2020, no provision for Singapore income tax has been made in the financial statements.

 

Unrecognized deferred tax assets

 

Deferred tax assets have not been recognized in respect of the following item, because it is not probable that future taxable profit will be available against which the Group can use the benefits therefrom.

 

    2019     2020  
      Gross amount       Tax effect       Gross amount       Tax effect  
    $     $     $     $  
Tax losses     13,988,506       2,378,046       20,161,258       3,427,414  
      13,988,506       2,378,046       20,161,258       3,427,414  

 

Tax losses for which no deferred tax asset was recognized never expire under current Singapore’s tax regulations.

 

Page 14

 

The reconciliations of the statutory income tax rate and the effective income tax rate are as follows:

 

    For the years ended December 31,  
    2019     2020  
Singapore statutory income tax rate     17 %     17 %
Items non-deductible for income tax purposes     (49 )%     2 %
Unrecognized deferred income tax assets     32 %     (19 )%
                 
Total            

 

8. Financial Instruments and Risk Management

 

Fair value

 

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The hierarchy is summarized as follows:

 

Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities;

Level 2: Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly from observable market data; and

Level 3: Inputs that are not based on observable market data

 

As of December 31, 2019 and 2020, there were no financial assets or liabilities measured at fair value. The carrying amounts of the Company’s financial assets and liabilities, such as other receivables, trade payable and other payable and accruals approximate their fair value due to the short-term nature of these instruments. Cryptocurrencies are initially measured at cost and subsequently adjusted for any impairment losses. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured. The quoted prices for various types of cryptocurrencies are from price aggregator websites, which are regarded as level 2 inputs.

 

Cryptocurrency risk

 

Cryptocurrency prices are affected by various forces including global supply and demand, interest rates, exchange rates, inflation or deflation and the global political and economic conditions. The profitability of the Group is directly related to the current and future market price of cryptocurrencies; in addition, the Group may not be able liquidate its holdings of cryptocurrencies at its desired price if required. A decline in the market prices for cryptocurrencies could negatively impact the Group’s future operations. The Group has not hedged the conversion of any of its sales of cryptocurrencies.

 

Cryptocurrencies have a limited history and the fair value historically has been very volatile. Historical performance of cryptocurrencies is not indicative of their future price performance. The Group’s cryptocurrencies currently primarily consist of bitcoin.

 

Liquidity risk

 

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group manages liquidity risk by maintaining sufficient cash and cryptocurrencies to ensure that it is able to meet its obligations as and when they fall due. The Group manages Company-wide cash and cryptocurrencies projections centrally and regularly updates projections for changes in business and fluctuations caused in cryptocurrency prices. The contractual maturities of trade and other payables are less than three months. In recent years, the cryptocurrency markets experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continual fluctuations in price will not occur.

 

Page 15

 

Credit risk

 

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Group. The Group’s credit risk primarily arises from cryptocurrencies held under custody of a related party under common control. To limit exposure to credit risk relating to cryptocurrencies under custody, the Group evaluates system security design of the custody service provider and regularly reviews the exposure of cryptocurrencies held in custody. The Group has further implemented internal controls to ensure the appropriate access to the cryptocurrencies under custody. The Group expects that there is no significant credit risk from non-performance by the related party. However, there is no assurance that loss of cryptocurrencies would not occur and the related losses would not be significant if such incidents occur. As of December 31, 2019 and 2020, $638,500 and $4,335,434 of the cryptocurrencies were held under custody by the related party under common control, respectively.

 

9. Supplemental Cash Flow Information

 

The non-cash investing and financing activities are as follows:

 

    For the Years Ended December 31,  
    2019     2020  
Distribution to parent in form of cryptocurrencies   $ 14,334,076     $ -  
Contribution from parent in form of cryptocurrencies     -       3,297,941  
Deposit received in form of cryptocurrencies     -       2,818,772  

 

10. Expenses by Nature

 

Operating expenses by nature are as follows:

 

    For the Years Ended December 31,  
    2019     2020  
Payroll expense   $ 2,120,845     $ 3,165,153  
Server fee     2,106,320       1,687,419  
Handling fees     562,813       315,439  
Advertising and entertainment expenses     181,234       138,169  
Amortization and depreciation     70,049       289,918  
Office expense     89,189       177,887  
Travelling expense     154,858       55,561  
Hosting fee     77,276       59,771  
Rent expense     65,285       123,554  
Impairment loss of cryptocurrencies     1,289,980       172,055  
Net gain on disposal of cryptocurrencies     (3,068,431 )     (1,852,725 )
Others     339,674       159,881  
Total   $ 3,989,092     $ 4,492,082  

 

11. Subsequent Events

 

The Group has evaluated transactions that occurred as of the issuance of these Combined Financial Statements, for purposes of disclosure of unrecognized subsequent events.

