UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

FORM 20-F

 

 

   

(Mark One) 

¨ Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 or

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2017

or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________

or

¨ Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of event requiring this shell company report

Commission file number 001-36206

 

500.com Limited

(Exact Name of Registrant as Specified in Its Charter)

 

Cayman Islands
(Jurisdiction of Incorporation or Organization)

 

12F, West Side, Block B, Building No. 7

Shenzhen Bay Eco-Technology Park
Nanshan District, Shenzhen 518115
The People’s Republic of China
(Address of Principal Executive Offices)

Qiang Yuan, Chief Financial Officer

12F, West Side, Block B, Building No. 7

Shenzhen Bay Eco-Technology Park
Nanshan District, Shenzhen 518115
The People’s Republic of China
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Securities and Exchange Act of 1934:

 

Title of Each Class

Name of Each Exchange on Which Registered

Ordinary shares, par value US$0.00005 per share* New York Stock Exchange*

 

* Not for trading, but only in connection with the listing of the American depositary shares (“ADSs”) on the New York Stock Exchange. Each ADS represents the right to receive ten ordinary shares. The ADSs are registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form F-6. Accordingly, the ADSs are exempt from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended, pursuant to Rule 12a-8 thereunder.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

 

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

333,787,552 Class A ordinary shares and 74,400,299 Class B ordinary shares, par value US$0.00005 per share, as of December 31, 2017.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No  x

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer x   Non-accelerated filer ¨ Emerging Growth Company ¨

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP x International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ Other ¨

 

If “Other” has been checked in response to the previous question, indicate by check mark which consolidated financial statement item the registrant has elected to follow.

Item 17 ¨     Item 18 ¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
PART I   3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 3
ITEM 3. KEY INFORMATION 3
ITEM 4. INFORMATION ON THE COMPANY 40
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 65
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 90
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 99
ITEM 8. FINANCIAL INFORMATION 100
ITEM 9. THE OFFER AND LISTING 101
ITEM 10. ADDITIONAL INFORMATION 102
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 110
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 111
PART II   113
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 113
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 113
ITEM 15. CONTROLS AND PROCEDURES 113
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 114
ITEM 16B. CODE OF ETHICS 114
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 114
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 115
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 115
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 116
ITEM 16G. CORPORATE GOVERNANCE 116
ITEM 16H. MINE SAFETY DISCLOSURE 116
PART III   117
ITEM 17. FINANCIAL STATEMENTS 117
ITEM 18. FINANCIAL STATEMENTS 117
ITEM 19. EXHIBITS 117

 

i  

 

 

CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F

 

Unless otherwise indicated, references in this annual report on Form 20-F to:

 

· “ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs;

 

· “ADSs” are to our American depositary shares, each of which represents ten ordinary shares;

 

· “China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan and the special administrative regions of Hong Kong and Macau;

 

· “consolidated affiliated entities” refer to our consolidated affiliated entities, namely,

 

o Beijing Baifengrun Technology Co., Ltd., or Baifengrun Technology,

 

o Beijing Daguo Xiaoxian Culture Media Co., Ltd or Daguoxiaoxian, which was disposed of by the Company on February 9, 2018,

 

o Hangzhou Laiqi Information Technology Co., Ltd., or Hangzhou Laiqi, which was disposed of by the Company on May 20, 2016,

 

o Lhasa Yicai Network Technology Co., Ltd., or Lhasa Yicai,

 

o The Multi Group Ltd, or TMG,

 

o Shangmeng Business Services Co., Ltd., or Shangmeng Services, which was disposed of by the Company on May 20, 2016,

 

o Shenzhen Caiyu Hudong Technology Co., Ltd., or Shenzhen Caiyu, which was disposed of by the Company on November 2, 2017,

 

o Shenzhen E-Sun Sky Network Technology Co., Ltd., or E-Sun Sky Network,

 

o Shenzhen E-Sun Network Co., Ltd., or E-Sun Network,

 

o Shenzhen Fenggu Network Technology Co., Ltd., or Shenzhen Fenggu,

 

o Shenzhen Kaisheng Jinfu Enterprise Management Co., Ltd., or Shenzhen Kaisheng,

 

o Shenzhen Guangtiandi Technology Co., Ltd., or Guangtiandi Technology,

 

o Shenzhen Qufan Network Technology Co., Ltd., or Shenzhen Qufan, which was disposed of by the Company on February 9, 2018,

 

o Shenzhen Tongfu Technology Co., Ltd., or Tongfu Technology,

 

o Shenzhen Wubai Zhifu Co., Ltd., or 500Fu, which was disposed of by the Company on February 7, 2018,

 

o Shenzhen Yicai Network Technology Co., Ltd., or Shenzhen Yicai,

 

o Shenzhen Youlanguang Science and Technology Co., Ltd., or Youlanguang Technology,

 

o Zhejiang Shangmeng Technology Co., Ltd, or Sumpay.cn, which was disposed of by the Company on May 20, 2016, and

 

o Other intermediate holding companies.

 

1

 

 

· “The Multi Group” or “TMG” are to The Multi Group Ltd., 93% of which is owned by us, and the following wholly-owned subsidiaries:

 

o Lotto Warehouse Ltd, or Loto Warehouse;

 

o Multi Brand Gaming Ltd, or Multi Brand;

 

o Multi Warehouse Ltd, or Multi Warehouse;

 

o Multilotto Australia PTY, or Multilotto Australia.

 

o Multilotto UK Ltd, or Multilotto UK;

 

o Multi pay N.V., or Multi pay;

 

o Round Spot Services Ltd., or Round Spot; and

 

o Wasp Media Ltd, or Wasp Media;

 

· “ordinary shares” are to our ordinary shares, par value US$0.00005 per share;

 

· “RMB” and “Renminbi” are to the legal currency of China;

 

· “US$” and “U.S. dollars” are to the legal currency of the United States;

 

· “EUR” are to the legal currency of the European Union; and

 

· “We,” “us,” “our company”, “our”, “the Group” or “the Company” are to 500.com Limited, its predecessor entities and its consolidated affiliated subsidiaries.

 

2

 

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

 

The following summary consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”.

 

Our historical results do not necessarily indicate our results to be expected for any future period.

 

    Year ended December 31,  
    2013     2014     2015     2016     2017     2017  
    RMB     RMB     RMB     RMB     RMB     US$  
    (in thousands, except for per share data)  
Consolidated Statement of Comprehensive Income (Loss) Data:                                    
Net Revenues     259,534       579,717       99,552       10,928       131,323       20,184  
Operating costs and expenses:                                                
Cost of services     (27,818 )     (53,909 )     (24,355 )     (14,141 )     (53,096 )     (8,161 )
Sales and marketing     (84,596 )     (173,883 )     (87,022 )     (44,921 )     (76,977 )     (11,831 )
General and administrative     (73,190 )     (156,309 )     (232,244 )     (247,688 )     (257,079 )     (39,512 )
Service development expenses     (28,686 )     (59,398 )     (63,296 )     (71,595 )     (68,341 )     (10,504 )
Write-off of deferred offering expenses     —       (3,241 )     —       —       —       —  
                                                 
Total operating expenses     (214,290 )     (446,740 )     (406,917 )     (378,345 )     (455,493 )     (70,008 )
Other operating income     14,560       17,414       6,910       2,732       1,204       185  
Government grant     2,792       3,643       2,022       10,017       6,789       1,043  
Indemnity cost     —       —       —       (9,979 )     —       —  
Other operating expenses     (2,678 )     (4,527 )     (2,975 )     (1,915 )     (34,691 )     (5,332 )
                                                 
Operating profit (loss)     59,918       149,507       (301,408 )     (366,562 )     (350,868 )     (53,928 )
Others, net     —       —       —       —       821       126  
Interest income     2,058       17,009       20,589       23,859       20,574       3,162  
Interest expense     (5,407 )     (356 )     (2,138 )             —       —  
Loss from equity method investments     —       —       (407 )     (406 )     (2,128 )     (327 )
Change in fair value of derivative component of the convertible note     (26,809 )     —       —       —       —       —  
Changes in fair value of the structured deposit     —       (1,124 )     1,124       —       (2,384 )     (366 )
Gain from disposal of subsidiaries     —       —       —       136,914       5,477       842  
                                                 
Income (loss) before income tax     29,760       165,036       (282,240 )     (206,195 )     (328,508 )     (50,491 )
Income tax benefit (expenses)     76,294       (7,987 )     (41,969 )     (3,057 )     12,366       1,901  
                                                 
Net income (loss)     106,054       157,049       (324,209 )     (209,252 )     (316,142 )     (48,590 )
Less: Net loss (income) attributable to the non-controlling interests                     (312 )     (6,287 )     957       147  
Net income (loss) attributable to 500.com Limited     106,054       157,049       (323,897 )     (202,965 )     (317,099 )     (48,737 )
                                                 
Other comprehensive (loss) income                                                
Foreign currency translation gain (loss)     (5,496 )     12,145       66,851       82,347       (55,805 )     (8,577 )
Change in fair value of available for sale investments     —       —       —       754       (733 )     (113 )
Other Comprehensive (loss) income, net of tax     (5,496 )     12,145       66,851       83,101       (56,538 )     (8,690 )
                                                 
Comprehensive Income (loss)     100,558       169,194       (257,358 )     (126,151 )     (372,680 )     (57,280 )
Less: Comprehensive loss attributable to noncontrolling interests     —       —       (312 )     (6,287 )     1,348       207  
Comprehensive income (loss) attributable to 500.com Limited      100,558       169,194       (257,046 )     (119,864 )     (374,028 )     (57,487 )

 

3

 

 

    Year ended December 31,  
    2013     2014     2015     2016     2017     2017  
    RMB     RMB     RMB     RMB     RMB     US$  
    (in thousands, except for per share data)  
Earnings (losses) per share attributable to 500.com Limited                                                
Basic     0.45       0.46       (0.84 )     (0.49 )     (0.78 )     (0.12 )
Diluted     0.41       0.44       (0.84 )     (0.49 )     (0.78 )     (0.12 )
                                                 
Weighted average number of Class A and Class B ordinary shares outstanding:                                                
Basic     238,342,685       339,782,819       385,590,213       414,872,756       408,310,122       408,310,122  
Diluted     259,729,367       357,848,704       385,590,213       414,872,756       408,310,122       408,310,122  
                                                 
Non-GAAP financial data (1)     106,054       157,049       (323,897 )     (202,965 )     (317,099 )     (48,737 )
Net income (loss) attributable to 500.com Limited                                                
Adjustment for share-based compensation expenses     7,561       89,922       158,628       163,341       91,143       14,008  
Adjustment for deferred tax expense relating to outside basis differences     (88,796 )     —       —       —       —       —  
Adjustment for deferred tax expense relating to valuation allowance     —       —       40,105       —       —       —  
Adjustment for changes in fair value of the derivative component of the convertible note     26,809       —       —       —       —       —  
Adjustment for interest expense relating to the convertible note     3,933       —       —       —       —       —  
Adjusted net income (loss) attributable to 500.com Limited (non-GAAP)     55,561       246,971       (125,164 )     (39,624 )     (225,956 )     (34,729 )

 

 

(1) As a supplement to net income, we use the non-GAAP financial measure of adjusted net income which is U.S. GAAP net income as adjusted to exclude share-based compensation, deferred tax expenses/(profit) relating to outside basis differences and valuation allowance in our consolidated affiliated entities and costs incurred on convertible note. This non-GAAP financial measure is provided as additional information to help our investors compare business trends among different reporting periods on a consistent basis and to enhance investors’ overall understanding of our current financial performance and prospects for the future. This non-GAAP financial measure should not be considered in addition to or as a substitute for or superior to U.S. GAAP net income. In addition, our definition of adjusted net income may be different from the definition of such term used by other companies, and therefore comparability may be limited.

 

The following table sets forth our selected consolidated balance sheet data as of the indicated dates:

 

    As of December 31,  
    2013     2014     2015     2016     2017     2017  
    RMB     RMB     RMB     RMB     RMB     US$  
    (in thousands)  
Consolidated Balance Sheet Data:                                                
Total current assets     909,876       1,256,403       1,712,086       1,707,032       737,022       113,276  
Total assets     958,300       1,319,692       2,084,497       2,076,892       1,754,559       269,669  
Total current liabilities     118,567       157,876       157,822       209,475       175,937       27,041  
Total liabilities     148,880       202,070       218,161       268,849       223,197       34,304  
Total 500.com Limited shareholders’ equity     809,420       1,117,622       1,767,863       1,709,531       1,409,774       216,678  
Total shareholders’ equity     809,420       1,117,622       1,866,336       1,808,043       1,509,310       231,976  
Total liabilities and shareholders’ equity     958,300       1,319,692       2,084,497       2,076,892       1,754,559       269,669  

 

Exchange Rate Information

 

Our business is primarily conducted in China and all of our revenues are denominated in Renminbi. Periodic reports made to shareholders will be expressed in Renminbi with translations of Renminbi amounts into U.S. dollars at the current exchange rate solely for the convenience of the reader. Conversions of Renminbi into U.S. dollars in this annual report are based on the noon buying rate as set forth in the H.10 statistical release of the Federal Reserve Board. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.5063 to US$1.00, the noon buying rate in effect as of December 29, 2017. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On April 20, 2018, the noon buying rate was RMB6.2945 to US$1.00.

 

4

 

 

The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated.

 

   

Exchange Rate (Renminbi per US Dollar) (1)

 
Period   Period End    

Average (2)

    Low     High  
    (RMB per US$1.00)  
     
2013     6.0537       6.1497       6.2438       6.0537  
2014     6.2046       6.1620       6.2591       6.0402  
2015     6.4778       6.2869       6.4896       6.1870  
2016     6.9430       6.6549       6.9580       6.4480  
2017     6.5063       6.7350       6.9575       6.4773  
October     6.6328       6.6254       6.6533       6.5712  
November     6.6090       6.6200       6.6385       6.5967  
December     6.5063       6.5932       6.6210       6.5063  
2018                                
January     6.2841       6.4233       6.5263       6.2841  
February     6.3280       6.3183       6.3471       6.2649  
March     6.2726       6.3174       6.3565       6.2685  
April (through April 20, 2018)     6.2945       6.2859       6.3045       6.2655  

 

 

(1) The source of the exchange rate is the H.10 statistical release of the Federal Reserve Board.

 

(2) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

 

B. Capitalization and Indebtedness

 

Not Applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

D. Risk Factors

 

Risks Related to Our Business and Industry

 

We have changed our business model a few times during the last few years, which makes it difficult to evaluate our business.

 

In recent years, we have begun new lines of businesses and suspended or disposed of existing lines of businesses, including:

 

· we launched our online lottery services in 2001 and became profitable in 2007. We have suspended all of our online lottery sales services since April 4, 2015, and have not generated any revenue from these operations since then.

 

· In December 2015, we acquired a 63% equity interest in Sumpay.cn and its wholly owned subsidiaries, which provide third party payment services in China, and disposed of this investment in May 2016.

 

· In July 2016, we acquired a 100% equity interest in Shenzhen Caiyu, a provider of sports information services in China and disposed of this investment in November 2017.

 

5

 

 

· In October 2016, we held a 51% equity interest in Shenzhen Kaisheng to provide online spot commodity trading services in China.

 

· In November 2016, we acquired a 51% equity interest in Qufan Internet Technology Inc., and Shenzhen Qufan Network Technology Co., Ltd. (together, “Qufan”) to provide mobile poker games services in China, and disposed of this investment in February 2018.

 

· In June 2017, we acquired a 40.65% equity interest in Loto Interactive Limited (Formerly named MelcoLot Limited), or Loto Interactive, a company listed on the Hong Kong Stock Exchange (Stock Code: 8198), which is principally engaged in the provision of lottery-related technologies, systems and solutions to two state-run lottery operators in China, namely the China Welfare Lottery Issuance Centre and the China Sports Lottery Administration Center, or the Sports Lottery Center.

 

· In July 2017, we acquired a 93% equity interest in The Multi Group Ltd., or TMG, which holds licenses to operate online gaming sites from Curacao, Malta, the United Kingdom and Ireland.

 

· In March 2018, we entered into a framework agreement with the Sports Lottery Center, pursuant to which we will cooperate with the Sports Lottery Center to develop physical channels to sell sports lottery tickets.

 

Many of our business lines are relatively new business models in an emerging and rapidly evolving market. This makes it difficult for you to evaluate our business, financial performance and prospects, and our historical growth rate may not be indicative of our future performance. We may not be able to realize our profit expectation when we began to offer any of these new lines of businesses. You should consider our prospects in light of the risks and uncertainties that fast-growing companies in a rapidly evolving market may encounter.

 

In particular, we have suspended all of our lottery sales services since April 4, 2015 in response to the promulgation of the Self-Inspection Notice and the Public Announcement and there is no clear indication as to how long our voluntary suspension will last as of the date of this annual report. As a result of the voluntary suspension of our online sports lottery sales services, our net revenues in 2015 were RMB99.6 million, representing an 82.8% decrease as compared to 2014, and we recorded a net loss attributable to 500.com Limited of RMB323.9 million in 2015, as compared to net income attributable to 500.com Limited of RMB157.0 million in 2014. We cannot assure you that even if we are able to resume our online sports lottery sales services in the future, our users’ purchasing activities for sports lottery products will return to previous levels and continue to grow at a comparable pace as compared to that of the period prior to the voluntary suspension.

 

We have suspended all of our online lottery sales services since April 4, 2015, and have not generated any revenue from these operations since then. There is no clear indication as to when the suspension will be lifted.

 

Since March 2015, all provincial sports lottery administration centers to which we provide sports lottery sales services have suspended accepting online purchase orders for lottery products, in response to the Notice related to Self-Inspection and Self-Remedy of Unauthorized Online Lottery Sales, or the Self-Inspection Notice, which was jointly promulgated by the Ministry of Finance, or the MOF, the Ministry of Civil Affairs and the General Administration of Sports of the People’s Republic of China on January 15, 2015.

 

The Self-Inspection Notice requires provincial and municipal government branches, including financial, civil affairs and sports bureaus, to conduct inspection and take remedial measures for unauthorized online lottery sales within their respective jurisdictions. The scope of inspection includes, among other things, commercial contract arrangements, online lottery products, lottery sales data exchange, online lottery sales channels, and sales commission fees in connection with unauthorized engagements of online sales agents by lottery administration centers. The Self-Inspection Notice further requires a formal report on the result of the self-inspection and self-remedy be submitted by each provincial or municipal government to the Ministry of Finance, the Ministry of Civil Affairs and the General Administration of Sports of the People’s Republic of China by March 1, 2015.

 

6

 

 

On February 24, 2015, we were informed by certain provincial sports lottery administration centers that as part of their respective self-inspection processes, such provincial sports lottery administration centers planned to suspend accepting online purchase orders for lottery products starting from February 25, 2015. On March 2, 2015, we were further informed by the remaining provincial sports lottery administration centers to which we provide sports lottery sales services that such provincial sports lottery administration centers also planned to suspend accepting online purchase orders for lottery products, in response to the Self-Inspection Notice. As a result, our transaction volume decreased significantly. On April 3, 2015, a public announcement, or the Public Announcement, with regard to online lottery sales in China was jointly released by eight competent government authorities, namely, the MOF, the Ministry of Public Security, the State Administration for Industry & Commerce, the Ministry of Industry and Information Technology, the Ministry of Civil Affairs, the People’s Bank of China, the General Administration of Sports of China and the China Banking Regulatory Commission. The Public Announcement mandates, among other things, that (i) all lottery institutions, internet companies, and other institutions or individuals which provide unauthorized online lottery sales services, either directly or through agents, shall immediately cease such services. The local governmental authorities of finance, civil affairs and sports shall investigate and sanction unauthorized online lottery sales in their respective jurisdictions according to relevant laws and regulations; (ii) the local government authorities of public security and industry & commerce shall investigate any issuance or sales of illegal lottery within their respective jurisdictions, with necessary assistance from local government authorities of finance, communication, banking regulatory commission, civil affairs, sports and local branches of the People’s Bank of China, and report any criminal activities to the judicial authority for prosecution; and (iii) the lottery issuance authorities that plan to sell lottery products online shall obtain the approval from the Ministry of Civil Affairs or the General Administration of Sports of China by submitting an application to the MOF for written approval. No entity shall provide online lottery sales services without the approval by the MOF.

 

We believe the close proximity of the promulgation of the Self-Inspection Notice and the Public Announcement signals a potential significant change of regulatory framework in the online lottery market in China. In light of such potential change of regulatory framework, we decided to voluntarily suspend all of our online lottery sales services on April 4, 2015. Since we voluntarily suspended our online lottery sales services and up to the date of this annual report, we had not generated any revenue from these services, which has caused our financial results to be materially and adversely impacted during the suspension period.

 

With the promulgation of the Self-Inspection Notice and the Public Announcement, the competent government authorities took further steps to regulate the lottery market in China and sanction unauthorized online lottery sales. After the issuance of the Self-Inspection Notice and the Public Announcement, there has been no indication as to when the online sales of sports lottery products will be permitted to resume, if at all. Therefore, as of the date of this annual report, there is no clear indication as to how long our voluntary suspension of online sports lottery sales services will last, and we have been working and will continue to work with the China Sports Lottery Administration Center to develop a management system to cope with any new regulatory framework to be adopted.

 

The rules and regulations on online lottery sales service market in China are relatively new and interpretations and implementation thereof have changed substantially on a number of occasions, and their further interpretations and implementation involve uncertainty.

 

During our 17-year history of providing online lottery sales services, we have encountered a number of significant changes on interpretations and implementation of the rules and regulations in respect of the provision of these services as further described below.

 

Operations under the Implementing Rules. On September 26, 2010, the MOF issued the Interim Measures for the Administration of Online Sales of Lottery, or the Interim Measures, which allows qualified service providers to provide online lottery sales services after obtaining the approval by and the operating permit from the MOF. On January 18, 2012, the MOF, the Ministry of Civil Affairs and the General Administration of Sports of China jointly promulgated the Implementing Rules of Regulation on Administration of Lottery, or the Implementing Rules, which set forth, among other things, detailed requirements and qualifications for the approvals to conduct online lottery sales. For a description of relevant PRC laws and regulations on online lottery services, see “Item 4B. Business Overview—Regulation on Lottery Services Industry and Online Lottery Sales.” Applications were submitted to the MOF in connection with the qualifications and approvals of our online lottery sales services for both sports and welfare lottery products provided on our websites, in accordance with the new measures.

 

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Partial suspension in 2012. From March to November 2012, we suspended our online lottery sales services to substantially all of our customers in response to the Urgent Notice with regard to the Implementation of the Implementing Rules of Regulation on Administration of Lottery promulgated by the General Administration of Sports of China on February 28, 2012, or the Urgent Notice. We, however, continued to provide lottery sales services via our mobile applications to mobile users and via our online platform to a limited number of loyal customers and generated service fees from such services. The PRC regulations on lottery sales services via mobile applications and their interpretations are subject to uncertainty. Our PRC legal counsel has advised us, given that the MOF has approved us as an authorized entity to conduct online lottery sales on behalf of China Sports Lottery Administration Center, our operation of lottery sales services prior to November 2012, including sales through our mobile applications and online platform, did not and will not likely to have a material adverse effect on us. However, under the rules and regulations on online lottery sales, the relevant PRC authorities have broad discretion on the lottery sales that are conducted without the approval by the MOF, and have the authority to impose sanctions thereon, including without limitation, levying fines, confiscating illegal income or suspending the operations and other sanctions. We have not received any legal sanctions, but there is no assurance that the competent authorities would not impose any legal sanction. Any legal sanctions imposed on us by the competent authorities could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Approval in 2012 to Conduct Online Sports Lottery Sales. In October 2012, we were notified by China Sports Lottery Administration Center that we were one of the two entities that had been approved by the MOF to conduct online sales of sports lottery products in China on behalf of the China Sports Lottery Administration Center. Since the operation of online sports lottery sales services by China Sports Lottery Administration Center itself was in a pilot phase and subject to further approval by the MOF, our operation of online sales of sports lottery products may be subject to suspension if China Sports Lottery Administration Center fails to obtain such further approval from the MOF. The competent authorities may establish certain management systems to supervise and monitor the online lottery sales, which systems may comprise a sales monitoring system, a back-office management system and an application service platform. The competent authorities may also ask the approved entities, like us, to adopt certain measures to meet specific regulatory requirements that may be adopted from time to time. For example, the competent authorities may monitor or adjust the categories of lottery products being sold online, and supervise the sales procedures and key data of our online lottery sales on a real-time basis, such as those relating to our customer account opening procedures, capital management, database information and risk controls. In addition, we may be required to enter into new lottery agency agreements with the relevant lottery administration center that could have different terms and conditions from those in our existing service agreements with the relevant sports lottery administration centers. As a result, we may have to amend our existing service agreements. Any unfavorable new regulatory requirements or amendments to the key terms of our existing service agreements could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Suspension since April 2015. As stated above, since April 4, 2015, we have voluntarily suspended our online sports lottery sales services in response to the issuance of the Self-Inspection Notice and the Public Announcement.

 

Our business, operation and financial results have been and will be further materially and adversely impacted by changes in interpretation or the implementation of rules and regulations governing the online lottery sale services in China.

 

We may not be able to continuously enhance our existing games and player experience and launch high-quality new games and services, which will materially and adversely affect our ability to continue to retain existing players and attract new players.

 

The growth of our mobile gaming business depends on our ability to attract new players and retain existing players. In order to maintain and expand our player base, we must continue to invest significant resources in research and development to enhance our existing games and launch new and high-quality games. Our ability to successfully launch, operate and expand our games to attract and retain players largely depends on many factors, including our ability to anticipate and effectively respond to changing player interests and preferences, anticipate and respond to changes in the competitive landscape, and develop and offer games that are fun, interesting and compelling to play. Although our games are based on long-lifespan classic card and board games, we cannot guarantee that our games will continue to maintain their current level of popularity, or rapidly changing industry trends and player preferences will not render our games obsolete over time. If we are unable to anticipate and respond to player interests and preferences or industry changes to enhance our games, or if we are unable to launch new games, our player base may not increase at the rate we anticipate, or at all, and it may even decrease. As a result, our business, prospects, financial condition and results of operations may be materially and adversely affected.

 

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In addition, in order to attract and retain players, we must also devote significant resources to enhancing our player experience on an ongoing basis. We must enhance the functions and technical and artistic features of our games in a manner that appeals to our demographically diverse players, and ensure the reliability of our game operating systems. If we fail to continuously enhance our player experience by anticipating and effectively responding to their different tastes, preferences and needs, or if we fail to provide superior customer service or address player complaints in a timely manner, we may lose existing players and fail to attract new players, and our business, results of operations and growth prospects will be materially and adversely affected.

 

All our revenues from mobile gaming business were provided by sales of virtual items. If we are unable to effectively market and price these virtual items, or if this business model ceases to be commercially successful, our results of operations, financial condition and business prospects could be materially and adversely affected.

 

All of our games are free to play, and we generate all of our mobile gaming revenues from sales of virtual items, including virtual tokens and other virtual items. The success of this business model largely depends upon whether we can attract game players to play our games and, even more importantly, whether we can successfully encourage more players to purchase virtual items and more paying players to increase their in-game purchases. We may not be able to market and price our virtual items effectively, or we may fail to accurately identify and introduce new and popular virtual items or price them properly. In addition, this business model may cease to be commercially successful. There is no assurance that a sufficiently broad base of game players will continue to accept this model or that a new, competing business model will not emerge. If we fail to continue to monetize our player base through sales of in-game virtual items, our business, financial condition and prospects may be materially and adversely affected.

 

Our games may become subject to laws and regulations of the PRC. We cannot guarantee you that such laws and regulations would not apply to us or be interpreted in ways that could affect our business.

 

We may face risks and uncertainties posed by local political, regulatory and religious environments and failure to compliance with regulatory restrictions may expose us to fines, penalties and liabilities. Even though we believe that our card games do not constitute gambling, but are casual online games as our virtual items can only be used in our games, cannot be cashed out and have no monetary value outside our games, we are required to continuously comply with laws and regulations in the PRC concerning content, operation and offering of such activities and games. As of the date of this report, our games had never been challenged or subject to any regulatory actions by any governmental authorities in the PRC. However, there is no assurance that our games will not be deemed as illegal or inappropriate by the PRC government. Similarly, there is no assurance that our game business will not be challenged or subject to any regulatory actions in any of our existing or future markets. If we are unable to offer any of our existing or new games in any of our target markets due to regulatory restrictions, our business, international expansion and growth prospects may be significantly harmed.

 

Our business has been and may continue to be materially affected by changes to, or interpretation of, government regulation in Europe that may apply to online gaming.

 

Through TMG, we hold licenses to operate online gaming sites from Curacao, Malta, the United Kingdom and Ireland, and are required to renew them periodically. Some European jurisdictions have introduced regulations attempting to restrict or prohibit online gaming, while other jurisdictions have taken the position that online gaming is legal and have adopted or are in the process of considering legislation to regulate online gaming.

 

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Sweden represents our top European market (generating approximately 60% of TMG’s total revenue in 2017), but does not have license requirement. We are operating in Sweden under the Curacao license. The Swedish government submitted a legislative proposal to the European Commission in late 2017, and by making this legislative proposal, the legislation entered a three-month period of standstill that ended on March 31, 2018, during which European Union authorities reviewed the proposal. It was recently reported that the Swedish government will begin accepting license applications from interested operators in mid-2018, and the new regulatory framework is expected to take effect on January 1, 2019.

 

While certain European countries are adopting a regulated online gaming approach, there are some opposing views. Some countries, where there are state-owned monopolies, are taking action aimed at banning foreign online gaming operators. Any decision of the European Court of Justice or legislation promulgated by the European Commission that effectively prohibits online gaming in European Union member states could have a severe material adverse effect on our business, revenues, operating results and financial condition.

 

As companies and consumers involved in online gaming are located around the globe, including our licensees and players, there is uncertainty regarding which government has authority to regulate or legislate the industry.

 

Future decisions may have a material impact on our operations and financial results. There is a risk that governmental authorities may view us or our licensees as having violated the local law of their end users. Therefore, there is a risk that civil and criminal proceedings, including class actions brought by or on behalf of public entities or private individuals, could be initiated against us, our licensees, Internet service providers, credit card processors, advertisers and others involved in the online gaming industry and could involve substantial litigation expense, penalties, fines, injunctions or other remedies or restrictions being imposed upon us, our licensees or others while diverting the attention of key executives. Such proceedings could have a material adverse effect on our business, revenues, operating results and financial condition.

 

There can be no assurance that prohibiting legislation will not be proposed and passed in potentially relevant European jurisdictions to legislate or regulate various aspects of the Internet or the online gaming industry. The burden of compliance with any such legislation may have a material adverse effect on our business, financial condition and results of operations.

 

Our operations in certain jurisdictions may violate local laws and regulations. The interpretation and enforcement of such laws and regulations could adversely impact our business.

 

We have sought legal advice regarding the legality of our online gaming services in certain European jurisdictions in which we operate. We have been advised by local counsel in certain jurisdictions, including Austria, Germany and the Netherlands, that certain of Multilotto’s operations in such jurisdictions are prohibited by local gaming laws and regulations. Local counsel, however, also advised us that there may be a reasonable legal basis to believe that such local laws contradict relevant European Union law, particularly Article 56 of the Treaty on the Functioning of the European Union regarding freedom of providing services among European Union member states. If such local laws violate European Union law, Multilotto’s operations would not be prohibited.

 

In addition, we have been advised by local counsel in Switzerland that the operation of online games in Switzerland is prohibited by local law, and any potential winnings and/or stake held by local users may be subject to forfeiture.

 

In 2017, net revenue from Germany, Austria, the Netherlands and Switzerland accounted for 4.6%, 0.6%, 2.4% and 60.1% of our total net revenue, respectively.

 

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Our business, operation and financial results may be adversely impacted by the interpretation and enforcement of laws and regulations governing online gaming services in these and other jurisdictions in which we operate.

 

Our game providers may fail to obtain or renew or may experience material delays in obtaining requisite approvals, licenses and permits, which could negatively impact our business.

 

Certain of our game providers require various approvals, licenses and permits to conduct their business, including business to business, or B2B, gaming and software licenses. We cannot assure you that these providers will not encounter significant problems in obtaining new or renewing existing approvals, licenses and permits, or that they will continue to satisfy the conditions to which such approvals, licenses and permits granted. If previously obtained approvals, licenses and permits are revoked and/or if the providers fail to obtain and/or maintain the necessary approvals, licenses and permits required to conduct their business and/or host or manage games as currently provided, we may be required to temporarily suspend the operation of certain gaming services, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Implementation of new lines of business, such as our recent cooperation with the Sports Lottery Center to develop physical channels to sell sports lottery tickets and certain other new business initiatives, may not yield desirable profits or improve our results of operations.

 

From time to time, we may implement new lines of business or offer new products and product enhancements as well as new services within our existing lines of business. For example, we began to cooperate with the China Sports Lottery Administration Center, or the Sports Lottery Center, in March 2018 to develop physical channels to sell sports lottery tickets, install sports lottery terminals and provide relevant maintenance and operational services in accordance with local development plans for the sports lottery business.

 

There are substantial risks and uncertainties associated with these efforts, particularly when considering the market is not fully developed. In developing these new lines of business or services, we may invest significant time and resources. Initial timetables for the introduction and development of these lines of business and services may not be achieved and profitability targets may not prove feasible. External factors, such as compliance with regulations, competition and shifting market preferences, may also impact the successful implementation these new lines business or services. Our personnel and technology systems may fail to adapt to the changes in these new lines of business or we may fail to effectively integrate new services into our existing operations. In addition, we may be unable to compete effectively due to different competitive landscape in the new areas of business. Furthermore, these lines of business could have a significant impact on the effectiveness of our internal control system. Failure to successfully manage these risks in the development and implementation of these lines of business and services could have a material adverse effect on our business, results of operations and financial condition.

 

The success of our business depends on our ability to maintain and enhance our reputation and brand.

 

We believe that our reputation in the industry and among our users as a leading reliable and trustworthy online lottery service provider and our “500wan” brand is of significant importance to the success of our business. A well-recognized brand is critical to increasing our user base and, in turn, increasing our net revenues from service fees. Since the online lottery service market is highly competitive, our ability to remain the market leader in China depends largely on maintaining and enhancing our reputation and brand, which may be difficult and expensive.

 

We have developed our reputation and established a leading position by providing our users with what we believe are superior and trustworthy services. We have conducted, and may continue to conduct, various marketing and brand promotion activities. We cannot assure you, however, that these activities will be successful and achieve the brand promotion and activity enhancement goals we expected. In addition, any negative publicity in relation to our services or products, regardless of its veracity, could harm our brand image and, in turn, have adverse effects on our user loyalty and stickiness, or result in a reduction in the number of our users. For example, we are aware of certain complaints against our websites on a number of online forums with regard to purchase order processing and prize collections. Even though the allegations made in such complaints were not factually proven or the amounts in issue were diminutive, such complaints can nonetheless have a detrimental effect on our reputation. If we fail to maintain and enhance our reputation and brand, or if we incur excessive expenses in our efforts to do so, our business, financial condition and results of operations may be materially and adversely affected.

 

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Our product portfolio depends on the offerings of the lottery administration centers and could change unfavorably for us as a result of decisions made by them.

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, the lottery products we serviced were issued and sold by national and provincial lottery administration centers. We do not have the right to issue lottery products and could not prevent the discontinuation of lottery products that were offered. If the national lottery administration centers had decided to discontinue one or more lottery products or to replace them with other products, this could have led to a decline in our purchase orders and thus would have had an adverse effect on our financial position and results of operations. In addition, if we had wanted to provide services on newly issued lottery products, we would have had to enter into service agreements with the lottery administration centers that issue or sell such new lottery products. We cannot assure you that such service agreements could have been entered into on terms favorable to us, or at all. If our competitors are able to enter into service agreements to service popular newly issued lottery products while we cannot, it could have an adverse effect on our revenue and brand name.

 

Lottery products offered by provincial lottery administration centers may have been discontinued or subject to restriction and regulations by the relevant national lottery administration centers. In particular, in March 2015 all provincial sports lottery administration centers we serviced suspended accepting online purchase orders for lottery products in response to the Self-Inspection Notice, which materially and adversely affected our results of operations and financial conditions since such suspension. In addition, due to the popularity of certain lottery products we service, those provincial lottery administration centers with which we did not have service agreements might have chosen to issue similar lottery products on more competitive terms. This may have resulted in a decrease in the purchase orders of those lottery products we serviced and, in turn, resulted in a decrease in the revenue we were able to generate from those lottery products. We cannot assure you that we will be able to reach an agreement with a provincial lottery administration center to obtain the right to service its lottery products that compete with products we currently service. In addition, the relevant lottery authorities could mandate the change of the rules or prize scheme of our current lottery products or stop the issuance of those lottery products altogether due to social policy or other considerations, which could have an adverse effect on our results of operations.

 

We depend on our agreements with a few provincial lottery administration centers for our service fees and such agreements could be terminated, amended or fail to be renewed.

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, substantially all of our revenues were provided by service fees paid to us by a few provincial lottery administration centers. We have entered into non-exclusive service agreements with these lottery centers for terms of one year or five years, and the lottery administration centers may choose to enter into similar arrangements with other service providers. We have long-term, mutually beneficial partnerships with a few provincial lottery administration centers, such as Jiangxi Sports Lottery Administration Center. The service fees received from the lottery administration centers represent revenues recognized before the reduction of incentives paid to users and the residual amount of lottery pool contributed by us to the lottery centers. We have a service agreement with Jiangxi Sports Lottery Administration Center that is effective until March 2018 and renewable upon expiration, but Jiangxi Sports Lottery Administration Center can terminate its agreement with us for various reasons or decide not to renew the agreement upon expiration. For example, the service agreement provides that the Jiangxi Sports Lottery Administration Center has the right to monitor our operations and unilaterally terminate the service agreement if we violate relevant laws and regulations. If any of the provincial sports lottery administration centers terminates or decides not to renew its agreement with us, or if the agreement is amended to our disfavor, this could have an adverse effect on our business, results of operations and prospects, and we could lose a substantial portion of our revenues.

 

By March 2015, all sports lottery administration centers have suspended accepting online purchase orders for lottery products in response to the Self-Inspection Notice, and we have voluntarily suspended our online lottery sales services in response to the issuance of the Self-Inspection Notice and the Public Announcement since April 4, 2015. There has been no indication as to when the online sales of sports lottery products will be permitted to resume, if at all. Therefore, as of the date of this annual report, there is no clear indication as to how long our voluntary suspension of online lottery sales services will last.

 

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We operate in an intensely competitive environment, which may lead to declining revenue growth or other circumstances that would negatively affect our results of operations.

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, we operated in the new and dynamically growing online market for lottery products. There is no guarantee that we could have maintained our position as one of the market leaders. If we are unable to resume our online sports lottery sales services in the future, we anticipate significant competition, primarily from other online lottery service providers that may obtain relevant approvals and licenses to provide online lottery sales services in China. When the approval and licensing system for online lottery service providers is fully implemented in China in the future, we may face increased competition from companies that do not currently operate in the online lottery services industry. For example, if major portal websites obtain relevant approvals and licenses to offer lottery sales services, they may be able to offer similar services at a lower cost or to a larger user group due to their larger operational scales and user bases, which will put us at a competitive disadvantage. We may also face competition from traditional offline lottery agents. If we do not recognize market trends or user demand in a timely manner, we may lose our market share to our competitors, which would have a negative impact on our results of operations.

 

The lottery industry in China in general and the online lottery service industry in particular may not grow as quickly as expected, which may adversely affect our revenues and business prospects.

 

Our business and prospects depend on the continuing development and expansion of the lottery industry in China in general and the online lottery service industry in particular. Both China’s lottery industry has, and, prior to the voluntary suspension of online sports lottery sales services in general in China in early 2015, the online lottery service industry had, experienced substantial growth in recent years in terms of both the number of people purchasing lottery products and revenue generated. We cannot assure you, however, that the lottery industry or the online lottery service industry in China may grow as rapidly as it has in the past. Growth of China’s lottery industry and the online lottery services industry are affected by numerous factors, such as GDP growth, growth of individual disposable income, regulatory changes, public perception and receptiveness, users’ trust and confidence level in the online lottery market, users’ general online purchase experience, technological innovations, development of the Internet and Internet-based services, and the macroeconomic environment. For example, the suspension by provincial lottery administration centers in response to the Self-Inspection Notice in March 2015 has had, and is expected to continue to, materially and adversely affected online lottery market in China as long as the suspension continues. If the lottery industry or online lottery service industry in China does not grow as quickly as expected or if we fail to benefit from such growth by failing to successfully implement our business strategies, our user base may decrease and our business and prospects may be adversely affected.

 

Online spot commodity trading is a highly regulated industry and any regulatory change may result in changes in trading models and trading rules of the exchanges, which could adversely affect our business and prospects.

 

As a relatively new industry, online spot commodity trading industry in China has undergone and continues to undergo significant changes in its regulatory regime. On November 11, 2011, the State Council issued Decision of the State Council on Straightening Out and Rectifying Various Types of Trading Venues to Effectively Prevent Financial Risks, or Circular 38. On July 12, 2012, the general office of the State Council issued the Implementation Opinions on Straightening Out and Rectifying Various Types of Trading Venues, or Circular 37, to further regulate various trading exchanges established with approval from provincial or other local governments. Pursuant to Circular 37, each of the provincial governments shall conduct inspection of trading exchanges within its jurisdiction based on the guidance of Circulars 38 and 37. Exchanges that are not in compliance may be banned from launching new products, be ordered to make rectification or even be shut down.

 

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The Shanghai Gold Exchange that we plan to focus our operation on, is not subject to such provincial inspection as a national exchange. However, different provincial governments and different departments of the central government may have different interpretations and implementation practices of Circulars 38 and 37. If the Shanghai Gold Exchange were to be found non-compliant under Circulars 38 and 37, and were to be required to change or adjust its trading models or rules accordingly, our operation on that exchange may become less profitable or even infeasible. We may have to transfer our business and customers to other exchanges, which may result in extra expenses and adversely affect our customers’ trading experience as well as our results of operations and financial condition. If we decide to continue to operate on that exchange, we may need to adjust our business model or our business on that exchange may become less profitable both in the short term and in the long term.

 

Apart from Circulars 38 and 37, the State Council and provincial governments may adopt new or revise current laws and regulations, and the interpretation and implementation of such laws and regulations may vary from one locality to another. For example, the government may impose restrictions on the commodities available for trading, limit the maximum leverage ratios or trading frequencies for certain commodities, impose qualification requirements on individual investors who can trade certain commodities, or require physical settlement of spot commodity transactions. The government may even prohibit online spot trading of certain commodities. Complying with these regulations and rules could potentially make it not feasible for us to continue with certain businesses that we currently engage in or reduce our customer trading volume or customer base, thus materially and adversely affecting our revenue and business prospects.

 

We depend on the technology and advanced information system, which may fail or be subject to disruption.

 

We are dependent on our IT systems for handling purchase orders, and the efficiency and reliability of our systems are in turn dependent on the functionality and stability of the underlying technical infrastructure. The functionality of the servers used by us and the related hardware and software infrastructure are of considerable significances to our business, our reputation and our ability to attract business partners and users. Our IT systems may be damaged or interrupted by increases in usage, human errors, unauthorized access, destruction of hardware, power cuts not covered by backup facilities, system crashes, software problems, virus attacks, natural hazards or disasters, or similar disruptions or disruptive events. Furthermore, our current IT systems may be unable to support a significant increase in online traffic or increased number of users, whether as a result of organic or inorganic growth of the business. We have in place business continuity procedures, disaster recovery systems and security measures to protect against network or technical failures or disruptions. Despite such procedures, failures in computer processing and weakness in the existing software and hardware cannot be completely prevented or eliminated. Any failure of our IT system and infrastructure could lead to significant costs and disruptions that could reduce our revenues, harm our reputation and have a material adverse effect on our operations.

 

In addition, we rely on bandwidth providers, communications carriers, data centers and other third parties for key aspects of the process in providing services to our users. Any failure or interruption in the services and products provided by these third parties could limit our ability to operate certain of our businesses, which could in turn have a material adverse effect on our business and financial condition.

 

We may not be able to develop and launch new services or new technologies in a timely manner or at all, and new services or technologies we manage to develop or provide may not be successful.

 

Our success in attracting new users and keeping existing users engaged have in the past depended on our ability to consistently develop and launch new and innovative services and technologies. Although we will continue to focus on research and development going forward, we cannot assure you that we will continue to be able to develop our technology to keep up-to-date with developments across the online lottery service industry and to launch new products or technologies in a timely manner or at all. New technologies and software are also less likely to be reliable, robust and resistant to viruses or failure. Given the fast growing online lottery service industry, we may not have enough time to fully test the new technologies and software we have developed before deploying them on our websites, which might cause service problems and negative user experience.

 

In particular, the number of people who access the Internet through non-PC devices such as mobile phones has increased in recent years. The software we have developed for these devices may not be widely adopted by users of such non-PC devices. If we are unable to attract and retain a substantial number of non-PC device users to our services or if we are slow to develop services and technologies that are more compatible with non-PC devices relative to our competitors, we may fail to capture a significant share of new users or lose our existing users who switch to non-PC devices for their lottery purchase activities.

 

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We could be subject to foreign laws and regulations applicable to lottery services, which could have important legal consequences for us.

 

We conduct our operations in China, and will continue to do so in the future. We have blocked direct access to our websites and mobile applications from the United States through IP address filtering. We have implemented an identity verification procedure as part of the prize collection process. A user who has won a prize is required to provide his or her valid PRC identification card number and valid PRC bank account number to us for identity and age verification through a government designated entity before we transfer the prize money to such user’s online account registered at our websites and mobile applications. Despite such measures taken by us, it is conceivable that a user with a valid Chinese bank account and a Chinese identification card could place an order or collect a prize at our websites or mobile applications from a jurisdiction other than China and the United States, or that a user could devise a way to evade our blocking measures and access our websites and mobile applications from the United States. In addition, we have not been able to implement the same identity verification process over users registered with websites of third-party online service providers, which conduct their own identity verification processes, and these users may place purchase orders with us and collect prize money they win without providing their identity to us. As a result, we could be subject to foreign laws and regulations applicable to lottery services, which could have important legal consequences for us. The fact that our websites and mobile applications are accessible from a foreign jurisdiction could render our business operations subject to the laws and regulations of such jurisdiction, even though we do not have a physical presence in that jurisdiction. As a result, we could be required to obtain the requisite approval or license for lottery services in such jurisdiction, or could be deemed to have violated the prohibition against lottery services in that jurisdiction.

 

If we were found to have violated any applicable foreign laws and regulations applicable to lottery services, we could face civil or even criminal liabilities, such as injunctions, restrictive orders, damage awards or fines. Even if we successfully defend ourselves against such allegations, we could nevertheless incur considerable costs in such defense or suffer reputational damage due to the negative publicity associated with such allegations.

 

Our systems and controls to restrict access to our websites from persons located in the United States may not be adequate.

 

In the United States, some credit card companies have classified online purchase orders of U.S. state-issued lottery products as online gambling and thus denied such purchase orders, despite the fact that many such purchases are exempt from the Unlawful Internet Gambling Enforcement Act, or UIGEA, enacted in 2006. The UIGEA is silent on whether lottery products issued by non-U.S. state entities are exempt from the definition of online gambling. There are several other U.S. federal laws relevant to online gaming, including the Professional and Amateur Sports Protection Act, the Federal Interstate Wire Act, the Illegal Gambling Business Act, the Interstate Transportation of Wagering Paraphernalia Act and the Interstate and Foreign Travel or Transportation in Aid of Racketeering Enterprising Act. In addition, laws and regulations exist in various individual U.S. states that limit or prohibit online games of chance. Although prior to the voluntary suspension of our online sports lottery sales services in April 2015, the services we provided to our users were solely related to lottery products issued and sold by national and authorized provincial lottery administration centers in China, we cannot assure you that the United States Department of Justice or other federal or state regulatory authorities will not deem our business as being in violation of the UIGEA or any of the laws mentioned above if purchase orders are placed on our platform from users in the United States not successfully blocked by our system. Violations of such laws can lead to criminal and civil penalties, including substantial fines, injunctions, damage claims and jail terms for persons accountable.

 

As a precaution, we have implemented technological and other measures to prevent persons in the United States from accessing our websites and mobile applications. These measures could fail or otherwise be inadequate, either currently or as a result of future technological developments. This may result in allegations or accusations of our violations of the above-mentioned or other applicable laws or regulations of the United States, and actions brought against us based on such violations, which could have a material adverse effect on our operations, financial performance and prospects.

 

15

 

 

Our service agreements with certain third-party Internet companies may be amended or terminated.

 

We generate a portion of our net revenues pursuant to cooperation agreements with certain third-party Internet companies. We build and maintain embedded lottery purchase webpages for websites of these Internet companies which redirect user purchase orders to our websites. We pay these third-party Internet companies a predetermined fixed percentage of the total purchase amount generated by purchase orders redirected to us from their websites. In 2015, 2016 and 2017, such payments to certain Internet companies accounted for 7.8%, nil and 3.9% of our net revenues, respectively. We also provide lottery information packages to the lottery information channels of some portal websites. The third-party Internet companies that we work with may request amendments to the material terms of our cooperation agreements in a manner that is unfavorable to us or decide to terminate such cooperation agreements. In particular, if any of these companies decide to start offering its own online lottery services after terminating its cooperation arrangement with us, users formerly redirected to our websites through websites of these companies may decide to use these companies’ services instead, which would have a negative impact on our net revenues.

 

We are exposed to contractual claims by third parties arising from regulatory actions, which could damage our reputation and results of operations.

 

We have entered into various service, online payment and advertisement agreements with a number of third parties. Many of these agreements contain warranties, indemnities and termination provisions in which we have made representations and warranties to the counterparties as to the legitimacy of our operations and our compliance with relevant laws and regulations. If a claim or regulatory action is brought against our counterparties alleging that our historical business conduct breached such provisions on which our counterparties have relied, whether as a result of judicial proceedings or a change of law or otherwise, we may face material claims or regulatory actions and may owe damages to the relevant third parties. We may also remain liable for any outstanding fees payable to the counterparty of an agreement which has been terminated.

 

Any extended periods in the future without our users winning substantial prizes could result in losses in revenues and profits for us.

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, 8 prizes of over RMB10 million, 76 prizes of RMB5 million to RMB10 million, and 570 prizes of RMB1 million to RMB5 million had been awarded to users who purchased their lottery products using our online lottery service platform. Our users’ record of winnings is one of the factors contributing to our ability to attract new users and retain existing users. Winning of number-based lotteries arise purely by chance during the lottery draws. No assurance can be given that there will not be long periods in the future without any of our users winning a prize of significant amount, which could lead to a reduction in user activity and therefore a shortfall in our revenue and profit.

 

Our operations and services relating to sports lottery products depend on the scheduling and live broadcasting of major sports events.

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, our operations and services relating to sports lotteries were affected by the scheduling and live broadcasting of the underlying sports events. In particular, a significant portion of our service fees prior to the voluntary suspension of our online sports lottery sales services in April 2015, were derived from results of international soccer games. Disruptions to the scheduling and broadcasting of those games may have a material impact on our results of operations. In some instances, the scheduling of major sports events occurs seasonally (for example, European soccer) or at regular but infrequent intervals (for example, the FIFA World Cup). The cancellation, postponement or curtailment of significant sports events, due to, among other things, adverse weather conditions, terrorist acts, other acts of war or hostility or the outbreak of infectious diseases, or cancellation of, disruption to, or postponement of the live broadcasting of such sports events, due to contractual disputes, technical or communication problems, or the insolvency of a major broadcaster, could materially adversely affect our operations and services relating to sports lotteries.

 

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Future strategic acquisitions may have a material adverse effect on our business, reputation and results of operations.

 

We may acquire additional assets, products, technologies or businesses that are complementary to our existing business if we are presented with appropriate opportunities. Future acquisitions and subsequent integration of newly acquired assets and businesses into our own would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. Acquired assets or businesses may not generate the financial results we expect. In addition, acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the cost of identifying and consummating acquisitions may be significant. In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from the relevant government authorities in the PRC for the acquisitions and to comply with any applicable PRC laws and regulations, which could result in increased cost and delay.

 

Negative publicity about our operations, or problems such as underage and compulsive lottery activities, fraud and corruption in sports matches may adversely affect our reputation and business.

 

Social responsibility policies are a key consideration in lottery laws and regulations. There are concerns as to the ability of online lottery service providers to effectively block minors from purchasing lottery products online and the possible increase in compulsive lottery activity due to the relative ease of making online lottery purchases. Publicity regarding such concerns could harm our brand and image. If the perception develops that online lottery operators or the lottery industry as a whole is failing to adequately protect minors and vulnerable lottery purchasers, we may face increased social resistance. Damage to the industry’s reputation could also lead to the withdrawal of support for the industry from the government or the tightening of regulations, which may have a material adverse effect on our business.

 

Negative publicity about potential fraud (including money laundering) and corruption in sports matches (including collusion and match-fixing), even if not directly or indirectly connected with us or our services, may adversely impact our reputation and the willingness of the public to participate in the purchase of sports lotteries. As a result, the number of potential users available to us could be adversely affected.

 

Undetected errors with regard to historical or real-time data in our information platform could adversely affect our user experience, which may materially and adversely affect our reputation and business.

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, our information database provided to our users real-time updated information on all 13 national lottery products and 96 provincial lottery products, as well as historical data, charts analytical tools and account management tools and functions. Although we intended to ensure the accuracy and reliability of all data in our information database, in a number of instances, users had complained on online forums of being misled by the wrong historical data and users have also alleged that the winning numbers posted by us differ from the actual winning numbers published by the relevant national or provincial lottery administration centers. Such complaints and allegations, whether with or without merit, may damage our reputation as a credible online lottery service provider and adversely affect user experience, which could materially and adversely affect our reputation and business.

 

We may fail to detect fraudulent activities of our users or employees.

 

Online transactions may be subject to sophisticated schemes or collusion to defraud or other illegal activities, and there is a risk that our platform may be used for those purposes either by our users or our employees. While we intended to continue our efforts to protect our business and our users from such illegal activities, including a user identity verifying system and pre-payment procedures to protect against fictitious transactions, the controls and procedures we have implemented may not be effective in all cases. Failure to protect our operations and our users from fraudulent activity either by other users or our employees could result in reputational damage to us and could materially and adversely affect our results of operations.

 

17

 

 

We rely on individual employees to handle prize collection using their personal bank accounts, which creates a risk of misappropriation of funds.

 

Under the current prize payout rules for national and provincial lottery products, prizes can only be claimed by natural persons who present the winning lottery tickets at the time of collection. Prior to the voluntary suspension of our online sports lottery sales services in April 2015, since we did not distribute physical tickets to individual users and needed to collect prizes on behalf of the winning users, we relied on certain of our employees to maintain bank accounts opened in their individual names into which winning prizes are first deposited before they are transferred into the bank account of E-Sun Sky Network Technology Co., Ltd., or E-Sun Sky Network, which then allocated the prize money to the winners’ accounts. We adopted several measures to ensure that such individual accounts are under our strict control. See “Item 4B. Business Overview—Purchase Order Processing and Prize Collection.” Although, prior to the voluntary suspension of our online sports lottery sales services in April 2015, we had never had an incident where prize money deposited in an employee’s account was misappropriated, there is no assurance that, if we are able to resume our online sports lottery sales services in the future, misappropriations of prize money will not happen in the future, which could have an adverse effect on our reputation and financial results. Currently, there is no indication as to whether we need to use the bank accounts of individual employees in the future.

 

Failure to adequately protect user account information could have a material adverse effect on us.

 

We process our users’ personal data (including name, address, age, bank details and lottery purchase history) as part of our business and therefore must comply with data protection laws in China. Data protection laws restrict our ability to collect and use personal information relating to our users and potential users. Notwithstanding our IT and data security and other systems, we may not be effective in detecting any intrusion or other security breaches, or safeguarding against sabotage, hackers, viruses and cybercrime. We are exposed to the risk that personal data could be wrongfully accessed and/or used, whether by employees, users or other third parties, or otherwise lost or disclosed or processed in breach of data protection laws. If we or any of the third party service providers whom we rely on fail to transmit user information and payment details online in a secure manner or if any such theft or loss of personal user data were to otherwise occur, it could subject us to liabilities under the data protection laws or result in the loss of the goodwill of our users.

 

We have no insurance coverage against product liability claims or business interruptions.

 

As the insurance industry in China is still in an early stage of development, insurance companies in China currently offer limited business insurance products. We do not have any product liability insurance or business interruption insurance. As we continue to increase the number of lottery products we service, we may be increasingly exposed to claims related to such lottery products. Any such claims, business disruption, or natural disaster could result in us incurring substantial costs and a diversion of our resources away from our business, which would have an adverse effect on our business and results of operations.

 

We might not be able to adequately protect our intellectual property rights.

 

We believe our trademarks, software, technology know-how and other intellectual property provide competitive advantages to us, which are important to our achievements to date and our future success. We have invested significant resources to develop our brand name, 500wan, which is an important asset to us. We cannot assure you that steps taken to protect our intellectual property rights will be sufficient to prevent infringement of our intellectual property rights. If we fail to adequately protect our intellectual property rights, including our rights in our trademarks and know-how, it could have a material adverse effect on our operations.

 

The validity, enforceability and scope of protection available under intellectual property laws with respect to the Internet industry in China are uncertain and evolving. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective. Accordingly, protection of intellectual property rights in China may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend our copyrights or other intellectual property rights or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and any adverse determination thereof could result in substantial costs and diversion of resources and management attention away from our business.

 

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We may be subject to allegations or liabilities for infringement of third-party intellectual property rights based on the content available on our websites or information services we provide.

 

We provide our users with real-time and historical lottery-related news, data, analyses, real-time match scores and other contents on our information platform. We obtain such contents from a third-party professional sports information agency as well as publicly available sources. The user forum of our websites also hosts a significant amount of content generated by our users. We cannot assure you that we will not be subject to allegations, claims or lawsuits by third parties regarding the use of lottery or sports related information or any other content on our websites, which may infringe upon the intellectual property rights of such third parties. If such claims are found valid by the courts and we are ordered to remove the content from our websites, our information platform will become less attractive and our user experience and satisfaction will be adversely affected. Even if we successfully defend ourselves against such claims or allegations, we could nevertheless incur considerable costs in such defense or suffer reputational damage due to the negative publicity associated with such claims or allegations.

 

We rely on our senior management and key employees.

 

Our success is dependent upon the expertise and continued service of our senior management and other key personnel. Our CEO, Mr. Zhengming Pan, who has substantial experiences in management and corporate finance, is also crucial to our operations and development. Most of our senior management team members have 16 years of experience in information technology or Internet related industries. They are crucial to our smooth operation and continued innovation. In addition, we rely on a limited number of specialized staff members in certain areas of our IT operations where we do not receive support from external service providers. Furthermore, our ability to expand our operations to accommodate our anticipated growth will also depend on our ability to attract and retain additional personnel such as qualified risk managers, finance, management, marketing, technical and other personnel. Competition for these employees is intense due to the limited number of qualified personnel. It may be difficult for us to manage our business and meet our objectives if we fail to attract and retain such personnel and our results of operations or financial condition may be adversely affected.

 

We are dependent on external service providers with respect to payment and settlement processing, and the provision of faulty services by these providers could lead to financial loss and damage to our reputation.

 

We are dependent on cooperation with external service providers with specialist knowledge and technology for processing lottery purchase orders. This includes, among other things, data and voice communication, procurement, installation, further development, maintenance and servicing of hardware and software, server housing and payment processing. It is possible that one or more of the external service providers do not perform the services, or that they do not perform them in a timely and accurate manner. It is therefore possible that, due to failures or omissions by the external service providers that we have engaged, we will not be in a position to perform our own services faultlessly or on time. This could lead to revenue losses, liability for damage, and substantial damage to our reputation.

 

We depend on payment processing for the success of our business.

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, we required our users to deposit funds in their registered accounts in advance of any lottery purchases. Users’ prize money was also deposited in and withdrawn from their respective accounts. Therefore, the provision of convenient, trusted and effective payment processing services to our users and potential users is critical to our business. If we are able to resume our online sports lottery sales services in the future and there is any deterioration or perceived deterioration in the quality of the payment processing services provided by us or any interruption to those services, or if our payment processing services are not performed in a timely manner, our users and potential users may be deterred from using our online lottery services, and we may be subject to user complaints and allegations concerning the mishandling of their funds, which may damage our reputation and have a material adverse effect on our business and results of operations.

 

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Our quarterly net revenues and operating results may fluctuate, which makes our results of operations difficult to predict and may cause our quarterly results of operations to fall short of expectations.

 

Our quarterly revenues and operating results have fluctuated in the past and may continue to fluctuate depending upon a number of factors, many of which are out of our control. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly and annual net revenues and costs and expenses as a percentage of our net revenues may be significantly different from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause the price of our ADSs to fall. Other factors that may affect our financial results include, among others:

 

· when and how we resume our online lottery sales services in the future;

 

· seasonality of sports events on which sport lotteries are based;

 

· change of lottery issuance schedules by the lottery issuance authorities;

 

· changes in government policies or regulations, or their enforcement;

 

· economic conditions in China and worldwide; and

 

· geopolitical events or natural disasters such as war, threat of war, earthquake or epidemics.

 

Our operating results tend to be seasonal. For instance, we may have lower net revenues during the first quarter of each year primarily due to the Chinese New Year holidays in that quarter.

 

We could be subject to administrative penalties or business losses if our current user identity verifying system cannot sufficiently prevent us from taking purchase orders from underage users.

 

According to the Regulation on Administration of Lottery issued by the State Council which came into effect on July 1, 2009, a lottery service provider may be subject to administrative penalties from the local civil affairs authority or the sports administration authorities if it takes lottery purchase orders from underage users. The lottery administration centers have the right to terminate their service agreements with a service provider if it becomes subject to administrative penalties. It is still unclear which security mechanisms have to be introduced for online service providers to protect minors. Although we have adopted a user identity verifying system which allows us to filter out underage users, we cannot assure you that our current system is sufficient for us to identify all underage users. If the relevant authorities determine that we are in violation of any relevant regulations, we may be subject to administrative penalties and we may lose our service agreements with the lottery operation centers.

 

In addition, a registration process that is as simple as possible and takes only a short time to complete is an important factor in our ability to attract new users. Currently, the age verification step of our registration process is relatively simple. If it becomes apparent that this measure is inadequate, the registration process might have to be made lengthier and difficult for more in-depth checks, such as requiring users to provide a copy of their Chinese ID card or other identification documents as part of the registration process, which could decrease the number of new registrations or lead to a decrease in users. This could have a material adverse effect on our financial condition and results of operations.

 

If we fail to maintain an effective system of internal control over financial reporting, we may lose investor confidence in the reliability of our financial statements.

 

We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on the company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting.

 

20

 

 

Our management has concluded that our internal control over financial reporting was effective as of December 31, 2017. See “Item 15. Controls and Procedures.” Our independent registered public accounting firm has issued an attestation report, which has concluded that our internal control over financial reporting was effective in all material aspects as of December 31, 2017. However, if we fail to maintain effective internal control over financial reporting in the future, our management and our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could in turn result in loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs, management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

 

Our grant of employee share options, restricted shares or other share-based compensation and any future grants could have an adverse effect on our net income.

 

U.S. GAAP prescribes how we account for share-based compensation and may have an adverse impact on our results of operations or the price of our ADSs. U.S. GAAP requires us to recognize share-based compensation as compensation expense in the consolidated statement of comprehensive income generally based on the fair value of equity awards on the date of the grant, with compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. The expenses associated with share-based compensation may reduce the attractiveness of issuing share options or restricted shares under our equity incentive plan. However, if we do not grant share options or restricted shares, or reduce the number of share options or restricted shares we grant, we may not be able to attract and retain key personnel. If we grant more share options or restricted shares to attract and retain key personnel, the expenses associated with share-based compensation may adversely affect our net income.

 

Our operations subject us to foreign exchange risk.

 

We operate in Europe, Africa, South America and North America. We are exposed to foreign exchange risk to the extent that there is a mismatch between the currencies in which revenues, expenses and borrowings are denominated. Much of our current revenue is derived from our interest in TMG, which uses the EUR as its functional currency. As a result, we are exposed to translational foreign exchange risk when we translate TMG’s financial statements from the EUR to the RMB. Because our reporting currency is the RMB, we may be exposed to translation risk when the income statements of us and our subsidiaries are converted into U.S. dollars using the average exchange rate for the period, and whilst revenues and costs are unchanged in local currency, changes in exchange rates may lead to effects on the converted balances of revenue, costs and the result in U.S. dollars. Potential adverse changes in economic conditions could have an adverse effect on our business, financial condition and results of operations.

 

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Risks Related to Our Corporate Structure

 

If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in the Internet and the lottery business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in the Internet and lottery businesses. We conduct our operations in China principally through contractual arrangements among our company 500.com Limited, our wholly owned PRC subsidiary, E-Sun Sky Computer, our consolidated affiliated entities in the PRC and their respective shareholders. Our online lottery services were primarily provided through E-Sun Sky Network, the wholly owned subsidiary of E-Sun Network, Lhasa Yicai, the wholly owned subsidiaries of E-Sun Sky Network, and Guangyi Network, the wholly owned subsidiary of E-Sun Sky Computer. E-Sun Sky Network owns and manages our operating websites, namely, www.500wan.com and www.500.com. Guangtiandi Technology and Youlanguang Technology were established to provide technical support to E-Sun Sky Network. Youlanguang Technology provides services to E-Sun Sky Network relating to the management of our users’ registration information and accounts, Shenzhen Yicai, and Shenzhen Fenggu, the wholly owned subsidiaries of Youlanguang Technology, while Guangtiandi Technology provides services to E-Sun Sky Network relating to the implementation of the technical interface with the provincial lottery administration centers, the maintenance of our lottery ticket database, and the printing of lottery tickets when needed for the purpose of prize collection. Baifengrun Technology, a wholly owned subsidiary of Guangtiandi Technology, was acquired to develop and operate mobile phone game services to third party customers. 500Fu, a wholly owned subsidiary of Youlanguang, was established to provide third party payment services. Shenzhen Caiyu was acquired through E-Sun Sky Network to provide sports information and data services. We disposed of our interest in Shenzhen Caiyu in November 2017. Shenzhen Qufan was acquired through Guangtiandi to provide online poker gaming services. We disposed of our interest in Shenzen Qufan in February 2018. Shenzhen Kaisheng was the subsidiary of Guangtiandi Technology to provide online spot commodity trading services. Our contractual arrangements with E-Sun Network, Guangtiandi Technology, Youlanguang Technology, Tongfu Technology, Shenzhen Qufan and their respective shareholders (i) enable us to exercise effective control over these entities, and (ii) give us the obligation to absorb losses and the right to receive benefits of these entities, requiring us to treat them as our consolidated affiliated entities and to consolidate their operating results. For a detailed discussion of these contractual arrangements, see “Item 4C. Organization Structure.”

 

We cannot assure you, however, that we will be able to enforce these contracts. Although we believe we are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are open to varying interpretations and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that we are not in compliance with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our websites, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.

 

We rely on contractual arrangements with our consolidated affiliated entities in China and their shareholders for our operations, which may not be as effective as direct ownership in providing operational control.

 

Since PRC laws restrict foreign equity ownership in companies engaged in the Internet and lottery businesses in China, we rely on contractual arrangements with our consolidated affiliated entities and their respective shareholders to operate our business in China. If we had direct ownership of E-Sun Network, Guangtiandi Technology, Youlanguang Technology or Tongfu Technology, Shenzhen Qufan, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of E-Sun Network, Guangtiandi Technology, Youlanguang Technology or Tongfu Technology, Shenzhen Qufan, which in turn could effectuate changes at the management level, subject to any applicable fiduciary obligations. However, under the current contractual arrangements that were executed on June 1, 2011, amended on May 2, 2013, supplemented December 28, 2013 and further amended on November 18, 2015 ,further supplemented on January 10, 2017 and further amended on July 3,2017 , we rely on our consolidated affiliated entities and their respective shareholders’ performance of their contractual obligations to exercise effective control over our business in China. In addition, our contractual arrangements generally have a term of 10 years with an automatic extension for a number of years to be determined by E-Sun Sky Computer and Qufan Information Technology, which is subject to E-Sun Sky Computer’s and Qufan Information Technology’s unilateral termination right. In general, neither our consolidated affiliated entities nor their respective shareholders may terminate the contracts prior to the expiration date. However, the shareholders of E-Sun Network, Guangtiandi Technology, Youlanguang Technology, Tongfu Technology or Shenzhen Qufan, may not act in the best interests of our company or may not perform their obligations under these contracts, including the obligation to renew these contracts when their initial term expires. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our consolidated affiliated entities and their respective shareholders. We may replace the shareholders of our consolidated affiliated entities at any time pursuant to our contractual arrangements with them and their shareholders. However, if any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law, arbitration and courts and therefore will be subject to uncertainties in the PRC legal system. See “Item3D. Risk Factors—Risks Related to Our Corporate Structure—Any failure by our consolidated affiliated entities or their respective shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business.” Therefore, these contractual arrangements may not be as effective as direct ownership in providing us with control over these consolidated affiliated entities.

 

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Any failure by our consolidated affiliated entities or their respective shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business.

 

Our consolidated affiliated entities and their respective shareholders may fail to take certain actions required for our business or follow our instructions despite their contractual obligations to do so. If they fail to perform their obligations under their respective agreements with us, we may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, which may not be effective.

 

All of these contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as compared to certain other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our consolidated affiliated entities, and our ability to conduct our business may be adversely affected.

 

Contractual arrangements with our consolidated affiliated entities may result in adverse tax consequences to us.

 

Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities within 10 years after the taxable year when the arrangements or transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities were to determine that the contractual arrangements among 500.com Limited, E-Sun Sky Computer, Qufan Information Technology, our subsidiary in China, our consolidated affiliated entities in China and their respective shareholders were not entered into on an arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment of income subject to taxation. Under the contractual agreements we agreed to provide unconditional financial support, through the nominee shareholders, to each consolidated affiliated entity in manners permitted by PRC laws and regulations and further agreed to waive the repayment of any such financial support if needed by such consolidated affiliated entity, which may also result in income tax burden on the nominee shareholders and the consolidated affiliated entities. In addition, the PRC tax authorities may impose interest on late payments on our consolidated affiliated entities for the adjusted but unpaid taxes. Our results of operations may be materially and adversely affected if our consolidated affiliated entities’ tax liabilities increase significantly or if they are required to pay interest on late payments.

 

The shareholders of our consolidated affiliated entities may have potential conflicts of interest with us, which may materially and adversely affect our business.

 

We provide no incentives to the shareholders of our consolidated affiliated entities for the purpose of encouraging them to act in our best interests in their capacity as the shareholders of our consolidated affiliated entities. We may replace any of the shareholders of our consolidated affiliated entities at any time pursuant to the exclusive option agreements. In addition, each of the shareholders of our consolidated affiliated entities has executed a shareholder’s voting power assignment agreement to authorize any person or entity designated by 500.com Limited as permitted by applicable law to vote on their behalf and exercise full voting rights as shareholders of the consolidated affiliated entities. We cannot assure you that when conflicts arise, the shareholders of our consolidated affiliated entities will act in the best interests of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of our consolidated affiliated entities, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

 

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We may rely principally on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business.

 

We are a holding company and we rely principally on dividends and other distributions on equity paid by our wholly owned PRC subsidiary, E-Sun Sky Computer, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If E-Sun Sky Computer incurs debt on its own behalf in the future, the instruments governing the debt may restrict their abilities to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements E-Sun Sky Computer currently has in place with our consolidated affiliated entities in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us.

 

Under PRC laws and regulations, E-Sun Sky Computer, as a wholly foreign-owned enterprise in the PRC, may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise such as E-Sun Sky Computer is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund a statutory reserve fund, until the aggregate amount of such a fund reaches 50% of its registered capital. At its discretion, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of E-Sun Sky Computer to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may limit our use of the proceeds we receive from our public offering to fund our expansion or operations.

 

As an offshore holding company with a PRC subsidiary, we may (i) make additional capital contributions to our existing PRC subsidiary, E-Sun Sky Computer, (ii) establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, (iii) make loans to our PRC subsidiaries or consolidated affiliated entities, or (iv) acquire offshore entities with business operations in China in an offshore transaction. However, most of these uses are subject to PRC regulations and approvals. For example:

 

· capital contributions to our PRC subsidiaries, whether existing or newly established ones, must be approved by the PRC Ministry of Commerce or its local counterparts;

 

· loans by us to our PRC subsidiaries, each of which is a foreign-invested enterprise, to finance their activities cannot exceed the statutory limit, which is the difference between the registered capital and the amount of total investment as approved by the Ministry of Commerce or its local counterparts, and must be registered with the PRC State Administration of Foreign Exchange, or SAFE, or its local branches; and

 

· loans by us to our consolidated affiliated entities, which are domestic PRC entities, must be approved by the National Development and Reform Commission and must also be registered with SAFE or its local branches.

 

On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renminbi by restricting how the converted Renminbi may be used. On March 30, 2015, SAFE promulgated SAFE Circular 19, which came into force replacing SAFE Circular 142 on June 1, 2015. SAFE Circular 19 removed certain restrictions previously provided under SAFE Circular 142 for conversion by a foreign-invested enterprise of foreign currency registered capital into RMB and use of such RMB capital. However, SAFE Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises.

 

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We expect that the PRC regulations of loans and direct investment by offshore holding companies to PRC entities may continue to limit our use of the proceeds we receive from our initial public offering. There are no costs associated with registering loans or capital contributions with relevant PRC governmental authorities, other than nominal processing charges. Under the relevant PRC laws and regulations, the PRC governmental authorities are required to process such approvals or registrations or deny our application within a prescribed time period, which is usually less than 90 days. The actual time taken, however, may be longer due to administrative delays. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to our future plans to use the U.S. dollar proceeds we receive from our initial public offering for our expansion and operations in China. If we fail to receive such registrations or approvals, our ability to use the proceeds of our initial public offering and to capitalize our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and ability to fund and expand our business.

 

Risks Related to Doing Business in China

 

The complexities, uncertainties and rapid changes in PRC regulation of Internet business and companies require significant resources for compliance.

 

The PRC government extensively regulates the Internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the Internet industry. These Internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of the Internet business include, but are not limited to, the following:

 

There are uncertainties relating to the regulation of the Internet business in China, including evolving licensing practices. This means that permits, licenses or operations at some of our companies may be subject to challenge, or we may fail to obtain permits or licenses that may be deemed necessary for our operations or we may not be able to obtain or renew certain permits or licenses. The major permits and licenses that could be involved include, without limitation, the Permit for Operation of Value-Added Telecom Services, or VAS license, issued by the Ministry of Industry and Information Technology, or the MIIT. Pursuant to the VAS license issued to E-Sun Sky Network by Telecommunication Management Bureau of Guangdong Province in February 2013, E-Sun Sky Network is permitted to provide internet information services. The license was renewed in 2017 and is effective until September 2022. We need to renew each of the licenses upon its expiration, and apply for permits and alteration of the license in advance of any change to the license holder regarding its shareholding structure, controlling shareholders, merger and acquisition, business scope and etc., and apply for alteration of the license for any change to the name, legal representative of the license holder. However, we cannot assure you that each of the licenses will be successfully and timely renewed, or that the license will continue to cover all aspects of our online lottery service business upon its renewal. If we fail to maintain any of these required licenses or approvals, we may be subject to various penalties, including fines and the discontinuation of or restriction on our operations. Any such disruption in our operations may have a material and adverse effect on our results of operations.

 

New laws and regulations that regulate Internet activities, including online lottery services, may be promulgated. If these new laws and regulations are promulgated, additional licenses may be required for our operations. If our operations do not comply with these new regulations after they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.

 

We only have contractual control over our operating websites, namely, www.500wan.com and www.500.com. We do not directly own our websites due to the restriction of foreign investment in businesses providing value-added telecom services in China, including Internet content provision services. If the authorities challenge our corporate structure or rights to our websites, it could significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other adverse effects on us.

 

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The interpretation and application of existing PRC laws, regulations and policies and any new laws, regulations or policies relating to the Internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, the Internet business in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain any new licenses required under any new laws or regulations. There are also risks that we may be found to violate existing or future laws and regulations given the uncertainty and complexity of China’s regulation of Internet business.

 

In addition, new laws and regulations governing the use of the Internet could be issued at the national or provincial level, or existing regulations could be interpreted more strictly. No assurance can be given that business on the Internet in general or our online services in particular will not be adversely impacted by further regulations. Technical limitations on Internet use can also be developed or implemented. For example, restrictions can be implemented on personal Internet use in the workplace in general or access to our site in particular. This could lead to a reduction of user activities or a loss of users which in turn could have a material adverse effect on our financial condition and results of operations.

 

Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The Ministry of Commerce is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

 

Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company should be treated as a foreign-invested enterprise, or an FIE. According to the definition set forth in the draft Foreign Investment Law, FIEs refer to enterprises established in China pursuant to PRC law that are solely or partially invested by foreign investors. The draft Foreign Investment Law specifically provides that entities established in China (without direct foreign equity ownership) but “controlled” by foreign investors, through contract or trust for example, will be treated as FIEs. Once an entity falls within the definition of FIE, it may be subject to foreign investment “restrictions” or “prohibitions” set forth in a “negative list” to be separately issued by the State Council later. If an FIE proposes to conduct business in an industry subject to foreign investment “restrictions” in the “negative list,” the FIE must go through a market entry clearance by the Ministry of Commerce before being established. If an FIE proposes to conduct business in an industry subject to foreign investment “prohibitions” in the “negative list,” it must not engage in the business. However, an FIE, during the market entry clearance process, may apply in writing to be treated as a PRC domestic enterprise if its foreign investor(s) is/are ultimately “controlled” by PRC government authorities and its affiliates and/or PRC citizens. In this connection, “control” is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% of more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business operations.

 

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The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. See “Item3D. Risk Factors—Risks Related to Our Corporate Structure” and “Item 4.C. Information on the Company—Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities.” Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is included in the “negative list” as restricted industry, the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC government authorities and its affiliates or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as FIEs and any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.

 

The draft Foreign Investment Law has not taken a position on what actions shall be taken with respect to the existing companies with a VIE structure, whether or not these companies are controlled by Chinese parties, while it is soliciting comments from the public on this point. Moreover, it is uncertain whether the internet and online sales of lottery products, in which our variable interest entities operate, will be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” to be issued. If the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions, such as Ministry of Commerce market entry clearance, to be completed by companies with existing VIE structure like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.

 

The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.

 

The 2006 M&A Rules establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it difficult for us to pursue growth through acquisitions in China.

 

The 2006 M&A Rules include provisions that purport to require approval of the Ministry of Commerce for acquisitions by offshore entities established or controlled by domestic companies, enterprises or natural persons of onshore entities that are related to such domestic companies, enterprises or natural persons, and prohibit offshore entities from using their foreign-invested subsidiaries in China, or through “other means,” to circumvent such requirement. As part of our growth strategy, we obtained control over E-Sun Network, E-Sun Sky Network, Youlanguang Technology and Guangtiandi Technology in June 2011, Tongfu Technology in December 2015, and Shenzhen Qufan in January 2017 by entering into contractual arrangements with VIEs and their respective shareholders. We did not seek the approval of the Ministry of Commerce for those transactions based on the legal advice we obtained from our PRC legal counsel in those transactions that such approval was unnecessary. However, the 2006 M&A Rules also prohibit companies from using any “other means” to circumvent the approval requirement set forth therein and there is no clear interpretation as to what constitutes “other means” of circumvention of the requirement under the 2006 M&A Rules. The Ministry of Commerce and other applicable government authorities would therefore have broad discretion in determining whether an acquisition is in violation of the 2006 M&A Rules. If PRC regulatory authorities take a view that is contrary to ours, we could be subject to severe penalties. In addition, we may in the future grow our business in part by acquiring complementary businesses in China. If we are required to obtain the approval from the Ministry of Commerce, completion of such transaction may be delayed or even inhibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.

 

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In addition, in August 2011 the Ministry of Commerce issued the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the MOFCOM Security Review Rules. The MOFCOM Security Review Rules, effective from September 1, 2011, require certain merger and acquisition transactions to be subject to merger control review or security review. The MOFCOM Security Review Rules further provide that, when deciding whether a specific merger or acquisition of a PRC enterprise by foreign investors is subject to the security review by the Ministry of Commerce, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision in the MOFCOM Security Review Rules stating that our business falls into the scope subject to the security review. However, as these rules are relatively new and there is a lack of clear statutory interpretation on the implementation of these new rules, there can be no assurance that the Ministry of Commerce will not apply these rules to our contractual arrangements with E-Sun Network, E-Sun Sky Network, Youlanguang Technology, Guangtiandi Technology, Tongfu Technology and Shenzhen Qufan If we are found to be in violation of the MOFCOM Security Review Rules, or fail to obtain any required approvals, the relevant regulatory authorities would have broad discretion in dealing with such violation, including levying fines, confiscating income, revoking our PRC consolidated affiliated entities’ business or operating licenses or requiring us to restructure or unwind the relevant ownership structure or operations. Any of these actions could cause significant disruption to our business operations and may materially and adversely affect our business, financial condition and results of operations. Further, if the business of any target company that we would like to acquire in the future falls into the ambit of security review, complying with the requirements of the relevant rules could be prohibitively time consuming or we may be legally prohibited from acquiring such company either by equity or asset acquisition, capital contribution or through any contractual arrangement, which could have a material and adverse impact on our ability to expand our business or maintain our market share.

 

Governmental control of currency conversion may affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of foreign currency out of China. We receive all of our service fees in Renminbi in China. Under our current corporate structure, most of our income is primarily derived from dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency-denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from SAFE or its local branch is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

Fluctuations in exchange rates of the Renminbi could materially affect our reported results of operations.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. In July 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the revised policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in a more than 20% appreciation of the RMB against the U.S. dollar in the following three years. Since July 2008, however, the RMB has traded within a narrow range against the U.S. dollar. As a consequence, the RMB has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. On June 20, 2010, the People’s Bank of China announced that the PRC government would further reform the RMB exchange rate regime and increase the flexibility of the exchange rate, and between June 30, 2010 and December 31, 2013, the value of the Renminbi appreciated approximately 12.0% against the U.S. dollar, although the value of the Renminbi depreciated approximately 2.5% against the U.S. dollar in 2014. In August 2015, the People’s Bank of China changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market makers who submit for reference rates to consider the previous day’s closing spot rate, foreign exchange demand and supply as well as changes in major currency rates. As a result, in 2015, the value of the Renminbi depreciated approximately 4.68% against the U.S. dollar, and in 2016, the value of the Renminbi further depreciated approximately 7.09% against the U.S. dollar. However, the value of Renminbi appreciated approximately 5.81% against the U.S. dollar in 2017. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

 

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As we may rely on dividends and other fees paid to us by our subsidiaries and affiliated consolidated entities in China, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, net revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars received from our initial public offering into Renminbi for our operations, an appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

 

Our operations may be adversely affected by changes in China’s political, economic and social conditions.

 

Most of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

 

The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industrial development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

 

While the Chinese economy has experienced significant growth over the past decade, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In the past the Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results. Any significant increase in China’s inflation rate could increase our costs and have a negative impact on our operating margins. In addition, any sudden changes to China’s political system or the occurrence of widespread social unrest could have negative effects on our business and results of operations.

 

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Under the EIT Law, we may be classified as a “resident enterprise” of China. Such classification would likely result in unfavorable tax consequences to us.

 

Under the new enterprise income tax law, or the EIT Law, and its implementation rules, or the Implementation Rules, both of which became effective on January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and is subject to enterprise income tax, or EIT, at the rate of 25% on its global income. The Implementation Rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following criteria are satisfied: (i) the place where the senior management and core management departments that are in charge of its daily operations perform their duties is mainly located in the PRC; (ii) its financial and human resources decisions are made by or are subject to approval by persons or bodies in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the enterprise’s directors or senior management with voting rights frequently reside in the PRC. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those invested in by PRC individuals, like our company, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or controlled by or invested in by PRC individuals. We do not believe that any of 500.com Limited, Fine Brand Limited, 500wan HK Limited, Qufan Internet Technology Inc., and Qufan Internet Technology (HK) Limited meets all of the criteria above. Although we conduct our business principally through contractual arrangements among our wholly owned PRC subsidiary and our consolidated affiliated entities in the PRC, and decisions relating to our financial and human resource matters are made by personnel of our wholly owned PRC subsidiary and our consolidated affiliated entities in the PRC, each of 500.com Limited, Fine Brand Limited, 500wan HK Limited, Qufan Internet Technology Inc., and Qufan Internet Technology (HK) Limited is a company incorporated outside the PRC. As holding companies, these three entities’ key assets and records, including the resolutions of their respective board of directors and the resolutions of their respective shareholders, are located and maintained outside the PRC. While we do not believe we would be considered a resident enterprise, if the PRC authorities were to subsequently determine that we should be so treated, a 25% EIT on our global income could significantly increase our tax burden and materially and adversely affect our financial condition and results of operations.

 

Pursuant to the EIT Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement and provided that relevant tax authorities approved the foreign investors as the beneficial owners of such dividends under applicable tax regulations. We are a Cayman Islands holding company and substantially all of our income may come from dividends from our PRC subsidiary, E-Sun Sky Computer and Qufan Information Technology, through our Hong Kong holding company. The Cayman Islands do not have such a tax treaty with China. According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income between China and Hong Kong entered into in August 2006, or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the relevant PRC tax authority to have satisfied the relevant conditions and requirements under the Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5%. To the extent dividends paid by our PRC subsidiary to our Hong Kong holding company are subject to withholding tax, the amount of funds available to us to meet our cash requirements, including the payment of dividends to our shareholders and ADS holders, will be reduced.

 

Furthermore, the State Administration of Taxation promulgated the Notice on How to Understand and Determine the Beneficial Owners in Tax Agreement in October 2009, or Circular 601, which provides guidance for determining whether a resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements. According to Circular 601, a beneficial owner generally must be engaged in substantive business activities. An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits. The conduit company normally refers to a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. If we and our Hong Kong holding company are not considered resident enterprises, we cannot assure you that any dividends distributed to our Hong Kong holding company will be eligible for a reduced withholding tax rate under the applicable treaty.

 

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Dividends payable to our foreign investors and gains on the sale of our ADSs or ordinary shares by our foreign investors may become subject to taxes under PRC tax laws.

 

Under the EIT Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is also subject to PRC tax at a rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our ordinary shares or ADSs, and any gain realized from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. See “Item 4. Information on the Company—Regulations Regarding the Enterprise Income Tax, Individual Income Tax and Withholding Tax.” Furthermore, if we are deemed a PRC resident enterprise, dividends payable to investors that are non-PRC individual investors and any gain realized on the transfer of ADSs or ordinary shares by such investors may be subject to PRC tax at a rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether, if we are considered a PRC resident enterprise, holders of our ADSs or ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas (although we do not expect to withhold at treaty rates if any withholding is required). If dividends payable to our non-PRC investors, or gains from the transfer of our ordinary shares or ADSs by such investors are subject to PRC tax, the value of your investment in our ordinary shares or ADSs may be adversely affected.

 

We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the State Administration of Taxation, or the SAT, on December 10, 2009 with retroactive effect from January 1, 2008, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly via disposing the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that (i) has an effective tax of rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the relevant tax authority of the PRC resident enterprise such Indirect Transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%. SAT Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.

 

There is uncertainty as to the application of SAT Circular 698. For example, while the term “Indirect Transfer” is not clearly defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax rates in foreign tax jurisdictions, and the process and format for reporting an Indirect Transfer to the relevant tax authority of the PRC resident enterprise. In addition, there are no formal declarations with regard to how to determine whether a foreign investor has adopted an abusive arrangement in order to reduce, avoid or defer PRC tax. SAT Circular 698 may be determined by the tax authorities to be applicable to our offshore restructuring transactions, if any of such transactions were to be determined by the tax authorities to lack reasonable commercial purpose. As a result, we and our non-resident investors in such transactions may be at risk of being taxed under SAT Circular 698 and we may be required to expend valuable resources to comply with SAT Circular 698 or to establish that we should not be taxed under the general anti-avoidance rule of the EIT Law, which may have a material adverse effect on our financial condition and results of operations or such nonresident investors’ investments in us.

 

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The PRC legal system embodies uncertainties which could limit the legal protections available to you and us.

 

As our main operating entities and a substantial majority of our assets are located in China, PRC laws and the PRC legal system in general may have a significant impact on our business operations. Although China’s legal system has developed over the last several decades, PRC laws, regulations and legal requirements remain underdeveloped relative to the United States. Moreover, PRC laws and regulations change frequently and their interpretation and enforcement involve uncertainties. For example, the interpretation or enforcement of PRC laws and regulations may be subject to government rules or policies, some of which are not published on a timely basis or at all. In addition, the relative inexperience of China’s judiciary in some cases may create uncertainty as to the outcome of litigation. These uncertainties could limit our ability to enforce our legal or contractual rights or otherwise adversely affect our business and operations. Furthermore, due to the existence of unpublished rules and policies, and since newly issued PRC laws and regulations may have retroactive effect, we may not be aware of our violation of certain PRC laws, regulations, policies or rules until after the fact.

 

A failure by our shareholders or beneficial owners who are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which could adversely affect our business and financial condition.

 

In July 2014, SAFE, issued the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Overseas Investment Financing and Roundtrip Investments via Overseas Special Purpose Companies, or SAFE Circular 37, which annulled the previously applicable Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE Circular 37 states that the PRC institutes, citizens or residents must register with the relevant local SAFE branch or central SAFE in connection with their direct establishment or indirect control of an offshore entity established with their domestic enterprise’s legal assets or equity or overseas legal assets or equity for the purpose of investment and financing, and in connection with a roundtrip investment, whereby the PRC institutes, citizens or residents engage in direct investment activities domestically through the offshore entity directly or indirectly, that is establishment of foreign investment enterprises or projects domestically through setting up new enterprise or merger and acquisition and obtain the ownership, right of control and right of operation and management and other rights and interests. In addition, such PRC institutes, citizens or residents must apply for the registration of the overseas investment foreign exchanges before they invest in the special purpose companies with their domestic legal assets and interests, and amend their SAFE registrations when the offshore special purpose companies undergoes material events , such as the change of their shareholders, names, operation period and other basic information, or their increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, or other material events , or offering equity incentive to the directors, supervisors, senior management and other employees with the equity or option of the non-listed special purpose companies, or obtaining the profit, dividend from the special purpose companies or no-longer holding the rights and interests of the special purpose companies due to share transfer, bankruptcy, dissolution, liquidation, expiration of the operation period, change of identity and other reasons or transferring the financing fund back inland after the special purpose companies has completed the overseas financing.

 

We are committed to complying, and to ensuring that our shareholders and beneficial owners who are PRC citizens or residents comply, with SAFE Circular 37 requirements. We have requested our beneficial owners who are PRC residents to complete the registration under SAFE Circular 37, if applicable. As of the date of this annual report, our beneficial owners who are subject to SAFE Circular 37 registrations are in the process of updating their registrations with the Shenzhen Branch of SAFE. However, we may not be fully informed of the identities of all our beneficial owners who are PRC citizens or residents, and we cannot compel our beneficial owners to comply with SAFE Circular 37 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or residents have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE Circular 37 or other related regulations. Failure by such shareholders or beneficial owners to comply with SAFE Circular 37, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

 

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Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.

 

Our independent registered public accounting firm issued the audit report included in this annual report. Generally, an auditor of companies that are traded publicly in the United States is registered with the Public Company Accounting Oversight Board (United States), or PCAOB, and is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. However, as our former auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our former auditor, like other independent registered public accounting firms operating in China, is not inspected by PCAOB.

 

Inspections of other firms outside of China conducted by PCAOB have identified deficiencies in those firms’ audit procedures and quality control procedures. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our former auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

We may be adversely affected by the initial decision issued by the administrative law judge against the Chinese affiliates of the Big Four accounting firms.

 

In December 2012, the SEC brought administrative proceedings against five accounting firms in China, alleging that the accounting firms refused to produce audit papers and other documents related to certain China-based companies that were under investigation by the SEC for potential accounting fraud. On January 22, 2014, an initial administrative law decision was issued, sanctioning the Chinese affiliates of the Big Four accounting firms and suspending them from practicing before the SEC for a period of six months. The sanction will not take effect until there is an order of effectiveness issued by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. The accounting firms involved have appealed the initial decision to the SEC, and may appeal to the federal appeal court if necessary. The independent registered public accounting firm that will issue the audit reports included in this annual report is one of the accounting firms named in the SEC’s proceedings, and we may be adversely affected by the outcome of the proceedings. In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

 

If our former independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States, result in a sharp decline of our market capitalization and materially and adversely affect the value of your investment in our ADSs.

 

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A failure to comply with PRC regulations regarding the registration of shares and share options held by our employees who are PRC citizens may subject such employees or us to fines and legal or administrative sanctions.

 

On February 15, 2012, SAFE promulgated the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Share Ownership Plans or Share Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007. Under the Share Option Rules and other relevant rules and regulations, PRC residents who participate in share incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a share incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of share options, the purchase and sale of corresponding shares or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the share incentive plan if there is any material change to the share incentive plan, the PRC agent or the overseas entrusted institution or other material changes. As of the date of this annual report, we and our PRC citizen employees who have been granted share options are applying for registration with the Shenzhen branch of SAFE pursuant to the Share Option Rules. See “Item 4B. Business Overview—Regulations on our Industry—Regulations on Foreign Exchange.”

 

Risks Related to Our ADSs

 

The trading price of our ADSs may be volatile, which could result in substantial losses to investors.

 

The trading price of our ADSs may be volatile and could fluctuate widely in response to factors relating to our business as well as external factors beyond our control. Factors such as variations in our financial results, announcements of new business initiatives by us or by our competitors, recruitment or departure of key personnel, changes in the estimates of our financial results or changes in the recommendations of any securities analysts electing to follow our securities or the securities of our competitors could cause the market price for our ADSs to change substantially. At the same time, securities markets may from time to time experience significant price and volume fluctuations that are not related to the operating performance of particular companies. For example, in late 2008 and early 2009, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may also have a material adverse effect on the market price of our ordinary shares.

 

In addition, the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs. In recent years, some of PRC companies having listing their securities on U.S. stock markets have experienced significant volatility, including significant price declines in connection with their initial public offerings. The trading performances of these PRC companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards PRC companies listed in the United States and consequently may impact the trading performance of our ADSs. These broad market and industry factors may significantly affect the market price and volatility of our ADSs, regardless of our actual operating performance. Any of these factors may result in large and sudden changes in the trading volume and price for our ADSs.

 

The price at which the ADSs are traded may decline below the offering price, meaning that you may experience a decrease in the value of your ADSs regardless of our operating performance or prospects. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior management, and, if adversely determined, could have a material adverse effect on our results of operations.

 

Future sales or perceived sales of our ADSs or ordinary shares by existing shareholders could cause our ADSs price to decline.

 

If our existing shareholders sell, indicate an intention to sell, or are perceived to intend to sell, substantial amounts of our ordinary shares in the public market after the 90-day contractual lock-up period and the lapse of other legal restrictions on resale discussed in this annual report, the trading price of our ADSs could decline. All ADSs sold in our initial public offering are freely tradable, without restriction, in the public market. The representatives of the underwriters may, in their sole discretion, permit any party subject to lock-up agreements to sell shares prior to the expiration of the lock-up agreements. After the lock-up agreements pertaining to our initial public offering expire (90 days or more from the date of this annual report), all of our outstanding shares will be eligible for sale in the public market, but they will be subject to volume limitations and other restrictions under Rule 144 under the Securities Act. In addition, ordinary shares subject to outstanding options under our share incentive plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our ordinary shares could decline.

 

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Future issuance of share options or restricted shares may have a diluting effect on existing and future shareholders.

 

The grant and exercise of share options or restricted shares to be issued in the future will likely result in a dilution of the value of our ordinary shares for all shareholders. We established a 2011 Share Incentive Plan under which we are able to issue up to 12% share options or up to 3% restricted shares of our issued and outstanding ordinary shares from time to time. We subsequently adjusted the exercise prices and period of certain options granted in June 2012 and June 2014. For more details, see “Item 6B. Compensation—Share Incentive Plans.” We may in the future issue additional share options and other share-based awards under the plan, which may dilute the interest of the existing and future shareholders. Moreover, we may seek authorization to increase the number of shares subject to our 2011 Share Incentive Plan, or sell additional securities and/or rights to purchase such securities at any time in the future. Dilution of the value of the ordinary shares will likely result from such sales, which in turn could adversely affect the market price of our ordinary shares and ADSs.

 

We may become a passive foreign investment company, or PFIC, which could result in adverse United States tax consequences to United States investors.

 

Based on our financial statements and the composition of our income and assets and the valuation of our assets, we do not believe that we were a passive foreign investment company, or PFIC, for United States federal income tax purposes for 2017, although there can be no assurances in this regard. Additionally, it is possible that we may be a PFIC in 2018 or future taxable years. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets and the valuation of our assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for United States federal income tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average percentage of our assets (which includes cash) by value in that taxable year which produce or are held for the production of passive income is at least 50%. The calculation of the value of our assets will be based, in part, on the quarterly market value of our ADSs, which is subject to change.

 

In addition, there is uncertainty as to the treatment of our corporate structure and ownership of our consolidated affiliated entities for United States federal income tax purposes. If it is determined that we do not own the stock of our consolidated affiliated entities for United States federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we would likely be treated as a PFIC.

 

If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, such characterization could result in adverse United States federal income tax consequences to you if you are a United States Holder, as defined under “Item 10E. Taxation—United States Federal Income Taxation.” For example, if we are or become a PFIC, you may become subject to increased tax liabilities under United States federal income tax laws and regulations, and will become subject to burdensome reporting requirements. See “Item 10E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.” We cannot assure you that we will not be a PFIC for 2018 or any future taxable year.

 

You may not be able to participate in rights offerings and may experience dilution of your holdings in relation to any such offerings.

 

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

 

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In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive such distribution.

 

Holders of our Class B ordinary shares will control the outcome of shareholder actions in our company.

 

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to 10 votes per share. Holders of our Class B ordinary shares hold 74,400,299 Class B ordinary shares, or 18.2 % of the combined total outstanding ordinary shares (representing 69.0 % of the total voting rights) in our company as of December 31, 2017. Their shareholding, in particular the greater voting rights of the Class B ordinary shares, gives Class B ordinary shareholders the power to control any actions that require shareholder approval under Cayman Islands law, our amended and restated memorandum and articles of association and the NYSE requirements, including the election and removal of any member of our board of directors, mergers, consolidations and other business combinations, changes to our amended and restated memorandum and articles of association, the number of shares available for issuance under share incentive plans and the issuance of significant amounts of our ordinary shares in private placements. Due to the disparate voting rights attached to the two classes of our ordinary shares, holders of our Class B ordinary shares could have sufficient voting rights to determine the outcome of all matters requiring shareholder approval even if it should, at some point in the future, hold considerably less than a majority of the combined total of our outstanding Class A and Class B ordinary shares.

 

As a result of their ownership of Class B ordinary shares, the voting power of holders of our Class B ordinary shares may cause transactions to occur that might not be beneficial to you as a holder of ADSs and may prevent transactions that would be beneficial to you. For example, their voting power may prevent a transaction involving a change of control of us, including transactions in which you as a holder of our ADSs might otherwise receive a premium for your securities over the then-current market price. Similarly, they may approve a merger or consolidation of our company that may result in you receiving a stake (either in the form of shares, debt obligations or other securities) in the surviving or new consolidated company, which may not operate our current business model and dissenter rights may not be available to you in such an event. In addition, holders of our Class B ordinary shares are not prohibited from selling a controlling interest in us to a third party and may do so without your approval. If they sell a controlling interest in us to a third party or otherwise undergo a change of control, any acquirer or successor will be entitled to exercise the voting control and may do so in a manner that could vary significantly from that of our current holders of Class B ordinary shares.

 

In addition, due to the disparate voting rights attached to these two classes, our Class B ordinary shareholders will have significant voting rights over matters requiring shareholder approval, including the election and removal of directors and certain corporate transactions, such as mergers, consolidations and other business combinations. This concentrated control could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

 

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Anti-takeover provisions in our charter documents may discourage a third party from acquiring us, which could limit our shareholders’ opportunities to sell their shares at a premium.

 

Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix the powers and rights of these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preferred shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues preferred shares, the market price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.

 

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by noncontrolling shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.

 

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although a judgment obtained in the United States will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction; (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given; (c) is final; (d) is not in respect of taxes, a fine or a penalty; and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

 

You will have limited ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, because we are incorporated in the Cayman Islands, because we conduct our operations exclusively in China and most of our directors and officers reside outside the United States.

 

We are incorporated in the Cayman Islands and conduct our operations exclusively in China. All of our assets are located outside the United States. Most of our directors and officers reside outside the United States and a substantial portion of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the applicable securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state, and it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state.

 

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Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our amended and restated articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.

 

Your ability to protect your rights as shareholders through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law.

 

Cayman Islands companies may not have standing to initiate a derivative action in a federal court of the United States. As a result, your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a United States federal court may be limited to direct shareholder lawsuits.

 

The voting rights of holders of ADSs are limited in several significant ways by the terms of the deposit agreement.

 

Holders of our ADSs may only exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. Under our amended and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is five days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested.

 

The depositary of our ADSs, except in limited circumstances, grants to us a discretionary proxy to vote the ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests and the ability of our shareholders as a group to influence the management of our company.

 

Under the deposit agreement for the ADSs, the depositary gives us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote, unless:

 

· we have failed to timely provide the depositary with our notice of meeting and related voting materials;

 

· we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

· we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

· a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

· voting at the meeting is made on a show of hands.

 

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The effect of this discretionary proxy is that you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for holders of ADSs to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

 

You may not receive distributions on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you.

 

The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration is required for such distribution. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you. These restrictions may have a material and adverse effect on the value of your ADSs.

 

You may be subject to limitations on the transfer of your ADSs.

 

Your ADSs, represented by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we think or the depositary thinks it is necessary or advisable to do so in connection with the performance of its duty under the deposit agreement, including due to any requirement of law or any government or governmental body, or under any provision of the deposit agreement.

 

We incurred, and will continue to incur increased costs as a result of being a public company.

 

As a public company, we have incurred significant accounting, legal and other expenses that we did not incur when we were a private company, including additional costs associated with our public company reporting obligations. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, and NYSE, impose various requirements on the corporate governance practices of public companies.

 

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. Since we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. Operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

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In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. On February 27, 2015, a purported stockholder class action lawsuit consisting of purchasers of our ADSs during the period between November 22, 2013 and February 25, 2015. For further details on this class action lawsuit, see “Item 4B. Business Overview— Legal and Administrative Proceedings.” When we are involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

We began operations in the online lottery service industry in 2001 through one of our consolidated affiliated entities, E-Sun Network Co., Ltd., or E-Sun Network, in Shenzhen, China. In May 2006, E-Sun Network established its wholly owned subsidiary, E-Sun Sky Network Technology Co., Ltd., or E-Sun Sky Network, which became our major operation entity for our online lottery services business. We have voluntarily suspended our online sports lottery sales services in response to the promulgation of the Self-Inspection Notice and the Public Announcement since April 4, 2015.

 

In December 2015, we acquired a 63% equity interest in Sumpay.cn and its wholly owned subsidiaries, which provide third party payment services in China, with a cash consideration of RMB233.1 million. We disposed of our interest in Sumpay.cn for RMB359.1 million in cash in May 2016.

 

In July 2016, we acquired a 100% equity interest in Shenzhen Caiyu, a provider of sports information services in China, with a cash consideration of RMB1.0 million. In October 2017, we entered into a share transfer agreement for the disposal of our 100% equity interest in Shenzhen Caiyu for a cash consideration of RMB3.8 million and the transaction was completed in November 2017.

 

In October 2016, we acquired a 51% equity interest in Shenzhen Kaisheng, a provider of online spot commodity trading services in China.

 

In November 2016, we acquired a 51% equity interest in Qufan Internet Technology Inc., and Shenzhen Qufan Network Technology Co., Ltd. with a cash consideration and contingent consideration of RMB110.5 million, to provide mobile poker games services in China. In February 2018, we entered into a share transfer agreement for the disposal of our 51% equity interest in Qufan Internet Technology Inc., and Shenzhen Qufan Network Technology Co., Ltd. for a cash consideration of RMB127.5 million.

 

In June 2017, we acquired a 40.65% equity interest in Loto Interactive Limited (formerly named MelcoLot Limited), or Loto Interactive, a company listed on the Hong Kong Stock Exchange (Stock Code: 8198), for a total consideration of approximately HK$322.2 million (US$41.3 million). Loto Interactive is principally engaged in the provision of lottery-related technologies, systems and solutions to two state-run lottery operators in China, namely the China Welfare Lottery Issuance Centre and the Sports Lottery Centre. Loto Interactive is a distributor of high quality, versatile lottery terminals and parts for the Sports Lottery Center. Loto Interactive provides game upgrading technology and system maintenance service for the rapid-draw game “Shi Shi Cai” in Chongqing Municipality. We accounted for the purchase as an equity method investment.

 

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In July 2017, we acquired a 93% equity interest in TMG for a total consideration of approximately EUR49.8 Million (US$56.0 million) in cash. TMG holds licenses to operate online gaming sites from Curacao, Malta, the United Kingdom and Ireland. Headquartered in Malta, TMG operates Multilotto.com, or Multilotto.net, which is considered one of the top online lottery betting and online casino platforms in the Nordic countries where it holds substantial market share. Operating under a Curacao e-Gaming license, Multilotto offers players the ability to bet on the outcomes of eleven of the world’s largest lotteries, and has a strong and balanced customer portfolio that has created a solid foundation for its expansion across Europe. Sweden is TMG’s top European market (generating approximately 60% of TMG’s total revenue in 2017). At this time, Sweden does not have license requirement, so TMG is operating in Sweden under the Curacao license. Beginning January 1, 2019, TMG is required to obtain the Swedish license if it wishes to continue operating in Sweden.

 

In March 2018, we entered into a framework agreement with the China Sports Lottery Administration Center, or the Sports Lottery Center, pursuant to which we will cooperate with the Sports Lottery Center to develop physical channels to sell sports lottery tickets. The Sports Lottery Center is the sports lottery issuance agency established by the General Administration of Sports in accordance with relevant laws, and it is the government authority in the PRC in charge of the issuance and organizing sales of sports lottery products in China. The Sports Lottery Center agrees to provide support to this project, and we plan to enter into cooperation agreements with provincial (including regional and municipal) sports lottery centers to assist in installing sports lottery terminals and provide relevant maintenance and operational services in accordance with local development plans for sports lottery business and requests of such provincial (including regional and municipal) sports lottery centers, in order to enhance the convenience of sports lottery ticket purchases, enlarge customer base and optimize user experience for lottery purchasers.

 

See “Item 4C. Organizational Structure” for a diagram illustrating our corporate structure as of December 31, 2017.

 

Our company was incorporated under the laws of the Cayman Islands on April 20, 2007 under the name Fine Success Limited, which was changed to 500wan.com on May 9, 2011 and further changed to the current name 500.com Limited on October 9, 2013.

 

On November 22, 2013, our ADSs began trading on the New York Stock Exchange under the ticker symbol “WBAI.” We issued and sold a total of 6,653,900 ADSs, representing 66,539,000 Class A ordinary shares, at an initial offering price of $13.00 per ADS.

 

In June 2015, Tsinghua Unigroup International Co., Ltd. purchased 63,500 newly issued Class A ordinary shares of the Company for a total purchase price of approximately US$123.8 million in cash. The per share purchase price was US$1.95 (corresponding to US$19.50 per ADS).

 

Our principal executive offices are located at 12F, West Side, Block B, Building No.7, Shenzhen Bay Eco-Technology Park, Nanshan District, Shenzhen, 518115, People’s Republic of China. Our telephone number at this address is +(86) 755 88352500 and our fax number is +(86) 755 83796070. Our registered office in the Cayman Islands is at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our websites are www.500.com and www.500wan.com. Our agent for service of process in the United States is Law Debenture Corporate Services Inc. located at 400 Madison Avenue, 4th Floor, New York, New York 10017.

 

B. Business Overview

 

Overview

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, we were a leading online sports lottery service provider in China. We acted as an aggregator and processor of lottery purchase orders from our registered user and offered a comprehensive and integrated suite of online lottery services, information, user tools and virtual community venues to our users.

 

We were among the first companies to provide online lottery services in China, and we are one of the two entities that are authorized by the MOF to provide online lottery sales services on behalf of China Sports Lottery Administration Center, the government authority in charge of the issuance and sale of sports lottery products in China.

 

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Through continued and significant investments in the past 17 years, we have built a prominent brand, 500wan, which means “five million” in Chinese and is the typical amount of top prizes of most lottery products in China. We believe our brand is known in the industry and by our users for its credibility and reliability.

 

Due to the voluntary suspension of our online sports lottery sales services and the uncertainty about when such services can be resumed, we continue to strive for diversification across our business lines. We currently offer several different lines of services, including (i) online gaming services through our newly acquired subsidiary, TMG; (ii) sports information services, lottery-related technologies, systems, solutions and information through our own platform and our investment in Loto Interactive; and (iii) financial technology services through our controlled subsidiary, Shenzhen Kaisheng.

 

Our Services

 

Our current and certain past service offerings are summarized as below:

 

Online Gaming Service

 

Licenses

 

In July 2017, we acquired a 93% equity interest in TMG. TMG holds licenses from Malta, the United Kingdom, Ireland and Curacao to operate online gaming sites. Through these licenses, TMG provides gaming services in close to 200 countries worldwide.

 

TMG is currently applying for a Romanian license.

 

Sweden is currently TMG’s top European market (generating approximately 60% of TMG’s total revenue in 2017). As of the date of this annual report, Sweden does not have license requirement. As a result, TMG is operating in Sweden under its Curacao license. Beginning January 1, 2019, TMG is required to obtain a Swedish license if it wishes to continue operating in Sweden. TMG plans to submit a Swedish license application in 2018.

 

Users

 

Headquartered in Malta, TMG serviced, in 2017, (i) approximately 5,000 monthly users in Germany, Austria and Malta (through its Malta remote gambling license) at multilotto.net; (ii) approximately 1,500 monthly users in the UK (through its UK remote operating license) at multilotto.co.uk; (iii) approximately 500 monthly users in Ireland (through its Irish remote bookmaker’s license) at multilotto.ie; and (iv) approximately 27,000 monthly users in close to 200 additional jurisdictions, including key markets in the Nordic countries, as well as other parts of Europe where online gaming is not prohibited, Africa, South America and North America (through its Curacao e-Gaming license) at Multilotto.com.

 

Services

 

TMG provides betting on the outcome services also known as Secondary Lottery Services and remote casino services to its users.

 

Through its Secondary Lottery Services, TMG offers users the ability to bet on the outcomes of some of the world’s largest lotteries (including Powerball, Mega Million and EuroMillions), and has a strong and balanced customer portfolio that has created a solid foundation for its expansion across Europe. In 2017, TMG’s Secondary Lottery Services generated (based on gross gaming revenue): (i) approximately 31,000 euros per month, under the Malta remote gambling license; (ii) approximately 6,000 euros per month, under the UK remote operating license; (iii) approximately 3,000 euros per month, under the Irish remote bookmaker’s license; and (iv) approximately 740,000 euros per month under the Curacao e-Gaming license.

 

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Through its remote casino services, TMG offers users several different casino services, including online slot machines and online table games. All online casino games are games of chance, and are provided and developed by third parties. Third party developers are responsible for obtaining approvals from government authorities for legality and chances of winning. In 2017, TMG’s remote casino services generated (based on gross gaming revenue): (i) approximately 67,000 euros per month, under the Malta remote gambling license; (ii) approximately 41,000 euros per month, under the UK remote operating license; (iii) approximately 4,000 euros per month, under the Irish remote bookmaker’s license; and (iv) approximately 620,000 euros per month under the Curacao e-Gaming license.

 

Anti-Fraud Procedures

 

In order to combat e-commerce fraud, a common issue for remote gaming operators, TMG has implemented a stringent set of anti-fraud procedures through technical and procedural controls. Specifically, to ensure only players within the jurisdictions where TMG operates can participate in the lottery and casino services, identification information (including full name, date of birth, address, e-mail address and mobile number) is required upon registration. Registrations from IP addresses outside of the licensed jurisdictions are blocked. Players under 18 years of age are not permitted to open accounts. If the player’s IP address does not match the state and country in which the player resides, the player’s account is locked out.

 

Whenever a player reaches the threshold of 2000 euros in cumulative deposits, he/she will be subject to TMG’s Know Your Customer, or KYC, procedure. This can also be done prior to a player reaching such threshold, at the discretion of TMG’s fraud team. At such point, the player will be required to provide personal identity information including a photograph, proof of address (bank statement less than three months old, utility bill, or tax card/return), proof of account funding (copy of credit card, credit card statement, or bank statement). In addition, in cases of suspected fraud, the user is required to provide a photograph in which both the user’s face and identity card are legible.

 

In comparison to competitors, TMG’s wagering limits are set relatively low, making it impractical for money launderers to join the gaming service. All withdrawal requests are initially checked, and all withdrawal requests are monitored in order to detect suspicious transactions (based on any suspected fraudulent background).

 

In addition, all transactions/customer accounts are checked by TMG’s Fraud and Payments team prior to the player’s first withdrawal. This includes checks for multiple accounts, individuals which may have been blacklisted by any relevant organization or company, transaction and betting behavior, handled amounts, deposit/withdrawal methods and any other factors that may lead to any suspicious activity based on the experience of TMG’s risk management team. If no such issues are encountered, the finding will be forwarded to the accounting department for a final review before payout. This process is generally completed within one working day.

 

In any cases where TMG encounters and verifies that any form of anti-money laundering is taking place or being attempted, such activity will be reported to the relevant gaming authorities, as required.

 

No cash deposits or cash withdrawals are permitted. Deposits and withdrawals can only be made through electronic payment methods and through banking/financial institutions

 

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Sports Lottery Ticket Sales

 

In March 2018, we entered into a framework agreement with the China Sports Lottery Administration Center, or the Sports Lottery Center, pursuant to which we will cooperate with the Sports Lottery Center to develop physical channels to sell sports lottery tickets. The Sports Lottery Center is the sports lottery issuance agency established by the General Administration of Sports in accordance with relevant laws, and it is the government authority in the PRC in charge of the issuance and organizing sales of sports lottery products in China.

 

The term of the framework agreement is three years, with an option to extend the agreement for an additional three years. We understand that, as of the date of this annual report, the Sports Lottery Center does not have any similar agreements with any other entity.

 

Under the framework agreement, we are responsible for negotiating, and entering into, cooperation agreements with provincial (including regional and municipal) sports lottery centers to install sports lottery terminals and provide relevant maintenance and operational services in accordance with local development plans.

 

We plan to work with the Sports Lottery Center to explore new physical sales channels and establish terminals in areas that existing and/or traditional lottery centers are not located. This may include establishing terminals in convenience stores, restaurants, bars, movie theaters, and other physical locations (particularly areas with high real estate costs) without access to lottery services at this time. Through the installation of terminals, we aim to provide users with physical access to sports lottery services 24 hours per day.

 

The installation of the sports lottery terminals aims to enhance the convenience of sports lottery ticket purchases, enlarge our customer base and optimize the user experience for lottery purchasers. In addition, we plan to develop a related mobile application, further simplifying the purchasing process for its existing users.

 

As of March 31, 2018, we have not entered into any cooperation agreements with any provincial (including regional and municipal) sports lottery centers.

 

Sports Information Services

 

Following our acquisition of Shenzhen Caiyu, a provider of sports information services in China, in July 2016, we began to offer a comprehensive sports information portal via a designated mobile application, which covers (i) real time soccer match information; and (ii) data-driven soccer match predictions generated by our proprietary analysis engine. In addition, users can post free or pay-per-view contents such as proprietary observations and analyses on our sports information portal. Although we disposed of Caiyu in November 2017, we continue to provide this information through our own service offerings named “Cai Xun Hao”.

 

In November 2016, we added a pay-service, which offers our users the ability to connect with independent sports experts to obtain more detailed information on specific sporting matches. In connection with the pay-service, revenues are split equally between us and the experts.

 

In addition, we hold a 40.65% equity interest in Loto Interactive, which is principally engaged in the provision of lottery-related technologies, systems and solutions to two state-run lottery operators in China, namely the China Welfare Lottery Issuance Centre and the Sports Lottery. Loto Interactive is a distributor of high quality, versatile lottery terminals and parts for the Sports Lottery Center. Loto Interactive provides game upgrading technology and system maintenance service for the rapid-draw game “Shi Shi Cai” in Chongqing Municipality. We accounted for the purchase as an equity method investment.

 

Revenues provided by sports information and data services during the consolidating period of 2017 were RMB13.2 million (US$2.0 million).

 

Financial Technology

 

With the increasing demand for more diversified financial and investment instruments in China, the precious metals trading market has expended very quickly over the past few years. We entered the precious metals trading industry, leveraging our existing customer base to build an online gold trading platform.

 

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Through our holding of a 51% interest in Shenzhen Kaisheng we have developed a platform to provide our customers with reliable online spot commodity trading for gold trade and delay products across PC and mobile devices. Beginning in 2017, we began to generate a small amount of revenue from trading commissions on the online spot commodity trading executed on our websites and mobile applications. Shenzhen Kaisheng processed its customer orders through a commercial bank, which is a member of Shanghai Gold Exchange in the past, and is in the process of forming a joint venture with another member of such exchange in the second quarter of 2018 to process its customer orders.

 

Sports Lottery Sales Services in China

 

We previously provided registered users with certain sports lottery sales services, which have been suspended since April 2015:

 

Individual Lottery Purchase . We provided our users with online purchase services to sports lottery products. Users place purchase orders for sports lottery products through our websites after registering, opening and funding an online account.

 

Lottery Pool Purchase. Lottery pools enabled individual users to purchase a share in a pooled lottery outcome or group of outcomes with other users. Lottery pool purchase was a service developed and first offered by us in China utilizing the unique advantages of the Internet, and it has become a standard feature on all websites that offer online lottery services.

 

Automatic Tag-along Purchase. Automatic tag-along purchase was another service we provided that distinguished us from traditional offline lottery agents. Through this service, a user can choose to automatically and periodically join a lottery pool initiated by another user. A user can customize the automatic tag-along feature by specifying the pools he wishes to automatically join, the commitment to be put down for each automatic pool and other specifications. Users may also use the “following” feature to be notified of the pooling activities initiated by certain users without automatically tagging-along. We placed the option to automatically join or follow a user’s pool on such user’s profile page. A profile page also contains a user’s basic information, such as winning record, number of pools initiated and consummated, number of followers and date of registration, to allow other users to judge whether to follow or join pools initiated by this particular user.

 

Recurring Purchase. Recurring purchase service enabled our users to repeatedly purchase a particular number or a combination of numbers. The user sets the combination once, and specifies the type and number of rounds or dates of lotteries he wants to purchase with the selected combination. We processed the purchase orders automatically. Users might cancel a recurring purchase prior to the date of any particular lottery. We also offered a filtering tool that helps users set certain parameters in choosing the combination of numbers.

 

Locked-in Lottery Number Purchase. Locked-in lottery number purchase service enabled users for number-based lottery products to lock in certain numbers for each of their purchases. For instance, a user may prefer the number “8” to occur somewhere in their selected combination. The number locked-in service let users specify numbers they want and randomly generate the remaining to form a lottery pick.

 

Mobile Gaming

 

When we owned a 51% interest in Qufan between the fourth quarter of 2016 and the first quarter of 2018, we offered two mobile games, namely Night of Texas Hold’em Poker and Paiyou for Texas Hold’em Poker. Both games are based on the real-world counterpart that dates back to the early 1900s.

 

The Night of Texas Hold’em Poker. Our Night of Texas Hold’em is open for all the registered users. Two to nine players can compete with each other in a virtual public poker room to win the virtual tokens contributed by all the playing parties.

 

Paiyou for Texas Hold’em Poker . Our Paiyou for Texas Hold’em is designed for friends and acquaintances. Registered users can open a virtual private poker room and invite friends and acquaintances to participate in the poker games. In additional to the traditional Texas Hold’em poker game, our Paiyou for Texas Hold’em is equipped with a number of appealing creative features such as poker room customization, social sharing and analytic tools.

 

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Revenues generated from these games in 2017 were RMB59.5 million (US$9.1 million). As a result of our decision to dispose of Qufan, we will no longer be generating revenues from these games (effective February 9, 2018). Our revenue in 2018 may be significantly less than that of 2017.

 

Independent of Qufan, we offered a mobile game in 2017 called Quiz . In the game, users aim to win virtual tokens, which can be used in a subsequent draw to win certain prizes (including iPhones and iPads). We ceased operations on Quiz in the first quarter of 2018.

 

Revenues provided by Quiz in 2017 were RMB8.9 million (US$1.4 million).

 

Payment Processing and Complementary Services

 

When we owned the 63.0% equity interest in Sumpay.cn and its wholly owned subsidiaries between December 2015 and March 2016, we provided certain online payment services and prepaid card services in the PRC.

 

Our Revenue Model

 

Online Gaming Service

 

We generate revenue from online gaming services through our users’ gaming losses.

 

Revenues from our online gaming services are determined by calculating (i) the aggregate net difference between our users’ real money gaming wins and real money gaming losses plus (ii) the aggregate net difference between our users’ “bonus” gaming bets (relating to promotions and loyalty programs) and “bonus” gaming wins.

 

Funds deposited by customers in advance are recognized as a liability before  gaming play occurs.

 

Sports Lottery Ticket Sales

 

As of the date of this annual report, we have not entered into any cooperation agreements with any provincial (including regional and municipal) sports lottery centers. As such, there is no clear indication in respect of the revenue model for our sports lottery ticket sales as of the date of this annual report.

 

Sports Information Services

 

Our sports information portal are free to use, and our users can view basic content such as real time soccer match information and part of the user-generated contents. We generate revenue from our sports information portal through (i) monthly subscription of premium content, primarily our data-driven soccer match predictions; and (ii) a fixed percentage of fee on the fee received by other users for the pay-per-view content they posted, including proprietary analyses and observations.

 

In 2017, we added a pay-service, which offers our users the ability to connect with independent sports experts to obtain more detailed information on specific sporting matches. In connection with the pay-service, revenues are split equally between us and the experts.

 

Financial Technology

 

Through our interest in Shenzhen Kaisheng, we generate revenue from financial technology services through trading commissions on each online spot commodity trade executed on our websites and mobile applications.

 

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Sports Lottery Sales Services in China

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, most of our net revenues came from service fees paid to us by provincial lottery administration centers for purchase orders of national and provincial lottery products we direct to them.

 

We have entered into service agreements with a number of provincial lottery administration centers. Pursuant to these service agreements, each provincial lottery administration center generally pays us a fixed percentage of the total purchase amount received from us as a service fee.

 

Aside from our operating websites, namely, www.500wan.com and www.500.com, we also offered our services in a number of other service channels. We provided content to third-party websites that offer lottery information services to their users prior to the voluntary suspension of our online sports lottery sales services in April 2015. Such third-party websites offer their users an option to submit lottery purchase order through us by redirecting such users to our websites. We paid the third-party websites a pre-determined fixed percentage of the total purchase amount provided by such redirected orders with third-party websites pursuant to agreed-upon allocations ratios.

 

The residual amount of lottery pool purchases we contributed was recognized as a reduction of revenue. We would distribute the prize money to the pool participants based on the predetermined payout ratio if the lottery pool wins a prize, and the residual amount after distribution is received by us and recorded as other operating income.

 

Mobile Gaming Services

 

For these services, we generated all of our revenue from the sales of in-game virtual items, including virtual tokens and other virtual items, to our paying players. We offered a limited amount of free virtual tokens to our players to allow them to enter and play our games. Players may purchase and earn virtual tokens and other virtual items that can only be used in our games, cannot be cashed out and have no monetary value outside our games. Our mobile gaming revenue may be significantly reduced in 2018 as a result of our decision to dispose of Qufan in early 2018.

 

User Support Operations

 

Our support team is divided into two groups: (i) customer service department; and (ii) online security (Fraud & Payments).

 

The customer service department receives a significant number of incoming emails and aims to identify and assess customers’ needs to achieve satisfaction, as well as build sustainable relationships and trust with customer accounts through open and interactive communication. The customer service department strives to provide accurate information, appropriate solutions and suitable alternatives within the applicable time constraints. In addition, the customer service department performs Know Your Customer checks regularly and applies enhanced due diligence accordingly.

 

The Fraud & Payments team processes and monitors all customers withdrawals in accordance with the procedures we have established and reviews player accounts and financial activity to minimize risk. In addition, they perform investigations and report suspicious customer account activity to our Money Laundering Reporting Officer. The Fraud & Payments team also assists customer service in handling user inquiries relating to payments, disputes and complaints filed with alternative dispute resolution centers.

 

Sales, Marketing and Branding

 

We were among the first companies to offer online lottery services in China and have built a strong brand name and reputation.

 

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Our approach to marketing and sales incorporates all available online marketing activities, utilizing both in-house and externally available resources. Apart from online marketing, we also pursue traditional advertising opportunities in offline marketing, while ensuring the use of a range of promotional messages across different channels.

 

Our marketing activities are aimed at targeting a specific audience in the local markets where such promotional messages are time sensitive, seasonal, on-going and live.

 

We place great importance on the reputation of our brand, and are focused on increasing brand visibility steadily in other markets (including, but not limited to, Germany, Austria and Romania).

 

Competition

 

Competition is very strong in our industry.

 

The lottery segment of our business is extremely competitive. Our main competitors include TheLotter, LottoLand and 25Lotto.

 

In the online and live casino segment of our business, our main competitors include Betsson, LeoVegas, Casumo and Mr. Green.

 

Product Development

 

We had a technology and product development team of 190 employees as of December 31, 2017, representing 46.6% of our total number of employees. The members of the core development team all have previous experience in major Chinese Internet enterprises, some of whom are the first generation Internet professionals in China. We are dedicated to expanding our product development team and to attracting highly experienced professionals. We provide our team members with frequent and up-to-date training to ensure that they are fully updated on industry trends and developments, and are capable of and efficient in handling any technical challenges we might face in our operations. Our current focus is on the development of new functions and improvement of existing technologies in a number of crucial areas, such as sever capacity, user interface, client-side software, mobile site and mobile client-side software, infrastructure optimization and user data mining. The product development department has subgroups that focus on various areas of research and development, such as product design, user interface design, product operation and product support. The product design group focuses on enhancing existing services and researching and developing new lottery services. The product operation and support groups are dedicated to building a safe, stable and highly efficient operating environment to handle our high volume of user traffic and data transmission. As a result, we operate an online lottery service platform that is stable, secure and fast. We plan to develop and improve our systems and technologies, and co-develop new lottery products in cooperation with lottery administration centers, which we believe will help to distinguish us from our competitors.

 

Legal and Administrative Proceedings

 

On September 12, 2016, we entered into a settlement agreement with certain plaintiffs who brought a stockholder class action lawsuit in the U.S. District Court for the Central District of California, shareholders’ litigation in February 2015. In 2016, we paid US$1.5 million for the settlement, and the remaining US$1.0 million was covered by the insurance company.

 

Regulation of Our Industry

 

This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’ rights to receive dividends and other distributions from us.

 

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As regulations on our industry are developing and evolving in China and in Europe, authorities may adopt from time to time new laws and regulations that will address new issues or require us to obtain licenses and permits in addition to those that we currently have. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future Chinese laws and regulations applicable to the online lottery services industry. See “Item 3D. Risk Factors—Risks Related to Our Business and Industry—The rules and regulations on our industry are relatively new and interpretations and implementation thereof have changed substantially on a number of occasions, and their further interpretations and implementation involve uncertainty.”

 

We maintain policies and procedures to ensure that orders for lottery products from IP addresses from the United States will not be accepted through our websites. Accordingly, we do not believe our operations are subject to the regulatory authority of the United States.

 

Regulations on Online Gaming in Europe

 

Through TMG, we hold licenses to operate online gaming sites from Curacao, Malta, the United Kingdom and Ireland, and are required to renew them periodically. Some European jurisdictions have introduced regulations attempting to restrict or prohibit online gaming, while other jurisdictions have taken the position that online gaming is legal and have adopted or are in the process of considering legislation to regulate online gaming.

 

Sweden represents our top European market (generating approximately 60% of TMG’s total revenue in 2017), but does not currently have a license requirement. We are operating in Sweden under the Curacao license. The Swedish government submitted a legislative proposal to the European Commission in late 2017, and by making this legislative proposal, the legislation entered a three-month period of standstill that ended on March 31, 2018, during which European Union authorities reviewed the proposal. It was recently reported that the Swedish government will begin accepting license applications from interested operators in mid-2018, and the new regulatory framework is expected to take effect on January 1, 2019.

 

While certain European countries are adopting a regulated online gaming approach, there are some opposing views. Some countries, where there are state-owned monopolies, are taking action aimed at banning foreign online gaming operators. Any decision of the European Court of Justice or legislation promulgated by the European Commission that effectively prohibits online gaming in European Union member states could have a severe material adverse effect on our business, revenues, operating results and financial condition.

 

Regulations on Lottery Services Industry and Online Lottery Sales

 

Since 1991, the Chinese government has promulgated a series of rules and regulations to regulate the lottery industry in China. The major rules and regulations currently in effect and applicable to our online lottery services include Regulation on Administration of Lottery, promulgated by the State Council on May 4, 2009 and effective as of July 1, 2009, or the Lottery Regulation, and the Interim Measures for the Administration of Online Sales of Lottery, promulgated by the MOF on September 26, 2010, or the Lottery Measures, and effective upon the promulgation. On January 18, 2012, the MOF, the Ministry of Civil Affairs and the General Administration of Sports of China jointly promulgated the Implementing Rules, which became effective on March 1, 2012. On February 28, 2012, General Administration of Sports of China promulgated the Urgent Notice. Under currently effective rules and regulations, only qualified service providers approved by the MOF may engage in online lottery sales. Such qualified service providers will act as agencies for the relevant lottery administration centers and must obtain a Lottery Agency License from and enter into lottery agency agreements with the competent lottery administration centers before engaging in lottery sales on their behalf.

 

Certain rules and regulations previously promulgated by the MOF and other regulatory authorities had previously prohibited the sales of lotteries through the Internet, but after the promulgation of the Lottery Measures those rules and regulations have ceased to have legal effect.

 

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Online Lottery Sales

 

The Lottery Measures set forth detailed requirements for the administration of online lottery sales as well as the requirements for qualified online lottery service providers. According to the Lottery Measures, the MOF is the supervisory and regulatory body of online lottery sales in the PRC, and China Welfare Lottery Issuance and Administration Center and China Sports Lottery Administration Center (collectively, “Lottery Issuance Agencies”) are responsible for the overall planning and management of online lottery sales for welfare lottery and sports lottery, respectively. The Lottery Issuance Agencies may collaborate with other entities or authorize relevant lottery sales agencies to conduct online lottery sales, or appoint qualified entities as their online lottery sales agents. The Lottery Measures require qualified online lottery service providers to meet certain criteria, including, among others, that (i) they have a minimum registered capital of RMB50 million, (ii) they maintain adequate organizational, internal control and risk management systems, (iii) they and their senior management have a clean criminal and credit history for the past five years, and (iv) they have obtained an Internet content provider license. The Lottery Issuance Agencies are required to selectively submit to the MOF information on the online lottery service providers that apply to become qualified to engage in online lottery business under the Lottery Measures. Jiangxi Sports Lottery Administration Center notified us that it submitted an application for qualification and approval for the online lottery sales services for sports lottery products that we provided on our websites to the China Sports Lottery Administration Center in January 2011, and that this application would be further submitted by China Sports Lottery Administration Center to the MOF for approval. In October 2012, we were notified by China Sports Lottery Administration Center that we were approved by the MOF to provide online sales services for sports lottery products on its behalf. Since the relevant regulations do not set forth a specific time limit for the MOF to issue such approval, it is not clear when we will be able to obtain the MOF’s approval, or at all.

 

On January 15, 2015, the MOF, the Ministry of Civil Affairs and the General Administration of Sports of the People’s Republic of China jointly promulgated the Self-Inspection Notice, which requires provincial and municipal government branches, including financial, civil affairs and sports bureaus, to conduct inspection and take remedial measures for unauthorized online lottery sales within their respective jurisdictions. The scope of inspection includes, among other things, commercial contract arrangements, online lottery products, lottery sales data exchange, online lottery sales channels, and sales commission fees in connection with unauthorized engagements of online sales agents by lottery administration centers. The Notice further requires a formal report on the result of the self-inspection and self-remedy be submitted by each provincial or municipal government to the Ministry of Finance, the Ministry of Civil Affairs and the General Administration of Sports of the People’s Republic of China by March 1, 2015.

 

On April 3, 2015, the Public Announcement was jointly released by eight competent government authorities, namely, the MOF, the Ministry of Public Security, the State Administration for Industry & Commerce, the Ministry of Industry and Information Technology, the Ministry of Civil Affairs, the People’s Bank of China, the General Administration of Sports of China and the China Banking Regulatory Commission. The Public Announcement mandates, among other things, that (i) all lottery institutions, internet companies, and other institutions or individuals which provide unauthorized online lottery sales services, either directly or through agents, shall immediately cease such services. The local governmental authorities of finance, civil affairs and sports shall investigate and sanction unauthorized online lottery sales in their respective jurisdictions according to relevant laws and regulations; (ii) the local government authorities of public security and industry & commerce shall investigate any issuance or sales of illegal lottery within their respective jurisdictions, with necessary assistance from local government authorities of finance, communication, banking regulatory commission, civil affairs, sports and local branches of the People’s Bank of China, and report any criminal activities to the judicial authority for prosecution; and (iii) the lottery issuance authorities that plan to sell lottery products online shall obtain the approval from the Ministry of Civil Affairs or the General Administration of Sports of China by submitting an application to the Ministry of Finance for written approval. Any entity shall not provide online lottery sales services without the approval by the Ministry of Finance.

 

We were one of the two entities approved by the Ministry of Finance in 2012 to provide online lottery sales services on behalf of the China Sports Lottery Administration Center. To the best of our knowledge, the approval by the MOF for us to provide online lottery sales services on behalf of the China Sports Lottery Administration Center is valid and has not been revoked or amended as of the date of this annual report.

 

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Lottery Regulatory Authorities

 

Under the current regulations and provisions, the State Council is vested with the power to authorize the issuance of welfare lottery and sports lottery, and is also the highest authority for granting the right to issue lotteries. The MOF is responsible for administering, regulating and supervising the national lottery industry. The Ministry of Civil Affairs and the General Administration of Sport of China are responsible for administering and regulating welfare lottery and sports lottery, respectively, and have established China Welfare Lottery Issuance and Administration Center and China Sports Lottery Administration Center, respectively, pursuant to regulations for the issuance and sales of welfare lottery and sports lottery. The civil affairs departments and sports administration departments of provincial governments are responsible for the administration of welfare lotteries and sports lotteries within their respective administrative regions. The following organization chart illustrates the overall governmental administrative authority in the China lottery operation:

 

 

Regulations on Lottery Administration

 

On May 4, 2009, the State Council promulgated the Lottery Regulation, which sets forth general provisions for the issuance, sales and administration of lottery products. According to the Lottery Regulation, the welfare and sports lotteries sold in China must be issued by the lottery issuance authorities, established by the civil affairs’ department and sports administration department of the PRC State Council, or the Lottery Issuance Agencies, and must be sold through Lottery Issuance Agencies or lottery sales offices established by the civil affairs’ departments and sports administration departments of the people’s government at the provincial level (“Lottery Sales Agencies”). Lottery Issuance Agencies and Lottery Sales Agencies may, by entering into agency agreements, appoint other entities or individuals as their agents in distributing lotteries. The Lottery Regulation also listed circumstances where the Lottery Issuance Agencies and Lottery Sales Agencies may terminate such agency agreements, including situations where the agent subcontracts the sales of the lottery products to any other persons or entities or sells lottery products to underage buyers.

 

The Lottery Regulation prohibits the Lottery Issuance Agencies, the Lottery Sales Agencies and their sales agents from (i) advertising false or misleading information, (ii) competing unfairly by discrediting others in the same industry, (iii) selling lottery or paying lottery prizes to underage purchasers and (iv) selling lottery on credit. If the Lottery Issuance Agencies or the Lottery Sales Agencies fail to comply with these requirements, the MOF or its relevant branches will have the power to (i) require the Lottery Issuance Agencies or the Lottery Sales Agencies to correct or cease their operations; (ii) confiscate the illegal income received by the Lottery Issuance Agencies or the Lottery Sales Agencies and impose fines; and/or (iii) impose administrative sanctions against persons that are responsible. If any lottery sales agent sells lotteries to the underage buyers, its relevant income may be confiscated and it may be subject to administrative fines up to RMB10,000, and the Lottery Issuance Agencies or the Lottery Sales Agencies may have the right to terminate the agency agreement with the lottery sales agent. In addition, the Lottery Measures prohibits the opening of online lottery accounts for or the granting of lottery prizes to underage buyers.

 

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Prior to the promulgation of the Lottery Regulation, the issuance and sales of the lottery products were governed by the Interim Provisions for the Administration of the Lottery Issuance and Sales, or the Interim Provisions, promulgated by the MOF on March 1, 2002. The Interim Provisions were replaced by the Administrative Measures for Lottery Issuance and Sales promulgated by the MOF on December 28, 2012. The Administrative Measures for Lottery Issuance and Sales provided that any Lottery Issuance Agency, which wishes to apply to create, change or abolish a specific type of welfare or sports lottery, is required to apply to the Ministry of Civil Affairs or the General Administration of Sport of China for creating, changing or abolishing a specific type of welfare or sports lottery. If the application has been approved by the Ministry of Civil Affairs or the General Administration of Sport of China, such application will be further submitted to the MOF for the MOF’s examination and approval before the implementation. After the creation or change of specific type of welfare or sports lottery has been approved by the MOF, the Lottery Issuance Agency receiving MOF approval or its related Lottery Sales Agencies shall submit sales implementation plans to the MOF or its provincial counterparts for approval prior to the sales of the specific type of lottery. The sales implementation plan shall include, among other things, the proposed sales commencement date, promotion plans and risk control measures. In order to sell the specific type of welfare or sports lottery so created or changed, the Lottery Issuance Agencies or the Lottery Sales Agencies may engage specific sales agents by entering into lottery sales agency agreements with such sales agents.

 

Regulation of Telecommunication Services

 

The telecommunication industry, including the Internet sector, is highly regulated in China. Regulations issued or implemented by the State Council of China, the MIIT, and other relevant government authorities cover many aspects of the operation of telecommunication and the Internet information services, including access to the telecommunication industry, the scope of permissible business activities, and licenses and permits required for various business activities and foreign investment.

 

The principal regulations governing telecommunication and Internet information services include:

 

· the Telecommunication Regulations promulgated by the State Council on September 25, 2000;

 

· the Administrative Measures for Telecommunications Business Operating License promulgated by the MIIT on March 5, 2009; and

 

· the Catalogue of Classes of Telecommunications Businesses promulgated by the Ministry of Information Industry, former of MIIT, also as MIIT on February 21, 2003.

 

Under these regulations, telecommunication services in China are categorized as either basic telecommunication services or value-added telecommunication services, both of which require relevant operating licenses.

 

Regulations on Value-Added Telecommunication and Internet Information Services

 

On September 25, 2000, the State Council promulgated the Telecommunication Regulations, or the Telecom Regulations. The Telecom Regulations categorize all telecommunication businesses in the PRC as either basic or value-added. Value-added telecommunication services are defined as telecommunication and information services provided through public network infrastructure. The “Catalog of Classes of Telecommunication Business,” an attachment to the Telecom Regulations and updated by the MII’s Notice on Adjusting the Catalog of the Class of Telecommunication Business, effective from April 1, 2003, categorizes various types of telecommunication and telecommunication-related activities into basic or value-added telecommunication services, according to which, Internet content provision services, or ICP services, are classified as value-added telecommunication businesses, or VAS business. Under the Telecom Regulations, commercial operators of value-added telecommunication services must first obtain an operating license for value-added telecommunication services, or the VAS license, from the MIIT or its provincial level counterparts before commencing any operations.

 

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The State Council issued the Administrative Measures on Internet Information Services, or the Internet Measures, on September 25, 2000, and subsequently amended the Internet Measures on January 8, 2011. According to the Internet Measures, a commercial ICP service operator must obtain a VAS license from the relevant government authorities before providing any commercial ICP service within the PRC. When the ICP service involves regulated industries, such as news, publication, education, medicine, health, pharmaceuticals and medical equipment, prior approval from the respective regulating authorities must be obtained prior to applying for the VAS license from MIIT or its local branch at the provincial level. Moreover, an ICP service operator must display its VAS license number in a conspicuous location on its website and must monitor its website to remove categories of harmful content that are broadly defined.

 

On December 26, 2001, the MIIT promulgated the Administrative Measures for Telecommunication Business Operating License, or the Telecom License Measures. On March 5, 2009, the MIIT issued amended Telecom License Measures, which took effect on April 10, 2009. The Telecom License Measures set forth more specific provisions regarding the types of licenses required to operate value-added telecommunication services, the qualifications and procedures for obtaining such licenses and the administration and supervision of such licenses. For example, the appendix to the VAS license is to detail the permitted activities to be conducted by the VAS operator and the VAS operator must conduct its business in accordance with the specifications recorded on its VAS license. The VAS license is subject to annual review and results of the annual review is to be recorded as an appendix to the VAS license, published to the public and notified to the Administration for Industry and Commerce.

 

Currently, E-Sun Sky Network holds a value-added telecommunication business operating license issued by MIIT, which is effective until September 5, 2022, for providing Internet information services. We intend to renew this license upon its expiration.

 

Regulations on Internet Content Services

 

Under various laws and regulations governing ICP services, ICP services operators are required to monitor and censor the content on their websites. They may not produce, duplicate, post or disseminate, and must remove from their websites, any content that falls within the prohibited categories, including any content that: (i) opposes the fundamental principles determined in the PRC constitution; (ii) compromises state security, divulges state secrets, subverts state power or damages national unity; (iii) harms the dignity or interests of the State, incites ethnic hatred or racial discrimination or damages inter-ethnic unity; (iv) sabotages China’s religious policy or propagates heretical teachings or feudal superstitions; (v) disseminates rumors, disturbs social order or disrupts social stability; (vi) propagates obscenity, pornography, gambling, violence, murder or fear or incites the commission of crimes; (vii) insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or (viii) or includes other content prohibited by laws or administrative regulations.

 

The PRC government may shut down the websites of VAS license holders that violate any of the content restrictions and requirements, revoke their VAS licenses or impose other penalties pursuant to the applicable laws and regulations.

 

Regulations on Foreign Investment in Lottery and Value-Added Telecommunications Services.

 

According to the Catalogue for the Guidance of Foreign Investment Industries (the “Guidance Catalogue”) jointly promulgated by the National Development & Reform Commission and the Ministry of Commerce on December 24, 2011 and effective from January 30, 2012, foreign investments are not allowed to operate in the lottery industry. As the development of the lottery industry is still in its early stage, there are no further regulations relating to foreign investment in the lottery industry.

 

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Under the Guidance Catalogue, foreign ownership in value-added telecommunication services shall not exceed 50%. Aside from the Guidance Catalogue, the Regulations for Administration of Foreign-Invested Telecommunication Enterprises, or the FITE Regulations, promulgated by the State Council on December 11, 2001 and amended on September 10, 2008, set forth detailed requirements with respect to, among other things, capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested telecommunication enterprise. Under the FITE Regulations, a foreign entity is prohibited from owning more than 50% of the total equity interest in any value-added telecommunication service providers in China and the major foreign investor in any value-added telecommunication service business in China is to have a good track record in the industry.

 

On July 13, 2006, the MIIT issued the Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunication Business. Under this circular, a domestic PRC company that holds a VAS license is prohibited from leasing, transferring or selling the VAS license to foreign investors in any form, and from providing any assistance, including resources, sites or facilities, to foreign investors that conduct value-added telecommunication business illegally in China. Further, the domain names and registered trademarks used by an operating company providing value-added telecommunication service is to be legally owned by a domestic PRC company and/or its shareholders. In addition, the company’s operation premises and equipment would have to comply with its approved VAS license, and the company should establish and improve its internal Internet and information security policies and standards and emergency management procedures.

 

We conduct our businesses in China primarily through contractual arrangements among our company 500.com Limited, E-Sun Sky Computer and Qufan Information Technology, our consolidated affiliated entities and their respective shareholders. There is no explicit provision under the Guidance Catalogue, the FITE Regulations or the Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunication Business, which classifies the contractual arrangements between our PRC subsidiary and each of our consolidated affiliated entities, including, among others, the Equity Interests Pledge Agreements, either by each agreement itself or taken as a whole, as a transaction that is subject to the approval of relevant government authorities. E-Sun Sky Network currently holds a regional VAS business operating license.

 

Regulations on Intellectual Property

 

Trademark

 

The PRC Trademark Law, adopted on August 23, 1982 and amended in 1993, 2001 and 2013 respectively, protects the proprietary rights of registered trademarks. The Trademark Office handles trademark registrations and grants proprietary rights for an initial term of 10 years to registered trademarks. Upon the expiration of the initial term, a second term of 10 years may be granted upon renewal. Trademark licensing agreements must be filed with the Trademark Office or its regional offices. In addition, if a registered trademark is recognized as a well-known trademark in a specific case, proprietary rights of the trademark holder may be extended beyond the registered scope of products and services to which the trademark relates.

 

Software Products

 

On October 27, 2000, the MIIT issued the Administrative Measures on Software Products, or the Software Measures, to strengthen the regulation of software products and to encourage the development of the PRC software industry. On March 5, 2009, the MIIT issued amended Software Measures, which became effective on April 10, 2009. The Software Measures provide a registration and filing system with respect to software products made in or imported into China. These software products may be registered with competent local authorities in charge of software industry administration. Registered software products may enjoy preferential treatment status granted by relevant software industry regulations. Software products can be registered for five years and the registration is renewable upon expiration.

 

In order to further implement the Computer Software Protection Regulations, promulgated by the State Council on December 20, 2001 and amended on January 30, 2013, the National Copyright Administration of the PRC issued Computer Software Copyright Registration Procedures on February 20, 2002, which apply to the registration of the software copyright, licensing agreements and transfer agreements.

 

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Domain Names

 

The Implementing Rules for Domain Name Registration, issued and amended by China Internet Network Information Center, or CNNIC, in September 2002 and May 2012, respectively, sets forth detailed rules for the registration of domain names. On November 5, 2004, the MIIT promulgated the Measures for Administration of Domain Names for the Chinese Internet, or the Domain Name Measures. The Domain Name Measures regulate the registration of domain names, such as the first-tier domain name “.cn.” The Measures on Domain Name Dispute Resolution and its implementing rules, issued and amended by CNNIC in February 2006 and May 2012, respectively, allows the CNNIC to authorize a domain name dispute resolution institution to resolve disputes.

 

Regulations on Foreign Exchange

 

Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents

 

In October 2005, SAFE issued the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE Circular 75 states that PRC citizens or residents must register with the relevant local SAFE branch or central SAFE in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must amend their SAFE registrations when the offshore special purpose company undergoes material events relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees, or other material events that do not involve roundtrip investments. Since May 2007, SAFE has issued guidance to its local branches regarding the operational procedures for such registration, which provides more specific and stringent requirements on the registration relating to SAFE Circular 75. The latest guidance was issued by SAFE on November 19, 2012 and took effect on December 17, 2012.

 

We conduct businesses in China primarily through our consolidated affiliated entities. We enter into contractual arrangements with our PRC consolidated affiliated entities and their respective shareholders, some of whom are PRC residents and also beneficial owners of our company. As of the date of this annual report, our beneficial owners who are subject to SAFE Circular 75 registrations are in the process of updating their registrations with the Shenzhen Branch of SAFE. However, we cannot assure you that our beneficial owners can successfully amend their foreign exchange registrations with SAFE in full compliance with Circular 75 for development of our company. See “Item 3D. Risk Factors—Risks Related to Doing Business in China—A failure by our shareholders or beneficial owners who are PRC citizens or residents to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which could adversely affect our business and financial condition.”

 

Regulations on Employee Stock Option Granted by Offshore Listed Companies

 

In December 2006, the People’s Bank of China promulgated the Administrative Measures on Individual Foreign Exchange, or the Individual Foreign Exchange Regulations, setting forth the requirements for foreign exchange transactions by individuals (both PRC and non-PRC citizens) under the current account and the capital account. In January 2007, SAFE issued the implementation rules for the Individual Foreign Exchange Regulations, which, among other things, specified the approval and registration requirement for certain capital account transactions, such as a PRC citizen’s participation in employee share ownership and share option plans of overseas listed companies.

 

The Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, promulgated by SAFE on February 15, 2012, replacing the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Share Ownership Plans, or Share Option Plans of Overseas Publicly-Listed Companies, issued by SAFE on March 28, 2007, require (i) PRC residents who are granted shares or share options by companies listed on overseas share exchanges based on share incentive plans to register with SAFE or its local branches, and (ii) PRC residents participating in the share incentive plans of an overseas publicly-listed companies to retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of these participants.

 

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Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of share options, purchase and sale of corresponding shares or interests, and fund transfer. In addition, the PRC agents are required to amend the SAFE registration with respect to the share incentive plan if there is any material change to the share incentive plan, the PRC agents, or the overseas entrusted institution. The PRC agents shall, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign exchange proceeds received by the PRC residents from the sale of shares granted under the share incentive plans and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution to such PRC residents. In addition, the PRC agents is to file the form for record-filing of information of the domestic individuals participating in the share incentive plans of overseas listed companies with SAFE or its local branches every quarter. We and our PRC citizen employees who have been granted share options are subject to these rules upon the listing and trading of our ADSs on the NYSE. As of the date of this annual report, we and our PRC citizen employees who have been granted share options are applying for registration with the Shenzhen branch of SAFE pursuant to the Share Option Rules.

 

M&A Regulations and Overseas Listings

 

On August 8, 2006, six PRC regulatory authorities, including the CSRC, promulgated the 2006 M&A Rules, which were later amended on June 22, 2009. Pursuant to the 2006 M&A Rules, an offshore special purpose vehicle, or SPV, refers to an overseas company controlled directly or indirectly by PRC domestic companies or individuals for purposes of overseas listing of equity interests in domestic companies (defined as enterprises in the PRC other than foreign-invested enterprises). If an SPV purchases, for the purpose of overseas listing, equity interests of any PRC company that are held by PRC companies or individuals controlling such SPV, then the overseas listing by the SPV must obtain the approval of the CSRC. The application of the 2006 M&A Rules remains unclear and there is currently no consensus among PRC law firms regarding the scope of CSRC’s jurisdiction. As of the date of this annual report, the CSRC has not issued any rules or written interpretation clarifying whether offerings like ours are subject to this new procedure.

 

Our then PRC counsel, Han Kun Law Offices, has advised us that the 2006 M&A Rules do not require us to obtain prior CSRC approval for the listing and trading of our ADSs on the NYSE, given that:

 

the CSRC approval requirement applies to SPVs that acquired equity interests of any PRC company that are held by PRC companies or individuals controlling such SPV and seek overseas listing; and

 

our PRC operating subsidiary was incorporated as a wholly foreign-owned enterprise by means of direct investment rather than by merger or acquisition by our company of the equity interest or assets of any “domestic company” as defined under the 2006 M&A Rules, and no provision in the 2006 M&A Rules classifies the contractual arrangements between our company, our PRC operating subsidiary and any of the affiliated consolidated entities, including, among others, the Equity Interests Pledge Agreements and the Shareholder’s Voting Power Assignment Agreement, either by each agreement itself or taken as a whole, as a type of acquisition transaction falling under the 2006 M&A Rules.

 

Regulations on Foreign Currency Exchange

 

Pursuant to applicable PRC regulations on foreign currency exchange, the Renminbi is freely convertible only to the extent that it relates to current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from the SAFE or its local branch for conversion of Renminbi into a foreign currency, such as U.S. dollars. Payments for transactions that take place within the PRC must be made in Renminbi. Domestic companies or individuals can repatriate foreign currency payments received from abroad into the PRC, or deposit these payments abroad, subject to compliance with the requirements promulgated by the SAFE. Foreign currencies received for current account items can be either retained or sold to financial institutions that have foreign exchange settlement or sales business without prior approval from the SAFE, subject to certain regulations. Foreign exchange income under capital account can be retained or sold to financial institutions that have foreign exchange settlement and sales business, with prior approval from the SAFE, unless otherwise provided.

 

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In addition, another notice issued by the SAFE, the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAF Circular 142, regulates the conversion by foreign-invested enterprises of foreign currency into Renminbi by restricting how the converted Renminbi may be used. On March 30, 2015, SAFE promulgated SAFE Circular 19, which came into force replacing SAFE Circular 142 on June 1, 2015. SAFE Circular 19 removed certain restrictions previously provided under Circular No. 142 for conversion by a foreign-invested enterprise of foreign currency registered capital into RMB and use of such RMB capital. However, SAFE Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises. On November 9, 2011, SAFE issued the Notice on Further Clarifying and Standardizing Related Issues Concerning Foreign Exchange Administration for Part of Capital Account Items to further regulate the payment and settlement of foreign currency exchange of foreign-invested enterprises.

 

Regulations on Dividend Distribution

 

Under applicable PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund statutory reserve funds, unless these reserves have reached 50% of the registered capital of the respective enterprises. These reserves are not distributable as cash dividends.

 

Regulations Regarding the Enterprise Income Tax, Individual Income Tax and Withholding Tax

 

The EIT Law, effective on January 1, 2008, imposes a uniform enterprise income tax at the rate of 25% on all domestic enterprises, including foreign-invested enterprises unless they qualify for certain exceptions, and terminates most of the tax exemptions, reductions and preferential treatments available under previous tax laws and regulations. Under the EIT Law and a notice issued by the PRC State Council on transition preferential policies, commencing January 1, 2008, (i) those enterprises that were established before March 16, 2007 and were formerly entitled to preferential policies of lower taxation will undergo a gradual transition to statutory tax rates within five years; and (ii) those enterprises that were established before March 16, 2007 and were formerly entitled to preferential income tax reduction policies, such as “two-years exempt and three-years halved” and “five-years exempt and five-years halved”, shall continue to enjoy such preferential policies as stipulated in the former taxation laws, administrative regulations and relevant documents until the end of the terms of these policies, provided however that for those enterprises not profitable enough to enjoy the aforementioned tax preferences, the preference time limits shall commence from 2008.

 

Pursuant to the EIT Law and its Implementation Rules, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise” for PRC EIT purposes. The term “de facto management body” is defined as the establishment that carries out substantial and overall management and control over the manufacturing and business operation, production, personnel, accounting and properties of an enterprise. Pursuant to Circular 82, a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following requirements are satisfied: (i) the place where the senior management and core management departments that are in charge of its daily operations perform their duties is mainly located in the PRC; (ii) its financial and human resources decisions are made by or are subject to approval by persons or bodies in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the enterprise’s directors or senior management with voting rights frequently reside in the PRC. Although the circular only applies to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals or foreigners, it is believed that the determining criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners. However, given that the EIT Law is relatively new and contains ambiguous definitions, requirements and procedures, it remains uncertain how tax authorities will determine tax residency status based on the facts of each case.

 

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Furthermore, the EIT Law and its Implementation Rules provide that the “non-resident enterprises” are subject to the EIT rate of 10% on their income derived from China, if such “non-resident enterprises” (i) do not have establishments or premises of business in China or (ii) have establishments or premises of business in China, but the relevant income does not have actual connection with their establishments or premises of business in China. Such income tax may be exempted or reduced by the PRC State Council or pursuant to a tax treaty with China that provides for a different withholding agreement between China and the jurisdictions in which the non-resident enterprise reside. The Cayman Islands, where we are incorporated, does not have such tax treaty with China.

 

Under the Foreign Invested Enterprise and Foreign Enterprise Income Tax Law, effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises were exempt from PRC withholding tax. Pursuant to the EIT Law, which became effective on January 1, 2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement and the foreign investor is approved by competent tax authorities as the beneficial owners of such dividends under applicable tax regulations.

 

Furthermore, the State Administration of Taxation issued the Notice on How to Understand and Determine the Beneficial Owners in Tax Agreement in October 2009, or Circular 601, which provides guidance for determining whether a resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements. According to Circular 601, a beneficial owner must generally be engaged in substantive business activities. An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits.

 

Moreover, non-resident individual investors may be required to pay PRC individual income tax at a rate of 20% on dividends payable to the investors or any capital gains realized from the transfer of ADSs or ordinary shares if such dividends or gains are deemed income derived from sources within the PRC. Under the PRC Individual Income Tax Law, or IIT Law, a “non-resident individual” refers to an individual who has no domicile in China and does not stay in the territory of China or who has no domicile in China and has stayed in the territory of China for less than one year. Pursuant to the IIT Law and its implementation rules, for purposes of the PRC capital gains tax, taxable income is the balance of the total income obtained from the transfer of the ADSs or ordinary shares minus all the costs and expenses that are permitted under PRC tax laws to be deducted from the income. Therefore, if we are considered a PRC “resident enterprise” and the relevant competent PRC tax authorities consider dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary shares to be income derived from sources within the PRC, such gains earned by non-resident individuals may also be subject to PRC withholding tax at a rate of 20%. Furthermore, according to the IIT Law and its implementation rules, a “resident individual” refers to an individual who, by reason of his or her permanent residence, family or economic interests, habitually resides in the territory of China or who has no domicile but has stayed in the territory of China for one year or longer. A PRC resident individual shall file tax returns with the competent tax authority for the income he or she receives from outside the territory of China.

 

Such income includes, among others, gains realized from transfer of securities, which shall be subject to a tax rate of 20%.

 

If the PRC tax authorities determine that our Cayman Islands holding company is a “resident enterprise” for PRC EIT purposes, a number of unfavorable PRC tax consequences could follow: (i) we may be subject to EIT at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations; (ii) a 10% withholding tax may be imposed on dividends we pay to our shareholders who are nonresident enterprises and gains derived by them from transferring our shares or ADSs, if such income is considered as PRC-sourced income by relevant PRC authorities; and (iii) a potential 20% withholding tax may be imposed on dividends we pay to our shareholders who are non-resident individuals and gains derived by them from transferring our shares or ADSs, if such income is considered as PRC-sourced income by relevant PRC authorities.

 

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Pursuant to SAT Circular 698, issued by the SAT, on December 10, 2009 with retroactive effect from January 1, 2008, where a non-resident enterprise transfers its equity interests in a PRC resident enterprise through an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the relevant tax authority of the PRC resident enterprise this Indirect Transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%. SAT Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.

 

There is uncertainty as to the application of SAT Circular 698. For example, while the term “Indirect Transfer” is not clearly defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax rates in foreign tax jurisdictions, and the process and format of reporting an Indirect Transfer to the relevant tax authority of the PRC resident enterprise. In addition, there are no formal declarations with regard to how to determine whether a foreign investor has adopted an abusive arrangement in order to reduce, avoid or defer PRC tax.

 

PRC Business Tax and Value-added Tax

 

In November 2011, the PRC Ministry of Finance and the State Administration of Taxation jointly issued two circulars setting out the details of the pilot value-added tax, or VAT, reform program, which change the charge of sales tax from business tax to VAT for certain pilot industries. The pilot VAT reform program initially applied only to the pilot industries in Shanghai, and has been expanded to eight additional regions, including, among others, Shenzhen, in 2012. According to two circulars jointly issued by the PRC Ministry of Finance and the State Administration of Taxation in May and December 2013, the pilot program has been expanded nationwide.

 

Since November 2012, a 6% VAT, which replaced the original 5% business tax in Shenzhen as a result of the PRC government’s pilot VAT reform program, applies to certain services provided by E-Sun Sky Computer and E-Sun Sky Network. Since June 2014, a 6% VAT applies to all services provided by VIEs, except for Lhasa Yicai, Guangyi Network, Shenzhen Yicai, Shenzhen Fenggu, 500Fu, Youlanguang Technology, E-Sun Network, Baifengrun Technology, Daguoxiaoxian and Shenzhen Caiyu, which are subject to a 3% VAT.

 

C. Organizational Structure

 

The following diagram illustrates our company’s organizational structure, and the place of formation, ownership interest and affiliation of each of our principal subsidiaries and affiliated entities as of the date of this annual report.

 

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Contractual Arrangements with Our Consolidated Affiliated Entities

 

PRC laws and regulations currently restrict foreign ownership in companies providing value-added telecommunications services and do not allow foreign investments in the lottery industry. Because we are a Cayman Islands company, we are classified as a foreign enterprise under PRC laws and regulations and our PRC subsidiary, E-Sun Sky Computer is foreign-invested enterprises. To comply with PRC laws and regulations, we conduct our operations in China through a series of contractual arrangements with our consolidated affiliated entities and their respective shareholders.

 

In September 2007, our PRC subsidiary, E-Sun Sky Computer entered into a set of control agreements with E-Sun Sky Network and its shareholders, which include the Exclusive Technology Consultation and Service Agreement, the Business Operation Agreement, the Equity Interest Disposal Agreement, the Equity Pledge Agreement and the Power of Attorney, or the control agreements. The control agreements, including the Business Operation Agreement, the Equity Interest Disposal Agreement and the Equity Pledge Agreement, were further amended in January 2010 and December 2010, respectively.

 

Following the establishment of Youlanguang Technology and Guangtiandi Technology in December 2008, E-Sun Sky Computer entered into an identical set of control agreements with each of Youlanguang Technology and Guangtiandi Technology and their respective shareholders. The control agreements between E-Sun Sky Computer and Youlanguang Technology and its shareholders, including the Business Operation Agreement, the Equity Interest Disposal Agreement and the Equity Pledge Agreement, were further amended in August 2009 and September 2010. The control agreements between E-Sun Sky Computer and Guangtiandi Technology and its shareholders, including the Business Operation Agreement, the Equity Interest Disposal Agreement and the Equity Pledge Agreement, were amended in August 2009.

 

Following the establishment of Tongfu Technology in December 2015, E-Sun Sky Computer entered into an identical set of control agreements with Tongfu Technology and its shareholders.

 

As a result of the acquisition of Qufan Cayman, Qufan Information technology entered into an identical set of control agreements arrangements with Shenzhen Qufan.

 

We have been relying and expect to continue to rely on our consolidated affiliated entities to operate our online lottery service business in China as long as PRC laws and regulations do not allow us to directly operate such business in China. We revised our contractual arrangements with the consolidated affiliated entities and their respective shareholders on June 1, 2011, and amended our contractual arrangements on May 2, 2013, supplemented on December 28, 2013, further amended on November 18, 2015, and further supplemented on January 10, 2017 and further amended on July 3, 2017, respectively. These contractual arrangements continue to enable us to:

 

· exercise effective control over E-Sun Network, Youlanguang Technology, Guangtiandi Technology, Tongfu Technology and Shenzhen Qufan;

 

· receive substantially all of the economic benefits and assume substantially all the losses of E-Sun Network, E-Sun Sky Network, Youlanguang Technology, Guangtiandi Technology, Tongfu Technology and Shenzhen Qufan in consideration for the services provided by our PRC subsidiary;

 

· have an exclusive option to purchase all of the equity interest in E-Sun Network, Youlanguang Technology, Guangtiandi Technology, Tongfu Technology and Shenzhen Qufan to the extent permitted under PRC law; and

 

· provide appropriate funds to the consolidated affiliated entities through the respective shareholders of consolidated affiliated entities for major losses resulting from their business and operations if any are incurred.

 

Accordingly, under U.S. GAAP, we consolidate E-Sun Network, Youlanguang Technology, Guangtiandi Technology, Tongfu Technology, E-Sun Sky Network, 500Fu, Lhasa Yicai, Shenzhen Yicai, Shenzhen Fenggu, Baifengrun Technology, Shenzhen Kaisheng, Shenzhen Qufan, Beijing Daguoxiaoxian and Shenzhen Caiyu, as our “subsidiaries of variable interest entities” in our consolidated financial statements. We also consolidate Sumpay.cn, Shangmeng Services, and Hangzhou Laiqi before its disposal in May 2016.

 

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Our contractual arrangements with our consolidated affiliated entities and their shareholders are described in further detail as follows:

 

Agreements that Transfer Economic Benefits to Us

 

Exclusive Business Cooperation Agreements . The exclusive business cooperation agreements are entered into by E-Sun Sky Computer and each of E-Sun Network, Youlanguang Technology, Guangtiandi Technology and Tongfu Technology, respectively. Pursuant to these exclusive business cooperation agreements, E-Sun Sky Computer provide technical services, business consultations, marketing consultancy, product research and development to the affiliated consolidated entities, in exchange for a service fee. The service fee is payable at such time as agreed between E-Sun Sky Computer and the relevant consolidated affiliated entity and approved by the board of such consolidated affiliated entity. The term of each exclusive business cooperation agreement is 10 years from the effective date.

 

Agreements that Provide Us with Effective Control

 

Exclusive Option Agreement. The exclusive option agreements are entered into by E-Sun Sky Computer and each of E-Sun Network, Youlanguang Technology, Guangtiandi Technology, Tongfu Technology and Shenzhen Qufan, respectively, and each of their respective shareholders. Pursuant to these exclusive option agreements, the shareholders irrevocably granted E-Sun Sky Computer and Qufan Information Technology or their designated representative exclusive options to purchase, to the extent permitted under PRC law, all or part of their equity interest in the consolidated affiliated entities. E-Sun Sky Computer and Qufan Information Technology or their designated representative have sole discretion as to when to exercise these options, whether in part or in full. These agreements are for terms of 10 years and are renewable at the discretion of E-Sun Sky Computer.

 

In November 2012, E-Sun Sky Computer, the consolidated affiliated entities (excluding E-Sun Sky Network) and each of their respective shareholders entered into certain supplementary agreements to exclusive option agreements; In January 2017, Qufan Information Technology, the consolidated affiliated entity and its shareholder entered into certain supplementary agreements to exclusive option agreements; pursuant to which the shareholders shall, in the manner permitted by PRC laws, transfer all the capital and assets (including but not limited to dividends, bonuses or any other rights and interests) they gain from the consolidated affiliated entities to E-Sun Sky Computer unconditionally per its request.

 

Equity Interests Pledge Agreements. The equity interests pledge agreements are entered into by E-Sun Sky Computer and each of E-Sun Network, Youlanguang Technology, Guangtiandi Technology, Tongfu Technology, also by Qufan Information Technology and Shenzhen Qufan, respectively and each of their respective shareholders. Pursuant to these equity interests pledge agreements, the shareholders have pledged their respective equity interests in the relevant consolidated affiliated entity to E-Sun Sky Computer and Qufan Information Technology to secure the obligations of such consolidated affiliated entity under its exclusive business cooperation agreement with E-Sun Sky Computer and Qufan Information Technology. In addition, except for the performance of the exclusive option agreement executed by them, the shareholders have agreed not to transfer, place or permit the existence of any security interest or other encumbrance on their respective equity interest, without the prior written consent of E-Sun Sky Computer.

 

Shareholder’s Voting Power Assignment Agreements . Each shareholder of E-Sun Network, Youlanguang Technology, Guangtiandi Technology, Tongfu Technology and Shenzhen Qufan executed an irrevocable power of attorney appointing E-Sun Sky Computer and Qufan Information Technology as his or her representative to attend shareholders’ meetings of the consolidated affiliated entities and to vote on his or her behalf on all matters requiring shareholder approval, including but not limited to, the sale, transfer, pledge, or disposition of his or her shareholding in the consolidated affiliated entities on June 1, 2011 and May 2, 2013 and January 10, 2017 respectively. Such irrevocable power of attorney was terminated by the shareholder’s voting power assignment agreements entered into among 500.com Limited, E-Sun Sky Computer, Qufan Information Technology and the nominee shareholders of the consolidated affiliated entities on December 28, 2013 and January 10, 2017. Pursuant to these shareholder’s voting power assignment agreements, the nominee shareholders of each consolidated affiliated entity assigned the rights to vote on all of the matters in each consolidated affiliated entity that require shareholders’ approval at the consolidated affiliated entities’ shareholders’ meetings to persons or entities designated by 500.com Limited as permitted by applicable laws. Unless terminated by 500.com limited or otherwise required by applicable laws, such shareholder’s voting power assignment agreements will remain valid and irrevocable from the date of their execution, so long as each shareholder remains the shareholder of the respective consolidated affiliated entities.

 

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Guangzhou Shu Lian Information Investment Co., Ltd. and Xiaojun Xu, two former shareholders of E-Sun Network, jointly entered into a share transfer agreement with Bo Zou on November 15, 2012, pursuant to which Guangzhou Shu Lian Information Investment Co., Ltd. and Xiaojun Xu transferred all the equity interest they respectively held in E-Sun Network to Bo Zou. E-Sun Network completed registration with relevant branch of SAIC for the aforementioned share transfer on December 5, 2012. Shijie Zhang, a former shareholder of Guangtiandi Technology, entered into a share transfer agreement with Liangdong Yuan on October 31, 2012, pursuant to which Shijie Zhang transferred all the equity interest he held in Guangtiandi Technology to Liangdong Yuan. Guangtiandi Technology completed registration with relevant branch of SAIC for the aforementioned share transfer on March 27, 2013. Accordingly, we updated certain control agreements on May 2, 2013 entered into by and among E-Sun Sky Computer, E-Sun Network and Bo Zou, including the Equity Interests Pledge Agreement, the Exclusive Option Agreement, and its supplementary agreement to replace those entered into by and among E-Sun Sky Computer, E-Sun Network, Guangzhou Shu Lian Information Investment Co., Ltd. and Xiaojun Xu respectively. We also updated the Irrevocable Power of Attorney executed by Bo Zou on May 2, 2013 to replace those executed by Guangzhou Shu Lian Information Investment Co., Ltd. and Xiaojun Xu respectively. In addition, we superseded agreements entered into by and among E-Sun Sky Computer, Guangtiandi Technology and Shijie Zhang, including the Equity Interests Pledge Agreement, the Exclusive Option Agreement and its supplementary agreement with agreements entered into by and among E-Sun Sky Computer, Guangtiandi Technology and Liangdong Yuan respectively on May 2, 2013. We also superseded the Irrevocable Power of Attorney executed by Shijie Zhang with the Irrevocable Power of Attorney executed by Liangdong Yuan on May 2, 2013. Moreover, in May 2013, Bo Zou executed a confirmation letter, under which he agrees to succeed to and assume any and all the rights and obligations of Xiaojun Xu and Guangzhou Shu Lian Information Investment Co., Ltd. under the aforementioned supplementary agreements immediately after the share transfer among Bo Zou, Xiaojun Xu and Guangzhou Shu Lian Information Investment Co., Ltd. completed and Bo Zou was registered as E-Sun Network’s shareholder. On the same date, Liangdong Yuan executed an identical confirmation letter, pursuant to which Liangdong Yuan agrees to succeed to and assume any and all the rights and obligations of Shijie Zhang under the aforementioned supplementary agreements immediately after the share transfer between Liangdong Yuan and Shijie Zhang completed and Liangdong Yuan was registered as Guangtiandi Technology’s shareholder.

 

On December 28, 2013, 500.com Limited entered into a Financial Support Agreement with each of our consolidated affiliated entities, under which 500.com Limited agreed to provide unconditional financial support, through the nominee shareholders of each consolidated affiliated entity to each consolidated affiliated entity in manners permitted by PRC laws and regulations for each consolidated affiliated entity’s operations.

 

Jing Zhang and Jin Li, two former shareholders of Youlanguang Technology, entered into a share transfer agreement with Bo Yu and Zhiwei Yin on November 1, 2015, pursuant to which Jing Zhang and Jin Li transferred all the equity interest they respectively held in Youlanguang Technology to Bo Yu and Zhiwei Yin. Youlanguang Technology completed registration with relevant branch of SAIC for the aforementioned share transfer on November 18, 2015. Accordingly, we superseded agreements entered into by and among E-Sun Sky Computer, Youlanguang Technology, Jing Zhang and Jin Li, including the Equity Interests Pledge Agreement, the Exclusive Option Agreement, the Financial Support Agreement and its supplementary agreement with agreements entering into by and among E-Sun Sky Computer, Youlanguang Technology, Bo Yu and Zhiwei Yin respectively on November 18, 2015. We also superseded the Irrevocable Power of Attorney executed by Jing Zhang and Jin Li with the Irrevocable Power of Attorney executed by Bo Yu and Zhiwei Yin on November 18, 2015. On the same date, E-Sun Sky Computer executed a confirmation letter, to the effect that its exercise of the rights under the Irrevocable Power of Attorney executed by Bo Yu and Zhiwei Yin shall be subject to consent by 500wan HK Limited in manners allowed by the PRC laws and regulation and in accordance with the instructions of 500wan HK Limited.

 

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Jiepin Fu, He Li, Xue Li, Ping Yuan, Bo Zou and Ying Zou, the former shareholders of E-Sun Network, jointly entered into a share transfer agreement with Bo Yu and Zhiwei Yin on November 1, 2015, pursuant to which Jiepin Fu, He Li, Xue Li, Ping Yuan, Bo Zou and Ying Zou transferred all the equity interest they respectively held in E-Sun Network to Bo Yu and Zhiwei Yin. E-Sun Network completed registration with relevant branch of SAIC for the aforementioned share transfer on November 18, 2015. Accordingly, we superseded agreements entered into by and among E-Sun Sky Computer, E-Sun Network, Jiepin Fu, He Li, Xue Li, Ping Yuan, Bo Zou and Ying Zou, including the Equity Interests Pledge Agreement, the Exclusive Option Agreement, the Financial Support Agreement and its supplementary agreement with agreements entering into by and among E-Sun Sky Computer, E-Sun Network and Bo Yu and Zhiwei Yin, respectively on November 18, 2015. We also superseded the Irrevocable Power of Attorney executed by Jiepin Fu, He Li, Xue Li, Ping Yuan, Bo Zou and Ying Zou, respectively, by the Irrevocable Power of Attorney executed by Bo Yu and Zhiwei Yin on November 18, 2015. On the same date, E-Sun Sky Computer executed a confirmation letter, to the effect that its exercise of the rights under the Irrevocable Power of Attorney executed by Zhiwei Yin and Bo Yu shall be subject to consent by 500wan HK Limited in manners allowed by the PRC laws and regulation and in accordance with the instructions of 500wan HK Limited.

 

On January 10, 2017, as a result of the acquisition of Qufan Cayman, we entered into similar contractual arrangements with Shenzhen Qufan through Qufan Information Technology, which obligates Qufan Information Technology to absorb a majority of the expected losses from the activities of Shenzhen Qufan’s activities, and entitles Qufan Information Technology to receive a majority of residual returns from Shenzhen Qufan. In February 2018, we disposed of Qufan due to a change in business strategy.

 

We have been advised by our PRC legal counsel, Grandall Law Firm, that the structure for operating our business in China (including our corporate structure and our contractual arrangements with our consolidated affiliated entities) complies with all applicable PRC laws, rules and regulations, and does not violate any applicable PRC laws, rules or regulations. However, there are uncertainties regarding the interpretation and application of PRC laws, rules and regulations that are relevant to our business operations. Accordingly, there can be no assurance that the PRC regulatory authorities will not take a view that is contrary to the opinion of our PRC legal counsel. Our PRC legal counsel has further advised us that if a PRC government authority determines that our corporate structure, the contractual arrangements or the reorganization to establish our current corporate structure violates any applicable PRC laws, rules or regulations, the contractual arrangements may become invalid or unenforceable, and we could be subject to severe penalties and required to obtain additional governmental approvals from the PRC regulatory authorities. See “Item 3D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in the Internet and the lottery business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “Item 3D. Risk Factors—The 2006 M&A Rules establish complex procedures for some acquisitions of Chinese Companies by foreign investors, which could make it difficult for us to pursue growth through acquisitions in China”.

 

D. Property, Plant and Equipment

 

Our principal executive offices are located at 12F, West Side, Block B, Building No.7, Shenzhen Bay Eco-Technology Park, Nanshan District, Shenzhen, China and occupy a total of 9,659 square meters. We also have representative offices in Beijing, Hong Kong, Japan and the United States of America. We lease our premises from unrelated third parties. Each of the lessors for the leased premises either has valid title to the property or has proper authorization from the title owner to sublease the property.

 

In September 2016, we entered into a lease agreement with Shenzhen Harbor Technology Development Co., Ltd., to lease offices of 9,659 square meters in Nanshan District, Shenzhen, with a total expenditure of RMB1.3 million (US$0.2 million) per month. We expect the rental expense to increase 5% annually. We also expected the total leasehold improvement expenses to be RMB80.0 million (US$12.3 million), and we have paid RMB75.0 million (US$11.5 million) as of the annual report.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion may contain forward looking statements based upon current expectations that involve risks and uncertainties. See “Item 5. Operating and Financial Review and Prospects—G. Safe Harbor.” Our actual results may differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth under “Item 3D. Risk Factors” or in other parts of this annual report.

 

A. Operating Results

 

Overview

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, we were a leading online sports lottery service provider in China. We have not generated any revenue from sports lottery sales since this suspension, and our financial results are materially and adversely impacted during the suspension period. Net revenues provided by the sports lottery sales were RMB98.8 million, nil and nil for 2015, 2016 and 2017, respectively.

 

We currently offer several different lines of services, including online gaming services in Europe and through our own platform of mobile gaming services, sports information services and online spot commodity trading services in the PRC, and our investment in Loto Interactive (formerly known as MelcoLot Limited), which is principally engaged in the business of lottery-related technologies, systems, solutions and information services.

 

We began to generate revenues from online gaming services in Europe in July 2017 after we acquired a 93% equity interest in TMG, which holds licenses from Curacao, Malta, the United Kingdom and Ireland to operate online gaming sites. We generated revenues of RMB49.4 million (US$7.6 million) from the provision of these services in 2017.

 

We generated revenues from sports information services through Shenzhen Caiyu and our own service offerings named “Cai Xun Hao”, which accounted for RMB1.8 million and RMB13.2 million (US$2.0 million) in 2016 and 2017, respectively.

 

Prior to the voluntary suspension of our online sports lottery sales services in April 2015, we were a leading online sports lottery service provider in China. We have not generated any revenue from sports lottery sales since this suspension, and our financial results are materially and adversely impacted during the suspension period. Net revenues provided by the sports lottery sales were RMB98.8 million, nil and nil for 2015, 2016 and 2017, respectively.

 

Between the fourth quarter of 2015 and the second quarter of 2016, we also generated revenues from the payment processing and complementary services provided by Sumpay.cn, which we disposed of in May 2016. Net revenues generated from these services were RMB0.7 million and RMB3.5 million in 2015 and 2016, respectively.

 

Between the fourth quarter of 2016 and the first quarter of 2018, we generated revenues from mobile gaming services through Qufan. We acquired 51% equity interest of Qufan in November 2016 and disposed of in February 2018. Net revenues generated from these services accounted for RMB5.7 million and RMB59.5 million (US$9.1 million) in 2016 and 2017, respectively. Also, we generated revenues from the mobile gaming services through Guangtiandi Technology, which accounted for nil and RMB8.9 million (US$1.4 million) in 2016 and 2017, respectively.

 

We generated RMB0.4 million (US$0.1 million) in 2017 from trading commissions on the online spot commodity trading executed on our websites and mobile applications through Shenzhen Kaisheng.

 

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Our net revenues were RMB99.6 million, RMB10.9 million and RMB131.3 million (US$20.2 million) in 2015, 2016 and 2017, respectively, representing a decrease of 89.1% from 2015 to 2016 and an increase of 1,104.6% from 2016 to 2017, respectively. Our service fees generated from sports lottery sales services accounted for 99.2%, nil and nil of our total net revenues in 2015, 2016 and 2017, respectively. The decrease from 2015 to 2016 was attributable to the voluntary suspension of our online sports lottery sales services starting from April 4, 2015, which is still in effect.

 

Net loss attributable to 500.com Limited were RMB323.9 million in 2015, RMB203.0 million in 2016 and RMB317.1 million (US$48.7 million) in 2017, representing a decrease of 37.3% from 2015 to 2016, and an increase of 56.2% from 2016 to 2017, respectively. Net loss attributable to 500.com Limited in 2015, 2016 and 2017 were adversely impacted by share-based compensation expenses of RMB158.6 million, RMB163.3 million and RMB91.1 million (US$14.0 million), respectively. Aside from the material adverse impact of our voluntary suspension of sports lottery sales starting from April 2015, our net loss in 2015 was adversely impacted by deferred tax expenses relating to valuation allowance in our consolidated affiliated entities of RMB40.1 million, our net loss in 2017 was adversely impacted by a donation of RMB30.0 million (US$4.6 million) made to a charitable organization and an impairment provision of RMB28.8 million (US$4.4 million) provided for long-term investment.

 

Description of Key Statement of Operations Items

 

Net revenues

 

In 2015, 2016 and 2017, we generated revenues from the following lines of businesses:

 

(i) Online gaming services in Europe and beyond, through TMG, a 93% equity interest of which was acquired by us in July 2017;

 

(ii) Sports information services mainly through Shenzhen Caiyu, which we disposed of in November 2017, and through our own service offerings “Cai Xun Hao”.

 

(iii) Online sports lottery sales services, suspended in April 2015, through which we derived substantially all of our net revenues from service fees paid to us by the provincial lottery administration centers for orders we direct to such centers. As a result of the suspension, we did not generate any revenue from online sports lottery sales services in 2016 or 2017;

 

(iv) Payment processing and complementary services through our investment in Sumpay, between the fourth quarter of 2015 and the second quarter of 2016;

 

(v) Mobile gaming service between the fourth quarter of 2016 and the first quarter of 2018 through Qufan and Guangtiandi Technology; and

 

(vi) Financial technology services through our investment in Shenzzhen Kaishen.

 

Our net revenues were RMB99.6 million, RMB10.9 million and RMB131.3 million (US$20.2 million) in 2015, 2016 and 2017, respectively, representing a decrease of 89.1% from 2015 to 2016 and an increase of 1,104.6% from 2016 to 2017, respectively. The table below sets forth our net revenues in aggregate and derived from services specified therein for the periods indicated:

 

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    Year ended December 31,  
    2015     2016     2017  
    RMB     RMB     RMB     US$  
    (in thousands)  
Online sports lottery sales:                                
Provincial lottery administration centers     103,727       —       —       —  
Third party aggregators     9,193       —       —       —  
Online sports lottery sales services     112,920       —       —       —  
Payment processing and other services     707       3,459       —       —  
Online gaming services in Europe and beyond     —       —       49,370       7,588  
Mobile gaming     —       5,677       68,371       10,508  
Sports information services     —       1,792       13,229       2,033  
Financial technology services     —       —       353       55  
Total revenues     113,627       10,928       131,323       20,184  
Deductibles (1)     (14,075 )     —       —       —  
Net revenues     99,552       10,928       131,323       20,184  

 

Service fees provided by sports lottery products accounted for 99.2%, nil and nil of total service fees provided by lottery products in 2015, 2016 and 2017, respectively.

 

(1) The table below sets forth the breakdowns of the deductibles for the periods indicated:

 

    Year ended December 31,  
    2015     2016     2017  
    RMB     RMB     RMB     US$  
    (in thousands)  
Residual payments to complete lottery pool purchases     3,232       —       —       —  
Super VIP incentive     4,046       —       —       —  
Promotional incentives granted to users     6,797       —       —       —  
Total     14,075       —       —       —  

 

Lottery products can be divided into three types as set forth by the MOF, namely, sports match lottery, Lotto (including high frequency lottery) and instant lottery. Both sports lottery administration centers and welfare lottery administration centers issue Lotto and instant lottery products, while only sports lottery administration centers issue sports match lottery products. We do not provide services for any instant lottery products as they are currently only sold through traditional channels. The table below sets forth the breakdown of our net revenues by lottery type for the periods indicated. We list high frequency lottery products as a separate revenue category because of its relatively significant proportion of our net revenues.

 

    Year ended December 31,  
    2015     2016     2017  
    RMB     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  
Sports match lottery     103,626       91.8       —       —       —       —       —  
Lotto*     3,320       2.9       —       —       —       —       —  
High frequency lottery     5,974       5.3       —       —       —       —       —  
Total online sports lottery sales service fees     112,920       100       —       —       —       —       —  
Deductibles     (14,075 )             —               —       —          
Net revenues     98,845               —               —       —          

 

 

* excluding high frequency lottery

 

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The table below sets forth our operating expenses for the periods indicated:

 

    Year ended December 31,  
    2015     2016     2017  
    RMB     RMB     RMB     US$  
    (in thousands)  
Operating Expenses:                                
Cost of services     24,355       14,141       53,096       8,161  
Sales and marketing     87,022       44,921       76,977       11,831  
General and administrative     232,244       247,688       257,079       39,512  
Service development expenses     63,296       71,595       68,341       10,504  
Total operating expenses     406,917       378,345       455,493       70,008  

 

Our operating expenses consist primarily of cost of services, sales and marketing expenses, general and administrative expenses and service development expenses.

 

Cost of Services

 

Our cost of services is directly related to the services we provide, and fluctuates in line with our revenues.

 

Our cost of services primarily consists of:

 

· business tax, which consists of business taxes, surcharges and cultural development fees that are levied on our online lottery services, was RMB0.6 million, nil and nil in 2015, 2016 and 2017, respectively;

 

· account handling expenses, which consist primarily of transaction fees charged by banks and third-party payment processors for cash transfers between our users’ accounts on our online platform including websites and mobile applications and their accounts with banks or third-party payment processors, were RMB7.0 million, RMB0.7 million and RMB3.7 million (US$0.6 million) in 2015, 2016 and 2017, respectively;

 

· salary and benefit expenses for our lottery ticket processing staff were RMB3.9 million, RMB0.5 million and nil in 2015, 2016 and 2017, respectively;

 

· server leasing and maintenance expenses, which consist primarily of leasing expense of servers and other equipment used in providing online services, were RMB7.6 million, RMB8.3 million and RMB9.2 million (US$1.4 million) in 2015, 2016 and 2017, respectively;

 

· share-based compensation expenses, which were RMB3.1 million, RMB3.0 million and nil in 2015, 2016 and 2017, respectively;

 

· lottery insurance expenses, which consist of insurance premiums charged by insurers for covering the first two categories of winnings in online gaming services for betting on the outcome of lotteries after the acquisition of TMG in July 2017, were RMB7.0 million (US$1.1 million) in 2017;

 

· platform fees, which consist of fees payable to online gaming software suppliers for providing various online casino games on TMG’s websites and apps after the acquisition of TMG in July 2017, were RMB5.9 million (US$0.9 million) in 2017;

 

· regulatory and compliance fees, which consist of fees payable to regulatory bodies such as Gambling Commission, HM Revenue & Customs, Malta Gaming Authority and Certria EOOD after the acquisition of TMG in July 2017, were RMB0.6 million (US$0.1 million) in 2017; and

 

· amortization fees, which consist primarily of amortization of intangible assets arising from business combination, were RMB1.2 million and RMB26.1 million (US$4.0 million) in 2016 and 2017, respectively.

 

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Sales and marketing expenses

 

Our sales and marketing expenses consist primarily of:

 

· commissions to third-party Internet companies, which are service fees we pay to third-party Internet companies for purchase orders placed on our websites by users redirected from their websites. The amount of such commissions paid to third-party Internet companies for each redirected order depends on an agreed-upon allocation ratio. The commissions to third-party Internet companies were RMB7.7 million, nil and RMB5.2 million (US$0.8 million) in 2015, 2016 and 2017, respectively;

 

· salary and benefit expenses for sales and marketing staff, which were RMB15.4 million, RMB18.0 million and RMB17.1 million (US$2.6 million) in 2015, 2016 and 2017, respectively;

 

· advertising expenses, which consist primarily of expenses associated with advertisements we placed on TV channels and other media, were RMB26.2 million, RMB0.3 million and RMB1.0 million (US$0.2 million) in 2015, 2016 and 2017, respectively;

 

· promotional and marketing expenses, which primarily consist of expenses associated with various promotional events, were RMB18.3 million, RMB8.8 million and RMB41.9 million (US$6.4 million) in 2015, 2016 and 2017, respectively; and

 

· share-based compensation expenses, which were RMB13.8 million, RMB14.0 million and RMB9.2 million (US$1.4 million) in 2015, 2016 and 2017, respectively.