 

Page 16

 

 

Exhibit 99.3

 

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

 

On March 31, 2021, the Company completed the subscription for 169,354,839 shares of Loto Interactive Limited (HKEX: 08198) (“Loto Interactive”), at a price of HK$0.62 per share for a total consideration of HK$105 million (US$13.5 million) in cash (the "Share Subscription"). The Company’s ownership of Loto Interactive thereby increased to 54.2%, and Loto Interactive became a subsidiary of the Company.

 

On April 15, 2021, the Company announced the first closing of its previously announced transactions contemplated by the share exchange agreement, as amended (the "Share Exchange Agreement"), dated February 16, 2021, with Blockchain Alliance Technologies Holding Company ("Blockchain Alliance Holding"). Pursuant to the Share Exchange Agreement, the Company has issued an aggregate of 44,353,435 Class A ordinary shares of par value US$0.00005 per share of the Company (the "Class A Ordinary Shares") to Blockchain Alliance Holding in exchange for the entire outstanding share capital of Blockchain Alliance Technologies Limited ("Blockchain Alliance") held by Blockchain Alliance Holding. In accordance with the Share Exchange Agreement, the entire mining pool business of Bitdeer Technologies Holding Company ("BitDeer") operated under BTC.com, including the domain name BTC.com and the cryptocurrency wallet of BTC.com (collectively, the "BTC.com Pool Businesses") have now been transferred to the Company.

 

We refer the two acquired companies, Loto Interactive and the Blockchain Alliance, collectively as “the acquired companies”, and the corresponding transactions collectively as “Acquisitions”.

 

We have previously conducted our lottery business in China through a series of contractual arrangements with Shenzhen Youlanguang Science and Technology Co., Ltd., Shenzhen E-Sun Network Co., Ltd., and Shenzhen Guangtiandi Science and Technology Co., Ltd. (collectively, the “lottery business-related VIEs”), and their respective shareholders. On July 23, 2021, the Company announced its decision to dispose of its Chinese lottery related business and the Company terminated all of its lottery business-related VIE contracts. The lottery business-related VIE subsidiaries will be deconsolidated and their financial results will no longer be included in the Company's consolidated financial statements as a result of eliminating the VIE structure. We refer this transaction as “Disposition”.

 

On July 23, 2021, Loto Interactive Information Technology (Shenzhen) Co., Ltd. (“Loto Shenzhen”), a subsidiary of Loto Interactive, terminated all contractual arrangements with Zhejiang Keying Huancai Information Technology Co., Ltd. (“Zhejiang Keying”), a VIE primarily engaged in the provision of data analysis and storage services in connection with our pre-existing cryptocurrency mining operations in China. The shareholders of Zhejiang Keying entered into an equity transfer agreement with Loto Shenzhen to transfer all of Zhejiang Keying’s equity interests to Loto Shenzhen. As of the date of this current report, Zhejiang Keying is in the process of completing the business registration of equity changes. The shareholders of Zhejiang Keying also executed a letter of undertaking in favor of Loto Shenzhen and undertook to transfer all assets held by Zhejiang Keying to Loto Shenzhen in the event that the equity transfer could not be completed. The Company believes that the completion of the business registration of the equity changes of Zhejiang Keying is probable and Loto Shenzhen still effectively controls Zhejiang Keying based on the above arrangements despite the termination of the VIE arrangements. Accordingly, the termination of the VIE arrangements with Zhejiang Keying was not reflected in the following unaudited pro forma financial information.

 

The following unaudited pro forma combined financial information of the Company and the acquired companies is presented to illustrate the estimated effects of the Acquisitions and Disposition described below (collectively, “Adjustments” or “Pro Forma Adjustments”).

 

The unaudited pro forma combined balance sheet as of December 31, 2020 combines the historical consolidated balance sheet of the Company and the consolidated or combined balance sheet of the acquired companies, and disposes the historical balance sheet of VIE subsidiaries, after giving effect to the Acquisitions and Disposition as if it had occurred on December 31, 2020. The unaudited pro forma statement of operations for the year ended December 31, 2020 combines the historical consolidated statement of comprehensive loss of the Company and the consolidated or combined statement of profit or loss and other comprehensive income or loss of the acquired companies and eliminates the historical operating results of the VIE subsidiaries, after giving effect to the Acquisitions and Disposition as if it had occurred on January 1, 2020. These unaudited pro forma combined balance sheet and unaudited pro forma combined statement of operations are referred to collectively as the “pro forma financial information.”