 

General and administrative expenses

 

Our general and administrative expenses consist primarily of:

 

· salary and benefit expenses for our management and general administrative staff, which were RMB34.0 million, RMB44.6 million and RMB58.8 million (US$9.0 million) in 2015, 2016 and 2017, respectively;

 

· office expenses, which consist primarily of office rental and other office administrative expenses, were RMB13.8 million, RMB18.8 million and RMB31.9 million (US$4.9 million) in 2015, 2016 and 2017, respectively;

 

· travel, communication and other business expenses, which consist primarily of expenses associated with business travels, were RMB13.3 million, RMB13.0 million and RMB12.9 million (US$2.0 million) in 2015, 2016 and 2017, respectively;

 

· third-party professional service fees, which consist primarily of professional service fees paid to third-party professionals, were RMB15.2 million, RMB27.1 million and RMB42.3 million (US$6.5 million) in 2015, 2016 and 2017, respectively;

 

· share-based compensation expenses, which were RMB119.0 million, RMB121.4 million and RMB65.5 million (US$10.1 million) in 2015, 2016 and 2017, respectively; and

 

· impairment provision provided for long-term investment, which were nil, RMB3.4 million and RMB28.8 million (US$4.4 million) in 2015, 2016 and 2017, respectively.

 

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Service development expenses

 

Our service development expenses consist primarily of:

 

· salary and benefit expenses for our research and development staff, which were RMB31.3 million, RMB35.3 million and RMB41.7 million (US$6.4 million) in 2015, 2016 and 2017, respectively;

 

· rental expenses, which were RMB3.3 million, RMB3.9 million and RMB4.2 million (US$0.6 million) in 2015, 2016 and 2017, respectively; and

 

· share-based compensation expenses, which were RMB22.8 million, RMB25.0 million and RMB16.4 million (US$2.5 million) in 2015, 2016 and 2017, respectively.

 

Other Operating Income

 

Our other operating income consists primarily of pool purchase prize amounts to which we are entitled from pool purchase prize distributions with respect to residual payments we make to complete lottery pool purchases, and technical services fees received from third parties. Our other operating income was RMB6.9 million, RMB2.7 million and RMB1.2 million (US$0.2 million) in 2015, 2016 and 2017, respectively.

 

Government Grant

 

In 2015, 2016 and 2017, we obtained grants from Shenzhen local government in an aggregate amount of RMB2.0 million, RMB10.0 million and RMB6.8 million (US$1.0 million), respectively. We might obtain similar grants from time to time in the future, but there is no assurance that we will continue to obtain such grants on a regular basis.

 

Gain from disposal of a subsidiary

 

In connection with our disposal of Sumpay.cn, we recognized in 2016 a disposition gain of RMB136.9 million, after deduction of the net loss arising from Sumpay.cn, and amortization expenses relating to the online payment and other licenses during the consolidating period.

 

In connection with our disposal of Shenzhen Caiyu in November 2017, we recognized in 2017 a disposition gain of RMB5.5 million (US$0.8 million), after deduction of the net loss arising from Shenzhen Caiyu.

 

Taxation

 

Our group includes entities incorporated in various jurisdictions throughout the world including Cayman Islands, British Virgin Islands, United States, United Kingdom, Malta, Curacao, Cyprus, Australia, Hong Kong, Japan and People’s Republic of China. Most of these entities are either holding companies or non-operating entities. As a result, they are either not subject to any taxes in their respective local jurisdictions or did not generate any income for tax purposes.

 

The applicable taxation for our main operating entities is as follows:

 

Malta

 

Under the current laws, profits tax in Malta is generally assessed at the rate of 35% of taxable income. When a dividend is paid or declared to the holding company, the paying entity is entitled to claim 6/7 ths of the profits tax paid as a refund, which may effectively reduce the income tax rate to 5%.

 

Curacao

 

Under the current laws, profits tax in Curacao is generally assessed at the rate of 2% of taxable income.

 

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Cyprus

 

Round Spot Services Ltd is incorporated in Cyprus and does not conduct any substantive operations of its own. No provision for Cyprus income tax has been made in the financial statements as Round Spot Services Ltd had no assessable income for the year ended December 31, 2017.

 

Hong Kong

 

Under the current laws, profits tax in Hong Kong is generally assessed at the rate of 16.5% of taxable income.

 

People’s Republic of China

 

A new enterprise income tax law (the “EIT Law”) in the PRC was enacted and became effective on January 1, 2008. The EIT Law applies a uniform 25% enterprise income tax (“EIT”) rate to both foreign invested enterprises and domestic enterprises. However, Chinese tax authorities offer various tax incentives or holidays to high-tech and innovative companies like us and our controlled subsidiaries like E-Sun Sky Network, E-Sun Sky Computer, Guangtiandi Technology. Lhasa Yicai and Shenzhen Qufan have also been granted various tax incentives or holidays in past years.

 

In March 2017, Shenzhen Qufan obtained the certificate of “Software Enterprise”, and was granted an exemption of EIT for its first two years of operations and a half reduction in tax rate for the succeeding three years commencing from the first profit-making year. 2015 was the first year of EIT exemption for Shenzhen Qufan. Thus, Shenzhen Qufan was exempt from paying income tax in both 2015 and 2016 and was subject to the reduced income tax rate of 12.5% in 2017. The income tax savings as a result of this tax holiday for Shenzhen Qufan were RMB 4.4 million (US$0.7 million) and RMB 0.7 million for the years ended December 31, 2017 and 2016, respectively. Per share effect of the tax holiday for Shenzhen Qufan was RMB 0.01 and RMB 0.002 for the years ended December 31, 2017 and 2016, respectively.

 

As of December 31, 2017, we have also recognized a total amount of RMB24.3 million (US$3.7 million) as an accrual for uncertain tax positions and associated interest and penalties related to certain unrecognized tax benefits.

 

During the years ended December 31, 2015, 2016 and 2017, the Group recognized approximately RMB4,534, RMB4,932 and RMB5,098 (US$784) in interest on these unrecognized tax benefits and reversed approximately RMB614, RMB1,827 and RMB7,667 (US$1,178) in interest. The Group had accrued approximately RMB6,884, RMB9,989 and RMB7,420 (US$1,140) for the interest on these uncertain tax positions as of December 31, 2015, 2016 and 2017, respectively. In general, the PRC tax authorities have up to three to five years to conduct examinations of the Group’s tax filings. As of December 31, 2017, the PRC subsidiaries’ 2014 to 2017 tax returns remain open to examination.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities, disclosure of contingent assets and liabilities on the date of each set of consolidated financial statements and the reported amounts of revenues and expenses during each financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates and assumptions is an integral component of the financial reporting process, actual results could differ from those estimates and assumptions.

 

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An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically could materially impact the consolidated financial statements. We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included elsewhere in this annual report.

 

Revenue Recognition

 

The Group’s revenues were derived principally from online lottery purchase services before voluntary suspension of this service in April 2015. During the voluntary suspension period, the Group diversified its revenue streams derived from mobile gaming services, online gaming services and sports information services. Revenue is recognized in accordance with ASC 605, “Revenue Recognition” when all of the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the service has been rendered; (iii) the fees are fixed or determinable; and (iv) collectability is reasonably assured, and with ASC 606, “Revenue from Contracts with Customers” when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied.

 

The Company will apply the new revenue standard beginning January 1, 2018, and plans to adopt a modified retrospective approach upon adoption. The Group has set up an implementation schedule and is currently in the process of analyzing each of the Group’s revenue streams in accordance with the new revenue standard to determine the impact on the Group’s consolidated financial statements. Specifically, we recognize revenues based on the following revenue recognition principles:

 

Online lottery purchase services

 

The Group earns service income for online lottery purchase services and revenues are provided by processing lottery purchase orders from end users (“Service Fee”). The Group receives purchase orders from end users through its online platforms, which include website and mobile applications, and processes the orders with the lottery administration centers. Service Fee is received from the lottery administration centers based on the pre-determined service fee rate and the total amount of the processed orders. Pursuant to ASC 605-45, “Principal Agent Considerations”, the Group records Service Fee on a net basis because the Group is not the primary obligor in the arrangement, but acts as an agent in providing such purchase services. The Group did not generate any revenue from this service since April 2015 when the Group voluntarily suspended the online lottery purchase services due to the change of related government regulation in the PRC. It is uncertain when the services will be resumed.

 

Contingent service fee

 

The Group was also entitled to receive additional Service Fee from lottery administration centers when the total amounts of purchase orders reach an agreed threshold (“Contingent Service Fee”). As the Group is the agent in providing lottery purchase services, any Contingent Service Fee received is recorded as net revenue when the agreed thresholds are reached. Once the Group reaches the agreed thresholds, the Contingent Service Fee is then fixed and not subject to any adjustments. As a result of the voluntarily suspension of the online lottery purchase services mentioned above, the Group did not generate any revenue from this source either since April 2015, and it is uncertain when we will be able to generate this fee again in the future.

 

Sports Information Services

 

The Group offers a comprehensive sports information portal via a designated mobile application, which covers (i) real time soccer match information; and (ii) data-driven soccer match predictions generated by our proprietary analysis engine. Users can also post free or pay-per-view contents such as proprietary observations and analyses on the sports information portal. The users pay for each information and data subscription at a fixed price, and the Group pays the original information providers a fixed percentage of total purchase amount. Revenue is recognized when users is accessible to the pay-per-view contents. The Group records the revenue on a net basis because the Group is not the primary obligor to provide the information, but acts as an agent in providing such purchase services.

 

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Mobile Gaming Services

 

The Group provides mobile gaming services through its designated mobile applications Quiz, Night of Texas Hold’em Poker and Paiyou for Texas Hold’em Poker, and derives revenues from in-game virtual tokens and other virtual items in its game development operations. Once the users purchase virtual tokens or other virtual items through the Group’s own charging system, the Group has an implied obligation to provide the services which enable the virtual tokens or other virtual items to be displayed or used in the games. Thus, the Group initially records the proceeds received from the sales of virtual tokens and other virtual items as deferred revenue, and once they are consumed when the services are rendered to the respective paying players, the Group recognizes the attributable portion of the deferred revenue as revenue. For consumable virtual items representing items that are extinguished after consumption in the form of fixed charges levied on each round of games played, the Group recognizes revenue when the items are consumed and the related services are rendered, since the paying players will not continue to benefit from the virtual items thereafter. For durable virtual items that are accessible and beneficial to paying players over an extended period, the Group recognizes revenue ratably over the average life of durable virtual items for the applicable game, which the Group makes best estimates to be average playing period of paying players. The Group tracks each paying player’s log-in history to estimate the average playing period of paying players. While the Group believes its estimates to be reasonable based on sufficient available paying player information, it may revise such estimates in the future as the games’ operation periods change or there is indication that the similarities in characteristics and playing patterns of paying players of the games change. Any adjustments arising from changes in the estimates of the average paying player life would be applied prospectively.

 

The Super VIP incentive

 

Certain qualified end users (“Super VIP”) are entitled to receive incentives from the Group based on actual purchase amount of each transaction. As the Group does not receive an additional service or benefit from the Super VIP other than service fee earned from lottery administration centers by the Group from the transaction, the incentives are recognized as a reduction of revenue at each year end in accordance with ASC 605-50, “Customer Payments and Incentives”.

 

Lottery pool purchase service

 

Lottery pools involve individual end users purchasing a share in a pooled lottery outcome or group of outcomes with other end users. Through the lottery pool purchase service, an end user, an initiator, starts a lottery pool by specifying a range of parameters, such as the lottery portfolio, total purchase amount and payout ratio.

 

The initiator is required to commit a minimum initial purchase amount when they initiate a pool, usually a certain percentage of the total purchase amount. Other end users then join the pool by agreeing to the parameters set by the initiator and committing on the purchase amount. When the total purchase amount as specified by the initiator is reached, the pooled lottery purchase order will be delivered in the manner specified by the initiator. When the actual purchase amount does not reach the total purchase amount as specified by the initiator, but reaches a certain percentage of total purchase amount before the lottery pool purchase deadline, the Group contributes the remaining outstanding purchase amount (i.e., residual amount of lottery pool) to complete the lottery pool transaction. If the tickets win prizes from the lottery, the Group distributes the cash prizes to the end users based on the predetermined payout ratio, and the residual amount after distribution is retained by the Group.

 

Since the Group contributes the residual amount of lottery pool to earn Service Fee from the purchase made by the lottery pool and does not provide any service to the lottery administration centers, the residual amount of lottery pool contributed by the Group paid to the lottery administration centers is recognized as a reduction of revenue. The residual amount of the lottery pool retained by the Group after distribution of the prizes are presented as “other operating income”, and recognized upon the announcement of lottery results, as the Group’s principal activity is to provide lottery purchase services to end users.

 

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Online gaming services

 

The Group also provides online lottery betting and online casino platforms through our designated website in TMG. We earn difference between betting and winning for online lottery betting services and online casino platforms as revenues that are generated from our registered users. The registered users enter into certain terms and conditions when they first open their accounts with us. Lottery and Casino purchase orders are placed by users through our online platforms view website. Then we process these orders. Prior to processing orders, users prepay all purchase amounts. We pay users prizes when there any winnings attributable to users. We record revenues on a net basis by deducting the winning amounts from betting amounts. Revenue comprises the fair value of the consideration received for the provision of internet gaming in the ordinary course of the company's activities, which is recognized when the outcome of an event is known.

 

Income Taxes

 

We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive income (loss) in the period that includes the enactment date.

 

Interest and penalties arising from underpayment of income taxes are computed in accordance with the related PRC tax law and is classified in the consolidated statements of comprehensive income (loss) as income tax expense. The amount of interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return.

 

In accordance with the provisions of ASC 740 (“ASC 740”), “Income taxes”, we recognize in our financial statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to be sustained upon examination based solely on the technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than a fifty percent likelihood of being realized upon settlement. Our estimated liability for unrecognized tax benefits which is included in “long-term payables” is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from our estimates. As each audit is concluded, adjustments, if any, are recorded in our consolidated financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur.

 

In conjunction with ASC 740, we also applied ASC 740-30 (“ASC 740-30”), “Income Taxes: Other Considerations or Special Areas”, to account for the temporary differences arising from the undistributed earnings of the foreign subsidiaries. According to ASC 740-30, all undistributed earnings of a subsidiary shall be presumed to be transferred to the parent entity. Accordingly, the undistributed earnings of a subsidiary included in consolidated income shall be accounted for as a temporary difference and affect deferred tax expense unless the tax law provides a means by which the investment in a domestic subsidiary can be recovered tax free.

 

Share-based compensation

 

Share options and restricted shares granted to employees and directors

 

Share options and restricted shares granted to employees and directors are accounted for under ASC 718 (“ASC 718”), Compensation - Stock compensation. In accordance with ASC 718, the Group determines whether a share option or restricted shares should be classified and accounted for as a liability award or an equity award. All grants of share options and restricted shares to employees and directors classified as equity awards are recognized in the financial statements based on their grant date fair values. There were no liability awards granted during any of the periods stated herein. The Group recognizes compensation expense using the accelerated method for share options and restricted shares granted with graded vesting based on service conditions, provided that the amount of compensation expense recognized at any date is at least equal to the portion of the grant-date value of the share options and restricted shares that are vested at that date.

 

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ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of em ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and is adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. To the extent the Group revises this estimate in the future, the share-based payments could be materially impacted in the period of revision, as well as in following periods.

 

The compensation costs associated with a modification of the terms of the award (“Modification Award”) are recognized if either the original vesting condition or the new vesting condition has been achieved. Such compensation costs cannot be less than the grant-date fair value of the original award. The incremental compensation cost is measured as the excess of the fair value of the Modification Award over the fair value of the original award at the modification date. Therefore, in relation to the Modification Award, the Group recognizes share-based compensation over the vesting periods of the new options, which comprises, (1) the amortization of the incremental portion of share-based compensation over the remaining vesting term, and (2) any unrecognized compensation cost of original award, using either the original term or the new term, whichever is higher for each reporting period.

 

Share options granted to non-employees

 

The Group records share-based compensation expense for awards granted to non-employees in exchange for services at fair value in accordance with the provisions of ASC 505-50, “Equity-based payment to non-employees”. As the share options granted to non-employees were fully vested on the grant date, the related compensation expense was fully recognized in the consolidated statement of comprehensive income (loss) on the grant date.

 

The Group, with the assistance of an independent valuation firm, determined the fair values of the share options recognized in the consolidated financial statements. The binomial option pricing model is applied in determining the estimated fair value of the share options granted to employees and non-employees.

 

Investments

 

Short-term investments

 

All highly liquid investments with original maturities of greater than three months, but less than 12 months, are classified as short-term investments in accordance with ASC 320-10, “Investments—Debt and Equity Securities”. In accordance with ASC 815, “Derivatives and Hedging”, the Group recognizes financial instruments or other contracts that have all the characteristics of a derivative on its balance sheet as either assets or liabilities, at fair value. Changes in the fair value of derivative financial instruments (“financial derivatives”) are either recognized periodically in earnings or in “other comprehensive income” depending on the use of the financial derivatives and whether it qualifies for hedge accounting. Changes in fair values of financial derivatives not qualified as hedges are reported in earnings. The estimated fair values of financial derivatives are determined at discrete points in time based on the relevant market information. These estimates are calculated with reference to the market rates using industry standard valuation techniques.

 

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Long-term investments

 

The Group’s long-term investments consist of cost method investments, equity method investments and available-for-sale investments.

 

In accordance with ASC 325, “Investments-Other”, for investments in an investee over which the Group does not have significant influence and which do not have readily determinable fair value, the Group carries the investment at cost and only adjusts for other-than-temporary declines in fair value and distributions of earnings that exceed the Group’s share of earnings since its investment. Management regularly evaluates the impairment of the cost method investments based on performance and financial position of the investee as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs. An impairment loss is recognized in earnings equal to the excess of the investment’s cost over its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value would then become the new cost basis of investment.

 

Investments in entities in which the Group can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC 323 (“ASC 323”), “Investments-Equity Method and Joint Ventures”. Under the equity method, the Group initially records its investment at cost and the difference between the cost of the equity investee and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. The equity method goodwill is not subsequently amortized and is not tested for impairment under ASC 350. The Group evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary. The Group subsequently adjusts the carrying amount of the investment to recognize the Group’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Group will discontinue applying the equity method if an investment (and additional financial supports to the investee, if any) has been reduced to zero. Under the conditions that the Group is not required to advance additional funds to an investee and the equity-method investment in ordinary shares is reduced to zero, if further investments are made that have a higher liquidation preference than ordinary shares, the Group would recognize the loss based on its percentage of the investment with the same liquidation preference, and the loss would be applied to those investments of a lower liquidation preference first before being further applied to the investments of a higher liquidation preference. The Group evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.

 

Available-for sale investments are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. Realized gains or losses are included in earnings during the period in which the gain or loss is realized. An impairment loss on the available-for-sale investments is recognized in the consolidated statements of comprehensive income (loss) when the decline in value is determined to be other-than-temporary.

 

Investments in limited partnerships greater than 3% to 5% are considered more than minor and accounted for using the equity method, unless it is readily apparent that the Group has virtually no influence over the partnership’s financial and operating policies.

 

Fair value measurements

 

Financial instruments include cash and cash equivalents, restricted cash, time deposits, accounts receivable, structured deposit (Note 5), other receivables, long-term investments and accounts payable. As of December 31, 2016 and 2017, the carrying values of these financial instruments, other than the structured deposit, approximate their fair values due to their short-term maturities. The Group determined the fair value of the derivative redemption feature and the structured deposit with the assistance of an independent third -party valuation firm.

 

The Group applies ASC 820 (“ASC 820”), “Fair Value Measurements and Disclosures”. ASC 820 defines fair value, establishes a framework for measuring fair value and requires disclosures to be provided on fair value measurement.

 

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ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1— Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2— Include other inputs that are directly or indirectly observable in the marketplace.

Level 3— Unobservable inputs which are supported by little or no market activity.

 

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach, and (3) cost approach. The market approach uses prices and other relevant information provided by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

Earnings (Loss) per share

 

The Group computes earnings per Class A and Class B ordinary shares in accordance with ASC 260 (“ASC 260”), “Earnings Per Share”, using the two class method. Under the provisions of ASC 260, basic net income (loss) per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the period. Potentially dilutive securities have been excluded from the computation of diluted net income (loss) per share if their inclusion is anti-dilutive. Potential ordinary shares consist of the incremental ordinary shares issuable upon the exercise of stock options. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income (loss) per share of Class A ordinary shares assumes the conversion of Class B ordinary shares, while the diluted net income (loss) per share of Class B ordinary shares does not assume the conversion of those shares.

 

The liquidation and dividend rights of the holders of the Group’s Class A and Class B ordinary shares are identical, except with respect to voting. As a result, and in accordance with ASC 260, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B ordinary shares as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the conversion of Class B ordinary shares is assumed in the computation of the diluted net loss per share of Class A ordinary shares, the undistributed earnings are equal to net loss for that computation.

 

For the purposes of calculating the Group’s basic and diluted earnings (loss) per Class A and Class B ordinary shares, the ordinary shares relating to the options that were exercised are assumed to have been outstanding from the date of exercise of such options.

 

Business combinations and noncontrolling interests

 

We account for our business combinations using the purchase method of accounting in accordance with ASC 805 (“ASC 805”), “ Business Combinations” . The purchase method of accounting requires that the consideration transferred to be allocated to the assets, including separately identifiable assets and liabilities we acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.

 

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The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period.

 

For our majority-owned VIEs, a noncontrolling interest is recognized to reflect the portion of their equity which is not attributable, directly or indirectly, to our consolidated net income (loss) on the consolidated income statements includes the net income (loss) attributable to noncontrolling interests. The cumulative results of operations attributable to noncontrolling interests are also recorded as noncontrolling interests in our consolidated balance sheets.

 

Internal Control over Financial Reporting

 

We are a public company in the United States subject to Sarbanes-Oxley. Section 404 of Sarbanes-Oxley and applicable rules and regulations thereunder require that we include a report of management on our internal control over financial reporting in this annual report.

 

Results of Operations

 

The following summary of the consolidated financial data for the periods and as of the dates indicated is qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”.

 

Our historical results do not necessarily indicate our results to be expected for any future period.

 

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    Year ended December 31,  
    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
    (in thousands, except for per share data)  
Consolidated Statement of Comprehensive Income Data:                        
Net Revenues     99,552       10,928       131,323       20,184  
Operating costs and expenses:                                
Cost of services     (24,355 )     (14,141 )     (53,096 )     (8,161 )
Sales and marketing     (87,022 )     (44,921 )     (76,977 )     (11,831 )
General and administrative     (232,244 )     (247,688 )     (257,079 )     (39,512 )
Service development expenses     (63,296 )     (71,595 )     (68,341 )     (10,504 )
Total operating expenses     (406,917 )     (378,345 )     (455,493 )     (70,008 )
Other operating income     6,910       2,732       1,204       185  
Government grant     2,022       10,017       6,789       1,043  
Indemnity cost     —       (9,979 )     —       —  
Other operating expenses     (2,975 )     (1,915 )     (34,691 )     (5,332 )
Operating loss     (301,408 )     (366,562 )     (350,868 )     (53,928 )
Others, net     —       —       821       126  
Interest income     20,589       23,859       20,574       3,162  
Interest expense     (2,138 )     —       —       —  
Loss from equity method investments     (407 )     (406 )     (2,128 )     (327 )
Gain from disposal of subsidiaries     —       136,914       5,477       842  
Changes in fair value of the structured deposit     1,124       —       —       —  
Changes in fair value of contingent considerations     —       —       (2,384 )     (366 )
Loss before income tax     (282,240 )     (206,195 )     (328,508 )     (50,491 )
Income tax (expense) benefit     (41,969 )     (3,057 )     12,366       1,901  
Net loss     (324,209 )     (209,252 )     (316,142 )     (48,590 )
Less: Net (loss) income attributable to the non-controlling interests     (312 )     (6,287 )     957       147  
Net loss attributable to 500.com Limited     (323,897 )     (202,965 )     (317,099 )     (48,737 )
Other Comprehensive income (loss)                                
Foreign currency translation gain (loss)     66,851       82,347       (55,805 )     (8,577 )
Realized and unrealized gain (loss) on available for sale investments     —       754       (733 )     (113 )
Other Comprehensive income (loss), net of tax     66,851       83,101       (56,538 )     (8,690 )
Comprehensive loss     (257,358 )     (126,151 )     (372,680 )     (57,280 )
Less: Comprehensive (loss) income attributable to non-controlling interests     (312 )     (6,287 )     1,348       207  
Comprehensive loss attributable to 500.com Limited     (257,046 )     (119,864 )     (374,028 )     (57,487 )
Earnings (losses) per share for Class A and Class B ordinary shares outstanding:                                
Basic     (0.84 )     (0.49 )     (0.78 )     (0.12 )
Diluted     (0.84 )     (0.49 )     (0.78 )     (0.12 )
Earnings (losses) per American Depositary Share (“ADS”) (1 ADS represents 10 Class A ordinary shares)                                
Basic     (8.40 )     (4.89 )     (7.77 )     (1.20 )
Diluted     (8.40 )     (4.89 )     (7.77 )     (1.20 )
Weighted average number of Class A and Class B ordinary shares outstanding:                                
Basic     385,590,213       414,872,756       408,310,122       408,310,122  
Diluted     385,590,213       414,872,756       408,310,122       408,310,122  
Non-GAAP financial data (1)                                
Net loss attributable to 500.com Limited     (323,897 )     (202,965 )     (317,099 )     (48,737 )
Adjustment for share-based compensation expenses     158,628       163,341       91,143       14,008  
Adjustment for deferred tax expenses relating to valuation allowance     40,105       —       —       —  
Adjusted net loss attributable to 500.com Limited (non-GAAP)     (125,164 )     (39,624 )     (225,956 )     (34,729 )

 

 

(1) As a supplement to net income, we use the non-GAAP financial measure of adjusted net income which is U.S. GAAP net income as adjusted to exclude share-based compensation expenses, and deferred tax expenses relating to valuation allowance. This non-GAAP financial measure is provided as additional information to help our investors compare business trends among different reporting periods on a consistent basis and to enhance investors’ overall understanding of our current financial performance and prospects for the future. This non-GAAP financial measure should not be considered in addition to or as a substitute for or superior to U.S. GAAP net income. In addition, our definition of adjusted net income may be different from the definition of such term used by other companies, and therefore comparability may be limited.

 

The year ended December 31, 2017 compared with the year ended December 31, 2016

 

Net revenues

 

Our net revenues increased by 1,104.6% from RMB10.9 million in 2016 to RMB 131.3 million (US$20.2 million) in 2017, primarily attributable to revenues generated from mobile gaming services, online gaming services and sports information services. The increase in our net revenues was slightly offset by the discontinuance of our payment processing and complementary services in May 2016.

 

Revenues generated from mobile gaming services increased by 1,100.0% from RMB5.7 million in 2016 to RMB68.4 million (US$10.5 million) in 2017, primarily due to an increase in the number of users for these services. We started generating revenues from mobile gaming services in the fourth quarter of 2016 upon the acquisition of Qufan and develop our new app “Quiz”. In February 2018, we disposed of all our equity interest in Qufan and ceased “Quiz”, and stopped generating mobile gaming revenues since then.

 

We began to generate revenues from online gaming services after the acquisition of 93% equity interest in TMG in July 2017, and generated revenues of RMB49.4 million (US$7.6 million) in 2017.

 

Revenues generated from sports information services increased by 633.3% from RMB1.8 million in 2016 to RMB13.2 million (US$2.0 million) in 2017, primarily due to an increase in the number of users for these services. We started generating revenues from sports information services in the fourth quarter of 2016 upon the acquisition of Shenzhen Caiyu. In November 2017, we disposed of our equity interest in Shenzhen Caiyu, but we expect to continue to generate revenues from sports information services through our own service offerings “Cai Xun Hao”.

 

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We also generated revenues from payment processing and complementary services in the amount of RMB3.5 million in 2016 through our investment in Sumpay.cn, which we disposed of in May 2016.

 

Operating expenses

 

Our operating expenses increased by 20.4% from RMB378.3 million in 2016 to RMB455.5 million (US$70.0 million) in 2017. Our operating expenses consisted of the following:

 

Cost of Services . Our cost of services increased by 275.5% from RMB14.1 million in 2016 to RMB53.1 million (US$8.2 million) in 2017. The increase was primarily due to (i) an increase in amortization expenses relating to the mobile applications obtained through the acquisition of Qufan in November 2016 and licenses through the acquisition of TMG in July 2017, from RMB1.2 million in 2016 to RMB26.1 million (US$4.0 million) in 2017; (ii) an increase in business insurance costs of TMG associated with online lottery betting of RMB7.0 million (US$1.1 million) in 2017; (iii) an increase in platform service fees of TMG associated with online casino platforms of RMB5.9 million (US$0.9 million) in 2017; and (iv) an increase in account handling expenses relating to our mobile distribution channels from RMB0.7 million in 2016 to RMB3.7 million (US$0.6 million) in 2017, slightly offset by a decrease in share-based compensation expenses associated with share options granted to our employees from RMB3.0 million in 2016 to nil in 2017.

 

Sales and marketing expenses . Sales and marketing expenses increased by 71.4% from RMB44.9 million in 2016 to RMB77.0 million (US$11.8 million) in 2017: The increase mainly due to:

 

· an increase in promotional and marketing expenses from RMB8.8 million in 2016 to RMB41.9 million (US$6.4 million) in 2017, which was primarily due to the operation of mobile gaming services, online gaming services and sports information services in 2017.

 

· the increase in sales and marketing expenses was slightly offset by a decrease in share-based compensation expenses associated with share options granted to our employees from RMB14.0 million in 2016 to RMB9.2 million (US$1.4 million) in 2017, which was primarily due to the expiration of share options granted in 2014.

 

General and administrative expenses . General and administrative expenses increased by 3.8% from RMB247.7 million in 2016 to RMB257.1 million (US$39.5 million) in 2017. The increase primarily consisted of:

 

· an increase in impairment loss on equity investment from RMB3.3 million in 2016 to RMB28.8 million (US$4.4 million) in 2017, the impairment loss in 2017 being primarily related to equity investment in Loto Interactive (formerly known as MelcoLot Limited), which we acquired in June 2017;

 

· an increase in consulting expenses from RMB27.1 million in 2016 to RMB42.3 million (US$6.5 million) in 2017, which was primarily related to the acquisition activities conducted in 2017;

 

· an increase in salary expenses from RMB44.6 million in 2016 to RMB58.8 million (US$9.0 million) in 2017, which was primarily related to the increased number of employees of Qufan and also the newly acquired subsidiary, TMG; and

 

· an increase in rental expenses from RMB11.7 million in 2016 to RMB24.9 million (US$3.8 million) in 2017, which was primarily related to our newly rented offices located in Hong Kong and Shenzhen starting late 2016.

 

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The increase in general and administrative expenses was slightly offset by a decrease in share-based compensation expenses associated with share options granted to our directors and employees from RMB121.4 million in 2016 to RMB65.5 million (US$10.1 million) in 2017, which was primarily due to the expiration of share options granted in 2014.

 

Service development expenses . Service development expenses decreased by 4.6% from RMB71.6 million in 2016 to RMB68.3 million (US$10.5 million) in 2017. The decreased was primarily due to (i) a decrease in share-based compensation expenses associated with the share options granted to our service development employees from RMB25.0 million in 2016 to RMB16.4 million (US$2.5 million) in 2017; and (ii) a decrease in technical service fee from RMB2.0 million in 2016 to RMB1.3 million (US$0.2 million) in 2017. The decrease in service development expenses was slightly offset by an increase in salary expenses from RMB35.3 million in 2016 to RMB41.7 million (US$6.4 million) in 2017, due to the increase in the number of employees of Qufan.

 

Other operating income

 

Other operating income decreased slightly from RMB2.7 million in 2016 to RMB1.2 million (US$0.2 million) in 2017.

 

Operating loss

 

As a result of the foregoing factors, we recorded operating loss of RMB350.9 million (US$53.9 million) in 2017, a decrease of RMB15.7 million compared with operating loss of RMB366.6 million in 2016.

 

Gain from disposal of subsidiaries

 

Gain from disposal of subsidiaries was RMB5.5 million (US$0.8 million) in 2017, a decrease of RMB131.4 million compared with gain from disposal of “Sumpay” of RMB136.9 million in 2016.

 

Loss before income tax

 

Loss before income tax was RMB328.5 million (US$50.5 million) in 2017, an increase of RMB122.3 million compared with loss before income tax of RMB206.2 million in 2016.

 

Income tax expense

 

We recorded income tax benefit of RMB12.4 million (US$1.9 million) in 2017, as compared to income tax expense of RMB3.1 million in 2016. Income tax benefit was primarily due to a reversal of uncertain tax liabilities of RMB14.7 million in 2017.

 

Net loss

 

As a result of the forgoing factors, we recorded net loss of RMB316.1 million (US$48.6 million) in 2017, as compared to net loss of RMB209.3 million in 2016.

 

Net loss attributable to 500.com Limited

 

We recorded net loss attributable to 500.com Limited of RMB317.1 million (US$48.7 million) in 2017, as compared to net loss attributable to 500.com Limited of RMB203.0 million in 2016. We also recorded non-GAAP net loss attributable to 500.com Limited of RMB226.0 million (US$34.7 million) in 2017, as compared to non-GAAP net loss attributable to 500.com Limited of RMB39.6 million in 2016.

 

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The year ended December 31, 2016 compared with the year ended December 31, 2015

 

Net revenue

 

Our net revenues decreased by 89.1% from RMB99.6 million in 2015 to RMB10.9 million in 2016, primarily due to the voluntary suspension of our online sports lottery sales services since April 2015. Prior to the voluntary suspension of our online sports lottery sales services in April 2015, we derived substantially all of our net revenues from service fees paid to us by the provincial lottery administration centers for orders we direct to such centers. Starting from the fourth quarter of 2015, we also derive revenues from the rendering of payment processing and complementary by Sumpay.cn. On March 29, 2016, Tongfu Technology entered into a share transfer agreement for the disposal of all its equity interest in Sumpay.cn, and the transaction was completed in May 2016. We stopped generating revenue from such source upon completion of this transaction. We started generating revenues from the rendering of mobile gaming and sports information services in the fourth quarter of 2016, upon the completion of acquisition of Shenzhen Qufan and Shenzhen Caiyu.

 

Operating expenses

 

Our operating expenses decreased by 7.0% from RMB406.9 million in 2015 to RMB378.3 million in 2016. Our operating expenses consisted of the following:

 

Cost of Services . Our cost of services decreased by 42.2% from RMB24.4 million in 2015 to RMB14.1 million in 2016. The decrease was primarily due to a decrease in account handling expenses from RMB6.7 million in 2015 to RMB0.7 million in 2016, and salary expenses from RMB3.9 million in 2015 to RMB0.5 million in 2016, primarily attributable to the voluntary suspension of our online sports lottery sales services since April 2015.

 

Sales and marketing expenses . Sales and marketing expenses decreased by 48.4% from RMB87.0 million in 2015 to RMB44.9 million in 2016. The decrease mainly comprised of:

 

· a decrease in commissions to third-party Internet companies from RMB7.7 million in 2015 to nil in 2016, which was primarily due to the voluntary suspension of our online sports lottery sales services since April 2015;

 

· a decrease in promotional and marketing expenses from RMB18.3 million in 2015 to RMB8.8 million in 2016, which was primarily due to the voluntary suspension of our online sports lottery sales services since April 2015; and

 

· a decrease in advertising expenses from RMB26.2 million in 2015 to RMB0.3 million in 2016, which was primarily due to the voluntary suspension of our online sports lottery sales services since April 2015.

 

General and administrative expenses . General and administrative expenses increased by 6.7% from RMB232.2 million in 2015 to RMB247.7 million in 2016. The increase primarily consisted of:

 

· an increase in consulting expenses from RMB15.2 million in 2015 to RMB27.1 million in 2016, which was primarily due to the acquisition activities conducted in 2016;

 

· an increase in amortization and depreciation expenses from RMB9.8 million in 2015 to RMB16.9 million in 2016, which was primarily due to the amortization expenses relating to the online payment and other licenses and mobile applications obtained through the acquisition of Sumpay.cn and Shenzhen Qufan;

 

· an increase in rental expenses from RMB3.4 million in 2015 to RMB11.7 million (US$1.7 million) in 2016, which was primarily due to our newly rented offices located in Hong Kong and Shenzhen in 2016;

 

· an increase in salary expenses from RMB34.0 million in 2015 to RMB44.6 million in 2016, which was primarily due to the acquisition of new subsidiaries;

 

· a bad debt provision of RMB19.9 million, and RMB0.2 million in 2015 and 2016, respectively, after assessing the collectability of the account receivables and other receivables, and

 

· an impairment loss on equity investment of RMB5.0 million and RMB3.3 million in 2015 and 2016, respectively.

 

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Service development expenses . Service development expenses increased by 13.1% from RMB63.3 million in 2015 to RMB71.6 million in 2016. The increase was primarily due to an increase in share-based compensation expenses associated with the share options granted to our service development employees from RMB22.8 million in 2015 to RMB25.0 million in 2016; an increase in salary expenses from RMB31.3 million in 2015 to RMB35.3 million in 2016; and an increase in technical maintenance expenses by RMB2.0 million in 2016.

 

Other operating income

 

Other operating income decreased from RMB6.9 million in 2015 to RMB2.7 million in 2016. The decrease was primarily due to:

 

· a decrease in residual prize amounts to which we were entitled from pool purchase prizes from RMB1.9 million in 2015 to nil in 2016 primarily due to the voluntary suspension of our online sports lottery sales services since April 2015; and

 

· a decrease in exchange gain from RMB4.2 million in 2015 to RMB2.7 million in 2016.

 

Operating loss

 

As a result of the voluntary suspension of our online sports lottery sales services since April 2015, we recorded operating loss of RMB366.6 million in 2016, compared with operating loss of RMB301.4 million in 2015.

 

Gain from disposal of subsidiaries

 

Gain from disposal of subsidiaries was RMB136.9 million in 2016, compared with gain from disposal of subsidiaries of nil in 2015.

 

Loss before income tax

 

Loss before income tax was RMB206.2 million in 2016, compared with loss before income tax of RMB282.2 million in 2015.

 

Income tax expense

 

We recorded income tax expense of RMB3.1 million in 2016, as compared to income tax expense of RMB42.0 million in 2015. We reassessed the recoverability of the deferred tax assets that arose from accrued payroll and welfare payable, excessive advertising expenses, government grant, change in fair value of the derivative component of a short-term investment, and losses carryforward of the consolidated affiliated entities, based on the earnings forecast in the next 3 years, and we concluded that we could not generate adequate profit to fully utilize the deferred tax assets we recorded, thus, we recognized a valuation allowance of RMB40.1 million in 2015.

 

Net loss

 

As a result of the forgoing factors, we recorded net loss of RMB209.3 million in 2016, as compared to net loss of RMB324.2 million in 2015.

 

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Net loss attributable to 500.com Limited

 

We recorded net loss attributable to 500.com Limited of RMB203.0 million in 2016, as compared to net loss attributable to 500.com Limited of RMB323.9 million in 2015. We also recorded non-GAAP net loss attributable to 500.com Limited of RMB 39.6 million in 2016, as compared to non-GAAP net loss attributable to 500.com Limited of RMB125.1 million in 2015.

 

B. Liquidity and Capital Resources

 

Our principal sources of liquidity has been cash provided by our operating activities and proceeds from the issuances of preferred shares and ordinary shares. As of December 31, 2017, we had RMB529.1 million (US$81.3 million) in cash and cash equivalents and RMB120.0 million (US$18.4 million) in short-term investments.

 

As a holding company with no material operations of our own, we conduct our operations primarily through our wholly owned subsidiaries and our consolidated affiliated entities in China and Europe. Our PRC subsidiaries’ ability to make dividends or other cash payments to us are subject to various restrictions under PRC laws and regulations. See “Item 3D. Risk Factors—Risks Related to Our Corporate Structure—We may rely principally on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.” and “Item 3D. Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may affect the value of your investment.” Although we consolidate the results of our PRC consolidated affiliated entities, we do not have direct access to their cash and cash equivalents or future earnings. However, we can direct the use of their cash through agreements that provide us with effective control of these entities. Moreover, we are entitled to receive service fees from them in exchange for certain technology consulting and other services provided by us and the use of certain intellectual properties owned by us.

 

We believe that our current cash and the net proceeds we received from equity financing will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months from the date of this report, after taking into consideration that we have suspended all of our online sports lottery sales since April 4, 2015 and are currently not generating any revenue from sports lottery sales. Our newly acquired subsidiary, TMG, has been continuing to generate positive cash flow since our acquisition and can be self-sufficient without requiring additional capital from us. We recently disposed of Qufan and received significant amount of cash from that disposal. All these factors combined will have a positive impact on our cash flows for at least next 12 months. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities or debt securities or borrow from lending institutions. Financing may be unavailable in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

 

The following table sets forth a summary of our cash flows for the years indicated.

 

    Year ended December 31,  
    2015     2016     2017  
    RMB     RMB     RMB     US$  
    (in thousands)  
Net cash provided by (used in) operating activities     42,375       (114,341 )     (202,199 )     (31,078 )
Net cash (used in) provided by investing activities     (922,063 )     503,833       108,355       16,654  
Net cash provided by (used in) financing activities     748,461       (117,094 )     (9,234 )     (1,419 )
Effect of exchange rate changes on cash and cash equivalents     46,328       47       (40,900 )     (6,286 )
Cash and cash equivalents at the beginning of the year     485,556       400,657       673,102       103,454  
Cash and cash equivalents at the end of the year     400,657       673,102       529,124       81,325  

 

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Net cash provided by (used in) operating activities

 

Net cash used in operating activities in 2017 was RMB202.2 million (US$31.1 million), which was primarily attributable to (i) net loss of RMB316.1 million (US$48.6 million) adjusted by subtracting RMB91.1 million (US$14.0 million) of share-based compensation; (ii) depreciation and amortization expenses of RMB39.5 million (US$6.1 million); (iii) impairment loss on equity investment of RMB28.8 million (US$4.4 million); (iv) loss from equity method investments of RMB2.1 million (US$0.3 million); (v) provision for bad debt of RMB1.5 million (US$0.2 million), and (vi) an increase in accrued expenses and other current liabilities of RMB12.6 million (US$1.9 million). Net cash provided by operating activities in 2017 was partially offset by (i) an increase in prepayments and other current assets of RMB32.2 million (US$5.0 million); (ii) a decrease in long-term payables of RMB19.6 million (US$3.0 million); (iii) a gain from disposal of subsidiary of RMB5.5 million (US$0.8 million); (iv) accumulated deficit brought forward from acquired VIE of RMB2.3 million (US$0.4 million), and (v) a decrease in income tax payable of RMB2.1 million (US$0.3 million).

 

Net cash used in operating activities in 2016 was RMB114.3 million, which was primarily attributable to (i) net loss of RMB209.3 million adjusted by subtracting RMB163.3 million of share-based compensation; (ii) depreciation and amortization expenses of RMB19.7 million; (iii) impairment loss on equity investment of RMB3.4 million; (iv) an increase in accrued expenses and other current liabilities of RMB55.4 million; (v) an increase in income tax payable of RMB5.3 million, and (vi) a decrease in accounts receivable of RMB4.4 million. Net cash provided by operating activities in 2016 was partially offset by (i) gain from disposal of a subsidiary of RMB136.9 million; (ii) an increase in deposits of RMB4.8 million; and (iii) an increase in prepayments and other current assets of RMB4.3 million.

 

Net cash provided by operating activities in 2015 was RMB42.4 million, which was primarily attributable to (i) net loss of RMB324.2 million adjusted by subtracting RMB158.6 million of share-based compensation; (ii) deferred tax expense of RMB40.1 million; (iii) bad debt provision of RMB19.9 million; (iv) depreciation of property and equipment of RMB10.2 million; (v) impairment loss on equity investment of RMB5.0 million; (vi) a decrease of RMB137.7 million in prepayments and other current assets; (vii) a decrease of RMB51.1 million in accounts receivable; and (viii) a decrease of RMB8.9 million in deposits. Net cash provided by operating activities in 2015 was partially offset by (i) a decrease of RMB43.1 million in accrued expenses and other current liabilities; (ii) a decrease of RMB15.9 million in accrued payroll and welfare payable; and (iii) a decrease of RMB9.2 million in income tax payable.

 

Net cash provided by (used in) investing activities

 

Net cash provided by investing activities in 2017 was RMB108.4 million (US$16.7 million), which was primarily attributable to (i) cash received from the maturity of time deposits of RMB804.7 million (US$123.7 million); (ii) cash received from disposal of a subsidiary of RMB71.8 million (US$11.0 million), and (iii) cash received from disposal of property and equipment of RMB3.5 million (US$0.5 million); which was partially offset by (i) cash paid for business combination of RMB374.3 million (US$57.5 million); (ii) cash paid for acquisition of other non-current assets (primarily attributable to investment in Loto Interactive) of RMB302.3 million (US$46.5 million); (iii) cash paid for acquisition of property and equipment of RMB72.9 million (US$11.2 million); (iv) cash paid for short-term investments of RMB20.0 million (US$3.1 million), and (v) cash paid for acquisition of intangible asset of RMB2.1 million (US$0.3 million).

 

Net cash provided by investing activities in 2016 was RMB503.8 million, which was primarily attributable to (i) cash received from the maturity of time deposits of RMB1,386.9 million; (ii) cash received from the maturity of short-term investments of RMB100.0 million; and (iii) cash received from disposal of a subsidiary of RMB224.4 million; which was partially offset by (i) cash paid for time deposits of RMB938.9 million; (ii) cash paid for short-term investments of RMB213.5 million; (iii) cash paid for acquisition of other assets of RMB28.4 million; (iv) cash paid for contingent consideration for acquisition of Sumpay.cn of RMB6.3 million; and (v) cash paid for acquisition of property and equipment of RMB26.9 million.

 

Net cash used in investing activities in 2015 was RMB922.1 million, which was primarily attributable to (i) an increase in time deposits of RMB2,077.9 million; (ii) cash paid for business combination (net of cash) of RMB93.2 million; (iii) cash paid for acquisition of other assets of RMB58.5 million; (iv) cash paid for short-term investments of RMB44.4 million; (v) cash paid for acquisition of property and equipment of RMB10.2 million in connection with the purchase of information-related equipment; which was partially offset by (i) cash received from the maturity of time deposits of RMB1,290.7 million; and (ii) cash received from the maturity of short-term investments of RMB70.2 million.

 

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Net cash provided by (used in) financing activities

 

Net cash used in financing activities in 2017 was RMB9.2 million (US$1.4 million) which was primarily attributable to payment for repurchase of shares of RMB17.3 million (US$2.7 million); which was partially offset by proceeds from the exercise of share options of RMB5.6 million (US$0.9 million) and cash received from release of restricted cash of RMB2.5 million (US$0.4 million).

 

Net cash used in financing activities in 2016 was RMB117.1 million which was primarily attributable to payment for repurchase of shares of RMB131.0 million; which was partially offset by proceeds from the exercise of share options of RMB12.6 million.

 

Net cash provided by financing activities in 2015 was RMB748.5 million which was primarily attributable to (i) proceeds from the private placement of RMB739.1 million; (ii) proceeds from the exercise of share options of RMB18.1 million; partially offset by payment for repurchase of shares of RMB8.8 million.

 

Capital Expenditures

 

We made capital expenditures, including for property and equipment and intangible assets, of RMB11.1 million, RMB26.9 million and RMB66.1 million (US$10.2 million) in 2015, 2016 and 2017, respectively. In addition, our capital expenditures in 2015, 2016 and 2017 primarily consisted of purchases of additional information technology-related equipment and lease hold improvement of our new office in Shenzhen and Hong Kong. We expect that our capital expenditures will increase in the future as we make technological improvements to our transaction and service platform.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board, or the FASB, issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of the promised goods or services to customers in an amount that reflects the consideration to which entity expects to be entitled to in exchange for goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim period within that reporting period. Early adoption is not permitted. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers-Deferral of the effective date” (“ASU 2015-14”). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 issued in May 2014. According to ASU 2015-14, the new revenue guidance ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Group will apply the new revenue standard beginning January 1, 2018, and plan to adopt a modified retrospective approach upon adoption. The cumulative effect of initially applying the guidance that will be recognized at the date of initial application is not expected to be material and prior periods will not be retrospectively adjusted. The Group has substantially completed the assessment and implementation work and does not expect the adoption of this standard to have a material impact on the Group’s net revenue in the consolidated statement of comprehensive income (loss) or will have a minimal impact by the new standard. The accounting treatment for the awards granted to certain qualified end user will be impacted the most by the adoption of this ASU. Specifically, the recognition of revenue associated with the awards will be impacted by eliminating the current accrual for the cost of the bonus awarded at the time of play and instead deferring the portion of the revenue received from the customer at the time of play and attributed to the awarded points until a later period when the bonus are redeemed or forfeited. The revenue deferral will be calculated from the portion of the transaction price allocated to the bonus based upon their retail value. Under the former guidance, the cost of the bonus was recorded as an operating expense through the consolidated statements of comprehensive income (loss).

 

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In January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), Financial Instruments. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adopting this standard on its consolidated financial statements

 

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), “Leases”. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”), Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. The standard will replace “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. We are currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In November 2016, the FASB issued Accounting Standards Update No. 2016-18 (“ASU 2016-18”), Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for public business entities in the first quarter of 2018. Early adoption is permitted. We are currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04(“ASU 2017-04”), Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This standard is effective for public business entities in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.

 

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, to provide guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted and application is prospective. The Group has not early adopted this update and it will become effective on January 1, 2018. The Group does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

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In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). The guidance of Part I is to clarify accounting for certain financial instruments with down round feature in a financial instrument that reduces the strike price of an issued financial instrument if the issuer sells shares of its stock for an amount less than the currently stated strike price of the issued financial instrument or issues an equity-linked financial instrument with a strike price below the currently stated strike price of the issued financial instrument. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features. The amendments also re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The amendments in Part I of ASU No. 2017-11 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Group has not early adopted this update and it will become effective on July 1, 2020. The Group is currently evaluating the impact of our pending adoption of ASU 2017-11 on its consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The amendments eliminate the stranded tax effects resulting from the United States Tax Cuts and Jobs Act (the “Act”) and will improve the usefulness of information reported to financial statement users. ASU No. 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Group has not early adopted this update and it will become effective on July 1, 2019. The Group does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-05 - Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 ("SAB 118") that was released by the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate internationally. The Group has evaluated the impact of the Act as well as the guidance of SAB 118 and incorporated the changes into the determination of a reasonable estimate of the deferred tax and appropriate disclosures in the notes to our consolidated financial statements.

 

C. Research and Development

 

We do not make, and do not expect to make, significant expenditures on research and development activities in the future as a result of the suspension of our online sport lottery sales services.

 

Intellectual Property

 

We rely on a combination of trademark, copyright and trade secret protection laws in the PRC and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property rights and our brands. “500wan”, “500.com”, “fengkuangcaiqiu” and “youqiu” are trademarks registered in the PRC, USA, UK, Hong Kong and Macau, respectively, which are owned by E-Sun Network, E-Sun Sky Network and 500wan HK Limited. We have registered 44 trademarks relating to “500wan”, 45 trademarks relating to “500.com“ and 5 trademarks relating to “youqiu” with the Trademark Office of the State Administration for Industry and Commerce of the PRC, registered 5 trademarks relating to “500.com“ with United States Patent and Trademark Office, 5 trademarks relating to “500.com“ with United kingdom Intellectual Property Office, 5 trademarks relating to “500.com“ with Hong Kong Trade Marks Registry Intellectual Property Department, and 5 trademarks relating to “500wan” and 5 trademarks relating to “500.com” with Macau Economic Services. We have also registered domain names including “500wan.com,” “500wan.com.cn,” “500wan.cn,” “500wan.net.cn,” and “500.com.” We own 79 software copyright registrations in PRC through Guangtiandi Technology, E-Sun Sky Computer and E-Sun Sky Network as of the date of this annual report mostly for our client software.

 

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D. Trend Information

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year 2017 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

 

E. Off Balance Sheet Arrangements

 

We do not engage in trading activities involving non-exchange traded contracts or interest rate swap transactions or foreign currency forward contracts. In the ordinary course of our business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financials partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table sets forth our future minimum payments under non-cancelable operating leases of office rent with initial terms in excess of one year as of the indicated dates.

 

    As of December 31, 2017  
    (RMB)     (US$)  
    (in thousands)  
2018     30,217       4,644  
2019     28,154       4,327  
2020     24,630       3,786  
Total     83,001       12,757  

 

As of December 31, 2017, we did not have any long-term debt obligations or purchase obligations.

 

G. Safe Harbor

 

This annual report contains forward looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition, all of which are largely based on our current expectations and projections. The forward looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” or other and similar expressions. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward looking statements include, among other things, statements relating to:

 

· our goals and strategies;

 

· our future business development, financial condition and results of operations;

 

· the expected growth of the online lottery market in China;

 

· our expectations regarding demand for and market acceptance of our services;

 

· our expectations regarding the retention and strengthening of our relationships with provincial lottery administration centers;

 

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· our plans to enhance user experience, infrastructure and service offerings;

 

· competition in our industry in China; and

 

· relevant government policies and regulations relating to our industry.

 

The forward looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report completely and with the understanding that our actual future results may be materially different from what we expect.

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

Directors and Executive Officers

 

The following table sets forth information regarding our directors and executive officers as of the date of this annual report.

 

Directors and Executive Officers

Age

Position/Title

Yonghong Zhang   51   Chairman
Bo Yu   50   Director
Qian Sun   43   Independent Director
Honghui Deng   47   Independent Director
Yu Wei   47   Independent Director
Angel Yan Ki Wong   47   Independent Director
Zhengming Pan   39   Director and Chief Executive Officer
Qiang Yuan   45   Chief Financial Officer
Lei Zheng   37   Chief Operating Officer
Zhaofu Tian   42   Chief Technology Officer

 

Mr. Yonghong Zhang has served as a director and Chairman of the Board since November 2017. Mr. Zhang has been the Vice President of Tsinghua Unigroup since December 2015. In addition, Mr. Zhang was the President of China Region of Acer Group from November 2009 to October 2015, the Vice President of CHINA HP Co., Ltd. from October 1998 to November 2009 and Deputy General Manager of Lenovo Group Ltd, from April 1993 to June 1996. Mr. Zhang received a master's degree in engineering in precision machinery from the University of Science and Technology of China in 1993 and a bachelor of engineering degree in precision instrument from Tsinghua University in 1990.

 

Mr. Qian Sun has served as our director from October 21, 2013, and became our independent director from August 2016. Mr. Sun is a managing director of Sequoia Capital China, where he focuses on consumer and technology related investment. Prior to joining Sequoia Capital China in 2006, Mr. Sun worked at General Atlantic from 2003 to 2005, focusing on technology related growth investment in China. He also worked as a management consultant at Monitor Group in Hong Kong from 1997 to 1999. Mr. Sun received a BA degree in applied mathematics from Harvard College in 1997, an MBA from Harvard Business School and a J.D. from Harvard Law School in 2003.

 

Mr. Bo Yu has served as our director from January 20, 2017. Mr. Yu was the Company’s general counsel. Mr. Yu received a master’s degree in law from the University of Iowa, and a master’s degree in law and a bachelor’s degree in science from the University of Wuhan. Mr. Yu is admitted to the Bar of the State of Michigan.

 

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Mr. Honghui Deng has served as our independent director since May 2011. Mr. Deng is also an independent director at Pacific Special Acquisition Corp., a company listed on NASDAQ. Mr. Deng has served as a fellow at the Innovation Creativity Capital Institute (IC2) of the University of Texas at Austin since 2010. He has taught as an EMBA/MBA professor at Peking University Guanghua School of Management since 2005. He has also taught as an assistant professor and associate professor at the School of Business of University of Nevada, Las Vegas since 2003. Mr. Deng was the founder and served as the chief executive officer of HHD Consulting Service LLC from 2003 to 2008. Mr. Deng has extensive consulting experiences for business firms on long-term strategy, finance and management. Mr. Deng received a bachelor’s degree in electronic engineering and business administration from the School of Electronic Engineering of Chongqing University in 1990 and 1994, and a Ph.D. degree in business administration from University of Texas at Austin in 2003.

 

Mr. Yu Wei has served as our independent director from November 21, 2013. Mr. Wei is the founder and director of Artix International Group Co., Ltd. Mr. Wei has served as vice president of China Railway Modern Logistics Technology Co., Ltd. since 2007 and vice president of Guiyang Longyuan Real Estate Co., Ltd. since 2011. Mr. Wei has served as director in Guangxi Dirun Mining Industry Investment Co., Ltd. and Beijing Happy Forever Investment Management Co., Ltd. in 2011 and 2012, and has served as vice president of Guangzhou China Railway Taibo Real Estate Co., Ltd. since 2013. Mr. Wei graduated from Beijing Jiaotong University, Institute of Economics and Logistics in 1990, and received an EMBA degree from Cheung Kong Graduate School of Business in 2009.

 

Ms. Angel Yan Ki Wong has served as our independent director from November 22, 2015. Ms. Wong has been the President and Executive Director of Advanced Capital Limited since January 2008, a financial and management consulting group providing advice and services to companies seeking IPOs and merger and acquisitions. Prior to that, Ms. Wong was the Vice President and Executive Director at Benefit Capital Limited, and was also previously the Chief Financial Officer of Shengda Holdings. Ms. Wong is currently a Non-Executive Independent Director at China Public Procurement Limited (HK: 1094), and was previously a Non-Executive Independent Director at China Shengda Packaging Group, (NASDAQ: CPGI) and also a Non-Executive Independent Director at Hengxing Gold Holding Company Limited (HK: 2303). Ms. Wong was a founding member of the Hong Kong Independent Non-Executive Director Association, and received her Bachelor of Art in Economics from Xiamen University.

 

Mr. Zhengming Pan has served as our President since September 1, 2014, and our chief financial officer from April 2011 to August 2014. On May 15, 2015, Mr. Pan was appointed as our chief executive officer and a director. Prior to joining us, Mr. Pan served as a vice president at Deutsche Bank AG, Hong Kong Branch from 2007 to April 2011 and an attorney at Simpson Thacher & Bartlett LLP from 2003 to 2007. Mr. Pan received a Master of Law degree and a Juris Doctor degree from Columbia University Law School in 2001 and 2003, respectively, a Master of Law degree from the University of Edinburgh in 2000 and a bachelor’s degree in law from Fudan University in 1999.

 

Mr. Qiang Yuan has served as our chief financial officer since December 18, 2017. Prior to his appointment as chief financial officer, Mr. Yuan has served in various positions within the Company since 2001. Mr. Yuan was a vice president in charge of financial matters for the Company from June 2014 to July 2016 and has served as a senior vice president since July 2016. Mr. Yuan received a bachelor’s degree in Financial Management from Zhongnan University of Finance and Economics.

 

Mr. Lei Zheng has served as our chief operating officer since 2009. Mr. Zheng has 10 years of experience in the information technology industry. From 2007 to 2009, Mr. Zheng worked at Shenzhen Youshou Digital Co., Ltd. From 2004 to 2007, Mr. Zheng worked at Tencent Inc. From 2001 to 2004, Mr. Zheng worked at Huawei Technologies Co., Ltd. Mr. Zheng received a bachelor’s degree from Wuhan University in 2001.

 

Mr. Zhaofu Tian has served as our chief technology officer since October 2012. Mr. Tian has over 10 years of experience in the information technology industry. From 2007 to 2009, Mr. Tian served as a director in Tencent Engineering. From 2001 to 2007, Mr. Tian worked in UTStarcom Shenzhen R&D Center. From 1997 to 1999, Mr. Tian worked in SONY Precise Devices (Huizhou) Co. Ltd. Mr. Tian received a bachelor’s degree from Harbin Institute of Technology in 1997, a master degree from Harbin Institute of Technology in 2001, and a Master of Business Administration degree from Hong Kong University of Science and Technology in 2011.

 

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B. Compensation

 

Compensation of Directors and Executive Officers

 

In 2017, the aggregate cash compensation to all our directors and our executive officers was RMB5.3 million (US$0.8 million). For share-based compensation, see “Item 6B. Compensation—Share Incentive Plans.” We do not have any amount accrued in 2017 for pension, retirement or other similar benefits to our directors and our executive officers.

 

Share Incentive Plans

 

We have adopted our 2011 share incentive plan to attract and retain the best available personnel, provide additional incentives to our employees, directors and consultants, and promote the success of our business. The 2011 share incentive plan provides for the grant of options, restricted shares and other share-based awards, collectively referred to as “awards.” The board has authorized under the plan the issuance of up to 12% of our issued and outstanding ordinary shares from time to time, on an as-exercised and fully diluted basis, upon exercise of awards granted under our 2011 share incentive plan.

 

The following table summarizes the share options and restricted shares granted to our employees under the 2011 share incentive plan that was outstanding as of the date of this annual report, respectively.

 

Name   Number of
Ordinary Shares
Underlying
Options 		    Exercise Price (1)
(US$/Share) 		    Vesting
Commencement
Date 		  Date of Grant     Date of Expiration  
Man San Law #     660,000       0.2     April 08, 2012     April 08, 2011       April 08, 2021  
      1,400,000       0.4     October 22, 2014     October 22, 2013       October 22, 2023  
      2,980,000       1     June 19, 2015     June 19, 2014       June 19, 2019  
      100,000       1.851     November 21, 2016     January 06, 2016       November 22, 2018  
Qi Li     66,670       1     November 22, 2014     June 19, 2014       November 22, 2018  
Zhengming Pan     2,483,330       1     June 19, 2015     June 19, 2014       June 19, 2019  
      100,000       1.851     November 21, 2016     January 06, 2016       November 22, 2018  
      100,000       1.35     November 21, 2017     December 16, 2016       November 22, 2019  
Lei Zheng     *       0.2     April 08, 2012     April 08, 2011       April 08, 2021  
              1     June 19, 2015     June 19, 2014       June 19, 2019  
Zhaofu Tian     *       0.4     October 22, 2014     October 22, 2013       October 22, 2023  
              1     June 19, 2015     June 19, 2014       June 19, 2019  
Qiang Yuan     *       1     June 19, 2015     June 19, 2014       June 19, 2019  
Weiguo Zhao #     *       2.545     June 29, 2016     June 29, 2015       June 29, 2020  
Honghui Deng     *       1     November 22, 2014     June 19, 2014       November 22, 2018  
              1.851     November 21, 2016     January 06, 2016       November 22, 2018  
              1.35     November 21, 2017     December 16, 2016       November 22, 2019  
Yu Wei     *       1     November 22, 2014     June 19, 2014       November 22, 2018  
              1.851     November 21, 2016     January 06, 2016       November 22, 2018  
              1.35     November 21, 2017     December 16, 2016       November 22, 2019  
Qian Sun     *       1     November 22, 2014     June 19, 2014       November 22, 2018  
              1.851     November 21, 2016     January 06, 2016       November 22, 2018  
              1.35     November 21, 2017     December 16, 2016       November 22, 2019  
Angel Yan Ki Wong     *       1.851     November 21, 2016     January 06, 2016       November 22, 2018  
              1.35     November 21, 2017     December 16, 2016       November 22, 2019  
Bo Yu     *       1     June 19, 2016     June 19, 2014       June 19, 2020  
              1.35     November 21, 2017     December 16, 2016       November 22, 2019  
Directors and officers as a group     2,090,000       0.2                      
      1,400,000       0.4                      
      10,103,350       1                      
      200,000       2.545                      
      600,000       1.851                      
      600,000       1.35                      
Other Individuals as a group     895,000       0.2                      
      41,350       0.4                      
      17,262,890       1                      
      5,900,000       1.743                      

 

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* Options to purchase less than 1% of our issued and outstanding share capital from time to time on an as-exercised and fully diluted basis as of the date of this annual report.
# Mr. Law and Mr. Zhao have stepped down from our board of directors on January 20, 2017.
(1) The exercise price of the options granted on April 8, 2011 was set by our board of directors at US$0.40 per share on the date of grant, and was adjusted to US$0.20 per share by our board of directors on June 8, 2012 as it believed the voluntary suspension would materially and adversely affect our revenues for 2012 and the fair value of our ordinary shares. The exercise price of options granted on June 19, 2014 was set by our board of directors at US$3.23 per share, which was equivalent to the market price of our publicly traded shares on the previous day, and was adjusted to US$1.00 per share by our board of directors on March 19, 2015 as it believed the suspension by provincial sport lottery administration centers to accept online lottery purchase orders would materially and adversely affect our revenues for 2015 and the fair value of our ordinary shares. The last vest date of the remaining unexercised shares of options granted on June 19, 2014 was extended by our board of directors from June 19, 2017 to June 19, 2018. All the other terms of the options remain unchanged.

 

Name   Number of Ordinary
Shares Underlying
Options 		    Vesting Commencement
 Date 		  Date of Grant     Date of Expiration  
Zhengming Pan     900,000     March 1, 2018     August 15, 2017       August 15, 2027  
      50,000     November 22, 2018     November 22, 2017       November 22, 2027  
Lei Zheng     *     March 1, 2018     August 15, 2017       August 15, 2027  
Zhaofu Tian     *     March 1, 2018     August 15, 2017       August 15, 2027  
Qiang Yuan     *     March 1, 2018     August 15, 2017       August 15, 2027  
Honghui Deng     *     November 22, 2018     November 22, 2017       November 22, 2027  
Yu Wei     *     November 22, 2018     November 22, 2017       November 22, 2027  
Qian Sun     *     November 22, 2018     November 22, 2017       November 22, 2027  
Angel Yan Ki Wong     *     November 22, 2018     November 22, 2017       November 22, 2027  
Bo Yu     *     March 1, 2018     August 15, 2017       August 15, 2027  
      *     November 22, 2018     November 22, 2017       November 22, 2027  
Yonghong Zhang     *     November 22, 2018     November 22, 2017       November 22, 2027  
Directors and officers as a group     2,000,000                      
Other Individuals as a group     10,580,280                      

 

The following paragraphs describe the principal terms of our Share Incentive Plan.

 

Plan Administration . Our compensation committee administers the 2011 share incentive plan. The committee or the full board of directors, as appropriate, will determine the participants to receive awards, the type and number of awards to be granted, and the terms and conditions of each award grant.

 

Option Agreements . Awards granted under our 2011 share incentive plan are evidenced by an option agreement that sets forth the terms, conditions and limitations for each grant, which may include the term of the award, the provisions applicable in the event that the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.

 

Transfer Restrictions . The right of a grantee in an award granted under our 2011 share incentive plan may not be transferred in any manner by the grantee other than by will or the laws of succession and, with limited exceptions, may be exercised during the lifetime of the grantee only by the grantee.

 

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Option Exercise . The term of options granted under the 2011 share incentive plan may not exceed 10 years from the date of grant. The consideration to be paid for our ordinary shares upon exercise of an option or purchase of ordinary shares underlying the option may include cash, check or other cash-equivalent, ordinary shares, consideration received by us in a cashless exercise, or any combination of the foregoing methods of payment.

 

Acceleration upon a Change of Control . If a change of control of our company occurs, (i) the compensation committee may determine that any outstanding unexercisable, unvested or lapsable awards shall automatically be deemed exercisable, vested and not subject to lapse immediately prior to the event triggering the change of control and (ii) the compensation committee may cancel such awards for fair value, provide for the issuance of substitute awards or provide that for a period of at least 15 days prior to the event triggering the change of control, such options shall be exercisable and that upon the occurrence of the change of control, such options shall terminate and be of no further force and effect.

 

Termination and Amendment . Unless terminated earlier, our share incentive plan will expire after 10 years. Our board of directors has the authority to amend or terminate our share incentive plan, subject to shareholder approval, to the extent necessary to comply with applicable laws. Shareholders’ approval is required for any amendment to the 2011 share incentive plan that (i) increases the number of ordinary shares available under the 2011 share incentive plan, or (ii) changes the maximum number of shares for which awards may be granted to any participant, or (iii) diminishes any of the rights of the participant under any award previously granted to such participant under the plan without such participant’s consent.

 

C. Board Practices

 

Committees of the Board of Directors

 

Board of Directors

 

We currently have seven directors, including four independent directors, on our board of directors. Our board of directors consists of an audit committee, a compensation committee, a nominating and corporate governance committee and a strategy committee. Each committee’s members and functions are described below.

 

Audit Committee

 

Our audit committee consists of Angel Yan Ki Wong, Honghui Deng and Yu Wei. Angel Yan Ki Wong is the chairman of our audit committee. Angel Yan Ki Wong satisfies the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. All three committee members satisfy the requirements for an “independent director” within the meaning of NYSE rules and will meet the criteria for independence set forth in Rule 10A-3 of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

The audit committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our audit committee is responsible for, among other things:

 

· selecting the independent auditor;

 

· pre-approving auditing and non-auditing services permitted to be performed by the independent auditor;

 

· annually reviewing the independent auditor’s report describing the auditing firm’s internal quality control procedures, any material issues raised by the most recent internal quality control review, or peer review, of the independent auditors and all relationships between the independent auditor and our company;

 

· setting clear hiring policies for employees and former employees of the independent auditors;

 

· reviewing with the independent auditor any audit problems or difficulties and management’s response;

 

· reviewing and approving all related party transactions on an ongoing basis;

 

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· reviewing and discussing the annual audited financial statements with management and the independent auditor;

 

· reviewing and discussing with management and the independent auditors major issues regarding accounting principles and financial statement presentations;

 

· reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and judgments;

 

· discussing earnings press releases with management, as well as financial information and earnings guidance provided to analysts and rating agencies;

 

· reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on our financial statements;

 

· discussing policies with respect to risk assessment and risk management with management, internal auditors and the independent auditor;

 

· timely reviewing reports from the independent auditor regarding all critical accounting policies and practices to be used by our company, all alternative treatments of financial information within U.S. GAAP that have been discussed with management and all other material written communications between the independent auditor and management;

 

· establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;

 

· annually reviewing and reassessing the adequacy of our audit committee charter;

 

· such other matters that are specifically delegated to our audit committee by our board of directors from time to time;

 

· meeting separately, periodically, with management, internal auditors and the independent auditor; and

 

· reporting regularly to the full board of directors.

 

Compensation Committee

 

Our compensation committee consists of Bo Yu, Yonghong Zhang, and Honghui Deng. Bo Yu is the chairman of our compensation committee. Honghui Deng satisfies the requirements for an “independent director” within the meaning of NYSE rules.

 

Our compensation committee is responsible for, among other things:

 

· reviewing and evaluating and, if necessary, revising our compensation policy;

 

· reviewing and evaluating the performance of our executive officers and determining the compensation of our executive officers;

 

· reviewing and approving our executive officers’ employment agreements and severance arrangements, if any;

 

· reviewing and evaluating the performance of our directors and recommending to our board the compensation for our directors;

 

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· reviewing all annual bonus, long-term incentive compensation, share option, employee pension and welfare benefit plans, setting performance targets of the executive officers under all annual bonus and long-term incentive compensation plans as appropriate, certifying that any and all performance targets of the executive officers have been met, and granting any awards under any performance-based annual bonus, long-term incentive compensation and equity compensation plans to the executive officers;

 

· periodically reviewing our policies concerning perquisite benefits, change of control or “parachute” payments, if any;

 

· reviewing and approving our executive officer and director indemnification and insurance matters; and

 

· such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.

 

Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee consists of Bo Yu, Yu Wei and Zhengming Pan. Bo Yu is the chairman of our nominating and corporate governance committee. Our nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and executive officers and in determining the composition of the board and its committees. The nominating and corporate governance committee will be responsible for, among other things:

 

· identifying qualified candidates as consistent with the criteria approved by our board of directors for director nominees and recommending such candidates to the board for selection for all directorships to be filled by the board or by the shareholders;

 

· identifying qualified candidates as consistent with the criteria approved by our board of directors for executive officer nominees and recommending such candidates to our board of directors for selection;

 

· conducting annual reviews of our board of directors’ independence, qualifications and experiences in light of the availability of potential board members; and

 

· monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our internal rules and procedures to ensure compliance with applicable laws and regulations.

 

Strategy Committee

 

Our strategic planning committee consists of Yonghong Zhang, Qian Sun and Zhengming Pan. Yonghong Zhang is the chairman of our strategic planning committee. Our strategic planning committee assists the board of directors in designing the strategic plan of our business. Our strategic planning committee is responsible for, among other things:

 

· reviewing and providing guidance to our management and the board of directors with respect to our strategy for strategic transactions;

 

· reporting to our board of directors any strategic transactions being considered, or authorized and approved, by our management;

 

· notifying our nominating and corporate governance committee of any conflict of interest or related party transaction that comes to its attention; and

 

· exercising such additional powers and duties as may be reasonable, necessary or desirable, in the committee’s discretion, to fulfill its duties.

 

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Terms of Directors and Executive Officers

 

We have 7 directors, 4 of whom are independent directors, on our board of directors. Any director on our board may be appointed or removed by way of an ordinary resolution of shareholders. Any vacancies on our board of directors or additions to the existing board of directors can be filled by the affirmative vote of a majority of the remaining directors, provided that any candidate for the vacancy or addition must be nominated by our nominating and corporate governance committee. Each of our directors holds office until he or she is removed by an ordinary resolution of shareholders or by a resolution of the board.

 

All of our executive officers are appointed by and serve at the discretion of our board of directors. Our executive officers are elected by and may be removed by a majority vote of our board of directors, provided that any candidate for an executive officer position must be nominated by our nominating and corporate governance committee.

 

Employment Agreements

 

We have entered into employment agreements with each of our executive officers. We may terminate an executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts of the officer, including, but not limited to, a conviction or plea of guilty to a felony, willful misconduct to our detriment or a failure to perform agreed duties. We may also terminate an executive officer’s employment under certain conditions, including, but not limited to, incapacity or disability of the officer, by a one-month prior written notice or upon paying compensation of one-month salary to the officer. An executive officer may terminate his or her employment with us with or without cause, or by a one-month prior written notice. The benefits provided upon termination of employment is T+1 months’ salary of the employee (T represents years of working experience in the Company).

 

D. Employees

 

Employees

 

Our ability to maintain a trained management team and other employees is critical to the success of our business. We had a total of 337, 366 and 408 employees as of December 31, 2015, 2016 and 2017, respectively. The table below sets forth the number of employees categorized by function as of December 31, 2017.

 

Function   Number of employees  
Management and Administration     12  
Sales, Marketing and Website Operation     74  
Service and User Support     20  
Technology and Product Development     190  
Administrative Support     112  
Total     408  

 

The remuneration package of our employees includes salary, bonus, stock options and other cash benefits. In accordance with applicable regulations in China, we participate in a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a personal injury insurance plan, a maternity insurance plan and a housing reserve fund for the benefit of all of our employees.

 

We have not experienced any material labor disputes or disputes with the labor department of the PRC government since our inception.

 

E. Share Ownership

 

The following table sets forth information as of the date of this annual report with respect to the beneficial ownership of our ordinary shares, by:

 

· each person known to us to own beneficially more than 5.0% of our ordinary shares; and

 

· each of our directors and executive officers.

 

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Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. Percentage of beneficial ownership for each of the persons listed below is determined by dividing (i) the number of ordinary shares beneficially owned by such person, including ordinary shares such person has the right to acquire within 60 days after the date of this annual report by (ii) the total number of ordinary shares outstanding plus the number of ordinary shares such person has the right to acquire within 60 days after the date of this annual report. The total number of ordinary shares outstanding as of the date of this annual report is 340,616,102 Class A ordinary shares and 74,400,299 Class B ordinary shares.

 

    Shares
Beneficially
Owned 		          Percentage of
Votes Held 		 
    Number     Percent     Percent  
Directors and Executive Officers:                        
Man San Law (1)#     59,413,854       14.14 %     43.44 %
Qi Li (2)     20,639,538       4.97 %     1.90 %
Zhengming Pan (3)     5,383,330       1.29 %     0.50 %
Lei Zheng     *       *       *  
Zhaofu Tian     *       *       *  
Qiang Yuan     *       *       *  
Honghui Deng     *       *       *  
Yu Wei     *       *       *  
Weiguo Zhao #     *       *       *  
Qian Sun     *       *       *  
Angel Yan Ki Wong     *       *       *  
Bo Yu     *       *       *  
Yonghong Zhang     —       —       —  
Principal Shareholders:                        
Delite Limited (4)     29,008,836       6.99 %     24.25 %
Brothers Union International Limited (5)     20,572,868       4.96 %     1.90 %
Smart Mega Holdings Limited (6)     25,265,018       6.09 %     18.93 %
Sequoia Capital 2010 CGF Holdco, Ltd. (7)     35,042,735       8.45 %     3.23 %
Tsinghua Unigroup International Co., Ltd. (8)     122,161,010       29.44 %     11.26 %

 

 

The business address of our directors and executive officers is 500.com Building, Shenxianling Sports Center, Longgang District, Shenzhen, 518057, People’s Republic of China.

* Less than 1% of our outstanding ordinary shares.
# Mr. Law and Mr. Zhao have stepped down from our board of directors on January 20, 2017.
(1) represents (i) 26,000,006 Class B ordinary shares owned by Delite Limited, a BVI company with the address of P.O. Box 3321, Road Town, Tortola, British Virgin Islands, which shares are held in irrevocable discretionary family trusts established by Mr. Law, (ii) 5,140,000 Class A ordinary shares issuable upon the exercise of options and RSUs within 60 days of the date of this annual report granted to Mr. Law under our 2011 Share Incentive Plan, (iii) 20,000,008 Class B ordinary shares owned by Smart Mega Holdings Limited, a BVI company with the address of P.O. Box 957, Offshore, which shares are held in irrevocable discretionary family trusts established by Ms. Ping Yuan, wife of Mr. Law. Mr. Law, by virtue of the relationship described above, may be deemed to beneficially own such 20,000,008 Class B ordinary shares, (iv) 300,883 ADSs which represents 3,008,830 Class A ordinary shares owned by Delite Limited, and (v) 526,501 ADSs which represents 5,265,010 Class A ordinary shares owned by Smart Mega Holdings Limited.
(2) represents (i) 8 Class B ordinary shares owned by Brothers Union International Limited, a BVI company wholly and beneficially owned by Mr. Li, (ii) 66,670 Class A ordinary shares issuable upon the exercise of options and RSUs within 60 days of the date of this annual report granted to Mr. Li under our 2011 Share Incentive Plan, and (iii) 2,057,286 ADSs which represents 20,572,860 Class A ordinary shares owned by Brothers Union International Limited.
(3) represents (i) 240,000 ADSs which represents 2,400,000 Class A ordinary shares owned by Ace Chance Global Limited, a BVI company wholly and beneficially owned by Mr. Pan, with the address of P.O. Box 957, Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. Mr. Pan, by virtue of his sole ownership of Ace Chance Global Limited, may be deemed to beneficially own such 2,400,000 Class B ordinary shares, and (ii) 2,983,330 Class A ordinary shares issuable upon the exercise of options and RSUs within 60 days of the date of this annual report granted to Mr. Pan under our 2011 Share Incentive Plan and 2014 Share Incentive Plan.

 

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(4) represents (i) 26,000,006 Class B ordinary shares, and (ii) 300,883 ADSs which represents 3,008,830 Class A ordinary shares owned by Delite Limited, a BVI company with the address of P.O. Box 3321, Road Town, Tortola, British Virgin Islands. Delite Limited is wholly owned by Jackpot International Ltd, a Cayman Islands company which is wholly owned by The Jackpot Trust, a revocable discretionary trust established by Mr. Law with Mr. Law as settlor and Mr. Law and his family members as beneficiaries, which include Ms. Ping Yuan, wife of Mr. Law, Ms. Yuhan Law, daughter of Mr. Law, Mr. Lin Law, father of Mr. Law, and Ms. Ruihua Hu, mother of Mr. Law. The 29,008,836 Class B ordinary shares are held by Credit Suisse Trust Limited as trustee of The Jackpot Trust.
(5) represents (i) 8 Class B ordinary shares, and (ii) 2,057,286 ADSs which represents 20,572,860 Class A ordinary shares owned by Brothers Union International Limited, a BVI company wholly and beneficially owned by our director, Qi Li. The address of Brothers Union International Limited is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
(6) represents (1) 20,000,008 Class B ordinary shares and (ii) 526,501 ADSs which represents 5,265,010 Class A ordinary shares owned by Smart Mega Holdings Limited, a BVI company with the address of P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. Smart Mega Holdings Limited is wholly owned by Vibrant Jade Ltd., a Cayman Islands company which is wholly owned by The Vibrant Jade Trust, a revocable discretionary trust established by Ms. Ping Yuan, wife of Mr. Law, with Ms. Yuan as settlor and Mr. Law and Ms. Yuhan Law, daughter of Ms. Ping Yuan, as beneficiaries. The 25,265,018 Class B ordinary shares are held by Credit Suisse Trust Limited as trustee of The Vibrant Jade Trust.
(7) represents (i) 5 Class B ordinary shares, and (ii) 3,504,273 Restricted ADSs which represents 35,042,730 Class A ordinary shares, owned by Sequoia Capital 2010 CGF Holdco, Ltd. Sequoia Capital 2010 CGF Holdco, Ltd. is wholly owned by Sequoia Capital China Growth 2010 Fund, L.P., Sequoia Capital China Growth 2010 Partners Fund, L.P. and Sequoia Capital China Growth 2010 Principals Fund, L.P. (collectively “SCC 2010 Growth Funds”). The SCC 2010 Growth Funds’ general partner is SC China Growth 2010 Management, L.P. The general partner of SC China Growth 2010 Management, L.P. is SC China Holding Limited, a company incorporated in the Cayman Islands. SC China Holding Limited is wholly owned by SNP China Enterprises Limited, a company wholly owned by Mr. Neil Nanpeng Shen. Mr. Neil Nanpeng Shen has the power to direct Sequoia Capital 2010 CGF Holdco, Ltd. as to the voting and disposition of shares directly or indirectly held by Sequoia Capital 2010 CGF Holdco, Ltd., Mr. Shen disclaims beneficial ownership of the shares held by Sequoia Capital 2010 CGF Holdco, Ltd., except to the extent of his pecuniary interest therein. The registered address of Sequoia Capital 2010 CGF Holdco, Ltd. is Cricket Square, Hutchins Drive, PO box 2681, Grand Cayman, KY1-1111, Cayman Islands.
(8) represents (i) 63,500,500 Class A ordinary shares, and (ii) 5,866,051 ADSs which represents 58,660,510 Class A ordinary shares, owned by Tsinghua Unigroup International Co., Ltd. The address of Tsinghua Unigroup International Co., Ltd. is Floor 6, Unis Plaza, Tsinghua Science Park, Haidian District, Beijing, China.

 

As of the date of this annual report, we are not aware of any of our shareholders being affiliated with a registered broker-dealer or being in the business of underwriting securities.

 

Please refer to “Item 6.B. Directors, Senior Management and Employees — Compensation of Directors and Executive Officers — Share Incentive Plans” for information regarding options, restricted shares and other share-based awards granted to our employees, directors and consultants.

 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders

 

Please refer to “Item 6E. Share Ownership.”

 

B. Related Party Transactions

 

Non-Interest Bearing Borrowings from Related Parties

 

Historically, we extended loans to certain directors and entities controlled by certain directors, executive officers and a principal shareholder of our company. As of December 31, 2015, 2016 and 2017, the total outstanding balance due from these related parties were nil.

 

Reorganization and Private Placement

 

See “Item 4. Information on the Company—History and Development of the Company” and “Item 4. Information on the Company—Organizational Structure”.

 

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Share Incentives

 

For a discussion of the share option plan we adopted in 2011, see “Item 6. Directors, Senior Management and Employees—Compensation of Directors and Executive Officers—Share Incentive Plans”.

 

C. Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

A. Consolidated Statements and Other Financial Information

 

We have appended consolidated financial statements filed as part of this annual report.

 

Legal and Administrative Proceedings

 

On September 12, 2016, we entered into a settlement agreement with certain plaintiffs who brought a stockholder class action lawsuit in the U.S. District Court for the Central District of California, shareholders’ litigation in February 2015. In 2016, we paid US$1.5 million for the settlement, and the remaining US$1.0 million was covered by the insurance company.

 

Dividend Policy

 

We currently intend to permanently reinvest all available funds and any future earnings to fund growth and expansion of our business and, therefore, we do not expect to pay any cash dividends on our ordinary shares, including those represented by ADSs, in the foreseeable future. We currently have no specific intention to issue share dividends in the future.

 

Any future determination to pay dividends will be made at the discretion of our board of directors and may be based on a number of factors, including our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares” in our F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we will rely on dividends distributed by our PRC subsidiary. Certain payments from our PRC subsidiary to us are subject to PRC taxes, such as withholding income tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Our PRC subsidiary is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory reserve fund until the aggregate amount of such reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory reserve fund is not distributable as loans, advances or cash dividends. The reserve fund can only be used for specific purposes and are not transferable to the company’s parent in the form of loans, advances or dividends. See “Item 3D. Risk Factors—We may rely principally on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business.”

 

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B. Significant Changes

 

We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

 

ITEM 9. THE OFFER AND LISTING

 

A. Offering and Listing Details

 

Our ADSs, each representing ten of our Class A ordinary shares, have been listed on the New York Stock Exchange since November 22, 2013 under the symbol “WBAI”. The table below shows, for the periods indicated, the high and low market prices for our ADSs. The closing price for our ADSs on the New York Stock Exchange on April 26, 2018 was US$17.77 per ADS.

 

    Market Price Per ADS (US$)  
    High     Low  
Annual Highs and Lows                
2013 (since November 22, 2013)     39.42       18.14  
2014     54.00       16.59  
2015     30.67       7.31  
2016     19.98       10.92  
2017     15.48       8.12  
Quarterly Highs and Lows                
First Quarter 2015     20.29       7.31  
Second Quarter 2015     30.67       10.32  
Third Quarter 2015     26.82       10.88  
Fourth Quarter 2015     22.37       15.73  
First Quarter 2016     19.58       13.77  
Second Quarter 2016     19.38       15.41  
Third Quarter 2016     19.27       16.42  
Fourth Quarter 2016     19.98       10.92  
First Quarter 2017     15.48       12.30  
Second Quarter 2017     14.90       8.12  
Third Quarter 2017     12.32       9.61  
Fourth Quarter 2017     12.15       9.05  
Monthly Highs and Lows                
October 2017     12.15       9.32  
November 2017     11.00       9.50  
December 2017     10.60       9.05  
January 2018     12.86       10.29  
February 2018     19.06       10.52  
March 2018     23.22       16.08  
April 2018 (through April 26, 2018)     18.38       16.30  

 

As of the date of this annual report, a total of 34,061,610 ADSs representing 340,616,102 Class A ordinary shares were outstanding. Such ordinary shares were registered in the name of a nominee of Deutsche Bank Trust Company Americas, the depositary for the ADSs. We have no further information as to ordinary shares or ADSs held, or beneficially owned, by U.S. persons.

 

B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

Our ADSs, each representing ten of our Class A ordinary shares, have been listed on the New York Stock Exchange since November 22, 2013 under the symbol “WBAI”.

 

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D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

A. Share Capital

 

Not applicable.

 

B. Memorandum and Articles of Association

 

We incorporate by reference into this annual report the description of our second amended and restated memorandum of association contained in our F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013. Our shareholders adopted our second amended and restated memorandum and articles of association by unanimous resolutions upon the completion of our initial public offering on November 22, 2013.

 

C. Material Contracts

 

In connection with our acquisition of a 93% equity interest in TMG in 2017, we entered into a shareholders’ agreement with Helmet Limited, or Helmet, which owns the remaining 7% equity interest (post-acquisition). Pursuant to this shareholders’ agreement, if Thomas Biro resigns from his employment with TMG, or his employment is terminated for whatever reason, Helmet has the right to request that we, on one occasion, purchase all or some of the TMG shares then held by Helmet. This right is exercisable within one year from the aforementioned resignation. However, such right is not exercisable if Mr. Biro resigns before December 31, 2018. When the notice to exercise such right is delivered, we and Helmet shall, within 30 business days, establish a fair market value as the purchase price for the TMG shares subject to sale. If both parties fail to reach an agreement during such period, the fair market value of those TMG shares will be decided by an independent valuation expert appointed by both parties. If the parties are not able to decide on an independent valuation expert, such expert shall be appointed in accordance with the dispute resolution provisions under the shareholders’ agreement.

 

We have not entered into any other material contracts, other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report.

 

D. Exchange Controls

 

See “Item 4. B. Business Overview—Regulation of Our Industry.”

 

E. Taxation

 

Cayman Islands Taxation

 

The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation, and there is no taxation in the nature of inheritance tax or estate duty. No Cayman Islands stamp duty will be payable unless an instrument is executed in, brought to, or produced before a court of the Cayman Islands. The Cayman Islands are not parties to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.

 

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People’s Republic of China Taxation

 

The PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations for the EIT Law issued by the PRC State Council, became effective as of January 1, 2008. The EIT law and its implementation regulations impose a single uniform income tax rate of 25% on all Chinese enterprises, including foreign-invested enterprises, and levies a withholding tax rate of 10% on dividends payable by Chinese subsidiaries to their non-PRC enterprise shareholders except with respect to any such non-PRC enterprise shareholder whose jurisdiction of incorporation has a tax treaty with China that provides for a different withholding agreement. The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State Council, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury and assets of an enterprise. On April 22, 2009, the State Administration of Taxation promulgated a circular which sets out criteria for determining whether “de facto management bodies” are located in China for overseas incorporated, domestically controlled enterprises. However, as this circular only applies to enterprises incorporated under the laws of foreign countries or regions that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “de facto management bodies” for overseas incorporated enterprises that are controlled by individual PRC residents like us and some of our subsidiaries. Therefore, although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require us to be treated as a PRC tax resident enterprise. We do not currently consider our company to be a PRC tax resident enterprise. However, if the Chinese tax authorities disagree with our assessment and determine that we are a PRC tax resident enterprise, we may be subject to a 25% enterprise income tax on our global income.

 

Under the EIT Law and implementation regulations issued by the State Council, a 10% PRC income tax is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Furthermore, a circular issued by the Ministry of Finance and the State Administration of Taxation on February 22, 2008 stipulates that accumulated undistributed earnings of foreign invested enterprises generated prior to January 1, 2008, if distributed to their foreign investors after 2008, are exempt from enterprise income tax. We are a holding company incorporated in the Cayman Islands, which indirectly holds, through Fine Brand Limited and 500wan HK Limited, our equity interests in our PRC subsidiary. Our business operations are principally conducted through our PRC subsidiary and our consolidated affiliated entities. Thus, dividends for earnings accumulated beginning on January 1, 2008 payable to us by our PRC subsidiary, if any, will be subject to the 10% income tax if we are considered a “non-resident enterprise” under the EIT Law. Under the EIT law, Notice of the State Administration of Taxation on Issuing the Table of Agreed Tax Rates on Dividends, or Notice 112, which was issued on January 29, 2008 and Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income, or the PRC-HK DTA, which became effective on December 8, 2006, dividends from our PRC subsidiary paid to us through our Hong Kong subsidiary may be subject to a 10% withholding tax or a 5% withholding tax if our Hong Kong subsidiary can be considered as a “beneficial owner” and entitled to treaty benefits under the PRC-HK DTA. Under the existing implementation rules of the EIT Law, it is unclear whether the PRC tax authority would treat us as a PRC tax resident enterprise. Accordingly, dividends paid by us to our non-PRC tax resident enterprise ADS holders and ordinary shareholders may be deemed to be derived from sources within the PRC and, therefore, be subject to the 10% PRC enterprise income tax.

 

Similarly, gains realized on the transfer of our ADSs or ordinary shares by our non-PRC tax resident enterprise ADS holders and ordinary shareholders may also be subject to the 10% PRC enterprise income tax if we are considered a PRC tax resident enterprise and such gain is regarded as income derived from sources within the PRC.

 

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United States Federal Income Taxation

 

The following discussion describes the material United States federal income tax consequences of the ownership of our ADSs and ordinary shares as of the date hereof. The discussion is applicable only to United States Holders (as defined below) who hold ADSs or ordinary shares as capital assets. As used herein, the term “United States Holder” means a beneficial owner of an ADS or ordinary share that is for United States federal income tax purposes:

 

· an individual citizen or resident of the United States;

 

· a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

· an estate the income of which is subject to United States federal income taxation regardless of its source; or

 

· a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.

 

This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:

 

· a dealer in securities or currencies;

 

· a financial institution;

 

· a regulated investment company;

 

· a real estate investment trust;

 

· an insurance company;

 

· a tax-exempt organization;

 

· a person holding our ADSs or ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;

 

· a trader in securities that has elected the mark-to-market method of accounting for your securities;

 

· a person liable for alternative minimum tax;

 

· a person who owns or is deemed to own 10% or more of our stock (by vote or value);

 

· a partnership or other pass-through entity for United States federal income tax purposes;

 

· a person required to accelerate the recognition of any item of gross income with respect to our ADSs or ordinary shares as a result of such income being recognized on an applicable financial statement; or

 

· a person whose “functional currency” is not the United States dollar.

 

The discussion below is based upon the provision of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax consequences different from those discussed below. In addition, this discussion is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.

 

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If a partnership holds our ADSs or ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ADSs or ordinary shares, you are urged to consult your tax advisors.

 

This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income, or, except as set forth below with respect to PRC tax considerations, the effects of any state, local or non-United States tax laws. If you are considering the purchase, ownership or disposition of our ADSs or ordinary shares, you are urged to consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.

 

The United States Treasury has expressed concerns that intermediaries in the chain of ownership between the holders of ADSs and the issuer of securities underlying the ADSs may be taking actions (including the pre-release of ADSs) that are inconsistent with the claiming of foreign tax credits by United States Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by non-corporate holders. Accordingly, the analysis of the creditability of PRC taxes and the availability of the reduced tax rate for dividends received by non-corporate holders, each described below, could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company.

 

ADSs

 

If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.

 

Taxation of Dividends

 

Subject to the discussion under “—Passive Foreign Investment Company” below, the gross amount of distributions on the ADSs or ordinary shares (including any amounts withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such income (including any withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of the ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code.

 

With respect to non-corporate United States investors, dividends received from a qualified foreign corporation generally will be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on ordinary shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that our ADSs, which are listed on the NYSE, are readily tradable on an established securities market in the United States. Thus, we believe that dividends we pay on our ADSs will meet the conditions required for the reduced tax rate. Since we do not expect that our ordinary shares will be listed on an established securities market in the United States, we do not believe that dividends that we pay on our ordinary shares that are not represented by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in the United States in later years. A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of certain income tax treaties with the United States. In the event that we are deemed to be a PRC resident enterprise under the PRC tax law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC, or the Treaty, and if we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by ADSs, would be eligible for the reduced rates of taxation. See “Taxation—People’s Republic of China Taxation.” Non-corporate United States Holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You are urged to consult your own tax advisors regarding the application of these rules given your particular circumstances.