 

The pro forma financial information should be read in conjunction with the accompanying notes. In addition, the pro forma financial information is derived from and should be read in conjunction with the following historical financial statements and accompanying notes of the Company and the acquired companies:

 

(i) audited consolidated financial statements as of and for the fiscal year ended December 31, 2020 and the related notes included in the annual report on Form 20-F for the year ended December 31, 2020 filed by the Company and

 

(ii) audited consolidated financial statements of Loto Interactive Limited as of and for the year ended December 31, 2020 and the related notes included as Exhibit 99.1 to this Current Report on Form 6-K filed July 30, 2021 and

 

(iii) audited combined financial statements of Blockchain Alliance Technologies Limited as of and for the year ended December 31, 2020 and the related notes included as Exhibit 99.2 to this Current Report on Form 6-K filed July 30, 2021.

 

  1  

 

 

Unaudited Pro Forma Combined Balance Sheet

(Amounts in thousands of Renminbi ("RMB") and U.S. dollars ("US$"))

 

    As of December 31, 2020  
    BIT Mining Limited Historical     Loto Interactive Historical     Blockchain Alliance Historical     Pro Forma Adjustments for Acquisitions     Notes   Pro forma Adjustments for Disposition (a)     Pro Forma Combined     Pro Forma Combined  
    RMB     RMB     RMB      RMB         RMB     RMB     US$*  
ASSETS                                              
Current assets:                                                            
Cash and cash equivalents     308,676       37,242       -       (88,106 )   A     (194,510 )     63,302       9,701  
Restricted cash     3,829       -       -       -           (1,242 )     2,587       396  
Cryptocurrencies     -       -       62,095       65,665     A     -       127,760       19,579  
Trade receivables     -       7,069       -       -           -       7,069       1,083  
   Amounts due from related parties     368       817       -       -           (368 )     817       125  
Prepayments and other current assets, net     22,980       69,052       758       -           360,662       453,452       69,495  
Total current assets     335,853       114,180       62,853       (22,441 )         164,542       654,987       100,379  
                                                             
Non-current assets:                                                            
Equity investments at fair value through other comprehensive income     -       4,256       -       (4,256 )   D     -       -       -  
Property and equipment, net     19,779       221,567       -       (48,823 )   A     (15,181 )     177,342       27,179  
Intangible assets, net     2,398       -       4,543       515,793     A     (1,229 )     521,505       79,924  
Deposits     1,479       -       -       -           (424 )     1,055       162  
Long-term investments     99,972       2,046       -       (62,729 )   A, D     (35,192 )     4,097       628  
Right-of-use assets     9,327       5,394       -       -           (9,327 )     5,394       827  
Other non-current assets     1,665       25,248       -       -           (1,665 )     25,248       3,869  
Goodwill     -       9,849       -       23,537     A     -       33,386       5,117  
Total non-current assets     134,620       268,360       4,543       423,522           (63,018 )     768,027       117,706  
TOTAL ASSETS     470,473       382,540       67,396       401,081           101,524       1,423,014       218,085  
                                                             
LIABILITIES AND SHAREHOLDERS’ EQUITY                                                            
Current liabilities:                                                            
Trade payables     -       3,880       38,086       22,750     A     -       64,716       9,918  
Trade payables – related party     -       -       3,466       3,489     A     -       6,955       1,066  
Amount due to a related company     -       393       -       -           -       393       60  
Accrued expenses and other current liabilities     69,361       21,658       20,774       137,289     A     (49,158 )     199,924       30,640  
Income tax payable     549       6,245       -       -           -       6,794       1,041  
Operating lease liabilities - current     3,710       2,828       -       -           (3,710 )     2,828       433  
Total current liabilities     73,620       35,004       62,326       163,528           (52,868 )     281,610       43,158  
                                                             
Non-current liabilities:                                                            
 Long-term payables     526       -       -       -           (526 )     -       -  
 Operating lease liabilities - non-current     5,807       2,724       -       -           (5,807 )     2,724       417  
Total non-current liabilities     6,333       2,724       -       -           (6,333 )     2,724       417  
TOTAL LIABILITIES     79,953       37,728       62,326       163,528           (59,201 )     284,334       43,575  
                                                             
Shareholders’ Equity:                                                            
Class A ordinary shares     151       -       -       14     A     -       165       25  
Class B ordinary shares     -       -       -       -           -       -       -  
Additional paid-in capital     2,602,883       -       -       456,372     A     (34,336 )     3,024,919       463,589  
Treasury shares     (143,780 )     -       -       -           -       (143,780 )     (22,035 )
Accumulated deficit and statutory reserve     (2,183,918 )     -       -       -           185,200       (1,998,718 )     (306,317 )
Accumulated other comprehensive income     128,441               -       -           (3,396 )     125,045       19,164  
Share Capital     -       31,899       -       (31,899 )   A     -       -       -  
Reserves             236,291       -       (236,291 )   A     -       -       -  
Net parent investment     -       -       5,070       (5,070 )   A     -       -       -  
Total BIT Mining Limited shareholders’ equity     403,777       268,190       5,070       183,126           147,468       1,007,631       154,426  
Noncontrolling interests     (13,257 )     76,622       -       54,427     A     13,257       131,049       20,084  
Total shareholders' equity     390,520       344,812       5,070       237,553           160,725       1,138,680       174,510  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY     470,473       382,540       67,396       401,081           101,524       1,423,014       218,085  

 

  2  

 

 


Unaudited Pro Forma Combined Statements of Operations
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
 except for number of shares, per share (or ADS) data)

 

    For the Year Ended December 31, 2020   
    BIT Mining Limited Historical     Loto Interactive Historical     Blockchain Alliance Historical     Pro forma Adjustments for Acquisitions     Note   Pro forma Adjustments for Disposition (b)     Pro Forma Combined     Pro Forma Combined  
    RMB     RMB     RMB     RMB          RMB     RMB     US$*  
Net Revenues     21,815       340,332       8,619,353       -           (6,886 )     8,974,614       1,375,420  
                                                             
Operating costs and expenses:                                                            
    Cost of services     (16,774 )     (304,124 )     (8,713,807 )     (41,814 )   B     2,884       (9,073,635 )     (1,390,595 )
    Sales and marketing     (16,748 )     (93 )     (10,655 )     -           8,845       (18,651 )     (2,858 )
    General and administrative     (152,541 )     (68,503 )     (31,854 )     217     C     53,874       (198,807 )     (30,469 )
    Service development     (30,201 )     -       -       -           16,830       (13,371 )     (2,049 )
Total operating expenses     (216,264 )     (372,720 )     (8,756,316 )     (41,597 )         82,433       (9,304,464 )     (1,425,971 )
    Other operating income     5,518       1,576       -       (217 )   C     (1,833 )     5,044       773  
    Government grant     891       -       -       -           (741 )     150       23  
    Other operating expenses     (2,752 )     (4,060 )     (48 )     -           874       (5,986 )     (917 )
Impairment loss of cryptocurrencies                     (1,186 )                 -       (1,186 )     (182 )
Net gain on disposal of cryptocurrencies     -       -       12,773       -           -       12,773       1,958  
Operating loss     (190,792 )     (34,872 )     (125,424 )     (41,814 )         73,847       (319,055 )     (48,896 )
    Other income (expense), net     748       -       -       (74 )   D     (449 )     225       34  
    Interest income     9,093       394       -       (129 )   C     (7,429 )     1,929       296  
    Finance costs     -       (398 )     -       129     C     -       (269 )     (41 )
    (Loss) gain from equity method investments     (10,798 )     (988 )     -       13,284     C     (2,060 )     (562 )     (86 )
Gain on previously held equity investments     -       -       -       33,945     A     -       33,945       5,202  
    Impairment of long-term investments     (33,001 )     -       -       33,001     C     -       -       -  
Loss before income tax     (224,750 )     (35,864 )     (125,424 )     38,342           63,909       (283,787 )     (43,491 )
    Income taxes benefits (expense)     3,654       (2,576 )     -       -           (3,445 )     (2,367 )     (363 )
Net loss     (221,096 )     (38,440 )     (125,424 )     38,342           60,464       (286,154 )     (43,854 )
    Less: net (loss) income attributable to noncontrolling interests     2,130      

3,121 

      -       (20,727 )   E     (2,130 )     (17,606 )     (2,698 )
Net loss attributable to BIT Mining Limited     (223,226 )     (41,561 )**     (125,424 )     59,069           62,594       (268,548 )     (41,156 )
Other comprehensive loss                                                            
    Share of other comprehensive loss of an equity method investee     (1,218 )     (74 )     -       1,292     C, D     -       -       -  
    Foreign currency translation  (loss) gain     (11,825 )     14,865       -       -           (14,289 )     (11,249 )     (1,724 )
Other comprehensive (loss) income, net of tax     (13,043 )     14,791       -      

1,292

          (14,289 )     (11,249 )     (1,724 )
Comprehensive loss     (234,139 )     (23,649 )     (125,424 )     39,634           46,175       (297,403 )     (45,578 )
    Less: Comprehensive (loss) income attributable to noncontrolling interests     2,130      

4,132

      -      

(14,963

)   E     (2,130 )     (10,831 )     (1,660 )
Comprehensive loss attributable to BIT Mining Limited     (236,269 )     (27,781 )**     (125,424 )     54,597           48,305       (286,572 )     (43,918 )
                                                             
Weighted average number of  Class A and Class B ordinary shares outstanding:                                                            
Basic     430,011,263                       44,353,435                   474,364,698       474,364,698  
Diluted     430,011,263                       44,353,435                   474,364,698       474,364,698  
                                                             
Losses per share attributable to BIT Mining Limited-Basic and Diluted                                                            
    Net loss     (0.52 )                                         (0.57 )     (0.09 )
                                                             
Losses per ADS***attributable to  BIT Mining Limited-Basic and Diluted                                                            
    Net loss     (5.19 )                                         (5.66 )     (0.87 )

 

 

 

*This statements contains translations of certain Renminbi amounts into U.S. dollars at specified rates solely for the convenience of readers. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the exchange rate of RMB6.5250 to US$1.00, as set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2020.