 

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In addition, notwithstanding the foregoing, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. See “—Passive Foreign Investment Company” below.

 

In the event that we are deemed to be a PRC resident enterprise under the PRC tax law, you may be subject to PRC withholding taxes on dividends paid to you with respect to the ADSs or ordinary shares. See “Taxation—People’s Republic of China Taxation.” In that case, PRC withholding taxes on dividends will be treated as foreign taxes eligible, subject to applicable limitations, for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as foreign-source income and will generally constitute passive category income. However, if you have held the ADSs or ordinary shares for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for any PRC withholding taxes imposed on dividends paid on the ADSs or ordinary shares. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.

 

To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of your ADSs or ordinary shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of the ADSs or ordinary shares), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to determine earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).

 

Passive Foreign Investment Company

 

Based on our financial statements and the composition of our income and assets and the valuation of our assets, we do not believe we were a PFIC for 2017 for United States federal income tax purposes, although there can be no assurances in this regard. Additionally, it is possible that we may be a PFIC in 2018 or future taxable years.

 

In general, we will be a PFIC for any taxable year in which:

 

· at least 75% of our gross income is passive income, or

 

· at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income.

 

For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). In addition, cash is treated as an asset that produces passive income. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. However, it is not entirely clear how the contractual arrangements between us and our consolidated affiliated entities will be treated for purposes of the PFIC rules. If it is determined that we do not own the stock of our consolidated affiliated entities for United States federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we would likely be treated as a PFIC.

 

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The determination of whether we are a PFIC is made annually. Accordingly, it is possible that our PFIC status may change due to changes in our asset or income composition. The calculation of the value of our assets will also be based, in part, on the quarterly market value of our ADSs, which is subject to change. Therefore, a decrease in the price of our ADSs may result in our becoming a PFIC. If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject to special tax rules discussed below.

 

If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares and you do not make a timely mark-to-market election (as described below), you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of ADSs or ordinary shares. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as excess distributions. Under these special tax rules:

 

· the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares,

 

· the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and

 

· the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

In addition, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. You will generally be required to file Internal Revenue Service Form 8621 if you hold our ADSs or ordinary shares in any year in which we are classified as a PFIC.

 

If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC, a United States Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.

 

In lieu of being subject to the rules discussed above regarding excess distributions and realized gains, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Since our ADSs are listed on the NYSE, which constitutes a qualified exchange, under current law, the mark-to-market election will be available to holders of ADSs if the ADSs are “regularly traded” for purposes of the mark-to-market election (for which no assurance can be given). It should also be noted that only the ADSs and not the ordinary shares are listed on the NYSE. Consequently, if you are a holder of ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election if we are or were to become a PFIC.

 

If you make an effective mark-to-market election, you will include in each year that we are a PFIC as ordinary income the excess of the fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, any gain you recognize upon the sale or other disposition of your ADSs in a year that we are a PFIC will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.

 

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Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.

 

A U.S. investor in a PFIC generally can mitigate the consequences of the rules described above by electing to treat the PFIC as a “qualified electing fund” under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.

 

You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADSs or ordinary shares if we are considered a PFIC in any taxable year.

 

Taxation of Capital Gains

 

For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of ADSs or ordinary shares in an amount equal to the difference between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares. Subject to the discussion under “—Passive Foreign Investment Company” above, such gain or loss will generally be capital gain or loss. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss. However, if we are treated as a PRC “resident enterprise” for PRC tax purposes and PRC tax were imposed on any gain, and if you are eligible for the benefits of the Treaty, you may elect to treat such gain as PRC source gain under the Treaty. If you are not eligible for the benefits of the Treaty or you fail to make the election to treat any gain as PRC source, then you generally would not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition of our ADSs or ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income derived from foreign sources. You will be eligible for the benefits of the Treaty if, for purposes of the Treaty, you are a resident of the United States, and you meet other factual requirements specified in the Treaty. Because qualification for the benefits of the Treaty is a fact-intensive inquiry which depends upon the particular circumstances of each investor, you are specifically urged to consult your tax advisors regarding your eligibility for the benefits of the Treaty. You are also urged to consult your tax advisors regarding the tax consequences if any PRC tax is imposed on gain on a disposition of our ADSs or ordinary shares, including the availability of the foreign tax credit and the election to treat any gain as PRC source, under your particular circumstances.

 

Information Reporting and Backup Withholding

 

In general, information reporting will apply to dividends in respect of our ADSs or ordinary shares and the proceeds from the sale, exchange or redemption of our ADSs or ordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax generally would apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or, in the case of dividend payments, if you fail to report in full dividend and interest income.

 

Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is furnished to the Internal Revenue Service in a timely manner.

 

Under the Hiring Incentives to Restore Employment Act of 2010, individuals that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 are required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons; (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties; and (iii) interests in foreign entities. United States Holders that are individuals are urged to consult their tax advisors regarding the application of this legislation to their ownership of ADSs or ordinary shares.

 

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F. Dividends and Paying Agents

 

Not applicable.

 

G. Statement by Experts

 

Not applicable.

 

H. Documents on Display

 

We have filed this annual report, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.

 

You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’s regional offices in New York, New York and Chicago, Illinois. You can also request copies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, by writing information on the operation of the SEC’s Public Reference Room.

 

The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may be accessed through this web site.

 

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short swing profit recovery provisions contained in Section 16 of the Exchange Act.

 

Our financial statements have been prepared in accordance with U.S. GAAP.

 

We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP.

 

I. Subsidiary Information

 

Not Applicable.

 

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Exchange Risk

 

We operate in Europe, Africa, South America and North America. We are exposed to foreign exchange risk to the extent that there is a mismatch between the currencies in which revenues, expenses and borrowings are denominated.

 

Much of our current revenue is derived from our interest in TMG, which uses the EUR as its functional currency. As a result, we are exposed to translational foreign exchange risk when we translate TMG’s financial statements from the EUR to the RMB.

 

Because our reporting currency is the RMB, we may be exposed to translation risk when the income statements of us and our subsidiaries are converted into U.S. dollars using the average exchange rate for the period, and whilst revenues and costs are unchanged in local currency, changes in exchange rates may lead to effects on the converted balances of revenue, costs and the result in U.S. dollars.

 

Other than as set out above, substantially most of our revenues and expenses are denominated in RMB, while a portion of our cash and cash equivalents, and time deposits are denominated in U.S. dollars. Our exposure to foreign exchange risk primarily relates to those financial assets denominated in U.S. dollars. We have not used any derivative financial instruments to hedge our exposure to foreign exchange risk. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the revised policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in a more than 20% appreciation of the RMB against the U.S. dollar in the following three years. Since July 2008, however, the RMB has traded within a narrow range against the U.S. dollar. As a consequence, the RMB has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. On June 20, 2010, the People’s Bank of China announced that the PRC government would further reform the RMB exchange rate regime and increase the flexibility of the exchange rate, and between June 30, 2010 and December 31, 2013, the value of the Renminbi appreciated approximately 12.0% against the U.S. dollar, although the value of the Renminbi depreciated approximately 2.5% against the U.S. dollar in 2014. In August 2015, the People’s Bank of China changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market makers who submit for reference rates to consider the previous day’s closing spot rate, foreign exchange demand and supply as well as changes in major currency rates. As a result, in 2015, the value of the Renminbi depreciated approximately 4.68% against the U.S. dollar, and in 2016, the value of the Renminbi further depreciated approximately 7.09% against the U.S. dollar. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. To the extent that we need to convert U.S. dollars we receive from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert the RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amounts available to us.

 

As of December 31, 2016, we had Renminbi denominated cash and cash equivalents, time deposits, restricted cash and short term investments of RMB398 million and U.S. dollar denominated cash and cash equivalents of US$170 million. Assuming we had converted RMB398 million into U.S. dollars at the exchange rate of RMB6.943 for US$1.00 as of December 31, 2016, our total U.S. dollar cash balance would have been US$227 million. If the Renminbi had depreciated by 10% against the U.S. dollar, our U.S. dollar cash balance would have been US$222 million.

 

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As of December 31, 2017, we had Renminbi denominated cash and cash equivalents, time deposits, restricted cash and short term investments of RMB256 million, EUR denominated cash and cash equivalents of EUR4.5 million, and U.S. dollar denominated cash and cash equivalents of US$54.5 million. Assuming we had converted RMB256 million into U.S. dollars at the exchange rate of RMB6.5063 for US$1.00 and EUR4.5 million into U.S. dollars at the exchange rate of EUR0.8318 for US$1.00 as of the end of 2017, our total U.S. dollar cash balance would have been US$99 million. If the Renminbi and EUR had depreciated by 10% against the U.S. dollar, our U.S. dollar cash balance would have been US$95 million.

 

Interest Rate Risk

 

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank accounts. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest rates.

 

Inflation

 

According to the National Bureau of Statistics of China, China’s overall national inflation rate, as represented by the general consumer price index, was approximately 1.4% in 2015, 2.0% in 2016 and 1.6% in 2017. We have not in the past been materially affected by any such inflation, but we can provide no assurance that we will not be affected in the future.

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A. Debt Securities

 

Not applicable

 

B. Warrants and Rights

 

Not applicable

 

C. Other Securities

 

Not applicable

 

D. American Depositary Shares

 

The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities or whose ADRs are cancelled or reduced for any other reason, US$5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property received in respect of a share distribution, rights and/or other distribution prior to such deposit to pay such charge.

 

The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable:

 

· a fee of up to US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;

 

· a fee of up to US$0.05 per ADS for any cash distribution made pursuant to the deposit agreement;

 

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· a fee of up to US$0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision);

 

· reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of the depositary’s agents (including, without limitation, the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection with the servicing of the shares or other deposited securities, the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable law, rule or regulation (which charge shall be assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions);

 

· a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto;

 

· stock transfer or other taxes and other governmental charges;

 

· cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of shares;

 

· transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities; and

 

· expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars.

 

We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.

 

Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses and exchange application and listing fees. Neither the depositary nor we can determine the exact amount to be made available to us because (i) the number of ADSs that will be issued and outstanding, (ii) the level of fees to be charged to holders of ADSs and (iii) our reimbursable expenses related to the ADR program are not known at this time. The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide services to any holder until the fees and expenses owing by such holder for those services or otherwise are paid.

 

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PART II

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

Material Modifications to the Rights of Securities Holders

 

See “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged.

 

Use of Proceeds

 

We completed our initial public offering of 66,539,000 Class A ordinary shares, in the form of ADSs, at a price of US$13.00 per ADS, in November 2013, after our ordinary shares and American Depositary Receipts were registered under the Securities Act. The aggregate price of the offering amount registered and sold was US$86.5 million, of which we received net proceeds of US$80.5 million. Deutsche Bank Securities Inc., Piper Jaffray& Co., and Oppenheimer & Co. Inc. were the underwriters for the initial public offering of our ADSs.

 

On June 9, 2015, Tsinghua Unigroup International Co., Ltd. purchase 63,500,500 newly issued Class A ordinary shares of the Company. We received net proceeds of US$123.8 million in cash.

 

As of December 31, 2017, approximately RMB723.5 million (US$111.2 million) of the net proceeds from our public offerings has been used for capital expenditures.

 

ITEM 15. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.

 

Based upon the evaluation, our management has concluded that, as of December 31, 2017, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the report that we file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the report that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of our newly acquired subsidiary, The Multi Group, as well as holding companies and non-operating companies, such as 500.com UK, 500.com Nihon, Qufan Cayman, Qufan HK, Qufan Malta, Daguoxiaoxian, Youlanguang Technology, E-sun Network, 500Fu, Tongfu technology, Lhasa Yicai, Shenzhen Yicai, Shenzhen Fenggu and Baifengrun technology, which are consolidated in our 2017 consolidated financial statements included in this annual report, and constituted RMB369 million (US$56.7 million) and RMB172 million (US$26.4 million) of our total and net assets, respectively, as of December 31, 2017 and RMB49.4 million (US$7.6 million) and RMB1.8 (US$0.3 million) of our revenues and net loss, respectively, for the year ended December 31, 2017.

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

Our independent registered public accounting firm, Friedman LLP (“Friedman”) , has audited the effectiveness of our internal control over financial reporting as of December 31, 2017, as stated in its report, which appears on page Fweer-2 of this annual report on Form 20-F.

 

Changes in Internal Control over Financial Reporting

 

The Company will apply the new revenue standard ASC 606, “Revenue from Contracts with Customers” beginning January 1, 2018, and plan to adopt a modified retrospective approach upon adoption. In order to accurately identify and recognize the revenue with customers, the Company has implemented new procedures of internal control over the adoption of ASC 606, such as training provided to employees and analysis of the Group’s revenue streams in accordance with the new revenue standard to determine its impact on the Company’s consolidated financial statements. Other than the aforementioned procedures, there were no other changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT

 

Our Board of Directors has determined that Angel Yan Ki Wong, an independent director within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual, and the chairman of our audit committee, qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F.

 

ITEM 16B.  CODE OF ETHICS

 

Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain provisions that specifically apply to our chief executive officer, chief financial officer, chief strategy officer, financial controller and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as an exhibit to our registration statement on Form F-1. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.

 

ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by: (i) Ernst & Young Hua Ming LLP (“Ernst & Young”), our previous independent registered public accounting firm, for the years ended December 31, 2016 and 2017, respectively, and (ii) Friedman LLP, our current independent registered public accounting firm, for the year ended December 31, 2017.

 

    For the Year Ended December 31,  
    2016     2017  
    RMB     RMB     US$  
    (in thousands)  
Audit fees (1)     2,600       2,835       436  
Audit related fees (2)     1,500       1,200       184  
Tax fees (3)     -       -       -  
All other fees     -       -       -  
Total     4,100       4,035       620  

 

 

(1) Audit fees include the aggregate fees billed in each of the fiscal periods listed for professional services rendered for the audits of our annual consolidated financial statements.

 

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(2) Audit-related fees include the aggregate fee billed in each of the fiscal year for interim review, agreed-upon procedures performed in relation to interim financial information, professional services associated with SEC filings.

 

(3) Tax fees, tax advice and tax planning services.

 

The policy of our audit committee is to pre approve all audit and non-audit services, such as audit-related, tax and other services, as provided by Ernst & Young and Friedman, respectively.

 

ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

Not applicable.

 

ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

In February 2015, our board of directors approved a share repurchase program, which provided authorization to purchase up to US$30 million worth of our outstanding ADSs. Under this plan, in 2015, we purchased approximately 122,000 ADSs (equivalent to 1,220,000 of our ordinary shares) with a total consideration of approximately US$1.43 million, and in 2016, we purchased approximately 114,153 ADSs (equivalent to 1,141,532 of our ordinary shares) with a total consideration of approximately US$17.24 million, and in 2017, we purchase approximately 260,200 ADSs (equivalent to 2,602,000 of our ordinary shares) with a total consideration of approximately US$3.0 million. The table below sets forth additional information on our repurchase of ADSs for each month indicated:

 

Month   Number of
ADSs
Purchased 		    Purchase
Price (US$) 		    Average Price
Paid Per ADS
(US$)* 		    Total Number of
ADSs Purchased as
Part of Share
Repurchase
Program 		    Approximate Dollar
 Value of ADSs that
 May Yet Be
 Purchased Under 
the Plan 		 
March 2015     122,000       1,434,250       11.76       122,000       28,565,750  
March 2016     582,500       9,626,481       16.53       704,500       18,939,268  
November 2016     509,032       6,937,462       13.63       1,213,532       12,001,807  
December 2016     50,000       675,715       13.51       1,263,532       11,326,092  
February 2017     160,200       2,065,710       12.89       1,423,732       9,260,382  
May 2017     100,000       932,900       9.33       1,523,732       8,327,482  
Total     1,523,732       21,672,517       14.22       1,523,732       8,327,482  

 

 

* Note: Price data includes trading commissions. Some numbers may not add due to rounding.

 

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ITEM 16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

On January 25, 2018, Ernst & Young Hua Ming LLP resigned as auditor of the Company.

 

Ernst & Young Hua Ming LLP’s audit reports on the Company's consolidated financial statements for each of the fiscal years ended December 31, 2015 and 2016 do not contain an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles.

 

On February 9, 2018, the Company appointed Friedman LLP to conduct the audit and review the effectiveness of its internal control over financial reporting for the fiscal year ended December 31, 2017. The decision to appoint a new auditor was unanimously approved by the directors of the Company, including all members of the Company's audit committee. The change was not made due to any disagreements with Ernst & Young Hua Ming LLP.

 

During Ernst & Young Hua Ming LLP’s term of audit engagement from January 1, 2015 to April 28, 2017, Ernst & Young Hua Ming LLP did not have any disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Ernst & Young, would have caused Ernst & Young Hua Ming LLP to make reference to the subject matter of the disagreements in connection with its audit reports.

 

During each of the fiscal years ended December 31, 2015 and 2016, there have been no reportable events requiring disclosures under this Form 20-F.

 

We provided a copy of the above statements to Ernst & Young Hua Ming LLP and requested that Ernst & Young Hua Ming LLP furnish a letter addressed to the SEC stating whether it agrees with the above statements, and if not, stating the respects in which it does not agree. A copy of the letter from Ernst & Young Hua Ming LLP addressed to the SEC, dated April 27, 2018, is filed as Exhibit 16.1.

 

During each of the fiscal years ended December 31, 2015 and 2016 and the subsequent period prior to our engagement of Friedman, neither we nor anyone on our behalf consulted Friedman regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, or (ii) any matter that was either the subject of a disagreement with Friedman or a reportable event.

 

During each of the fiscal years ended December 31, 2015 and 2016 and the subsequent period prior to our engagement of Friedman, we have not obtained any written report or oral advice that Friedman concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue.

 

ITEM 16G.  CORPORATE GOVERNANCE

 

We have followed and intend to continue to follow the applicable corporate governance standards under the NYSE Corporate Governance Rules. We are not aware of any significant differences between our corporate governance practices and those followed by domestic companies under NYSE listing standards.

 

ITEM 16H.  MINE SAFETY DISCLOSURE

 

Not applicable.

 

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PART III

 

ITEM 17. FINANCIAL STATEMENTS

 

We have elected to provide financial statements pursuant to Item 18.

 

ITEM 18. FINANCIAL STATEMENTS

 

Our consolidated financial statements are included at the end of this annual report.

 

ITEM 19. EXHIBITS

 

1.1 Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by reference to Exhibit 3.2 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)

 

2.1 Specimen American Depositary Receipt of the Registrant (incorporated by reference to Exhibit 4.3 from the F-1/A registration statement (File No. 333-191844), as amended, initially filed with the Commission on November 20, 2013)

 

2.2 Specimen Certificate for Ordinary Shares of the Registrant (incorporated by reference to Exhibit 4.2 from the F-1/A registration statement (File No. 333-191844), as amended, initially filed with the Commission on November 20, 2013)

 

2.3 Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts Registrant (incorporated by reference to Exhibit 4.2 from the F-1/A registration statement (File No. 333-191844), as amended, initially filed with the Commission on November 20, 2013)

   
4.1 Registrant’s 2011 Share Incentive Plan (incorporated by reference to Exhibit 10.1 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.2 Form of Employment Agreement with the Registrant’s executive officers (incorporated by reference to Exhibit 10.2 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.3 Form of Indemnification Agreement with the Registrant’s directors and executive officers, (incorporated by reference to Exhibit 10.3 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.4 English translation of Exclusive Business Cooperation Agreement entered into by and between E-Sun Sky Computer and E-Sun Network as of June 1, 2011 (incorporated by reference to Exhibit 10.4 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.5 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Fu Jiepin as of June 1, 2011 (incorporated by reference to Exhibit 10.5 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.6 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Fu Jiepin as of June 1, 2011 (incorporated by reference to Exhibit 10.6 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)

 

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4.7 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Li He as of June 1, 2011 (incorporated by reference to Exhibit 10.8 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.8 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Li He as of June 1, 2011 (incorporated by reference to Exhibit 10.9 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.9 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Li Xue as of June 1, 2011(incorporated by reference to Exhibit 10.11 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.10 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Li Xue as of June 1, 2011 (incorporated by reference to Exhibit 10.12 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.11 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Yuan Ping as of June 1, 2011 (incorporated by reference to Exhibit 10.14 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.12 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Yuan Ping as of June 1, 2011 (incorporated by reference to Exhibit 10.15 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.13 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Zou Bo as of May 2, 2013 (incorporated by reference to Exhibit 10.17 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.14 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Zou Bo as of May 2, 2013 (incorporated by reference to Exhibit 10.18 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.15 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Zou Ying as of June 1, 2011 (incorporated by reference to Exhibit 10.20 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.16 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, E-Sun Network and Zou Ying as of June 1, 2011 (incorporated by reference to Exhibit 10.21 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.17 English translation of Exclusive Business Cooperation Agreement entered into by and between E-Sun Sky Computer and Guangtiandi Technology as of June 1, 2011 (incorporated by reference to Exhibit 10.23 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)

 

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4.18 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Guangtiandi Technology and Wang Ying as of June 1, 2011 (incorporated by reference to Exhibit 10.24 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.19 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Guangtiandi Technology and Wang Ying as of June 1, 2011 (incorporated by reference to Exhibit 10.25 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.20 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Guangtiandi Technology and Yuan Liangdong as of May 2, 2013 (incorporated by reference to Exhibit 10.27 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.21 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Guangtiandi Technology and Yuan Liangdong as of May 2, 2013 (incorporated by reference to Exhibit 10.28 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.22 English translation of Exclusive Business Cooperation Agreement entered into by and between E-Sun Sky Computer and Youlanguang Technology as of June 1, 2011 (incorporated by reference to Exhibit 10.30 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.23 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Youlanguang Technology and Li Jin as of June 1, 2011 (incorporated by reference to Exhibit 10.31 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.24 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Youlanguang Technology and Li Jin as of June 1, 2011 (incorporated by reference to Exhibit 10.32 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.25 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Youlanguang Technology and Zhang Jing as of June 1, 2011 (incorporated by reference to Exhibit 10.34 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.26 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Youlanguang Technology and Zhang Jing as of June 1, 2011 (incorporated by reference to Exhibit 10.35 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.27 English translation of Service Agreement with Jiangxi Sports Lottery Administration Center, dated January 1, 2011 (incorporated by reference to Exhibit 10.37 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.28 English translation of Exclusive Business Cooperation Agreement entered into by E-Sun Sky Computer and E-Sun Sky Network (incorporated by reference to Exhibit 10.38 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)

 

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4.29 Supplementary Agreement entered into by and among E-Sun Sky Computer, Wang Ying, Guangtiandi Technology and certain other parties thereto as of November 20, 2012 (incorporated by reference to Exhibit 10.39 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.30 Supplementary Agreement entered into by and among E-Sun Sky Computer, Fu Jiepin, Li He, Li Xue, Yuan Ping, Zou Bo, Zou Ying, E-Sun Network and certain other parties thereto as of November 20, 2012 (incorporated by reference to Exhibit 10.40 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.31 Supplementary Agreement entered into by and among E-Sun Sky Computer, Zhang Jing, Li Jin and Youlanguang Technology as of November 20, 2012 (incorporated by reference to Exhibit 10.41 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.32 Confirmation Letter executed by Zou Bo as of May 2, 2013 (incorporated by reference to Exhibit 10.42 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.33 Confirmation Letter executed by Yuan Liangdong as of May 2, 2013 (incorporated by reference to Exhibit 10.43 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
4.34 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Fu Jiepin as of December 28, 2013 (incorporated by reference to Exhibit 4.34 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.35 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Li He as of December 28, 2013 (incorporated by reference to Exhibit 4.35 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.36 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Li Xue as of December 28, 2013 (incorporated by reference to Exhibit 4.36 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.37 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Yuan Ping as of December 28, 2013 (incorporated by reference to Exhibit 4.37 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.38 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Zou Bo as of December 28, 2013 (incorporated by reference to Exhibit 4.38 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.39 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Zou Ying as of December 28, 2013 (incorporated by reference to Exhibit 4.39 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)

 

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4.40 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Wang Ying as of December 28, 2013 (incorporated by reference to Exhibit 4.40 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.41 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Yuan Liangdong as of December 28, 2013 (incorporated by reference to Exhibit 4.41 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.42 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Li Jin as of December 28, 2013 (incorporated by reference to Exhibit 4.42 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.43 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd and Zhang Jing as of December 28, 2013 (incorporated by reference to Exhibit 4.43 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.44 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Fu Jiepin and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 (incorporated by reference to Exhibit 4.44 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.45 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Li Xue and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 incorporated by reference to Exhibit 4.45 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.46 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Li He and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 incorporated by reference to Exhibit 4.46 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.47 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Yuan Ping and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 (incorporated by reference to Exhibit 4.47 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.48 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Zou Bo and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 (incorporated by reference to Exhibit 4.48 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.49 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Zou Ying and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 (incorporated by reference to Exhibit 4.49 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.50 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Wang Ying and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 (incorporated by reference to Exhibit 4.50 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014

 

121

 

 

4.51 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Yuan Liangdong and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 (incorporated by reference to Exhibit 4.51 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.52 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Li Jin and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 (incorporated by reference to Exhibit 4.52 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.53 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among 500.com Limited, Zhang Jing and E-Sun Sky Computer (Shenzhen) Co., Ltd as of December 28, 2013 (incorporated by reference to Exhibit 4.53 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 26, 2014)
   
4.54 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Yu Bo and E-Sun Network on November 18, 2015 (incorporated by reference to Exhibit 4.54 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.55 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Yin Zhiwei and E-Sun Network on November 18, 2015 (incorporated by reference to Exhibit 4.55 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.56 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Yu Bo and Shenzhen E-Sun Network on November 18, 2015 (incorporated by reference to Exhibit 4.56 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.57 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Yin Zhiwei and Shenzhen E-Sun Network on November 18, 2015 (incorporated by reference to Exhibit 4.57 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.58 English translation of Confirmation Letter executed by Yu Bo as a legal representative of E-Sun Sky Computer on November 18, 2015 (incorporated by reference to Exhibit 4.58 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.59 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer, Yu Bo and Yin Zhiwei on November 18, 2015 (incorporated by reference to Exhibit 4.59 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.60 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among E-Sun Sky Computer, Yu Bo, Yin Zhiwei and Shenzhen E-Sun Network on November 18, 2015 (incorporated by reference to Exhibit 4.60 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.61 English translation of Irrevocable Power of Attorney executed by Yu Bo on November 18, 2015 (incorporated by reference to Exhibit 4.61 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)

 

122

 

 

4.62 English translation of Irrevocable Power of Attorney executed by Yin Zhiwei on November 18, 2015 (incorporated by reference to Exhibit 4.62 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.63 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Yu Bo and Youlanguang Technology on November 18, 2015 (incorporated by reference to Exhibit 4.63 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.64 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Yin Zhiwei and Youlanguang Technology on November 18, 2015 (incorporated by reference to Exhibit 4.64 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.65 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Yu Bo and Youlanguang Technology on November 18, 2015 (incorporated by reference to Exhibit 4.65 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.66 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Yin Zhiwei and Youlanguang Technology on November 18, 2015 (incorporated by reference to Exhibit 4.66 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.67 English translation of Confirmation Letter executed by Yu Bo as a legal representative of E-Sun Sky Computer on November 18, 2015 (incorporated by reference to Exhibit 4.67 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.68 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer, Yu Bo and Yin Zhiwei on November 18, 2015 (incorporated by reference to Exhibit 4.68 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.69 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among E-Sun Sky Computer, Yu Bo, Yin Zhiwei and Youlanguang Technology on November 18, 2015 (incorporated by reference to Exhibit 4.69 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.70 English translation of Irrevocable Power of Attorney executed by Yu Bo on November 18, 2015 (incorporated by reference to Exhibit 4.70 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.71 English translation of Irrevocable Power of Attorney executed by Yin Zhiwei on November 18, 2015 (incorporated by reference to Exhibit 4.71 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.72 English translation of Exclusive Business Cooperation Agreement entered into by and between E-Sun Sky Computer and Tongfu Technology on December 20, 2015 (incorporated by reference to Exhibit 4.72 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.73 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Zhang Han and Tongfu Technology on December 20, 2015 (incorporated by reference to Exhibit 4.73 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)

 

123

 

 

4.74 English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer, Zhang Jing and Tongfu Technology on December 20, 2015 (incorporated by reference to Exhibit 4.74 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.75 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Zhang Han and Tongfu Technology on December 20, 2015 (incorporated by reference to Exhibit 4.75 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.76 English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer, Zhang Jing and Tongfu Technology on December 20, 2015 (incorporated by reference to Exhibit 4.76 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.77 English translation of Confirmation Letter executed by Yu Bo as a legal representative of E-Sun Sky Computer on December 20, 2015 (incorporated by reference to Exhibit 4.77 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.78 English translation of Financial Support Agreement entered into by and among 500.com Limited, E-Sun Sky Computer, Zhang Han and Zhang Jing on December 22, 2015 (incorporated by reference to Exhibit 4.78 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.79 English translation of Shareholder’s Voting Power Assignment Agreement entered into by and among E-Sun Sky Computer, Zhang Jing, Zhang Han and Tongfu Technology on December 20, 2015 (incorporated by reference to Exhibit 4.79 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.80 English translation of Irrevocable Power of Attorney executed by Zhang Han on December 20, 2015 (incorporated by reference to Exhibit 4.80 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.81 English translation of Irrevocable Power of Attorney executed by Zhang Jing on December 20, 2015 (incorporated by reference to Exhibit 4.81 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.82 English translation of Equity Transfer Agreement entered into by and between Tongu Technology and Shanghai Xingyie Investment Development Co., Ltd. on March 29, 2016 (incorporated by reference to Exhibit 4.82 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016)
   
4.83* English translation of Undertaking Letter executed by Pan Zhengming as a legal representative of 500wan HK Limited on July 3, 2017
   
4.84 RESERVED
   
4.85* English translation of Proxy Agreement entered into by and among QUFAN Internet Technology INC., Shenzhen Guangtiandi Technology Co., Ltd, CAO Yu, ZHANG Jiahui, ZHU Nianyang and Qfun Information Technology (Shenzhen) Co., Ltd. on January 10, 2017
   
4.86* English translation of Financial Support Agreement by and among QUFAN Internet Technology INC., Qfun Information Technology (Shenzhen) Co., Ltd., Shenzhen Guangtiandi Technology Co., Ltd, CAO Yu, ZHANG Jiahui and ZHU Nianyang on January 10, 2017

 

124

 

 

4.87* English translation of Exclusive Call Option Agreement entered into by and among Qfun Information Technology (Shenzhen) Co., Ltd., Zhang Jiahui, Cao Yu, Zhu Nianyang and Shenzhen Guangtiandi Technology Co., Ltd. on January 10, 2017
   
4.88* English translation of Shareholders’ Voting Rights Proxy Agreement entered into by and among Qfun Information Technology (Shenzhen) Co., Ltd., Zhang Jiahui, Cao Yu, Zhu Nianyang and Shenzhen Guangtiandi Technology Co., Ltd. on January 10, 2017
   
4.89* English translation of Equity Pledge Agreement entered into by and among Qfun Information Technology (Shenzhen) Co., Ltd., Zhang Jiahui, Cao Yu, Zhu Nianyang and Shenzhen Guangtiandi Technology Co., Ltd. on January 10, 2017
   
4.90* English translation of Entrusted Management Agreement entered into by and between Qfun Information Technology (Shenzhen) Co., Ltd. and Shenzhen Qfun Internet Technology Co., Ltd. on January 10, 2017
   
4.91* English translation of Undertaking Letter from Qufan Internet Technology (HK Limited) regarding the grant of consent or instructions to Qufan Information Technology (SZ) Co., Ltd. with respect to the exercise of rights in accordance with the instructions of QUFAN Internet Technology INC. on January 10, 2017
   
4.92* English translation of confirmation letter executed by Qufan Internet Technology (SZ) Co, Ltd. on January 10, 2017
   
4.93* Share Purchase Agreement entered into by and among 500.com Limited and certain selling shareholders on May 26, 2017 regarding The Multi Group Ltd.
   
4.94* Shareholder’s Agreement entered into by and between 500.com Limited and Helmet Limited on May 26, 2017 regarding The Multi Group Ltd.
   
4.95* Sale and Purchase Agreement entered into by and between 500.com Limited and Melco LottVentures Holdings Limited on June 6, 2017 regarding MelcoLot Limited
   
4.96* English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer (Shenzhen) Co., Ltd., Yu Bo and Shenzhen E-Sun Network Co., Ltd. on July 3, 2017
   
4.97* English translation of Exclusive Option Agreement entered into by and among E-Sun Sky Computer (Shenzhen) Co., Ltd., Zhang Han and Shenzhen E-Sun Network Co., Ltd. on July 3, 2017
   
4.98* English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer (Shenzhen) Co., Ltd., Yu Bo and Shenzhen E-Sun Network Co., Ltd. on July 3, 2017
   
4.99* English translation of Equity Interest Pledge Agreement entered into by and among E-Sun Sky Computer (Shenzhen) Co., Ltd., Zhang Han and Shenzhen E-Sun Network Co., Ltd. on July 3, 2017
   
4.100* English translation of Confirmation Letter executed by Yu Bo as a legal representative of E-Sun Sky Computer (Shenzhen) Co., Ltd. on July 3, 2017
   
4.101* English translation of Financial Support Agreement by and among 500.Com Limited, E-Sun Sky Computer (Shenzhen) Co., Ltd., Yu Bo and Zhang Han on July 3, 2017
   
4.102* English translation of Shareholder’s Voting Power Assignment Agreement by and among E-Sun Sky Computer (Shenzhen) Co., Ltd., Yu Bo, Zhang Han and Shenzhen E-Sun Network Co, Ltd. on July 3, 2017
   
4.103* English translation of Power of Attorney executed by Yu Bo on July 3, 2017
   
4.104* English translation of Power of Attorney executed by Zhang Han on July 3, 2017
   
8.1* List of Subsidiaries and Consolidated Affiliated Entities of the Registrant
   
11.1 Code of Business Conduct and Ethics of Registrant (incorporated by reference to Exhibit 99.1 from the F-1 registration statement (File No. 333-191844), as amended, initially filed with the Commission on October 22, 2013)
   
12.1* Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
12.2* Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
13.1* Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
13.2* Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
15.1* Consent of Ernst & Young Hua Ming LLP
   
15.2* Consent of Friedman LLP
   
15.3* Opinion of Grandall law firm
   
16.1* Letter dated April 28, 2018 of Ernst & Young Hua Ming LLP, as required by Item 16F of Form 20-F

 

125

 

 

101.INS* XBRL Instance Document
   
101.SCH* XBRL Taxonomy Extension Scheme Document
   
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed with this annual report

 

126

 

 

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

  500.COM LIMITED
     
  By: /s/ Zhengming Pan
    Name:  Zhengming Pan
    Title:  Chief Executive Officer
     
Date:  April 27, 2018    

 

127

 

 

REPORT OF CONSOLIDATED FINANCIAL STATEMENTS

 

500.COM LIMITED

 

December 31, 2015, 2016 and 2017

 

 

 

 

500.COM LIMITED

 

CONTENTS

 

  Pages
   
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS F-1 – F-5
   
AUDITED CONSOLIDATED FINANCIAL STATEMENTS  
   
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2016 AND 2017 F-6 – F-7
   
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017 F-8
   
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017 F-9 – F-10
   
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017 F-11
   
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017 F-12 – F-83

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of 500.com Limited

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheet of 500.com Limited and Subsidiaries (collectively, the “Company”) as of December 31, 2017, and the related consolidated statements of comprehensive loss, changes in shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017 based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

 

Basis for Opinion

 

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

  F- 1  

 

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the Multi Group Limited (“The Multi Group”), a subsidiary newly acquired in 2017, as well as the holding companies and non-operating entities including 500.com Gaming UK Limited (“500.com UK”), 500.com Nihon Co., Ltd. (“500.com Nihon”), Qufan Internet Technology Inc. (“Qufan Cayman”), Qufan Internet Technology (HK) Limited (“Qufan HK”), Qufan Internet Technology Ltd. (“Qufan Malta”), Beijing Daguoxiaoxian Culture Media Co., Ltd. (“Beijing Daguoxiaoxian”), Shenzhen Youlanguang Science and Technology Co., Ltd. (“Youlanguang Technology”), Shenzhen E-Sun Network Co., Ltd. (“E-Sun Network”), Shenzhen Wubai Zhifu Co., Ltd. (“500Fu”), Shenzhen Tongfu Technology Co., Ltd. (“Tongfu Technology”), Lhasa Yicai Network Technology Co., Ltd. (“Lhasa Yicai”), Shenzhen Yicai Network Technology Co., Ltd. (“Shenzhen Yicai”), Shenzhen Fenggu Network Technology Co., Ltd. (“Shenzhen Fenggu”) and Beijing Baifengrun Science and Technology Co., Ltd.(“Baifengrun Technology”). All of these above-mentioned entities are included in the 2017 consolidated financial statements of 500.com Limited and constituted RMB 369 million ($56.7 million) and RMB 172 million ($26.4 million) of total and net assets, respectively, as of December 31, 2017 and RMB 49.4 million ($7.6 million) and RMB 1.8 million ($0.3 million) of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of 500.com Limited also did not include an evaluation of the internal control over financial reporting of The Multi Group, 500.com UK, 500.com Nihon, Qufan Cayman, Qufan HK, Qufan Malta, Beijing Daguoxiaoxian, Youlanguang Technology, E-Sun Network, 500Fu, Tongfu Technology, Lhasa Yicai, Shenzhen Yicai, Shenzhen Fenggu and Baifengrun Technology.

 

/s/ Friedman LLP

 

We have served as the Company’s auditor since 2018.

 

New York, New York

April 27, 2018

 

  F- 2  

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of 500.com Limited

 

We have audited the accompanying consolidated balance sheet of 500.com Limited (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of 500.com Limited at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), 500.com Limited’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 28, 2017 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young Hua Ming LLP

Shenzhen, the People’s Republic of China

April 28, 2017

 

  F- 3  

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

The Board of Directors and Shareholders of 500.com Limited

 

We have audited 500.com Limited’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). 500.com Limited’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of 500.com Gaming UK Limited (“500.com UK”), Qufan Internet Technology Inc. (“Qufan Cayman”), Qufan Internet Technology (HK) Limited (“Qufan HK”), Shenzhen Qufan Network Technology Co., Ltd. (“Shenzhen Qufan”), Shenzhen Caiyu Hudong Technology Co., Ltd. (“Shenzhen Caiyu”) and Shenzhen Kaisheng Jinfu Enterprise Management Co., Ltd. (Shenzhen Kaisheng”), which is included in the 2016 consolidated financial statements of 500.com Limited and constituted RMB28.1 million and RMB9.2 million of total and net assets, respectively, as of December 31, 2016 and RMB7.5 million and RMB0.2 million of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of 500.com Limited also did not include an evaluation of the internal control over financial reporting of 500.com UK, Qufan Cayman, Qufan HK, Shenzhen Qufan, Shenzhen Caiyu and Shenzhen Kaisheng.

 

  F- 4  

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

In our opinion, 500.com Limited maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 500.com Limited as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016 of 500.com Limited and our report dated April 28, 2017 expressed an unqualified opinion thereon.

 

 

/s/ Ernst & Young Hua Ming LLP

Shenzhen, The People’s Republic of China

April 28, 2017

 

  F- 5  

 

 

500.COM LIMITED

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares)

 

    Notes   As of
December
31, 2016 		    As of
December
31, 2017 		    As of
December
31, 2017 		 
          RMB       RMB       US$  
                             
ASSETS                            
Current assets:                            
Cash and cash equivalents         673,102       529,124       81,325  
Restricted cash         3,704       1,238       190  
Time deposits         804,692       -       -  
Short-term investments   5     100,000       120,000       18,444  
Prepayments and other receivables   7     125,534       74,049       11,379  
Other current assets         -       12,611       1,938  
Total current assets         1,707,032       737,022       113,276  
                             
Non-current assets:                            
Property and equipment, net   8     53,935       106,991       16,444  
Intangible assets, net   9     61,547       291,086       44,739  
Goodwill   4     160,438       260,366       40,018  
Deposits   7     5,810       5,764       886  
Long-term investments   5     85,459       347,073       53,344  
Other non-current assets         2,671       6,257       962  
Total non-current assets         369,860       1,017,537       156,393  
                             
TOTAL ASSETS         2,076,892       1,754,559       269,669  
                             
LIABILITIES AND SHAREHOLDERS’ EQUITY                            
Current liabilities:                            
Accrued payroll and welfare payable (including accrued payroll and welfare payable of the consolidated VIEs without recourse to 500.com Limited of RMB15,846 and RMB14,703 (US$2,260) as of December 31, 2016 and 2017, respectively)         16,270       16,683       2,564  
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to 500.com Limited of RMB67,166 and RMB57,761 (US$8,878) as of December 31, 2016 and 2017, respectively)   10     184,155       152,337       23,414  
Income tax payable (including income tax payable of the consolidated VIEs without recourse to 500.com Limited of RMB8,897 and RMB5,310 (US$816) as of December 31, 2016 and 2017, respectively)         9,050       6,917       1,063  
Total current liabilities         209,475       175,937       27,041  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

  F- 6  

 

 

500.COM LIMITED

CONSOLIDATED BALANCE SHEETS (continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares)

 

    Notes   As of
December
31, 2016 		    As of
December
31, 2017 		    As of
December
31, 2017 		 
        RMB     RMB     US$  
                       
Non-current liabilities:                            
Long-term payables (including long-term payables of the consolidated VIEs without recourse to 500.com Limited of RMB42,705 and RMB 27,673 (US$4,253) as of December 31, 2016 and 2017, respectively)         44,472       27,785       4,270  
Deferred tax liabilities (including deferred tax liabilities of the consolidated VIEs without recourse to 500.com Limited of RMB 14,902 and RMB 12,721(US$1,955) as of December 31, 2016 and 2017, respectively)       14,902       19,475       2,993  
Total non-current liabilities         59,374       47,260       7,263  
                             
TOTAL LIABILITIES         268,849       223,197       34,304  
                             
Commitments and contingencies   15                        
                             
Redeemable noncontrolling interest   4     -       22,052       3,389  
                             
Shareholders’ equity:                            
Class A ordinary shares, par value US$0.00005 per share, 700,000,000 shares authorized as of December 31, 2016 and December 31, 2017; 335,494,792 and 333,787,552 shares issued and outstanding as of December 31, 2016 and December 31, 2017, respectively   17     115       115       17  
Class B ordinary shares, par value US$0.00005 per share; 300,000,000 shares authorized as of December 31, 2016 and December 31, 2017; 74,400,299 and 74,400,299 shares issued and outstanding as of December 31, 2016 and December 31, 2017, respectively   17     28       28       4  
                             
Additional paid-in capital   17     2,198,385       2,295,111       352,753  
Treasury shares         (123,258 )     (143,780 )     (22,099 )
Accumulated other comprehensive income         172,589       116,051       17,837  
Accumulated deficit and statutory reserve   11     (538,328 )     (857,751 )     (131,834 )
Total 500.com Limited shareholders’ equity         1,709,531       1,409,774       216,678  
Noncontrolling interests         98,512       99,536       15,298  
Total shareholders' equity         1,808,043       1,509,310       231,976  
                             
TOTAL LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY         2,076,892       1,754,559       269,669  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

  F- 7  

 

 

500.COM LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

 

    Notes   For the years ended December 31,  
        2015     2016     2017     2017  
        RMB     RMB     RMB     US$  
                             
Net Revenues         99,552       10,928       131,323       20,184  
Operating costs and expenses:                                    
Cost of services         (24,355 )     (14,141 )     (53,096 )     (8,161 )
Sales and marketing         (87,022 )     (44,921 )     (76,977 )     (11,831 )
General and administrative         (232,244 )     (247,688 )     (257,079 )     (39,512 )
Service development expenses         (63,296 )     (71,595 )     (68,341 )     (10,504 )
                                     
Total operating expenses         (406,917 )     (378,345 )     (455,493 )     (70,008 )
Other operating income         6,910       2,732       1,204       185  
Government grant         2,022       10,017       6,789       1,043  
Indemnity cost   15     -       (9,979 )     -       -  
Other operating expenses         (2,975 )     (1,915 )     (34,691 )     (5,332 )
Operating loss         (301,408 )     (366,562 )     (350,868 )     (53,928 )
Others, net         -       -       821       126  
Interest income         20,589       23,859       20,574       3,162  
Interest expense         (2,138 )     -       -       -  
Loss from equity method investments   5     (407 )     (406 )     (2,128 )     (327 )
Gain from disposal of subsidiaries         -       136,914       5,477       842  
Changes in fair value of the structured deposits   5     1,124       -       -       -  
Changes in fair value of contingent considerations         -       -       (2,384 )     (366 )
 Loss before income tax         (282,240 )     (206,195 )     (328,508 )     (50,491 )
Income tax (expense) benefit   12     (41,969 )     (3,057 )     12,366       1,901  
Net loss         (324,209 )     (209,252 )     (316,142 )     (48,590 )
Less: Net (loss) income attributable to the noncontrolling interests         (312 )     (6,287 )     957       147  
Net loss attributable to 500.com Limited         (323,897 )     (202,965 )     (317,099 )     (48,737 )
Other comprehensive income (loss):                                    
Foreign currency translation gain (loss)         66,851       82,347       (55,805 )     (8,577 )
Realized and unrealized gain (loss) on available for sale investments         -       754       (733 )     (113 )
Other comprehensive income (loss) net of tax         66,851       83,101       (56,538 )     (8,690 )
Comprehensive loss         (257,358 )     (126,151 )     (372,680 )     (57,280 )
Less: Comprehensive (loss) income attributable to noncontrolling interests         (312 )     (6,287 )     1,348       207  

Comprehensive loss attributable to 500.com Limited

        (257,046 )     (119,864 )     (374,028 )     (57,487 )
                                     
Losses per share for Class A and Class B ordinary shares outstanding:   16                                
Basic         (0.84 )     (0.49 )     (0.78 )     (0.12 )
Diluted         (0.84 )     (0.49 )     (0.78 )     (0.12 )
Losses per American Depositary Share (“ADS”) (1 ADS represents 10 Class A ordinary shares)   16                                
Basic         (8.40 )     (4.89 )     (7.77 )     (1.20 )
Diluted         (8.40 )     (4.89 )     (7.77 )     (1.20 )
Weighted average number of Class A and Class B ordinary shares outstanding:   16                                
Basic         385,590,213       414,872,756       408,310,122       408,310,122  
Diluted         385,590,213       414,872,756       408,310,122       408,310,122  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

  F- 8  

 

 

500.COM LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

 

    For the years ended December 31,  
    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Cash flow from operating activities                                
Net loss     (324,209 )     (209,252 )     (316,142 )     (48,590 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                                
Depreciation of property and equipment     10,209       12,865       13,400       2,060  
Amortization of intangible assets     1,361       6,846       26,102       4,012  
Deferred tax (benefit) expense     40,079       (496 )     405       62  
Share-based compensation     158,628       163,341       91,143       14,008  
Losses on disposal of property and equipment     228       15       171       26  
Impairment loss on long-term investments     5,000       3,440       28,781       4,424  
Provision for bad debt     19,848       200       1,500       231  
Changes in fair value of the structured deposit     (1,124 )     -       -       -  
Loss from equity method investments     407       406       2,128       327  
Reimbursement of American Depositary Receipt (“ADR”) program related expenses     -       (1,390 )     -       -  
Gain on disposal of subsidiaries     -       (136,914 )     (5,477 )     (842 )
Accumulated deficit brought forward from acquired VIE     (96 )     -       (2,324 )     (357 )
Changes in operating assets and liabilities:                                
Account payable     -       18       -       -  
Accounts receivable     51,062       (4,360 )     -       -  
Prepayments and other current assets     137,652       (4,347 )     (32,208 )     (4,950 )
Deposits     8,854       (4,759 )     46       7  
Accrued expenses and other current liabilities     (43,114 )     55,359       11,619       1,785  
Accrued payroll and welfare payable     (15,896 )     1,807       413       63  
Long-term payables     2,734       (2,456 )     (19,623 )     (3,016 )
Income tax payable     (9,248 )     5,336       (2,133 )     (328 )
Net cash provided by (used in) operating activities     42,375       (114,341 )     (202,199 )     (31,078 )
                                 
Cash flows from investing activities                                
Acquisition of property and equipment     (10,214 )     (26,888 )     (72,892 )     (11,203 )
Acquisition of intangible assets     (885 )     -       (2,142 )     (329 )
Cash received from disposal of subsidiary     -       224,392       71,820       11,038  
Acquisition of other non-current assets     (58,487 )     (28,385 )     (302,317 )     (46,465 )
Restricted cash     2,070       6,895       -       -  
Cash paid for business combination, net of cash     (93,201 )     (6,671 )     (374,342 )     (57,535 )
Cash paid for short-term investments     (44,416 )     (213,460 )     (20,000 )     (3,074 )
Cash paid for time deposits     (2,077,901 )     (938,928 )     -       -  
Cash received from return of time deposits     1,290,692       1,386,854       804,692       123,679  
Cash received from return of short-term investments     70,182       100,000       -       -  
Proceeds from disposal of property and equipment     97       24       3,536       543  
Net cash (used in) provided by investing activities     (922,063 )     503,833       108,355       16,654  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

  F- 9  

 

 

500.COM LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

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

 

    For the years ended December 31,  
    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Cash flows from financing activities                                
Proceeds from short-term bank borrowings     174,000       -       -       -  
Repayment of short-term bank borrowings     (174,000 )     -       -       -  
Cash received from release of restricted cash     190,839       -       2,466       379  
Cash paid for restricted cash     (190,839 )     -       -       -  
Proceeds from the exercise of share options     18,126       12,558       5,583       858  
Proceeds from the private placement     739,108       -       -       -  
Repurchase of ordinary shares     (8,773 )     (131,042 )     (17,283 )     (2,656 )
Reimbursement of ADR program related expenses     -       1,390       -       -  
Net cash provided by (used in) financing activities     748,461       (117,094 )     (9,234 )     (1,419 )
Effect of exchange rate changes on cash and cash equivalents     46,328       47       (40,900 )     (6,286 )
Net (decrease) increase in cash and cash equivalents     (84,899 )     272,445       (143,978 )     (22,129 )
Cash and cash equivalents at beginning of the year     485,556       400,657       673,102       103,454  
Cash and cash equivalents at end of the year     400,657       673,102       529,124       81,325  
                                 
Supplemental disclosures of cash flow information:                                
Income tax paid     (9,439 )     (51 )     (8,931 )     (1,373 )
Interest received     15,400       18,977       19,416       2,984  

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

  F- 10  

 

 

500.COM LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”) except for number of shares)

 

    500.com Limited shareholders              
    Number of
Class A
ordinary
shares 		    Number of
Class B
ordinary
shares 		    Ordinary
shares 		    Additional
paid-in
capital 		    Treasury
shares 		    Accumulated
other
comprehensive
income 		    Accumulated
deficit 		    Noncontrolling
interests 		    Total
Equity 		 
                RMB     RMB     RMB     RMB     RMB     RMB     RMB  
Balance as of December 31, 2014     254,844,582       96,634,529       121       1,106,234       -       22,637       (11,370 )     -       1,117,622  
Acquisition of VIE     -       -       -       -       -       -       (96 )     -       (96 )
Acquisition of shares of consolidated subsidiaries     -       -       -       -       -       -       -       98,785       98,785  
Net loss for the year     -       -       -       -       -       -       (323,897 )     (312 )     (324,209 )
Other comprehensive income     -       -       -       -       -       -       -       -       -  
Foreign currency translation gain     -       -       -       -       -       66,851       -       -       66,851  
Conversion of Class B to Class A ordinary shares     11,635,370       (11,635,370 )     -       -       -       -       -       -       -  
Issuance of ordinary shares from private placement     63,500,500       -       20       739,089       -       -       -       -       739,109  
Issuance of ordinary shares from exercise of share options     5,274,480       -       1       18,418       -       -       -       -       18,419  
Repurchase of ordinary shares     (1,220,000 )     -       -       -       (8,773 )     -       -       -       (8,773 )
Share-based compensation     -       -       -       158,628       -       -       -       -       158,628  
                                                                         
Balance as of December 31, 2015     334,034,932       84,999,159       142       2,022,369       (8,773 )     89,488       (335,363 )     98,473       1,866,336  
Acquisition of shares of consolidated subsidiaries     -       -       -       -       -       -       -       98,887       98,887  
Net loss for the year     -       -       -       -       -       -       (202,965 )     (6,287 )     (209,252 )
Other comprehensive income     -       -       -       -       -       -       -       -       -  
Foreign currency translation gain     -       -       -       -       -       82,347       -       -       82,347  
Change in fair value of available for sale investments     -       -       -       -       -       754       -       -       754  
Conversion of Class B to Class A ordinary shares     10,598,860       (10,598,860 )     -       -       -       -       -       -       -  
Issuance of ordinary shares from exercise of share options     2,276,320       -       1       12,675       -       -       -       -       12,676  
Disposal of shares of consolidated subsidiaries     -       -       -       -       -       -       -       (92,561 )     (92,561 )
Repurchase of ordinary shares     (11,415,320 )     -       -       -       (114,485 )     -       -       -       (114,485 )
Share-based compensation     -       -       -       163,341       -       -       -       -       163,341  
                                                                         
Balance as of December 31, 2016     335,494,792       74,400,299       143       2,198,385       (123,258 )     172,589       (538,328 )     98,512       1,808,043  
                                                                         
Disposal of VIE     -       -       -       -       -       -       (2,324 )     67       (2,257 )
Acquisition of shares of consolidated subsidiaries     -       -       -       -       -       -       -       -       -  
Net (loss) income for the year     -       -       -       -       -       -       (317,099 )     957       (316,142 )
Other comprehensive income                                                                        
Foreign currency translation gain     -       -       -       -       -       (55,805 )     -       -       (55,805 )
Change in fair value of available for sale investments     -       -       -       -       -       (733 )     -       -       (733 )
Issuance of ordinary shares from exercise of share options     894,760       -       -       5,583       -       -       -       -       5,583  
Repurchase of ordinary shares     (2,602,000 )     -       -       -       (20,522 )     -       -       -       (20,522 )
Share-based compensation     -       -       -       91,143       -       -       -       -       91,143  
                                                                         
Balance as of December 31, 2017     333,787,552       74,400,299       143       2,295,111       (143,780 )     116,051       (857,751 )     99,536       1,509,310  
Balance as of December 31, 2017, in US$                     21       352,753       (22,099 )     17,837       (131,834 )     15,298       231,976  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

  F- 11  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

1. ORGANIZATION

 

500.com Limited (the “Company”) was incorporated under the laws of the Cayman Islands on April 20, 2007 under the original name of “Fine Success Limited”, which was changed to “500wan.com” on May 9, 2011 and further changed to the current name on October 9, 2013.

 

As of December 31, 2017, the Company has subsidiaries incorporated in countries and jurisdictions including the People’s Republic of China (“PRC”), British Virgin Islands, Hong Kong, the United States of America (“USA”), United Kingdom of British (“UK”), Malta, Cyprus, Curacao, Australia and Japan and the Company also effectively controls a number of variable interest entities (“VIEs”), through the Primary Beneficiaries, as defined below. The accompanying consolidated financial statements include the financial statements of the Company, its subsidiaries, VIEs and VIEs’ subsidiaries.

 

The Company does not conduct any substantive operations on its own but instead conducts its business operations through its wholly-owned and majority-owned subsidiaries and their respective VIEs or subsidiaries. As of December 31, 2017, the Company’s major subsidiaries, VIEs and VIEs’ subsidiaries are listed below:

 

Entity   Date of
establishment 		  Place of
establishment 		  Percentage
of
ownership
by the
Company 		    Principal
activities
                   
Subsidiaries                    
Fine Brand Limited (“BVI”)   February 9, 2011   British Virgin Islands     100 %   Investment Holding
500wan HK Limited (“500wan HK”)   March 8, 2011   Hong Kong     100 %   Investment Holding
500.com USA Corporation (“500.com USA”)   July 21, 2014   USA     100 %   Investment Holding
500.com Gaming UK Limited (“500.com UK”)   August 5, 2016   UK     100 %   Investment Holding
E-Sun Sky Computer (Shenzhen) Co., Ltd. (“E-Sun Sky Computer”)   June 18, 2007   PRC     100 %   Software Service
Shenzhen Guangyi Network Technology Co., Ltd. (“Guangyi Network”)   August 5, 2015   PRC     100 %   Software Service
Qufan Internet Technology Inc. (“Qufan Cayman”)   September 30, 2016   Cayman     51 %   Investment Holding
Qufan Internet Technology (HK) Limited (“Qufan HK”)********   October 18, 2016   Hong Kong     51 %   Investment Holding
Qufan Internet Technology (Malta) Limited (“Qufan Malta”)********   August 4, 2017   Malta     51 %   Online Gaming Service
Qufan Information Technology (Shenzhen) Co., Ltd (“Qufan Information Technology”)********   January 5, 2017   PRC     51 %   Software Service
500.com Nihon Co.,Ltd. (“500.com JP”)   July 27, 2017   Japan     100 %   Investment Holding
The Multi Group Ltd (“The Multi Group”)   June 26, 2015   Malta     93 %   Investment Holding
Multi Warehouse Ltd*******   December 3, 2014   Malta     93 %   Online Gaming
Multi Brand Gaming Ltd*******     October 3, 2014   Malta     93 %   Online Gaming
Multilotto UK Ltd*******    September 1, 2016    Malta     93 %   Online Gaming
Lotto Warehouse Ltd*******    September 1, 2016    Malta     93 %   Online Gaming
Wasp Media Ltd*******    August 12, 2016    Malta     93 %   Online Gaming
Round Spot Services Ltd*******    May 6, 2015   Cyprus     93 %   Online Gaming
Multi Pay N.V.*******    August 25, 2011   Curacao     93 %   Online Gaming
Multilotto Australia PTY Ltd*******    December 13, 2016    Australia     93 %   Online Gaming

 

 

  F- 12  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

1. ORGANIZATION (continued)

 

Entity   Date of
establishment 		  Place of
establishment 		  Percentage of
ownership
by the
Company 		    Principal
activities
                   
VIEs                    
Shenzhen E-Sun Network Co., Ltd. (“E-Sun Network”)   December 7, 1999   PRC     -     Online Lottery Service
Shenzhen Youlanguang Science and Technology Co., Ltd. (“Youlanguang Technology”)   December 16, 2008   PRC     -     Online Lottery Service
Shenzhen Guangtiandi Science and Technology Co., Ltd. (“Guangtiandi Technology”)   December 16, 2008   PRC     -     Online Lottery Service
Shenzhen Tongfu Technology Co., Ltd. (“Tongfu Technology”)   August 28, 2015   PRC     -     Third party payment service
Shenzhen Qufan Network Technology Co., Ltd. (“Shenzhen Qufan”) *****   September 13, 2013   PRC     -     Mobile Gaming
                     
Subsidiaries of the VIEs                    
Shenzhen E-Sun Sky Network Technology Co., Ltd. (“E-Sun Sky Network”) *   May 22, 2006   PRC     -     Online Lottery Service
Lhasa Yicai Network Technology Co., Ltd. (“Lhasa Yicai”) **   October 17, 2014   PRC     -     Online Lottery Service
Shenzhen Yicai Network Technology Co., Ltd. (“Shenzhen Yicai”) ***   July 21, 2015   PRC     -     Online Lottery Service
Shenzhen Wubai Zhifu Co.,Ltd. (“500Fu”)***   April 23, 2014   PRC     -     Third party payment service
Shenzhen Fenggu Network Technology Co., Ltd. (“Shenzhen Fenggu”) ****   August 27, 2015   PRC     -     Online Lottery Service
Beijing Baifengrun Science and Technology Co., Ltd. (“Baifengrun Technology”) *****   September 13, 2011   PRC     -     Development, operation of Online Gaming
Shenzhen Kaisheng Jinfu Enterprise Management Co., Ltd. (“Shenzhen Kaisheng”) *****   June 24, 2016   PRC     -     Online Spot Commodity Trading Services
Beijing Daguo Xiaoxian Culture Media Co., Ltd (“Daguoxiaoxian”)******    July 24, 2014   PRC     -     Investment
Holding

 

* A subsidiary of E-Sun Network

** A subsidiary of E-Sun Sky Network

*** A subsidiary of Youlanguang Technology

**** A subsidiary of Shenzhen Yicai

***** A subsidiary of Guangtiandi Technology

****** A subsidiary of Shenzhen Qufan

******* A subsidiary of The Multi Group

******** A subsidiary of Qufan Cayman

 

  F- 13  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

1. ORGANIZATION (continued)

 

The Company, its subsidiaries and VIEs are hereinafter collectively referred to as the “Group”.

 

Most of the entities listed above are either holding companies or companies that have no operations. The entities that have substantive operations include: E-Sun Sky Computer, Qufan Information Technology, The Multi Group and the VIEs or subsidiaries related to these entities.

 

The Group provides online lottery purchase services, mobile gaming services, sports information services, online spot commodity trading services in the PRC, and online gaming services in Europe. The Group’s principal geographic markets are in the PRC and northern Europe.

 

Information on Variable Interest Entities (“VIEs”)

 

PRC laws and regulations prohibit or restrict foreign ownership of Internet businesses. To comply with these foreign ownership restrictions, the Company operates its websites and provides online lottery purchase services in the PRC through the VIEs. Prior to December 28, 2013, the Company entered into exclusive business cooperation agreements, power of attorney, equity interest pledge agreements, exclusive option agreements, financial support agreements and supplementary agreements to the exclusive option agreements (previously named as exclusive technical consulting and service agreements, power of attorney, equity pledge agreements, equity interest disposal agreements, financial support agreements, business operation agreements and intellectual properties license agreements prior to June 1, 2011) (the “Contractual Arrangements”), with several entities through E-Sun Sky Computer, which obligates E-Sun Sky Computer to absorb a majority of the expected losses from the activities of these entities’ activities, and entitles E-Sun Sky Computer to receive a majority of residual returns from these entities’ activities. As result of these contractual arrangements, these entities are considered as VIEs of the Company. Through these aforementioned agreements, the Company maintains the ability to approve decisions made by the VIEs, and the ability to acquire the equity interests in the VIEs when permitted by the PRC laws via E-Sun Sky Computer.

 

As a result of the Contractual Arrangements and because the Company has been determined to 1) be the most closely associated with the VIEs as it has the power to direct the activities of the VIEs that most significantly impact their economic performance, and 2) has the obligation to absorb losses and/or the right to receive benefits of the VIEs that could potentially be significant to the VIEs, the Company consolidates the VIEs as required by Accounting Standards Codification (“ASC”) 810 (“ASC 810”), “ Consolidation” .

 

On December 28, 2013, the Company agreed to provide unlimited financial support to the VIEs for their operations. In addition, pursuant to the power of attorney agreements entered into among the Company, E-Sun Sky Computer and the nominee shareholders of the VIEs, on December 28, 2013, the nominee shareholders of the VIEs assigned the rights to attend the VIEs’ shareholders' meetings and to vote on all of the matters in the VIEs that require shareholders' approval, which was originally entrusted to E-Sun Sky Computer, to the Company. As a result of the assignment of power of attorney from E-Sun Sky Computer to the Company and the provision of unlimited financial support from the Company to the VIEs, the Company has been determined to be most closely associated with the VIEs within the group of related parties and replaced E-Sun Sky Computer as the primary beneficiary of the VIEs on December 28, 2013.

 

On January 10, 2017, as a result of acquisition of Qufan Cayman, the Company also entered into the contractual arrangements with Shenzhen Qufan through Qufan Information Technology, which obligates Qufan Information Technology to absorb a majority of the expected losses from the activities of Shenzhen Qufan, and entitles Qufan Information Technology to receive a majority of residual returns from Shenzhen Qufan.

 

  F- 14  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

1. ORGANIZATION (continued)

 

The carrying amounts of the assets, liabilities, the results of operations and cash flows of all of these VIEs included in the Group’s consolidated balance sheets, statements of comprehensive income (loss) and statements of cash flows are as follows:

 

    As of
December
31, 2016 		    As of
December
31, 2017 		    As of
December
31, 2017 		 
    RMB     RMB     US$  
                   
ASSETS                        
Current assets:                        
Cash and cash equivalents     257,001       101,023       15,527  
Restricted cash     3,703       1,237       190  
Short-term investments     -       20,000       3,074  
Amounts due from intergroup companies     1,589       2,562       394  
Prepayments and other current assets     109,032       38,016       5,843  
                         
Total current assets     371,325       162,838       25,028  
                         
Non-current assets:                        
Property and equipment, net     46,986       100,627       15,466  
Intangible assets, net     60,408       49,558       7,617  
Deposits     4,397       4,254       654  
Long-term investments     53,995       53,044       8,153  
Other non-current assets     2,671       6,296       968  
Goodwill     160,438       130,613       20,075  
                         
Total non-current assets     328,895       344,392       52,933  
                         
TOTAL ASSETS     700,220       507,230       77,961  
                         
LIABILITIES                        
Current liabilities:                        
Amounts due to intergroup companies     69,423       71,168       10,938  
Accrued payroll and welfare payable     15,846       14,703       2,260  
Accrued expenses and other current liabilities     67,166       57,761       8,878  
Income tax payable     8,897       5,310       816  
                         
Total current liabilities     161,332       148,942       22,892  
                         
Non-current liabilities:                        
Deferred tax liability, non-current     14,902       12,721       1,955  
Long-term payables     42,705       27,673       4,253  
                         
Total non-current liabilities     57,607       40,394       6,208  
                         
TOTAL LIABILITIES     218,939       189,336       29,100  

 

  F- 15  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

1. ORGANIZATION (continued)

 

    For the years ended December 31,  
    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Net revenues     87,065       10,928       81,954       12,596  
Net loss     (130,330 )     (8,851 )     (124,034 )     (19,064 )
                                 
    For the years ended December 31,  
    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Net cash (used in) operating activities     (83,113 )     (50,876 )     (162,328 )     (24,949 )
Net cash (used in) provided by investing activities     (105,922 )     166,222       6,350       976  
Net cash (used in) provided by financing activities     -       -       -       -  

 

There was no pledge or collateralization of the VIEs’ assets. Creditors of the VIEs have no recourse to the general credit of the Company, which is the primary beneficiary of the VIEs. In addition, the Company has not provided any financial support to its VIEs as of December 31, 2017.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and use of estimates

 

The accompanying consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in the Group’s consolidated financial statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, useful lives of property and equipment, impairment of long-lived assets, long-term investments and goodwill, the purchase price allocation and fair value of non-controlling interests with respect to business combinations and acquisition of equity method investees, realization of deferred tax assets, uncertain income tax positions and share-based compensation. Actual results could materially differ from those estimates.

 

Changes in Presentation of Comparative Information

 

Certain comparative amounts have been reclassified to conform with the current year’s presentation.

 

  F- 16  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Principles of consolidation

 

The consolidated financial statements of the Group include the financial statements of the Company, its subsidiaries and VIEs in which it has a controlling financial interest. The results of the subsidiaries are consolidated from the date on which the Group obtained control and continue to be consolidated until the date that such control ceases. A controlling financial interest is typically determined when a company holds a majority of the voting equity interest in an entity. Furthermore, if the Company demonstrates that it has ability to control the VIEs through its rights to all the residual benefits of the VIEs and its obligation to fund losses of the VIEs then the entity is consolidated. All significant intercompany balances and transactions among the Company, its subsidiaries and VIEs have been eliminated on consolidation.

 

Convenience translation

 

Translations of amounts from RMB into US$ for the convenience of the reader were calculated at the noon buying rate of US$1.00 to RMB6.5063 on December 29, 2017 in the city of New York for wire transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

 

Foreign currency translation

 

The functional currency of the Company, BVI, 500wan HK, 500.com UK, 500.com USA, 500.com JP, Qufan Cayman, Qufan HK is the US$. The functional currency of The Multi Group and its subsidiaries and Qufan Malta is EUR. E-Sun Sky Computer, Qufan Information Technology and their VIEs determined their functional currencies to be the RMB, which is their respective local currencies based on the criteria of ASC 830, “ Foreign Currency Matters” . The Group uses the monthly average exchange rate for the year and the spot exchange rate at the balance sheet date to translate the operating results and financial position, respectively. Translation differences are recorded in accumulated other comprehensive income as a component of shareholders’ equity. The Group uses the RMB as its reporting currency.

 

Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Exchange gains and losses resulting from foreign currency transactions are included in the consolidated statements of comprehensive income (loss).

 

  F- 17  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Business combinations and noncontrolling interests

 

The Group accounts for its business combinations using the purchase method of accounting in accordance with ASC 805 (“ASC 805”), “ Business Combinations” . The purchase method of accounting requires that the consideration transferred to be allocated to the assets, including separately identifiable assets and liabilities the Group acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.

 

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Group determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period.

 

For the Company's majority-owned VIEs, a noncontrolling interest is recognized to reflect the portion of their equity which is not attributable, directly or indirectly, to the Group. “Net income (loss)” on the consolidated income statements includes the “net loss attributable to noncontrolling interests”. The cumulative results of operations attributable to noncontrolling interests are also recorded as noncontrolling interests in the Company's consolidated balance sheets.

 

  F- 18  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Cash and cash equivalents

 

Cash and cash equivalents represent cash on hand and time deposits, which have original maturities of three months or less when purchased and which are unrestricted as to withdrawal and use. In addition, highly liquid investments which have original maturities of three months or less when purchased are classified as cash equivalents.

 

Restricted cash

 

Restricted cash represents cash held by banks which were granted by the government and designated only for the purchase of fixed assets for certain approved projects.

 

Time deposits

 

Time deposits represent deposits in commercial banks with original maturities of greater than three months but less than a year. Interest income from time deposits is included in the consolidated statements of comprehensive income (loss). During the years ended December 31, 2015, 2016 and 2017, the Group recorded interest income of RMB20,589, RMB23,859 and RMB20,574 (US$3,162), respectively, in the consolidated statements of comprehensive income (loss).

 

Accounts receivables and allowance for doubtful accounts

 

Accounts receivables are carried at original invoiced amount less an allowance for doubtful accounts when collection of the amount is no longer probable. In evaluating the collectability of receivable balances, the Group considers factors such as customer circumstances or age of the receivable. Accounts receivable are written off after all collection efforts have ceased. Collateral is not typically required, nor is interest charged on accounts receivable.

 

  F- 19  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Property and equipment, net

 

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, as follows:

 

Category   Estimated Useful Life   Estimated Residual  
           
Electronics and office equipment   3-5 years     5 %
Motor vehicles   5-10 years     2-5 %
Leasehold improvements   Shorter of lease term or the estimated useful lives of the assets     -  

 

Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extend the useful lives of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of comprehensive income (loss).

 

Intangible assets

 

Intangible assets represent computer software, internet domain name, licensing agreement, and intangible assets arising from business combination. Computer software, internet domain name and licensing agreement purchased from third parties are initially recorded at cost and amortized on a straight line basis over their estimated useful lives of the respective assets. The Group performs valuation of the intangible assets arising from business combination to determine the relative fair value to be assigned to each asset acquired. The acquired intangible assets are recognized and measured at fair value and are expensed or amortized using the straight-line approach over the estimated useful life of the assets. Estimated useful lives of the respective assets are set out as follows:

 

Category   Estimated Useful Life
     
Computer software   3-10 years
Internet domain name   10 years
Licensing agreement   Agreement term
Intangible assets arising from business combination    
Online payment and other licenses, brand name   10-15 years
Mobile applications and software   5 years

 

  F- 20  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Goodwill

 

The Group assesses goodwill for impairment in accordance with ASC 350-20 (“ASC 350-20”), “ Intangibles–Goodwill and Other: Goodwill” , which requires that goodwill to be tested for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by ASC 350-20.

 

The Group has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step test in accordance with ASC 350-20. If the Group believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, the two-step quantitative impairment test described above is required. Otherwise, no further testing is required. In the qualitative assessment, the Group considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. In performing the two-step quantitative impairment test, the first step compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares or estimated fair value using a combination of the income approach and the market approach. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and the Group is not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the Group must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss.

 

In 2017, the Group performed qualitative assessments for the reporting units. Based on the requirements of ASC 350-20, the Group evaluated all relevant factors, weighed all factors in their entirety and concluded that the fair value was greater than the carrying amount of the newly acquired entities, and further impairment testing on goodwill was unnecessary as of December 31, 2017.

 

  F- 21  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Impairment of long-lived assets other than goodwill

 

The Group evaluates its long-lived assets or asset group, including property and equipment and intangible assets, with finite lives for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Group evaluates the impairment by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount of the asset group over its fair value. No impairment charge for the long-lived assets was recognized for any of the years presented.

 

Short-term investments

 

All highly liquid investments with original maturities of greater than three months, but less than 12 months, are classified as short-term investments in accordance with ASC 320-10, “Investments—Debt and Equity Securities” . In accordance with ASC 815, “Derivatives and Hedging” , the Group recognizes financial instruments or other contracts that have all the characteristics of a derivative on its balance sheet as either assets or liabilities, at fair value. Changes in the fair value of derivative financial instruments (“financial derivatives”) are either recognized periodically in earnings or in “other comprehensive income” depending on the use of the financial derivatives and whether it qualifies for hedge accounting. Changes in fair values of financial derivatives not qualified as hedges are reported in earnings. The estimated fair values of financial derivatives are determined at discrete points in time based on the relevant market information. These estimates are calculated with reference to the market rates using industry standard valuation techniques.

 

Long-term investments

 

The Group’s long-term investments consist of cost method investments, equity method investments and available-for-sale investments.

 

  F- 22  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Long-term investments (continued)

 

In accordance with ASC 325, “ Investments-Other” , for investments in an investee over which the Group does not have significant influence and which do not have readily determinable fair value, the Group carries the investment at cost and only adjusts for other-than-temporary declines in fair value and distributions of earnings that exceed the Group’s share of earnings since its investment. Management regularly evaluates the impairment of the cost method investments based on performance and financial position of the investee as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs. An impairment loss is recognized in earnings equal to the excess of the investment’s cost over its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value would then become the new cost basis of investment.

 

Investments in entities in which the Group can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC 323 (“ASC 323”), “Investments-Equity Method and Joint Ventures” . Under the equity method, the Group initially records its investment at cost and the difference between the cost of the equity investee and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. The equity method goodwill is not subsequently amortized and is not tested for impairment under ASC 350. The Group evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary. The Group subsequently adjusts the carrying amount of the investment to recognize the Group’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Group will discontinue applying the equity method if an investment (and additional financial supports to the investee, if any) has been reduced to zero. Under the conditions that the Group is not required to advance additional funds to an investee and the equity-method investment in ordinary shares is reduced to zero, if further investments are made that have a higher liquidation preference than ordinary shares, the Group would recognize the loss based on its percentage of the investment with the same liquidation preference, and the loss would be applied to those investments of a lower liquidation preference first before being further applied to the investments of a higher liquidation preference. The Group evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.

 

According to the above testing, an impairment loss of RMB28.8 million (US$ 4.4 million) for the long-term investments was recognized during the year of 2017.

 

  F- 23  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Long-term investments (continued)

 

Available-for sale investments are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. Realized gains or losses are included in earnings during the period in which the gain or loss is realized. An impairment loss on the available-for-sale investments is recognized in the consolidated statements of comprehensive income (loss) when the decline in value is determined to be other-than-temporary.

 

Investments in limited partnerships greater than 3% to 5% are considered more than minor and accounted for using the equity method, unless it is readily apparent that the Group has virtually no influence over the partnership’s financial and operating policies.

 

Fair value measurements

 

Financial instruments include cash and cash equivalents, restricted cash, time deposits, accounts receivable, structured deposit (Note 5), other receivables, long-term investments and accounts payable. As of December 31, 2016 and 2017, the carrying values of these financial instruments, approximate their fair values due to their short-term maturities. The Group determined the fair value of the derivative redemption feature and the structured deposit with the assistance of an independent third -party valuation firm.

 

The Group applies ASC 820 (“ASC 820”), “Fair Value Measurements and Disclosures ”. ASC 820 defines fair value, establishes a framework for measuring fair value and requires disclosures to be provided on fair value measurement.

 

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

  Level 1— Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
  Level 2— Include other inputs that are directly or indirectly observable in the marketplace.
  Level 3— Unobservable inputs which are supported by little or no market activity.

 

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach, and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

  F- 24  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue recognition

 

The Group’s revenues were derived principally from online lottery purchase services before voluntary suspension of this service since April 2015. During the voluntary suspension period, The Group diversified its revenue streams, and derived revenues from mobile gaming services, sports information services, online spot commodity trading services and online gaming services. Revenue is recognized in accordance with ASC 605, “Revenue Recognition” when all of the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the service has been rendered; (iii) the fees are fixed or determinable; and (iv) collectability is reasonably assured. And with ASC 606, “Revenue from Contracts with Customers” when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied.

 

The Company will apply the new revenue standard beginning January 1, 2018, and plans to adopt a modified retrospective approach upon adoption. The Group has set up an implementation schedule and is currently in the process of analyzing each of the Group’s revenue streams in accordance with the new revenue standard to determine the impact on the Group’s consolidated financial statements. Specifically, we recognize revenues based on the following revenue recognition principles:

 

Online lottery purchase services

 

The Group earns service income for online lottery purchase services and revenues are generated from processing lottery purchase orders from end users (“Service Fee”). The Group receives purchase orders from end users through its online platforms, which include website and mobile applications, and processes the orders with the lottery administration centers. Service Fee is received from the lottery administration centers based on the pre-determined service fee rate and the total amount of the processed orders. Pursuant to ASC 605-45, “ Principal Agent Considerations ”, the Group records Service Fee on a net basis because the Group is not the primary obligor in the arrangement, but acts as an agent in providing such purchase services. The Group did not generate any revenue from this service since April 2015 when the Group voluntarily suspended the online lottery purchase services due to the change of related government regulation in the PRC. It is uncertain when the services will be resumed.

 

Contingent service fee

 

The Group was also entitled to receive additional Service Fee from lottery administration centers when the total amounts of purchase orders reach an agreed threshold (“Contingent Service Fee”). As the Group is the agent in providing lottery purchase services, any Contingent Service Fee received is recorded as net revenue when the agreed thresholds are reached. Once the Group reaches the agreed thresholds, the Contingent Service Fee is then fixed and not subject to any adjustments. As a result of the voluntarily suspension of the online lottery purchase services mentioned above, the Group did not generate any revenue from this source either since April 2015, and it is uncertain when we will be able to generate this fee again in the future.

 

  F- 25  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The Super VIP incentive

 

Certain qualified end users (“Super VIP”) are entitled to receive incentives from the Group based on actual purchase amount of each transaction. As the Group does not receive an additional service or benefit from the Super VIP other than service fee earned from lottery administration centers by the Group from the transaction, the incentives are recognized as a reduction of revenue at each year end in accordance with ASC 605-50, “ Customer Payments and Incentives” .

 

  F- 26  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Lottery pool purchase service

 

Lottery pools involve individual end users purchasing a share in a pooled lottery outcome or group of outcomes with other end users. Through the lottery pool purchase service, an end user, an initiator, starts a lottery pool by specifying a range of parameters, such as the lottery portfolio, total purchase amount and payout ratio.

 

The initiator is required to commit a minimum initial purchase amount when they initiate a pool, usually a certain percentage of the total purchase amount. Other end users then join the pool by agreeing to the parameters set by the initiator and committing on the purchase amount. When the total purchase amount as specified by the initiator is reached, the pooled lottery purchase order will be delivered in the manner specified by the initiator. When the actual purchase amount does not reach the total purchase amount as specified by the initiator but reaches a certain percentage of total purchase amount before the lottery pool purchase deadline, the Group contributes the remaining outstanding purchase amount (i.e., residual amount of lottery pool) to complete the lottery pool transaction. If the tickets win prizes from the lottery, the Group distributes the cash prizes to the end users based on the predetermined payout ratio, and the residual amount after distribution is retained by the Group.

 

Since the Group contributes the residual amount of lottery pool to earn Service Fee from the purchase made by the lottery pool and does not provide any service to the lottery administration centers, the residual amount of lottery pool contributed by the Group paid to the lottery administration centers is recognized as a reduction of revenue. The residual amount of the lottery pool retained by the Group after distribution of the prizes are presented as “other operating income”, and recognized upon the announcement of lottery results, as the Group’s principal activity is to provide lottery purchase services to end users.

 

Mobile Gaming Services

 

The Group provides mobile gaming services through its designated mobile applications Quiz, Night of Texas Hold’em Poker and Paiyou for Texas Hold’em Poker, and derives revenues from in-game virtual tokens and other virtual items in its game development operations. Once the users purchase virtual tokens or other virtual items through the Group’s own charging system, the Group has an implied obligation to provide the services which enable the virtual tokens or other virtual items to be displayed or used in the games. Thus, the Group initially records the proceeds received from the sales of virtual tokens and other virtual items as deferred revenue, and once they are consumed when the services are rendered to the respective paying players, the Group recognizes the attributable portion of the deferred revenue as revenue. For consumable virtual items representing items that are extinguished after consumption in the form of fixed charges levied on each round of games played, the Group recognizes revenue when the items are consumed and the related services are rendered, since the paying players will not continue to benefit from the virtual items thereafter. For durable virtual items that are accessible and beneficial to paying players over an extended period, the Group recognizes revenue ratably over the average life of durable virtual items for the applicable game, which the Group makes best estimates to be average playing period of paying players. The Group tracks each paying player’s log-in history to estimate the average playing period of paying players. While the Group believes its estimates to be reasonable

 

  F- 27  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Mobile Gaming Services (continued)

 

based on sufficient available paying player information, it may revise such estimates in the future as the games’ operation periods change or there is indication that the similarities in characteristics and playing patterns of paying players of the games change. Any adjustments arising from changes in the estimates of the average paying player life would be applied prospectively.

 

Sports Information Services

 

The Group offers a comprehensive sports information portal via a designated mobile application, which covers (i) real time soccer match information; and (ii) data-driven soccer match predictions generated by our proprietary analysis engine. Users can also post free or pay-per-view contents such as proprietary observations and analyses on the sports information portal. The users pay for each information and data subscription at a fixed price, and the Group pays the original information providers a fixed percentage of total purchase amount. Revenue is recognized when users is accessible to the pay-per-view contents. The Group records the revenue on a net basis because the Group is not the primary obligor to provide the information, but acts as an agent in providing such purchase services.

 

Online spot commodity trading services

 

The Group provides online spot commodity trading services through our designated website and mobile application in Shenzhen Kaisheng . We provide our customers with reliable online spot commodity trading for gold trade and delay products across PC and mobile devices. We processed customer orders through a commercial bank, which is a member of Shanghai Gold Exchange in the past, and is in the process of forming a joint venture with another member of such exchange in the second quarter of 2018 to process its customer orders. Trading commissions are received from the commercial bank based on the pre-determined commission fee rate and the total amount of the processed orders. We began to generate a small amount of revenue from trading commissions on the online spot commodity trading services in 2017.

 

Online gaming services

 

The Group also provides online lottery betting and online casino platforms through our designated website in TMG, We earn difference between betting and winning for online lottery betting services and online casino platforms as revenues that are generated from our registered users. The registered users enter into certain terms and conditions when they first open their accounts with us. Lottery and Casino purchase orders are placed by users through our online platforms view website. Then we process these orders. Prior to processing orders, users prepay all purchase amounts. We pay users prizes when there are any winnings attributable to users. We record revenues on a net basis by deducting the winning amounts from betting amounts. Revenue comprises the fair value of the consideration received for the provision of internet gaming in the ordinary course of the company's activities, which is recognized when the outcome of an event is known.

 

  F- 28  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Cost of services

 

Account handling expenses

 

Account handling expenses, which consist primarily of transaction fees charged by banks and third-party payment processors for cash transfers between our users’ accounts on our online platform including websites and mobile applications and their accounts with banks or third-party payment processors, were RMB7.0 million, RMB0.7 million and RMB3.7 million (US$0.6 million) in 2015, 2016 and 2017, respectively.

 

Server leasing and maintenance expenses

 

Server leasing and maintenance expenses, which consist primarily of leasing expense of servers and other equipment used in providing online services, were RMB7.6 million, RMB8.3 million and RMB9.2 million (US$1.4 million) in 2015, 2016 and 2017, respectively.

 

Lottery Insurance expenses

 

Lottery insurance expenses, are consist of insurance premiums payable to insurers for covering the first two categories of winnings in online gaming services for betting on the outcome of lotteries after the acquisition of TMG in July 2017, were RMB7.0 million (US$1.1 million) in 2017.

 

Platform fee

 

Platform fees, are consist of fees payable to online gaming software suppliers for providing various online casino games on The Multi Group’s websites after the acquisition of TMG in July 2017, were RMB5.9 million (US$0.9 million) in 2017.

 

Regulatory and compliance fees

 

Regulatory and compliance fees, which consist of fees payable to regulatory bodies such as Gambling Commission, HM Revenue & Customs, Malta Gaming Authority and Certria EOOD after the acquisition of TMG in July 2017, were RMB0.6 million (US$0.1 million) in 2017.

 

Amortization fees

 

Amortization fees, which consist primarily of amortization of intangible assets arising from business combination, were RMB1.2 million and RMB26.1 million (US$4.0 million) in 2016 and 2017, respectively.

 

Cost of services also comprises employee costs, business tax and surcharges and other direct costs incurred in providing services. These costs are expensed as incurred.

 

  F- 29  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Sales and marketing expenses

 

Commission to certain internet companies

The Group is responsible to pay certain internet companies a predetermined fixed percentage of the total purchase or deposit amount only if 1) public users enter the Group’s website by redirection through these internet companies’ website, and/or 2) public users have successfully purchased any lottery tickets, virtual tokens, or betting, or deposited certain amounts of cash into their accounts in the Group’s website. The Group is responsible for providing respective services when such public users enter the Group’s website to purchase lottery tickets, virtual tokens or betting. Since these internet companies are providing similar services as those services that have been provided by the Group’s internal sales personnel agent, any relevant costs to be paid by the Group is treated as sales and marketing expenses.

 

Advertising expenditure

Advertising costs are expensed as incurred and are included in “sales and marketing expenses” in the consolidated statements of comprehensive income (loss). Advertising expenses for the years ended December 31, 2015, 2016 and 2017 were approximately RMB26,192, RMB347 and RMB967 (US$149), respectively.

 

Sponsorship expenses

The Group’s sales and marketing expenses also consist of payments under a sponsorship contract. Accounting for sponsorship payments is based upon specific contract provisions.

 

Generally, sponsorship payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance provisions of the contract. Prepayments made under the contract are included in prepayments based on the period to which the prepayments apply.

 

  F- 30  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Sales and marketing expenses (continued)

 

Awards granted to certain qualified end users

All new end users are entitled to receive bonus credits from the Group upon the initial registration of their user accounts and all existing users are entitled to receive bonus credits from the Group by depositing a specified amount of cash into their user accounts during a marketing promotion period. The end users can only apply the bonus credits received against future lottery product purchases and online gaming orders processed by the Group. The bonus credits are recognized as sales and marketing expenses when the bonus credits are granted to the end users.

 

All new and existing end users are entitled to receive additional prize money for winning tickets from selected lotteries purchased through the Group during a marketing promotion period. The cost of the additional prize money is to be shared between the lottery administration centers and the Group at a predetermined percentage or funded entirely by the Group. As the Group does not receive an identifiable benefit in return for the consideration that is sufficiently separable from the lottery administration centers’ purchase of lottery processing services from the Group, the additional prize money provided to the lottery administration center, are recognized as a reduction of revenue at each period end in accordance with ASC 605-50, “ Customer Payments and Incentives”. The additional prize money provided directly from the Group to customers are recognized as sales and marketing expenses when the prize are granted to the end users.

 

Service development expenses

 

Service development expenses consist primarily of personnel-related expenses incurred for the development of, enhancement to, and maintenance of the Group’s website that either (i) did not meet the capitalization criteria in accordance with ASC 350, “Intangibles - Goodwill and other” ; or (ii) met the capitalization criteria but the costs cannot be separated on a reasonably cost-effective basis between maintenance and relatively minor upgrades and enhancements. Service development expenses are recognized as expenses when incurred.

 

  F- 31  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Leases

 

The Group leases certain office facilities under cancelable and non-cancelable operating leases, generally with an option to renew upon expiration of the lease term. In accordance with ASC 840, “ Leases” , leases for a lessee are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the properties estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. The Group had no capital leases for the years ended December 31, 2015, 2016 and 2017.

 

Income taxes

 

The Group follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive income (loss) in the period that includes the enactment date.

 

Interest and penalties arising from underpayment of income taxes are computed in accordance with the related PRC tax law and is classified in the consolidated statements of comprehensive income (loss) as income tax expense. The amount of interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return.

 

  F- 32  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Income taxes (continued)

 

In accordance with the provisions of ASC 740 (“ASC 740”), “Income taxes” the Group recognizes in its financial statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to be sustained upon examination based solely on the technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit, determined on a cumulative probability basis, that has a greater than fifty percent likelihood of being realized upon settlement. The Group’s estimated liability for unrecognized tax benefits which is included in the “long-term payables” account is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits or liability ultimately realized may differ from the Group’s estimates. As each audit is concluded, adjustments, if any, are recorded in the Group’s financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require the Group to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur.

 

In conjunction with ASC 740, the Group also applied ASC 740-30 (“ASC 740-30”), “ Income Taxes: Other Considerations or Special Areas” , to account for the temporary differences arising from the undistributed earnings of the foreign subsidiaries. According to ASC 740-30, all undistributed earnings of a subsidiary shall be presumed to be transferred to the parent entity. Accordingly, the undistributed earnings of a subsidiary included in consolidated income shall be accounted for as a temporary difference and affect deferred tax expense unless the tax law provides a means by which the investment in a domestic subsidiary can be recovered tax free.

 

Share-based compensation

 

Share options and restricted shares granted to employees and directors

Share options and restricted shares granted to employees and directors are accounted for under ASC 718 (“ASC 718”), Compensation - Stock compensation . In accordance with ASC 718, the Group determines whether a share option or restricted shares should be classified and accounted for as a liability award or an equity award. All grants of share options and restricted shares to employees and directors classified as equity awards are recognized in the financial statements based on their grant date fair values. There were no liability awards granted during any of the periods stated herein. The Group recognizes compensation expense using the accelerated method for share options and restricted shares granted with graded vesting based on service conditions, provided that the amount of compensation expense recognized at any date is at least equal to the portion of the grant-date value of the share options and restricted shares that are vested at that date.

 

  F- 33  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Share-based compensation (continued)

 

Share options and restricted shares granted to employees and directors (continued)

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and is adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. To the extent the Group revises this estimate in the future, the share-based payments could be materially impacted in the period of revision, as well as in following periods.

 

The compensation costs associated with a modification of the terms of the award (“Modification Award”) are recognized if either the original vesting condition or the new vesting condition has been achieved. Such compensation costs cannot be less than the grant-date fair value of the original award. The incremental compensation cost is measured as the excess of the fair value of the Modification Award over the fair value of the original award at the modification date. Therefore, in relation to the Modification Award, the Group recognizes share-based compensation over the vesting periods of the new options, which comprises, (1) the amortization of the incremental portion of share-based compensation over the remaining vesting term, and (2) any unrecognized compensation cost of original award, using either the original term or the new term, whichever is higher for each reporting period.

 

Share options granted to non-employees

The Group records share-based compensation expense for awards granted to non-employees in exchange for services at fair value in accordance with the provisions of ASC 505-50, “ Equity-based payment to non-employees” . As the share options granted to non-employees were fully vested on the grant date, the related compensation expense was fully recognized in the consolidated statement of comprehensive income (loss) on the grant date.

 

The Group, with the assistance of an independent valuation firm, determined the fair values of the share options recognized in the consolidated financial statements. The binomial option pricing model is applied in determining the estimated fair value of the share options granted to employees and non-employees.

 

  F- 34  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Earnings (Loss) per share

 

The Group computes earnings per Class A and Class B ordinary shares in accordance with ASC 260 (“ASC 260”), “ Earnings Per Share” , using the two class method. Under the provisions of ASC 260, basic net income (loss) per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the period. Potentially dilutive securities have been excluded from the computation of diluted net income (loss) per share if their inclusion is anti-dilutive. Potential ordinary shares consist of the incremental ordinary shares issuable upon the exercise of stock options. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income (loss) per share of Class A ordinary shares assumes the conversion of Class B ordinary shares, while the diluted net income (loss) per share of Class B ordinary shares does not assume the conversion of those shares.

 

The liquidation and dividend rights of the holders of the Group’s Class A and Class B ordinary shares are identical, except with respect to voting. As a result, and in accordance with ASC 260, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B ordinary shares as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the conversion of Class B ordinary shares is assumed in the computation of the diluted net loss per share of Class A ordinary shares, the undistributed earnings are equal to net loss for that computation.

 

For the purposes of calculating the Group’s basic and diluted earnings (loss) per Class A and Class B ordinary shares, the ordinary shares relating to the options that were exercised are assumed to have been outstanding from the date of exercise of such options.

 

  F- 35  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Government grants

 

Government grants are recognized when there is reasonable assurance that the attached conditions will be complied with. When the grant relates to an expense item, it is recognized in the consolidated statements of comprehensive income (loss) over the period necessary to match the grant on a systematic basis to the related costs. Where the grant relates to an asset acquisition, it is recognized in the consolidated statements of comprehensive income (loss) in proportion to the depreciation of the related assets.

 

Treasury shares

 

The Group accounts for treasury shares using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury shares account on the consolidated balance sheets. At retirement, the ordinary shares account is charged only for the aggregate par value of the shares. The excess of the acquisition cost of treasury shares over the aggregate par value is allocated between additional paid-in capital (up to the amount credited to the additional paid-in capital upon original issuance of the shares) and retained earnings.

 

Change in accounting principle

 

There were no changes during 2017 relating to (i) significant and critical accounting policies, (ii) critical accounting estimates and (iii) evaluation of the quality and application of the Company’s accounting policies and reasonableness of estimates.