 

**Amount attributable to Loto Interactive’s shareholders.

 

*** American Depositary Shares, which are traded on the NYSE. Each ADS represents ten Class A ordinary shares of the Company.

 

  3  

 

 

NOTES TO UNAUDITED PRO FORMA COMSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation

 

The pro forma financial information was prepared in conformity with Article 11 of Regulation S-X. The pro forma financial information for acquisitions was prepared using the acquisition method of accounting in accordance with Accounting Standards Codification 805, “Business Combinations” (“ASC 805”) and was derived from the audited historical financial statements of the Company and the acquired companies.

 

The pro forma financial information has been prepared by the Company for illustrative and informational purposes only in accordance with Article 11. The pro forma financial information is not necessarily indicative of what the Company’s consolidated statement of comprehensive loss or consolidated balance sheet actually would have been had the Acquisitions, Disposition and other Adjustments been completed as of the dates indicated or will be for any future periods. The pro forma financial information does not purport to project the Company’s future financial position or results of operations following the completion of the Acquisitions and Disposition.

  

The Company is still in the process of performing a full review of the acquired companies’ accounting policies to determine if there are any additional material differences that require modification or reclassification of the acquired companies’ revenues, expenses, assets or liabilities to conform to the Company’s accounting policies and classifications. As a result of that review, the Company may identify differences between the accounting policies of the companies that, when conformed, could have a material impact on the pro forma financial information.

 

2. Consideration and Purchase Price

 

Consideration and Purchase Price of Loto Interactive

 

Before the Share Subscription, the Company previously held 127,871,432 shares of Loto Interactive and the ownership of Loto Interactive was 33.74%. On March 31, 2021, the Company completed the subscription for 169,354,839 shares of Loto Interactive, at a price of HK$0.62 per share for a total consideration of HK$105 million (US$13.5 million) in cash. The Company’s ownership of Loto Interactive thereby increased to 54.2%.

 

Concurrently with the completion of the Share Subscription, Loto Interactive has completed its acquisition of the remaining equity interests in its indirectly held subsidiary, Ganzi Changhe Hydropower Consumption Service Co., Ltd. (“Ganzi Changhe Data Center”), for a total consideration of approximately RMB88.2 million (approximately US$13.6 million) in cash.

 

The following table presents the calculation of preliminary purchase consideration:

 

    RMB  
      (in thousands)  
Re-measurement of the fair value of previously-held equity interest     66,985  
Purchase price at acquisition close on March 31, 2021     88,106  
Fair value of non-controlling shareholders     131,049  
Total allocated purchase price     286,140  

 

Consideration and Purchase Price of Blockchain Alliance

 

Pursuant to the Share Exchange Agreement, the Company has issued an aggregate of 44,353,435 Class A ordinary shares to Blockchain Alliance Holding in exchange for the entire outstanding share capital of Blockchain Alliance. The following calculated purchase price based on the market value of the Company’s Class A ordinary shares on April 15, 2021.

 

    RMB  
      (in thousands)  
Fair value of Class A ordinary shares at acquisition close on April 15, 2021     456,386  
Estimate of post-closing adjustments     99,064  
Total allocated purchase price     555,450  

 

  4  

 

 

Given that the purchase price is subject to certain post-closing valuation adjustment terms as provided in the Share Exchange Agreement (estimates of which are included in the table above), the final transaction consideration to be paid by the Company assumed for the purpose of this pro forma financial information may not reflect the ultimate purchase price that the Company will have to pay for the Acquisition of Blockchain Alliance.

 

Furthermore, the allocation of the consideration is preliminary and pending finalization of various estimates, inputs and analyses. Since this pro forma financial information has been prepared based on preliminary estimates of consideration and fair values attributable to the Acquisitions, the actual amounts eventually recorded in accordance with the acquisition method of accounting, including the identifiable intangibles and goodwill, may differ materially from the information presented.

 

3. The allocation of the purchase price

 

The following table presents the preliminary purchase price allocation of the assets acquired and the liabilities assumed as if the Acquisitions occurred on December 31, 2020.

 

Preliminary purchase price allocation of Loto Interactive

 

    RMB  
      (in thousands)  
Assets        
Cash and cash equivalents     37,242  
Trade receivable     7,069  
Amounts due from related parties     817  
Prepayments and other current assets     69,052  
Property and equipment, net     172,744  
Long-term investments     6,302  
Right-of-use assets     5,394  
Other non-current assets     25,248  
      323,868  
Liabilities        
Accounts payables     3,880  
Amount due to a related company     393  
Accrued expenses and other current liabilities     21,658  
Income tax payable     6,245  
Operating lease liabilities - current     2,828  
Operating lease liabilities - non-current     2,724  
      37,728  
Total allocated purchase price           286,140  

 

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Preliminary purchase price allocation of Blockchain Alliance

 

    RMB  
    (in thousands)  
Assets        
Cryptocurrencies     127,760  
Prepayments and other current assets     758  
Intangible assets, net     520,336  
Goodwill     33,386  
      682,240  
Liabilities        
Trade payable     60,836  
Trade payable – related party     6,955  
Accrued expenses and other current liabilities     58,999  
      126,790  
Total allocated purchase price     555,450  

 

The business combination accounting is not yet final and the amounts assigned to the assets acquired and the liabilities assumed are provisional. Therefore, this may result in future adjustments to the provisional amounts as new information is obtained about the facts and circumstances that existed at the acquisition date. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments.

 

4. Pro Forma Adjustments for Acquisitions

 

A. Reflects the preliminary purchase price allocation recorded, and the elimination of the acquired companies’ net assets balances in accordance with the acquisition method of accounting.

 

B. Represents adjustments provided on depreciation and amortization for property and equipment and finite intangible assets based on the preliminary purchase price allocation. Property and equipment have been depreciated on a straight-line basis over their estimated useful lives. Intangible assets having a finite life have been amortized on a straight-line basis over their estimated useful lives.

 

C. Represents the elimination of internal transactions between Loto Interactive and the Company during the year of 2020.

 

D. Reflects the adjustments to conform the accounting and presentation of certain equity investments to the accounting and presentation of the Company.

 

E. Reflects the adjustments provided on net loss attributable to the non-controlling interest and comprehensive loss attributable to non-controlling interest based on the net loss and comprehensive loss of Loto Interactive and the percentage of ownership of the non-controlling interest.

 

5. Pro Forma Adjustments for Disposition

 

(a) Reflects the derecognition of the assets and liabilities of the lottery business-related VIEs.

 

(b) Reflects the elimination of revenues and expenses associated with the operations of the lottery business-related VIEs.

 

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Exhibit 99.4

 

Risk Factors

 

This section includes material updates in certain risks relating to us since April 14, 2021 the date of our annual report on Form 20-F for the year ended December 31, 2020 (the “Annual Report”). This section is a supplement to and should be read in conjunction with the section titled “Risk Factors” included in the Annual Report.

 

Adverse changes in the regulatory and policy environment in China and overseas markets where we operate could make it illegal to acquire, own, hold, sell, or use bitcoin, ether, or other cryptocurrencies, participate in the blockchain or utilize similar bitcoin assets in China or other countries, or negatively affect our ability to carry out the expansion of overseas operations, which would materially and adversely affect our business, financial condition and results of operations.

 

Our blockchain and cryptocurrency mining business could be significantly affected by, among other things, the regulatory and policy developments in China and overseas jurisdictions where we operate, such as the United States and Kazakhstan. Governmental authorities are likely to continue to issue new laws, rules and regulations governing the blockchain and cryptocurrency industry we operate in and enhance enforcement of existing laws, rules and regulations. For example, the People’s Bank of China (the “PBOC”), Ministry of Industry and Information Technology, State Administration for Industry and Commerce, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission issued “Announcement on Preventing Token Fundraising Risks” on September 4, 2017, prohibiting all organizations and individuals from engaging in initial coin offering transactions. On May 21, 2021, the Financial Stability and Development Committee of the PRC State Council mentioned the need to resolutely crack down on bitcoin mining and trading activities. On June 18, 2021, the “Notice of the Sichuan Provincial Development and Reform Commission and the Sichuan Provincial Energy Administration on the Cleanup and Shutdown of Virtual Currency Mining Projects” required electricity companies within Sichuan Province to close down power supply to businesses involved in bitcoin and cryptocurrency mining. On June 19, 2021, one of our indirectly held subsidiaries, Ganzi Changhe Hydropower Consumption Service Co. Ltd. (“Ganzi Changhe Data Center”), received notice from State Grid Sichuan Ganzi Electric Power Co., Ltd. (the “Power Supplier”), informing Ganzi Changhe Data Center that its power supply would be suspended, effective June 19, 2021. Ganzi Changhe Data Center has since suspended its operations. Data centers in Sichuan, including the Ganzi Changhe Data Center, contributed approximately 3% of our total revenues in the month of May 2021. Furthermore, on June 21, 2021, the PBOC was reported to have held interviews with certain financial institutions in China, and stressed that banks and other financial institutions in China shall strictly implement the “Guarding Against Bitcoin Risks” and the “Announcement on Preventing Token Fundraising Risks” and other regulatory requirements, diligently fulfill their customer identification obligations, and shall not provide account opening, registration, trading, clearing, settlement and other services related to blockchain and cryptocurrency business.