 

  F- 36  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board, or the FASB, issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition” . The core principle of the guidance is that an entity should recognize revenue to depict the transfer of the promised goods or services to customers in an amount that reflects the consideration to which entity expects to be entitled to in exchange for goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim period within that reporting period. Early adoption is not permitted. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers-Deferral of the effective date” (“ASU 2015-14”). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 issued in May 2014. According to ASU 2015-14, the new revenue guidance ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Group will apply the new revenue standard beginning January 1, 2018, and plans to adopt a modified retrospective approach upon adoption. The cumulative effect of initially applying the guidance will be recognized at the date of initial application is not expected to be material and prior periods will not be retrospectively adjusted. The Group has substantially completed the assessment and implementation work and does not expect the adoption of this standard to have a material impact on the Group’s net revenue in the consolidated statement of comprehensive income (loss) or will have a minimal impact by the new standard. The accounting treatment for the awards granted to certain qualified end user will be impacted the most by the adoption of this ASU. Specifically, the recognition of revenue associated with the awards will be impacted by eliminating the current accrual for the cost of the bonus awarded at the time of play and instead deferring the portion of the revenue received from the customer at the time of play and attributed to the awarded points until a later period when the bonus are redeemed or forfeited. The revenue deferral will be calculated from the portion of the transaction price allocated to the bonus based upon their retail value. Under the former guidance, the cost of the bonus was recorded as an operating expense through the consolidated statements of comprehensive income (loss).

 

In January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), “ Financial Instruments” . ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently adopting this standard on its consolidated financial statements beginning after December 15, 2017.

 

  F- 37  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent accounting pronouncements (continued)

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. The Group is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”), “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” . ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. The standard will replace “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements

 

  F- 38  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent accounting pronouncements (continued)

 

In November 2016, the FASB issued Accounting Standards Update No. 2016-18 (“ASU 2016-18”), “Statement of Cash Flows (Topic 230): Restricted Cash” . ASU 2016-18 requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for public business entities in the first quarter of 2018. Early adoption is permitted. The Company is currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04(“ASU 2017-04”), “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” . ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This standard is effective for public business entities in the first quarter of 2020. Early adoption is permitted. The Company is currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.

 

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, to provide guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted and application is prospective. The Group has not early adopted this update and it will become effective on January 1, 2018. The Group does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

  F- 39  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent accounting pronouncements (continued)

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). The guidance of Part I is to clarify accounting for certain financial instruments with down round feature in a financial instrument that reduces the strike price of an issued financial instrument if the issuer sells shares of its stock for an amount less than the currently stated strike price of the issued financial instrument or issues an equity-linked financial instrument with a strike price below the currently stated strike price of the issued financial instrument. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features. The amendments also recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The amendments in Part I of ASU No. 2017-11 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Group has not early adopted this update and it will become effective on July 1, 2020. The Group is currently evaluating the impact of our pending adoption of ASU 2017-11 on its consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. ASU No. 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Group has not early adopted this update and it will become effective on July 1, 2019. The Group does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-05 - Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 ("SAB 118") that was released by the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate internationally. The Group has evaluated the impact of the Act as well as the guidance of SAB 118 and incorporated the changes into the determination of a reasonable estimate of the deferred tax and appropriate disclosures in the notes to our consolidated financial statements (see Note 12).

 

  F- 40  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

3. CONCENTRATION OF RISKS

 

Concentration of credit risk

 

Assets that potentially subject the Group to significant concentration of credit risk primarily consist of cash and cash equivalents, time deposits and accounts receivable. As of December 31, 2017, substantially all of the Group’s cash and cash equivalents and time deposits were deposited in financial institutions located in the PRC, Hong Kong, Malta, Japan and USA, which management believes are of high credit quality. Accounts receivable are typically unsecured and derived from commission earned from lottery administration centers in the PRC. The risk with respect to accounts receivable ismitigated by credit evaluations the Group performs on its lottery administration centers and its ongoing monitoring of outstanding balances.

 

Certain Risks and Uncertainties

 

The Group’s newly acquired subsidiary, the Multi Group’s operations are dependent on its continued licensing by the Nordic countries gaming regulatory bodies such as the Curacao e-Gaming license, the remote gambling licenses from Malta, the remote operating licenses from the UK, and the remote bookmaker’s license from Ireland. The loss of a license could have a material adverse effect on future results of its operations. The Group is dependent on the PRC and European markets for a significant number of its patrons and revenues. If economic conditions in these areas deteriorate or additional gaming licenses are awarded to other competitors, the Group’s results of operations could be adversely affected.

 

The Group is also dependent on the PRC economy in general, and any deterioration in the national economic, energy, credit and capital markets could have a material adverse effect on future results of operations. The Group is dependent upon a stable gaming and admission tax structure in the locations in which it operates. Any change in the tax structure could have a material adverse effect on future results of operations.

 

The Group transacts the majority of its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into US$ or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

 

Current vulnerability due to change of regulations or policies

 

The Group’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 30 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

 

  F- 41  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

3. CONCENTRATION OF RISKS (continued)

 

Current vulnerability due to change of regulations or policies (continued)

 

In October 2012, the Group was notified by China Sports Lottery Administration Center that the Group was one of the two entities that had been approved by the Ministry of Finance (“MOF”) to conduct online sales of sports lottery products in PRC on behalf of China Sports Lottery Administration Center. In particular, such approval mandated that the China Sports Lottery Administration Center use its best effort to develop an online lottery sales management system as part of a pilot program for online lottery sales in PRC, and once such a management system is finished, the China Sports Lottery Administration Center should apply again for approval from the MOF for official commencement of online lottery sales in the PRC. However, since the operation of online sports lottery sales services by China Sports Lottery Administration Center itself is in a pilot phase and is subject to further approval by the MOF, the Group’s operation of online sales of sports lottery products may be subject to suspension if China Sports Lottery Administration Center fails to obtain such further approval from the MOF.

 

On January 15, 2015, the MOF, the Ministry of Civil Affairs and the General Administration of Sports of the People’s Republic of China jointly promulgated the Notice on Issues related to the Self-Inspection and Self-Remedy of Unauthorized Online Lottery Sales (the “Self-Inspection Notice”), as a further step to regulate the lottery market in PRC and sanction unauthorized online lottery sales. On February 28, 2015, all sports lottery administration centers temporarily suspended online purchase orders for lottery products in response to the Self-Inspection Notice.

 

On April 3, 2015, eight competent government authorities, namely, the MOF, the Ministry of Public Security, the State Administration for Industry and Commerce, the Ministry of Industry and Information Technology, Ministry of Civil Affairs, People’s Bank of China, the General Administration of Sports of China and China Banking Regulatory Commission, jointly released a public bulletin with regard to online lottery sales in China, or Bulletin 18. Bulletin 18 mandates, among other things, that (i) all institutions, online entities, or individuals which provide unauthorized online lottery sales services, either directly or through agents, shall immediately cease such services and all provincial governmental authorities of finance, civil affairs and sports shall investigate and sanction unauthorized online lottery sales in their respective jurisdictions according to relevant laws and regulations; and (ii) lottery issuance authorities that plan to sell lottery products online are required to obtain a consent from the Ministry of Civil Affairs or the General Administration of Sports of China in order to submit an application for written approval by the MOF.

 

Although the Group is one of the two entities that had been approved by the MOF to conduct online sales of sports lottery products in PRC on behalf of China Sports Lottery Administration Center, the Group decided to voluntarily and temporarily suspend all of its lottery sales services on April 4, 2015. As of December 31, 2017, the online lottery sales business is still not resumed.

 

  F- 42  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

4. BUSINESS COMBINATION

 

Business Combination in 2017:

 

Acquisition of Daguoxiaoxian

 

On May 8, 2017, Shenzhen Qufan entered into a share purchase agreement with the shareholder of Daguoxiaoxian, named Fu Rong, to acquire 70% equity interests of Daguoxiaoxian with the consideration of RMB2.0 million (“Purchase agreement”). Previously, Daguoxiaoxian mainly operates market promotion business and also owns a gaming cooperation agreement (“cooperation agreement”) with Tianjin Zhongqiweiye Sports development Co., Ltd.

 

By obtaining the cooperation agreement, Daguoxiaoxian is authorized to operate China Competitive Poker Championship, from May 14, 2017 to May 14, 2018, with one-year extension upon the expiration if no objection between both parties. The Group acquired Daguoxiaoxian primarily for the cooperation agreement.

 

Acquisition of The Multi Group

 

On July 17, 2017 (“the acquisition date”), the Company acquired 93.0% equity interest of The Multi Group (“TMG”) through 500.com Limited for a total consideration of approximately EUR49.8 million (US$59.9 million). The Multi Group engages in operating Multilotto.com (“Multilotto”) which is considered one of the top online lottery betting and online casino platforms in the Nordic countries where it holds substantial market share.

 

As of July 17, 2017, the Group settled payment of EUR49,754 cash consideration for the acquisition.

 

The Group recognized RMB18,766(US$2,884) of acquisition-related costs that were expensed in the current period. These costs are included in the line item “General and administrative expenses” in the statement of comprehensive income (loss).

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date. The Group obtained a third-party valuation of certain intangible assets. The calculation of RMB amount was based on the exchange rate of 1.00 EUR to 7.7514 RMB of the acquisition date on July 17, 2017.

 

    Amount     Amount     Amount     Amortization Years  
    EUR     RMB     USD        
License     19,400       150,377       23,113       10.0  
Brand name     11,100       86,041       13,224       10.0  
Software     900       6,976       1,072       5.0  
Others     7,116       55,159       8,478          
Total identifiable assets acquired     38,516       298,553       45,887          
                                 
Deferred tax liabilities     (1,164 )     (9,023 )     (1,694 )        
Other current liabilities     (1,422 )     (11,022 )     (1,387 )        
Total liabilities assumed     (2,586 )     (20,045 )     (3,081 )        
                                 
Net identifiable assets acquired     35,930       278,508       42,805          
Noncontrolling interests #     2,915       22,595       3,473          
Total Consideration     49,754       385,662       59,275          
Goodwill     16,739       129,749       19,943          

 

  F- 43  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

4. BUSINESS COMBINATION (continued)

 

In accordance with the acquisition agreement, the Group is obligated to purchase the remaining 7% equity interest of The Multi Group at the option of the non-controlling shareholder, which is outside the control of the Group (upon the occurrence of an event that is not solely within the control of the issuer). As such, the noncontrolling interest relating to this portion of put options is presented as redeemable noncontrolling interest in mezzanine equity and be initially measured at its fair value in accordance with ASC 480-10-S99-3A.

 

The fair value of redeemable noncontrolling interest was initially recorded as the value assessed by the third-party on the acquisition day and is increased or decreased based on earnings or losses of the investments allocable to the noncontrolling interest. Accordingly, the carrying value of the noncontrolling interest as of December 31, 2017 is stated as follows:

 

    For the year ended December 31, 2017  
    EUR     RMB     USD  
                   
Noncontrolling interest-valuation*     2,915       22,595       3,472  
Total comprehensive income attributable to noncontrolling interest     (70 )     (543 )     (83 )
                         
Redeemable noncontrolling interest     2,845       22,052       3,389  

 

*Noncontrolling interest in EUR was evaluated by third party appraiser as of the acquisition day. The calculation of RMB amount was based on the exchange rate of 1.00 EUR to 7.7514 RMB at the acquisition date.

 

Goodwill, which is not tax deductible, is primarily attributable to the excess of the consideration and fair value of noncontrolling interest over the fair value of the net identifiable assets of the acquiree and is related to synergies expected to be achieved from the acquisition.

 

Acquired intangible assets have weighted average economic lives from the date of purchase as follows:

 

License   10.0 years
Brand name   10.0 years
Software   5.0 years

 

As of the acquisition date, the fair value of the 7% noncontrolling interest in The Multi Group is estimated to be EUR2,915. The fair value of the noncontrolling interest was estimated using the Income Approach. As The Multi Group was a private company, the fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The fair value estimates are based on (a) internal rate of return of 16%; (b) a long-term sustainable growth rate of 2%; (c) adjustment of risk premium of 3%; and (d) financial multiples of companies in the same industry as The Multi Group.

 

  F- 44  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

4. BUSINESS COMBINATION (continued)

 

Since the acquisition date, The Multi Group contributed revenues of RMB49,370 (EUR6,447) and net income of RMB2,959 (EUR386) to the Group for the year ended 2017.

 

The following unaudited pro forma information summarizes the results of operations of the Group for the years ended December 31, 2016 and 2017, as if the acquisition had been completed on January 1, 2016. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on the date indicated and may not be indicative of future operating results. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable.

 

    For the years ended December 31, (unaudited)  
    2016     2016     2017     2017     2017  
    EUR     RMB     EUR     RMB     USD  
                               
Pro forma total revenues     11,686       76,893       12,188       93,334       14,345  
Pro forma net income (loss)     2,519       16,576       (1,614 )     (12,360 )     (1,900 )
Pro forma net income (loss) attributable to
500.com Limited 		    2,343       15,416       (1,501 )     (11,495 )     (1,767 )

 

These amounts have been calculated after applying the Company’s accounting policies.

 

Business Combination in 2016:

 

Acquisition of Qufan Cayman, Qufan HK and Shenzhen Qufan:

 

On November 25, 2016 (“the acquisition date”), the Group invested in ordinary shares representing a 51.0% equity interest in each of Qufan Internet Technology Inc. (including Qufan Internet Technology (HK) Limited as wholly owned subsidiary) and Shenzhen Qufan Network Technology Co., Ltd. (together “Qufan”), an operator of mobile social poker games, for an aggregate cash consideration and contingent consideration of RMB110.5 million. The Group expected to cooperate with Qufan to help develop and promote its mobile social poker games platform.

 

The acquisition-date fair value of the consideration transferred totaled RMB105,000, which consisted of the following:

 

    Amount  
    RMB  
       
Fair value of consideration transferred        
Cash consideration     52,760  
Contingent consideration     52,240  
Total Consideration     105,000  

 

As of December 31, 2016, the Group paid RMB510 cash consideration for the acquisition and recognized RMB52,250 unpaid cash consideration and RMB52,240 contingent consideration in accrued expenses and other current liabilities.

 

  F- 45  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

4. BUSINESS COMBINATION (continued)

 

The contingent consideration arrangement requires the Group to pay the consideration of RMB57,840 to Qufan Cayman’s shareholders. The fair value of the contingent consideration arrangement at the acquisition date was RMB52,240 while on December 2017 was RMB54,550, respectively. As the Group disposed Qufan Cayman and Shenzhen Qufan on February 9, 2018, the contingent consideration was offset against the disposal consideration and was no longer required to be paid.

 

The Group recognized RMB2,661 of acquisition-related costs that were expensed in the current period. These costs are included in the line item “General and administrative expenses” in the statement of comprehensive income (loss).

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date. The Group obtained a third-party valuation of certain intangible assets.

 

    Amount     Amortization Years  
    RMB        
             
Cash     439          
Mobile applications     60,200       5.0  
Other receivables     37,863          
Total identifiable assets acquired     98,502          
                 
Deferred tax liabilities     (15,050 )        
Other current liabilities     (10,281 )        
Total liabilities assumed     (25,331 )        
                 
Net identifiable assets acquired     73,171          
Noncontrolling interests     98,784          
Total Consideration     105,000          
Goodwill     130,613          

 

Goodwill, which is not tax deductible, is primarily attributable to the excess of the consideration and fair value of noncontrolling interest over the fair value of the net identifiable assets of the acquiree and is related to synergies expected to be achieved from the acquisition.

 

Acquired intangible assets consist primarily of mobile applications, which have estimated weighted average economic lives of 5 years from the date of purchase.

 

The fair value of the 49% noncontrolling interest in Qufan is estimated to be RMB98,784. The fair value of the noncontrolling interest was estimated using the income approach. As Qufan is a private company, the fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The fair value estimates are based on (a) a discount rate of 29%, (b) a long-term sustainable growth rate of 3%, (c) an inflation rate of 3%, (d) financial multiples of companies in the same industry as Qufan and (e) adjustments because of the lack of control or lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest in Qufan.

 

  F- 46  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

4. BUSINESS COMBINATION (continued)

 

Since the acquisition date, Qufan contributed revenues of RMB5,669 and RMB59,465 (US$9,140) and net income of RMB706 and RMB15,328 (US$2,356) to the Group for the year ended 2016 and 2017, respectively.

 

The following unaudited pro forma information summarizes the results of operations of the Group for the years ended December 31 2015 and 2016, as if the acquisition had been completed on January 1, 2015. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on the date indicated and may not be indicative of future operating results. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable.

 

    For the years ended December 31, (unaudited)  
    2015     2016     2016  
    RMB     RMB     US$  
                   
Pro forma total revenues     99,921       27,379       3,943  
Pro forma net loss     (333,814 )     (217,359 )     (31,306 )
Pro forma net loss attributable to 500.com Limited     (328,795 )     (209,921 )     (30,235 )

 

These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Qufan to reflect the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied on January 1, 2015, together with the consequential tax effects.

 

The Group has subsequently disposed Qufan in February 2018 due to a change of business strategy.

 

Acquisition of Shenzhen Caiyu:

 

On July 25, 2016 (“the acquisition date”), one of the Group’s VIE subsidiaries, Guangtiandi acquired 100.0% equity interest in Shenzhen Caiyu, a provider of sports information in China, for an aggregate cash consideration of RMB1.0 million but assumed liabilities of RMB2.7 million. Shenzhen Caiyu provides a comprehensive sports information portal via a designated mobile application, which covers (i) real time soccer match information; and (ii) data-driven soccer match predictions generated by our proprietary analysis engine. Users can also post free or pay-per-view contents such as proprietary observations and analyses on the sports information portal.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date.

 

    Amount  
    RMB  
       
Cash     700  
Other receivables     635  
Total identifiable assets acquired     1,335  
         
Other current liabilities     (2,660 )
Total liabilities assumed     (2,660 )
         
Net identifiable liabilities acquired     (1,325 )
Total Consideration     1,000  
Goodwill     2,325  

 

  F- 47  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

4. BUSINESS COMBINATION (continued)

 

Since the acquisition date, Shenzhen Caiyu contributed revenues of RMB1,792 and net loss of RMB424 to the Group for the year ended 2016 and revenues of RMB10,897 (US$1,675) and net income of RMB94 (US$14) to the Group for the year ended 2017.

 

The Group subsequently disposed Shenzhen Caiyu on November 2, 2017 due to a change in business strategy and recognized a disposal gain of RMB5,477 (US$842) in the year of 2017.

 

The actual results of operation after the acquisition date and pro forma results of operations for the acquisition of Shenzhen Caiyu are not presented because the effects were immaterial.

 

5. INVESTMENTS

 

Short-term Investments

 

Short-term investments of the Group comprised of a structured deposit investment. The Structured deposit was carried at fair value of RMB100,000 and RMB120,000 (US$18,444) as of December 31, 2016 and 2017, respectively.

 

Besides the increase in principal of Structured deposits of RMB20,000 (US$3,074) in 2017, there was no other change in fair value of the Structured deposits during the years ended December 31, 2016 and 2017.

 

  F- 48  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

  

5. INVESTMENTS (continued)

 

Long-term Investments

 

Long-term investments consisted of the following:

 

    As of
December 31,
2016 		    As of
December 31,
2017 		    As of
December 31,
2017 		 
    RMB     RMB     US$  
Cost Method Investments                        
Private companies     45,156       47,214       7,256  
Limited partnerships     19,137       22,290       3,426  
Cost of cost method investments     64,293       69,504       10,682  
Impairment loss on equity investment     (8,583 )     (3,267 )     (502 )
Carrying amount of cost method investments     55,710       66,237       10,180  
                         
Equity Method Investments                        
Private company     5,500       -       -  
Listed company     -       283,655       43,597  
Limited partnership     20,796       27,331       4,201  
Cost of equity method investments     26,296       310,986       47,798  
Impairment loss on equity investment     -       (27,893 )     (4,287 )
Loss from equity method investment     (813 )     (2,257 )     (347 )
Carrying amount of equity method investments     25,483       280,836       43,164  
                         
Available-for-sale investments                        
Available-for-sale investments     3,512       -       -  
Change in fair value of available-for-sale investments     754       -       -  
Carrying amount of available-for-sale investments     4,266       -       -  
Total carrying amount of long-term investments     85,459       347,073       53,344  

 

Cost method investments

 

Private companies

 

In January 2014, the Group acquired 20% of the share capital of Beijing Huanlelingdang Technology Co., Ltd. (“Huanlelingdang”), a non-listed company, at a cash consideration of RMB5,000. In March 2017, Huanlelingdang was subsequently disposed for a gain of RMB302 (US$46).

 

In April 2014, the Group acquired 19% of the share capital of Shenzhen Hewei Technology Co., Ltd. (“Hewei”), a non-listed company, for a cash consideration of RMB114. The Company has made a liquidation of Hewei in January 2017 with no consideration received.

 

In March 2015, the Group acquired 10% of the share capital of Hzone Holding Company, a non-listed company, for a cash consideration of US$2,000. In March 2016, the Group changed 10% of the share capital of Hzone Holding Company, a non-listed company to its VIEs Beijing Huizhong wealth investment management Co., Ltd.

 

  F- 49  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

5. INVESTMENTS (continued)

 

Long-term Investments (continued)

 

Cost method investments (continued)

 

In March 2015, the Group acquired 2% of the share capital of Big Stomach Limited, a non-listed company, for a cash consideration of US$500.

 

In August 2015, the Group acquired 1.29% of the share capital of Topgame Global Limited, a non-listed company, for a cash consideration of US$1,373. The Group also acquired 1.29% of the share capital of its VIEs, Caicaihudong (Beijing) Technology Co., Ltd. and Youwang Technology (Shanghai) Co., Ltd., for cash consideration of RMB13 and RMB477, respectively.

 

In June 2016, the Group acquired 0.84% of the share capital of Beijing Weisaishidai Sports Technology Co., Ltd, for a cash consideration of RMB10,000.

 

In November 2016, the Group acquired 2% of the share capital of Techelix Co., Ltd, a non-listed company, for a cash consideration of US$600.

 

In March 2017, the Group acquired 5% of the share capital of Cheerful Interactive Limited, a non-listed company, for a cash consideration of US$1,250.

 

All of these above-mentioned investments were classified as cost method investments as the Group does not have significant influence over these entities. For the year ended December 31, 2016, the Group recognized an impairment loss of RMB3,469 in Big Stomach Limited and an impairment loss of RMB114 in Hewei Technology Co., Ltd. There was no additional impairment recognized for the year ended December 31, 2017. Additionally, the Group determined that it is not practicable to estimate their fair values for disclosure purposes.

 

Limited partnerships

 

In June 2014, the Group and Danhua Capital L.P (“Danhua”) entered into a subscription agreement, whereby the Group agreed to purchase limited partnership interest in Danhua’s fund (the “Fund”) in the amount of US$1,000, which entitles the Group an aggregate equity interest of approximately 1.1% in the Fund. The Group fully funded the subscription to the Fund as of December 31, 2016. There is no unfunded commitment to the Fund as of December 31, 2017.

 

The Fund’s investment strategy is primarily to invest in emerging companies operating in the USA and PRC. The Fund’s investments are focused in the technology, media and telecommunications sectors. The Fund is scheduled to be in existence until November 15, 2021, unless terminated sooner or extended in accordance with the amended and restated limited partnership agreement.

 

  F- 50  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

5. INVESTMENTS (continued)

 

Long-term Investments (continued)

 

Cost method investments (continued)

 

In June 2015, the Group and Beijing Heimatuoxin Venture Capital L.P. (“Heimatuoxin”) entered into a subscription agreement, whereby the Group agreed to purchase 3.49% limited partnership interest in Heimatuoxin for the total amount of RMB3,000. As of the end of December 2017, the Group received RMB707 dividend from Heimatuoxin.

 

Heimatuoxin’s investment strategy is primarily to invest in emerging companies operating in the PRC. Heimatuoxin’s investments are focused in the technology, media and telecommunications sectors. Heimatuoxin is scheduled to be in existence until April 16, 2021, unless terminated sooner or extended in accordance with the amended and restated limited partnership agreement.

 

In June 2016, the Group and Shanghai Jingyan Corporate Development Centre L.P. (“Jingyan”) entered into a subscription agreement, whereby the Group agreed to purchase 4.64% limited partnership interest in Jingyan for a total amount of RMB6,000. In September, 2017, the equity interest was diluted to 4.45% because of the joining of additional limited partners. As of December 31, 2017, the Group has invested a total of RMB4,020 in Jingyan.

 

Jingyan’s investments are focused in the consulting services of corporate management, business information, exhibition, media and telecommunications sectors. Jingyan is scheduled to be in existence until the fifth anniversary of the Initial Contribution Date, unless terminated sooner or extended in accordance with the amended and restated limited partnership agreement.

 

In December 2016, the Group and zPark Capital Ⅱ,L.P. (“zPark”) entered into a subscription agreement, whereby the Group agreed to purchase 2% limited partnership interest in zpak for a total amount of US$1,000. In July 2017, the limited partnership interest was diluted to 1.78% due to the joining of additional limited partners. The Group paid the subscription in full to zPark in 2016, and there was no outstanding payment as of December 31, 2017.

 

zPark’s investment strategy is primarily to make venture capital investments, principally by investing in and holding equity and equity-oriented securities of privately held early-stage technology companies, with an emphasis on companies with a connection to China, Japan and other Asia markets. The general purposes of zPark are to buy, hold, sell and otherwise invest in Securities, whether readily marketable or not; to exercise all rights, powers, privileges and other incidents of ownership or possession with respect to Securities held or owned by zPark; to enter into, make and perform all contracts and other undertakings. zPark is scheduled to be in existence until the tenth anniversary of the Initial Contribution Date, unless terminated sooner or extended in accordance with the amended and restated limited partnership agreement.

 

  F- 51  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

5. INVESTMENTS (continued)

 

Long-term Investments (continued)

 

Equity method investments

 

Private company

 

In April 2015, the Group acquired approximately 19% of the share capital of Shanxi Xibianyuan Technology Co., Ltd. (“Xibianyuan”), a non-listed company, for a cash consideration of RMB5,500. The company subsequently disposed Xibianyuan in June 2017 and recognized an investment gain of RMB608 (US$93) in the consolidated statements of comprehensive loss.

 

Publicly listed company

 

On June 6, 2017, the Company acquired from Melco LottVentures Holdings Limited an aggregate of 1,278,714,329 shares (the “Sale Shares”) of Loto Interactive Limited (“Loto Interactive”, formerly known as MelcoLot Limited), a company listed on the Hong Kong Stock Exchange (Stock Code: 8198), representing approximately 40.65% of Loto Interactive’s existing issued share capital as of the acquisition date. The total consideration paid for the Sale Shares is approximately HK$322.2 million (US$41.3 million), equivalent to approximately HK$0.252 per Sale Share.

 

Loto Interactive is principally engaged in the provision of lottery-related technologies, systems and solutions to two state-run lottery operators in China, namely the China Welfare Lottery Issuance Centre and China Sports Lottery Administration Centre (“CSLA”). Loto Interactive is a distributor of high quality, versatile lottery terminals and parts for CSLA, which is the exclusive sports lottery operator in China. Loto Interactive provides game upgrading technology and system maintenance service for the rapid-draw game “Shi Shi Cai” in Chongqing Municipality. The Group’s proportionate share of Loto Interactive’s net loss recognized in the Statements of Comprehensive loss was RMB2,469 (US$379) during the year ended December 31, 2017.

 

Limited partnership

 

In April 2015, the Group and Guangda Sports Culture Capital L.P (“Guangda Sports Culture”) entered into a subscription agreement, whereby the Group agreed to purchase 9.9% limited partnership interest in Guangda Sports Culture’s fund for a total amount of RMB20,000, which was fully funded as of December 31, 2015.

 

Guangda Sports Culture’s investment strategy is primarily to invest in emerging companies operating in the PRC. Guangda Sports Culture’s investments are focused in the sports sectors. Guangda Sports Culture is scheduled to be in existence until February 9, 2018, unless terminated sooner or extended in accordance with the amended and restated limited partnership agreement. The Group’s proportionate share of Guangda’s net income recognized in earnings was RMB341 (US$52) during the year ended December 31, 2017.

 

In Feb 2017, the Group and Sparkland Venture Capital Growth Fund L.P (“Sparkland”) entered into a subscription agreement, whereby the Group agreed to purchase 6.67% limited partnership interest in Sparkland’s fund for a total amount of US$1,000, which was fully funded as of December 31, 2017.

 

  F- 52  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

5. INVESTMENTS (continued)

 

Long-term Investments (continued)

 

Equity method investments (continued)

 

All of these above-mentioned investments were classified as equity method investments as the Group does have significant influence over the entities. For the year ended December 31, 2017, the Group recognized an impairment accounted RMB28,781 (US$4,424) of Loto Interactive and accounted a total amount of RMB2,128(US$327) net operating losses from these equity method investments.

 

Available-for-sale investments

 

In April 2016, the Group acquired 37,500 ADS of the share capital of Yintech Investment Holdings Limited (“Yintech”), a listed company on NASDAQ, for a cash consideration of US$506. In May 2017, the Group sold these ADS of Yintech for a loss of US$118.

 

6. ACCOUNTS RECEIVABLE

 

Accounts receivable and the related allowance for doubtful accounts are summarized as follows:

 

   

As of

December 31,

2016

   

As of

December 31,

2017

   

As of

December 31,

2017

 
    RMB     RMB     US$  
                   
Accounts receivable     19,847       19,847       3,050  
Less: Allowance for doubtful accounts     (19,847 )     (19,847 )     (3,050 )
                         
Accounts receivable, net     -       -       -  

 

After voluntary suspension since April 2015, considering age of these receivables and after exhausting all collection efforts, the Group believes that the collection of the amount is no longer probable. The Group wrote off all of the outstanding accounts receivable at the end of year 2015.

 

  F- 53  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

7. PREPAYMENTS, OTHER RECEIVABLES AND DEPOSITS

 

Prepayments and other receivables consist of the following:

 

   

As of

December 31,

2016

   

As of

December 31,

2017

   

As of

December 31,

2017

 
    RMB     RMB     US$  
                   
Receivables from third party payment service providers     13,450       1,893       291  
Interest receivables     4,882       1,158       178  
Deposit for share repurchase *     16,557       13,318       2,047  
Receivables of remaining consideration **     71,820       -       -  
Deferred sponsorship and advertising expenses     -       3,673       565  
Prepaid insurance     -       5,344       821  
Deferred expense***     -       15,063       2,315  
Receivables for disposal of long-term investments****     -       9,322       1,432  
Others     18,825       24,278       3,730  
      125,534       74,049       11,379  

 

* Deposit for share repurchase represents cash paid in advance by the Group under the share repurchase program commenced in 2015. The Group has received this deposit in Feb 2018.

 

** Receivables of remaining consideration represent the remaining cash consideration relating to the disposal of equity interest in Sumpay.cn as of December 31, 2016, which has been fully collected in March 2017.

 

*** Deferred expense represents cash paid in advance to vendors, such as consultant expense, marketing promotion expense and platform fee, which would be amortized according to their respective service periods.

 

**** Receivables for disposal of long-term investment represent the receivables from the disposal of Caiyu and Xibianyuan as of December 31, 2017. In March 2018, the amount related to the disposal of Xibianyuan has been fully collected.

 

Deposits consist of the following:

 

   

As of

December 31,

2016

   

As of

December 31,

2017

   

As of

December 31,

2017

 
    RMB     RMB     US$  
                   
Deposits for office leases and others     5,810       5,764       886  

 

  F- 54  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

8. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

   

As of

December 31,

2016

   

As of

December 31,

2017

   

As of

December 31,

2017

 
    RMB     RMB     US$  
                   
Electronics and office equipment     37,846       44,011       6,764  
Motor vehicles     11,783       12,828       1,972  
Leasehold improvements     49,045       106,904       16,431  
                         
Property and equipment, cost     98,674       163,743       25,167  
Less: Accumulated depreciation     (44,739 )     (56,752 )     (8,723 )
                         
Property and equipment, net     53,935       106,991       16,444  

 

Depreciation expenses were approximately RMB10,209, RMB12,865 and RMB13,400 (US$2,060) for the years ended December 31, 2015, 2016 and 2017, respectively.

 

9. INTANGIBLE ASSETS, NET

 

Intangible assets consist of the following:

 

    As of
December 31,
2016 		    As of
December 31,
2017 		    As of
December 31,
2017 		 
    RMB     RMB     US$  
Cost:                        
Computer software     3,576       24,649       3,788  
License agreement     800       152,277       23,405  
Mobile applications     60,200       60,200       9,253  
Internet domain name     2,861       3,023       465  
Brand name     -       86,041       13,224  
      67,437       326,190       50,135  
Accumulated amortization:                        
Computer software     (2,320 )     (8,059 )     (1,239 )
License agreement     (800 )     (8,059 )     (1,239 )
Mobile applications     (1,188 )     (13,228 )     (2,033 )
Internet domain name     (1,582 )     (1,814 )     (279 )
Brand name     -       (3,944 )     (606 )
      (5,890 )     (35,104 )     (5,396 )
                         
Intangible assets, net     61,547       291,086       44,739  

 

  F- 55  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

9. INTANGIBLE ASSETS, NET (continued)

 

Amortization expenses were approximately RMB1,361, RMB6,846 and RMB26,102 (US$4,012) for the years ended December 31, 2015, 2016 and 2017, respectively. Annual estimated amortization expense for each of the five succeeding years is as follows:

 

    RMB     US$  
             
2018     41,760       6,418  
2019     41,281       6,345  
2020     38,981       5,991  
2021     36,749       5,648  
2022 and thereafter     132,315       20,337  
                 
      291,086       44,739  

 

10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of the following:

 

   

As of

December 31,

2016

   

As of

December 31,

2017

   

As of

December 31,

2017

 
    RMB     RMB     US$  
                   
Advance from end users*     34,388       35,888       5,516  
Business tax and other taxes payable     3,280       4,118       634  
Deferred government grant     5,018       2,807       431  
Professional fees payable     15,136       12,039       1,850  
Promotional events payables     7,921       8,120       1,248  
Decoration payables**     -       5,328       819  
Unpaid consideration for business combination***     104,490       54,550       8,384  
Others     13,922       29,487       4,532  
                         
      184,155       152,337       23,414  

 

* Advance from end users represents payments received by the Group in advance from the end users prior to the services provided.

 

** Decoration payables represent the decoration expenses accrued including office furniture mainly for the new office building rented in Nanshan district, Shenzhen, which became formally functional in December 2017.

 

*** Unpaid consideration for business combination represents the unpaid cash consideration and contingent consideration relating to the acquisition of Qufan as of December 31, 2017. On February 9, 2018, the Company announced that it has disposed of its 51% equity interest in Qufan for a total consideration of RMB127,500, which will be offset by the unpaid contingent consideration of RMB54,550.

 

  F- 56  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

11. ACCUMULATED DEFICIT AND STATUTORY RESERVE

 

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC subsidiary only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s PRC subsidiary.

 

In accordance with the Regulations on Enterprises with Foreign Investment of China and its Articles of Association, the Company’s PRC subsidiary, E-Sun Sky Computer and Qufan Information Technology, being foreign-invested enterprises established in the PRC, are required to provide for certain statutory reserves, namely the general reserve fund, enterprise expansion fund and staff welfare and bonus fund, all of which are appropriated from net profit as reported in its PRC statutory accounts. E-Sun Sky Computer and Qufan Information Technology are required to allocate at least 10% of their after-tax profits to the general reserve fund until such fund has reached 50% of their registered capital. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors of the E-Sun Sky Computer and Qufan Information Technology.

 

In accordance with the China Company Laws, the Company’s VIEs are PRC domestic companies (i.e. E-Sun Network, E-Sun Sky Network, Youlanguang Technology, Guangtiandi Technology, Guangyi Network, Tongfu Technology, 500Fu, Lhasa Yicai, Shenzhen Yicai, Shenzhen Fenggu, Baifengrun Technology, Shenzhen Kaisheng, Shenzhen Qufan and Daguoxiaoxian), and they must make appropriations from their after-tax profits as reported in their PRC statutory accounts to non-distributable reserve funds, namely statutory surplus fund, statutory public welfare fund and discretionary surplus fund. The VIEs are required to allocate at least 10% of their after-tax profits to the statutory surplus fund until such fund has reached 50% of their respective registered capital. Appropriation to discretionary surplus is made at the discretion of each individual VIE.

 

The general reserve fund and statutory surplus fund are restricted to set-off against losses, expansion of production and operation and increasing registered capital of the respective company. The staff welfare and bonus fund and statutory public welfare fund are restricted to the capital expenditures for the collective welfare of employees. The reserves are not allowed to be transferred to the Company in terms of cash dividends, loans or advances, nor are they available for distribution except under liquidation.

 

   

As of

December 31,

2016

   

As of

December 31,

2017

   

As of

December 31,

2017

 
    RMB     RMB     US$  
                   
PRC statutory reserved funds     30,224       30,882       4,746  
Unreserved accumulated deficit     (568,552 )     (888,633 )     (136,580 )
                         
      (538,328 )     (857,751 )     (131,834 )

 

  F- 57  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

11. ACCUMULATED DEFICIT (continued)

 

Under PRC laws and regulations, there are restrictions on the Company’s PRC subsidiary and VIEs with respect to transferring certain of their net assets to the Company either in the form dividends, loans, or advances. Amounts restricted include paid-in capital, statutory reserve funds and retained earnings of the Company’s PRC subsidiary and VIEs, as determined pursuant to PRC generally accepted accounting principles, totaling approximately RMB317,894 (US$48,859) as of December 31, 2017. Therefore, in accordance with Rules 504 and 4.08(e)(3) of Regulation S-X, the condensed parent company only financial statements as of December 31, 2016 and 2017 and for each of the three years in the period ended December 31, 2017 are disclosed in Note 21.

 

Furthermore, cash transfers from the Company’s PRC subsidiary to its subsidiaries outside of China are subject to PRC government control of currency conversion. Shortages in the availability of foreign currency may restrict the ability of the PRC subsidiary and consolidated affiliated entities to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency denominated obligations.

 

12. INCOME TAXES

 

Cayman Islands

 

Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.

 

USA

 

500.com USA is incorporated in the USA and does not conduct any substantive operations of its own. No provision for USA income tax has been made in the financial statements as 500.com USA had no assessable income for the years ended December 31, 2015, 2016 and 2017.

 

British Virgin Islands

 

Under the current laws of the British Virgin Islands, BVI is not subject to tax on income or capital gains.

 

United Kingdom

 

500.com UK is incorporated in the UK and does not conduct any substantive operations of its own. No provision for UK income tax has been made in the financial statements as 500.com UK had no assessable income for the year ended December 31, 2016 and 2017.

 

Curacao

 

Under the current laws, profits tax in Curacao is generally assessed at the rate of 2% of taxable income.

 

Malta

 

Under the current laws, profits tax in Malta is generally assessed at the rate of 35% of taxable income. When dividend is paid or declared to the holding company, the paying entity is entitled to claim 6/7 of the profit tax paid as refund, which may effectively reduce income tax rate to 5%.

 

  F- 58  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

12. INCOME TAXES (continued)

 

Cyprus

 

Round Spot Services Ltd is incorporated in Cyprus and does not conduct any substantive operations of its own. No provision for Cyprus income tax has been made in the financial statements as Round Spot Services Ltd had no assessable income for the year ended December 31, 2017.

 

Australia

 

Multilotto Australia PTY Ltd is incorporated in Australia and does not conduct any substantive operations of its own. No provision for Australia income tax has been made in the financial statements as Multilotto Australia PTY Ltd had no assessable income for the year ended December 31, 2017.

 

Hong Kong

 

Under the current laws, profits tax in Hong Kong is generally assessed at the rate of 16.5% of taxable income.

 

Japan

 

500.com Nihon Co., Ltd is incorporated in Japan in July 2017 and does not conduct any substantive operations of its own. No provision for Japan income tax has been made in the financial statements as 500.com Nihon Co., Ltd had no assessable income for the year ended December 31, 2017.

 

People’s Republic of China

 

A new enterprise income tax law (the “EIT Law”) in the PRC was enacted and became effective on January 1, 2008. The EIT Law applies a uniform 25% enterprise income tax (“EIT”) rate to both foreign invested enterprises and domestic enterprises. Accordingly, Youlanguang Technology, E-Sun Network, 500Fu, Guangyi Network, Shenzhen Yicai, Shenzhen Fenggu, Tongfu Technology and Baifengrun Technology are subject to the EIT rate of 25% in 2015, 2016 and 2017. Shenzhen Kaisheng is subject to the EIT rate of 25% in 2016 and 2017.

 

In October 2011, E-Sun Sky Network obtained the certificate of “High-tech Enterprise” and was granted a preferential income tax rate of 15% for the three years commencing from 2011. In September 2014, E-Sun Sky Network renewed the certificate of “High-tech Enterprise” and was still able to extend the preferential income tax rate of 15% for additional three years until September 30, 2017. In 2014, E-Sun Sky Network obtained the certificate of “Key Software Enterprise” and therefore was granted a preferential income tax rate of 10% for the year ended December 31, 2014. Thus, E-Sun Sky Network was taxed at the lower preferential tax rate of 10% in 2014, and taxed at the preferential tax rate of 15% in 2015 due to the expiration of the “Key Software Enterprise” certificate. For 2016 and 2017, E-Sun Sky Network is subject to the EIT rate of 25% due to the suspension of online lottery sales in the PRC. E-Sun Sky Network did not generate any income for the years ended December 31, 2015, 2016 and 2017 as a result of the suspension.

 

  F- 59  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

12. INCOME TAXES (continued)

 

In March 2011, E-Sun Sky Computer obtained the certificate of “Software Enterprise”, and was granted an exemption of EIT for its first two years of operations and a half reduction in tax rate for the succeeding three years commencing from the first profit-making year. 2011 was the first year of EIT exemption for E-Sun Sky Computer. In November 2015, E-Sun Sky Computer obtained the certificate of “High-tech Enterprise” and was granted a preferential income tax rate of 15% for the three years commencing from 2016. E-Sun Sky Computer is subject to EIT at the rate of 12.5% in 2014 and 2015. For 2016 and 2017, E-Sun Sky Computer is subject to the EIT rate of 25% due to the suspension of online lottery sales in the PRC. E-Sun Sky Computer did not generate any income for the years ended December 31, 2015, 2016 and 2017 as a result of the suspension.

 

In June 2013, Guangtiandi Technology obtained the certificate of “Software Enterprise”, and was granted an exemption of EIT for its first two years of operations and a half reduction in tax rate for the succeeding three years commencing from the first profit-making year. 2013 and 2014 was the first two years of EIT exemption for Guangtiandi Technology. Guangtiandi Technology is subject to EIT at the rate of 12.5%, 12.5% and 12.5% in 2015, 2016 and 2017, respectively. Guangtiandi did not generate any income for the years ended December 2015 and 2016 and recognized an accumulated taxable loss as of December 2017.

 

Lhasa Yicai was established in Tibet in 2014 and qualified as a “Western Area Encouraged Industry”. According to local government policy, qualified entities were granted a preferential tax rate of 15% from January 1, 2011 to December 31, 2020. Therefore, Lhasa Yicai is entitled to a preferential tax rate of 15% in 2015, 2016 and 2017. Additionally, Lhasa Yicai is also exempt from provincial allocated corporate income tax during January 1, 2015 to December 31, 2017 according to local tax law. Lhasa Yicai did not generated any income for the years ended December 31, 2015, 2016 and 2017.

 

In March 2017, Shenzhen Qufan obtained the certificate of “Software Enterprise”, and was granted an exemption of EIT for its first two years of operations and a half reduction in tax rate for the succeeding three years commencing from the first profit-making year. 2015 was the first year of EIT exemption for Shenzhen Qufan. Thus, Shenzhen Qufan was exempt from paying income tax in both 2015 and 2016 and was subject to the reduced income tax rate of 12.5% in 2017. The income tax savings as a result of this tax holiday for Shenzhen Qufan were RMB4,399 (US$676) and RMB702 for the years ended December 31, 2017 and 2016, respectively. Per share effect of the tax holiday for Shenzhen Qufan was RMB0.01 and RMB0.002 for the years ended December 31, 2017 and 2016.

 

(Loss)/income before income taxes consists of:

 

    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Cayman Islands     (163,416 )     (179,348 )     (163,239 )     (25,089 )
British Virgin Islands     -       (31 )     (3 )     -  
USA     (2,320 )     (3,809 )     (4,703 )     (723 )
Hong Kong     (1,470 )     (10,524 )     (10,929 )     (1,680 )
Japan     -       -       (174 )     (27 )
Malta     -       -       (4,321 )     (664 )
Curacao     -       -       7,449       1,145  
Cyprus     -       -       (13 )     (2 )
Australia     -       -       -       -  
PRC     (115,034 )     (12,483 )     (152,575 )     (23,451 )
                                 
      (282,240 )     (206,195 )     (328,508 )     (50,491 )

 

  F- 60  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

12. INCOME TAXES (continued)

 

The current and deferred components of the income tax expense appearing in the consolidated statements of comprehensive (loss) income are as follows:

 

    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Current tax (expense) benefit     (1,890 )     (3,553 )     12,771       1,963  
Deferred tax (expense) benefit     (40,079 )     496       (405 )     (62 )
                                 
Income tax (expense) benefit     (41,969 )     (3,057 )     12,366       1,901  

 

The reconciliation of tax computed by applying the statutory income tax rate applicable to PRC operations to income tax (benefit) expense is as follows:

 

    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Income (loss) before income taxes     (282,240 )     (206,195 )     (328,508 )     (50,491 )
Income tax computed at applicable tax rates (25%)     (70,560 )     (51,549 )     (82,127 )     (12,623 )
Effect of different tax rates in different jurisdictions     1,206       4,743       693       107  
Non-deductible expenses     47,324       54,588       87,632       13,468  
Effect of tax rate changes     (24,125 )     (1,841 )     -       -  
Change in valuation allowance     88,661       (5,144 )     -       -  
Changes in interest and penalties on unrecognized tax benefits     3,920       3,105       5,098       784  
Effect of EIT reversal for previous years     (2,099 )     2,760       (19,704 )     (3,028 )
Research and development super-deduction     (2,363 )     (2,947 )     (1,364 )     (210 )
Others     5       (658 )     (2,594 )     (399 )
      41,969       3,057       (12,366 )     (1,901 )

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Balance at beginning of year     38,901       42,983       38,457       5,911  
Increase relating to current year tax positions     7,496       3,630       5,194       798  
Decrease relating to prior year tax positions     (1,119 )     (3,204 )     (1,595 )     (245 )
Decrease relating to expiration of applicable statute of limitations     (2,295 )     (4,952 )     (17,758 )     (2,729 )
                                 
Balance at end of year     42,983       38,457       24,298       3,735  

 

  F- 61  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

12. INCOME TAXES (continued)

 

The Group recognizes interest accrued related to unrecognized tax benefits in taxation expenses. During the years ended December 31, 2015, 2016 and 2017, the Group recognized approximately RMB4,534, RMB4,932 and RMB5,098 (US$784) in interest on these unrecognized tax benefits and reversed approximately RMB614, RMB1,827 and RMB7,667 (US$1,178) in interest. The Group had accrued approximately RMB6,884, RMB9,989 and RMB7,420 (US$1,140) for the interest on these uncertain taxes as of December 31, 2015, 2016 and 2017, respectively. In general, the PRC tax authorities have up to three to five years to conduct examinations of the Group’s tax filings. As of December 31, 2017, the PRC subsidiaries 2014 to 2017 tax returns remain open to examination.

 

The components of deferred taxes are as follows:

 

    2016     2017     2017  
    RMB     RMB     US$  
                   
Deferred tax assets, non-current portion                        
Advertising expenditure deductible in future years     58,654       61,191       9,405  
Deferred revenue     -       982       151  
Deferred government grants     2,417       2,417       371  
Loss from equity method investment     203       203       31  
Bad debt provision     4,962       5,097       783  
Accrued rental expense     817       817       126  
Impairment loss     1,250       1,250       192  
Net operating losses (“NOLs”)     16,411       34,700       5,333  
Less: valuation allowance     (84,714 )     (106,657 )     (16,392 )
                         
Total deferred tax assets, non-current portion     -       -       -  
                         
Deferred tax liabilities, non-current portion                        
Apps and other licenses arisen from business combination     (14,902 )     (19,475 )     (2,993 )
                         
Total deferred tax liabilities, non-current portion     (14,902 )     (19,475 )     (2,993 )

 

The Group records a valuation allowance on its deferred tax assets that is sufficient to reduce the deferred tax assets to an amount that is more likely than not to be realized. Future reversal of the valuation allowance will be recognized either when the benefit is realized or when it has been determined that it is more likely than not that the benefit in future earnings will be realized.

 

As of December 31, 2017, the Group had NOLs of approximately RMB226,617 (US$34,830) from several of its VIEs, which can be carried forward to offset future net profit for income tax purposes. The NOLs as of December 31, 2017 will expire in years 2018 to 2022 if not utilized.

 

 

  F- 62  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

12. INCOME TAXES (continued)

 

The cumulative amount of the temporary differences in respect of investments in foreign subsidiaries is RMB448,176 and RMB255,333 (US$39,244) as of December 31, 2016 and 2017, respectively. Upon repatriation of the foreign subsidiaries and the VIEs’ earnings, in the form of dividends or otherwise, the Company would be subject to various PRC income taxes including withholding income tax. The related unrecognized deferred tax liabilities were approximately RMB44,818 and RMB25,533 (US$3,924) as of December 31, 2016 and 2017, respectively.

 

13. EMPLOYEE DEFINED CONTRIBUTION PLAN

 

Full time employees of the Group in PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiary and VIEs of the Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. Such employee benefits, which were expensed as incurred, amounted to approximately RMB12,587, RMB15,591 and RMB14,160 (US$2,176) for the years ended December 31, 2015, 2016 and 2017, respectively.

 

14. SHARE-BASED PAYMENT

 

On March 28, 2011, the shareholders and board of directors of the Company approved the 2011 Share Incentive Plan (the “Plan”). The Plan provides for the grant of options, restricted shares and other share-based awards. These options were granted with exercise prices denominated in US$, which is the functional currency of the Company. The board of directors has authorized under the Plan the issuance of up to 12% of the Company’s issued and outstanding ordinary shares from time to time, on an as-exercised and fully diluted basis, upon exercise of awards granted under the Plan. The maximum term of any issued share option is ten years from the grant date.

 

On April 8, 2011, the Company granted 13,864,000 share options to a director and employees with an exercise price of US$0.40 per share. For these awards, 5,506,600 options will be vested upon the first anniversary of the grant date, 5,225,800 options will be vested upon the second anniversary of the grant date, 1,565,800 options will be vested upon the third anniversary of the grant date, and 1,565,800 options will be vested upon the fourth anniversary of the grant date.

 

On April 8, 2011, the Company granted 5,003,980 and 12,600,000 share options to another director and a consultant with an exercise price of US$0.40 per share, and all were vested on the grant date.

 

  F- 63  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

14. SHARE-BASED PAYMENT (continued)

 

On October 22, 2013, the Company granted 2,660,000 share options to employees with an exercise price of US$0.40 per share. For these awards, 600,000 options will be vested on 180 days after the grant date, 1,620,000 options will be vested upon the first anniversary of the grant date, 220,000 options will be vested upon the second anniversary of the grant date, and 220,000 options will be vested upon the third anniversary of the grant date.

 

On June 19, 2014, the Company granted 2,000,000 options to directors and 32,561,800 options to employees, with an exercise price of US$3.232 per share (US$32.32 per ADS). For awards to directors, 666,690 options will be vested on November 22, 2014, 666,690 options will be vested on November 22, 2015, and 666,620 options will be vested on November 22, 2016. For awards to employees, 5,437,820 options will be vested upon the first anniversary of the grant date, 10,843,080 options will be vested upon the second anniversary of the grant date, and the last vest date of the remaining unexercised shares options was extended by our board of directors from June 19, 2017 to June 19, 2018.

 

On June 29, 2015, the Company granted 200,000 share options to a director with an exercise price of US$2.55 per share. For these awards, 66,670 options will be vested upon the first anniversary of the grant date, 66,670 options will be vested upon the second anniversary of the grant date, and 66,660 options will be vested upon the third anniversary of the grant date.

 

On January 5, 2016, the Company granted 2,500,000 share options to employees with an exercise price of US$2.00 per share. For these awards, 750,000 options were vested on June 19, 2016, 750,000 options were vested on December 15, 2016, and 1,000,000 options will be vested on June 19, 2017.

 

On January 6, 2016, the Company granted 600,000 share options to a director with an exercise price of US$1.851 per share, which were vested on November 21, 2016.

 

On January 16, 2016, the Company granted 15,900,000 share options to employees with an exercise price of US$1.743 per share. For these awards, 2,650,000 options will be vested on January 16, 2017, 5,300,000 options will be vested on January 16, 2018, and 7,950,000 options will be vested on January 16, 2019.

 

On December 16, 2016, the Company granted 600,000 share options to directors with an exercise price of US$1.35 per share, which will be vested on November 21, 2017.

 

  F- 64  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

14. SHARE-BASED PAYMENT (continued)

 

On August 15, 2017, the Company granted 12,230,280 restricted share units ("RSUs") to employees. For these rewards, 4,035,994 options will be vested on March 1, 2018, 4,035,994 options will be vested on December 31, 2018, and 4,158,292 options will be vested on December 1, 2019.

 

On November 22, 2017, the Company granted 350,000 RSUs to directors, which will be vested on November 21, 2018.

 

A summary of share option and restricted shares activity and related information for the year ended December 31, 2017 is as follows:

 

Share options granted to employees and directors

 

    Number of
option 		    Weighted
average
exercise
price 		    Weighted
average
grant date
fair value per
share 		    Weighted
average
remaining
contractual
year 		    Aggregated
intrinsic
value 		 
          US$     US$     (Years)     US$’000  
                               
Outstanding, January 1, 2017     55,382,320       1.70       1.12       2.65          
Granted     -       -       -               -  
Forfeited     (12,500,000 )     1.79       0.90                  
Exercised     (894,760 )     1.22       1.28                  
Outstanding, December 31, 2017     41,987,560       1.04       1.18       1.59       3,986  
Vested and expected to vest at December 31, 2017     41,762,129       1.05       1.19       1.51       3,803  
Exercisable at December 31, 2017     37,006,200       0.95       1.22       1.53       3,986  

 

Restricted shares granted to employees and directors

 

    Number of
option 		    Weighted
average
grant date
fair value per
share 		    Weighted
average
remaining
contractual
year 		    Aggregated
intrinsic
value 		 
          US$     (Years)     US$’000  
                         
Outstanding, January 1, 2017     -                          
Granted     12,580,280       0.96       9.63       12,719  
Forfeited     -                          
Exercised     -                          
Outstanding, December 31, 2017     12,580,280       0.96       9.63       12,719  
Vested and expected to vest at December 31, 2017     12,580,280       0.96       9.63       12,719  
Exercisable at December 31, 2017     -                          

 

  F- 65  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

14. SHARE-BASED PAYMENT (continued)

 

The aggregate intrinsic value in the table above represents the difference between the fair value of Company’s common share as of December 31, 2017 and the exercise price. Total intrinsic value of options granted to employees and directors exercised for the years ended December 31, 2015, 2016 and 2017 were RMB49,625, RMB11,051 and RMB479 (US$74), respectively. No share options granted to the consultants were exercised during the years ended December 31, 2017. No restricted shares granted to employees and directors were exercised during the years ended December 31, 2015, 2016 and 2017.

 

On June 8, 2012 (the “First Modification Date”), the Company modified the exercise price of both vested and unvested 13,740,000 options that were previously granted to 88 employees, from US$0.4 to US$0.2. The modification was intended to provide additional incentives for these employees.

 

In accordance with ASC 718, the effects of a modification resulted in incremental compensation cost of US$670, which was measured as the excess of the fair value of the modified award of US$3,460 over the fair value of the original award of US$2,790 at the First Modification Date.

 

The total compensation cost measured at the First Modification Date was US$2,214, representing the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at the First Modification Date of US$1,544 and the incremental compensation cost resulting from the modification of US$670.

 

The incremental compensation cost of US$178 for vested options was recognized immediately at the First Modification Date, while the compensation cost of US$2,036 for unvested options is being amortized on an accelerated basis over the remaining vesting term of the original award.

 

On March 19, 2015 (the “Second Modification Date”), the Company modified the exercise price of the share options granted on June 19, 2014 from US$3.232 (US$32.32 per ADS) to US$1.00 (US$10.00 per ADS). The modification was intended to provide additional incentives for these employees.

 

In accordance with ASC 718, the effects of a modification resulted in incremental compensation cost of US$11,197, which was measured as the excess of the fair value of the modified award of US$15,390 over the fair value of the original award of US$4,193 at the Second Modification Date.

 

The total compensation cost measured at the Second Modification Date was US$39,829, representing the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at the Second Modification Date of US$28,632 and the incremental compensation cost resulting from the modification of US$11,197.

 

  F- 66  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

14. SHARE-BASED PAYMENT (continued)

 

The incremental compensation cost of US$213 for vested options was recognized immediately at the Second Modification Date, while the compensation cost of US$39,616 for unvested options is being amortized on an accelerated basis over the remaining vesting term of the original award.

 

On July 19, 2017 (the “Third Modification Date”), the Company extended the maturity date of the remaining unexercised share options granted on July 19, 2014 from July 19, 2017 to July 19, 2018. The modification was intended to provide additional incentives for these employees.

 

In accordance with ASC 718, the effects of a modification resulted in incremental compensation cost of US$55, which was measured as the one extending year of the fair value of the modified award of 2,828,620 shares.

 

The incremental compensation cost of US$55 for unexercised options is being amortized on an accelerated basis over the extending term of the original award from July 19, 2017 to July 19, 2018.

 

As of December 31, 2017, there was RMB7,079 (US$1,088) of unvested share-based compensation costs related to equity awards granted to employees and directors that is expected to be recognized over a weighted-average vesting period of 1.1 years. To the extent the actual forfeiture rate is different from the original estimate, actual share-based compensation costs related to these awards may be different from the expectation.

 

As of December 31, 2017, there was RMB78,902 (US$12,127) of unvested restricted share compensation costs related to equity awards granted to employees and directors that is expected to be recognized over a weighted-average vesting period of 9.6 years. To the extent the actual forfeiture rate is different from the original estimate, actual restricted share compensation costs related to these awards may be different from the expectation.

 

As the share options granted to the consultants were fully vested at the grant date, the related compensation expenses were fully recognized in the consolidated statement of comprehensive income (loss) at the grant date.

 

The fair value of share options was determined using the binomial option valuation model, with the assistance from an independent third-party appraiser. The binomial model requires the input of highly subjective assumptions, including the expected share price volatility and the suboptimal early exercise factor. For expected volatilities, the Company has made reference to historical volatilities of several comparable companies. The sub-optimal early exercise factor was estimated based on the vesting and contractual terms of the awards and management’s expectation of exercise behavior of the grantees. The risk-free rate for periods within the contractual life of the options is based on market yield of U.S. Treasury Bond in effect at the time of grant. The assumptions used to estimate the fair value of the share options granted are as follows:

 

  F- 67  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

14. SHARE-BASED PAYMENT (continued)

 

    For the years ended December 31  
    2015     2016     2017  
                   
Expected volatility     51.96%~56.23 %     70.80%~77.52 %     54.83 %
Risk-free interest rate     1.06%~1.64 %     1.13%~1.62 %     1.20 %
Dividend yield     0.00 %     0.00 %     0.00 %
Forfeiture rate     0.00 %     0.00 %     0.00 %
Suboptimal early exercise factor     2.8       2.2~2.8       2.2  

 

The fair value of restricted shares was determined using the market price of the ordinary shares of the Company on the grant date.

 

The total fair value of the vested equity share options granted to the employees and directors during the years ended December 31, 2015, 2016 and 2017 were RMB63,200, RMB127,333 and RMB157,956 (US$24,277), respectively.

 

There were no vested restricted shares granted to the employees and directors during the year ended December 31, 2017.

 

The exercise price of share options granted during the year of 2016 equalled the market price of the ordinary shares on the grant date. No share options were granted during the year ended December 31, 2017. The weighted-average grant-date fair value per share granted to employees and directors during the year ended December 31, 2016, and 2017 were US$0.89 and nil, respectively.

 

The Company granted restricted shares to employees and directors during the year ended December 31, 2017 with free exercise price. The weighted-average grant-date fair value per restricted share granted to employees and directors during the year ended December 31, 2017 was US$0.96.

 

  F- 68  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

14. SHARE-BASED PAYMENT (continued)

 

Total share-based compensation expenses relating to options granted to employees and directors for the years ended December 31, 2015, 2016 and 2017 are included in:

 

    For the year ended December 31, 2015  
    Employees     Directors     Total     Total  
    RMB     RMB     RMB     US$  
                         
Cost of services     3,052       -       3,052       471  
Sales and marketing     13,771       -       13,771       2,126  
General and administrative     109,940       9,062       119,002       18,371  
Service development expenses     22,804       -       22,804       3,520  
                                 
      149,567       9,062       158,629       24,488  

 

    For the year ended December 31, 2016  
    Employees     Directors     Total     Total  
    RMB     RMB     RMB     US$  
                         
Cost of services     2,993       -       2,993       431  
Sales and marketing     13,966       -       13,966       2,012  
General and administrative     114,244       7,114       121,358       17,479  
Service development expenses     25,024       -       25,024       3,604  
                                 
      156,227       7,114       163,341       23,526  

 

    For the year ended December 31, 2017  
    Employees     Directors     Total     Total  
    RMB     RMB     RMB     US$  
                         
Cost of services     1,343       -       1,343       206  
Sales and marketing     9,228       -       9,228       1,418  
General and administrative     61,113       3,089       64,202       9,868  
Service development expenses     16,370       -       16,370       2,516  
                                 
      88,054       3,089       91,143       14,008  

 

  F- 69  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

15. COMMITMENTS AND CONTINGENCIES

 

Operating lease commitments

 

    RMB     US$  
             
2018     30,217       4,644  
2019     28,154       4,327  
2020     24,630       3,786  
                 
      83,001       12,757  

 

Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases. The Group’s lease arrangements have no renewal options, rent escalation clauses, restrictions or contingent rents and are all conducted with third parties. For the years ended December 31, 2015, 2016 and 2017, total rental expenses for all operating leases amounted to approximately RMB4,013, RMB11,421 and RMB29,170 (US$4,483), respectively.

 

Uncertain Income tax position

 

As of December 31, 2016 and 2017, the Group has recognized approximately RMB38,457 and RMB24,298 (US$3,735), respectively, as an accrual for unrecognized tax benefits, including related interest and penalties. The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statute of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. As of December 31, 2016, and 2017, the Group classified the accrual of RMB38,457 and RMB24,298 (US$3,735), respectively, as a long-term payable.

 

  F- 70  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

15. COMMITMENTS AND CONTINGENCIES (continued)

 

Variable interest entity structure

 

In the opinion of management, (i) the ownership structure of the Company and its VIEs are in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the VIEs and their shareholders are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Group’s business operations are in compliance with existing PRC laws and regulations in all material respects.

 

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Group and its contractual arrangements with VIEs are found to be in violation of any existing or future PRC laws and regulations, the Group may be required to restructure its ownership structure and operations in the PRC to comply with the changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Group’s current ownership structure or the contractual arrangements with VIEs is remote based on current facts and circumstances.

 

Contractual Arrangements among the Company and the VIEs

 

Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. The Company could face material and adverse tax consequences if the PRC tax authorities were to determine that the Contractual Arrangements among the Company and the respective VIEs were not entered into on an arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment on taxation. In addition, the PRC tax authorities may impose interest on late payments on the Company and the respective VIEs for the adjusted but unpaid taxes. In the opinion of management, the likelihood of such an upward adjustment on taxation and related interest is remote based on current facts and circumstances.

 

  F- 71  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

15. COMMITMENTS AND CONTINGENCIES (continued)

 

Guarantees

 

The Group accounts for guarantees in accordance with ASC topic 460 (“ASC 460”), Guarantees . Accordingly, the Group evaluates its guarantees to determine whether (a) the guarantee is specifically excluded from the scope of ASC 460, (b) the guarantee is subject to ASC 460 disclosure requirements only, but not subject to the initial recognition and measurement provisions, or (c) the guarantee is required to be recorded in the financial statements at fair value.

 

The memorandum and articles of association of the Company require that the Company indemnify its officers and directors, as well as those who act as directors and officers of other entities at the Company’s request, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to the Company. The indemnification obligations are more fully described in the memorandum and articles of association. The Company purchases standard directors and officers insurance to cover claims or a portion of the claims made against its directors and officers. Since a maximum obligation is not explicitly stated in the Company’s memorandum and articles of association and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated.

 

Historically, the Group has not been required to make payments related to these obligations, and the fair value for these obligations is zero as of December 31, 2016 and 2017.

 

Indemnity Cost

 

On September 12, 2016, the Group entered into an agreement, approved by the U.S. District Court to settle outstanding legal proceedings relating to a stockholder class action lawsuit during the period between November 22, 2013 and February 25, 2015 for USD 2,500, with USD1,500 paid by the Group and USD1,000 covered by the insurance company. As of December 31, 2016, the amount was fully funded, and the stockholder class action lawsuit has since been settled. There was no any other related lawsuit or indemnity cost occurred in 2017.

 

  F- 72  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

16. LOSSES PER SHARE

 

Basic and diluted losses per share for each of the years presented is calculated as follows:

 

    For the years ended  
    2015     2016     2017  
    RMB     RMB     RMB     RMB     RMB     US$     RMB     US$  
    Class A     Class B     Class A     Class B     Class A     Class A     Class B     Class B  
                                                 
Losses per share—basic:                                                                
Numerator:                                                                
Allocation of net loss attributable to 500.com Limited’s ordinary shareholders used in calculating income per ordinary share—basic     (247,664 )     (76,233 )     (166,057 )     (36,908 )     (259,319 )     (39,857 )     (57,780 )     (8,880 )
                                                                 
Denominator:                                                                
Weighted average number of ordinary shares outstanding used in calculating basic losses per share     294,836,665       90,753,548       339,429,946       75,442,810       333,909,823       333,909,823       74,400,299       74,400,299  
Denominator used for losses per share     294,836,665       90,753,548       339,429,946       75,442,810       333,909,823       333,909,823       74,400,299       74,400,299  
Losses per share—basic     (0.84 )     (0.84 )     (0.49 )     (0.49 )     (0.78 )     (0.12 )     (0.78 )     (0.12 )
                                                                 
Losses per share—diluted:                                                                
Numerator:                                                                
Allocation of net loss attributable to 500.com Limited’s ordinary shareholders used in calculating loss per ordinary share— diluted     (247,664 )     (76,233 )     (166,057 )     (36,908 )     (259,319 )     (39,857 )     (57,780 )     (8,880 )
Reallocation of net loss attributable to 500.com Limited’s ordinary shareholders as a result of conversion of Class B to Class A shares     (76,233 )     -       (36,908 )     -       (57,780 )     (8,880 )     -       -  
Net loss attributable to ordinary shareholders     (323,897 )     (76,233 )     (202,965 )     (36,908 )     (317,099 )     (48,737 )     (57,780 )     (8,880 )
                                                                 
Denominator:                                                                
Weighted average number of ordinary shares outstanding used in calculating basic losses per share     294,836,665       90,753,548       339,429,946       75,442,810       333,909,823       333,909,823       74,400,299       74,400,299  
Conversion of Class B to Class A ordinary shares     90,753,548       -       75,442,810       -       74,400,299       74,400,299       -       -  
Share options     -       -       —       -       -       -       -       -  
Denominator used for losses per share     385,590,213       90,753,548       414,872,756       75,442,810       408,310,122       408,310,122       74,400,299       74,400,299  
Losses per share—diluted     (0.84 )     (0.84 )     (0.49 )     (0.49 )     (0.78 )     (0.12 )     (0.78 )     (0.12 )
                                                                 
Losses per ADS:                                                                
Denominator used for losses per ADS - basic     29,483,667       -       33,942,995       -       33,390,982       33,390,982       -       -  
Denominator used for losses per ADS - diluted     38,599,021       -       41,487,276       -       40,831,012       40,831,012       -       -  
Losses per ADS – basic     (8.40 )     -       (4.89 )     -       (7.77 )     (7.77 )     -       -  
Losses per ADS – diluted     (8.40 )     -       (4.89 )     -       (7.77 )     (7.77 )     -       -  

 

  F- 73  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

17.

EQUITY TRANSACTIONS

 

Upon completion of the Company’s IPO in November 2013, the Company’s ordinary shares were converted into 66,539,000 Class A ordinary shares and 231,428,220 Class B ordinary shares. The conversion of ordinary shares into Class A and Class B ordinary shares has been retroactively reflected in the financial statements as if the conversion had occurred from the earliest period presented.

 

The Memorandum and Articles of Association were amended and restated such that the authorized share capital consisted of 1,000,000,000 ordinary shares at a par value of US$0.00005 per share, of which 700,000,000 shares were designated as Class A ordinary shares, and 300,000,000 as Class B ordinary shares. The rights of the holders of Class A and Class B ordinary shares are identical, except with respect to voting and conversion rights. Each share of Class A ordinary shares is entitled to one vote per share and is not convertible into Class B ordinary shares under any circumstances. Each share of Class B ordinary shares is entitled to ten votes per share and is convertible into one Class A ordinary share at any time by the holder thereof.

 

Additionally, the Company issued 19,230,769 and 11,538,462 Class B ordinary shares as a result of the conversion of the convertible note and the concurrent private placement for an aggregate consideration of US$15,000, respectively. As of December 31, 2013, 66,539,000 and 262,197,451 Class A and Class B ordinary shares were issued and outstanding, respectively.

 

In 2014, 22,742,660 share options were exercised at the exercise prices of US$0.2 to US$0.4 per share, resulting in the issuance of 22,742,660 Class A ordinary shares at US$0.00005 each for an aggregate consideration of US$8,107. As of December 31, 2014, 254,844,582 and 96,634,529 Class A and Class B ordinary shares were issued and outstanding, respectively.

 

In 2015, 5,274,480 share options were exercised at the exercise prices of US$0.2 to US$1.0 per share, resulting in the issuance of 5,274,480 Class A ordinary shares at US$0.00005 each for an aggregate consideration of US$2,960. Additionally, the Company issued 63,500,500 Class A ordinary shares to a shareholder for an aggregate consideration of US$123,391. The Company repurchased 1,220,000 Class A ordinary shares for a consideration of US$1,434. As of December 31, 2015, 334,034,932 and 84,999,159 Class A and Class B ordinary shares were issued and outstanding, respectively.

 

In 2016, 2,276,320 share options were exercised at the exercise prices of US$0.2 to US$1.0 per share, resulting in the issuance of 2,276,320 Class A ordinary shares at US$0.00005 each for an aggregate consideration of US$2,032. The Company repurchased 11,415,320 Class A ordinary shares for a consideration of US$17,240. As of December 31, 2016, 335,494,792 and 74,400,299 Class A and Class B ordinary shares were issued and outstanding, respectively.

 

In 2017, 894,760 share options were exercised at the exercise prices of US$0.2 to US$1.0 per share, resulting in the issuance of 894,760 Class A ordinary shares at US$0.00005 each for an aggregate consideration of US$831.The Company repurchased 2,602,000 Class A ordinary shares for a consideration of US$2,999. As of December 31, 2017, 333,787,552 and 74,400,299 Class A and Class B ordinary shares were issued and outstanding, respectively.

 

  F- 74  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

18. FAIR VALUE MEASUREMENT

 

In accordance with ASC 820-10, the Group measures available-for-sale investments, contingent consideration payable at fair value on a recurring basis. The fair value of the available-for-sale investments are measured based on the market price in an active market.

 

The Group measures certain financial assets, including cost method investments, at fair value on a nonrecurring basis only if an impairment charge were to be recognized. The Group’s non-financial assets, such as intangible assets and fixed assets, would be measured at fair value only if they were determined to be impaired on an other-than-temporary basis.

 

Assets measured or disclosed at fair value are summarized below:

 

          Fair value measurement
at December 31, 2016 		 
    Total fair
value at
December 31,
2016 		    Quoted
prices
in active
markets for
identical
assets
(Level 1) 		    Significant other
observable
inputs
(Level 2) 		    Significant
unobservable
inputs
(Level 3) 		    Total
losses 		 
    RMB     RMB     RMB     RMB     RMB  
                               
Fair value disclosure                                        
Cash equivalents                                        
Fixed-rate investments     312,165       -       312,165       -       -  
Adjustable-rate investments     223,000       -       223,000       -       -  
Time deposits     804,692       -       804,692       -       -  
Total     1,339,857       -       1,339,857       -       -  
                                         
Fair value measurement                                        
Recurring                                        
Short-term investments                                        
Structured deposit (Note 5)     100,000       -       100,000       -       -  
Available-for-sale investments     4,266       4,266       -       -       -  
Non-recurring                                        
Long-term investments     -       -       -       -       (3,583 )
Total assets measured at fair value     104,266       4,266       100,000       -       (3,583 )
                                         
Fair value measurement                                        
Recurring                                        
Contingent consideration payable     52,240       -       -       52,240       -  
Total liabilities measured at fair value     52,240       -       -       52,240       -  

 

  F- 75  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

18. FAIR VALUE MEASUREMENT (continued)

 

Assets and liabilities measured or disclosed at fair value are summarized below:

 

          Fair value measurement
at December 31, 2017 		       
    Total fair
value at
December 31,
2017 		    Quoted prices
in active
markets for
identical
assets
(Level 1) 		    Significant
other
observable
inputs
(Level 2) 		    Significant
unobservable
inputs
(Level 3) 		    Total losses  
    RMB     US$     RMB     RMB     RMB     RMB     US$  
                                           
Fair value disclosure                                                        
Cash equivalents                                                        
Fixed-rate investments     289,304       44,465       -       289,304       -       -       -  
Adjustable-rate investments     189,604       29,142       -       189,604       -       -       -  
Time deposits     -       -       -       -       -       -       -  
Total     478,908       73,607       -       478,908       -       -       -  
                                                         
Fair value measurement                                                        
Recurring Short-term investments                                                        
Structured deposit (Note 5)     120,000       18,444       -       120,000       -       -       -  
Available-for-sale investments     -       -       -       -       -       733       113  
Non-recurring                                                        
Long-term investments     -       -       -       -       -       28,781       4,424  
Total assets measured at fair value     120,000       18,444       -       120,000       -       29,514       4,537  
                                                         
Fair value measurement                                                        
Recurring                                                        
Contingent consideration payable     54,550       8,384       -       -       54,550       2,384       366  
Total liabilities measured at fair value     54,550       8,384       -       -       54,550       2,384       366  

 

  F- 76  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

18. FAIR VALUE MEASUREMENT (continued)

 

There were no transfers of fair value measurements into or out of Level 3 for the years ended December 31, 2015, 2016 and 2017.

 

The Group has measured the contingent consideration payable at fair value on a recurring basis using significant unobservable inputs (Level 3) as of the years ended December 31, 2017. The significant unobservable inputs used in the fair value measurement and the corresponding impacts to the fair values are presented below:

 

    Valuation
techniques 		  Unobservable
inputs 		  Estimation as of
December
31, 2017 		    Change in
unobservable inputs 		  Change in fair value
Contingent consideration payable   Monte Carlo simulation technique   Spot value of net income     31,698     Increase / (decrease)   Increase / (decrease)
        Volatility of net income     10.00 %   Increase / (decrease)   (Decrease) / increase
        Expected annual growth rate of net income     0.00 %   Increase / (decrease)   Increase / (decrease)
        Discount factor     0.95     Increase / (decrease)   (Decrease) / increase

 

  F- 77  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

18. FAIR VALUE MEASUREMENT (continued)

 

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2017:

 

    Contingent consideration payable  
    RMB  
       
Balance as of December 31, 2015     -  
Recognized during the year     52,240  
Balance as of December 31, 2016     52,240  
Recognized during the year     2,310  
Balance as of December 31, 2017     54,550  
Balance as of December 31, 2017 in US$     8,384  

 

  F- 78  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

19. SEGMENT REPORTING

 

The Group engages primarily in the online lottery purchase services, online mobile gaming and information services in the PRC. After acquiring the business of online lottery betting and online casino platforms generated from the Multi Group, the Group distinguishes revenues, costs and expenses between different geographic operating segment in its internal reporting, and reports costs and expenses by nature in different geographic operating segments. In accordance with ASC topic 280, “ Segment Reporting” , the Group’s chief operating decision maker has been identified as the Board of Directors and the chief executive officer, who makes resource allocation decisions and assesses performance based on the Group’s geographic location operating results. As a result, the Group has two reportable segment, including the PRC and Europe.

 

The following table presents summary information by segment for the years ended December 31, 2016 and 2017, respectively.

 

    For the years ended December 31, 2016  
    PRC     Europe     Total  
    RMB     RMB     RMB  
                   
Net Revenues     10,928       -       10,928  
Depreciation and Amortization     19,711       -       18,995  
Operating (loss)     (366,562 )     -       (366,562 )
Interest income     23,859       -       23,859  
Interest expense     -       -       -  
Income tax expense     3,057       -       3,057  
Segment net (loss)     (209,252 )     -       (209,252 )
Segment assets     2,076,892       -       2,076,892  

 

    For the years ended December 31, 2017  
    PRC     Europe     Total     Total  
    RMB     RMB     RMB     US$  
                         
Net Revenues     81,953       49,370       131,323       20,184  
Depreciation and Amortization     37,158       2,344       39,502       6,071  
Operating (loss) income     (353,623 )     2,755       (350,868 )     (53,928 )
Interest income     20,574       -       20,574       3,162  
Interest expense     -       -       -       -  
Income tax expense (benefit)     (12,522 )     156       (12,366 )     (1,901 )
Segment net (loss) income     (319,101 )     2,959       (316,142 )     (48,590 )
Segment assets     1,696,024       58,535       1,754,559       269,669  

 

20. SUBSEQUENT EVENTS

 

Disposal of Qufan Cayman and Shenzhen Qufan

 

On February 9, 2018, the Company entered into a share disposal agreement with the founding shareholder of Qufan and disposed its 51% equity interest in Qufan Internet Technology Inc., and Shenzhen Qufan Network Technology Co., Ltd, for a total consideration of RMB127.5 million and recognized a disposal gain of RMB7,877 (US$1,211) in February 2018 .

 

  F- 79  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

20. SUBSEQUENT EVENTS (continued)

 

The following unaudited pro forma information summarizes the results of operations of Qufan.

 

    For the years ended December 31  
    2016     2017     2017  
    RMB     RMB     US$  
                   
Pro forma total revenues     5,669       59,465       9,140  
Pro forma net income     706       15,328       2,356  
Pro forma net income attributable to 500.com Limited     360       7,817       1,201  

 

Disposal of 500Fu

 

In February 2018, the Company disposed its 100% equity interest in 500Fu and recognized a disposal gain of RMB6,933 (US$1,066) in February 2018.

 

21. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY

 

Under PRC laws and regulations, the Company’s PRC subsidiary E-Sun Sky Computer and VIEs are restricted in their ability to transfer certain of its net assets to the Company in the form of dividend payments, loans and/or advances. The amounts restricted include paid up capital, retained earnings and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling RMB317,894 (US$48,859) as of December 31, 2017. The following is the condensed financial information of the Company on a parent company only basis.

 

Condensed balance sheets

 

    As of
December 31,
2016 		    As of
December 31,
2017 		    As of
December 31,
2017 		 
    RMB     RMB     US$  
                   
ASSETS                        
Current assets:                        
Cash and cash equivalents     341,671       1,304       200  
Time deposits     700,637       -       -  
Other current assets     23,728       20,257       3,113  
Amounts due from intergroup companies     194,117       400,659       61,580  
                         
Total current assets     1,260,153       422,220       64,893  
                         
Non-current assets:                        
Investment in subsidiaries and VIEs     566,267       1,060,273       162,961  
Property and equipment, net     343       241       37  
                         
Total non-current assets     566,610       1,060,514       162,998  
                         
TOTAL ASSETS     1,826,763       1,482,734       227,891  

 

  F- 80  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

21. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (continued)

 

Condensed balance sheets (continued)

 

    As of
December 31,
2016 		    As of
December 31,
2017 		    As of
December 31,
2017 		 
    RMB     RMB     US$  
                   
LIABILITIES AND SHAREHOLDERS’ EQUITY                        
Current liabilities:                        
Accrued payroll and welfare payable     43       544       84  
Accrued expenses and other liabilities     112,548       68,015       10,453  
Amounts due to intergroup companies     4,641       4,401       676  
                         
Total current liabilities     117,232       72,960       11,213  
                         
TOTAL LIABILITIES     117,232       72,960       11,213  
                         
Shareholders’ equity:                        
Class A Ordinary shares, par value US$0.00005 per share, 700,000,000 shares authorized as of December 31, 2016 and 2017; 335,494,792 and  333,787,552 shares issued and outstanding as of December 31, 2016 and 2017, respectively     115       115       17  
Class B Ordinary shares, par value US$0.00005 per share; 300,000,000 shares authorized as of December 31, 2016 and 2017; 74,400,299 and 74,400,299 shares issued and outstanding as of December 31,2016 and 2017, respectively     28       28       4  
Additional paid-in capital     2,198,385       2,295,111       352,753  
Treasury shares     (123,258 )     (143,780 )     (22,099 )
Accumulated other comprehensive income     172,589       116,051       17,837  
Accumulated deficit and statutory reserve     (538,328 )     (857,751 )     (131,834 )
                         
Total shareholder’s equity     1,709,531       1,409,774       216,678  
                         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY     1,826,763       1,482,734       227,891  

 

  F- 81  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

21. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (continued)

 

Condensed statements of comprehensive income (loss)

 

    For the years ended December 31,  
    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Net Revenues     -       -       -       -  
Operating expenses:                                
Sales and marketing     (330 )     (402 )     (497 )     (76 )
General and administrative     (13,160 )     (15,934 )     (68,260 )     (10,491 )
                                 
Total operating expenses     (13,490 )     (16,336 )     (68,757 )     (10,567 )
                                 
Indemnity cost     -       (9,979 )     -       -  
Other operating income     -       39       -       -  
                                 
Operating loss     (13,490 )     (26,276 )     (68,757 )     (10,567 )
Interest income     8,703       10,269       4,818       741  
Equity in (loss) profits of subsidiaries and VIEs     (319,110 )     (186,958 )     (253,160 )     (38,911 )
                                 
Loss before income tax     (323,897 )     (202,965 )     (317,099 )     (48,737 )
Income tax benefit     -       -       -       -  
                                 
Net loss     (323,897 )     (202,965 )     (317,099 )     (48,737 )
                                 
Other comprehensive income                                
Foreign currency translation gain (loss)     66,851       82,347       (56,196 )     (8,637 )
Change in fair value of AFS     -       -       (733 )     (113 )
                                 
Comprehensive loss     (257,046 )     (120,618 )     (374,028 )     (57,487 )

 

  F- 82  

500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and United States dollars (“US$”) and EUR, except for number of shares and per share (or ADS) data)

 

21. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (continued)

 

Condensed statements of cash flows

 

    For the years ended December 31,  
    2015     2016     2017     2017  
    RMB     RMB     RMB     US$  
                         
Net cash (used in) provided by operating activities     (2,266 )     25,679       (270,965 )     (41,647 )
Net cash (used in) provided by investing activities     (865,971 )     413,401       3,065       471  
Net cash provided by (used in) financing activities     748,755       (118,484 )     (11,945 )     (1,836 )
Effect of exchange rate changes on cash and cash equivalents     46,328       481       (60,522 )     (9,302 )
Net (decrease) increase in cash and cash equivalents     (73,154 )     321,077       (340,367 )     (52,314 )
Cash and cash equivalents at beginning of the year     93,748       20,594       341,671       52,514  
Cash and cash equivalents at end of the year     20,594       341,671       1,304       200  

 

Basis of presentation

 

Condensed financial information is used for the presentation of the Company, or the parent company. The condensed financial information of the parent company has been prepared using the same accounting policies as set out in the Group’s consolidated financial statements except that the parent company used the equity method to account for its investment in its subsidiaries and VIEs.

 

The parent company records its investment in its subsidiaries and VIEs under the equity method of accounting as prescribed in ASC 323, “ Investments-Equity Method and Joint Ventures”. Such investments are presented on the condensed balance sheets as “Investment in subsidiaries and VIEs” and their respective profit or loss as “Equity in profits (losses) of subsidiaries and VIEs” on the condensed statements of comprehensive income (loss). Equity method accounting ceases when the carrying amount of the investment, including any additional financial support, in a subsidiary and VIEs is reduced to zero unless the parent company has guaranteed obligations of the subsidiary and VIEs or is otherwise committed to provide further financial support. If the subsidiary and VIEs subsequently reports net income, the parent company shall resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.

 

The parent company’s condensed financial information should be read in conjunction with the Group’s consolidated financial statements.

 

  F- 83  

 

Exhibit 4.83

 

承诺函

Undertaking Letter

 

承诺函

Undertaking Letter

 

致： 500.COM LIMITED ( 以下称“ 500.COM ” )
To:   500.COM LIMITED (“ 500.COM ”)

 

鉴于：

Whereas:

 

A. 500.COM 通过其全资子公司 Fine Brand Limited 持有 500wan HK Limited （以下称“ 500wan 香港 ”） 100% 股权；

500.COM holds 100% of the equity interest in 500wan HK Limited (“ 500wan HK ”) through its wholly owned subsidiary Fine Brand Limited;

 

B. 500wan 香港 系易讯天空计算机技术（深圳）有限公司（以下称“ 易讯天空计算机 ”）股东并持有易讯天空计算机 100% 股权；

 500wan HK is the shareholder of E-Sun Sky Computer (Shenzhen) Co., Ltd. (“ E-Sun Sky Computer ”) and holds 100% of the equity interest in E-Sun Sky Computer;

 

C. 易讯天空计算机分别与张涵（中国身份证号码： 422802198708030014 ）、余波（中国身份证号码： 420106196805034857 ）于 2017 年 7 月 3 日签订了一份《授权委托书》（以下合称“ 《授权委托书》 ”），约定由张涵、余波分别授权易讯天空计算机全权代为行使其各自在深圳市易讯网络有限公司中享有的股东表决权及其他股东权利（以下称“ 权利 ”）。

E-Sun Sky Computer entered into a Power of Attorney on July 3, 2017 respectively with Zhang Han (Chinese identification No.: 422802198708030014 ) and Yu Bo (Chinese identification No.: 420106196805034857) (collectively referred to as the “ POA ”). Pursuant to the POA, Zhang Han and Yu Bo respectively delegate and authorize E-Sun Sky Computer to exercise their voting powers and all other shareholder rights in respect of Shenzhen E-Sun Co., Ltd. on their behalf (the “ Rights ”).

 

D. 易讯天空计算机于 2017 年 7 月 3 日向 500wan 香港出具确认函，确认其行使《授权委托书》项下的权利应通过中国法律允许的方式取得其股东 500wan 香港的书面决议或者同意，且易讯天空计算机知悉， 500wan 香港在进行上述书面决议或者同意时，将根据 500wan 香港的股东或者董事会的意志行事。

E-Sun Sky Computer issued a Confirmation Letter to 500wan HK on July 3 2017, confirming that, in exercising the Rights under the POA, E-Sun Sky Computer shall obtain the written resolution or consent from 500wan HK in the manner allowed by the PRC laws, and further acknowledged that 500wan HK will exercise the Rights in accordance with the instructions from its shareholder or board of directors.

 

  1  

 

 

承诺函

Undertaking Letter

 

就权利的行使事宜， 500wan 香港兹此承诺如下：

Now therefore, with respect to the exercise of the Rights, the 500wan HK hereby covenants as follows:

 

1. 500wan 香港应按照 500.COM 的指示对易讯天空计算机就权利的行使给予许可或作出指示；未经 500.COM 许可， 500wan 香港不得自行或授权 500.COM 之外的第三方就权利的行使对易讯天空计算机给予许可或作出指示。

500wan HK shall grant consent or give instructions to E-Sun Sky Computer with respect to the exercise of the Rights in accordance with the instructions of 500.COM. Without 500.COM’s consent, 500wan HK shall not on its own or authorize any party other than 500.COM to grant consent or give instructions to E-Sun Sky Computer with respect to the exercise of the Rights.

 

2. 本承诺函自签署之日起生效，至《授权委托书》据其条款终止之日起终止。

This undertaking letter shall become effective upon execution, and maintain effective unless the POA is terminated in accordance with the provisions thereof.

 

3. 本承诺函的订立、效力、解释、履行、修改和终止以及争议的解决适用香港法律。

The execution, effectiveness, construction, performance, amendment and termination of this undertaking letter and the resolution of disputes hereunder shall be governed by the laws of Hong Kong.

 

4. 本承诺函以中文和英文书就；中英文版本如有冲突，应以中文版为准。

This undertaking letter is written in both Chinese and English language; in case there is any conflict between the Chinese version and the English version, the Chinese version shall prevail.

 

500wan HK Limited  
500wan HK Limited  
   
签署：  
By: /s/ Pan Zhengming  
姓名：  
Name:  
职务：董事  
Title: Director  
日期：  
Date  

 

  2  

 

 

Exhibit 4.85

 

Proxy Agreement

 

THIS PROXY AGREEMENT (hereinafter referred to as the “ Agreement ”) is made and entered into by and among the following parties on January 10, 2017 in Shenzhen, the People’s Republic of China (hereinafter referred to as the “ PRC ”, which, for the purposes of this Agreement, excludes Hong Kong, Macao and Taiwan):

 

Party A: QUFAN Internet Technology INC

Registered Address: Floor 4,Willow House, Cricket Square, PO Box 2804, Grand Crand Cayman KYl-1112, Cayman Islands

 

Party B: Shenzhen Guangtiandi Technology Co., Ltd.

Registered Address: Room 2-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

Party C: CAO Yu

ID Card No.: 211302198507211639

 

Party D: ZHANG Jiahui

ID Card No.: 220104198806164441

 

Party E: ZHU Nianyang

ID Card No.: 370212198801151519

 

Party F: Qfun Information Technology (Shenzhen) Co., Ltd.

Registered Address: Room 101-1, Building No.3, North Block, Pingshan Dayuan Industrial Park, Pingshan 1st Road, Taoyuan Street, Nanshan District, Shenzhen

Party A, Party B, Party C, Party D, Party E and Party F shall be hereinafter collectively referred to as the “ Parties ”, and Party B, Party C, Party D and Party E shall be collectively referred to as the “ Shareholders ”.

 

Whereas:

 

1. Shareholders as shareholders of Shenzhen Qfun Internet Technology Co., Ltd. (hereinafter referred to as “ Qfun Internet ”) hold 100% equity of Qfun Internet (hereinafter referred to as the “ Equity of Shareholders ”).

 

2. Shareholders agree to entrust Party A or the entity or individual designated by Party A to exercise their shareholder’s rights in Qfun Internet in accordance with the terms and conditions agreed herein and Party A agrees to accept such entrustment in accordance with the terms and conditions agreed herein.

 

3. Shareholders have issued a Power of Attorney (hereinafter referred to as the “ Prior POA ”) to entrust Party F to exercise their shareholder’s rights in Qfun Internet on January 10, 2017.

 

THEREFORE , the Parties hereby agree as follows:

 

Article 1 The Parties confirm and agree that, at the effectiveness of this Agreement, the Prior POA shall immediately terminate, and all rights and obligations of Party F under the Prior POA shall terminate simultaneously.

 

     
   

 

Article 2 On the effective date of this Agreement, Shareholders irrevocably entrust Party A or the entity or individual designated by Party A to exercise all of their shareholder’s voting power and other shareholder’s rights under the laws and the articles of association at the shareholders’ meeting of Qfun Internet on behalf of Shareholders, which include but not limited to the right to sell, transfer, pledge or dispose any or all of the equity held by Shareholders in Qfun Internet; the right to convene, attend or preside over the shareholders’ meeting of Qfun Internet as an authorized representative of Qfun Internet’s shareholders; the right to elect and replace executive director, director, supervisor, manager and other senior executive; the right to deliberate and approve the profits distribution scheme and loss make-up scheme of Qfun Internet and resolve on Qfun Internet’s merger, split, liquidation or change of corporate form; and the right to decide the operation policy and investment plan of Qfun Internet and amend the articles of association, etc.
   
Article 3 Party A may designate an entity or individual permitted by relevant applicable laws to accept the proxy granted by the Shareholders in Article 2 hereof, and will exercise such voting power and shareholder’s rights on behalf of Shareholders in accordance with the provisions of this Agreement.
   
Article 4 Shareholders hereby confirm that they will entrust Party A or the entity or individual designated by Party A to exercise all shareholder’s voting power and other shareholder’s rights regardless of any change in the equity of Qfun Internet.
   
Article 5 Shareholders hereby confirm that if Party A recalls designation to relevant entity or individual, they will immediately recall the proxy and authorization granted to such entity or individual, and will according to the designation of Party A, authorize another entity or individual designated by Party A to exercise all shareholder’s voting power and other shareholder’s rights of Shareholders at the shareholders’ meeting of Qfun Internet. During the term of this Agreement, Shareholders hereby waive all rights they have granted to Party A through this Agreement in connection with the Equity of Shareholders, and will no longer exercise such rights by themselves or entrusting other parties other than the person designated by Party A.
   
Article 6 This Agreement shall be signed by the Parties personally or their respective legal representatives or authorized representatives and take effect on the date first written above. Unless otherwise explicitly specified herein or except Party A determines to terminate this Agreement in writing, this Agreement shall be in full effect and force during the period when Shareholders hold any equity of Qfun Internet. During the term of this Agreement, unless otherwise provided for by laws, Shareholders shall in no case cancel, terminate in advance or rescind this Agreement. Notwithstanding the foregoing, Party A may at any time issue a written notice to Shareholders thirty (30) days in advance to terminate this Agreement.
   
Article 7 Unless otherwise provided herein, the amendment to and/or termination of this Agreement must be consented by the Parties in writing. Any amendment and supplement will become an integral part of this Agreement after proper execution by the Parties and have same legal effect as this Agreement.
   
Article 8 If any provision of this Agreement is invalid or unenforceable due to inconsistency with relevant laws, such provision shall be deemed invalid only to the extent where the relevant laws apply, and will not affect the legal validity of other provisions of this Agreement.
   
Article 9 Any notice or other communication given by any Party as required hereunder shall be written in Chinese and delivered by personal delivery, mail or fax to the following address of other Parties or other address as may be designated by other Parties to such Party from time to time. The date on which the notice is deemed to have been properly served shall be determined as follows: (a) in case of notice sent by personal delivery, it shall be deemed to have been properly served on the same date of personal delivery; (b) in case of notice sent by letter, it shall be deemed to have been properly served on the tenth (10th) day upon the date of mailing by the registered airmail, postage prepaid (and the mailing date shall be the one indicated on the postmark), or the fourth (4th) day upon delivery to an internationally recognized courier service agency; and (c) in case of notice sent by fax, it shall be deemed to have been properly served at the time of receipt showed on the confirmation of transmission of relevant documents.

 

     
   

 

Party A: QUFAN Internet Technology INC

Address:

Attn.:

Fax:

Tel:

 

Party B: Shenzhen Guangtiandi Technology Co., Ltd.

Address:

Attn.:

Fax:

Tel:

 

Party C: CAO Yu

Address:

Attn.:

Fax:

Tel:

 

Party D: ZHANG Jiahui

Address:

Attn.:

Fax:

Tel:

 

Party E: ZHU Nianyang

Address:

Attn.:

Fax:

Tel:

 

Party F: Qfun Information Technology (Shenzhen) Co., Ltd.

Address:

Attn.:

Fax:

Tel:

 

     
   

 

Article 10 Without prior written consent of Party A, Shareholders may not assign their rights and obligations hereunder to any third party. Shareholders hereby agree that Party A may assign its rights and obligations hereunder to any other third party whenever necessary. Party A shall only be required to issue a written notice to Shareholders when such assignment occurs, without the need to obtain consent from Shareholders on such assignment.
   
Article 11 The Parties acknowledge and confirm that any oral or written information mutually exchanged in connection with this Agreement shall be Confidential Information. The Parties shall keep in confidential all such information, and without written consent of other Parties, they may not disclose any relevant information to any third party except under the following circumstances: (a) where such information is or will be known by the general public (for reasons other than the unauthorized disclosure to the public by any Party receiving such information); (b) where the disclosure of such information is required by the applicable laws or stock exchange rules or regulations; or (c) where any Party needs to disclose such information to its legal or financial advisor for the purpose of the transaction contemplated herein, and such legal or financial advisor also needs to assume confidentiality liability similar to that provided in this Article. The breach of confidentiality by the staff of or agency retained by any Party shall be deemed as breach of confidentiality by such Party, and such Party shall assume the liabilities for breach of contract in accordance with this Agreement. This Article will survive the invalidity, change, termination, rescission or inoperability of this Agreement due to any reason.
   
Article 12 The conclusion, validity, interpretation, performance, revision and termination and dispute resolution of this Agreement shall be governed by the PRC laws. In case of any dispute between the Parties hereto arising out of the interpretation and performance of this Agreement, the Parties shall negotiate to solve such dispute in good faith. In case of failure to do so, either Party may submit such dispute to the China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules then in force. The seat of arbitration shall be Beijing, and the language of arbitration shall be Chinese. The arbitration award shall be final and binding upon the Parties.
   
Article 13 Once effective, this Agreement shall constitute the entire agreement among the Parties hereto with respect to the content of this Agreement and thoroughly supersede all oral and written agreements and understandings among the Parties with respect to the content hereof prior to the conclusion of this Agreement.
   
Article 14 This Agreement shall be made in six original copies, with each Party holding one copy with the same legal effect.

 

(The remainder of this page is intentionally left blank.)

 

     
   

 

[No text on this page.]

 

IN WITNESS WHEREOF, this Agreement has been executed by the Parties on the date first written above.

 

Party A: QUFAN Internet Technology INC .

Signature:

Name:

Title:

 

Party B: Shenzhen Guangtiandi Technology Co., Ltd.

Signature:

Name:

Title:

 

Party C: CAO Yu

Signature:

Name:

Title:

 

Party D: ZHANG Jiahui

Signature:

Name:

Title:

 

Party E: ZHU Nianyang

Signature:

Name:

Title:

 

Party F: Qfun Information Technology (Shenzhen) Co., Ltd.

Signature:

Name:

Title:

 

Signature Page of Proxy Agreement

 

     

 

 

Exhibit 4.86

 

Financial Support Agreement

 

THIS AGREEMENT (hereinafter referred to as the “ Agreement ”) is made and entered into by and among the following parties on January 10, 2017 in Shenzhen, the People’s Republic of China (hereinafter referred to as the “ PRC ”):

 

1. QUFAN Internet Technology INC. (hereinafter referred to as “ Qfun Cayman ”), a company incorporated and existing under the laws of Cayman Islands, with its address at Floor 4,Willow House, Cricket Square, P O Box2804, Grand Craned Cayman KYI-1112,Gayman Islands;
2. Qfun Information Technology (Shenzhen) Co., Ltd. (hereinafter referred to as “ Qfun Shenzhen ”), a wholly foreign-owned company incorporated and existing under the PRC laws, with its address at Room 101-1, Building No.3, North Block, Pingshan Dayuan Industrial Park, Pingshan 1st Road, Taoyuan Street, Nanshan District, Shenzhen;
3. Shenzhen Guangtiandi Technology Co., Ltd. , a wholly foreign-owned company incorporated and existing under the PRC laws, with its address at Room 2-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen;
4. CAO Yu , a Chinese citizen with ID Card number of: 211302198507211639;
5. ZHANG Jiahui , a Chinese citizen with ID Card number of: 220104198806164441; and
6. ZHU Nianyang , a Chinese citizen with ID Card number of :370212198801151519.

 

Qfun Cayman, Qfun Shenzhen, Shenzhen Guangtiandi Technology Co., Ltd., CAO Yu, ZHANG Jiahui and ZHU Nianyang are hereinafter collectively referred to as the “ Parties ”, and Shenzhen Guangtiandi Technology Co., Ltd., CAO Yu, ZHANG Jiahui and ZHU Nianyang are hereinafter collectively referred to as the “ Shareholders ”.

 

Whereas:

 

A. Shareholders are shareholders of Shenzhen Qfun Internet Technology Co., Ltd., a limited liability company incorporated and existing under the PRC laws, with its address at A09, 11/F, East Block, SKYWORTH Semiconductor Design Building, High Tech South Four Road, Nanshan District, Shenzhen (hereinafter referred to as the “ Qfun Internet ”);
B. Qfun Shenzhen is a subsidiary 100% wholly owned by Qfun Cayman through Qfun Internet Technology (HK) Limited;

 

The Parties hereby confirm the finance and other matters of Qfun Internet as follows:

 

Article 1 Qfun Cayman confirms and undertakes that, from the date hereof (hereinafter referred to as the “ Effective Date ”), at the request of Qfun Internet, Qfun Cayman agrees to unconditionally provide financial support (hereinafter referred to as the “ Financial Support ”) to Shareholders by itself or through its wholly-owned subsidiary in the PRC (i.e. Qfun Shenzhen) in the way and by the means permitted under the PRC laws and regulations. Shareholders agree to accept such Financial Support in the way and by the means permitted by the PRC laws and regulations, and undertake to unconditionally use Financial Support they receive to fund Qfun Internet only so as to support the development of business by Qfun Internet.

 

     

 

 

Article 2 If Qfun Cayman provides any Financial Support to Qfun Internet by itself or through Qfun Shenzhen, the time and method of repayment shall be otherwise determined by the Parties upon negotiation. To the extent permitted by the PRC laws and other applicable laws, if required by Qfun Internet, Shareholders shall exempt Qfun Internet's repayment obligation for the Financial Support, and Qfun Cayman agrees to exempt Shareholders from the repayment obligation by itself or by instructing Qfun Shenzhen to do so.

 

Article 3 Shareholders agree that, to the extent permitted by the PRC laws and other applicable laws, if required by Qfun Internet, Shareholders shall exempt Qfun Internet's repayment obligation.

 

(The remainder of this page is intentionally left blank.)

 

     

 

 

[This is the signature page of the Financial Support Agreement.]

 

QUFAN Internet Technology INC.
Signature:
Name:
Title: Director
 
Qfun Information Technology (Shenzhen) Co., Ltd.
Signature:
Name:
Title: Legal Representative
 
Shenzhen Guangtiandi Technology Co., Ltd.
Signature:
Name:
Title: Legal Representative
 
CAO Yu
Signature:
 
ZHANG Jiahui
Signature:
 
ZHU Nianyang
Signature:
 
     

 

 

Exhibit 4.87

 

Exclusive Call Option Agreement

 

On

 

Shenzhen Qfun Internet Technology Co., Ltd.

 

______________________________________

 

Between

 

Qfun Information Technology (Shenzhen) Co., Ltd.

 

And

 

ZHANG Jiahui

 

CAO Yu

 

ZHU Nianyang

 

Shenzhen Guangtiandi Technology Co., Ltd.

 

______________________________________

 

January 10, 2017

 

     
   

 

Exclusive Call Option Agreement

 

This Agreement is made and entered into by and among the following Parties on January 10, 2017 in Shenzhen:

 

Party A: Qfun Information Technology (Shenzhen) Co., Ltd.

Domicile: Room 101-1, Building No. 3, North Block, Pingshan Dayuan Industrial Park, Pingshan
1st Road, Taoyuan Street, Nanshan District, Shenzhen

Legal Representative: WANG Ying

(hereinafter referred to as “ Party A ” or the “ WFOE ”)

 

Party B:

Party B1: ZHANG Jiahui

ID No.: 220104198806164441

 

Party B2: CAO Yu

ID No.: 211302198507211639

 

Party B3: ZHU Nianyang

ID No.: 370212198801151519

 

Party B4: Shenzhen Guangtiandi Technology Co., Ltd. (hereinafter as “ Guangtiandi ”) Domicile: Room 2-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen, Legal Representative: YIN Zhiwei (Party B1, Party B2, Party B3, Party B4 collectively referred to as “ Party B ” or the “ Shareholders ”)

 

Party C: Shenzhen Qfun Internet Technology Co., Ltd.

Domicile: A09, 11/F, East Block, SKYWORTH Semiconductor Design Building, High Tech South Four Road, Nanshan District, Shenzhen

Legal Representative: WANG Ying (hereinafter referred to as “ Party C ” or the “ Target Company ”)

 

WHEREAS,

 

1. Party B, as the shareholders of record of Target Company, legally hold all equity of Target Company, and as of the date hereof, their contribution amount of the registered capital and their shareholding of Target Company are respectively shown in Appendix I;

 

2. Party B and Target Company agree to transfer all assets of Target Company or all equity of Target Company held by the Shareholders to Party A and/or other entity or individual designated by it to the extent permissible under the PRC laws, and the WFOE accepts such transfer;

 

3. In order to realize such transfer, Party B and Target Company agree to irrevocably grant the exclusive Equity Call Option and Asset Call Option to Party A, whereby to the extent permissible under the PRC laws, Party B and Target Company shall, per request of Party A, transfer the Option Equity to Party A and any other entity or individual designated by it according to this Agreement, or transfer the transferred assets to Party A and any other entity or individual designated by it according to this Agreement;

 

     
   

 

4. Target Company agrees that the Shareholders grant Equity Call Option and Asset Call Option to the WFOE according to this Agreement.

 

THEREFORE, the Parties hereby agree below upon negotiation:

 

Article 1 Definitions and Interpretation

 

1.1 Unless otherwise defined in the context, the following terms herein shall have the following meanings:

 

“ PRC Laws ”   Refer to the laws, administrative regulations, administrative rules, local regulations, judicial interpretations and other binding normative documents then in force of the People's Republic of China (which, for the purposes of this Agreement, excludes Hong Kong Special Administrative Region, Macau Special Administrative Region or Taiwan).
     
“ Equity Call Option ”   Refers to the call option with respect to the equity of Target Company granted by the Shareholders to the WFOE in accordance with the terms and conditions herein.
     
“ Asset Call Option ”   refer to the call option with respect to the assets of Target Company granted by the Shareholders to the WFOE in accordance with the terms and conditions herein.
     
“ Option Equity ”   With respect to each Shareholder, refers to all equity he/she/it holds in the Registered Capital of the Target Company; and with respect to the Shareholders, refers to the equity accounting for 100% of the Registered Capital of the Target Company.
     
“ Company Business ”   All business activities operated and developed by Target Company for the time being and anytime during the term hereof, including without limitation, Internet technology development; technical development, technical consulting and onsite maintenance of computer software and hardware; development of game software; onsite maintenance of database and computer network; software system integration business and other business approved by competent authority for operation.
     
“ Registered Capital ”   Refers to all registered capital of Target Company as of the date hereof, i.e. RMB One Million (1,000,000).
     
“ Transferred Equity ”   Refers to the equity of Target Company that the WFOE, when exercising its Equity Call Option, is entitled to require the Shareholders to transfer to it or its designated entity or individual in accordance with Article 3 herein, the quantity of which may be all or part of the Option Equity, as determined at the discretion of the WFOE based on the then PRC Laws and its own business consideration.
     
“ Transferred Asset ”   Refers to the asset of Target Company that the WFOE, when exercising its Asset Call Option, is entitled to require Target Company to transfer to it or its designated entity or individual in accordance with Article 3 herein, the quantity of which may be all or part of the asset of Target Company, as determined at the discretion of the WFOE based on the then PRC Laws and its own business consideration.

 

     
   

 

“ Structure Agreements ”   Collectively refer to this Agreement, the Equity Pledge Agreement and the Shareholders' Voting Rights Proxy Agreement by and among the Parties hereto on the date hereof, and the Entrusted Management Agreement by and between Target Company and the WFOE on the date hereof.
     
“ Exercise ”   Refers to the WFOE exercising its Equity Call Option or Asset Call Option.
     
“ Transfer Price ”   Refers to all consideration payable to the Shareholders or Target Company by the WFOE or its designated entity or individual for obtaining the Transferred Equity or Transferred Asset in each Exercise.
     
“ Operation Certificates ”   Refer to any approval, license, filing, registration, etc. necessary for Target Company to legally and effectively operation all of its business, including but not limited to the Business License,  the Value-added Telecommunication Business Operation Permit, the Internet Culture Operation License and other relevant licenses and certificates then required by PRC Laws.
     
“ Company Assets ”   Refer to all tangible and intangible assets owned by or at the disposal of Target Company during the term hereof, including but not limited to any real estate, movable property, trademarks, copyrights, patents, proprietary technologies, domain names, software use rights and other intellectual property rights, any investment interests, and the benefits that can be obtained under all contracts concluded by the Company and any other benefits that should be obtained by the Company.
     
“ Material Assets ”   Refer to the asset with a book value of or over RMB Five Hundred Thousand (500,000), or the asset with material influence over the business operation of a Party.
     
“ Material Agreements ”   Refer to the agreements to which Target Company is a party and having material influence over the operation, business or assets of Target Company.
     
“ Exercise Notice ”   Having the meaning set forth in Article 3.4 hereof.
     
“ Confidential Information ”   Refers to the trade secrets, proprietary information, customer information and any other information of a confidential nature of the other Parties known during the conclusion and performance of this Agreement.
     
“ Defaulting Party ”   Refers to any Party materially breaching any provision hereunder or materially failing to perform or delaying in performance of any of its obligations hereunder.
     
“ Default ”   Refers to the act of any Party hereto materially breaching any provision hereunder or materially failing to perform or delaying in performance of any of its obligations hereunder.
     
“ Business Day ”   Refers to any business day other than Saturday, Sunday or legal holidays in the PRC.

 

1.2 References to any PRC Laws herein shall be deemed to:

 

(1) Include amendment, change, supplement and reenactment of such PRC Laws, regardless of they take effect before or after the conclusion of this Agreement; and

 

     
   

 

(2) Include other decisions, notices and rules formulated under or effective due to such Laws.

 

1.3 Unless the context otherwise requires herein, references to article, paragraph, item and sub-item herein shall refer to the corresponding content in this Agreement.

 

Article 2 Grant of Equity Call Option and Asset Call Option

 

2.1 Party B agrees to hereby irrevocably and unconditionally grant the exclusive Equity Call Option and Asset Call Option to Party A, whereby to the extent permissible under the PRC laws, Party A shall be entitled to require Party B to transfer the Option Equity to the WFOE and its designated entity or individual in accordance with the terms and conditions hereof, or require Target Company to transfer the Transferred Asset to Party A and any other entity or individual designated by it according to this Agreement. Party A also agrees to accept such grant of Equity Call Option and Asset Call Option.

 

Article 3 Methods of Exercise

 

3.1 Subject to the terms and conditions hereof and to the extent permissible under the PRC Laws, Party A has absolute discretion to decide the specific time, method and times of its Exercise.

 

Notwithstanding the foregoing, Party A shall Exercise the Equity Call Option or the Asset Call Option hereunder as soon as possible from the date PRC Laws allow Party A directly operates the business of Target Company, so that Party A may directly operate the business of Target Company, and terminate the Structure Agreements with Target Company and other relevant parties.

 

3.2 Subject to the terms and conditions hereof, without violating the PRC Laws, Party A shall be entitled to require accepting the Transferred Equity from Party B or accepting the Transferred Asset from Target Company by itself or through other entity or individual it designates at any time.

 

3.3 At each Exercise, Party A shall be entitled to, at its discretion, designate the quantity of equity that Party B shall transfer to Party A and/or other entity or individual it designates in such Exercise, and also entitled to designate the amount of Company Assets that Target Company shall transfer to Party B and/or other entity or individual it designates in such Exercise. Party B or Target Company shall, per the amount required by Party A, respectively transfer the Transferred Equity or assets of Target Company to Party A and/or other entity or individual it designates. Party A and/or other entity or individual it designates shall pay the Transfer Price in accordance with the terms and conditions hereof, to the Shareholders that transfer the Transferred Equity or to Target Company that transfers the Transferred Asset, with respect to the accepted Transferred Equity or the assets of Target Company in each Exercise.

 

3.4 Before Exercise, Party A shall send an Exercise Notice of Equity Call Option or Asset Call Option to Party B or Target Company, the form of which see Appendix II hereto. Upon receipt of the Exercise Notice, Party B or Target Company shall immediately transfer all the Transferred Equity or Transferred Asset in one time to Party A and/or other entity or individual it designates by the means stated in Article 3.3 hereof according to the Exercise Notice.

 

     
   

 

Article 4 Transfer Price

 

4.1 At each Exercise of Party A, the Transfer Price that Party A or its designated entity or individual pays to Party B or Target Company shall be lowest price permissible under the then PRC Laws.

 

Article 5 Representations and Warranties

 

5.1 Party B represents and warrants that:

 

5.1.1 Party B are Chinese citizens with full capacity for conduct, have full and independent legal status and capacity to execute, deliver and perform this Agreement and may sue or be sued as an independent party.

 

5.1.2 This Agreement will be lawfully and duly executed and delivered by Party B. This Agreement will constitute its legal and binding obligations enforceable against it in accordance with terms of this Agreement.

 

5.1.3 Party B are legal owners of record of Option Equity at the effectiveness of this Agreement, and except for the Proxy Rights set forth in the Shareholders' Voting Rights Proxy Agreement executed on the date hereof by and among Target Company, Party A and Party B, there is no lien, pledge, claim and other security interest or third party right over the Option Equity.

 

5.1.4 Party B irrevocably warrants that there is no lien, mortgage, claim and other security interest or third party right over the assets of Target Company.

 

5.1.5 Party B has full power and authorization to execute, deliver and perform this Agreement and all other documents to be executed by it in connection with the transactions contemplated hereunder as well as full power and authorization to consummate the transactions contemplated hereunder; the execution, delivery and performance of this Agreement and consummation of the transactions hereunder by Party B do not violate PRC Laws, or breach any agreement, contract or other arrangement with any third party and binding upon it.

 

5.2 Target Company represents and warrants that:

 

5.2.1 Target Company is a limited liability company duly registered and lawfully existing under the PRC Laws with independent legal personality, has full and independent legal status and capacity to execute, deliver and perform this Agreement and may sue or be sued as an independent party.

 

5.2.2 Target Company has full internal corporate power and authorization to execute, deliver and perform this Agreement and all other documents to be executed by it in connection with the transactions contemplated hereunder as well as full power and authorization to consummate the transactions contemplated hereunder.

 

5.2.3 This Agreement will be lawfully and duly executed and delivered by Target Company. This Agreement constitutes legal and binding obligations to it. The execution, delivery and performance of this Agreement and consummation of the transactions hereunder by Target Company do not violate PRC Laws, or breach any agreement, contract or other arrangement with any third party and binding upon it.

 

5.2.4 At the effectiveness of this Agreement, Target Company is the lawful owner of Company Assets, and there is no lien, mortgage, claim and other security interest or third party right over the Company Assets.

 

     
   

 

5.2.5 Except for the Proxy Rights set forth in the Shareholders' Voting Rights Proxy Agreement executed on the date hereof, there is no lien, pledge, claim and other security interest or third party right over the Option Equity.

 

5.3 Party A represents and warrants that:

 

5.3.1 Party A is a limited liability company duly registered and lawfully existing under the PRC Laws with independent legal personality. The WFOE has full and independent legal status and capacity to execute, deliver and perform this Agreement and may sue or be sued as an independent party.

 

5.3.2 Party A has full internal corporate power and authorization to execute, deliver and perform this Agreement and all other documents to be executed by it in connection with the transactions contemplated hereunder as well as full power and authorization to consummate the transactions contemplated hereunder.

 

5.3.3 This Agreement will be lawfully and duly executed and delivered by Party A. This Agreement constitutes legal and binding obligations to it.

 

Article 6 Undertakings of Shareholders and Target Company

 

The Shareholders and Target Company hereby severally and jointly undertake to Party A as follows:

 

6.1 During the term hereof, the Shareholders shall ensure Target Company validly existing and subject to no termination, liquidation or dissolution, and without prior written consent of Party A, no Shareholder may:

 

6.1.1 Transfer or otherwise dispose any Option Equity, or create any security interest or other third party right over any Option Equity;

 

6.1.2 Increase or decrease Registered Capital of Target Company, cause or consent to the split of, or merge with other entity by, Target Company;

 

6.1.3 Dispose or cause the management of Target Company to dispose the lawful beneficiary right of any asset, business or revenue of the Company, or allow Target Company to create any security interest or other third party right over any of its assets;

 

6.1.4 Terminate or cause the management of Target Company to terminate Material Agreements signed by the Company, or enter into any other agreement conflicting with the existing Material Agreements;

 

6.1.5 Appoint or remove any director, supervisor of Target Company or other management personnel of Target Company that shall be appointed or removed by the Shareholders;

 

6.1.6 Cause Target Company to announce distribution or actually distribute any distributable profits, bonus or dividends;

 

6.1.7 Amend the Articles of Association;

 

6.1.8 Borrow or take out loan, or provide guarantee or make other security, or assume any substantial obligation outside the ordinary course of business, or succeed any of such borrowing or loan, guarantee or any other obligation; and

 

6.1.9 Except for the equity investment in the Company, engage in any substantial production and operation activities, or merge, partner with, have joint venture or associate with any person, or make any acquisition or investment, or agree to, cause Target Company or management agree that Target Company makes any investment.

 

     
   

 

6.2 During the term hereof, Party B must make its best efforts to develop the business of Target Company, and ensure Target Company is operating in compliance with laws and regulation, without any act or omission that may damage the assets, goodwill of Target Company or affect the validity of the Operation Certificates of the Company.

 

6.3 During the term hereof, Party B shall timely inform Party A of any circumstance which may generate material adverse effect on the existing, business operation, financial condition, asset or goodwill of Target Company, any litigation, arbitration or administrative proceeding relating to the asset, business or income of Target Company that will or may occur, and timely take all measures excluding such adverse condition or take effective remedies against it.

 

6.4 Once Party A sends an Exercise Notice:

 

6.4.1 Party B shall immediately organize the convention of shareholders’ meeting and through resolutions of shareholders’ meeting or take all other necessary actions to agree to transfer all Transferred Equity or Transferred Asset to Party A and/or other entity or individual it designates at Transfer Price;

 

6.4.2 Party B shall immediately enter into an equity transfer agreement or asset transfer agreement with Party A and/or other entity or individual it designates, and transfer all Transferred Equity or Transferred Asset to Party A and/or other entity or individual it designates at Transfer Price, and pursuant to Party A’s requirements and laws and regulations, provide necessary support to Party A (including providing and executing all relevant legal documents, perform all governmental approval and registration procedures and assume all relevant obligations), so that Party A and/or other entity or individual it designates obtains all Transferred Equity or Transferred Asset, and such Transferred Equity or Transferred Asset shall have no legal defect, or security interests, third party restriction or any other limitation on the equity.

 

Article 7 Undertakings of Target Company

 

7.1 Where the execution and performance of this Agreement and the grant of the Equity Call Option or Asset Call Option hereunder require the consent, permission, waiver, authorization of a third party, or approval, permission, exemption of any governmental authority, or registration or filing with any governmental authority (if required by law), then Target Company shall try to assist in satisfying the above.

 

7.2 Without Party A’s prior written consent, Target Company will not assist or allow the Shareholders to transfer or otherwise dispose any Option Equity, or create any security interest or other third party right over any Option Equity.

 

7.3 Without Party A’s prior written consent, Target Company will not transfer or otherwise dispose any Material Assets, or create any security interest or other third party right over any assets of Target Company.

 

7.4 Target Company will not conduct or allow any act or action that may have adverse effect on the interests of Party A hereunder, include without limitation, any act and action subject to Article 6.1.

 

     
   

 

Article 8 Confidentiality

 

8.1 Irrespective of whether this Agreement has been terminated or not, each of the Parties shall maintain in strict confidence the trade secrets, proprietary information, customer information and any other information of a confidential nature of the other Parties known during the conclusion and performance of this Agreement. Except with prior written consent of the Party disclosing the Confidential Information or where disclosure to a third party is mandated by relevant laws or regulations or by applicable listing rules at the place where an affiliate of a Party is listed, the Party receiving the Confidential Information shall not disclose any Confidential Information to any third party. The Party receiving the Confidential Information shall not use, either directly or indirectly, any Confidential Information other than for the purpose of performing this Agreement.

 

8.2 The following information shall not be deemed as the Confidential Information:

 

(1) any information which, as shown by written evidence, has previously been known to the receiving Party by way of legal means; or

 

(2) any information which enters the public domain other than as a result of a fault of the receiving Party; or

 

(3) any information lawfully acquired by the receiving Party from other source subsequent to the receipt of relevant information.

 

8.3 A receiving Party may disclose the Confidential Information to its relevant employees, agents or its engaged professionals, provided that such receiving Party shall ensure that such persons shall comply with relevant terms and conditions of this Agreement and that it shall assume any liability arising out of any breach by such persons of relevant terms and conditions of this Agreement.

 

8.4 Notwithstanding any other provisions of this Agreement, the validity of this Article shall not be affected by termination of this Agreement.

 

Article 9 Term of Agreement

 

This Agreement shall take effect upon duly execution by the Parties. This Agreement shall terminate upon the lawful transfer of all Option Equity or Company Assets to Party A and/or other entity or individual it designates in accordance with the provisions herein.

 

Article 10 Notice

 

10.1 Any notice, request, demand and other correspondence required or given hereunder shall be delivered to relevant Parties in writing.

 

10.2 Such notice or other correspondence, if sent by fax, shall be deemed properly served once sent, or if delivered by personal delivery, shall be deemed properly served once delivered in person, or if sent by post, shall be deemed properly served after 3 Business Days after posting, or if sent by email, shall be deemed to properly served when the notice email is deemed to enter into the email receipt system of the other Party after the sender correctly fills in the email address and the email is not returned by the system.

 

10.3 The addresses, contact persons and electronic communication terminals agreed herein shall be the addresses for work contacts between the Parties and the service of legal instruments and for the arbitration institution and/or people's court to serve instruments during dispute resolution, and legal instruments served via such addresses and/or the addresses disclosed in information registered with the administration for industry and commerce (or the registered address on the resident ID Card) shall be deemed as validly served. The notice and service provisions in Article 10 hereof shall be independent provisions, not affected by the validity of the entire Agreement or other provisions hereof.

 

     
   

 

Article 11 Default Liabilities

 

11.1 The Parties agree and confirm that if any Party hereto materially breaches any provision hereunder or materially fails to perform or delays in performance of any of its obligations hereunder, it shall constitute the Default hereunder, and the non-defaulting Party may demand the Defaulting Party to make correction or take remedy measures within a reasonable time limit. Should the Defaulting Party still fail to make correction or take remedy measures within such reasonable time limit or 10 Business Days after the non-defaulting Party notifies the Defaulting Party in writing and requests for correction, the non-defaulting Party may at its liberation decide:

 

11.1.1 If the Defaulting Party is Party B or Target Company, Party A shall have the right to terminate this Agreement and request the Defaulting Party to pay liquidated damages;

 

11.1.2 If the Defaulting Party is Party A, the non-defaulting Party shall have the right request the Defaulting Party to pay liquidated damages, provided that the non-defaulting Party shall have no right to terminate or rescind this Agreement, unless otherwise stipulated by the laws.

 

11.2 Notwithstanding any other provisions of this Agreement, the validity of this Article shall not be affected by termination of this Agreement.

 

Article 12 Dispute Resolution

 

12.1 Any dispute arising out of and in connection with this Agreement shall be resolved by the Parties upon negotiation.

 

12.2 Where the Parties fail to reach a consensus within 20 Business Days after the dispute occurs, either Party may submit such dispute to South China International Economic and Trade Arbitration Commission (the “ Commission ”) for arbitration in Shenzhen in accordance with the arbitration rules of the Commission in force at the time of submittal for arbitration. The arbitration tribunal shall consist of three arbitrators, and the arbitration language shall be Chinese, and the arbitration award shall be final and binding upon the Parties.

 

12.3 Subject to the PRC Laws, the Commission shall have the right to render award on the following: (1) with respect to equity, land assets or other assets of the Company, remedy measures; (2) injunction relief, for example, requiring the Company to carry out business operation or compulsorily transfer assets of the Company; (3) liquidation of the Company.

 

12.4 Subject to the PRC Laws, before the Commission forms an arbitration tribunal in accordance with the arbitration rules or under appropriate circumstances, the courts with jurisdiction at the following places shall have the right to render a ruling on remedy measures to support the arbitration: (1) Hong Kong Special Administrative Region; (2) place of registration of Party A; (3) place of registration of Party B; (4) place of registration of Party C; and (5) place where major assets of Party A or Party B or Party C locate.

 

12.5 Unless otherwise ruled by the arbitration tribunal, all expenses paid or advanced for arbitration (including but not limited to the arbitration fee, fee for arbitrators and attorneys, travel expenses, etc.) shall be borne by the defeated Party.

 

     
   

 

Article 13 Miscellaneous

 

13.1 This Agreement shall be written in Chinese and made in septuplicate, with Party B4 holding two copies and other Parties each holding one copy, of the same legal effect.

 

13.2 The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

13.3 Any right, power or remedy granted to a Party under any provision hereof shall not preclude such Party from other rights, powers or remedies available to it under the Laws and other provisions hereof, and a Party's exercise of its rights, powers and remedies shall not preclude the exercise of other rights, powers and remedies available to it.

 

13.4 Failure to exercise or delay in exercising any right, power or remedy under this Agreement or available under the Laws by a Party shall not cause waiver of such rights, and any single or partial waiver of rights of such Party shall not prevent it from exercising such rights in other ways or exercising its other rights.

 

13.5 Each provision hereof shall be separable and independent from every other provision, and if any or several provisions hereof become invalid, illegal or unenforceable at any time, the validity, legality and enforceability of other provisions hereof shall not be affected thereby. The Parties shall, through good faith negotiation, make efforts to replace such invalid, illegal or unenforceable provisions with valid provisions to the maximum extent permitted by the Laws and meeting expectations of the Parties, and the economic effects produced by such valid provisions shall be close to the economic effects of such invalid, illegal or unenforceable provisions as much as possible.

 

13.6 This Agreement, once executed, shall supersede any other prior legal documents executed by the Parties with respect to the same subject matter. Any amendment or supplement to this Agreement shall be made in writing, and shall only become effective upon duly execution by the Parties.

 

13.7 Without prior written consent of Party A, neither Party B nor Target Company may transfer any of its right and/or obligation hereunder to any third party; Party B and Target Company hereby agree that Party A shall be entitled to transfer any of its rights and/or obligations hereunder to any third party upon written notice to Party B and Target Company.

 

13.8 This Agreement shall be binding upon the legal assignees and successors of the Parties.

 

(The following page is intentionally left blank, and is followed by the signature page.)

 

     
   

 

(No text on this page. This is the signature page of the Exclusive Call Option Agreement of Shenzhen Qfun Internet Technology Co., Ltd.)

 

Party A (Seal): Qfun Information Technology (Shenzhen) Co., Ltd.

 

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

Party B1: ZHANG Jiahui /s/ ZHANG Jiahui (Signature)

Party B2: CAO Yu /s/ CAO Yu (Signature)

Party B3: ZHU Nianyang /s/ ZHU Nianyang (Signature)

Party B4 (Seal): Shenzhen Guangtiandi Technology Co., Ltd.

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

Party C (Seal): Shenzhen Qfun Internet Technology Co., Ltd.

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

     
   

 

Appendix I:

 

Basic Information of Shenzhen Qfun Internet Technology Co., Ltd.

 

Name of Company: Shenzhen Qfun Internet Technology Co., Ltd.
Registered Address: A09, 11/F, East Block, SKYWORTH Semiconductor Design Building, High Tech South Four Road, Nanshan District, Shenzhen
Registered Capital: RMB One Million
Legal Representative: WANG Ying

 

Shareholding Structure:

 

Serial No.   Name of Shareholder of
Record 		  Contribution
Amount (¥0,000s) 		    Shareholding Ratio  
1   ZHANG Jiahui     25.333       25.333 %
2   CAO Yu     16.121       16.121 %
3   ZHU Nianyang     7.546       7.546 %
4   Shenzhen Guangtiandi Technology Co., Ltd.     51.000       51 %
    Total     100       100 %

 

     
   

 

Appendix II:

 

Form of Exercise Notice of Equity Call Option

 

To: ________________ (“ You ”)

 

Considering that we entered into the Exclusive Call Option Agreement (“ Call Option Agreement ”) with Shenzhen Qfun Internet Technology Co., Ltd. (“ Qfun Internet ”), You and other relevant parties on January 10, 2017, whereby to the extent permissible under PRC Laws and regulations, You shall at the request of us, transfer the equity You hold in Qfun Internet to us or any third party we designate.

 

Therefore, we hereby send the notice to You below:

 

We hereby require exercising the Equity Call Option under the Call Option Agreement, and have us/ ______ we designate to accept the transfer of _____% equity You hold in Qfun Internet (“ Proposed Equity ”). Please immediately transfer all Proposed Equity to us/ _____ we designate in accordance with the Call Option Agreement upon receipt of this notice.

 

Best regards,

 

  Qfun Information Technology (Shenzhen) Co., Ltd. (Seal)
  Legal Representative / Authorized Representative:
  Date:

 

     
   

 

Form of Exercise Notice of Asset Call Option

 

To: Shenzhen Qfun Internet Technology Co., Ltd. (“ You ”)

 

Considering that we entered into the Exclusive Call Option Agreement (“ Call Option Agreement ”) with You, Your shareholders and other relevant parties on January 10, 2017, whereby to the extent permissible under PRC Laws and regulations, You shall at the request of us, transfer all or part of Your asset to us or any third party we designate.

 

Therefore, we hereby send the notice to You below:

 

We hereby require exercising the Asset Call Option under the Call Option Agreement, and have us/ ______ we designate to accept the transfer of Your assets of ________ (“ Proposed Assets ”). Please immediately transfer all Proposed Assets to us/ _____ we designate in accordance with the Call Option Agreement upon receipt of this notice.

Best regards,

 

  Qfun Information Technology (Shenzhen) Co., Ltd. (Seal)
  Legal Representative / Authorized Representative:
  Date:

  

     

 

Exhibit 4.88

 

Shareholders' Voting Rights Proxy Agreement

 

of

 

Shenzhen Qfun Internet Technology Co., Ltd.

 

 

 

Between

 

Qfun Information Technology (Shenzhen) Co., Ltd.

 

And

 

ZHANG Jiahui

 

CAO Yu

 

ZHU Nianyang

 

Shenzhen Guangtiandi Technology Co., Ltd.

 

 

 

January 10, 2017

 

     

 

  

Shareholders' Voting Rights Proxy Agreement

 

This Agreement is made and entered into by and among the following Parties on January 10, 2017 in Shenzhen:

 

Party A: Qfun Information Technology (Shenzhen) Co., Ltd.

 

Domicile: Room 101-1, Building No.3, North Block, Pingshan Dayuanc Industrial Park, Pingshan 1st Road, Taoyuan Street, Nanshan District, Shenzhen

Legal Representative: WANG Ying

(hereinafter referred to as “ Party A ” or the “ WFOE ”)

 

Party B:

Party B1: ZHANG Jiahui

|ID Card No.:220104198806164441

Party B2: CAO Yu

ID Card No.:211302198507211639

Party B3: ZHU Nianyang

ID Card No.:370212198801151519

Party B4 : Shenzhen Guangtiandi Technology Co., Ltd. (hereinafter referred to as “ Guangtiandi ”)

Domicile: Room 2-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

Legal Representative: YIN Zhiwei

(Party B1, Party B2, Party B3 and Party B4 shall be collectively referred to as “ Party B ” or the “ Shareholders ”, and their rights and obligations hereunder are inseparable.)

 

Party C: Shenzhen Qfun Internet Technology Co., Ltd.

Domicile: A09, 11/F, East Block, SKYWORTH Semiconductor Design Building, High Tech South Four Road, Nanshan District, Shenzhen

Legal Representative: WANG Ying

(hereinafter referred to as “ Party C ”, the “ Company ” or the “ Target Company ”)

 

In this Agreement, Party A, Party B and Party C shall be hereinafter referred to collectively as the “ Parties ” and individually as a “ Party ”.

 

     

 

  

Whereas,

 

1. Party B are shareholders of record of the Target Company and legally hold all equity of the Target Company; and

 

2. Party B intends to entrust Party A or any director or successor to such director as authorized by Party A upon decision to exercise the voting rights and other relevant shareholder's rights of Party B in the Target Company, and Party A agrees to accept such entrustment.

 

NOW, THEREFORE, the Parties, upon friendly negotiation, agree as follows:

 

Article 1 Voting Rights Entrustment

 

1.1 Party B irrevocably undertakes that they will each execute a power of attorney in the form and substance of Appendix 1 attached hereto upon execution of this Agreement whereby he/she/it authorizes Party A or any director or successor to such director (including the liquidator replacing such director) as authorized by Party A upon decision (hereinafter referred to as the “ Proxy ”) to exercise, on his/her/its behalf, the following rights available to Party B under the then effective articles of association of the Target Company (collectively, “ Proxy Rights ”):

 

(1) to propose the convening of, and attend, shareholders’ meetings in accordance with the articles of association of the Company as the proxy of the Shareholders;

 

(2) to exercise voting rights on behalf of the Shareholders on all matters required to be deliberated and resolved by the shareholders’ meeting, including without limitation the appointment, election and removal of all directors and other senior executives to be appointed and removed by the shareholders, of the Company;

 

(3) to adopt resolution on disposal of assets of the Company on behalf of the Shareholders;

 

(4) to adopt resolution on the dissolution or liquidation of the Company on behalf of the Shareholders, form a liquidation group and legally exercise the authority of the liquidation group during liquidation on behalf of the Shareholders, including but not limited to adopting resolution on disposal of assets of the Company;

 

(5) to sign any resolution as the proxy of the Shareholders;

 

(6) to deliver any required document to relevant registration authority of the Company or other relevant authorities as the proxy of the Shareholders; and

 

     

 

  

(7) other voting rights and all shareholder’s rights of the Shareholders under the articles of association and the laws of China.

 

1.2 The Proxy shall, acting with care and diligence, lawfully fulfill the entrusted duties within the scope of authorization hereunder; Party B acknowledges, and assumes liability for, legal consequences arising out of the exercise by the Proxy of the foregoing Proxy Rights.

 

1.3 Party B confirms that when exercising the foregoing Proxy Rights, the Proxy is not required to solicit the opinions of Party B. Without prior written consent of the Proxy, Party B will not exercise any right already authorized to the Proxy. However, the Proxy shall promptly inform Party B of all resolutions adopted or any proposal for an extraordinary shareholders’ meeting.

 

Article 2 Right to Information

 

2.1 For the purpose of the exercise of the Proxy Rights hereunder, the Proxy shall have the right to be informed of the operations, business, customers, finances, employees and other matters of the Target Company and to access to relevant documents of the Target Company; the Company shall provide full cooperation with respect thereto.

 

Article 3 Exercise of Proxy Rights

 

3.1 Party B shall provide full assistance with respect to the exercise by the Proxy of the Proxy Rights, including, where necessary (e.g., in order to meet the document submission requirements in connection with governmental authority approval, registration and filing), timely executing the shareholders’ meeting resolutions or other relevant legal documents adopted by the Proxy.

 

3.2 If at any time during the term hereof, the grant or exercise of the Proxy Rights hereunder cannot be realized for any reason (other than a breach by the Shareholders or the Company), the Parties shall immediately seek an alternative scheme closest to the unrealizable provisions and shall, when necessary, enter into a supplementary agreement to amend or modify the terms hereof so that the purpose of this Agreement may continue to be achieved.

 

Article 4 Exemption and Compensation

 

4.1 The Parties acknowledge that in no event shall the Proxy be required to bear any liability or provide any economic or other compensation to the other Parties or to any third party in connection with the exercise of the Proxy Rights hereunder by it.

 

     

 

  

4.2 The Shareholders and the Company agree to indemnify and hold harmless the Proxy against any and all losses the Proxy suffers or may suffer as a result of the exercise of the Proxy Rights, including without limitation any losses arising out of any suit, arbitration or claims brought by any third party against the Proxy or any administrative investigation or sanction by any governmental authorities, unless such losses are caused by any willful misconduct or gross negligence of the Proxy.

 

Article 5 Representations and Warranties

 

5.1 Party B severally and jointly represents and warrants to the Proxy as follows:

 

5.1.1 Party B is each a Chinese citizen with full capacity for conduct, and has full and independent legal status and capacity to execute, deliver and perform this Agreement and may sue or be sued as an independent party.

 

5.1.2 Party B has full power and authorization to execute and deliver this Agreement and all other documents to be executed by it in connection with the transactions contemplated hereunder as well as full power and authorization to consummate the transactions contemplated hereunder. This Agreement will be lawfully and duly executed and delivered by it. This Agreement will constitute legal and binding obligations of Party B which may be enforceable against Party B.

 

5.1.3 Party B are legal shareholders of record of the Target Company at the time of effectiveness of this Agreement, and other than the rights created under this Agreement and the Exclusive Call Option Agreement entered into by Party B, the Target Company and Party A on the same date of this Agreement, the Proxy Rights are free from any third party rights. Pursuant to this Agreement, the Proxy may fully and completely exercise the Proxy Rights under the then effective articles of association of the Target Company.

 

5.1.4 Party B's execution, delivery and performance of this Agreement will neither violate the laws of China, nor breach any agreement, contract or other arrangement entered into between it and any third party and which binds it.

 

5.2 Each of Party A and the Target Company severally represents and warrants that:

 

5.2.1 It is a limited liability company duly registered and lawfully existing under the laws of its place of incorporation with independent legal personality, has full and independent legal status and capacity to execute, deliver and perform this Agreement and may sue or be sued as an independent party.

 

     

 

  

5.2.2 It has full internal corporate power and authorization to execute and deliver this Agreement and all other documents to be executed by it in connection with the transactions contemplated hereunder as well as full power and authorization to consummate the transactions contemplated hereunder.

 

Article 6 Term of Agreement

 

6.1 This Agreement shall take effect from duly execution by the Parties. Once effective, this Agreement shall become irrevocable. Unless otherwise explicitly specified herein, or the Parties determines to terminate this Agreement in writing, this Agreement shall be in full effect and force permanently.

 

6.2 The Target Company and Party A shall each complete the approval and registration procedures to extend its business term within 3 months before expiry thereof, so that the term of this Agreement may continue.

 

6.3 If with prior written consent of Party A, Party B transfers all its equity in the Company to the entity designated by Party A and/or WFOE, then this Agreement shall terminate.

 

Article 7 Notice

 

7.1 Any notice, request, demand and other correspondence required or given hereunder shall be delivered to relevant Parties in writing.

 

7.2 Such notice or other correspondence, if sent by fax, shall be deemed properly served once sent, or if delivered by personal delivery, shall be deemed properly served once delivered in person, or if sent by post, shall be deemed properly served after 3 Business Days after posting, or if sent by email, shall be deemed to properly served when the notice email is deemed to enter into the email receipt system of the other Party after the sender correctly fills in the email address and the email is not returned by the system.

 

7.3 The addresses, contact persons and electronic communication terminals agreed herein shall be the addresses for work contacts between the Parties and the service of legal instruments and for the arbitration institution and/or people's court to serve instruments during dispute resolution, and legal instruments served via such addresses and/or the addresses disclosed in information registered with the administration for industry and commerce (or the registered address on the resident ID Card) shall be deemed as validly served. The notice and service provisions in Article 7 hereof shall be independent provisions, not affected by the validity of the entire Agreement or other provisions hereof.

 

     

 

  

Article 8 Confidentiality

 

8.1 Whether this Agreement has been terminated or not, the Parties shall strictly keep confidential the trade secrets, proprietary information, Customer Information and all other information of a confidential nature of other Parties known in the conclusion and performance of this Agreement (hereinafter collectively referred to as “ Confidential Information ”). Except with prior written consent of the Party disclosing the Confidential Information or where disclosure to a third party is mandated by relevant laws or regulations or by applicable listing rules at the place where an affiliate of a Party is listed, the Party receiving the Confidential Information shall not disclose any Confidential Information to any third party. The Party receiving the Confidential Information shall not use, either directly or indirectly, any Confidential Information other than for the purpose of performing this Agreement.

 

8.2 The following information shall not be deemed as the Confidential Information:

 

(a) any information which, as shown by written evidence, has previously been known to the receiving Party by way of legal means; or

 

(b) any information which enters the public domain other than as a result of a fault of the receiving Party; or

 

(c) any information lawfully acquired by the receiving Party from other source subsequent to the receipt of relevant information.

 

8.3 A receiving Party may disclose the Confidential Information to its relevant employees, agents or its engaged professionals, provided that such receiving Party shall ensure that such persons shall comply with relevant terms and conditions of this Agreement and that it shall assume any liability arising out of any breach by such persons of relevant terms and conditions of this Agreement.

 

8.4 Notwithstanding any other provisions of this Agreement, the validity of this Article shall not be affected by termination of this Agreement.

 

     

 

  

Article 9 Default Liabilities

 

9.1 The Parties agree and confirm that if any Party hereto (“ Defaulting Party ”) materially breaches any provision hereunder or materially fails to perform or delaying in performance of any of its obligations hereunder, it shall constitute the default hereunder (“ Default ”), and any of the other non-defaulting Parties (“ Non-Defaulting Party ”) may demand the Defaulting Party to make correction or take remedy measures within a reasonable time limit. Should the Defaulting Party still fail to make correction or take remedy within such reasonable time limit or ten (10) days after the other Party notifies the Defaulting Party in writing and requests for correction, then:

 

9.1.1 If the Defaulting Party is Party B or the Target Company, Party A shall have the right to terminate this Agreement and request the Defaulting Party to pay liquidated damages; or

 

9.1.2 If the Defaulting Party is Party A, the Non-Defaulting Party shall have the right to request the Defaulting Party to pay liquidated damages, provided that the Non-Defaulting Party shall in no case have any right to terminate or rescind this Agreement, unless otherwise stipulated by the laws.

 

9.2 Notwithstanding any other provisions of this Agreement, the validity of this Article shall not be affected by any suspension or termination of this Agreement.

 

Article 10 Dispute Resolution

 

10.1 Any dispute arising out of and in connection with this Agreement shall be resolved by the Parties upon negotiation.

 

10.2 Where the Parties fail to reach a consensus within 20 Business Days after the dispute occurs, either Party may submit such dispute to South China International Economic and Trade Arbitration Commission (the “ Commission ”) for arbitration in Shenzhen in accordance with the arbitration rules of the Commission in force at the time of submittal for arbitration. The arbitration tribunal shall consist of three arbitrators, and the arbitration language shall be Chinese, and the arbitration award shall be final and binding upon the Parties.

 

10.3 Subject to the PRC Laws, the Commission shall have the right to render award on the following: (1) with respect to equity, land assets or other assets of the Company, remedy measures; (2) injunction relief, for example, requiring the Company to carry out business operation or compulsorily transfer assets of the Company; (3) liquidation of the Company.

 

     

 

  

10.4 Subject to the PRC Laws, before the Commission forms an arbitration tribunal in accordance with the arbitration rules or under appropriate circumstances, the courts with jurisdiction at the following places shall have the right to render a ruling on remedy measures to support the arbitration: (1) Hong Kong Special Administrative Region, (2) place of registration of Party A, (3) domicile of Party B, and (4) place where major assets of Party A or Party B locate.

 

10.5 Unless otherwise ruled by the arbitration tribunal, all expenses paid or advanced for arbitration (including but not limited to the arbitration fee, fee for arbitrators and attorneys, travel expenses, etc.) shall be borne by the defeated Party.

 

Article 11 Miscellaneous

 

11.1 This Agreement shall be written in Chinese and made in septuplicate, with Party B4 holding two copies and other Parties each holding one copy, of the same legal effect.

 

11.2 The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the laws of the People’s Republic of China.

 

11.3 Any right, power or remedy granted to a Party under any provision hereof shall not preclude such Party from other rights, powers or remedies available to it under the Laws and other provisions hereof, and a Party's exercise of its rights, powers and remedies shall not preclude the exercise of other rights, powers and remedies available to it.

 

11.4 Failure to exercise or delay in exercising any right, power or remedy under this Agreement or available under the Laws by a Party shall not cause waiver of such rights, and any single or partial waiver of rights of such Party shall not prevent it from exercising such rights in other ways or exercising its other rights.

 

11.5 Each provision hereof shall be separable and independent from every other provision, and if any or several provisions hereof become invalid, illegal or unenforceable at any time, the validity, legality and enforceability of other provisions hereof shall not be affected thereby. The Parties shall, through good faith negotiation, make efforts to replace such invalid, illegal or unenforceable provisions with valid provisions to the maximum extent permitted by the Laws and meeting expectations of the Parties, and the economic effects produced by such valid provisions shall be close to the economic effects of such invalid, illegal or unenforceable provisions as much as possible.

 

11.6 Any amendment or supplement to this Agreement shall be made in writing, and shall only become effective upon duly execution by the Parties.

 

     

 

  

11.7 Without prior written consent of Party A, other Parties may not transfer any of their rights and/or obligations hereunder to any third party; Party B and the Target Company hereby agree that Party A may assign its rights and/or obligations hereunder to any third party after giving a written notice to Party B and the Target Company.

 

11.8 This Agreement shall be binding upon the legal assignees and successors of the Parties.

 

(The following page is intentionally left blank, and is followed by the signature page))

 

     

 

  

(No text on this page. This is the signature page of the Shareholders' Voting Rights Proxy Agreement on Shenzhen Qfun Internet Technology Co., Ltd.)

 

Party A (Seal): Qfun Information Technology (Shenzhen) Co., Ltd.

 

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

Party B1: ZHANG Jiahui /s/ ZHANG Jiahui (Signature)

 

Party B2: CAO Yu /s/ CAO Yu (Signature)

 

Party B3: ZHU Nianyang /s/ ZHU Nianyang (Signature)

 

Party B4 (Seal): Shenzhen Guangtiandi Technology Co., Ltd.

 

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

Party C (Seal): Shenzhen Qfun Internet Technology Co., Ltd.

 

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

     

 

  

Appendix 1:

 

Power of Attorney

 

THIS POWER OF ATTORNEY (this " POA "), executed by ________ on ________ , 2017, is issued in favor of Qfun Information Technology (Shenzhen) Co., Ltd. or any director or successor to such director (including the liquidator replacing such director) as authorized by Shenzhen Qfun Information Technology (Shenzhen) Co., Ltd. upon decision (hereinafter referred to as the " Proxy ").

 

The Shareholder hereby grants to the Proxy a general proxy authorizing the Proxy to exercise, as the sole and exclusive proxy of and in the name of the Shareholder, the following rights enjoyed by the Shareholder in my capacity as a shareholder of Shenzhen Qfun Internet Technology Co., Ltd. (hereinafter referred to as the “ Company ”):

 

(1) to propose the convening of, and attend, shareholders’ meetings as my/our proxy in accordance with the articles of association of the Company;

 

(2) to exercise voting rights as my/our proxy on all matters to be deliberated and resolved by the shareholders’ meeting, including without limitation the appointment and election of all directors and other senior executives to be appointed and removed by the shareholders' meeting, of the Company;

 

(3) to adopt resolution on disposal of assets of the Company as my/our proxy;

 

(4) to adopt resolution on the dissolution or liquidation of the Company as my/our proxy, and on my/our behalf, form a liquidation group and legally exercise the authority of the liquidation group during liquidation, including but not limited to adopting resolution on disposal of assets of the Company;

 

(5) to sign any resolution as my/our proxy;

 

(6) to submit any required document to relevant registration authority of the Company or other relevant authorities as my/our proxy; and

 

(7) to exercise other voting rights of Shareholders and all shareholder's rights under the articles of association and the laws of China (including any other shareholders’ voting rights and other shareholder's rights stipulated upon an amendment to such articles of association) as my/our proxy.

 

The Shareholder irrevocably confirms that the validity of this POA shall extend to the expiry or early termination of the Shareholders' Voting Rights Proxy Agreement entered into by and among Qfun Information Technology (Shenzhen) Co., Ltd., the Company and the Shareholders of the Company on January 10, 2017.

 

     

 

  

IN WITNESS HEREOF, I/we hereby issue this POA.

 

  Shareholder: ____________
   
  Date: _____________, 2017

 

     

 

Exhibit 4.89

 

Equity Pledge Agreement

 

of

 

Shenzhen Qfun Internet Technology Co., Ltd.

 

_______________________________________

 

Between

 

Qfun Information Technology (Shenzhen) Co., Ltd.

 

And

 

ZHANG Jiahui

 

CAO Yu

 

ZHU Nianyang

 

Shenzhen Guangtiandi Technology Co., Ltd.

 

_______________________________________

 

January 10, 2017

 

     
   

 

Equity Pledge Agreement

 

This Agreement is made and entered into by and among the following Parties on January 10, 2017 in Shenzhen:

 

Party A (Pledgee): Qfun Information Technology (Shenzhen) Co., Ltd.

Domicile: Room 101-1, Building No.3, North Block, Pingshan Dayuan Industrial Park, Pingshan 1st Road, Taoyuan Street, Nanshan District, Shenzhen

Legal Representative: WANG Ying

(hereinafter referred to as “ Party A ” or “ Pledgee ”)

 

Party B (Pledgors):

Party B1: ZHANG Jiahui

|ID Card No.: 220104198806164441

Party B2: CAO Yu

ID Card No.: 211302198507211639

Party B3: ZHU Nianyang

ID Card No.: 370212198801151519

Party B4: Shenzhen Guangtiandi Technology Co., Ltd. (hereinafter referred to as “ Guangtiandi ”)

Domicile: Room 2-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

Legal Representative: YIN Zhiwei

(Party B1, Party B2, Party B3 and Party B4 shall be collectively referred to as “ Party B ” or “ Pledgors ”, and their rights and obligations hereunder are inseparable.)

 

Whereas:

 

1. Party B are shareholders of record of the Target Company and legally hold all equity of Shenzhen Qfun Internet Technology Co., Ltd. (hereinafter referred to as “ Target Company ”). Of which, Party B1 holds 25.333% of the equity of the Target Company, Party B2 holds 16.121% of the equity of the Target Company, Party B3 holds 7.546% of the equity of the Target Company, and Party B4 holds 51% of the equity of the Target Company.

 

2. On or before the date hereof, the Parties hereto have entered into the Shareholders' Voting Rights Proxy Agreement and the Exclusive Call Option Agreement concerning Party B's equity in the Target Company, and the Target Company and Party A have entered into the Entrusted Management Agreement for the operation of the Target Company.

 

     
   

 

3. In order to realize the agreement of Party A and Party B in the Exclusive Call Option Agreement, and ensure Party A may exercise relevant options to realize the purpose of obtaining Party B's equity in the Target Company or assets of the Target Company, prior to completion of such purchase, Party B agrees to pledge 100% equity it holds in the Target Company to Party A, and Party A agrees to accept Party B's pledge of equity.

 

THEREFORE, upon negotiation, the Parties hereby agree as follows:

 

Article 1 Definitions and Interpretation

 

1.1 Unless otherwise interpreted in the context, the following terms herein shall have the following meanings:

 

“Business Day” refers to any day other than national legal holidays and public holidays in China.
   
“Target Company”  refers to Shenzhen Qfun Internet Technology Co., Ltd.
   
“Encumbrance” refers to (1) mortgage, pledge, lien, priority, or other security interest; (2) acquisition agreement; (3) debt subordination agreement or arrangement (under which a debt is inferior to other debts in terms of repayment); or (4) agreement setting up or enforcing any of the foregoing.
   
“Creditor and Pledgee” refers to the creditor under the Master Contracts, i.e. Qfun Information Technology (Shenzhen) Co., Ltd. and/or the entity or individual it designates.
   
“Debtors” refer to the debtors under the Master Contracts, i.e. shareholders of record of Shenzhen Qfun Internet Technology Co., Ltd. on the date hereof.
   
“Governmental Authorities” refer to (1) the people’s governments, people’s congresses, people’s courts and people’s procuratorates at all levels in China; (2) arbitration institutions in China and their branches; and (3) all agencies, institutions and social groups as may be authorized by the government to exercise any administrative, legislative, judicial, managerial, regulatory, expropriation and tax levying power under the leadership or in the name of the said authorities.

 

     
   

 

“Pledged Equity” refers to the 100% equity in the Target Company as held by the Pledgors, including all bonus shares, shares obtained after capital reserves converting into share capital, and right issue, during the term of the pledge.
   
“PRC” refers to the People’s Republic of China, and for the purpose of this Agreement, excluding Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan.
   
“Master Contracts” collectively refer to, the Shareholders' Voting Rights Proxy Agreement and the Exclusive Call Option Agreement entered into by and between the Parties hereto, and the Entrusted Management Agreement entered into by and between the Target Company and Party A, on or before the date hereof.
   
“Person” refers to any individual, partnership, limited liability company, company limited by shares, trust, unincorporated association, joint venture, enterprise legal person, government entity or any other entity.
   
“Primary Claims” refer to the claims as the Creditor may have against the Debtors under the Master Contracts.
   
“Primary Debts” refer to the debts as the Debtors may owe to the Creditor under the Master Contracts.
   
“Confidential Information” refers to the trade secrets, proprietary information, customer information and all other information of a confidential nature of other Parties known in the conclusion and performance of this Agreement.
   
“Defaulting Party” refers to any Party materially breaching any provision hereunder or materially failing to perform or delaying in performance of any of its obligations hereunder.
   
“Default” refers to the act of any Party hereto materially breaching any provision hereunder or materially failing to perform or delaying in performance of any of its obligations hereunder.

 

1.2 References to any PRC law herein shall be deemed to:

 

(1) Include amendment, change, supplement and reenactment to and of such PRC law, regardless of they take effect before or after the conclusion of this Agreement; and

 

(2) Include other decisions, notices and rules formulated under or effective due to such law.

 

1.3 Unless the context otherwise requires herein, references to article, paragraph, item and sub-item herein shall refer to the corresponding content in this Agreement.

 

     
   

 

Article 2 The Pledge

 

2.1 The Pledgors agree to pledge the Pledged Equity they hold for the Primary Debts and other relevant obligations and liabilities of the Debtors under the Master Contracts, and the Pledgee agrees to accept such pledge.

 

2.2 The scope of pledge hereunder includes:

 

(1) principal and interest of the Main Claims, penalty interest, compound interest, penalty, damages to be paid due to Default of the Debtors under the Master Contracts, costs payable to the Creditor by the Debtors, costs incurred by the Creditor for realizing the claims and security interests, etc.; and

 

(2) The costs incurred by the Creditor for realizing the claims and security interests refer to all costs incurred by the Creditor in exercising any right or interest under the Master Contracts, this Agreement and other guarantee contracts, including but not limited to the litigation costs (or arbitration fee), attorney’s fee, appraisal fee, auction fee, travel expenses, and other costs.

 

2.3 The period for satisfaction of debts by the Debtors shall be subject to the provisions of the Master Contracts.

 

2.4 The Pledgors shall, within 10 Business Days upon execution of this Agreement, assist the Pledgee in completing the registration and other relevant formalities for the pledge of the Pledged Equity with the administration for industry and commerce at the place of registration of the Target Company, and ensure the Pledgee will be registered as the only pledgee of the Pledged Equity, and that the pledge of the Pledged Equity will be recorded on the register of members of the Target Company and the certificates of contribution of the Pledged Equity, and the Pledgors shall then deliver the certificates of contribution of the Pledged Equity to the Pledgee for custody. If, in addition to the pledge registration, there are other relevant formalities such as approval, filing, notarization required for the pledge of the Pledged Equity by the Pledgor, then the Pledgors shall, within 20 Business Days upon execution of this Agreement, complete relevant formalities or obtain approval or filing documents issued by the relevant Governmental Authorities, and deliver such approval or filing documents to the Pledgee. All costs incurred by completing the pledge registration and other relevant formalities shall be borne by the Pledgors.

 

     
   

 

2.5 During pledge, the Pledgee is entitled to such fructus generated from the Pledged Equity as dividends and bonus, and such fructus shall be pledged together with the Pledged Equity. The fructus collected by the Pledgee shall be first used to pay any cost incurred from collection of the fructus.

 

2.6 The Pledgee may transfer the Primary Claims and the rights, titles and interests hereunder after giving a written notice to the Pledgors, without consent of the Pledgors. The Pledgors shall assist the Pledgee or the transferee in completing all approval or registration formalities or other formalities required for such transfer.

 

Article 3 Representations and Warranties of the Pledgors

 

3.1 For the benefits of the Pledgee, the Pledgors represent and warrant to the Pledgee as follows, and the following representations and warranties are authentic, accurate and sufficient:

 

(1) The Pledgors each has the competency to enter into this Agreement and has full and independent legal status and capacity to execute, deliver and perform this Agreement and may sue or be sued as an independent party.

 

(2) The Pledgors each warrants that all certificates, documents, materials and information provided by the Pledgors to the Pledgee for the execution and performance of this Agreement are authentic, accurate and sufficient, without any concealed or fraudulent information.

 

(3) The Pledgors' execution, delivery and performance of this Agreement will neither violate any laws applicable to the Pledgors, nor breach any valid agreement binding upon them or their property.

 

(4) The Pledgors each has legal and absolute ownership, right to dispose and other rights, titles and interests of the Pledged Equity, and there is no mortgage, pledge or other Encumbrance over the Pledged Equity.

 

(5) The Pledgors each has paid in full the contribution payable under the Pledged Equity, and there is no withdrawal of contribution, inadequate contribution, false contribution or other circumstance affecting the value of the Pledged Equity.

 

     
   

 

(6) The Pledged Equity is not subject to property preservation or enforcement measures such as attachment, freezing and detention, and there is no lawsuit, arbitration, administrative proceedings or other circumstance against the Pledged Equity, and no such circumstance will occur after the execution of this Agreement.

 

(7) During the term of pledge, the Pledgors shall actively exercise their right to share allotment, and may not waive any bonus share, share obtained after capital reserves converting into share capital, or right issue, and undertake to assume the consideration payable for obtaining the right to share allotment, and warrant to cooperate with the Pledgee in completing the pledge formalities for such newly increased shares.

 

(8) Notwithstanding the pledge hereunder, the Pledgors and the Target Company shall still be responsible for complying with and performing all of their obligations under the articles of association and/or relevant laws and the approval replies of Governmental Authorities.

 

Article 4 Limitation of Rights

 

4.1 During the term of pledge, without written consent of the Pledgee, the Pledgors may not in any way (including but not limited to sale, transfer, gift, re-pledge, etc.) dispose all or part of the Pledged Equity, unless the Pledgors provide other collateral or security agreed by the Pledgee in writing, or repay the Primary Debts as agreed.

 

4.2 During the term of pledge, any exercise of the voting rights by the Pledgors or the director or supervisor they appoint must obtain written consent of the Pledgee.

 

Article 5 Enforcement of Rights of Pledge

 

5.1 Under any of the following circumstances, the Pledgee is entitled to immediately enforce the pledge rights:

 

(1) Where the Debtors breach the Master Contracts or the Pledgors breach any provision of this Agreement;

 

(2) Where the Pledgors or the Debtors file for (or are filed for) bankruptcy, reorganization or settlement, are declared bankruptcy, reorganization or settlement, are dissolved, deregistered, cancelled, shut down, revoked off, closed down, or have any merger, split, change in organization form or other similar circumstance; and

 

(3) Where the Pledgors or the Debtors have other events which endanger or damage the rights, titles or interests of the Pledgee.

 

     
   

 

5.2 Under any of the circumstances set forth in Article 5.1 hereof, the Pledgee may apply to the people's court with jurisdiction to auction or sell the Pledged Equity.

 

Article 6 Lapse of Rights of Pledge

 

6.1 Under any of the following circumstances, the rights of pledge hereunder shall lapse:

 

(1) Where the Debtors have fully discharged all debts in accordance with the Master Contracts; and

 

(2) Where the Pledgee has enforced the rights of pledge in accordance with this Agreement.

 

6.2 After lapse of the rights of pledge, the Pledgee shall, within 30 Business Days, assist the Pledgors in completing the pledge release formalities and other relevant formalities (if necessary), and all costs incurred for completing the pledge release formalities and other relevant formalities shall be borne by the Pledgors.

 

Article 7 Confidentiality

 

7.1 During the term of this Agreement, all Customer Information and other relevant data in connection with Party A’s operation and services provided by Party B shall be jointly owned by the Parties.

 

7.2 Regardless of whether this Agreement has been terminated or not, the Parties shall strictly keep confidential the trade secrets, proprietary information, Customer Information and all other information of a confidential nature of other Parties known in the conclusion and performance of this Agreement. Except with prior written consent of the Party disclosing the Confidential Information or where disclosure to a third party is mandated by relevant laws or regulations or by applicable listing rules at the place where an affiliate of a Party is listed, the Party receiving the Confidential Information shall not disclose any Confidential Information to any third party. The Party receiving the Confidential Information shall not use, either directly or indirectly, any Confidential Information other than for the purpose of performing this Agreement.

 

7.3 The following information shall not be deemed as the Confidential Information:

 

(1) any information which, as shown by written evidence, has previously been known to the receiving Party by way of legal means; or

 

(2) any information which enters the public domain other than as a result of a fault of the receiving Party; or

 

     
   

 

(3) any information lawfully acquired by the receiving Party from other source subsequent to the receipt of relevant information.

 

7.4 A receiving Party may disclose the Confidential Information to its relevant employees, agents or its engaged professionals, provided that such receiving Party shall ensure that such persons shall comply with relevant terms and conditions of this Agreement and that it shall assume any liability arising out of any breach by such persons of relevant terms and conditions of this Agreement.

 

7.5 Notwithstanding any other provisions of this Agreement, the validity of this Article shall not be affected by termination of this Agreement. Upon termination or rescission of this Agreement, the Parties shall still assume the confidentiality obligation agreed herein.

 

Article 8 Notice

 

8.1 Any notice, request, demand and other correspondence required or given hereunder shall be delivered to relevant Parties in writing.

 

8.2 Such notice or other correspondence, if sent by fax or telegraph, shall be deemed properly served once sent, or if delivered by personal delivery, shall be deemed properly served once delivered in person, or if sent by post, shall be deemed properly served after 3 Business Days after posting, or if sent by email, shall be deemed to properly served when the notice email is deemed to enter into the email receipt system of the other Party after the sender correctly fills in the email address and the email is not returned by the system.

 

8.3 The addresses, contact persons and electronic communication terminals agreed herein shall be the addresses for work contacts between the Parties and the service of legal instruments and for the arbitration institution and/or people's court to serve instruments during dispute resolution, and legal instruments served via such addresses and/or the addresses disclosed in information registered with the administration for industry and commerce (or the registered address on the resident ID Card) shall be deemed as validly served. The notice and service provisions in Article 8 hereof shall be independent provisions, not affected by the validity of the entire Agreement or other provisions hereof.

 

     
   

 

Article 9 Default Liabilities

 

9.1 The Parties agree and confirm that if any Party hereto materially breaches any provision hereunder or materially fails to perform or delays in performance of any of its obligations hereunder, it shall constitute the Default hereunder, and the non-defaulting Party may demand the Defaulting Party to make correction or take remedy measures within a reasonable time limit. Should the Defaulting Party still fail to make correction or take remedy measures within such reasonable time limit or 10 Business Days after the non-defaulting Party notifies the Defaulting Party in writing and requests for correction, the non-Defaulting Party may at its liberation decide: (1) to terminate this Agreement and demand the Defaulting Party to pay all liquidated damages; or (2) to demand specific performance of the obligations of the Defaulting Party hereunder and demand the Defaulting Party to pay all liquidated damages.

 

9.2 Notwithstanding any other provisions of this Agreement, the validity of this Article shall not be affected by termination of this Agreement.

 

Article 10 Force Majeure

 

In case of any natural disaster, storm, tornado or other weather conditions, strike, shutdown, stoppage or other industrial problems, war, riot or civil commotion, conspiracy, hostility, terrorist or violence of criminal organization, blockage, serious disease or plague, earthquake or other crustal movement, flood or other acts of God, bomb explosion or other explosion, fire, accident, or other Force Majeure Event which is unpredictable or the consequence of which is unpreventable or inevitable, and such Force Majeure Event directly affects a Party’s performance of this Agreement or causes the failure of such Party to perform per the agreed conditions, the affected Party shall immediately give a notice thereof to the other Party by fax, and within 20 Business Days, provide details of Force Majeure and supporting documents on the reasons for the non-performance or delay in performance of this Agreement, and such supporting documents shall be issued by the notarization authority at the place where the Force Majeure occurs. Based on the degree of influence of the Force Majeure Event on the performance of this Agreement, the Parties shall negotiate whether to partially exempt the performance of this Agreement or delay the performance of this Agreement. Neither Party shall be liable for compensation for the economic loss of each other caused by Force Majeure.

 

Article 11 Dispute Resolution

 

11.1 Any dispute arising out of and in connection with this Agreement shall be resolved by the Parties upon negotiation.

 

     
   

 

11.2 Where the Parties fail to reach a consensus within 20 Business Days after the dispute occurs, either Party may submit such dispute to South China International Economic and Trade Arbitration Commission (the “ Commission ”) for arbitration in Shenzhen in accordance with the arbitration rules of the Commission in force at the time of submittal for arbitration. The arbitration tribunal shall consist of three arbitrators, and the arbitration language shall be Chinese, and the arbitration award shall be final and binding upon the Parties.

 

11.3 Subject to the PRC Laws, the Commission shall have the right to render award on the following: (1) with respect to equity, land assets or other assets of the Company, remedy measures; (2) injunction relief, for example, requiring the Company to carry out business operation or compulsorily transfer assets of the Company; (3) liquidation of the Company.

 

11.4 Subject to the PRC Laws, before the Commission forms an arbitration tribunal in accordance with the arbitration rules or under appropriate circumstances, the courts with jurisdiction at the following places shall have the right to render a ruling on remedy measures to support the arbitration: (1) Hong Kong Special Administrative Region, (2) place of registration of Party A, (3) domicile of Party B, and (4) place where major assets of Party A or Party C locate.

 

11.5 Unless otherwise ruled by the arbitration tribunal, all expenses paid or advanced for arbitration (including but not limited to the arbitration fee, fee for arbitrators and attorneys, travel expenses, etc.) shall be borne by the defeated Party.

 

Chapter 12 Miscellaneous

 

12.1 This Agreement shall be written in Chinese and made in septuplicate, with Party B4 holding 2 copies and other Parties each holding one copy, and the last for completion of the pledge registration formalities, all copies having the same legal effect.

 

12.2 The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

12.3 Any right, power or remedy granted to a Party any provision hereof shall not preclude such Party from other rights, powers or remedies available to it under the Laws and other provisions hereof, and a Party's exercise of its rights, powers and remedies shall not preclude the exercise of other rights, powers and remedies available to it.

 

12.4 Failure to exercise or delay in exercising any right, power or remedy under this Agreement or available under the Laws by a Party shall not cause waiver of such rights, and any single or partial waiver of rights of such Party shall not prevent it from exercising such rights in other ways or exercising its other rights.

 

     
   

 

12.5 Each provision hereof shall be separable and independent from every other provision, and if any or several provisions hereof become invalid, illegal or unenforceable at any time, the validity, legality and enforceability of other provisions hereof shall not be affected thereby. The Parties shall, through good faith negotiation, make efforts to replace such invalid, illegal or unenforceable provisions with valid provisions to the maximum extent permitted by the Laws and meeting expectations of the Parties, and the economic effects produced by such valid provisions shall be close to the economic effects of such invalid, illegal or unenforceable provisions as much as possible.

 

12.6 Any amendment or supplement to this Agreement shall be made in writing, and shall only become effective upon duly execution by the Parties.

 

12.7 This Agreement shall be binding upon the legal assignees and successors of the Parties.

 

12.8 This Agreement shall constitute the entire agreement among the Parties with respect to the content of this Agreement and supersede all previous oral and written agreements, contracts, understandings and communications among the Parties with respect to the content hereof.

 

(The following page is intentionally left blank, and is followed by the signature page.)

 

     
   

 

(No text on this page. This is the signature page of the Equity Pledge Agreement on Shenzhen Qfun Internet Technology Co., Ltd.)

Party A (Seal): Qfun Information Technology (Shenzhen) Co., Ltd.

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

Party B1: ZHANG Jiahui /s/ ZHANG Jiahui (Signature)

Party B2: CAO Yu /s/ CAO Yu (Signature)

Party B3: ZHU Nianyang /s/ ZHU Nianyang (Signature)

Party B4 (Seal): Shenzhen Guangtiandi Technology Co., Ltd.

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

  

     

 

Exhibit 4.90

 

Entrusted Management Agreement

 

Of

 

Shenzhen Qfun Internet Technology Co., Ltd.

 

 

 

Between

 

Shenzhen Qfun Internet Technology Co., Ltd.

 

And

 

Qfun Information Technology (Shenzhen) Co., Ltd.

 

 

 

January 10, 2017

 

     

 

  

Entrusted Management Agreement

 

This Agreement is made and entered into on January 10, 2017 in Shenzhen.

 

Party A: Shenzhen Qfun Internet Technology Co., Ltd.

 

Registered Address: A09, 11/F, East Block, SKYWORTH Semiconductor Design Building, High Tech South Four Road, Nanshan District, Shenzhen Legal Representative: WANG Ying

 

Party B1:ZHANG Jiahui

 

ID Card No.:220104198806164441

 

Party B2: CAO Yu

 

ID Card No.:211302198507211639

 

Party B3: ZHU Nianyang

 

ID Card No.:370212198801151519

 

Party B4 : Shenzhen Guangtiandi Technology Co., Ltd. (hereinafter referred to as “Guangtiandi”)

 

Domicile: Room 2-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

Legal Representative: YIN Zhiwei

 

(Party B1, Party B2, Party B3 and Party B4 shall be hereinafter collectively referred to as “ Party B ” or “ Party A's Shareholders ”)

 

Party C: Qfun Information Technology (Shenzhen) Co., Ltd.

 

Domicile: Room 101-1, Building No.3, North Block, Pingshan Dayuan Industrial Park, Pingshan 1st Road, Taoyuan Street, Nanshan District, Shenzhen

Legal Representative: WANG Ying

 

(hereinafter referred to as “ Party C ” or “ WFOE ”)

 

In this Agreement, Party A, Party B and Party C shall be hereinafter referred to collectively as the “ Parties ” and individually as a “ Party ”.

 

Whereas

 

1. Party A is a limited liability company registered and incorporated in Shenzhen under PRC laws, engaging in the development and operation of Internet games, and Party B1, Party B2, Party B3 and Party B4 jointly own all issued shares of Party A and constitute all Party A's Shareholders.

 

     

 

  

2. Party C is a wholly foreign owned enterprise (“ WFOE ”) registered and incorporated in Shenzhen under PRC laws, and its scope of business includes: computer software development; software services; marketing strategy; development of database technology and network engineering technology; sale of technical achievements independently developed and relevant technical services, development of wireless technologies and mobile phone software; undertaking system applications management and maintenance, information technology support management, software development and other information technology and technology research and development by means of service outsourcing.

 

3. Party A and Party B propose to entrust Party C to take charge of Party A’s operation and provide management and consulting services for Party A’s operation. Party C agrees to accept the entrustment of Party A and Party B in accordance with the provisions of this Agreement.

 

Upon friendly negotiation, the Parties, intending to be legally bound, enter into this Agreement in order to specify the rights and obligations of the Parties.

 

Article 1 Definitions and Interpretation

 

1.1 Unless otherwise provided herein or the context otherwise requires, when used herein, the following terms have the following meaning:

 

“ Party A’s Operation ”   refers to all business activities operated and developed by Party A currently and at any time during the term of this Agreement, including but not limited to the network technologies development; technical development, technical consulting and on-site maintenance of computer software and hardware; development of game software; on-site maintenance of database and computer network; software system integration business and other business operated with approval and permission of the competent authority.
     
“ Service Fee ”   refers to the fee payable by Party A to Party C as the consideration for Party C to provide management service.
     
“ Party A’s Shareholders ”   collectively refer to Party B1, Party B2, Party B3 and Party B4 which jointly hold all issued shares of Party A.
     
“ PRC ”   refers to the People’s Republic of China (excluding Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan);

 

     

 

  

“ Business Day ”   refers to any business day other than Saturday, Sunday or legal holidays in the PRC.
     
“ Tax ”   refers to any and all taxes and charges imposed on Party A’s Operation by a tax authority under the PRC laws.
     
“ Senior Officer ”   refers to the president, chairman, director, legal representative, general manager, technical manager, financial manager, marketing manager, or any person who exercises the authority of the aforesaid persons in the operation of Company, of Party A.
     
“ Customer information ”   refers to all customer information and other relevant data in connection with Party A’s Operation and services provided by Party C.
     
“ Confidential Information ”   refers to the trade secrets, proprietary information, Customer Information and all other information of a confidential nature of other Parties known in the execution and performance of this Agreement.
     
“ Defaulting Party ”   refers to any Party materially breaching any provision hereunder or materially failing to perform or delaying in performance of any of its obligations hereunder.
     
“ Default ”   refers to the act of any Party hereto materially breaching any provision hereunder or materially failing to perform or delaying in performance of any of its obligations hereunder.

 

1.2 References to any law or regulation (hereinafter referred to as the “ Laws ”) herein shall be deemed to:

 

(1) Include amendment, change, supplement and reenactment of such Laws, regardless of they take effect before or after the conclusion of this Agreement; and

 

(2) Include other decisions, notices and rules formulated under or effective due to such Laws.

 

1.3 Unless the context otherwise requires herein, references to article, paragraph, item and sub-item herein shall refer to the corresponding content in this Agreement.

 

     

 

 

 

Article 2 Entrusted Services

 

2.1 During the term of this Agreement, Party A and Party B exclusively entrust Party C to provide management and consulting services for Party A. Party C shall diligently provide services to Party A based on the needs of Party A's business and the specific requirements as Party A may propose from time to time.

 

2.2 The Parties understand that the services actually provided by Party C are subject to the approved scope of business of Party C; if the services which Party A requires Party C to provide are beyond the approved scope of business of Party C, Party C will apply to extend its scope of business to the maximum extent permitted by the Laws, and provide relevant services after it is approved to extend its scope of business.

 

2.3 Notwithstanding other provisions herein, Party C may designate any third party to provide any or all services hereunder, or perform any obligation of Party C hereunder on behalf of Party C. Party A and Party B hereby agree that Party C may assign its rights and obligations hereunder to any other third party after giving a written notice to Party A.

 

Article 3 Fee

 

3.1 As the consideration for Party C to provide management and consulting services, Party A shall pay a Service Fee to Party C, and the amount of Service Fee shall the remaining amount after Party A's pre-tax profits deduct relevant costs and reasonable expenses.

 

3.2 The Parties agree that, within 5 Business Days before ending of any quarter, Party C shall issue a bill of Service Fee of the quarter to Party A in accordance with Article 3.1 hereof. Unless otherwise exempted by Party C, Party A shall pay the Service Fee to Party C per the amount of Service Fee indicated in the bill of Service Fee before the last day of the quarter.

 

3.3 All bank charges arising out of payment shall be borne by Party A. All payments shall be transferred into the bank account designated by Party C by means of remittance or other means recognized by the Parties. The Parties agree that Party C may change such payment instructions by giving a notice to Party A from time to time.

 

3.4 The Parties agree that, the payment of such Service Fee shall in principle not cause any difficulty to the operation of any Party, and for this purpose and to the extent of realizing such principle, Party C may agree on Party A's delay in payment of Service Fee, or upon reaching consensus after negotiation, the Parties may adjust the schedule for Party A's payment of Service Fee to Party C under Article 3.2 in writing.

 

     

 

 

 

3.5 The Parties shall respectively bear the Taxes which are required to be paid for their execution and performance of this Agreement under the Laws. At the request of Party C, Party A shall make efforts to assist Party C in obtaining any exemption or credit of Tax for all or part of the Service Fee to be obtained by Party C hereunder.

 

Article 4 Party A’s Obligations

 

4.1 Party C’s services herein are exclusive and during the term of this Agreement, without prior written consent of Party C, Party A may not enter into any agreement with any other third party or otherwise accept other services provided by such third party identical or similar to Party C’s services.

 

4.2 In order to facilitate Party C to provide services, Party A shall provide relevant materials to Party C timely and according to the requirements as Party C may from time to time propose, including but not limited to all information, files, certificates and licenses, customer data, development plans and developed and developing products, etc. in connection with Party A's Operation.

 

4.3 Without written consent of Party C, Party A and Party B may not carry out any activity which may affect Party A's assets, increase Party A's liabilities and affect Party A's Operation, including but not limited to:

 

(1) Incurring any debts to others;

 

(2) Any sale or transfer of Party A's assets or property interests or exemption of debts or interests owed to Party A by a third party, etc.;

 

(3) Any security set up on its own assets or interests to intellectual property rights for a third party;

 

(4) Entering into any agreement with any third party to transfer or change the control of the Company; and

 

(5) Merger with other enterprise or change of the current shareholding structure.

 

4.4 Party C shall take full charge of Party A's Operation, including appointment and removal of members of the board of directors and employment of Senior Officers. Party A shall implement the instructions in Party C’s notice within 20 Business Days upon receipt of Party C’s notice on appointment or removal of any Senior Officer.

 

4.5 Except for performance of oblations agreed in this Agreement and other agreement in connection with the performance of this Agreement, without written consent of Party C, Party A's Shareholders may not:

 

     

 

  

(1) Set up any pledge over their equity in Party A, or set up any encumbrance which will impede the normal exercise of their shareholder's right   s; and

 

(2) Sell, gift or otherwise dispose their equity in Party A (or any shareholder’s interest).

 

4.6 Party A shall maintain its good reputation and actively expand business to strive for income maximization.

 

4.7 During the term of this Agreement, Party A and Party B agree to cooperate with Party C and Party C’s parent (directly or indirectly) for audit of related parties transactions and other audits, and provide relevant information and materials relating to Party A's Operation, business, customers, finance and employees to Party C or its parent or auditors engaged by it, and agree that Party C's parent may disclose such information and materials for the purpose of satisfying regulatory requirements at the place where its securities are listed.

 

Article 5 Representations and Warranties

 

5.1 Each Party represents and warrants that:

 

(1) It is a limited liability company duly registered and lawfully existing under the PRC Laws with independent legal personality, has full and independent legal status and capacity to execute, deliver and perform this Agreement and may sue or be sued as an independent party.

 

(2) It has full internal corporate power and authorization to execute and deliver this Agreement and all other documents to be executed by it in connection with the transactions contemplated hereunder as well as full power and authorization to consummate the transactions contemplated hereunder. This Agreement will be lawfully and duly executed and delivered by it. This Agreement will constitute its legal and binding obligations enforceable against it in accordance with terms of this Agreement.

 

(3) It has all business licenses required for its operation at the time of effectiveness of this Agreement, and has full rights and qualifications to engage in its business currently carrying out in the PRC.

 

     

 

  

5.2 Party A represents and warrants that:

 

(1) It will provide the quarterly financial statements and budget of next quarter to Party C within 15 Business Days upon ending of each quarter, and provide the annual financial statements and budget of next year to Party C within 30 Business Days upon ending of each year.

 

(2) It will timely report any circumstance which will or may have material adverse effect on Party A’s business and Party A's Operation to Party C, and make best efforts to prevent the occurrence of such circumstance and/or the enlargement of loss.

 

(3) At the written request of Party C, it will take all accounts receivable and/or all other assets legally owned by it and at its disposal at that time, as the guarantee for its performance of the payment obligation set forth in Article 3 hereof by means permitted by the Laws applicable at that time.

 

(4) It will indemnify and hold harmless Party C against any and all losses Party C suffers or may suffer as a result of the provision of services, including without limitation any losses arising out of any suit, recourse, arbitration or claims brought by any third party against Party C or any administrative investigation or sanction by any governmental authorities, unless such losses are caused by any willful misconduct or gross negligence of Party C.

 

(5) Without written consent of Party C, it may not enter into any other agreement or arrangement which conflicts with this Agreement or may damage Party C's rights and interests hereunder.

 

Article 6 Confidentiality

 

6.1 During the term of this Agreement, all Customer Information and other relevant data in connection with Party A’s Operation and services provided by Party C shall be jointly owned by the Parties.

 

6.2 Whether this Agreement has been terminated or not, the Parties shall strictly keep confidential the trade secrets, proprietary information, Customer Information and all other information of a confidential nature of other Parties known in the execution and performance of this Agreement. Except with prior written consent of the Party disclosing the Confidential Information or where disclosure to a third party is mandated by relevant laws or regulations or by applicable listing rules at the place where an affiliate of a Party is listed, the Party receiving the Confidential Information shall not disclose any Confidential Information to any third party. The Party receiving the Confidential Information shall not use, either directly or indirectly, any Confidential Information other than for the purpose of performing this Agreement.

 

     

 

  

6.3 The following information shall not be deemed as the Confidential Information:

 

(1) any information which, as shown by written evidence, has previously been known to the receiving Party by way of legal means; or

 

(2) any information which enters the public domain other than as a result of a fault of the receiving Party; or

 

(3) any information lawfully acquired by the receiving Party from other source subsequent to the receipt of relevant information.

 

6.4 A receiving Party may disclose the Confidential Information to its relevant employees, agents or its engaged professionals, provided that such receiving Party shall ensure that such persons shall comply with relevant terms and conditions of this Agreement and that it shall assume any liability arising out of any breach by such persons of relevant terms and conditions of this Agreement.

 

6.5 Notwithstanding any other provisions of this Agreement, the validity of this Article shall not be affected by termination of this Agreement. Upon termination or rescission of this Agreement, the Parties shall still assume the confidentiality obligation agreed herein.

 

Article 7 Term and Termination of Agreement

 

7.1 This Agreement shall take effect from duly execution by the representatives of the Parties. Once effective, this Agreement shall become irrevocable. Unless otherwise explicitly specified herein, or the Parties determines to terminate this Agreement in writing, this Agreement shall be in full effect and force permanently. Parties

 

7.2 Each Party hereto shall complete the approval and registration procedures to extend its business term within 3 months before expiry thereof, so that the term of this Agreement may continue.

 

7.3 In case of any Default of any Party, the non-defaulting Party shall issue a notice to the Defaulting Party to require for correction within the prescribed time limit, and if the Defaulting Party still fails to make correction within 10 Business Days upon receipt of such notice, the non-defaulting Party shall be entitled to immediately terminate this Agreement in writing, and seek to hold the other Party liable for the Default liability in accordance with Article 9.1.

 

     

 

  

7.4 Upon termination of this Agreement, Party C shall return all documents and records in connection with Party A’s Operation, including but not limited to all operation documents, financial books and original vouchers, etc. to Party A in accordance with Party A's requirements.

 

Article 8 Notice

 

8.1 Any notice, request, demand and other correspondence required or given hereunder shall be delivered to relevant Parties in writing.

 

8.2 Such notice or other correspondence, if sent by fax or telegraph, shall be deemed properly served once sent, or if delivered by personal delivery, shall be deemed properly served once delivered in person, or if sent by post, shall be deemed properly served after 3 Business Days after posting, or if sent by email, shall be deemed to properly served when the notice email is deemed to enter into the email receipt system of the other Party after the sender correctly fills in the email address and the email is not returned by the system.

 

8.3 The addresses, contact persons and electronic communication terminals agreed herein shall be the addresses for work contacts between the Parties and the service of legal instruments and for the arbitration institution and/or people's court to serve instruments during dispute resolution, and legal instruments served via such addresses and/or the addresses disclosed in information registered with the administration for industry and commerce (or the registered address on the resident ID Card) shall be deemed as validly served. The notice and service provisions in Article 8 hereof shall be independent provisions, not affected by the validity of the entire Agreement or other provisions hereof.

 

Article 9 Default Liabilities

 

9.1 The Parties agree and confirm that if any Party hereto materially breaches any provision hereunder or materially fails to perform or delays in performance of any of its obligations hereunder, it shall constitute the Default hereunder, and the non-defaulting Party may demand the Defaulting Party to make correction or take remedy measures within a reasonable time limit. Should the Defaulting Party still fail to make correction or take remedy measures within such reasonable time limit or 10 Business Days after the non-defaulting Party notifies the Defaulting Party in writing and requests for correction, the non-Defaulting Party may at its liberation decide: (1) to terminate this Agreement and demand the Defaulting Party to pay liquidated damages; or (2) to demand specific performance of the obligations of the Defaulting Party hereunder and demand the Defaulting Party to pay all liquidated damages.

 

     

 

  

9.2 Despite Article 9.1 above, the Parties agree and confirm that Party A and Party B shall in no case require the termination of this Agreement on any ground, unless otherwise provided under the Laws or in this Agreement.

 

9.3 Notwithstanding any other provisions of this Agreement, the validity of this Article shall not be affected by termination of this Agreement.

 

Article 10 Force Majeure

 

In case of any natural disaster, storm, tornado or other weather conditions, strike, shutdown, stoppage or other industrial problems, war, riot or civil commotion, conspiracy, hostility, terrorist or violence of criminal organization, blockage, serious disease or plague, earthquake or other crustal movement, flood or other acts of God, bomb explosion or other explosion, fire, accident, or other Force Majeure Event which is unpredictable or the consequence of which is unpreventable or inevitable, and such Force Majeure Event directly affects a Party’s performance of this Agreement or causes the failure of such Party to perform per the agreed conditions, the affected Party shall immediately give a notice thereof to the other Party by fax, and within 20 Business Days, provide details of Force Majeure and supporting documents on the reasons for the non-performance or delay in performance of this Agreement, and such supporting documents shall be issued by the notarization authority at the place where the Force Majeure occurs. Based on the degree of influence of the Force Majeure Event on the performance of this Agreement, the Parties shall negotiate whether to partially exempt the performance of this Agreement or delay the performance of this Agreement. Neither Party shall be liable for compensation for the economic loss of each Party caused by Force Majeure.

 

Article 11 Dispute Resolution

 

11.1 Any dispute arising out of and in connection with this Agreement shall be resolved by the Parties upon negotiation.

 

     

 

  

11.2 Where the Parties fail to reach a consensus within 20 Business Days after the dispute occurs, either Party may submit such dispute to South China International Economic and Trade Arbitration Commission (the “ Commission ”) for arbitration in Shenzhen in accordance with the arbitration rules of the Commission in force at the time of submittal for arbitration. The arbitration tribunal shall consist of three arbitrators, and the arbitration language shall be Chinese, and the arbitration award shall be final and binding upon the Parties.

 

11.3 Subject to the PRC Laws, the Commission shall have the right to render award on the following: (1) with respect to equity, land assets or other assets of the Company, remedy measures; (2) injunction relief, for example, requiring the Company to carry out business operation or compulsorily transfer assets of the Company; (3) liquidation of the Company.

 

11.4 Subject to the PRC Laws, before the Commission forms an arbitration tribunal in accordance with the arbitration rules or under appropriate circumstances, the courts with jurisdiction at the following places shall have the right to render a ruling on remedy measures to support the arbitration: (1) Hong Kong Special Administrative Region, (2) place of registration of Party A, (3) place of registration of Party C, and (4) place where major assets of Party A or Party C locate.

 

11.5 Unless otherwise ruled by the arbitration tribunal, all expenses paid or advanced for arbitration (including but not limited to the arbitration fee, fee for arbitrators and attorneys, travel expenses, etc.) shall be borne by the defeated Party.

 

Article 12 Miscellaneous

 

12.1 This Agreement shall be written in Chinese and made in septuplicate, with Party B4 holding two copies and other Parties each holding one copy, of the same legal effect.

 

12.2 The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

12.3 Any right, power or remedy granted to a Party under any provision hereof shall not preclude such Party from other rights, powers or remedies available to it under the Laws and other provisions hereof, and a Party's exercise of its rights, powers and remedies shall not preclude the exercise of other rights, powers and remedies available to it.

 

12.4 Failure to exercise or delay in exercising any right, power or remedy under this Agreement or available under the Laws by a Party shall not cause waiver of such rights, and any single or partial waiver of rights of such Party shall not prevent it from exercising such rights in other ways or exercising its other rights.

 

     

 

  

12.5 Each provision hereof shall be separable and independent from every other provision, and if any or several provisions hereof become invalid, illegal or unenforceable at any time, the validity, legality and enforceability of other provisions hereof shall not be affected thereby. The Parties shall, through good faith negotiation, make efforts to replace such invalid, illegal or unenforceable provisions with valid provisions to the maximum extent permitted by the Laws and meeting expectations of the Parties, and the economic effects produced by such valid provisions shall be close to the economic effects of such invalid, illegal or unenforceable provisions as much as possible.

 

12.6 Any amendment or supplement to this Agreement shall be made in writing, and shall only become effective upon duly execution by the Parties.

 

12.7 This Agreement shall be binding upon the legal assignees and successors of the Parties.  

 

12.8 This Agreement shall constitute the entire agreement among the Parties with respect to the content of this Agreement and supersede all previous oral and written agreements, contracts, understandings and communications among the Parties with respect to the content hereof.