 

We had begun the development of our overseas operations before these recent regulatory and policy developments in China. In light of these developments in China, we are in the process of moving our pre-existing China operations overseas. We may be subject to restrictions relating to the transfer of cryptocurrency mining machines out of China, as China has recently strengthened regulations on exports of goods, technology and services. Specifically, for computers and related components used in cryptocurrency mining machines, exporting enterprises should carefully evaluate whether the mining machines, their components, and any data or information contained therein are subject to export restrictions, and therefore are required to go through relevant export licensing procedures before such mining machines can be transported out of China. The relevant restrictions that apply to the transfer of cryptocurrency mining machines by us include, but are not limited to, the Catalogue of Goods Prohibited from Export, the Catalogue of Goods Subject to Export License Management, the Catalogue of Technologies Prohibited from Export and Restricted from Export in China, the Catalogue for the Administration of Import and Export Licenses of Dual-use Items and Technologies, and other applicable export control catalogues and lists. In addition, since most of our mining machines are second-hand equipment, we may also be required to evaluate, inspect and dispose of the relevant stored information or data to comply with relevant data security regulations before moving such machines to overseas markets. If we are deemed to have violated export restrictions or data security regulations in China or otherwise become subject to government interferences, we may be subject to administrative penalties or criminal investigation by relevant government authorities and our operation migration to overseas may be delayed, interrupted or compromised.

 

 

Recently, we have adopted the development strategy to focus on the overseas expansion of our blockchain and cryptocurrency mining operations. In May 2021, we entered into a binding investment term sheet to invest in a cryptocurrency mining data center in Texas, the United States, and a binding investment term sheet with a Kazakhstan-based company to jointly invest in a cryptocurrency mining data center in Kazakhstan. As of the date of this current report, we have delivered mining machines with a theoretical maximum total hash rate capacity of 292.7 PH/s to Kazakhstan. However, we cannot assure you that the government authorities in these overseas markets will not adopt new laws and regulations in the future to restrict blockchain and cryptocurrency business.

 

Some jurisdictions, including China, restrict various uses of cryptocurrencies, including the use of cryptocurrencies as a medium of exchange, the conversion between cryptocurrencies and fiat currencies or between cryptocurrencies, the provision of trading and other services related to cryptocurrencies by financial institutions and payment institutions, and initial coin offerings and other means of capital raising based on cryptocurrencies. We cannot assure you that these jurisdictions will not enact new laws or regulations that further restrict activities relate to cryptocurrencies.

 

In addition, cryptocurrencies may be used by market participants for black market transactions, to conduct fraud, money laundering and terrorism-funding, tax evasion, economic sanction evasion or other illegal activities. As a result, governments may seek to regulate, restrict, control or ban the mining, use, holding and transferring of cryptocurrencies. We may not be able to eliminate all instances where other parties use cryptocurrencies mined by us to engage in money laundering or other illegal or improper activities. We cannot assure you that we will successfully detect and prevent all money laundering or other illegal or improper activities which may adversely affect our reputation, business, financial condition and results of operations. In addition, as mining activities employ sophisticated and high-powered computing devices that require large amounts of electricity to operate, future developments in the regulation of energy consumption, including possible restrictions on energy usage in the jurisdictions where we sell our products, may also affect our business operations and the demand for bitcoins and other cryptocurrencies mined by us. Our business, financial condition and results of operations may be materially and adversely affected by these adverse changes in the regulatory and policy environment in in the markets where we operate our blockchain and cryptocurrency mining operations.

 

We have been subject to a variety of PRC laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations or exposure to government interference actions could have a material and adverse effect on our business, financial condition and results of operations; and the future offering of our securities may be subject to additional disclosure requirements and review that the U.S. Securities and Exchange Commission may adopt for companies with China-based operations.

 

We have been subject to PRC laws relating to the collection, use, sharing, retention, security, and transfer of confidential and private information, such as personal information and other data. These laws apply not only to third-party transactions, but also to transfers of information between us, E-Sun Sky Computer (Shenzhen) Co., Ltd., our wholly foreign-owned enterprise in China (“WFOE”), our variable interest entities (“VIEs”), and our VIEs’ subsidiaries, and among us, our WFOE, our VIEs, and our VIEs’ subsidiaries, and other parties with which we have commercial relations. These laws and their interpretations and enforcement continue to develop and are subject to change, and the PRC government may adopt other rules and restrictions in the future.

 

Pursuant to the PRC Cybersecurity Law, which was promulgated by the Standing Committee of the National People’s Congress on November 7, 2016 and took effect on June 1, 2017, personal information and important data collected and generated by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affects or may affect national security, it should be subject to cybersecurity review by the Cyberspace Administration of China (“CAC”). Due to the lack of further interpretations, the exact scope of “critical information infrastructure operator” remains unclear. On July 10, 2021, the CAC publicly issued the “Cybersecurity Review Measures” (Revised Draft for Comments) aiming to, upon its enactment, replace the existing Measures for Cybersecurity Censorship. The draft measures extend the scope of cybersecurity reviews to data processing operators engaging in data processing activities that affect or may affect national security, including listing in a foreign country. If the enacted version of the draft measures mandates clearance of cybersecurity review and other specific actions to be completed by companies like us, we face uncertainties as to whether such clearance can be timely obtained, or at all. In connection with our lottery business in China, we processed users’ personal data (including name, address, age, bank details and lottery purchase history) as part of our business, which could subject us to cybersecurity review.