 

(The following page is intentionally left blank, and is followed by the signature page.)

 

     

 

  

(No text on this page. This is the signature page of the Entrusted Management Agreement on Shenzhen Qfun Internet Technology Co., Ltd.)

Party A (Seal): Qfun Information Technology (Shenzhen) Co., Ltd. 

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

Party B1: ZHANG Jiahui /s/ ZHANG Jiahui (Signature)

Party B2: CAO Yu /s/ CAO Yu (Signature) 

Party B3: ZHU Nianyang /s/ ZHU Nianyang (Signature)

Party B4 (Seal): Shenzhen Guangtiandi Technology Co., Ltd. 

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

Party C (Seal): Shenzhen Qfun Internet Technology Co., Ltd.

Legal Representative or Authorized Representative: /s/ Authorized Representative (Signature)

 

     

 

 

Exhibit 4.91

 

 

   

 

 

 

   

 

Exhibit 4.92

 

  

   

 

 

  

   

 

 

Exhibit 4.93

 

Execution version

 

 

A NUMBER OF SELLERS AND

 

500.COM LIMITED

 

 

 

SHARE PURCHASE AGREEMENT
REGARDING THE MULTI GROUP LTD

 

 

   

     
   

 

APPENDICES

 

Appendix A Sellers and ownership of the Shares
   
Appendix 1.3 Group structure
   
Appendix 4.1 Calculation of Purchase Price
   
Appendix 5.1 Gaming Authorities
   
Appendix 6.2 f) Shareholder´s agreement
   
Appendix 7.1 Due Diligence
   
Appendix 7.5.1 Accounts
   
Appendix 7.5.2 Locked Box Accounts
   
Appendix 7.6.1 Material Agreements
   
Appendix 7.7.1 Intellectual Property Rights

 

  2
   

 

This share purchase agreement including its appendices (this “ Agreement ”) is entered into on this day (“ Signing Date ”) between:

 

(1) The persons and legal entities set out in Appendix A (jointly the “ Sellers ” and each a “ Seller ” ); and

 

(2) 500.com Limited, Reg. No. 186078, a company duly incorporated and organised under the laws of Cayman Islands, having its registered address at P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands (the “ Buyer ” ).

 

The Sellers and the Buyer are each referred to as a “ Party ” and jointly as the “ Parties ”.

 

1 Background

 

1.1 The Sellers own 100% of all issued and outstanding shares in The Multi Group Ltd, a Maltese limited liability company with Reg. No. C 71212 (the “ Company ” ). The Company has a share capital of EUR 10,500 divided into 10,500 shares.

 

1.2 The Sellers wish to sell the shares set out in Appendix A, corresponding to 93% of all issued and outstanding shares in the Company (the “ Shares ”) .

 

1.3 The Company is the parent company of the subsidiaries listed in Appendix 1.3 (jointly the “ Group Companies ” and the Company or any of the subsidiaries listed in the mentioned appendix a “ Group Company ” ).

 

1.4 The Buyer has expressed an interest to acquire the Shares from the Sellers, and the Sellers have expressed an interest in selling the Shares to the Buyer, subject to the terms and conditions set out in this Agreement.

 

2 Definitions

 

2.1 In this Agreement, the following definitions are used:

 

“ Accounting Principles ” means the accounting principles which are in accordance with applicable laws and generally accepted accounting principles applied by each Group Company respectively;

 

“ Accounts ” means the statutory consolidated audited annual accounts of the Company and the statutory audited annual accounts of each of the Group Companies for the financial year ended on the Accounts Date, attached hereto as Appendix 7.5.1;

 

“ Accounts Date ” means 31 December 2016;

 

“ Affiliate ” means all companies, partnerships or other forms of legal entities directly or indirectly controlling or controlled by or under common control with a Seller, excluding the Group Companies;

 

“ Borrowings ” means any outstanding borrowing and outstanding indebtedness of the Group Companies, including any interest, break-fees, pre-payment fees or similar;

 

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“ Business ” means the operational day to day business of the Group Companies as currently conducted;

 

“ Business Day ” means a day when banks are open for general banking business in Sweden and in Malta (other than for internet-banking only);

 

“ Claim ” means any bona fide claim made by the Buyer against the Seller s in respect of a Loss;

 

“ Closing ” means the completion of the transaction contemplated by this Agreement; “ Closing Date ” means either (i) the date occurring 5 Business Days from the date the necessary approvals or clearances pursuant to Section 5.1 have been received or (ii) such other date as the Parties may agree on in writing;

 

“ Confidential Information ” means any information of any kind or nature whatsoever, whether written or oral, including, without limitation, this Agreement, financial information, trade secrets, customer lists and other information, regarding the Buyer, the Sellers and any of the Group Companies which is not known to the general public;

 

“ Due Diligence ” means the due diligence procedure described in Section 7.1; “ Encumbrance ” means an option, lien, mortgage, or any other encumbrance; “ EUR ” means the currency Euro;

 

“ Gaming Authorities ” means the gaming authorities in the jurisdictions listed in Appendix 5.1;

 

“ Intellectual Property Rights ” means the intellectual property rights owned or licensed by any of the Group Companies as listed in Appendix 7.7.1;

 

“ Key Employee ” means any person employed by a Group Company as of Signing Date with a monthly salary exceeding EUR 4,500;

 

“ Leakage ” means (i) any dividend or other distribution in accordance with the Maltese Companies Act to the Sellers (whether in cash or in kind) or any of their Affiliates; (ii) any professional fees, expenses or other costs paid or incurred owing to any adviser of a Group Company for the benefit of the Sellers in connection with the transaction contemplated by this Agreement, excluding professional fees, expenses or other costs paid or incurred to any such adviser prior to or on the Locked Box Date; and (iii) any new Borrowings, guarantees provided or any significant capital expenditure except for in the ordinary course of business;

 

“ Locked Box Accounts ” means the consolidated financial statements of the Group Companies for the period ended on the Locked Box Date, attached hereto as Appendix 7.5.2;

 

“ Locked Box Date ” means 31 March 2017;

 

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“ Loss ” means any direct loss, damage or expense (excluding any indirect or consequential damage, loss or expense), resulting from a breach of the Warranties or other breach of this Agreement by the Sellers;

 

“ Material Agreements ” means the agreements listed in Appendix 7.6.1;

“ Purchase Price ” means the purchase price for the Shares set out in Section 4.1; “ Sellers’ Knowledge ” means the actual knowledge of the managing director of the Company on the date hereof;

 

“ Taxes ” means income taxes, duties, charges and withholding taxes and any other taxes imposed by any tax authority, including penalties and interest relating to such taxes;

 

“ Third Party Claim ” means any claim by a third party (including tax and other authorities) against any of the Group Companies; and

 

“ Warranties ” means the warranti es of the Sellers set out in Section 7.

 

3 Sale and Purchase

 

3.1 Upon the terms and subject to the conditions set out in this Agreement, the Sellers agree to sell the Shares, and the Buyer agrees to purchase the Shares, together with all rights attached to them.

 

3.2 The Shares shall be transferred to the Buyer on the Closing Date after payment of the Purchase Price.

 

4 Purchase Price and Payment

 

4.1 The purchase price for the Shares shall be EUR 49,753,803 (the “ Purchase Price ”) , calculated as set out in Appendix 4.1 .

 

4.2 The Purchase Price shall be paid in EUR by the Buyer in immediately available funds as follows:

 

4.2.1 The sum of EUR 500,000 on the Signing Date to Helmet Ltd´s (as the Sellers’ authorised representative) bank account number 365.015 with Bendura Bank, swift code HYIBLI22 and IBAN: LI11 0880 3103 6501 5000 0 (the “ Advance Payment ”) ; and

 

4.2.2 the sum of EUR 49,253,803 on the Closing Date to the bank accounts as instructed by the Sellers in writing or by e-mail at least within 3 Business Days prior to the Closing Date.

 

5 Conditions Precedent

 

5.1 The respective obligations of the Buyer and the Sellers to complete the transaction contemplated by this Agreement shall be subject to the receipt of clearances and approvals by the Gaming Authorities in the jurisdictions listed in Appendix 5.1 .

 

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5.2 In order to obtain the clearances and approvals set out in Section 5.1 above, the Buyer shall prepare and submit qualitative and all (except for criminal records for certain directors which however will be obtained as soon as possible) necessary notifications/applications to the Gaming Authorities no later than 10 Business Days after the Signing Date (and shall submit a copy to the Sellers of such application in advance). All the Buyer’s costs and expenses (including filing and advisors’ fees) shall be borne by the Buyer.

 

5.3 The Buyer shall use its best endeavours and take all reasonable measures to fulfil the condition precedent set out in Section 5.1 as soon as possible. The Sellers shall procure that the Group Companies provides the Buyer with necessary assistance and information for preparation of such application/filings.

 

5.4 In the event that the condition precedent set out in Section 5.1 above has not been fulfilled within 8 weeks from the Signing Date or the Buyer in any other way fails to consummate and complete the transaction contemplated by this Agreement, the Sellers shall be entitled (and thereby not obliged), in their sole discretion, to terminate this Agreement forthwith in writing and keep EUR 200,000 of the Advance Payment as liquidated damages. The remaining amount of the Advance Payment (i.e. EUR 300,000) shall be repaid to the Buyer and the Buyer shall not be entitled to any additional compensation of any kind due to such termination.

 

5.5 The Sellers shall not be entitled to exercise their right to terminate this Agreement in accordance with Section 5.4 above if the Gaming Authorities, during the said 8 weeks period, have given a clear and written indication that the clearances and approvals set out in Section 5.1 will be issued at the latest one week after the said 8 weeks period (i.e. the said 8 weeks will thereby be prolonged with one additional week). For the avoidance of doubt, in the event that the Gaming Authorities, despite their communication, do not issue the clearances and approvals set out in Section 5.1 within said 9 weeks period, the Sellers shall have the right to terminate the Agreement in accordance with Section 5.4 above.

 

5.6 The Buyer shall, at any time (if not the Sellers have terminated the Agreement in accordance with Section 5.4 above), be entitled to waive any or all condition precedents as set forth in Section 5.1 of this Agreement and complete the transaction contemplated by this Agreement and thereby complete all Closing steps set out in Section 6 below.

 

6 Closing

 

6.1 Closing shall take place at the offices of the Company at 10.00 a.m. on the Closing Date. 6.2 At Closing:

 

a) the Buyer shall pay the Purchase Price (minus the Advance Payment) in cash to the bank accounts instructed by the Sellers in accordance with Section 4.2.2 above;

 

b) the Sellers shall deliver, to the Buyer, a resolution in writing executed in original by the sole director of the Company in terms of Article 33 of the Articles of Association of the Company, and a resolution of the shareholders in original or certified true copy, expressly approving the transfer of the Shares to the Buyer and the registration of the Buyer as a member of the Company in the register of members maintained by the Company;

 

c) the Sellers shall deliver, to the Buyer, the register of members of the Company in which the Buyer has been inserted as the owner of all Shares;

 

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d) the Sellers shall, if requested by the Buyer, cause the Company to issue powers of attorney, enabling the persons appointed by the Buyer to sign for and on behalf of the Company until new signatories have been duly registered;

 

e) the Sellers shall A) deliver consents from i) Red Rake Tech S.L., (ii) Yellow Square S.L., (iii) Playson (Alderney) Ltd, (iv) Leaseweb Netherlands B.V. and (v) Quickspin AB to the change of control of the Company as contemplated by this Agreement and B) notify Wirecard Bank AG regarding the transaction contemplated by this Agreement;

 

f) the Buyer shall, and shall procure that Helmet Ltd shall, enter into the shareholder´s agreement on the terms set out in Appendix 6.2 f) ;

 

g) the Sellers shall ensure that all board members of the Group Companies appointed by the Sellers, other than Mr Thomas Biro, retire from their respective offices, unless necessary under local requirements or unless instructed otherwise by the Buyer; and

 

h) the Buyer shall appoint new board members to the board of directors of the Group Companies.

 

6.3 All of the actions to be taken and documents to be executed and delivered by each of the Parties at Closing as set out in Section 6.2 above shall be deemed to be taken, executed and delivered simultaneously, and no such action, execution or delivery shall be effective until all such other actions, executions and deliveries are complete.

 

6.4 The Buyer shall procure, with the reasonable assistance of the Sellers, that as soon as possible following Closing, and in no case more than 14 days thereafter, all duly completed statutory forms required for the registration of the transfer of the Shares, the filing of the updated Memorandum and Articles of Association of the Company and the Group Companies reflecting the change of members and directors (if applicable) of the respective companies, together with all other notices, forms, documents and the like required for this purpose are registered with the Registrar of Companies in Malta. All required documentation shall also be provided by the Buyer to the Gaming Authorities (to the extent legally required) confirming that the transfer of the Shares has been completed.

 

7 Warranties of the Sellers

 

7.1 The Buyer and its professional advisors have during the period from 6 March 2017 to the Signing Date conducted a due diligence investigation of the Group Companies, during which the Buyer and its advisors have had access to a virtual data room organized by Merrill Corporation , have been given full access to the Group Companies’ operations and financial affairs and have, inter alia , (i) reviewed the data room documents listed in Appendix 7.1 , (ii) raised the questions and received the answers listed in said appendix, and (iii) attended management presentations including meetings with the management of the Group Companies (the “ Due Diligence ”).

 

7.2 The Sellers makes the following Warranties to the Buyer, all of which are made as of the Signing Date and the Closing Date (unless the context provide otherwise).

 

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7.3 Corporate Existence and Power

 

7.3.1 The Group Companies are duly incorporated and validly existing under the laws of the jurisdictions in which they were incorporated, and the Sellers have the requisite power and authority to enter into and perform this Agreement.

 

7.3.2 None of the Group Companies has filed (or have had filed against them) any petition for their winding-up, are not insolvent within the meaning of applicable laws, rules or regulations or similar requirements, and have not made any assignment in favour of their creditors, nor has any petition for receivership or any administration order been presented in respect of any of the Group Companies. None of the Group Companies has initiated any proceedings with respect to a compromise or arrangement with their creditors or for the dissolution, liquidation or reorganisation of any of the Group Companies or the winding-up or cessation of the Business. No receiver or administrative receiver or liquidator has been appointed in respect of any of the Group Companies or any of their material assets.

 

7.3.3 All material documentation concerning the Group Companies, including its shareholders register, certificate of incorporation, memorandum and articles of association, minutes from shareholders’ meetings and board meetings (if any) and meetings of any other existing corporate body of the respective Group Company (if any) as well as accounts, financial records and other records required by law, have been properly kept, are up to date, and the required filings of the same have been duly effected with relevant authorities in accordance with the applicable law in the relevant jurisdiction of such Group Company.

 

7.4 Ownership of the Shares and Capitalisation of the Group Companies

 

7.4.1 The Sellers own the Shares which constitute 93% of the issued share capital of the Company. The Shares are free and clear from any Encumbrances and there is no agreement to create any Encumbrance over Shares.

 

7.4.2 All the shares of the subsidiaries listed in Appendix 1.3 are directly owned by the Company as set out in said appendix and the details in said appendix regarding the shares of such subsidiaries are correct and all such shares are fully paid.

 

7.4.3 There are no arrangements or commitments which call for the issue or transfer of any shares, warrants, convertible debentures or other securities of the subsidiaries listed in Appendix 1.3 . The Company’s shares in said subsidiaries are not subject to any Encumbrances.

 

7.5 Accounts, Accounting Records and Statutory Books

 

7.5.1 In all material respects, the Accounts, Appendix 7.5.1 , give a true and fair view of the financial position and the results of the operations of the Company on a consolidated basis as of the Accounts Date and they have been prepared in accordance with the Accounting Principles.

 

7.5.2 The Locked Box Accounts, Appendix 7.5.2 , have been prepared in accordance with the Accounting Principles as consistently applied by the Group Companies and they give, in all material respects, a true and fair view of the financial position and results of the operations of each of the Group Companies and for the consolidated group as of the Locked Box Date.

 

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7.5.3 The accounting records of the Group Companies are up-to-date and contain, in all material respects, complete and accurate details of the business activities of the Group Companies to the extent required by applicable law, in the jurisdiction of the respective Group Company, to be included in such records.

 

7.5.4 Since the Locked Box Date, the Group Companies have carried out the Business in the ordinary course, consistent with past practices and the Sellers have not declared, paid or caused any Leakage.

 

7.6 Material Agreements

 

7.6.1 There are no other Material Agreements than those listed in Appendix 7.6.1 . The Material Agreements listed in said appendix are in full force and effect and the text of the agreements accurately reflects the contents of the agreements.

 

7.6.2 To the Sellers’ Knowledge, (i) none of the Group Companies are per the Signing Date in breach or default under any Material Agreement, and (ii) the Group Companies are complying in all material respects with their Material Agreements, and no party to such contracts has per the Signing Date given notice of that it will terminate any such contract.

 

7.6.3 Except those Material Agreements which have been disclosed that require approval for change of control, no other Material Agreement will become terminable as a result of this Agreement or the Closing.

 

7.7 Intellectual Property Rights

 

7.7.1 The respective Group Company is the owner of the Intellectual Property Rights set out in Appendix 7.7.1 or has been granted rights to use such, as applicable and such Intellectual Property Rights are held free and clear of any Encumbrances.

 

7.7.2 The Group Companies hold (either by ownership or license) all necessary Intellectual Property Rights for conducting their respective business, including all software licenses used in the Business.

 

7.7.3 No Person infringes any of the Intellectual Property Rights of any of the Group Companies.

 

7.7.4 In addition to the above, as of the date of this Agreement, apart from the disclosed claim received from Lottoland in respect of a claimed breach of Lottoland’s Intellectual Property Rights, no other Group Company has received any written claim stating that it is in infringement of any Intellectual Property Rights of any other Person. To the Seller’s knowledge none of the Group Companies are infringing any material Intellectual Property rights of any other Person.

 

7.7.5 To the Sellers’ Knowledge, none of the Group Companies have received any third party claims regarding potential infringement of intellectual property rights except as disclosed to the Buyer during the Due Diligence.

 

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7.8 Insurance

 

All material insurance policies in respect of the Group Companies have been disclosed to the Buyer and all such policies are in full force and effect until the Closing Date.

 

7.9 Employment and labour matters

 

7.9.1 The Key Employees including their employment contracts have been disclosed during the Due Diligence, and the information in said appendix correctly and exhaustively reflects the full terms of employment for the Key Employees, including their benefits.

 

7.9.2 None of the Key Employees has given or received notice of termination of his or her employment and, to the Sellers’ Knowledg e, no such Key Employee has any current intention of giving such notice.

 

7.9.3 There are no share incentive, share option, bonus, deferred compensation, profit sharing, severance pay, other incentive scheme or similar arrangements in force with respect to any current or former directors, officers or other employees of the Group Companies.

 

7.10 Leased Premises and Real Property

 

7.10.1 All leases, pursuant to which the Group Companies lease real property have been disclosed during the Due Diligence.

 

7.10.2 The Group Companies occupy and use the leased properties for the sole purpose of conducting the Business.

 

7.10.3 None of the Group Company owns any real property.

 

7.11 Taxes

 

7.11.1 The Group Companies have filed the required tax returns and reports with the appropriate tax authorities and all Taxes that have become due for payment under decisions of appropriate tax authorities have been paid.

 

7.11.2 There are no tax audits pending with respect to any of the Group Companies.

 

7.11.3 The Group Companies have not obtained from appropriate tax authorities any subsidies, preferential Tax treatments, state aids or grants of whatever kind, which the Group Companies are not entitled to and which the Group Companies will be obliged to refund or repay in view of the Agreement.

 

7.12 Litigation

 

The Group Companies are not engaged in any pending or threatened litigation or arbitration proceedings whether as plaintiffs, defendants or otherwise.

 

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7.13 Regulatory and Compliance

 

7.13.1 To the Sellers’ Knowledge, t he Group Companies conduct and have conducted their business, in all material respect, in accordance with applicable licences, permits, certificates, authorizations, law and regulations in the relevant jurisdiction of such Group Company, including, for the avoidance of doubt, with respect to gambling operations, information security, data protection and player privacy.

 

7.13.2 The Group Companies currently hold all licenses, permits, certificates and authorizations required to carry on the businesses conducted by them.

 

7.13.3 No Group Company, nor any of their directors, officers or employees, agents or representatives has taken any actions in furtherance of an offer, payment, promise to pay, or authorization or approval of the payment or giving of money, property, gifts or anything else of value, directly or indirectly, to any government official (including any officer or employee of a government or government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office) to influence official action or secure an improper advantage.

 

7.13.4 The Group Companies have conducted their businesses in compliance with applicable anti-corruption laws and have instituted and maintained policies and procedures designed to promote and achieve compliance with such laws.

 

7.13.5 The operations of the Group Companies are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements and anti- money laundering statutes in the relevant jurisdiction of such Group Company and the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (together the “Anti -Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Group Companies with respect to Anti- Money Laundering Laws is pending or, to the Sellers’ Knowledge, threatened.

 

7.14 Ordinary Course

 

Unless disclosed during the Due Diligence, during the period from Lock Box Date until the Signing Date, no Group Company has operated its business other than in the ordinary course of business and more specifically has not:

 

a) incurred any additional Borrowings;

 

b) acquired or agreed to acquire any share or other interest in any company, partnership or other venture;

 

c) created, allotted or issued any share capital or loan capital of the Group Companies or any option to subscribe for the same;

 

d) made any transfer of value, including but not limited to dividend payments, distribution of profits or assets, from the Group Companies;

 

e) repaid, redeemed or repurchased any share capital or loan capital of the Group Companies;

 

f) made any material amendment to the terms and conditions of employment (including, without limitation, remuneration, pension entitlements and other benefits) of any employee (other than non-material increases of salary in the ordinary course of business) or offered any employee a share option incentive scheme;

 

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g) created, amended or agreed to create or amend any Encumbrance over any of its assets;

 

h) made any change to its accounting practices or policies or change its accounting reference date;

 

i) made any amendment to the articles of association of the Group Companies;

 

j) entered into dissolution or winding-up proceedings of the Group Companies;

 

k) entered into or amended or terminated a material contract or licence to which it is a party other than in the ordinary course of business;

 

l) entered into any transaction with the Seller or any of their Affiliates;

 

m) initiated or settled any legal, arbitration or other such proceedings otherwise than for the purpose of debt collection in the ordinary course of business;

 

n) decreased any marketing spend or made changes in bonus levels; or o) agreed to enter into any arrangement to do any of the foregoing.

 

7.15 Information

 

The information provided to the Buyer in the Due Diligence is, to the Sellers’ Knowledge, true, accurate and complete in all material respect and not misleading and no information which reasonably should have been disclosed by the Sellers acting in good faith to a potential buyer of shares and a company or which a prudent buyer of shares and a company would otherwise reasonably expect to be made available, has been withheld.

 

7.16 No other Warranties

 

The Buyer agrees that the Sellers have made no, and the Buyer has not relied on any, express or implied representation or warranty other than the Warranties contained in this Agreement and no action or omission by the Sellers or any of the Group Companies shall be construed as implying any representation or warranty.

 

8 Warranties of the Buyer

 

The Buyer make the following warranties to the Sellers, all of which are made as of the Signing Date and as of the Closing Date.

 

8.1 Corporate Existence and Power

 

The Buyer is duly incorporated and validly existing under the laws of the jurisdiction in which the Buyer was incorporated, has the requisite power and authority, and the necessary funds, to enter into and perform this Agreement and any other undertaking to be executed by the Buyer pursuant to this Agreement. The Buyer has not filed (or has had filed against it) any petition for its winding up, is not insolvent within the meaning of applicable laws, rules or regulations or similar requirements, and has not made any assignment in favour of its creditors or any class of them, nor has any petition for receivership or any administration order been presented in respect of the Buyer. The Buyer has not initiated any proceedings for a compromise or arrangement with its creditors or for the dissolution, liquidation or reorganisation of the Buyer or the winding- up or cessation of the business the Buyer. No receiver or administrative receiver or liquidator has been appointed in respect of the Buyer or any of its material assets and no execution have been levied upon any of its material assets.

 

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8.2 Corporate Authorisation and Non-Contravention

 

8.2.1 This Agreement and any other documents or instruments to be executed by the Buyer pursuant to this Agreement and the performance by the Buyer of its obligations under them, have been duly authorised by all necessary corporate action on the part of the Buyer, and this Agreement, and any other documents or instruments to be executed by the Buyer pursuant to this Agreement, will, when executed, constitute valid and binding obligations of the Buyer in accordance with their respective terms.

 

8.2.2 The Buyer is not aware of any fact or circumstance which would entitle the Buyer to make a Claim against the Sellers or which the Buyer would reasonably have concluded could lead to a Claim against the Sellers.

 

8.3 Financing

 

The Buyer has obtained or will have obtained by the time of Closing the necessary financing for the payment of all amounts to be paid under this Agreement.

 

9 Covenants

 

9.1 Conduct of Business

 

9.1.1 Subject to Section 9.1.2 below, the Sellers shall procure that from the Signing Date to Closing no Group Company will take any corporate or other action (without the prior consent of the Buyer, such consent not to be unreasonably withheld or delayed) to operate its business other than in the ordinary course of business, and, more specifically that no Group Company will take any of the actions listed in Section 7.14 and/or employ any new Key Employees, without the approval of the Buyer.

 

9.1.2 Provided that the Buyer is informed beforehand, Section 9.1.1 above shall not operate as to restrict or prevent

 

a) any matter reasonably undertaken by a Group Company in an emergency or a disaster situation with the intention of minimizing any adverse effect of such situation;

 

b) the completion or performance of any obligations undertaken pursuant to any agreement or arrangement entered into by the Group Companies prior to the Signing Date;

 

c) any action pursuant to a requirement under applicable law; or

 

d) any action provided for under this Agreement.

 

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9.1.3 The Buyer hereby authorises the individual specified as the Buyer’s contact in Section 17 (Notices) to, during the period between the Signing Date and the Closing Date, represent the Buyer and give such consents as stipulated in Section 9.1.1.

 

9.1.4 The Sellers hereby authorises the individual specified as the Sellers’ contact in Section 17 (Notices) to, during the period between the Signing Date and the Closing Date, represent the Sellers under this Agreement.

 

9.2 Non-competition

 

9.2.1 From the Closing Date until the date falling 36 (thirty-six) months thereafter, the Sellers agree not to, and shall procure that their respective Affiliates shall not, engage or prepare to engage, directly or indirectly, as a principal or for its own account, or solely or jointly with others, or as holder of any shares or business interest in any Person, or in any business which directly competes with the Business of the Group Companies as it is conducted on the Closing Date.

 

9.2.2 Notwithstanding Section 9.2.1, the Sellers shall be entitled to make investments in listed companies provided that such investment does not exceed five (5) per cent of the votes or issued share capital of the listed company.

 

9.3 Non-solicitation

 

From the Signing Date until the date falling 36 (thirty-six) months thereafter, the Sellers undertake to, and shall procure that their respective Affiliates shall, refrain from employing, offering or negotiating employment with, or enticing away, or receiving or accepting the performance of services by, any of the employees of the Group Companies.

 

10 Indemnification

 

10.1 Indemnification

 

10.1.1 Subject to Section 10.2 below, in the event of a breach of any of the Warranties, covenants or agreements made or to be performed by the Sellers pursuant to this Agreement, the Buyer shall be entitled to a reduction of the Purchase Price with an amount corresponding to the Loss EUR by EUR. Consequently, it is specifically agreed that the Sellers’ liability in relation to the Shares is exclusively governed by this Section 10 and thus no remedy whatsoever under the Swedish Sale of Goods Act, the International Sale of Good Act or any other acts, or any similar legal principles in any jurisdiction, shall apply for the transaction under this Agreement or between the Parties.

 

10.1.2 Instead of compensating the Buyer in accordance with the above, the Sellers shall have the right to remedy the subject matter of a Claim that is capable of being remedied, provided that the Sellers (i) within five Business Days after receipt of a notice of a Claim in accordance with Section 10.2.4 below notify the Buyer that the Sellers will exercise their right to remedy such subject matter of the Claim, and (ii) remedy the subject matter of a Claim within 30 Business Days from such notice.

 

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10.2 Limitation of Indemnification

 

The Sellers’ liability in respect of any breach of any of the Warranties, covenants or agreements made or to be performed by the Sellers pursuant to this Agreement is subject to the following limitations:

 

10.2.1 The Buyer shall not be entitled to a reduction of the Purchase Price unless the aggregate amount of all Losses, subject to any restrictions made under this Section 10, exceeds EUR 300,000, in which case only the excess shall be payable. For the purposes hereof no individual Loss which is less than EUR 50,000 shall be taken into account.

 

10.2.2 The maximum aggregate liability of the Sellers in respect of all Claims shall in no event exceed 25 % of the Purchase Price.

 

10.2.3 Each Sellers’ liability under this Agreement is individual (and not jointly) and shall not exceed the portion of a Claim equal to such Sellers’ portion of the Purchase Price .

 

10.2.4 No Claim shall entitle the Buyer to a reduction of the Purchase Price unless notice in writing of any such Claim, accompanied by reasonable particulars thereof specifying the nature of the Claim and, as far as practicable, the amount of the Loss, has been given to the Sellers within 30 days from the date when the Buyer or the relevant Group Company became aware of the circumstances giving rise to the Claim, and in any event no later than 18 months after the Closing Date. Any such Claim which may be made, which has not been previously satisfied, settled or withdrawn, shall be deemed to have been withdrawn four months subsequent to when the Claim was made, unless legal proceedings in accordance with in Section 20 below have been commenced against the Sellers in respect thereof by then.

 

10.2.5 For the purposes of this Agreement, a liability, which is contingent, shall not constitute a Loss unless and until such contingent liability becomes an actual liability and is due and payable.

 

10.2.6 If any Loss is a tax deductible item, or relates to an untaxed reserve, the recoverable Loss shall be reduced by an amount equivalent to the Loss multiplied by the actual corporate tax rate applicable in the relevant jurisdiction of the Group Companies (or, as the case may be, the Buyer) during the relevant fiscal year.

 

10.2.7 No Claim may be made and no liability shall arise if and to the extent that

 

a) such Claim is based on facts or circumstances which have been disclosed to the Buyer or its advisors in this Agreement, during the Due Diligence or otherwise through the information disclosed in writing or by e-mail to the Buyer, or which were otherwise known or reasonably should have been known to the Buyer or the Buyer´s advisors prior to the Closing Date. The Buyer specifically understand that the Warranties do not release the Buyer from carrying out a prudent investigation of the state of affairs of the Group Companies;

 

b) a provision or allowance for the matter of the Loss (whether as a specific reserve or as a general reserve) has been made in the Accounts, or the same is otherwise taken account of or reflected in the Accounts;

 

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c) such Claim occurs as a result of the passing of any legislation not in force at the Closing Date, or which takes effect retroactively, or occurs as a result of any increase in the tax rate in force on the Closing Date or any change in the generally established practice of the relevant tax authorities or courts;

 

d) such Claim which is recoverable under an insurance policy or which would have been recoverable had the insurance protection level, which existed at the Closing Date, been continued; or

 

e) such Claim would not have arisen but for an act, omission or transaction carried out by any Buyer, or persons deriving title from any Buyer or any of the Group Companies after the Closing Date.

 

10.3 Third Party Claims

 

10.3.1 In case a Third Party Claim that could lead to a breach of any of the Warranties should come to the Buyer´s knowledge, the Buyer, in order to preserve its right to bring a Claim against the Sellers, either itself, or shall procure that the relevant Group Company:

 

a) shall give notice thereof to the Sellers in accordance with Section 10.2.4;

 

b) shall not make any admission of liability and not agree to settle or compromise with any person, body or authority in relation thereto, without obtaining the prior written consent of the Sellers;

 

c) procure that the Sellers are able to provide advice and non-binding recommendations to the Buyer with respect to a potential Third Party Claim;

 

d) shall give the Sellers, or the Sellers’ duly authorised representatives, reasonable access to the personnel of the Buyer and/or the relevant Group Company, as the case may be, and to any relevant premises, accounts, documents and records within their respective possession, and to take copies thereof, in order to enable the Sellers, or the Sellers’ duly authorised representatives, to examine the basis of any potential Third Party Claim.

 

10.3.2 If the Sellers make any payment to the Buyer as a settlement of a Claim and the Buyer or any of the Group Companies have the right to recover from any third party any amount that has formed the basis of the Claim, the Buyer shall promptly and without request from the Sellers assign that right to the Sellers.

 

11 Specific Indemnities

 

11.1 Notwithstanding any limitation of the Sellers’ liability set forth in this Agreement, except for (i) the cap in Section 10.2.2 and (ii) each Sellers’ liability in Section 10.2.3 which shall apply, the Sellers shall indemnify and hold the Buyer or the Group Companies harmless

 

a) from any and all costs, losses, liabilities or expenses arising out of or in relation to any and all liability arising out of the alleged breach of Lottoland’s intellectual property rights prior to Closing;

 

b) from any and all liability arising under the Occupational Health and Safety Act, in respect of an alleged offence committed prior to Closing in relation of the holding a risk assessment of the place of work; and

 

  16
   

  

c) from the amount of any Taxes that the Sellers or the Group Companies incurred or are assessed, in connection with the Sellers’ or relevant Group Company’s failure to timely file any and all Tax report, pay or remit, or any failure of Sellers or the Group Companies to withhold or to assist in withholding from payments to Sellers any Taxes arising from the transaction contemplated by this Agreement or the transfer of the intellectual property rights to the Company’s subsidiary Multi Warehouse Ltd .

 

12 Confidentiality

 

12.1 Each Party undertakes not to use or disclose any Confidential Information unless (i) required to do so by law or pursuant to any order of court or other competent authority or tribunal (ii) required to do so by any applicable stock exchange regulations or the regulations of any other recognised market place (iii) such disclosure has been consented to by the other Party in writing (such consent not to be unreasonably withheld) or (iv) to its professional advisers who are bound to such Party by a duty of confidence which applies to any information disclosed. If a Party becomes required, in circumstances contemplated by (i) or (ii) to disclose any information, the disclosing Party shall use its reasonable endeavours to consult with the other Party prior to any such disclosure.

 

12.2 If this Agreement is terminated, irrespective of the cause of such termination, the Buyer shall – and shall procure that its advisors – upon a request in writing from the Sellers, return or destroy any document containing Confidential Information, and any copy thereof.

 

13 Announcements

 

13.1 All press releases, public announcements and public relations activities by the Parties with regard to this Agreement or the transaction contemplated by it shall be mutually approved by the Parties in advance of such release or announcement. A Party shall, however, not be prevented from, after reasonable consultation with the other Party, disclosing such information which is required under applicable law or stock exchange regulations.

 

13.2 Notwithstanding Section 13.1 above, the Buyer undertakes, on Signing Date, to announce to the public (including applicable stock exchange) the announcement as per SEC rules.

 

14 Costs

 

Each Party shall pay its own costs and expenses in connection with the preparation and completion of the transaction contemplated by this Agreement.

 

15 Entire Agreement

 

This Agreement represents the entire understanding and agreement between the Parties with respect to the subject matter hereof and supersedes all prior negotiations, understandings and agreements with respect to the subject matter hereof.

 

  17
   

 

16 Amendments and Waivers

 

This Agreement may only be amended by an instrument in writing duly executed by the Parties. No change, termination, modification or waiver of any provision, term or condition of this Agreement shall be binding on the Parties, unless it is made in writing.

 

17 Notices

 

17.1 All notices, requests, demands, approvals, waivers and other communications required or permitted under this Agreement must be in writing in the English language and shall be deemed to have been received by a Party when:

 

a) delivered by hand, on the day of delivery;

 

b) delivered by e-mail, upon confirmation by the receiving Party.

 

17.2 All such notices and communications shall be addressed as set out below or to such other addresses as may be given by written notice in accordance with this Section.

 

If to the Sellers: Helmet Ltd
  Suites 41/42, Victoria House,
  26 Main Street, Gibraltar
  GX 11 1AA, Gibraltar
  E-mail: thomas@themultigroup.com
   
With a copy (not serving as Grey Advokatbyrå AB
a notice) to: Attention: Philip Asmar
  Birger Jarlsgatan 12, 114 34 Stockholm,
  Sweden
  E-mail: philip.asmar@greyadvokat.se
   
If to the Buyer: 500.com Limited
  Attention: Tianshi Zhou
  Vice President of Corporate Development
  500.com Building, Shenxianling Sports  
  Center, Longgang District,
  Shenzhen, China
  E-mail: zhouts@500wan.com
   
With a copy (not serving as WH Partners
a notice) to: Attention: Robert Zammit
  Level 5, Quantum House, 75 Abate Rigord
Street, Ta' Xbiex XBX 1120
  Malta
  E-mail: robert.zammit@whpartners.eu

 

18 Assignments

 

No Party may assign, delegate, sub-contract, or otherwise transfer or pledge or grant any other security interest in or over any of its rights or obligations under this Agreement without the prior written consent of the other Party.

 

  18
   

  

19 Partial Invalidity

 

If any provision of this Agreement or the application of it shall be declared or deemed void, invalid or unenforceable in whole or in part for any reason, the remaining provisions of this Agreement shall continue in full force and effect. The Parties shall seek to amend such void, invalid or unenforceable provisions and thereby this Agreement in order to give effect to, so far as is possible, the spirit of this Agreement and to achieve the purposes intended by the Parties.

 

20 Governing Law and Disputes

 

20.1 This Agreement shall be governed by and construed in accordance with the laws of Sweden.

 

20.2 Any dispute, controversy or claim arising out of, or in connection with, this Agreement, or the breach, termination or invalidity of the Agreement, shall be finally settled by arbitration in accordance with the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. The place of arbitration shall be Stockholm, Sweden. The language to be used in the arbitral proceedings shall be English. The arbitral tribunal shall be composed of three arbitrators.

 

20.3 The Parties undertake and agree that all arbitral proceedings conducted with reference to this arbitration clause will be kept strictly confidential. This confidentiality undertaking shall cover all information disclosed in the course of such arbitral proceedings, as well as any decision or award that is made or declared during the proceedings. Information covered by this confidentiality undertaking may not, in any form, be disclosed to a third party without the written consent of the other Party. This notwithstanding, a Party shall not be prevented from disclosing such information in order to safeguard in the best possible way his rights in connection with the dispute, or if obligated to do so pursuant to statute, regulation, a decision by an authority, a stock exchange agreement or similar.

 

20.4 In case this Agreement or any part of it is assigned or transferred to a third party, such third party shall automatically be bound by the provisions of this arbitration clause.

 

____________________________

 

[ SIGNATURE PAGE TO FOLLOW ]

 

  19
   

 

This Agreement has been duly executed in two originals, of which the Sellers have taken one and the Buyer have taken one.

 

26 May 2017

  

ATHENA NIKOU HOLDING AB   500.COM LIMITED
     
/s/ Athena Nikou   /s/ Zhengming Pan
Athena Nikou   Zhengming Pan (CEO, Director)
     
    /s/ Bo Yu
    Bo Yu (Director)
     
KARL RAUSING HOLDING AB    
     
/s/ Karl Rausing    
Karl Rausing    
     
CROSSBONE LTD    
     
/s/ Maria Zembyla    
Maria Zembyla    
     
DC COACHING AB    
     
/s/ Maria Hamrin    
Maria Hamrin    

 

  20
   

 

MR BILL SVERIGE AB    
   
/s/ Edvard Plepel  
Edvard Plepel  
   
JENNY PLEPEL HOLDING AB    
   
/s/ Jenny Plepel  
Jenny Plepel  
   
PER WIDELÖV HOLDING AB  
   
/s/ Per Widelöv  
Per Widelöv    
   
ANNA WIDELÖV HOLDING AB  
   
/s/ Anna Widelöv  
Anna Widelöv    
   
TOLGA ISLERCELIK HOLDING AB  
   
/s/ Tolga Islercelik  
Tolga Islercelik  

 

  21
   

 

BATES HOLDINGBOLAG AB    
   
/s/ Michael Evenholt  
Michael Evenholt  
   
WILHELM BUHRING HOLDING AB  
   
/s/ Wilhelm Bühring  
Wilhelm Bühring  
   
JOHAN TÖRNSTRÖM HOLDING AB  
   
/s/ Johan Törnström  
Johan Törnström  
   
TIMOTHY AB  
   
/s/ Tim Holmberg  
Tim Holmberg  
   
HELMET LTD  
   
/s/ Thomas Biro  
Thomas Biro  

 

  22
   

 

/s/ Jonas Ejevärn  
Jonas Ejevärn    
   
/s/ Ivan Fialdini  
Ivan Fialdini     

 

  23

 

Exhibit 4.94

 

SHAREHOLDERS’ AGREEMENT

 

 

 

 

BETWEEN

 

the Shareholders

 

of

 

THE Multi Group Limited

 

______________________________________________________________________

 

17 July 2017

 

     
   

 

SHAREHOLDERS’ AGREEMENT

 

This Shareholder’s Agreement (hereinafter referred to as the “Agreement” ) entered into on this day, by and between:

 

1. 500.com Limited, with company registration number 01-86078, of 4 th Floor, Willow House, P.O. Box, Grand Cayman, KY1-112, Cayman Islands (hereinafter referred to as the “500.com” );

 

AND

 

2. Helmet Limited, with company registration number 114862, of Suites 41/42, Victoria House, 26 Main Street, Gibraltar (hereinafter referred to as the “Helmet” )

 

500.com and Helmet are individually referred to as a “Party” and collectively referred to as the “Parties” or the “Shareholders” .

 

1. BACKGROUND

 

1.1 500.com acquired through a Share Purchase Agreement dated on 26 May 2017 (hereinafter referred to as the “ Share Purchase Agreement ”) its shares in The Multi Group Limited, a company incorporated under the laws of Malta with the registration number C73974 (the “ Company ”).

 

1.2 The Shares are held by the Parties as set out in Schedule 2.

 

1.3 On the terms and subject to the conditions set out in this Agreement the Parties agree to regulate their relationship, rights and obligations vis-à-vis the Company by means of this Agreement, as well as each Shareholder’s rights and obligations as a shareholder in the Company.

 

1.4 This Agreement shall apply to Shares and all other equity securities issued by the Company.

 

2. INTERPRETATION

 

2.1 Definitions

 

In this Agreement:

 

  “Act” means the Companies Act 1995, Chapter 386 of the Laws of Malta;
     
  “Agreement” means this Shareholders’ Agreement, as amended from time to time;
     
  “Articles” means the Memorandum and Articles of Association of the Company, as amended from time to time;

 

  2

 

 

 

  ‘Put Option Right’ means Helmet´s right to sell the Sale Shares and thereby 500.com´s corresponding obligation to purchase the Sale Shares as described in Clause 7.1;
     
  ‘Company’ The Multi Group Limited C73974 as incorporated under the Laws of Malta with the details as specified in Schedule 1;
     
 

“Directors”

 

means the directors from time to time of the Board of the Company;
     
 

“Group”

 

Means the Company or any of its subsidiaries or other companies owned by the Company from time to time;
     
  “Memo and Articles” Memorandum and Articles of Association of the Company set out in Schedule 3;
     
 

 “Shares”

 means the issued shares of the Company;

     
 

 “Shareholders”

 Means the persons listed in Schedule 2 and any other Person that may acquire and/or subscribe to Shares in the Company and who has agreed to be bound by this Agreement in accordance with the terms and conditions of the same;

 

2.2 In this Agreement, a reference to a clause, sub-clause, paragraph or Appendix, unless the context otherwise requires, is a reference to a section or paragraph of, or Appendix to, this Agreement. The Appendices form part of this Agreement and shall have the same force and effect as if set out in the body of this Agreement and references to this Agreement include the Appendices.

 

3.        BUSINESS OF THE COMPANY

 

3.1 The business of the Company shall be, without prejudice to applicable law, to conduct the business activities defined in the Memo and Articles as amended from time to time.

 

4. Conflict with the ArticleS OF ASSOCIATION AND THIS AGREEMENT

 

4.1 In the event of a conflict between this Agreement and the Memo and Articles, this Agreement shall prevail, as between the Shareholders and, in the event of such conflict, the Shareholders shall:

 

4.2.1 exercise all voting and other rights and powers available to them to give effect to the provisions of this Agreement; and

 

4.2.2 ensure that any required amendment is made to the Memo and Articles of the Company.

 

  3

 

  

4.2 If the Memo and Articles are amended in accordance with the provisions of this Agreement, such amended and restated Memo and Articles shall be attached hereto as a new Schedule 3.

 

5. DIRECTORS AND MANAGEMENT

 

5.1 The business and affairs of the Company shall be managed by the board of the Company. The board of the Company is to be appointed by the shareholders of the Company in the general meeting.

 

5.2 Helmet shall have the right to appoint one director for as long as Helmet continue to hold shares in the Company.

 

5.3 The presence of three Directors shall constitute a quorum. Any Director who is unable to attend and vote at a meeting of the Board, shall have the power to appoint a person as his Alternate Director to attend, speak and vote in his stead at meetings of the Board.

 

5.4 At any meeting of the Board, each Director shall be entitled to one vote. The vote of the majority of the Directors present shall constitute the decision of the Board.

 

5.5 Any Director may participate in a meeting of the Board by telephone or video conference or any other telecommunication equipment by means of which the persons participating can hear each other speak.

 

5.6 The legal and judicial representation of the Company shall be exercised jointly by any two (2) directors.

 

6. TRANSFER Of SHARES

 

6.1 Helmet shall not be allowed to transfer, assign, sale, pledge, hypothecate, encumber or dispose, whether voluntary or involuntary, of its shares in the Company unless such transfer, assignment, sale, pledge, hypothecation, encumbrance or disposal is made in accordance with the terms and conditions of this Agreement and the Memo and Articles.

 

6.2 If Helmet commits a material breach of this Agreement and fails to remedy such breach within 30 days from receiving a notice in writing of the breach from 500.com and 500.com obtains a final award from an arbitration tribunal in terms of clause 19 stating that Helmet has committed such breach, then 500.com shall be entitled to purchase all Shares held by Helmet at a 40% discount to the fair market value to be determined by agreement between the parties, or failing such agreement by an independent expert appointed by the Parties.

 

6.3 The entitlement to purchase Helmet’s Shares in pursuance of the preceding clause shall not prejudice any remedies that 500.com might have at law and under this Agreement as a result of the breach of any provision of the same Agreement.

 

  4

 

  

6.4 If 500.com wishes to purchase the Helmet Shares in pursuance of the clause 6.2, it shall notify Helmet of such intention to purchase in writing not later than 60 days after the final award from the arbitration tribunal referred to in clause 6.2. On the day after the end of the above mentioned 60-day period, Helmet shall transfer its Shares to 500.com.

 

7. Put Option right

 

7.1 If Mr Thomas Biro resigns from his employment within the Group or his employment is terminated for whatever reason, Helmet shall have the right to request that 500.com, on one occasion, purchases all or some of the shares of the Company then held by Helmet (“ Sale Shares ”) by delivering notice to 500.com (“ Transfer Notice ”). Such right shall be exercisable within 1 year from the resignation mentioned above (“ Put Option Right Period ”), however such right shall not be exercisable if Mr Thomas Biro resigns before 31 December 2018. Upon delivery of the Transfer Notice, 500.com shall be obligated to buy the amount of shares demanded in the Transfer Notice.

 

7.2 The Transfer Notice shall contain all material terms of the proposed sale, including the terms of payment and the number and description of the ordinary shares to be acquired by 500.com.

 

7.3 Upon the delivery of the Transfer Notice, the Parties shall, within 30 Business Days, establish a fair market value as the purchase price for the Sale Shares, and if the Parties fail to reach such agreement during such period (after good faith negotiations as to what is the fair market value for the Sale Shares), the fair market value of the Sale Shares shall be decided by an independent valuation expert, appointed by the Parties or if the Parties are not able to decide, appointed in accordance with Clause 19. The valuation expert shall be experienced in valuing businesses such as the Company. The price of the Shares shall be assessed as of the date of the Transfer Notice and shall correspond to their proportionate part of the Company’s (including all subsidiaries and other companies owned by the Company) total market value. Hence, there shall be no minority share discount. The valuation expert shall base his decision on information provided by the Parties. The decision of the valuation expert shall, to the extent practically possible, be provided within 30 days from his appointment. The fee of the valuation expert shall be borne by 500.com. The decision of the valuation expert shall be final and binding on the Parties. However, the purchase price of the Sale Shares shall always be the higher of (i) the fair market value provided by the valuation expert or (ii) the value as it was agreed in the Share Purchase Agreement regarding the Shares.

 

7.4 The purchase price to be paid by 500.com for the Sale Shares shall be payable in cash.

 

7.5 After the lapse of the Put Option Right Period, 500.com shall have no obligation to purchase the Sale Shares under this Clause, and the procedure as per the Memo and Articles shall apply.

 

  5

 

  

8. Drag-along right and tag-along right

 

8.1 If the holders of fifty-one percent or more of the Shares in issue for the time being (“Selling Shareholders”) wish to transfer all of their Shares (“Sellers' Shares”) to a bona fide purchaser on arm's length terms (“Proposed Buyer”), the Selling Shareholders may require the other Shareholders (“Called Shareholders”) to sell and transfer all their shares (“Called Shares”) to the Proposed Buyer (or as the Proposed Buyer directs) on the same terms and conditions as for the Selling Shareholders in accordance with the provisions of this Clause (“Drag Along Option”).

 

8.2 The Selling Shareholders may exercise the Drag Along Option after the lapse of 2 years from signing of this Agreement, by giving written notice to that effect to the Called Shareholders (“Drag Along Notice”) at any time before the transfer of the Sellers’ Shares to the Proposed Buyer. The Drag Along Notice shall specify:

 

8.2.1 that the Called Shareholders are required to transfer all their Called Shares pursuant to this clause 8;

 

8.2.2 the person to whom the Called Shares are to be transferred;

 

8.2.3 the consideration payable for the Called Shares which shall, for each Called Share, be an amount at least equal to the consideration per share offered by the Proposed Buyer for the Sellers’ Shares and shall be on the same terms and conditions; and

 

8.2.4 the proposed date of the transfer.

 

8.3 Once issued, a Drag Along Notice shall be irrevocable. However, a Drag Along Notice shall lapse if, for any reason, the Selling Shareholders have not sold the Sellers’ Shares to the Proposed Buyer within 90 Business Days of serving the Drag Along Notice. The Selling Shareholders may serve further Drag Along Notices following the lapse of any particular Drag Along Notice.

 

8.4 In the event the Selling Shareholders wish to transfer their Sellers' Shares to a Proposed Buyer in accordance with Section 8.1 above, the Selling Shareholders shall procure that the other Parties are given the opportunity to sell Shares (pro rata to their shareholdings) at the same price and on the same terms and conditions as the Selling Shareholders.

 

9. Completion of share purchase

 

9.1 Completion of the sale and purchase of shares under clause 7 of this Agreement shall take place 15 Business Days after the fair market value of the Sales Shares has been determined.

 

9.2 At such completion:

 

9.2.1 Helmet shall deliver to 500.com a duly completed stock transfer form transferring the legal and beneficial ownership of the relevant Sale Shares to 500.com, together with the relevant share certificate(s) (or an indemnity in lieu thereof) and such other documents as 500.com or the Company may reasonably require to show good title to the Sale Shares, or to enable it to be registered as the holder of the Sale Shares;

 

  6

 

  

9.2.2 500.com shall pay the purchase price for the Sale Shares to a bank account designated by Helmet (or such other method of payment agreed between 500.com and Helmet in writing); and

 

9.2.3 if, following a sale of shares in accordance with this Agreement, Helmet holds no further shares in the Company:

 

9.2.3.1 the Seller shall procure that there are delivered to the Company and its subsidiaries, the resignation from office of the director appointed by Helmet and such resignation shall take effect at completion of the sale of the Sale Shares; and

 

9.2.3.2 Helmet shall automatically cease to be a party to this Agreement, but without prejudice to any rights or obligations of Helmet which accrued before such cessation including in respect of any prior breach of this agreement.

 

9.3 Any transfer of shares by way of a sale that is required to be made under this Agreement shall be deemed to include a warranty that the Seller sells the shares with full title guarantee.

 

9.4 500.com shall procure (so far as is lawfully possible in the exercise its rights and powers as a shareholder of the Company) the registration (subject to due stamping by the continuing Shareholder) of the transfers of the Sale Shares under clause 7 .

 

10.       CONFIDENTIALITY

 

10.1 The Parties to this Agreement agree that, without the prior written consent of the other party (including the Company), they will not at any time reveal to any Person or use for their own account or in any way use in any matter which may be detrimental to the Company, any non-public, confidential or proprietary information relating to the business, technology or affairs of the Company (hereinafter ‘Confidential Information’); provided, however, that such confidentiality obligation shall not apply to information that:

 

10.1.1 is or hereafter becomes generally available to the public other than by reason of any default with respect to confidentiality by the party concerned under this Agreement, or

 

10.1.2 has been or is hereafter disclosed to a party by a third party who is not in default of any confidentiality obligation to the Company, or

 

10.1.3 required to be disclosed in compliance with applicable laws or regulations or order by a court or other governmental or regulatory agency or body having competent jurisdiction provided that if possible reasonable measures shall be taken to assure confidential treatment of such information, or

 

10.1.4 disclosure in confidence by a Party to its directors, officers, employees, agents and professional or other advisers (‘Representatives’) on a ‘need to know’ basis where the recipient, in the reasonable opinion of the disclosing Party, requires access to the information for a purpose reasonably incidental to the Party’s interest in the relevant Company.

 

  7

 

  

10.2 Each Party shall use all its powers to ensure (so far as it is able) that the Company and its respective officers observe a similar obligation of confidence in favour of the Parties to this Agreement.

 

10.3 The provisions of this clause 10 shall survive any termination of this Agreement.

 

11. INTELLECTUAL PROPERTY RIGHTS

 

11.1 The intellectual property rights (including patents, patent applications, trademarks, trademark applications, copyrights, know-how and all other intellectual property rights) created or evolved as a result of the Company’s business operations shall remain the property of the Company and all rights relating to these intellectual property rights shall be protected for the benefit of the Company. The Parties agree to use their commercially reasonable efforts to safeguard the protection of these rights.

 

11.2 Each Party hereby confirms that it does not have, and will not have, any claims on the ownership or the like regarding inventions, patents, know-how and other intellectual property rights related to the products or business of the Company.

 

12. DURATION AND TERMINATION

 

12.1 This Agreement shall come into force on the date of signing.

 

12.2 This Agreement shall be valid until the Parties hereto, whether those signing it on Completion or those becoming bound by it by virtue of a subscription of and/or transfer of Shares in pursuance of the terms and conditions of the Agreement, shall all agree to the termination thereof.

 

12.3 This Agreement shall automatically terminate once the Put Option Right is exercised or in any event where one shareholder becomes the sole shareholder of the Company.

 

13. NOTICES

 

13.1 All notices and other communications made pursuant to this Agreement shall be in writing, addressed to the Party’s address stated in the heading of this Agreement.

 

13.2 A Party may change or supplement the contact details for service of any notice pursuant to this Agreement, or designate additional addresses, for the purposes of this clause by giving the other parties written notice of the new contact details in the manner set forth above.

 

14. SUCCESSORS BOUND

 

14.1 This Agreement shall be binding on and shall benefit successors, assignees, transferees of each of the Parties hereto as well as subscribers to any new Shares in the Company.

 

  8

 

  

15. AMENDMENTS

 

15.1 No amendments, changes, revisions or discharges of this Agreement, in whole or in part, shall have any force or effect unless set forth in writing and signed by all the Parties.

 

16. ENTIRE AGREEMENT

 

16.1 The Parties to this Agreement represent that with respect to the subject matter hereof, this Agreement constitutes the sole and exclusive understanding of the Parties and supersedes all prior agreements, arrangements or understandings relating to the subject matter.

 

17. WAIVER

 

17.1 The failure of a Party to insist upon the strict adherence to any term of this Agreement on any occasion shall not be considered as a waiver of any right hereunder nor shall it deprive that Party of the right to insist upon the strict adherence to that term or any other term of this Agreement at some other time.

 

18. GOVERNING LAW

 

18.1 This Agreement shall be governed by and construed and enforced in accordance with the substantive laws of Malta without regard to its principles of conflict of laws.

 

19. DISPUTES

 

19.1 If any dispute, controversy or claim arises out of or in connection with this Agreement, including the breach, termination or invalidity thereof (hereinafter ‘Dispute’), the Parties hereby agree to refer and resolve any Dispute between them exclusively by means of arbitration proceedings, to be carried in Malta by one arbitrator, in accordance with the Malta Arbitration Act, 1996 and the Arbitration Rules of the Malta Arbitration Centre as at present in force. The language of arbitration shall be English.

 

19.2 The Parties shall have the right to seek interim relief from a court of competent jurisdiction, at any time before and after the arbitrator has been appointed, up until the arbitrator has made his final award.

 

  9

 

 

Place: Malta  
   
Date: July 17, 2017  
   
Signed by Helmet Limited ...../s/ Authorized Signatory.....
   
  SIGNATURE OF HELMET LIMITED
   
Signed by 500.COM Limited ...../s/ Authorized Signatory.....
   
  SIGNATURE OF 500 COM LIMITED

 

  10

 

 

Schedule 1 - The Company

 

Company Name:

The Multi Group Limited
Registered number: C 71212
Status: Private limited company
Registered office: 1 st Floor, Suite 3, Central Business Centre, Mdina Road, Malta.
Directors: Thomas Michael Biro
Secretary: Orsolya Felix
Authorised share capital: EUR 12,500
Issued share capital: EUR 10,500

 

  11

 

 

Schedule 2 - The Shareholders

  

Shareholder   Address   Shares   Percentage of
ownership
             
             
             

 

  12

 

 

Schedule 3 – Memorandum and Articles of Association

  

  13

 

 

Exhibit 4.95

 

Execution Version

 

29 May 2017

 

  (1) Melco LottVentures Holdings Limited
     
  (2) 500.com Limited
     
  (3) Melco International Development Limited

 

 

 

SALE AND PURCHASE AGREEMENT

relating to ordinary shares in MelcoLot Limited

 

 

 

     

 

 

CONTENTS

 

CLAUSE PAGE
     
1. INTERPRETATION 1
     
2. SALE AND PURCHASE OF SALE SHARES 6
     
3. CLOSING 7
     
4. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF THE VENDOR 9
     
5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER 11
     
6. CONDUCT OF BUSINESS PRIOR TO CLOSING 12
     
7. ACKNOWLEDGEMENT AND UNDERTAKINGS 14
     
8. GUARANTOR’S GUARANTEE AND INDEMNITY 16
     
9. TERMINATION 17
     
10. ANNOUNCEMENTS 18
     
11. IMPLEMENTATION AND STATUS OF MOU 19
     
12. COSTS AND EXPENSES 19
     
13. NOTICES 19
     
14. GOVERNING LAW AND JURISDICTION 21
     
15. PROCESS AGENT 21
     
16. GENERAL PROVISIONS 22
     
SCHEDULE 1 24
     
SCHEDULE 2 28
     
SCHEDULE 3 31
     
SCHEDULE 4 38

 

     

 

  

THIS SALE AND PURCHASE AGREEMENT is made on 29 May 2017

 

Between

 

(1) Melco LottVentures Holdings Limited, a company incorporated in the British Virgin Islands with a business address at Room 3701, 37/F., the Centrium, 60 Wyndham Street, Central, Hong Kong (the Vendor );

 

(2) 500.com Limited , a company incorporated in the Cayman Islands with a business address at 500.com Building, Shenxianling Sports Center, Longgang District, Shenzhen, China and having its shares listed and traded on the New York Stock Exchange (the Purchaser ); and

 

(3) Melco International Development Limited , a company incorporated in Hong Kong with a business address at 38 th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong and having its shares listed and traded on The Stock Exchange of Hong Kong Limited (the Guarantor ).

 

Whereas

 

(A) The Company is a company incorporated with limited liability in the Cayman Islands having its shares listed on the Growth Enterprise Market of the Stock Exchange. As at the date of this Agreement, the issued share capital of the Company is 3,145,656,900 Shares.

 

(B) The Vendor is the beneficial owner of the Sale Shares, representing approximately 40.65% of the issued share capital of the Company.

 

(C) The Vendor has agreed to sell, and the Purchaser has agreed to buy, the Sale Shares upon the terms and subject to the conditions set forth in this Agreement.

 

(D) The Guarantor indirectly owns 100% of the issued share capital of the Vendor. The Guarantor has agreed to guarantee the obligations of the Vendor under this Agreement.

 

NOW IT IS HEREBY AGREED as follows:

 

1. Interpretation

 

1.1 In this Agreement (including the recitals) unless specifically provided otherwise or the context otherwise requires, the following expressions shall have the following meanings:

 

2002 Share Option Scheme means the share option scheme adopted by the Company on 20 April 2002;

 

2012 Share Option Scheme means the share option scheme adopted by the Company on 18 May 2012;

 

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Accounts means the consolidated financial statements of the Group, which comprise the consolidated statement of financial position as at the Last Accounts Date, 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 year ended the Last Accounts Date, and the notes thereto, as set out in the annual report of the Company for the year ended on the Last Accounts Date, as published on the website of the Stock Exchange;

 

Affiliate means any holding company or subsidiary of a Party and any subsidiary of any such holding company;

 

Agreement means this sale and purchase agreement (as it may be amended or varied from time to time by an agreement in writing duly executed by the Parties);

 

BTI means Beijing Huancai Information Technology Ltd. ( 北京環彩信息技術有限公 司 ) (formerly known as Beijing Telenet Information Technology Ltd. ( 北京電信達信 息技術有限公司 ), a company incorporated in the PRC and a member of the Group;

 

BTI Receivable means the accounts receivable by BTI from its customers at the relevant time;

 

Business Day means any day (excluding Saturdays and Sundays) on which banks generally are open for business in Hong Kong;

 

Cash and Cash Equivalents means the total cash and cash equivalents (including structured notes, fixed deposits, cash and bank balances) held by the Group;

 

CCASS means Central Clearing and Settlement System established and operated by HKSCC;

 

Closing means completion of the obligations of the Parties under this Agreement pursuant to clause 3;

 

Closing Date means 6 June 2017 unless the conditions set forth in clause 3.1 or 3.2 have not been satisfied (or waived by the Purchaser under clause 3.4 or by the Vendor under clause 3.5, as the case may be) on or before that date, in which event the Closing Date shall be any other date as mutually agreed by the Parties in writing.

 

Company means MelcoLot Limited, a company incorporated with limited liability in the Cayman Islands and having its shares listed on the Growth Enterprise Market of the Stock Exchange;

 

Confidential Information has the meaning given to it in clause 11.1;

 

Consideration means the amount payable in respect of the Sale Shares as set forth in clause 2.2;

 

Despatch Date means the date on which the Offer Document is despatched to the shareholders of the Company;

 

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Deposit means the deposit in the amount of US$2,000,000 paid by the Purchaser to the Vendor on 30 March 2017;

 

Due Diligence Bundle means the agreed bundle of documents initialled by or on behalf of the Parties for the purpose of identification containing the written information furnished or made available by or on behalf of the Vendor to the Purchaser or its professional advisers for the purpose of the Purchaser’s due diligence investigation in respect of the Group;

 

First Closing Date of the Offers means the first date on which the Offers are closed for acceptances (disregarding any extensions of the Offers);

 

Group means the Company and its subsidiaries, and member of the Group shall be construed accordingly and for the avoidance of doubt, member(s) of the Group shall include the Company;

 

GEM Listing Rules means the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange;

 

HK$ means Hong Kong Dollars, the lawful currency of Hong Kong;

 

HKSCC means the Hong Kong Securities Clearing Company Limited;

 

Hong Kong means the Hong Kong Special Administrative Region of the People’s Republic of China;

 

IP Licence Deed has the meaning given to it in clause 7.3;

 

Last Accounts Date means 31 December 2016;

 

Liabilities means consolidated liabilities of the Group (including both actual and contingent liabilities), determined in accordance with the accounting standards, principles, policies and practices (with consistent classifications, judgments, valuation and estimation techniques) that were used in the preparation of the Accounts which, for the avoidance of doubt, shall exclude (1) the amount of any Permitted Payments made by the Group from the date of this Agreement up to Closing; (2) the amount of the Retention Bonus; and (3) any cost of termination payable by the Group had the employment of any individual employed by the Group as at the date of this Agreement been terminated as of the date of this Agreement;

 

Liens means liens, charges and encumbrances, claims, options, third party rights and adverse rights of any description, or agreement or commitment to give or create any of the foregoing;

 

Listing Rules means the Rules Governing the Listing of Securities on the Stock Exchange;

 

Longstop Date means 6 June 2017 (or such later date as the Parties may agree in writing);

 

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Losses , in respect of any matter, event or circumstance, means losses, liabilities, damages, interest, penalties, judgment awards or settlement payments of any nature or kind suffered or incurred as a result of the relevant matter, event or circumstance, and costs and expenses incurred as result of the relevant matter, event or circumstance (including, without limitation, reasonable legal fees) ;

 

Management Accounts means the unaudited consolidated statement of financial position of the Group as at 30 April 2017 and the unaudited consolidated statement of profit or loss and other comprehensive income of the Group for the period from 1 January 2017 to 30 April 2017;

 

Melco Intellectual Property means the Melco Name and the logo representing the Melco Name and any other intellectual property rights granted by the Guarantor or any of its Affiliates to the Group under the IP Licence Deed or otherwise;

 

Melco Name means the English word “Melco” (whether in capital case, small case or a combination of both) and the Chinese word “ 新濠 ”;

 

MOU means the Memorandum of Understanding dated 29 March 2017 entered into between the Parties (as amended by a supplemental MOU dated 8 May 2017 and a second supplemental MOU dated 26 May 2017 entered into between the Parties) in respect of the sale and purchase of the Sale Shares;

 

Offers means the Share Offer and the Option Offer;

 

Offer Document means the offer document to be issued in relation to the Offers (or as the case may be, the composite offer document containing the offeror document and the offeree board circular);

 

Office License means the license granted by Melco Services Limited to the Company in connection with the occupation and use of office area designated as 37/F, The Centrium, 60 Wyndham Street, Central, Hong Kong by a letter dated 8 March 2016;

 

Office License Termination Deed means the termination deed, in the agreed form initialled by or on behalf of the Parties for the purpose of identification, a copy of which is to be delivered on Closing by the Vendor pursuant to paragraph 1(g) of Part A of Schedule 1, terminating the Office License;

 

Options means the outstanding options granted by the Company pursuant to the 2002 Share Option Scheme and the 2012 Share Option Scheme;

 

Option Offer means that the possible conditional mandatory cash offer to be made by CCB International Capital Limited on behalf of the Purchaser for the cancellation of the Options in accordance with the Takeovers Code;

 

Parties means the named parties to this Agreement and their respective successors and permitted assigns and Party means each one of them;

 

Permitted Payments has the meaning given to it in clause 6.1;

 

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PRC means the People’s Republic of China, excluding (for the purpose of this Agreement) the Hong Kong Special Administrative Region, Taiwan and the Macau Special Administrative Region;

 

Public Release has the meaning given to it in clause 10.1;

 

Purchaser Warranties means the representations and warranties of the Purchaser set forth in clause 5.1 and Purchaser Warranty shall be construed accordingly;

 

Retention Bonus means an amount of HK$800,000 payable to employees of the Group as a retention bonus in accordance with clause 7.9;

 

Retention Bonus Allocation List means the agreed list initialled by or on behalf of the Parties for the purpose of identification containing the information relating to the allocation of the Retention Bonus;

 

Sale Shares means 1,278,714,329 Shares to be sold by the Vendor pursuant to clause 2.1;

 

Services Agreement means services agreement dated 1 April 2017 entered into between Melco Services Limited and the Company;

 

Services Termination Deed means the termination deed, in the agreed form initialled by or on behalf of the Parties for the purpose of identification, a copy of which is to be delivered on Closing by the Vendor pursuant to paragraph 1(e) of Part A of Schedule 1, terminating the Services Agreement;

 

Shares means the ordinary shares in the Company and Share means each one of them; Share Offer means the possible conditional mandatory cash offer to be made by CCB International Capital Limited on behalf of the Purchaser in accordance with the Takeovers Code;

 

SFC means the Securities and Futures Commission of Hong Kong;

 

Stock Exchange means The Stock Exchange of Hong Kong Limited;

 

Supplemental IP Licence Deed means the supplemental deed to the IP Licence Deed, in the agreed form initialled by or on behalf of the Parties for the purpose of identification, to be entered into between the Guarantor and the Company at Closing;

 

Taxation and Tax mean all forms of taxation whether of Hong Kong or elsewhere in the world whenever imposed and all statutory, governmental, state, provincial, local governmental or municipal impositions, duties and levies and all penalties, charges, costs and interests relating thereto;

 

Takeovers Code means the Hong Kong Code on Takeovers and Mergers;

 

Vendor Warranties means the representations and warranties of the Vendor set forth in clause 4.1 and Schedule 3 and Vendor Warranty shall be construed accordingly; and

 

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US$ means United States Dollars, the lawful currency of the United States of America. 1.2 In this Agreement, unless the context otherwise requires, references to recitals, clauses and the schedules are to recitals to, clauses of and the schedules to this Agreement.

 

1.3 In this Agreement, unless the context otherwise requires, words importing the singular include the plural and vice versa; words importing a gender include every gender and references to persons include bodies corporate and unincorporated.

 

1.4 In this Agreement, unless the context otherwise requires, headings are for convenience only and shall not affect the construction of this Agreement.

 

2. Sale and Purchase of Sale Shares

 

Sale Shares

 

2.1 The Vendor agrees to sell, and the Purchaser agrees to purchase, the Sale Shares, free and clear of all Liens and together with all rights attaching to them at the date of this Agreement and at Closing, including the right to receive all dividends and other distributions declared, made or paid on the Sale Shares at any time on or after the date of this Agreement and up to Closing, on the terms and subject to the conditions set forth in this Agreement.

 

Consideration

 

2.2 The Consideration for the sale and purchase of the Sale Shares is HK$322,236,010.91, being HK$0.252 per Sale Share.

 

Deposit

 

2.3 Pursuant to the MOU, the Purchaser paid the Deposit to the Vendor on 30 March 2017.

 

2.4 If Closing occurs, the Deposit, together with all interest (if any) accrued on it, shall be applied on Closing towards payment of the Consideration and shall constitute payment of that part of the Consideration equal to the amount of the Deposit and the interest (if any) accrued on the Deposit. For the purpose of calculating the amount of the Consideration paid by the application of the Deposit and interest (if any) accrued on it, as aforesaid, the Deposit and such interest shall be deemed converted into Hong Kong Dollars at an agreed rate of exchange of US$1=HK$7.75.

 

2.5 If the Purchaser terminates this Agreement pursuant to clause 9.1(b), the Deposit (together with all interest (if any) accrued on it) shall be refunded to the Purchaser by the Vendor within five (5) Business Days after the receipt by the Vendor of the written notice of termination given by the Purchaser under clause 9.1(b).

 

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2.6 If the Vendor terminates this Agreement pursuant to clause 9.1(c) or this Agreement terminates pursuant to clause 9.2, the Vendor shall retain the Deposit (together with all interest (if any) accrued on it) for the Vendor’s benefit absolutely, free from all Liens, and the Purchaser shall have no further rights or claims in respect of the Deposit (or the interest (if any) accrued on the Deposit) or the return of the Deposit (or any such interest).

 

No Set-off

 

2.7 All payments to be made by the Purchaser under this Agreement shall be made in full without any set-off, deduction or withholding for or on account of any Taxation unless the Purchaser shall pay to the Vendor such increased amount as will result, after the set-off, deduction or withholding of the relevant Tax, in the receipt by the Vendor of a net amount equal to the full amount which would otherwise have been received by it had no such set-off, deduction or withholding for or on account of Taxation been made.

 

3. CLOSING

 

Conditions

 

3.1 The obligation of the Purchaser to complete the sale and purchase of the Sale Shares is conditional upon:

 

(a) there not having come to the attention of the Purchaser at any time prior to Closing (i) any material breach of, or any event rendering untrue, incorrect, misleading or breached in any material respect, any of the Vendor Warranties which are not qualified by materiality, or (ii) any breach of, or any event rendering untrue, incorrect, misleading or breached, any of the Vendor Warranties which are qualified by materiality, or (iii) any material breach of, or failure to perform, any of the other obligations of the Vendor under this Agreement which are required to be performed at or before Closing; and

 

(b) (i) the current listing of the Shares not having been withdrawn, (ii) the Shares continuing to be traded on the Stock Exchange prior to Closing (save for (1) any temporary suspension for no longer than seven (7) consecutive trading days or such other period as the Purchaser may agree in writing and/or (2) any temporary suspension in connection with the transaction contemplated under this Agreement (regardless of the period of that suspension) and (iii) neither the Stock Exchange nor the SFC having indicated before Closing that it will object to such continued listing for reasons related to or arising from the transaction contemplated under this Agreement for any reason other than a reason relating to the Purchaser, its Affiliates or the directors, officers or employees of any of them (an objection for a reason relating to the Purchaser, its Affiliates or the directors, officers or employees of any of them shall not amount to a failure to fulfil this condition).

 

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3.2 The obligation of the Vendor to complete the sale and purchase of the Sale Shares is conditional upon there not having come to the attention of the Vendor at any time prior to Closing (i) any material breach of, or any event rendering untrue, incorrect, misleading or breached in any material respect, any of the Purchaser Warranties which are not qualified by materiality, or (ii) any breach of, or any event rendering untrue, incorrect, misleading or breached, any of the Purchaser Warranties which are qualified by materiality, or (iii) any material breach of, or failure to perform, any of the other obligations of the Purchaser under this Agreement which are required to be performed at or before Closing.

 

3.3 The Vendor shall exercise its reasonable efforts to cause the respective conditions set forth in clause 3.1 to be satisfied (save to the extent that satisfaction of any such conditions requires any action on the part of the Purchaser), as soon as practicable and in any event before the Longstop Date, and shall promptly notify the Purchaser if it becomes aware that any condition has been satisfied or has become incapable of being satisfied before the Longstop Date. Without prejudice to the foregoing, each Party agrees that all requests and enquiries from the Stock Exchange which relate to the satisfaction of any of the conditions set forth in clause 3.1 shall be dealt with by the relevant Party in consultation with the other Parties.

 

3.4 The Purchaser may waive any or all of the conditions set out in clause 3.1 in whole or in part (and whether conditionally or unconditionally) at any time by written notice to the Vendor.

 

3.5 The Vendor may waive any or all of the conditions set out in clause 3.2 in whole or in part (and whether conditionally or unconditionally) at any time by written notice to the Purchaser.

 

Closing

 

3.6 Closing of the sale and purchase of the Sale Shares shall take place at 10:00 a.m. on the Closing Date at the office of the Vendor’s solicitors, Gibson, Dunn & Crutcher, at 32/F Gloucester Tower, The Landmark, 15 Queen’s Road Central, Hong Kong (or at such other time and/or venue as may be agreed in writing between the Parties).

 

3.7 At Closing, the Vendor shall comply with its obligations set forth in Part A of Schedule 1 and the Purchaser shall comply with its obligations set forth in Part B of Schedule 1.

 

Clear title on delivery

 

3.8 The Vendor shall procure that all Sale Shares delivered on the Closing Date in accordance with the provisions of this Agreement shall comply in all respects with clause 2.1.

 

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4. Representations, Warranties and Undertakings of the Vendor

 

Representations and warranties

 

4.1 In consideration of the Purchaser entering into this Agreement and agreeing to perform its obligations hereunder, the Vendor represents and warrants to the Purchaser as set forth below and in Schedule 3, and acknowledges that the Purchaser is entering into this Agreement in reliance on the Vendor Warranties:

 

(a) the Vendor has been duly incorporated and is validly existing under the laws of the jurisdiction of its place of incorporation;

 

(b) the Guarantor has been duly incorporated and is validly existing under the laws of the jurisdiction of its place of incorporation;

 

(c) the Vendor has full right, power and authority to execute and deliver this Agreement, and to perform its obligations hereunder, and this Agreement constitutes the Vendor’s valid and legally binding obligations, enforceable against the Vendor in accordance with the terms of this Agreement;

 

(d) the Guarantor has full right, power and authority to execute and deliver this Agreement, and to perform its obligations hereunder, and this Agreement constitutes the Guarantor’s valid and legally binding obligations, enforceable against the Guarantor in accordance with the terms of this Agreement;

 

(e) the execution and delivery of, and the performance by the Vendor of the Vendor’s obligations under, this Agreement do not and will not result in a breach or constitute a default under any agreement or instrument to which the Vendor is a party or by which the Vendor is bound, or any order, judgment, decree or other restriction applicable to the Vendor;

 

(f) the execution and delivery of, and the performance by the Guarantor of the Guarantor’s obligations under, this Agreement do not and will not result in a breach or constitute a default under any agreement or instrument to which the Guarantor is a party or by which the Guarantor is bound, or any order, judgment, decree or other restriction applicable to the Guarantor;

 

(g) the Vendor is the sole beneficial owner of the Sale Shares and is entitled to sell and transfer the Sale Shares and pass the full legal and beneficial ownership thereof to the Purchaser on the terms of this Agreement with all rights attaching or accruing to the Sale Shares on or after the Closing Date. The Sale Shares are fully paid up and are free from any Lien and the Company has not exercised any Lien over any of the Sale Shares;

 

(h) no regulatory consent or approval is required by the Vendor or the Guarantor for the sale of the Sale Shares under this Agreement;

 

(i) there is no order of any governmental authority or court of competent jurisdiction outstanding or pending, or any enacted or proposed legislation, applicable to the Vendor or the Guarantor which would prohibit or interfere with, or be breached by, the sale of the Sale Shares by the Vendor under this Agreement or by the performance by the Guarantor of its obligations under this Agreement;

 

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(j) as at 31 March 2017, the respective amounts of the Cash and Cash Equivalents, BTI Receivable and Liabilities were as set forth in Schedule 4;

 

(k) on Closing, “A” minus “B” will be not less than HK$386,000,000, where:

 

“A” is the aggregate of (1) the Cash and Cash Equivalents on Closing and (2) the BTI Receivable on Closing; and

 

“B” is the aggregate of (1) the Liabilities on Closing, (2) the amount of any Permitted Payments made by the Group from the date of this Agreement up to Closing, and (3) the Retention Bonus;

 

(l) the amount of the Cash and Cash Equivalents as at Closing is not less than HK$411,000,000;

 

(m) the amount of the Liabilities as at Closing do not exceed HK$24,000,000; and (n) the representations and warranties set forth in Schedule 3 to this Agreement are true, accurate and not misleading.

 

Repetition

 

4.2 The Vendor Warranties (other than the Vendor Warranty in clause 4.1(j) which is given only as at 31 March 2017) shall be deemed to be repeated by the Vendor on Closing with reference to the facts then subsisting and shall remain in full force and effect notwithstanding Closing. The Vendor undertakes and agrees that up to and until Closing it will forthwith notify the Purchaser if at any time anything has occurred which would or would be likely to render untrue, incorrect, misleading or breached any of the Vendor Warranties when deemed to be repeated on Closing.

 

Limitation of Liability

 

4.3 The liability of the Vendor in respect of the Vendor Warranties, as deemed repeated pursuant to clause 4.2, shall be limited in the circumstances and to the extent set out in Schedule 2.

 

Undertaking in relation to reporting and payment obligations of taxes

 

4.4 The Vendor shall comply with all the Vendor’s reporting and payment obligations in respect of taxes payable by the Vendor in connection with the transaction contemplated by this Agreement as required by all applicable laws and regulations, including, to the extent applicable, the reporting obligations provided in the Public Notice No. 7 issued by the State Administration of Taxation of PRC on 3 February 2015.

 

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Indemnity

 

4.5 The Vendor agrees to indemnify the Purchaser against all Losses arising from any breach by the Vendor of the Vendor Warranty in clause 4.1(k), 4.1(l) and 4.1(m), provided that the Purchaser shall only be entitled to recover once in respect of any Losses arising from a breach of any or all of those Vendor Warranties from the same circumstances and double (or multiple) recovery shall not be permitted.

 

5. Representations and Warranties of the Purchaser

 

Representations and warranties

 

5.1 The Purchaser hereby represents and warrants to the Vendor that:

 

(a) the Purchaser has been duly incorporated and is validly existing under the laws of the jurisdiction of its place of incorporation;

 

(b) the Purchaser has full right, power and authority to execute and deliver this Agreement, and to perform its obligations under this Agreement, and this Agreement constitutes its valid and legally binding obligations, enforceable against it in accordance with the terms of this Agreement;

 

(c) the execution and delivery of, and the performance by the Purchaser of its obligations under, this Agreement do not and will not result in a breach or constitute a default under any agreement or instrument to which the Purchaser is a party or by which it is bound, or any order, judgment, decree or other restriction applicable to the Purchaser;

 

(d) the Purchaser and its ultimate holding company are not “connected persons” (as defined in the Listing Rules) of the Guarantor; and

 

(e) the Purchaser has in its possession or under its control, in one or more bank accounts located outside mainland China, an amount of freely available unrestricted cash sufficient to pay the balance of the Consideration payable on Closing, after taking into account the application of the Deposit and interest (if any) accrued thereon in part payment of the Consideration in accordance with clause 2.4.

 

Repetition

 

5.2 The Purchaser Warranties shall be deemed to be repeated by the Purchaser on Closing with reference to the facts then subsisting and shall remain in full force and effect notwithstanding Closing. The Purchaser undertakes and agrees that up to and until Closing it will forthwith notify the Vendor if at any time anything has occurred which would or would be likely to render untrue, incorrect, misleading or breached any of the Purchaser Warranties when deemed to be repeated on Closing.

 

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6. Conduct of Business Prior to Closing

 

6.1 From the date of this Agreement up to Closing, the Vendor shall exercise its rights and powers in respect of the Company to procure (so far as the Vendor is able to do so by the exercise of those rights and powers) that, except as expressly required or contemplated by this Agreement, the business of the Group shall be conducted in the normal course, consistent with the past practice of the Group and payments not in the normal course consistent with the past practice of the Group shall not exceed HK$5,800,000 in aggregate (payments not in the normal course consistent with the past practice of the Group which do not exceed such aggregate amount shall not be prohibited by, or constitute a breach of, this clause 6.1 and are referred to in this Agreement as “ Permitted Payments ”).

 

6.2 Without prejudice to and notwithstanding clause 6.1, the Vendor undertakes that except as expressly required or contemplated by this Agreement, it shall from the date of this Agreement up to Closing exercise its rights and powers in respect of the Company to procure (so far as the Vendor is able to do so by the exercise of those rights and powers) that the Group (or, in the case of (c) below, the Company) shall not carry out any of the following actions and no resolution of the board of directors of each member of the Group or of its general meeting shall be passed to carry out the same unless the written consent of the Purchaser (not to be unreasonably withheld or delayed) is obtained:

 

(a) borrow or raise money from banks, financial institutions and any other third parties;

 

(b) save for the Services Termination Deed referred to in paragraph 1(e) of Part A of Schedule 1, the Supplemental IP Licence Deed referred to in clause 7.4 and paragraph 1(f) of Part A of Schedule 1 and the Office License Termination Deed referred to in paragraph 1(g) of Part A of Schedule 1, enter into or amend any material contract or other material transaction or capital commitment or undertake any material contingent liability, in each case, other than in the ordinary course of its business;

 

(c) save for the termination of the Services Agreement pursuant to the Services Termination Deed, as referred to in paragraph 1(e) of Part A of Schedule 1, the termination of the Office License pursuant to the Office License Termination Deed referred to in paragraph 1(g) of Part A of Schedule 1, and the amendments to the IP Licence Deed pursuant to the Supplemental IP Licence Deed as referred to in clause 7.4 and paragraph 1(f) of Part A of Schedule 1, terminate any material agreement or waive any right of a material nature;

 

(d) declare, pay or make any dividends or other distributions in respect of the Shares of the Company;

 

(e) create or permit to arise any mortgage, charge, lien, pledge, other form of security or encumbrance or equity of whatsoever nature, whether similar to the foregoing or not, on or in respect of any part of its undertaking, property or assets other than liens arising by operation of law in amounts which are not material in its ordinary and usual course of business and/or other than as contemplated under this Agreement;

 

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(f) except for the appointments of new directors and company secretary designated by the Purchaser, as referred to in Part A of Schedule 1 and the appointment of the chief financial officer as referred to in clause 6.3, appoint any new directors or employ any senior employees, officers, company secretary or attorney;

 

(g) dispose of or agree to dispose of or acquire or agree to acquire any material asset other than in the ordinary course of its business (Permitted Payments made by the Group from the date of this Agreement up to Closing are not restricted by this sub-clause (g));

 

(h) compromise, settle, release, discharge or compound any material civil, criminal, arbitration or other proceedings or any material liability, claim, action, demand or dispute or waive any right in relation to any of the foregoing;

 

(i) release, compromise or write off any material amount recorded in the books of account of the relevant member of the Group as owing by any debtors of such member of the Group;

 

(j) terminate or allow to lapse any insurance policy of any member of the Group now in effect (excluding any insurance policy of the Guarantor’s group which will cease to apply to the Group following Closing);

 

(k) issue or agree to issue any shares, warrants or other securities or loan capital or grant or agree to grant any option over or right to acquire or convertible into any share or loan capital in each member of the Group or otherwise take any action which might result in the Company reducing its interest in any member of the Group (excluding the Company itself);

 

(l) purchase or redeem any shares in the Group or provide financial assistance for any such purchase;

 

(m) make any advances or other credits to any third party or give any guarantee, indemnity, surety or security in favour of any third party, except for trade credits provided in the ordinary course of business;

 

(n) propose or pass any shareholders' resolution at any general meeting which is a special business and not in connection with this Agreement or transactions contemplated hereunder or incidental hereto, save for the proposal of and the passing of any shareholders’ resolution regarding the ordinary business at any of their respective annual general meeting;

 

(o) employ or engage any staff or personnel (other than the chief financial officer to be appointed on Closing as referred to in clause 6.3) or enter into or amend any service agreements with directors or officers or senior employees to increase the remuneration which would be payable thereunder during the period after Closing;

 

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(p) employ or engage any adviser or consultant (including for the purpose of the Offers) without the prior written consent of the Purchaser (not to be unreasonably withheld or delayed); and

 

(q) do, allow or procure any act or permit any omission which would constitute a breach of any of the Vendor Warranties.

 

6.3 The Vendor shall procure that, if and to the extent permitted by the Takeovers Code and the SFC, a resolution shall be passed by the board of directors of the Company on Closing (1) appointing a candidate nominated by the Purchaser as the chief financial officer of the Company with effect from Closing and (2) including a scope of authority for the chief financial officer stating that all material matters including but not limited to matters involving expenditure or value exceeding HK$100,000 must be approved by such chief financial officer from Closing.

 

6.4 At the request of the Purchaser, the Vendor shall exercise its rights and powers in respect of the Company to use its reasonable efforts (so far as the Vendor is able to do so by the exercise of those rights and powers) to assist with the Group’s endeavours to have BTI, a member of the Group, enter into, within 3 months after Closing, a supply agreement with Beijing Intradak System Technology Co., Ltd. ( 北京英特達系統技術有限公司 ), for a contract period of not less than one year, on terms to the satisfaction of the Purchaser (acting reasonably).

 

7. Acknowledgement and Undertakings

 

Takeovers Code

 

7.1 The Purchaser acknowledges that Closing of the sale and purchase of the Sale Shares will require the Purchaser to make a mandatory general offer under the Takeovers Code for all the remaining shares in the Company not owned by the Purchaser and persons acting in concert with the Purchaser.

 

7.2 The Purchaser undertakes to the Vendor that the Purchaser will comply with all the relevant requirements of the Takeovers Code applicable to the Purchaser in respect of the sale and purchase of the Sale Shares under this Agreement.

 

Intellectual property rights

 

7.3 The Guarantor as licensor and the Company as licensee have entered into a deed of licence dated 20 November 2013 (the “ IP Licence Deed ”), pursuant to which the Guarantor has granted to the Company, at nil consideration, a revocable, non-transferable and non-exclusive licence to use the Melco Intellectual Property specified in the IP Licence Deed in connection with the business of the Company. The IP Licence Deed provides that it will automatically terminate if the Guarantor ceases to have more than a 35% beneficial interest in the Company.

 

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7.4 On Closing, the Guarantor and the Company shall enter into the Supplemental IP Licence Deed, pursuant to which the Group is allowed to use the Melco Intellectual Property specified in the IP Licence Deed on the terms of the IP Licence Deed, as amended by the Supplemental IP Licence Deed, on substantially the same terms as the IP Licence Deed, for a transitional period of 4 months after Closing.

 

7.5 As soon as practicable after Closing, and in any event within 4 months of the Closing Date, the Purchaser shall cause the Company and all relevant members of the Group to (i) obtain all necessary approvals and file all documentation necessary at the relevant government authority to change its and their respective names and company logos to remove any reference to the Melco Name; (ii) complete the deregistration of the Hong Kong trade mark with number 301043694 registered under the name of Rising Move International Limited, a wholly owned subsidiary of the Company; and (iii) cease use of the websites hosted on the relevant internet domain names which contain the Melco Name. In the event that the Company and/or the relevant members of the Group breach this clause 7.5, the Guarantor and/or any of its Affiliates (other than the Group) shall be entitled to specific performance of this clause 7.5 and to injunctive relief against further violations, as well as any other remedies at law or in equity available to the Guarantor and/or any such Affiliate.

 

7.6 During the transitional period referred to in clause 7.4 above, the Purchaser shall procure that all members of the Group shall, as promptly as practicable and in any event by the end of the transitional period, cease to use (i) any advertising and promotional materials and (ii) any signage, decals, stationery, business cards, business forms and other similar items used in the business of the Group, in each case that embody or contain anywhere thereon any of the Melco Intellectual Property. After the expiry of the transitional period referred to in clause 7.4 above, the Purchaser must procure that all members of the Group shall not use any Melco Intellectual Property in connection with their respective services or otherwise in the conduct of their respective businesses.

 

7.7 Upon the expiry of the transitional period referred to in clause 7.4 above, the licence granted under the IP Licence Deed, as amended by the Supplemental IP Licence Deed, to use the Melco Intellectual Property specified therein shall immediately cease and terminate.

 

7.8 Except as otherwise expressly provided in this clause 7, neither the Purchaser nor the Company nor any members of the Group shall (i) have any rights in or to any of the Melco Intellectual Property or (ii) contest the use, ownership, validity or enforceability of any rights of the Guarantor (or any Affiliate of the Guarantor) in or to any of the Melco Intellectual Property.

 

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Retention Bonus

 

7.9 The Retention Bonus shall be paid by the Group to the employees of the Group as specified in Retention Bonus Allocation List, in the respective amounts set forth opposite their respective names in Retention Bonus Allocation List, not earlier than 6 months after Closing but not later than 9 months after Closing (provided that the relevant person remains an employee of the Group at that time), except that such payment to Mr. Ko Chun Fung, Henry shall be made on his last day of employment with the Group, and the Purchaser shall procure that the Group makes such payments, failing which the Purchaser shall itself make such payments. The Purchaser consents to the payments of the Retention Bonus to be made pursuant to this clause 7.9 and to the allocation of the Retention Bonus in the Retention Bonus Allocation List.

 

Resignation of Chief Executive Officer and Human Resources Head

 

7.10 The Purchaser acknowledges and agrees and the Vendor shall procure that the Chief Executive Officer of the Company, Mr. Ko Chun Fung Henry, will give notice of the termination of his service agreement with the Group on Closing, such notice to expire 6 months after Closing in accordance with the terms of Mr. Ko’s service agreement and the Senior Manager, Human Resources and Administration of the Group, Ms. Chan Siu Wai Kathy, will cease to be employed by the Group on or before Closing.

 

8. Guarantor’s Guarantee and Indemnity

 

8.1 The Guarantor unconditionally and irrevocably guarantees to the Purchaser the due and punctual performance by the Vendor of the Vendor’s obligations under this Agreement.

 

8.2 As a separate undertaking, the Guarantor unconditionally and irrevocably indemnifies the Purchaser against all Losses arising from any breach by the Vendor of the Vendor’s obligations under this Agreement.

 

8.3 The Guarantor waives any right it has of first requiring the Purchaser to commence proceedings or enforce any other right against the Vendor before claiming under the Guarantor’s guarantee and indemnity under this clause 8.

 

8.4 The guarantee and indemnity under this clause 8 is a continuing guarantee and indemnity and is not discharged by any one payment (other than a payment of the full amount due).

 

8.5 The Guarantor’s liability under its guarantee and indemnity under this clause 8 is not affected by anything which might otherwise affect it at law or in equity, including one or more of the following:

 

(a) the Purchaser granting time or other indulgence to the Vendor, compounding or compromising with the Vendor or releasing the Vendor in any way;

 

(b) acquiescence, delay, acts, omissions or mistakes on the part of the Purchaser;

 

(c) any novation of a right of the Purchaser;

 

     Page 16

 

  

(d) any variation of this Agreement or any agreement entered into in performance of this Agreement; or

 

(e) the invalidity or unenforceability of an obligation or liability of the Vendor.

 

9. Termination

 

Termination by the Parties

 

9.1 This Agreement may only be terminated prior to Closing:

 

(a) by the mutual written consent of the Parties;

 

(b) by the Purchaser by written notice to the Vendor and the Guarantor if there has been a breach of the Vendor Warranties, or an event rendering the Vendor Warranties untrue, incorrect, misleading or breached, or any material breach of, or failure to perform, any of the other obligations of the Vendor under this Agreement which are required to be performed at or before Closing, that would give rise to the failure of either of the conditions specified in clause 3.1 or a material failure to satisfy the Vendor’s obligations at Closing as specified in clause 3.6 and Part A of Schedule 1 and, in each case, such breach, inaccuracy or failure is incapable of being cured by the Longstop Date or, if capable of being so cured, has not been cured by the Vendor within five Business Days of the Vendor’s receipt of written notice of such material breach, inaccuracy or failure from the Purchaser; or

 

(c) by the Vendor by written notice to the Purchaser and the Guarantor if there has been a breach of the Purchaser Warranties, or an event rendering the Purchaser Warranties untrue, incorrect, misleading or breached, or any material breach of, or failure to perform, any of the other obligations of the Purchaser under this Agreement which are required to be performed at or before Closing, that would give rise to the failure of either of the conditions specified in clause 3.2 or a material failure to satisfy the Purchaser’s obligations at Closing as specified in clause 3.6 and Part B of Schedule 1 and, in each case, such breach, inaccuracy or failure is incapable of being cured by the Longstop Date or, if capable of being so cured, has not been cured by the Purchaser within five Business Days of the Purchaser’s receipt of written notice of such material breach, inaccuracy or failure from the Vendor.