 

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We have previously conducted our lottery business in China through a series of contractual arrangements with Shenzhen Youlanguang Science and Technology Co., Ltd., Shenzhen E-Sun Network Co., Ltd., and Shenzhen Guangtiandi Science and Technology Co., Ltd. (collectively, the “lottery business-related VIEs”), and their respective shareholders. Since March 31, 2021, we also consolidated the financial results of Zhejiang Keying Huancai Information Technology Co., Ltd. (“Zhejiang Keying”), a VIE primarily engaged in the provision of data analysis and storage services in connection with our pre-existing cryptocurrency mining operations in China, through its contractual arrangement with Loto Interactive Information Technology (Shenzhen) Co., Ltd. (“Loto Shenzhen”), which is indirectly controlled by us after the completion of our acquisition of the majority interest of Loto Interactive Limited on March 31, 2021. On July 23, 2021, we announced our decision to dispose of our Chinese lottery related business, and we effectively terminated all of our contractual arrangements with our lottery business-related VIEs and Zhejiang Keying. On the same date, the shareholders of Zhejiang Keying entered into an equity transfer agreement with Loto Shenzhen to transfer all of Zhejiang Keying’s equity interests to Loto Shenzhen. The shareholders of Zhejiang Keying also executed a letter of undertaking in favor of Loto Shenzhen, and undertook to transfer all assets held by Zhejiang Keying to Loto Shenzhen in the event that the equity transfer could not be completed due to restrictions on foreign investment in or operation of blockchain and cryptocurrency mining-related business in China. As of the date of this current report, we are in the process of completing the disposal of our lottery business-related VIEs and deconsolidating their financial results from our consolidated financial statement, completing the relevant business registration changes for unwinding the VIE structures of our lottery business-related VIEs and Zhejiang Keying, and completing the transfer of equity interests of Zhejiang Keying to Loto Shenzhen. We cannot assure you that any of the aforementioned actions can be completed in a timely or liability-free manner or at all. Any instance of non-compliance with the PRC cybersecurity and data protection laws and foreign investment laws and regulations, including any prior non-compliance involving the former VIEs and their subsidiaries, could result in penalties or other significant legal liabilities.

 

The lottery business-related VIEs contributed RMB6.9 million (US$1.1 million) and RMB2.7 million (US$0.4 million) in 2020 and the three months ended March 31, 2021, accounting for 31.6% and 13.6 % of our total revenue for the periods, respectively. In addition, the lottery business-related VIEs incurred a net loss of RMB60.5 million (US$9.3 million) and RMB8.5 million (US$0.8 million) for 2020 and the three months ended March 31, 2021, respectively. As of March 31, 2021, total assets held by the lottery business-related VIEs represented RMB93.4 million (US$14.3 million), or 7.2%, of our total assets, and net debt held by VIEs was RMB229.6 million (US$35.0 million). We cannot assure you that the disposal of the lottery business-related VIEs and unwinding of VIE arrangements with such VIEs and Zhejiang Keying will be completed as anticipated in a timely and liability-free manner or that no dispute or liability will arise during or following such disposal and unwinding process, or that such disposal and unwinding will not adversely affect our overall results of operations and financial condition. In addition, during the process of disposing of the lottery business-related VIEs and the unwinding of the VIE structure of Zhejiang Keying, and after such process is completed, we cannot guarantee that we will not continue to be subject to PRC regulatory inspection and/or review relating to cybersecurity, especially when there remains significant uncertainty as to the scope and manner of the regulatory enforcement and/or the possible government interferences that we may be exposed to. If we become subject to cybersecurity inspection and/or review by CAC or other PRC authorities or are required by them to take any specific actions, it could cause suspension or termination of the future offering of our securities, disruptions to our operations, result in negative publicity regarding our company, and divert our managerial and financial resources. We may also be subject to fines or other penalties, which could materially and adversely affect our business, financial condition, and results of operations. Furthermore, although we have suspended our blockchain and cryptocurrency mining business in China and are in the process of disposing of our Chinese lottery related business, in light of the recent regulatory and policy developments in China and government actions taken by the PRC government, including possible imposition of restrictions and/or approval requirements on China-based companies raising capital offshore, the future offering of our securities may be subject to additional disclosure requirements and review that the U.S. Securities and Exchange Commission or other regulatory authorities in the United States may adopt for companies with China-based operations.

 

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