 

Termination if Closing does not occur by Longstop Date

 

9.2 Unless otherwise agreed by the Parties, this Agreement shall terminate at 11:59 p.m., Hong Kong time, on the Longstop Date if Closing has not occurred prior to that time.

 

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No Other Termination Rights

 

9.3 This Agreement may only be terminated pursuant to clause 9.1 or terminate pursuant to clause 9.2. Any and all other rights of termination and/or rescission arising under applicable law are hereby expressly excluded.

 

Effect of Termination

 

9.4 If this Agreement terminates under clause 9.2 or is terminated pursuant to clause 9.1, it will immediately cease to have any further force and effect except for:

 

(a) any provision of this Agreement that expressly or by implication is intended to come into or continue in force on or after termination of this Agreement (including clause 1 ( Interpretation ), clauses 2.5 and 2.6 relating to the Deposit, clause 9 ( Termination ), clause 10 ( Announcements ), clause 12 ( Costs and Expenses ), clause 13 ( Notices ), clause 14 ( Governing Law and Jurisdiction ), clause 15 ( Process Agent ) and clause 16 ( General Provisions ) (inclusive)), each of which shall remain in full force and effect; and

 

(b) any rights, remedies, obligations and liabilities of the Parties that have accrued up to the date of termination, including in respect of any breach of this Agreement occurring prior to such termination.

 

10. Announcements

 

10.1 Subject to clause 10.2, no announcement, communication or circular ( Public Release ) concerning the existence or the subject matter of this Agreement or any ancillary matter shall be made or issued by any Party or its Affiliates without the prior written approval of the other Parties (such approval not to be unreasonably withheld or delayed).

 

10.2 Clause 10.1 shall not affect any Public Release concerning the existence or the subject matter of this Agreement to the extent required by:

 

(a) any order of any court of competent jurisdiction or any regulatory, judicial, governmental or similar body or taxation authority of competent jurisdiction;

 

(b) the Takeovers Code and/or any requests or requirements of the SFC;

 

(c) the rules of any listing authority or stock exchange on which a Party’s (or its Affiliates’) shares are listed; or

 

(d) the laws or regulations of any country to which a Party’s (or its Affiliates’) affairs are subject,

 

in which case the disclosing Party (and/or its relevant Affiliates) shall, prior to making or issuing such Public Release:

 

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(i) to the extent permitted by law and insofar as is reasonably practicable, first give notice to the other Parties of its intention to make such Public Release; and

 

(ii) take all such steps as may be reasonable and practicable in the circumstances to agree the contents of such Public Release with the other Parties.

 

11. Implementation and Status of MOU

 

11.1 This Agreement is entered into to implement the MOU.

 

11.2 Paragraphs 1 ( Parties ) to 9 ( Conduct of Business Prior to Closing ) (inclusive), paragraph 11 ( Guarantee ) and paragraph 12 ( General ) of the MOU are hereby terminated with effect from the date of this Agreement and are superseded and replaced by the provisions of this Agreement, but without prejudice to any claim for breach of the obligations of the Vendor under paragraph 9 ( Conduct of Business Prior to Closing ) of the MOU occurring prior to such termination.

 

11.3 Subject to and conditional upon Closing occurring under this Agreement, paragraphs 10 ( Confidentiality ) and 13 ( Governing Law and Jurisdiction ) of the MOU shall terminate upon Closing.

 

12. Costs and Expenses

 

12.1 Subject to clauses 12.2 and 12.3, each Party shall bear its own costs and expenses respectively incurred by it in connection with the transaction contemplated by this Agreement.

 

12.2 The Vendor will pay all Hong Kong seller’s ad valorem stamp duty, seller’s fixed duty on the instruments of transfer, seller’s Stock Exchange trading fee and seller’s SFC transaction levy as may be payable by the seller in respect of the sale of the Sale Shares to be sold by the Vendor to the Purchaser.

 

12.3 The Purchaser will pay all Hong Kong buyer’s ad valorem stamp duty, buyer’s fixed duty on the instruments of transfer, buyer’s Stock Exchange trading fee, buyer’s SFC transaction levy and brokerage commission as may be payable by the buyer in respect of the purchase of the Sale Shares. Such amounts do not form part of the Consideration.

 

13. Notices

 

13.1 Any notice or other communication to be given by one Party to other Parties under, or in connection with, this Agreement shall be in writing and signed by or on behalf of the Party giving it. It shall be served by sending it by fax to the number set out in clause 13.2, or delivering it by hand, or sending it by pre-paid recorded delivery or registered post, to the address set out in clause 13.2 and in each case marked for the attention of the relevant Party set out in clause 13.2 (or as otherwise notified from time to time in accordance with the provisions of this clause 13). Any notice so served by hand, fax or post shall be deemed to have been duly given:

 

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(a) in the case of delivery by hand, when delivered;

 

(b) in the case of fax, upon confirmation of transmission;

 

(c) in the case of prepaid recorded delivery or registered post, at 10:00 a.m. on the second Business Day following the date of posting,

 

provided that in each case where delivery by hand or by fax occurs after 6:00 p.m. on a Business Day or on a day which is not a Business Day, service shall be deemed to occur at 9:00 a.m. on the next following Business Day.

 

References to time in this clause are to Hong Kong time.

 

13.2 The addresses and fax numbers of the Parties for the purposes of clause 13.1 are as follows:

 

Vendor: Melco LottVentures Holdings Limited
  38th Floor, The Centrium
  60 Wyndham Street
  Hong Kong

 

  Fax: (852) 3162 3579
  Attention: Company Secretary

 

Purchaser: 500.com Limited
  500.com Building
  Shenxianling Sports Center
  Longgang District
  Shenzhen
  People’s Republic of China

 

  Tel: +86 755 89452254
  Fax: +86 755 83796070
  Attention: Mr. Zhengming Pan

 

Guarantor: Melco International Development Limited
  38th Floor, The Centrium
  60 Wyndham Street
  Hong Kong

 

  Fax: (852) 3162 3579
  Attention: Company Secretary

 

13.3 A Party may notify the other Parties of a change to its name, relevant addressee, address and/or fax number for the purposes of this clause 13, provided that such notice shall only be effective on:

 

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(a) the date specified in the notice as the date on which the change is to take place; or

 

(b) if no date is specified or the date specified is less than five Business Days after the date on which notice is given, the fifth Business Day after the date on which the notice has been given.

 

13.4 All notices under or in connection with this Agreement shall be in the English language.

 

14. Governing Law and Jurisdiction

 

14.1 This Agreement and the relationship between the Parties shall be governed by and interpreted in accordance with Hong Kong law.

 

14.2 The courts of Hong Kong are (subject to clause 14.4 below) to have exclusive jurisdiction to settle any dispute (including claims for set off and counter claims) which may arise in connection with the creation, validity, effect, interpretation, or performance of, or the legal relationships established by, this Agreement or otherwise arising in connection with this Agreement and for such purposes irrevocably submit to the jurisdiction of the Hong Kong courts.

 

14.3 The Parties irrevocably waive any objections to the jurisdiction of the courts of Hong Kong.

 

14.4 Each Party irrevocably agrees that a judgment or order of the courts of Hong Kong in connection with this Agreement may be enforced against it in the courts of any other jurisdiction.

 

15. Process Agent

 

15.1 The Vendor hereby irrevocably appoints the Guarantor of 38th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong as the Vendor’s agent to receive and acknowledge on its behalf service of any writ, summons, order, judgment or other notice of legal process in Hong Kong as regards any proceeding, claim, dispute or matter arising out of or relating to this Agreement or any document to be executed pursuant to this Agreement. Such service shall be deemed completed on delivery to such agent (whether or not it is forwarded to and received by the Vendor).

 

15.2 The Purchaser hereby irrevocably appoints 500WAN HK Limited of Room 2001-2002, 20/F China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong as the Purchaser’s agent to receive and acknowledge on its behalf service of any writ, summons, order, judgment or other notice of legal process in Hong Kong as regards any proceeding, claim, dispute or matter arising out of or relating to this Agreement or any document to be executed pursuant to this Agreement. Such service shall be deemed completed on delivery to such agent (whether or not it is forwarded to and received by the Vendor).

 

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15.3 If for any reason the process agent of the Vendor or the Purchaser ceases to be able to act as agent or no longer has an address in Hong Kong, the Vendor or the Purchaser (as the case may be) shall forthwith appoint a substitute process agent and notify each of the other Parties thereof and deliver to the other Parties the new process agent’s name, address and fax number; PROVIDED that until a Party receives such notification it shall be entitled to treat the agent named above as the process agent of the Vendor or the Purchaser (as the case may be) for the purposes of this clause 15.

 

16. General Provisions

 

16.1 This Agreement and the documents referred herein constitutes the entire agreement and understanding between the Parties in connection with the transactions contemplated by this Agreement. Subject to clause 11.3, this Agreement supersedes all previous agreements or understandings between the Parties relating to such transactions. No Party has entered into this Agreement in reliance upon any representation, warranty or undertaking which is not set out or referred to in this Agreement.

 

16.2 This Agreement may be executed in any number of counterparts and by the Parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument.

 

16.3 No variation of this Agreement (or of any documents referred to in this Agreement) shall be valid unless it is in writing and signed by or on behalf of each of the Parties to it. The expression variation shall include any variation, supplement, deletion or replacement however effected.

 

16.4 Each of the Parties agrees to perform (or procure the performance of) all further acts and things, and execute and deliver (or procure the execution and delivery of) such further documents, as may be required by law or as the other Parties may consider to be reasonably necessary, whether on or after Closing, to implement and/or give effect to this Agreement and the transaction contemplated by it.

 

16.5 If any provision of this Agreement is held to be invalid, illegal or unenforceable, then such provision shall (so far as it is invalid, illegal or unenforceable) be given no effect and shall be deemed not to be included in this Agreement but without invalidating any of the remaining provisions of this Agreement. The Parties shall then use all reasonable endeavours to replace the invalid, illegal or unenforceable provision with a valid and enforceable substitute provision the effect of which is as close as possible to the intended effect of the invalid, illegal or unenforceable provision.

 

16.6 No failure or delay by any Party in exercising any right or remedy provided by law under or pursuant to this Agreement shall impair such right or remedy or operate or be construed as a waiver or variation of it or preclude its exercise at any subsequent time and no single or partial exercise of any such right or remedy shall preclude any other or further exercise of it or the exercise of any other right or remedy.

 

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16.7 Any Affiliate of the Guarantor which owns, or has any interest in, any Melco Intellectual Property shall be entitled to enforce the provisions of clauses 7.3 to 7.8 (inclusive) against the Purchaser. Subject to that, no person (other than the Parties to this Agreement) who is given any rights or benefits under this Agreement shall be entitled to enforce those rights or benefits against any Party under the Contracts (Rights of Third Parties) Ordinance.

 

16.8 No Party shall be entitled to assign, transfer or create any trust in respect of the benefit or burden of any provision of this Agreement without the prior written consent of the other Parties. Subject to the foregoing, this Agreement shall be binding upon, and inure to the benefit of the successors and permitted assigns of the Parties.

 

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Schedule 1

 

Closing

 

Part A – Actions to be taken by the Vendor

 

1. On Closing, the Vendor shall procure the delivery to the Purchaser of:

 

(a) a certified true copy of the resolutions of the directors of the Vendor authorising the execution by the Vendor of this Agreement and any document to be delivered by the Vendor at or prior to Closing;

 

(b) (i) if the Sale Shares are held in certificated form, the original duly executed instruments of transfers in favour of the Purchaser (or its nominees) of all the Sale Shares, together with the share certificates representing the Sale Shares (or an express indemnity in a form reasonably satisfactory to the Purchaser, in the case of any lost share certificates) and such other documents as may reasonably be required to give a good title to the Sale Shares and to enable the Purchaser (or its nominees) to become the registered holder of the Sale Shares; or (ii) if the Sale Shares are held in CCASS, a copy of the irrevocable settlement instruction to the Vendor’s designated CCASS participant to effect a transfer of the Sale Shares into a CCASS investor participant stock account designated by the Purchaser or the stock account of the Purchaser’s designated CCASS participant (details of which shall be provided by the Purchaser to the Vendor at least three Business Days prior to Closing), together with such other documents as may reasonably be required to enable the Purchaser (or its nominee) to become the beneficial owner of the Sale Shares held through CCASS, and in each case, cheque in respect of the Hong Kong seller’s ad valorem stamp duty and seller’s fixed duty on the instruments of transfer;

 

(c) written resignation letters from each of (i) Mr. Tsui Che Yin, Frank, (ii) Mr. Ko Chun Fung, Henry, (iii) Mr. Tsang Yuen Wai, Samuel and (iv) Mr. Tam Chi Wai, in each case acknowledging that (except in the case of Mr. Ko Chun Fung, Henry in respect of claims under his service agreement with the Group referred to in clause 7.11 to have the Group comply with the Group’s obligations under such service agreement) he has no claim against any member of the Group for compensation for loss of office as a director, such resignations to take effect on the later of (i) the First Closing Date of the Offers or (ii) the date when the Offers become or are declared unconditional, or on such earlier date as may be stipulated by the Purchaser, agreed by the relevant director and permitted by the SFC under the Takeovers Code;

 

(d) written resignation letters from each of (i) Mr. Leung Hoi Wai, and (ii) Ms. Chan Yuen Mei as company secretaries of each member of the Group in respect of which either of them serves as company secretary, in each case acknowledging that he/she has no claim against any member of the Group for compensation for loss of office as a company secretary, such resignations to take effect on the later of (i) the First Closing Date of the Offers or (ii) the date when the Offers become or are declared unconditional, or on such earlier date as may be stipulated by the Purchaser, agreed by the relevant company secretary and permitted by the SFC under the Takeovers Code;

 

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(e) a copy of the Services Termination Deed, duly executed by Melco Services Limited and the Company;

 

(f) a copy of the Supplemental IP Licence Deed duly executed by the Guarantor and the Company;

 

(g) a copy of the Office License Termination Deed duly executed by the Melco Services Limited and the Company;

 

(h) a copy of the Management Accounts;

 

(i) copies of bank statements, securities account statements or other documentation acceptable to the Purchaser (acting reasonably) showing the Cash and Cash Equivalents as at the date falling one Business Day before the Closing Date and an updated version of Schedule 4 produced by the Company stating the estimated amounts of Cash and Cash equivalent, BTI Receivables and the Liabilities as at the date of Closing;

 

(j) a certified true extract of the resolutions of the directors of the Guarantor authorising the execution by the Guarantor of this Agreement and any document to be delivered by the Guarantor at or prior to Closing;

 

(k) a copy of the notice from Mr. Ko Chun Fung Henry of termination of his service agreement with the Group referred to in clause 7.11 acknowledging that he has no claim against any member of the Group for compensation for loss of office, for accrued remuneration, for fees or otherwise whatsoever as at Closing (except for the right to receive remuneration and other benefits under such service agreement accrued up to Closing but have not been paid by the Group as at Closing and any claim under such service agreement to have the Group comply with the Group’s obligations under such service agreement after Closing); and

 

(l) the irrevocable undertakings addressed to the Purchaser from the directors of the Company specified in (i) to (iv) (both inclusive) of paragraph 1(c) of Part A of this Schedule 1 above (1) to accept the Share Offer in respect of the Shares and/or the Option Offer in respect of options granted pursuant to the 2012 Share Option Scheme held by them; and (2) to agree to the forfeiture of such outstanding options granted pursuant to the 2012 Share Option Scheme should the Share Offer not become or is not declared unconditional at the close of the Offers.

 

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2. On or prior to Closing, the Vendor shall exercise such rights and powers as it has in relation to the Company and the directors of the Company to procure (so far as it is possible to do so by the exercise of those rights and powers) that a meeting of the board of directors of the Company is held at which it is resolved that:

 

(a) such person(s) as nominated by the Purchaser are appointed as additional director(s) of the Company as of the Despatch Date (or such other date as may be stipulated by the Purchaser and permitted by the SFC under the Takeovers Code);

 

(b) the resignations referred to in paragraph 1(c) above be accepted, noting that the resignations will take effect on the later of (i) the First Closing Date of the Offers or (ii) the date when the Offers become or are declared unconditional, or on such earlier date as may be stipulated by the Purchaser, agreed by the relevant director and permitted by the SFC under the Takeovers Code;

 

(c) such person as nominated by the Purchaser is appointed as the new company secretary of the Company with effect from the later of (i) the First Closing Date of the Offers or (ii) the date when the Offers become or are declared unconditional, or on such earlier date as may be stipulated by the Purchaser, agreed by such person and permitted by the SFC under the Takeovers Code;

 

(d) such person as nominated by the Purchaser is appointed as chief financial officer of the Company as of the date of Closing and that all material matters including but not limited to matters involving expenditure or value exceeding HK$100,000 must be approved by such chief financial officer from Closing;

 

(e) (if applicable) the transfer of the Sale Shares and registration of the Purchaser as holder of the Sale Shares be approved and new share certificates be issued accordingly; and

 

(f) the Group’s existing bank account mandates be revised and/or revoked in such manner, and new instructions be given to such banks in such form, as the Purchaser may reasonably require and as may be permitted by applicable laws and regulations, including the Takeovers Code.

 

3. On Closing, the Vendor shall apply the Deposit, together with all interest (if any) accrued on it, towards payment of the Consideration in accordance with clause 2.4, which shall constitute payment of an amount of the Consideration equal to the amount of the Deposit and the interest (if any) accrued on the Deposit so applied, converted into Hong Kong dollars at the agreed rate of exchange specified in clause 2.4.

 

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Part B – Actions to be taken by the Purchaser

 

1. Against performance by the Vendor (or waiver by the Purchaser thereof) of the matters referred to in Part A of this Schedule 1, the Purchaser shall:

 

(a) pay the balance of the Consideration (after taking into account the application of the Deposit and interest (if any) accrued on it in part payment of the Consideration, in accordance with the provisions of clause 2.4 and paragraph 3 of Part A of this Schedule 1) to the Vendor, such payment to be made by electronic transfer of funds to the following bank account designated by the Vendor:

 

Beneficiary Bank (F57):

UBS AG, Hong Kong

(SWIFT Address: UBSWHKHH)

Bank Code 103

Branch Code: 492

   
Beneficiary (F59):

A/C No: 225539

Name: Melco International Development Ltd

 

(b) deliver to the Vendor a certified true copy of the resolutions of the directors of the Purchaser authorising the execution by the Purchaser of this Agreement and the performance by the Purchaser of its obligations under this Agreement.

 

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  Schedule 2

 

Limitation of Liability

 

1. Application of this schedule

 

The provisions of this Schedule 2 shall apply to any claim against the Vendor for breach of the Vendor Warranties.

 

2. Time period

 

2.1 The Vendor shall not be liable for breach of any Vendor Warranty in respect of any claim for breach of the Vendor Warranties unless the Purchaser shall have:

 

(a) given written notice of such claim by no later than the date specified below:

 

(i) in respect of any Tax-related Vendor Warranties: three years from Closing Date; and

 

(ii) in respect of any other Vendor Warranties: two years from the Closing Date; and

 

(b) (unless otherwise agreed in writing by the Vendor and subject to paragraph 2.2 of this Schedule 2) commenced and served proceedings in respect of the relevant claim within six months of the date of notification of the claim.

 

2.2 Where a claim for breach of the Vendor Warranties is made in respect of a contingent liability or an actual liability where the ability to bring a claim is dependent upon the crystallization of a contingent liability, such legal action need not be brought until six months after such contingent liability becomes an actual liability and is due and payable.

 

3. Notices

 

3.1 Notices of claims for breach of Vendor Warranties given by the Purchaser shall set out, in reasonable detail, the legal and factual basis of the claim and the evidence upon which the Purchaser relies.

 

3.2 The Vendor may make a written request for any additional information which is reasonably necessary for the Vendor to understand the general nature of the claim made (and the Purchaser shall promptly provide such information), but the lack of sufficient information in any notice of claim given shall not in any way invalidate the notice or affect the rights of the Purchaser to make a claim under this Agreement.

 

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4. Quantum

 

4.1 The Vendor shall have no liability in respect of any claim for breach of Vendor Warranty by the Purchaser unless:

 

(a) the liability agreed or determined in respect of any individual claim (or series of claims arising from substantially identical facts or circumstances) exceeds an amount equal to 0.1% of the amount of the Consideration; and

 

(b) the aggregate amount of all claims exceeding the individual claim threshold specified in sub-paragraph (a) above exceeds an amount equal to 1.0% of the amount of the Consideration, in which event the Vendor shall be liable for the full amount of all such claims, and not just the excess.

 

4.2 The maximum aggregate liability of the Vendor in relation to claims for all breaches of the Vendor Warranties under this Agreement shall not exceed an amount equal to the Consideration.

 

5. Other exclusions

 

5.1 The Vendor shall not be liable for breach of any Vendor Warranty in respect of any indirect or consequential Losses.

 

5.2 The liability of the Vendor in respect of claims for breach of the Vendor Warranties (excluding any breach by the Vendor of the Vendor Warranty in clause 4.1(k), 4.1(l) and 4.1(m) which shall not be subject to limitation under this paragraph) shall be limited to loss and damage which the Purchaser may suffer or incur in respect of the Sale Shares and shall not extend to any loss or damage which the Purchaser may suffer or incur in respect of any other shares in the Company acquired by the Purchaser or its Affiliates (including any shares to be acquired pursuant to the Share Offer).

 

5.3 The Vendor shall not be liable in respect of any claim for breach of any Vendor Warranty to the extent that the facts and circumstances giving rise to such claim have been fairly disclosed in any announcement, circular or other document (including annual reports) published by the Company on the website of the Stock Exchange.

 

5.4 The Purchaser shall not be entitled to make a claim for breach of any Vendor Warranty if and to the extent that the facts, matters, events or circumstances giving rise to the claim are within the actual knowledge of the Purchaser, its agents or advisers at the date of this Agreement, whether arising as a result of its investigation of the Group or otherwise.

 

5.5 The Vendor shall have no liability in respect of any claim for breach of any Vendor Warranty if and to the extent any allowance, provision or reserve was made in the Accounts or the Management Accounts in respect of the matter or circumstances giving rise to the claim.

 

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5.6 The Vendor shall not be liable in respect of any claim for breach of any Vendor Warranty to the extent that the matter or circumstance giving rise to such claim arises, occurs or is otherwise attributable to, or the Vendor’s liability pursuant to such claim is increased as a result of, any act, omission, transaction or arrangement carried out or effected in accordance with the terms of this Agreement or at the written request or with the prior written consent of the Purchaser.

 

6. General

 

6.1 The limitations of liability contained in this Schedule 2 shall not apply to any liability for any claim for breach of the Vendor Warranties to the extent that such liability is attributable to fraud, wilful misconduct or wilful concealment on the part of the Vendor.

 

6.2 Any failure by the Purchaser to comply with the requirements of this Schedule 2 (other than the specified time limit for the notification of claims or commencement of legal action as set forth in paragraph 2 of this Schedule 2) shall not absolve or release the Vendor from liability.

 

6.3 Nothing in paragraph 3.2 of this Schedule 2 shall require the Purchaser to disclose or cause to be disclosed any material or information which is of a legally privileged nature.

 

6.4 Nothing in this paragraph 6 restricts or limits any general obligation at law of the Purchaser to mitigate any loss or damage which it may suffer or incur as a consequence of any breach of any Vendor Warranty.

 

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Schedule 3

 

Vendor Warranties

 

Except where the context otherwise requires, the Vendor Warranties shall apply not only to the Company but also to members of the Group as if they had been expressly repeated with respect to each member of the Group and references in this Schedule to “Company” shall be construed accordingly.

 

1. COMPLETENESS AND ACCURACY OF DISCLOSURE

 

All information contained in this Agreement and all other written information contained in the Due Diligence Bundle is true, complete and accurate in all material respects and there is no matter or fact that has not been disclosed which renders any such information untrue or misleading in all material respects.

 

2. PREVIOUS PUBLICATIONS

 

With respect to written information published by the Company on the Stock Exchange website during the period commencing three years prior to the date of this Agreement and ending on the date of this Agreement, all statements of fact contained therein were true and accurate in all material respects as at the date of the relevant publication and not misleading in any material respect as at such date and all expressions of opinion or intention contained therein were made on reasonable grounds and were truly and honestly held by the directors of the Company as at the date of the relevant publication and were fairly based and there were no other material facts omitted so as to make any such statement or expression of opinion or intention in any of such publications misleading in all material respects as at the date of the relevant publication.

 

3. CORPORATE

 

3.1 The copy of the constitution of each member of the Group provided to the Purchaser is true and complete and, in the case of each member of the Group incorporated in Hong Kong, has annexed it a copy of every resolution or agreement referred to in Subdivision 4 of Division 2 of Part 3 of the Companies Ordinance.

 

3.2 Save as disclosed in the Accounts, each member of the Group is not the holder or beneficial owner of, and has not agreed to acquire, any shares or securities of any other company or corporation not being a member of the Group.

 

3.3 Save as disclosed in the Accounts, each member of the Group is not and has not agreed to become a member of any partnership, joint venture, consortium or other incorporated or unincorporated association.

 

     Page 31

 

  

4. SHARES

 

4.1 Save as disclosed in the annual report of the Company for the year ended the Last Accounts Date or in any subsequent monthly return, next day return or announcement of the Company which is publicly available on the Stock Exchange website up to the date of this Agreement, there is no option, right to acquire, mortgage, charge, pledge, lien or other form of security, encumbrance or third party rights on, over or affecting any part of the unissued share capital or loan capital of the Company or over any part of the issued or unissued share capital or loan capital of any member of the Group and there is no agreement or commitment to give or create any of the foregoing and no claim has been made by any person to be entitled to any of the foregoing which has not been waived in its entirety or satisfied in full.

 

4.2 Save as disclosed in the annual report of the Company for the year ended the Last Accounts Date or in any subsequent monthly return, next day return or announcement of the Company which is publicly available on the Stock Exchange website up to the date of this Agreement, there is no agreement or commitment outstanding which calls for the allotment of or issue or accords to any person the right to call for the allotment or issue of any shares in or securities or debentures of any member of the Group.

 

4.3 Save as disclosed in the annual report of the Company for the year ended the Last Accounts Date or in any subsequent monthly return, next day return or announcement of the Company which is publicly available on the Stock Exchange website up to the date of this Agreement, there are no outstanding, vested or unvested share options granted by the Company.

 

4.4 Since the Last Accounts Date and save as disclosed in any subsequent monthly return, next day return or announcement of the Company which is publicly available on the Stock Exchange website up to the date of this Agreement, each member of the Group has not purchased or redeemed or agreed to purchase or redeem any shares of any class of its share capital or otherwise reduced or agreed to reduce its issued share capital or any class of it.

 

5. THE VENDOR AND THE GUARANTOR

 

Neither the Vendor nor the Guarantor is bankrupt, in receivership, liquidation or analogous process, has taken steps to enter into liquidation and no petition has been presented for their bankruptcy, winding-up and to the best of their knowledge, information and belief, there are no grounds on which a petition or application could be based for their bankruptcy, winding up or appointment of a receiver of their assets.

 

6. COMPLIANCE AND LITIGATION

 

6.1 (1) The Group has complied in all material respects with, and is not in material breach of any laws, rules or regulations of Hong Kong, the PRC and any relevant jurisdiction applicable to the Group or to any of the assets of the Group (including but without limitation the GEM Listing Rules); (2) none of the officers or employees of the Group (during the course of their duties in relation to the relevant member of the Group) has contravened any such laws, rules or regulations in any material respect in circumstances where such breach or contravention, in each case, would have a material adverse effect on the Group or its business or operations; and (3) there is no order, decree or judgment of any court or any governmental agency of Hong Kong, the PRC or any jurisdiction outstanding against each member of the Group.

 

     Page 32

 

  

6.2 The statutory books and minute books of each member of the Group have been properly written up and compliance has been made in all material respects with all applicable legal requirements concerning the relevant member of the Group and all issues of shares, debentures or other securities thereof.

 

6.3 The Group is not engaged in any litigation or arbitration proceedings, there are no litigation or arbitration proceedings or any prosecution pending or threatened by or against any member of the Group, no injunction has been granted against any member of the Group, each member of the Group has given no undertaking to any court or to any third party arising out of any legal proceedings and there is no matter or fact in existence that might give rise to the same or form the basis of any criminal prosecution against each member of the Group.

 

6.4 No order has been made or petition presented or resolution passed for the appointment of a receiver or manager in relation to any member of the Group, or for its winding up, nor has any distress, execution or other process been levied against any member of the Group nor is any receiver or manager of the undertaking or assets (or any part) or provisional liquidator threatened or expected to be appointed.

 

6.5 There is no contract, agreement or arrangement to which any member of the Group is a party which has not been disclosed in the Due Diligence Bundle which, in accordance with its terms or by virtue of applicable law or regulation, will be varied, avoided, cancelled, repudiated, rescinded, prematurely determined, declared to be invalid or not renewed in any such case by virtue of a change of control of the Company or Closing, the variation, avoidance, cancellation, repudiation, rescission, premature determination, invalidity or non-renewal of which would have a material adverse effect on the business or operations of the Group.

 

7. TAXATION

 

7.1 All Taxation assessed upon each member of the Group, or for which any member of the Group is liable to account, has been paid by the respective member of the Group on or before the due date for payment, and each member of the Group is not under any liability to pay any penalty or interest in connection with any Taxation, and each member of the Group has deducted all Taxation required to be deducted from any payments made by it and where appropriate it has duly accounted for any such Taxation deducted or collected.

 

7.2 All necessary information notices returns particulars claims for reliefs and allowances and computations have been properly and duly submitted by the Group to the Inland Revenue Department ( IRD ) and any other relevant taxation or excise authorities (whether of Hong Kong or elsewhere) and such information notices returns particulars claims and computations are true and accurate in all material respects and are not the subject of any question or dispute nor to the best knowledge of the Vendor, are likely to become the subject of any question or dispute with the IRD or any other such taxation or excise authority.

 

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7.3 None of members of the Group is in dispute with any Taxation or revenue authority and no such dispute is pending or threatened.

 

7.4 As at Closing, all documents in the enforcement of which the Group may be interested have been duly stamped and, where appropriate or necessary, adjudicated and no document belonging to the Group now or at Closing that is subject to ad valorum stamp duty is or will be unstamped or insufficiently stamped; nor has any relief from such duty been improperly obtained, nor has any event occurred as a result of which any such duty from which the Group has obtained relief may be or become payable.

 

7.5 The Group has not entered into or been engaged in or been a party to any transaction which is artificial or fictitious or any transaction or series of transactions or scheme or arrangement of which the main or dominant purpose or one of the main or dominant purposes was the avoidance or deferral of or reduction in the liability to Taxation of the Group.

 

7.6 All business transactions amongst members of the Group have been conducted in all material respects in accordance with all applicable taxation laws and regulations.

 

8. ACCOUNTS AND RECORDS

 

8.1 The Accounts:

 

(i) were prepared in accordance with the historical cost convention and on a proper and consistent basis; the bases and policies of accounting adopted for the purpose of preparing the Accounts are the same as those adopted in preparing the audited accounts of the Company in respect of the three last preceding accounting periods;

 

(ii) are complete and accurate in all material respects and give a true and fair view of the assets, liabilities, state of affairs and financial position of the Company at the Last Accounts Date and its profits for the financial period ended on that date;

 

(iii) comply with the requirements of the Companies Ordinance and other relevant laws; and

 

(iv) have been prepared in accordance with generally accepted accounting principles and practices in Hong Kong and comply with all current Statements of Standard Accounting Practices applicable to a Hong Kong company.

 

8.2 The Management Accounts have been prepared on a basis consistent with that employed in preparing the Accounts and fairly represent the assets and liabilities and the profits and losses of the Group as at and to the date for which they have been prepared.

 

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8.3 Records and documents: All accounting, financial and other records of the Group (including the statutory books of the Group):

 

(i) have been properly prepared, filed and maintained;

 

(ii) constitute an accurate record of all matters required by law to appear in them;

 

(iii) do not contain any material inaccuracies or discrepancies;

 

(iv) are in the possession of the member of the Group to which they relate; and

 

(v) comply with all applicable laws.

 

No notice has been received or allegation made that any of those records are incorrect or should be rectified.

 

9. EVENTS SINCE THE LAST ACCOUNTS DATE

 

9.1 Since the Last Accounts Date:

 

(i) except for the termination of the Services Agreement pursuant to the Services Termination Deed, the termination of the Office License pursuant to the Office License Termination Deed, the amendments to the IP Licence Deed pursuant to the Supplemental IP Licence and Permitted Payments made by the Group from the date of this Agreement up to Closing (each of which shall not constitute a breach of this representation and warranty), the Group has carried on its business in the ordinary course and as a going concern and without any interruption or alteration in the nature, scope or manner of the business;

 

(ii) there has been no material adverse change of the Group as a whole;

 

(iii) no dividend or other distribution has been declared, made or paid by the Company in respect of its Shares and no loans or loan capital have been repaid by any member of the Group in whole or in part to any person other than another member of the Group;

 

(iv) except as disclosed in any monthly return, next day return or announcement of the Company which is available on the Stock Exchange website up to the date of this Agreement, there has been no issue of any shares in each member of the Group or the grant or agreement to grant any option over any shares or uncalled capital of each member of the Group or the issue of any obligations convertible into such shares other than as contemplated under this Agreement;

 

     Page 35

 

  

(v) except for the termination of the Services Agreement pursuant to the Services Termination Deed, the termination of the Office License pursuant to the Office License Termination Deed, the amendments to the IP Licence Deed pursuant to the Supplemental IP Licence and Permitted Payments made by the Group from the date of this Agreement up to Closing (each of which shall not constitute a breach of this representation and warranty), there has been no sale or disposal of any part of the material undertaking or the material assets of the Company and other members of the Group otherwise than in the ordinary course of its business;

 

(vi) the Group has not entered into, or agreed to enter into, any material commitments involving capital expenditure otherwise than in the ordinary course of its business;

 

(vii) there has been no creation or issue or allowing to come into being of any mortgage or charge upon any part of the property or assets or uncalled capital of the Group or the creation or issue of any debenture or debenture stock or the obtaining of any advance or credit in any form from any person which is not a member of the Group other than normal trade credit in the ordinary course of business and other than as contemplated under this Agreement;

 

(viii) except as required or contemplated by this Agreement, there has been no dismissal or any change in the terms of employment of any director or senior employee of the Group;

 

(ix) there has been no voluntary liquidation of any member of the Group;

 

(x) each member of the Group has not borrowed any money from any person which is not a member of the Group, created any material liabilities or assumed material capital commitment other than in the ordinary course of business;

 

(xi) no event has occurred which would entitle any third party (with or without the giving of notice) to call for the repayment of indebtedness by any member of the Group prior to its normal maturity date;

 

(xii) there are no unusual or long term commitments or contracts of an onerous nature in effect in connection with the Company’s business which are not included in the Due Diligence Bundle; and

 

(xiii) no resolution of shareholders in general meeting of each member of the Group has been passed, except for those representing the ordinary business of an annual general meeting.

 

9.2 Since the Last Accounts Date, the Company has been paying its third party creditors in respect of all of its debts which have become due and payable in its ordinary course of business and in accordance with the normal trading practice generally accepted in the markets in which the Company carries on its business.

 

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10. INTELLECTUAL PROPERTY RIGHTS

 

10.1 In this section, Intellectual Property Rights shall mean patents, knowhow, trade secrets and other confidential information, registered or unregistered designs, copyrights, Internet domain names of any level, design rights, trade marks, service marks, business names, registrations of, applications to register and rights to apply for registration of any of the aforesaid items, rights in the nature of any of the aforesaid items in any country, rights in the nature of unfair competition rights, rights to sue for passing off, moral rights and other registrable or unregistrable intellectual property rights.

 

10.2 The Group’s use or exploitation of its Intellectual Property Rights has not infringed and does not infringe any Intellectual Property Rights of any person in circumstances where any such infringement would have a material adverse effect on the business or operations of the Group. There are not and have not been any disputes, claims or proceedings threatened or in existence in any court, tribunal or other competent authority in respect of any use or exploitation of Intellectual Property Rights by the Group.

 

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Schedule 4

 

Cash and Cash Equivalents, BTI Receivable and Liabilities as at 31 March 2017

 

The Cash and Cash Equivalents, BTI Receivable and Liabilities as at 31 March 2017 are as follows:

 

    HK$  
Cash and Cash Equivalents     100,114,548  
(a)     Structured Notes        
(b)     Bank deposits with original maturity over three months     94,206,878  
(c)     Bank balances and cash     228,344,170  
Total:     422,665,596  
         
BTI Receivable     10,125,117  
         
Liabilities        
(a)     Trade payables     9,662,181  
(b)     Accrued liabilities and other payables     8,134,551  
(c)     Taxation payable     3,360,153  
(d)     Amount due to a fellow subsidiary     845,126  
(e)     Amount due to a shareholder of a joint venture     2,334,000  
(f)       Amount due to related companies     1,424,553  
Total:     25,760,564  

 

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[Signature Page to the Sale and Purchase Agreement relating to Shares in MelcoLot Limited]

 

In Witness whereof this Agreement has been entered into the day and year first above written.

 

SIGNED by )  
for and on behalf of )  
Melco LottVentures Holdings Limited )  
     
SIGNED by )  
for and on behalf of )  
500.com Limited )  
     
EXECUTED AS A DEED by )  
  )  
for and on behalf of )  
Melco International Development )  
Limited )  

 

     

 

Exhibit 4.96

 

Exclusive Option Agreement

 

This Exclusive Option Agreement (this “Agreement”) is executed by and among the following Parties as of July 3, 2017 in Shenzhen, the People’s Republic of China (“China” or the “PRC”):

 

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd, a wholly foreign owned enterprise, organized and existing under the laws of the PRC, with its address at Room 3-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

Party B: Yu Bo , a Chinese citizen with Chinese Identification No.: 420106196805034857; and

 

Party C: Shenzhen E-Sun Network Co., Ltd, a limited liability company organized and existing under the laws of the PRC, with its address at Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

In this Agreement, each of Party A, Party B and Party C shall be referred to as a “Party” respectively, and they shall be collectively referred to as the “Parties”.

 

Whereas:

 

Party B holds 50% of the equity interest in Party C;

 

Now therefore, upon mutual discussion and negotiation, the Parties have reached the following agreement:

 

1、 Sale of Purchase of Equity Interest

 

1.1 Option Granted

 

Party B hereby irrevocably grants Party A an irrevocable and exclusive right to purchase, or designate one or more persons (each, a “Designee”) to purchase the equity interests in Party C then held by Party B once or at multiple times at any time in part or in whole at Party A’s sole and absolute discretion to the extent permitted by Chinese laws and at the price described in Section 1.3 herein (such right being the “Equity Interest Purchase Option”). Except for Party A and the Designee(s), no other person shall be entitled to the Equity Interest Purchase Option or other rights with respect to the equity interests of Party B. Party C hereby agrees to the grant by Party B of the Equity Interest Purchase Option to Party A. The term “person” as used herein shall refer to individuals, corporations, partnerships, partners, enterprises, trusts or non-corporate organizations.

 

     

 

  

1.2 Steps for Exercise of Equity Interest Purchase Option

 

Subject to the provisions of the laws and regulations of China, Party A may exercise the Equity Interest Purchase Option by issuing a written notice to Party B (the “Equity Interest Purchase Option Notice”), specifying: a) Party A’s decision to exercise the Equity Interest Purchase Option, b) the portion of equity interests to be purchased from Party B (the “Optioned Interests”); and c) the date for purchasing the Optioned Interests and/or the date for transfer of the Optioned Interests.

 

1.3 Equity Interest Purchase Price

 

The purchase price of the Optioned Interests (the “Base Price”) shall be RMB 10. If appraisal is required by the laws of the PRC at the time when Party A exercises the Equity Interest Purchase Option, the Parties shall negotiate in good faith and based on the appraisal result make necessary adjustment to the Equity Interest Purchase Price so that it complies with any and all then applicable laws of the PRC (collectively, the “Equity Interest Purchase Price”), under such circumstances, Party B shall compensate Party A for the difference between the Equity Interests Purchase Price and the Basic Price.

 

1.4 Transfer of Optioned Interests

 

For each exercise of the Equity Interest Purchase Option:

1.4.1 Party B shall cause Party C to promptly convene a shareholder’s meeting, at which a resolution shall be adopted approving Party B’s transfer of the Optioned Interests to Party A and/or the Designee(s);

1.4.2 Party B shall obtain written statements from the other shareholders of Party B giving consent to the transfer of the equity interest to Party A and/or the Designee(s) and waiving any right of first refusal related thereto.

1.4.3 Party B shall execute a share transfer contract with respect to each transfer with Party A and/or each Designee (whichever is applicable), in accordance with the provisions of this Agreement and the Equity Interest Purchase Option Notice regarding the Optioned Interests;

1.4.4 The relevant Parties shall execute all other necessary contracts, agreements or documents, obtain all necessary government licenses and permits and take all necessary actions to transfer valid ownership of the Optioned Interests to Party A and/or the Designee(s), unencumbered by any security interests, and cause Party A and/or the Designee(s) to become the registered owner(s) of the Optioned Interests. For the purpose of this Section and this Agreement, “security interests” shall include securities, mortgages, third party’s rights or interests, any stock options, acquisition right, right of first refusal, right to offset, ownership retention or other security arrangements, but shall be deemed to exclude any security interest created by this Agreement and Party B’s Share Pledge Agreement. “Party B’s Share Pledge Agreement” as used in this Section and this Agreement shall refer to the Share Pledge Agreement (“Share Pledge Agreement”) executed by and among Party A, Party B and Party C as of the date hereof, whereby Party B pledges all of its equity interest in Party C to Party A, in order to guarantee Party C’s performance of its obligations under the Exclusive Business Corporation Agreement executed by and between Party C and Party A.

 

     

 

 

2、 Covenants

 

2.1 Covenants regarding Party C

 

Party B (as the shareholders of Party C) and Party C hereby covenants as follows: 

2.1.1 Without the prior written consent of Party A, they shall not in any manner supplement, change or amend the articles of association and bylaws of Party C, increase or decrease its registered capital, or change its structure of registered capital in other manners;

2.1.2 They shall maintain Party C’s corporate existence in accordance with good financial and business standards and practices by prudently and effectively operating its business and handling its affairs;

2.1.3 Without prior written consent of Party A, they shall not at any time following the date hereof, sell, transfer, mortgage or dispose of in any manner any assets of Party C or legal or beneficial interest in the business or revenues of Party C, or allow the encumbrance thereon of any security interest;

2.1.4 Without prior written consent of Party A, they shall not incur, inherit, guarantee or suffer the existence of any debt, except for a) debts incurred in the ordinary course of business other than through loans; and b) debts disclosed to Party A for which Party A’s written consent has been obtained;

2.1.5 They shall always operate all of Party C’s business during the ordinary course of business to maintain the asset value of Party C and refrain from any action/omission that may affect Party C’s operating status and asset value.

2.1.6 Without prior written consent of Party A, they shall not cause Party C to execute any major contract, except the contracts in the ordinary course of business (for purpose of this subsection, a contract with a price exceeding RMB500,000 shall be deemed a major contract);

2.1.7 Without prior written consent of Party A, they shall not cause Party C to provide any person with any loan or credit;

2.1.8 They shall provide Party A with information on Party C’s business operations and financial condition at Party A’s request;

2.1.9 If requested by Party A, they shall procure and maintain insurance in respect of Party C’s assets and business from an insurance carrier acceptable to Party A, at an amount and type of coverage typical for companies that operate similar business;

2.1.10 Without the prior written consent of Party A, they shall not cause or permit Party C to merge, consolidate with, acquire or invest in any person;

2.1.11 They shall immediately notify Party A of the occurrence or possible occurrence of any litigation, arbitration or administrative proceedings relating to Party C’s assets, business or revenue;

2.1.12 To maintain the ownership by Party C of all of its assets, they shall execute all necessary or appropriate documents, take all necessary or appropriate actions and file all necessary or appropriate complaints or raise necessary and appropriate defenses against all claims;

2.1.13 Without prior written consent of Party A, they shall ensure that Party C shall not in any manner distribute dividends to its shareholders, provided that upon Party A’s written request, Party C shall immediately distribute profits to its shareholders; and

2.1.14 At the request of Party A, they shall appoint any persons designated by Party A as the executive director of Party C.

 

     

 

  

2.2 Covenants of Party B and Party C

 

Party B hereby covenants as follows: 

2.2.1 Without the prior written consent of Party A, Party B shall not sell, transfer, mortgage or dispose of in any other manner any legal or beneficial interest in the equity interest in Party C held by Party B, or allow the encumbrance thereon of any security interest, except for the pledge placed on these equity interests in accordance with Party B’s Share Pledge Agreement;

2.2.2 Party B shall cause the shareholders’ meeting and/or the executive director of Party C not to approve the sale, transfer, mortgage or disposition in any other manner of any legal or beneficial interest in the equity interests in Party C held by Party B, or allow the encumbrance thereon of any security interest, without the prior written consent of Party A, except for the pledge placed on these equity interests in accordance with Party B’s Share Pledge Agreement;

2.2.3 Party B shall cause the shareholders’ meeting or the executive director of Party C not to approve any merger or consolidation with any person, or any acquisition of or investment in any person, without the prior written consent of Party A;

2.2.4 Party B shall immediately notify Party A of the occurrence or possible occurrence of any litigation, arbitration or administrative proceedings relating to the equity interests in Party C held by Party B;

2.2.5 Party B shall cause the shareholders’ meeting or the executive director of Party C to vote their approval of the transfer of the Optioned Interests as set forth in this Agreement and to take any and all other actions that may be requested by Party A;

2.2.6 To the extent necessary to maintain Party B’s ownership in Party C, Party B shall execute all necessary or appropriate documents, take all necessary or appropriate actions and file all necessary or appropriate complaints or raise necessary and appropriate defenses against all claims;

2.2.7 Party B shall appoint any designee of Party A as the executive director of Party C, at the request of Party A;

2.2.8 At the request of Party A at any time, Party B shall promptly and unconditionally transfer its equity interests in Party C to Party A’s Designee(s) in accordance with the Equity Interest Purchase Option under this Agreement, and Party B hereby waives its right of first refusal to the respective share transfer by the other exiting shareholder of Party C (if any); and

2.2.9 Party B shall strictly abide by the provisions of this Agreement and other contracts jointly or separately executed by and among Party B, Party C and Party A, perform the obligations hereunder and thereunder, and refrain from any action/omission that may affect the effectiveness and enforceability thereof. To the extent that Party B has any remaining rights with respect to the equity interests subject to this Agreement hereunder or under the Share Pledge Agreement among the same parties hereto or under the Power of Attorney granted in favor of Party A, Party B shall not exercise such rights except in accordance with the written instructions of Party A.

 

     

 

  

3、 Representations and Warranties

 

Party B and Party C hereby represent and warrant to Party A, jointly and severally, as of the date of this Agreement and each date of transfer of the Optioned Interests, that: 

3.1 They have the authority to execute and deliver this Agreement and any share transfer contracts to which they are parties concerning the Optioned Interests to be transferred thereunder (each, a “Transfer Contracts”), and to perform their obligations under this Agreement and any Transfer Contracts. Party B and Party C agree to enter into Transfer Contracts consistent with the terms of this Agreement upon Party A’s exercise of the Equity Interest Purchase Option. This Agreement and the Transfer Contracts to which they are parties constitute or will constitute their legal, valid and binding obligations and shall be enforceable against them in accordance with the provisions thereof;

3.2 The execution and delivery of this Agreement or any Transfer Contracts and the obligations under this Agreement or any Transfer Contracts shall not: i) cause any violation of any applicable laws of China; ii) be in consistent with the articles of association, bylaws or other organizational documents of Party C; iii) cause the violation of any contracts or instruments to which they are a party or which are binding on them, or constitute any breach under any contracts or instruments to which they are a party or which are binding on them; iv) cause any violation of any condition for the grant and/or continued effectiveness any licenses or permits issued to either of them; or v) cause the suspension or revocation of or imposition of additional conditions to any licenses or permits issued to either of them;

3.3 Party B has a good and merchantable title to the equity interests in Party C he holds. Except for Party B’s Share Pledge Agreement, Party B has not placed any security interest on such equity interests;

3.4 Party C has a good and merchantable title to all of its assets, and has not placed any security interest on the aforementioned assets;

3.5 Party C does not have any outstanding debts, except for (i) debt incurred in the ordinary course of business; and (ii) debts disclosed to Party A for which Party A’s written consent has been obtained.

3.6 Party C has complied with all laws and regulations of China applicable to asset acquisitions; and

3.7 There are no pending or threatened litigation, arbitration or administrative proceedings relating to the equity interests in Party C, assets of Party C or Party C.

 

4、 Effective Date

 

This Agreement shall become effective upon the date hereof, and remain effective for a term of 10 years, and may be renewed at Party A’s sole discretion.

 

5、 Governing Law and Resolution of Disputes

 

5.1 Governing law

The execution, effectiveness, construction, performance, amendment and termination of this Agreement and the resolution of disputes hereunder shall be governed by the formally published and publicly available laws of China. Matters not covered by formally published and public available laws of China shall be governed by international legal principles and practices.

 

     

 

  

5.2 Methods of Resolution of Disputes

 

In the event of any dispute with respect to the construction and performance of this Agreement, the Parties shall first resolve the dispute through friendly negotiations. In the event the Parties fail to reach an agreement on the dispute within 30 days after either Party’s request to the other Parties for resolution of the dispute through negotiations, either Party may submit the relevant dispute to the China International Economic and Trade Arbitration Commission South China Sub-Commission for arbitration, in accordance with its Arbitration Rules. The arbitration shall be conducted in Shenzhen, and the language used in arbitration shall be Chinese. The arbitration award shall be final and binding of all Parties.

 

6、 Taxes and Fees

 

Each Party shall pay any and all transfer and registration tax, expenses and fees incurred thereby or levied thereon in accordance with the law of China in connection with the preparation and execution of this Agreement and the Transfer Contracts, as well as the consummation of the transactions contemplated under this Agreement and the Transfer Contracts.

 

7、 Notices

 

7.1 All notices and other communications required or permitted to be given pursuant to this Agreement shall be delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile transmission to the address of such Party set forth below. A confirmation copy of each notice shall also be sent by mail. The dates on which notices shall be deemed to have been effectively given shall be determined as follows:

7.1.1 Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be deemed effectively given on the date or receipt or refusal at the address specified for notices.

7.1.2 Notices given by facsimile transmission shall be deemed effectively given on the date of successful transmission (as evidence by an automatically generated confirmation of transmission).

7.2 For the purpose of notices, the addresses of the Parties are as follows:

Party A: Room 3-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

Party B: Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

Party C: Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

     

 

 

7.3 Any Party may at any time change its address for notices by a notice delivered to the other Parties in accordance with the terms hereof.

 

8、 Confidentiality

 

The Parties acknowledge that the existence and the terms of this Agreement and any oral or written information exchanged between the Parties in connection with the preparation and performance this Agreement are regarded as confidential information. Each Party shall maintain confidentiality of all such confidential information, and without obtaining the written consent of the other Party, it shall not disclose any relevant confidential information to any third parties, except for the information that: i) is or will be in the public domain (other than through the receiving Party’s unauthorized disclosure); ii) is under the obligation to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange, or orders of the court or other government authorities; or iii) is required to be disclosed by any Party to its shareholders, investors, legal counsels or financial advisors regarding the transaction contemplated hereunder, provided that such shareholders, investors, legal counsels or financial advisors shall be bound by the confidentiality obligations similar to those set forth in this Section. Disclosure of any confidential information by the staff members or agencies hired by any Party shall be deemed disclosure of such confidential information by such Party, which Party shall be held liable for breach of this Agreement. This Section shall survive the termination of this Agreement for any reason.

 

9、 Further Warranties

 

The Parties agree to promptly execute documents that are reasonably required for or are conducive to the implementation of the provisions and purposes of this Agreement and take further actions that are reasonably required for or are conducive to the implementation of the provisions and purposes of this Agreement.

 

10、 Miscellaneous

 

10.1 Amendments, change and supplement

Any amendment, change and supplement to this Agreement shall require the execution of a written agreement by all of the Parties.

 

10.2 Entire agreement

Except for the amendments, supplements or changes in writing executed after the execution of this Agreement, this Agreement shall constitute the entire agreement reached by and among the Parties hereto with respect to the subject matter hereof, and shall supercede all prior oral and written consultations, representations and contracts reached with respect to the subject matter of this Agreement.

 

10.3 Headings

The headings of this Agreement are for convenience only, and shall not be used to interpret, explain or otherwise affect the meanings of the provisions of this Agreement.

 

     

 

  

10.4 Language

This Agreement is written in both Chinese and English language in three copies, each Party having one copy with equal legal validity; in case there is any conflict between the Chinese version and the English version, the Chinese version shall prevail.

 

10.5 Severability

In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected or compromised in any respect. The Parties shall strive in good faith to replace such invalid, illegal or unenforceable provisions with effective provisions that accomplish to the greatest extent permitted by law and the intensions of the Parties, and the economic effect of such effective provisions shall be as close as possible to the economic effect of those invalid, illegal or unenforceable provisions.

 

10.6 Successors

This Agreement shall be binding on and shall inure to the interest of the respective successors of the Parties and the permitted assigns of such Parties.

 

10.7 Survival

10.7.1 Any obligations that occur or that are due as a result of this Agreement upon the expiration or early termination of this Agreement shall survive the expiration or early termination thereof.

10.7.2 The provisions of Sections 5, 7, 8 and this Section 10.7 shall survive the termination of this Agreement.
     

10.8 Waivers

Any Party may waive the terms and conditions of this Agreement, provided that such a waiver must be provided in writing and shall require the signatures of the Parties. No waiver by any Party in certain circumstances with respect to a breach by other Parties shall operate as a waiver by such a Party with respect to any similar breach in other circumstances.

 

The Remainder of this page is intentionally left blank.

 

     

 

  

IN WITNESS WHEREOF, the Parties have caused their authorized representatives to execute this Exclusive Option Agreement as of the date first above written.

 

Party A:  E-Sun Sky Computer (Shenzhen) Co., Ltd

By: /s/ Yu Bo  

Name: Yu Bo  
Title: Legal Representative  

 

Party B:  Yu Bo

By: /s/ Yu Bo  

 

Party C: Shenzhen E-Sun Network Co., Ltd

By: /s/ Yu Bo  

Name: Yu Bo  
Title: Legal Representative  

 

     

 

Exhibit 4.97

 

Exclusive Option Agreement

 

This Exclusive Option Agreement (this “Agreement”) is executed by and among the following Parties as of July 3, 2017 in Shenzhen, the People’s Republic of China (“China” or the “PRC”):

 

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd, a wholly foreign owned enterprise, organized and existing under the laws of the PRC, with its address at Room 3-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

Party B: Zhang Han , a Chinese citizen with Chinese Identification No.: 422802198708030014; and

 

Party C: Shenzhen E-Sun Network Co., Ltd, a limited liability company organized and existing under the laws of the PRC, with its address at Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

In this Agreement, each of Party A, Party B and Party C shall be referred to as a “Party” respectively, and they shall be collectively referred to as the “Parties”.

 

Whereas:

 

Party B holds 50% of the equity interest in Party C;

 

Now therefore, upon mutual discussion and negotiation, the Parties have reached the following agreement:

 

1、 Sale of Purchase of Equity Interest

 

1.1 Option Granted

Party B hereby irrevocably grants Party A an irrevocable and exclusive right to purchase, or designate one or more persons (each, a “Designee”) to purchase the equity interests in Party C then held by Party B once or at multiple times at any time in part or in whole at Party A’s sole and absolute discretion to the extent permitted by Chinese laws and at the price described in Section 1.3 herein (such right being the “Equity Interest Purchase Option”). Except for Party A and the Designee(s), no other person shall be entitled to the Equity Interest Purchase Option or other rights with respect to the equity interests of Party B. Party C hereby agrees to the grant by Party B of the Equity Interest Purchase Option to Party A. The term “person” as used herein shall refer to individuals, corporations, partnerships, partners, enterprises, trusts or non-corporate organizations.

 

1.2 Steps for Exercise of Equity Interest Purchase Option

Subject to the provisions of the laws and regulations of China, Party A may exercise the Equity Interest Purchase Option by issuing a written notice to Party B (the “Equity Interest Purchase Option Notice”), specifying: a) Party A’s decision to exercise the Equity Interest Purchase Option, b) the portion of equity interests to be purchased from Party B (the “Optioned Interests”); and c) the date for purchasing the Optioned Interests and/or the date for transfer of the Optioned Interests.

 

     

 

 

1.3 Equity Interest Purchase Price

The purchase price of the Optioned Interests (the “Base Price”) shall be RMB 10. If appraisal is required by the laws of the PRC at the time when Party A exercises the Equity Interest Purchase Option, the Parties shall negotiate in good faith and based on the appraisal result make necessary adjustment to the Equity Interest Purchase Price so that it complies with any and all then applicable laws of the PRC (collectively, the “Equity Interest Purchase Price”), under such circumstances, Party B shall compensate Party A for the difference between the Equity Interests Purchase Price and the Basic Price.

 

1.4 Transfer of Optioned Interests

For each exercise of the Equity Interest Purchase Option:

 

1.4.1 Party B shall cause Party C to promptly convene a shareholder’s meeting, at which a resolution shall be adopted approving Party B’s transfer of the Optioned Interests to Party A and/or the Designee(s);
1.4.2 Party B shall obtain written statements from the other shareholders of Party B giving consent to the transfer of the equity interest to Party A and/or the Designee(s) and waiving any right of first refusal related thereto.
1.4.3 Party B shall execute a share transfer contract with respect to each transfer with Party A and/or each Designee (whichever is applicable), in accordance with the provisions of this Agreement and the Equity Interest Purchase Option Notice regarding the Optioned Interests;
1.4.4 The relevant Parties shall execute all other necessary contracts, agreements or documents, obtain all necessary government licenses and permits and take all necessary actions to transfer valid ownership of the Optioned Interests to Party A and/or the Designee(s), unencumbered by any security interests, and cause Party A and/or the Designee(s) to become the registered owner(s) of the Optioned Interests. For the purpose of this Section and this Agreement, “security interests” shall include securities, mortgages, third party’s rights or interests, any stock options, acquisition right, right of first refusal, right to offset, ownership retention or other security arrangements, but shall be deemed to exclude any security interest created by this Agreement and Party B’s Share Pledge Agreement. “Party B’s Share Pledge Agreement” as used in this Section and this Agreement shall refer to the Share Pledge Agreement (“Share Pledge Agreement”) executed by and among Party A, Party B and Party C as of the date hereof, whereby Party B pledges all of its equity interest in Party C to Party A, in order to guarantee Party C’s performance of its obligations under the Exclusive Business Corporation Agreement executed by and between Party C and Party A.

 

2 、 Covenants

 

2.1

Covenants regarding Party C

Party B (as the shareholders of Party C) and Party C hereby covenants as follows:

 

     

 

  

2.1.1 Without the prior written consent of Party A, they shall not in any manner supplement, change or amend the articles of association and bylaws of Party C, increase or decrease its registered capital, or change its structure of registered capital in other manners;
2.1.2 They shall maintain Party C’s corporate existence in accordance with good financial and business standards and practices by prudently and effectively operating its business and handling its affairs;
2.1.3 Without prior written consent of Party A, they shall not at any time following the date hereof, sell, transfer, mortgage or dispose of in any manner any assets of Party C or legal or beneficial interest in the business or revenues of Party C, or allow the encumbrance thereon of any security interest;
2.1.4 Without prior written consent of Party A, they shall not incur, inherit, guarantee or suffer the existence of any debt, except for a) debts incurred in the ordinary course of business other than through loans; and b) debts disclosed to Party A for which Party A’s written consent has been obtained;
2.1.5 They shall always operate all of Party C’s business during the ordinary course of business to maintain the asset value of Party C and refrain from any action/omission that may affect Party C’s operating status and asset value.
2.1.6 Without prior written consent of Party A, they shall not cause Party C to execute any major contract, except the contracts in the ordinary course of business (for purpose of this subsection, a contract with a price exceeding RMB500,000 shall be deemed a major contract);
2.1.7 Without prior written consent of Party A, they shall not cause Party C to provide any person with any loan or credit;
2.1.8 They shall provide Party A with information on Party C’s business operations and financial condition at Party A’s request;
2.1.9 If requested by Party A, they shall procure and maintain insurance in respect of Party C’s assets and business from an insurance carrier acceptable to Party A, at an amount and type of coverage typical for companies that operate similar business;
2.1.10 Without the prior written consent of Party A, they shall not cause or permit Party C to merge, consolidate with, acquire or invest in any person;
2.1.11 They shall immediately notify Party A of the occurrence or possible occurrence of any litigation, arbitration or administrative proceedings relating to Party C’s assets, business or revenue;
2.1.12 To maintain the ownership by Party C of all of its assets, they shall execute all necessary or appropriate documents, take all necessary or appropriate actions and file all necessary or appropriate complaints or raise necessary and appropriate defenses against all claims;
2.1.13 Without prior written consent of Party A, they shall ensure that Party C shall not in any manner distribute dividends to its shareholders, provided that upon Party A’s written request, Party C shall immediately distribute profits to its shareholders; and
2.1.14 At the request of Party A, they shall appoint any persons designated by Party A as the executive director of Party C.

 

2.2 Covenants of Party B and Party C

Party B hereby covenants as follows:

 

2.2.1 Without the prior written consent of Party A, Party B shall not sell, transfer, mortgage or dispose of in any other manner any legal or beneficial interest in the equity interest in Party C held by Party B, or allow the encumbrance thereon of any security interest, except for the pledge placed on these equity interests in accordance with Party B’s Share Pledge Agreement;

 

     

 

 

2.2.2 Party B shall cause the shareholders’ meeting and/or the executive director of Party C not to approve the sale, transfer, mortgage or disposition in any other manner of any legal or beneficial interest in the equity interests in Party C held by Party B, or allow the encumbrance thereon of any security interest, without the prior written consent of Party A, except for the pledge placed on these equity interests in accordance with Party B’s Share Pledge Agreement;
2.2.3 Party B shall cause the shareholders’ meeting or the executive director of Party C not to approve any merger or consolidation with any person, or any acquisition of or investment in any person, without the prior written consent of Party A;
2.2.4 Party B shall immediately notify Party A of the occurrence or possible occurrence of any litigation, arbitration or administrative proceedings relating to the equity interests in Party C held by Party B;
2.2.5 Party B shall cause the shareholders’ meeting or the executive director of Party C to vote their approval of the transfer of the Optioned Interests as set forth in this Agreement and to take any and all other actions that may be requested by Party A;
2.2.6 To the extent necessary to maintain Party B’s ownership in Party C, Party B shall execute all necessary or appropriate documents, take all necessary or appropriate actions and file all necessary or appropriate complaints or raise necessary and appropriate defenses against all claims;
2.2.7 Party B shall appoint any designee of Party A as the executive director of Party C, at the request of Party A;
2.2.8 At the request of Party A at any time, Party B shall promptly and unconditionally transfer its equity interests in Party C to Party A’s Designee(s) in accordance with the Equity Interest Purchase Option under this Agreement, and Party B hereby waives its right of first refusal to the respective share transfer by the other exiting shareholder of Party C (if any); and
2.2.9 Party B shall strictly abide by the provisions of this Agreement and other contracts jointly or separately executed by and among Party B, Party C and Party A, perform the obligations hereunder and thereunder, and refrain from any action/omission that may affect the effectiveness and enforceability thereof. To the extent that Party B has any remaining rights with respect to the equity interests subject to this Agreement hereunder or under the Share Pledge Agreement among the same parties hereto or under the Power of Attorney granted in favor of Party A, Party B shall not exercise such rights except in accordance with the written instructions of Party A.

 

     

 

 

3、 Representations and Warranties

Party B and Party C hereby represent and warrant to Party A, jointly and severally, as of the date of this Agreement and each date of transfer of the Optioned Interests, that:

 

3.1 They have the authority to execute and deliver this Agreement and any share transfer contracts to which they are parties concerning the Optioned Interests to be transferred thereunder (each, a “Transfer Contracts”), and to perform their obligations under this Agreement and any Transfer Contracts. Party B and Party C agree to enter into Transfer Contracts consistent with the terms of this Agreement upon Party A’s exercise of the Equity Interest Purchase Option. This Agreement and the Transfer Contracts to which they are parties constitute or will constitute their legal, valid and binding obligations and shall be enforceable against them in accordance with the provisions thereof;
3.2 The execution and delivery of this Agreement or any Transfer Contracts and the obligations under this Agreement or any Transfer Contracts shall not: i) cause any violation of any applicable laws of China; ii) be in consistent with the articles of association, bylaws or other organizational documents of Party C; iii) cause the violation of any contracts or instruments to which they are a party or which are binding on them, or constitute any breach under any contracts or instruments to which they are a party or which are binding on them; iv) cause any violation of any condition for the grant and/or continued effectiveness any licenses or permits issued to either of them; or v) cause the suspension or revocation of or imposition of additional conditions to any licenses or permits issued to either of them;
3.3 Party B has a good and merchantable title to the equity interests in Party C he holds. Except for Party B’s Share Pledge Agreement, Party B has not placed any security interest on such equity interests;
3.4 Party C has a good and merchantable title to all of its assets, and has not placed any security interest on the aforementioned assets;
3.5 Party C does not have any outstanding debts, except for (i) debt incurred in the ordinary course of business; and (ii) debts disclosed to Party A for which Party A’s written consent has been obtained.
3.6 Party C has complied with all laws and regulations of China applicable to asset acquisitions; and
3.7 There are no pending or threatened litigation, arbitration or administrative proceedings relating to the equity interests in Party C, assets of Party C or Party C.

 

4、 Effective Date

This Agreement shall become effective upon the date hereof, and remain effective for a term of 10 years, and may be renewed at Party A’s sole discretion.

 

5 、 Governing Law and Resolution of Disputes

5.1 Governing law

The execution, effectiveness, construction, performance, amendment and termination of this Agreement and the resolution of disputes hereunder shall be governed by the formally published and publicly available laws of China. Matters not covered by formally published and public available laws of China shall be governed by international legal principles and practices.

 

     

 

 

 

5.2 Methods of Resolution of Disputes

In the event of any dispute with respect to the construction and performance of this Agreement, the Parties shall first resolve the dispute through friendly negotiations. In the event the Parties fail to reach an agreement on the dispute within 30 days after either Party’s request to the other Parties for resolution of the dispute through negotiations, either Party may submit the relevant dispute to the China International Economic and Trade Arbitration Commission South China Sub-Commission for arbitration, in accordance with its Arbitration Rules. The arbitration shall be conducted in Shenzhen, and the language used in arbitration shall be Chinese. The arbitration award shall be final and binding of all Parties.

 

6、 Taxes and Fees

Each Party shall pay any and all transfer and registration tax, expenses and fees incurred thereby or levied thereon in accordance with the law of China in connection with the preparation and execution of this Agreement and the Transfer Contracts, as well as the consummation of the transactions contemplated under this Agreement and the Transfer Contracts.

 

7 、 Notices

7.1 All notices and other communications required or permitted to be given pursuant to this Agreement shall be delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile transmission to the address of such Party set forth below. A confirmation copy of each notice shall also be sent by mail. The dates on which notices shall be deemed to have been effectively given shall be determined as follows:
7.1.1 Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be deemed effectively given on the date or receipt or refusal at the address specified for notices.
7.1.2 Notices given by facsimile transmission shall be deemed effectively given on the date of successful transmission (as evidence by an automatically generated confirmation of transmission).
7.2 For the purpose of notices, the addresses of the Parties are as follows:

Party A: Room 3-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

Party B: Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

Party C: Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

7.3 Any Party may at any time change its address for notices by a notice delivered to the other Parties in accordance with the terms hereof.

 

     

 

 

8、 Confidentiality

The Parties acknowledge that the existence and the terms of this Agreement and any oral or written information exchanged between the Parties in connection with the preparation and performance this Agreement are regarded as confidential information. Each Party shall maintain confidentiality of all such confidential information, and without obtaining the written consent of the other Party, it shall not disclose any relevant confidential information to any third parties, except for the information that: i) is or will be in the public domain (other than through the receiving Party’s unauthorized disclosure); ii) is under the obligation to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange, or orders of the court or other government authorities; or iii) is required to be disclosed by any Party to its shareholders, investors, legal counsels or financial advisors regarding the transaction contemplated hereunder, provided that such shareholders, investors, legal counsels or financial advisors shall be bound by the confidentiality obligations similar to those set forth in this Section. Disclosure of any confidential information by the staff members or agencies hired by any Party shall be deemed disclosure of such confidential information by such Party, which Party shall be held liable for breach of this Agreement. This Section shall survive the termination of this Agreement for any reason.

 

9 、 Further Warranties

The Parties agree to promptly execute documents that are reasonably required for or are conducive to the implementation of the provisions and purposes of this Agreement and take further actions that are reasonably required for or are conducive to the implementation of the provisions and purposes of this Agreement.

 

10、 Miscellaneous

10.1 Amendments, change and supplement

Any amendment, change and supplement to this Agreement shall require the execution of a written agreement by all of the Parties.

10.2 Entire agreement

Except for the amendments, supplements or changes in writing executed after the execution of this Agreement, this Agreement shall constitute the entire agreement reached by and among the Parties hereto with respect to the subject matter hereof, and shall supercede all prior oral and written consultations, representations and contracts reached with respect to the subject matter of this Agreement.

10.3 Headings

The headings of this Agreement are for convenience only, and shall not be used to interpret, explain or otherwise affect the meanings of the provisions of this Agreement.

10.4 Language

This Agreement is written in both Chinese and English language in three copies, each Party having one copy with equal legal validity; in case there is any conflict between the Chinese version and the English version, the Chinese version shall prevail.

10.5 Severability

In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected or compromised in any respect. The Parties shall strive in good faith to replace such invalid, illegal or unenforceable provisions with effective provisions that accomplish to the greatest extent permitted by law and the intensions of the Parties, and the economic effect of such effective provisions shall be as close as possible to the economic effect of those invalid, illegal or unenforceable provisions.

 

     

 

 

10.6 Successors

This Agreement shall be binding on and shall inure to the interest of the respective successors of the Parties and the permitted assigns of such Parties.

10.7 Survival
10.7.1 Any obligations that occur or that are due as a result of this Agreement upon the expiration or early termination of this Agreement shall survive the expiration or early termination thereof.
10.7.2 The provisions of Sections 5, 7, 8 and this Section 10.7 shall survive the termination of this Agreement.
10.8 Waivers

Any Party may waive the terms and conditions of this Agreement, provided that such a waiver must be provided in writing and shall require the signatures of the Parties. No waiver by any Party in certain circumstances with respect to a breach by other Parties shall operate as a waiver by such a Party with respect to any similar breach in other circumstances.

 

The Remainder of this page is intentionally left blank.

 

     

 

 

IN WITNESS WHEREOF, the Parties have caused their authorized representatives to execute this Exclusive Option Agreement as of the date first above written.

 

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd  
By: /s/ Yu Bo  
Name: Yu Bo  
Title: Legal Representative  
   
Party B: Zhang Han  
By: /s/ Zhang Han  
   
Party C: Shenzhen E-Sun Network Co., Ltd  
By: /s/ Yu Bo
Name: Yu Bo  
Title: Legal Representative  

 

     

 

 

Exhibit 4.98

 

Equity Interest Pledge Agreement

 

This Equity Interest Pledge Agreement (this “Agreement”) has been executed by and among the following parties on July 3, 2017 in Shenzhen, the People’s Republic of China (“China” or the “PRC”):

 

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd (hereinafter “Pledgee”), a wholly foreign owned enterprise, organized and existing under the laws of the PRC, with its address at Room B01, Floor 8, Building 7B, Shenzhen Bay ecological science and Technology Park, Nanshan District, Shenzhen;

 

Party B: Yu Bo (hereinafter “Pledgor”), a Chinese citizen with Chinese Identification No.: 420106196805034857; and

 

Party C: Shenzhen E-Sun Network Co., Ltd ., a limited liability company organized and existing under the laws of the PRC, with its address at Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

In this Agreement, each of Pedgee, Pledgor and Party C shall be referred to as a “Party” respectively, and they shall be collectively referred to as the “Parties”.

 

Whereas:

 

Party C is a limited liability company registered in Shenzhen, China, engaging in the Internet information service business. Party C acknowledges the respective rights and obligations of Pledgor and Pledgee under this Agreement, and intends to provide any necessary assistance in registering the Pledge;

 

Pledgee is wholly foreign-owned enterprise registered in China. Pledgee and Party C partially owned by Pledgor have executed an Exclusive Business Cooperation Agreement on as of the execution date of this Agreement;

 

To ensure that Party C fully performs its obligations under the Exclusive Business Cooperation Agreement any pay the consulting and service fees thereunder to the Pledgee when the same becomes due, Pledgor hereby pledges to the Pledgee all of the equity interest he holds in Party C as security for payment of the consulting and service fees by Party C under the Business Cooperation Agreement.

 

To ensure that Party C fully performs its obligations under the Exclusive Business Cooperation Agreement and pay the consulting and service fees thereunder to the Pledgee when the same becomes due, Pledgor hereby pledges to the Pledgee all of the equity interest he holds in Party C as security for payment of the consulting and service fees by Party C under the Business Cooperation Agreement.

 

     

 

  

To perform the provisions of the Business Cooperation Agreement, the Parties have mutually agreed to execute this Agreement upon the following terms.

 

1、 Definitions

Unless otherwise provided herein, the terms below shall have the following meaning:

1.1 Pledge: shall refer to the security interest granted by Pledgor to Pledgee pursuant to Article 2 of this Agreement, i.e. the right of Pledgee to be compensated on a preferential basis with the conversion, auction or sales price of the Equity Interest.
1.2 Equity Interest: shall refer to all of the equity interest lawfully now held and hereafter acquired by Pledgor in Party C.
1.3 Term of Pledge: shall refer to the term set forth in Section 3.2 of this Agreement.
1.4 Business Cooperation Agreement: shall refer to the Exclusive Business Cooperation Agreement executed by and between Party C and Pledgee as of the execution date of this Agreement.
1.5 Event of Default: shall refer to any of the circumstances set forth in Article 7 of this Agreement.
1.6 Notice of Default: shall refer to the notice issued by Pledgee in accordance with this Agreement declaring an Event of Default.

 

2、 The Pledge

As collateral security for the timely and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of any or all of the payments due by Party C, including without limitation the consulting and services fees payable to the Pledgee under the Business Cooperation Agreement, Pledgor hereby pledges to Pledgee a first security interest in all of Pledgor’s right, title and interest, whether now owned or hereafter acquired by Pledgor, in the Equity Interest of Party C.

 

3、 Term of Pledge
3.1 The Pledge shall become effective on such date when the pledge of the Equity Interest contemplated herein has been registered with relevant administration for industry and commerce (the “AIC”). The Pledge shall be continuously valid until all payments due under the Business Cooperation Agreement have been fulfilled by Party C. Pledgor and Party C shall 1) register the Pledge in the shareholders’ register of Party C within 3 business days following the execution of this Agreement, and 2) submit an application to the AIC for the registration of the Pledge of the Equity Interest contemplated herein within three (3) months following the execution of this Agreement. The parties covenant that for the purpose of registration of the Pledge, the parties hereto and all other shareholders of Party C shall submit to the AIC this Agreement or an equity interest pledge contract in the form required by the AIC at the location of Party C which shall truly reflect the information of the Pledge hereunder (the “AIC Pledge Contract”). For matters not specified in the AIC Pledge Contract, the Parties shall be bound by the provisions of this Agreement. Pledgor and Party C shall submit all necessary documents and complete all necessary procedures, as required by the PRC laws and regulations and the relevant AIC, to ensure that the Pledge of the Equity Interest shall registered with the AIC as soon as possible after filing.

 

     

 

  

3.2 During the Term of Pledge, in the event Party C fails to pay the exclusive consulting or service fees in accordance with the Business Cooperation Agreement, Pledgee shall have the right, but not the obligation, to dispose of the Pledge in accordance with the provisions of this Agreement.

 

4、 Custody of Records for Equity Interest subject to Pledge
4.1 During the Term of Pledge set forth in this Agreement, Pledgor shall deliver to Pledgee’s custody the capital contribution certificate for the Equity Interest and the shareholders’ register containing the Pledge within one week from the execution of this Agreement. Pledgee shall have custody of such items during the entire Term of Pledge set forth in this Agreement.
4.2 Pledgee shall have the right to collect dividends generated by the Equity Interest during the Term of Pledge.

 

5、 Representations and Warranties of Pledgor
5.1 Pledgor is the sole legal and beneficial owner of the Equity Interest.
5.2 Pedgee shall have the right to dispose of and transfer the Equity Interest in accordance with the provisions set forth in this Agreement.
5.3 Except for the Pledge, Pledgor has not placed any security interest or other encumbrance on the Equity Interest.

 

6、 Covenants and Further Agreements of Pledgor
6.1 Pledgor hereby covenants to the Pledgee, that during the term of this Agreement, Plegor shall:
6.1.1 not transfer the Equity Interest, place or permit the existence of any secutiry interest or other encumbrance on the Equity Interest, without the prior written consent of Pledgee, except for the performance of the Exclusive Option Agreement executed by Pledgor, the Pledgee and Party C on the execution date of this Agreement;
6.1.2 comply with the provisions of all laws and regulations applicable to the pledge of rights, and within 5 days of receipt of any notice, order or recommendation issued or prepared by relevant competent authorities regarding the Pledge, shall present the aforementioned notice, order or recommendation to Pledgee, and shall comply with the aforementioned notice, order or recommendation or submit objections and representations with respect to the aforementioned matters upon Pledgee’s reasonable request or upon consent of Pledgee;
6.1.3 promptly notify Pledgee of any event or notice received by Pledgor that may have an impact on Pledgee’s rights to the Equity Interest or any portion thereof, as well as any event or notice received by Pledgor that may have an impact on any guarantees and other obligations of Pledgor arising out of this Agreement.

 

     

 

  

6.2 Pledgor agrees that the rights acquired by Pledgee in accordance with this Agreement with respect to the Pledgee shall not be interrupted or harmed by Pledgor or any heirs or representatives of Pledgor or any other persons through any legal proceedings.
6.3 To protect or perfect the security interest granted by this Agreement for payment of the consulting and service fees under the Business Cooperation Agreement, Plegor hereby undertakes to execute all certificates, agreements, deeds and/or covenants required by Pledgee. Pledgor also undertakes to perform and to cause other parties who have an interest in the Pledge to perform actions required by Pledgee, to facilitate the exercise by Pledgee of its rights and authority granted thereto by this Agreement, and to enter into all relevant documents regarding ownership of Equity Interest with Pledgee or designee(s) of Pledgee (natural persons/legal persons). Pledgor undertakes to provide Pledgee within a reasonable time with all notices, orders and decisions regarding the Pledge that are required by Pledgee.
6.4 Pledgor hereby undertakes to comply with and perform all guarantees, promises, agreements, representations and conditions under this Agreement. In the event of failure or partial performance of its guarantees, promises, agreements, representations and conditions, Pledgor shall indemnify Pledgee for all losses resulting therefrom.
6.5 The Pledgor agrees that, during the term of this Agreement, any and all dividends obtained by the Pledgor from Party C shall constitute fructus of the pledged Equity Interest. The Pledgee shall have the right to collect the dividends on behalf of the Pledgor and such dividends shall constitute part of the Pledge and shall always be subject to the provisions under this Agreement in connection with the Pledge. The Pledgor further agrees to pledge such dividends to the Pledgee in the manner allowed by relevant laws and regulations and shall complete relevant registration procedures, if so required.

 

7、 Event of Breach
7.1 The following circumstances shall be deemed an Event of Default:
7.1.1 Party C fails to fully and timely fulfill any liabilities under the Business Cooperation Agreement, including without limitation failure to pay in full any of the consulting and service fees payable under the Business Cooperation Agreement or breaches any other obligations of Party C thereunder;
7.1.2 Pledgor or Party C has committed a material breach of any provisions of this Agreement;
7.1.3 Except as expressly stipulated in Section 6.1.1, Pledgor transfers or purports to transfer or abandons the Equity Interest pledged or assigns the Equity Interest pledged without the written consent of Pledgee; and
7.1.4 The successor or custodian of Party C is capable of only partially perform or refuses to perform the payment obligations under the Business Cooperation Agreement.
7.2 Upon notice or discovery of the occurrence of any circumstances or event that may lead to the aforementioned circumstances described in Section 7.1, Pledgor shall immediately notify Pledgee in writing accordingly.

 

     

 

  

7.3 Unless an Event of Default set forth in this Section 7.1 has been successfully resolved to Pledgee’s satisfaction within twenty (20) days after the Pledgee delivers a notice to the Pledgor requesting ratification of such Event of Default, Pledgee may issue a Notice of Default to Pledgor in writing at any time thereafter, demanding the Pledgor to immediately dispose of the Pledge in accordance with the provisions of Article 8 of this Agreement.

 

8、 Exercise of Pledge
8.1 Prior to the full payment of the consulting and service fees described in the Business Cooperation Agreement, without the Pledgee’s written consent, Pledgor shall not assign the Equity Interest in Party C.
8.2 Pledgee may issue a Notice of Default to Pledgor when exercising the Pledge.
8.3 Subject to the provisions of Section 7.3, Pledgee may exercise the right to enforce the Pledge at any time after the issuance of the Notice of Default in accordance with Section 7.2.
8.4 Pledgee is entitled to convert the Equity Interests of Party C hereunder, in whole or in part, into money for offset or have priority in satisfying his claim from the proceeds of auction or sale thereof in accordance with legal procedures, until the debts and all other liabilities of Party C under Business Cooperation Agreement are fully and completely repaid.
8.5 When Pledgee disposes of the Pledge in accordance with this Agreement, Pledgor and Party C shall provide necessary assistance to enable Pledgee to enforce the Pledge in accordance with this Agreement.

 

9、 Assignment
9.1 Without Pledgee’s prior written consent, Pledgor shall not have the right to assign its rights and obligations under this Agreement.
9.2 This Agreement shall be binding on Pledgor and tis successors and permitted assigns, and shall be valid with respect to Pledgee and each of its successors and assigns.
9.3 At any time, Pledgee may assign any and all of its rights and obligations under the Business Cooperation Agreement to its designee(s) (natural/legal persons), in which case the assigns shall have the rights and obligations of Pledgee under this Agreement, as if it were the original party to this Agreement. When the Pledgee assigns the rights and obligations under the Business Cooperation Agreement, upon Pledgee’s request, Pledgor shall execute relevant agreements or other documents relating to such assignment.
9.4 In the event of a change in Pledgee due to an assignment, Pledgor shall, at the request of Pledgee, execute a new pledge agreement with the new pledgee on the same terms and conditions as this Agreement, and register the same with the relevant AIC.
9.5 Pledgor shall strictly abide by the provisions of this Agreement and other contracts jointly or separately executed by the Parties hereto or any of them, including the Exclusive Option Agreement and the Power of Attorney granted to Pledgee, perform the obligations hereunder and thereunder, and refrain from any action/omission that may affect the effectiveness and enforceability thereof.

 

     

 

  

10、 Termination

Upon the full payment of the consulting and service fees under the Business Cooperation Agreement and upon termination of Party C’s obligations under the Business Cooperation Agreement, this Agreement shall be terminated, and Pledgee shall then cancel or terminate this Agreement as soon as reasonably practicable.

 

11、 Handling Fees and Other Expenses

All fees and out of pocket expenses relating to this Agreement, including but not limited to legal costs, costs of production, stamp tax and any other taxes and fees, shall be borne by Party C.

 

12、 Confidentiality

The Parties acknowledge that the existence and the terms of this Agreement and any oral or written information exchanged between the Parties in connection with the preparation and performance this Agreement are regarded as confidential information. Each Party shall maintain confidentiality of all such confidential information, and without obtaining the written consent of the other Party, it shall not disclose any relevant confidential information to any third parties, except for the information that: a) is or will be in the public domain (other than through the receiving Party’s unauthorized disclosure); b) is under the obligation to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange, or orders of the court or other government authorities; or c) is required to be disclosed by any Party to its shareholders, investors, legal counsels or financial advisors regarding the transaction contemplated hereunder, provided that such shareholders, investors, legal counsels or financial advisors shall be bound by the confidentiality obligations similar to those set forth in this Section. Disclosure of any confidential information by the staff members or agencies hired by any Party shall be deemed disclosure of such confidential information by such Party, which Party shall be held liable for breach of this Agreement. This Section shall survive the termination of this Agreement for any reason.

 

13、 Governing Law and Resolution of Disputes
13.1 The execution, effectiveness, construction, performance, amendment and termination of this Agreement and the resolution of disputes hereunder shall be governed by the laws of China.
13.2 In the event of any dispute with respect to the construction and performance of this Agreement, the Parties shall first resolve the dispute through friendly negotiations. In the event the Parties fail to reach an agreement on the dispute within 30 days after either Party’s request to the other Parties for resolution of the dispute through negotiations, either Party may submit the relevant dispute to the South China International Economic and Trade Arbitration Commission for arbitration, in accordance with its Arbitration Rules. The arbitration shall be conducted in Shenzhen, and the language used in arbitration shall be Chinese. The arbitration award shall be final and binding on all Parties.
13.3 Upon the occurrence of any disputes arising from the construction and performance of this Agreement or during the pending arbitration of any dispute, except for the matters under dispute, the Parties to this Agreement shall continue to exercise their respective rights under this Agreement and perform their respective rights under this Agreement and perform their respective obligations under this Agreement.

 

     

 

  

14、 Notices
14.1 All notices and other communications required or permitted to be given pursuant to this Agreement shall be delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile transmission to the address of such party set forth below. A confirmation copy of each notice shall also be sent by E-mail. The dates on which notices shall be deemed to have been effectively given shall be determined as follows.
14.2 Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be deemed effectively given on the date of receipt or refusal at the address specified for notices.
14.3 Notices given by facsimile transmission shall be deemed effectively given on the date of successful transmission (as evidenced by an automatically generated confirmation of transmission).
14.4 For the purpose of notices, the addresses of the Parties are as follows:

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd

Address: Room B01, Floor 8, Building 7B, Shenzhen Bay ecological science and Technology Park, Nanshan District, Shenzhen

 

Party B: Yu Bo

Address: Room 3-A, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

Party C: Shenzhen E-Sun Network Co., Ltd .

Address: Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

14.5 Any Party may at any time change its address for notice by a notice delivered to the other Parties in accordance with the terms hereof.

 

15、 Severability

In the event that one or several of the provisions of this Contract are found to be invalid, illegal or unenforceable in any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of this Contract shall not be affected or compromised in any respect. The Parties shall strive in good faith to replace such invalid, illegal or unenforceable provisions with effective provision that accomplish to the greatest extent permitted by law and the intentions of the Parties, and the economic effect of such effective provisions shall be as close as possible to the economic effect of those invalid, illegal or unenforceable provisions.

 

16、 Attachments

The attachments set forth herein shall be an integral part of this Agreement.

 

     

 

  

17、 Effectiveness

The Parties have the requisite power and authority to enter into and perform this Agreement; the execution and delivery of, and performance by any Party of its obligations under this Agreement have all been duly authorized and approved by such Party.

Any amendments, changes and supplements to this Agreement shall be in writing and shall become effective upon completion of the governmental filing procedures (if applicable) after the affixation of the signature or seals of the Parties.

This Agreement is written in Chinese and English in three copies. Pledgor, Pledgee and Party C shall hold one copy respectively. Each copy of this Agreement shall have equal validity. In case there is any conflict between the Chinese version and the English version, the Chinese version shall prevail.

 

This page was intentionally left blank.

 

     

 

 

IN WITNESS WHEREOF, the Parties have caused their authorized representative to execute this Equity Interest Pledge Agreement as of the date first above written.

 

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd

By: /s/Yu Bo  

Name: Yu Bo  
Title: Legal Representative  

 

Party B: Yu Bo

By: /s/Yu Bo  

 

Party C: Shenzhen E-Sun Network Co., Ltd .

By: /s/Yu Bo  

Name: Yu Bo  
Title: Legal Representative  

 

     

 

Exhibit 4.99

 

Equity Interest Pledge Agreement

 

This Equity Interest Pledge Agreement (this “Agreement”) has been executed by and among the following parties on July 3, 2017 in Shenzhen, the People’s Republic of China (“China” or the “PRC”):

 

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd (hereinafter “Pledgee”), a wholly foreign owned enterprise, organized and existing under the laws of the PRC, with its address at Room B01, Floor 8, Building 7B, Shenzhen Bay ecological science and Technology Park, Nanshan District, Shenzhen;

 

Party B: Zhang Han (hereinafter “Pledgor”), a Chinese citizen with Chinese Identification No.: 422802198708030014; and

 

Party C: Shenzhen E-Sun Network Co., Ltd ., a limited liability company organized and existing under the laws of the PRC, with its address at Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

In this Agreement, each of Pedgee, Pledgor and Party C shall be referred to as a “Party” respectively, and they shall be collectively referred to as the “Parties”.

 

Whereas:

 

Party C is a limited liability company registered in Shenzhen, China, engaging in the Internet information service business. Party C acknowledges the respective rights and obligations of Pledgor and Pledgee under this Agreement, and intends to provide any necessary assistance in registering the Pledge;

 

Pledgee is wholly foreign-owned enterprise registered in China. Pledgee and Party C partially owned by Pledgor have executed an Exclusive Business Cooperation Agreement on as of the execution date of this Agreement;

 

To ensure that Party C fully performs its obligations under the Exclusive Business Cooperation Agreement any pay the consulting and service fees thereunder to the Pledgee when the same becomes due, Pledgor hereby pledges to the Pledgee all of the equity interest he holds in Party C as security for payment of the consulting and service fees by Party C under the Business Cooperation Agreement.

 

To ensure that Party C fully performs its obligations under the Exclusive Business Cooperation Agreement and pay the consulting and service fees thereunder to the Pledgee when the same becomes due, Pledgor hereby pledges to the Pledgee all of the equity interest he holds in Party C as security for payment of the consulting and service fees by Party C under the Business Cooperation Agreement.

 

     

 

  

To perform the provisions of the Business Cooperation Agreement, the Parties have mutually agreed to execute this Agreement upon the following terms.

 

1、 Definitions

Unless otherwise provided herein, the terms below shall have the following meaning:

 

1.1 Pledge: shall refer to the security interest granted by Pledgor to Pledgee pursuant to Article 2 of this Agreement, i.e. the right of Pledgee to be compensated on a preferential basis with the conversion, auction or sales price of the Equity Interest.
1.2 Equity Interest: shall refer to all of the equity interest lawfully now held and hereafter acquired by Pledgor in Party C.
1.3 Term of Pledge: shall refer to the term set forth in Section 3.2 of this Agreement.
1.4 Business Cooperation Agreement: shall refer to the Exclusive Business Cooperation Agreement executed by and between Party C and Pledgee as of the execution date of this Agreement.
1.5 Event of Default: shall refer to any of the circumstances set forth in Article 7 of this Agreement.
1.6 Notice of Default: shall refer to the notice issued by Pledgee in accordance with this Agreement declaring an Event of Default.

 

2、 The Pledge

As collateral security for the timely and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of any or all of the payments due by Party C, including without limitation the consulting and services fees payable to the Pledgee under the Business Cooperation Agreement, Pledgor hereby pledges to Pledgee a first security interest in all of Pledgor’s right, title and interest, whether now owned or hereafter acquired by Pledgor, in the Equity Interest of Party C.

 

3、 Term of Pledge

3.1 The Pledge shall become effective on such date when the pledge of the Equity Interest contemplated herein has been registered with relevant administration for industry and commerce (the “AIC”). The Pledge shall be continuously valid until all payments due under the Business Cooperation Agreement have been fulfilled by Party C. Pledgor and Party C shall 1) register the Pledge in the shareholders’ register of Party C within 3 business days following the execution of this Agreement, and 2) submit an application to the AIC for the registration of the Pledge of the Equity Interest contemplated herein within three (3) months following the execution of this Agreement. The parties covenant that for the purpose of registration of the Pledge, the parties hereto and all other shareholders of Party C shall submit to the AIC this Agreement or an equity interest pledge contract in the form required by the AIC at the location of Party C which shall truly reflect the information of the Pledge hereunder (the “AIC Pledge Contract”). For matters not specified in the AIC Pledge Contract, the Parties shall be bound by the provisions of this Agreement. Pledgor and Party C shall submit all necessary documents and complete all necessary procedures, as required by the PRC laws and regulations and the relevant AIC, to ensure that the Pledge of the Equity Interest shall registered with the AIC as soon as possible after filing.

 

     

 

  

3.2 During the Term of Pledge, in the event Party C fails to pay the exclusive consulting or service fees in accordance with the Business Cooperation Agreement, Pledgee shall have the right, but not the obligation, to dispose of the Pledge in accordance with the provisions of this Agreement.

 

4、 Custody of Records for Equity Interest subject to Pledge

4.1 During the Term of Pledge set forth in this Agreement, Pledgor shall deliver to Pledgee’s custody the capital contribution certificate for the Equity Interest and the shareholders’ register containing the Pledge within one week from the execution of this Agreement. Pledgee shall have custody of such items during the entire Term of Pledge set forth in this Agreement.
4.2 Pledgee shall have the right to collect dividends generated by the Equity Interest during the Term of Pledge.

 

5、 Representations and Warranties of Pledgor

5.1 Pledgor is the sole legal and beneficial owner of the Equity Interest.
5.2 Pedgee shall have the right to dispose of and transfer the Equity Interest in accordance with the provisions set forth in this Agreement.
5.3 Except for the Pledge, Pledgor has not placed any security interest or other encumbrance on the Equity Interest.

 

6、 Covenants and Further Agreements of Pledgor

6.1 Pledgor hereby covenants to the Pledgee, that during the term of this Agreement, Plegor shall:
6.1.1 not transfer the Equity Interest, place or permit the existence of any secutiry interest or other encumbrance on the Equity Interest, without the prior written consent of Pledgee, except for the performance of the Exclusive Option Agreement executed by Pledgor, the Pledgee and Party C on the execution date of this Agreement;
6.1.2 comply with the provisions of all laws and regulations applicable to the pledge of rights, and within 5 days of receipt of any notice, order or recommendation issued or prepared by relevant competent authorities regarding the Pledge, shall present the aforementioned notice, order or recommendation to Pledgee, and shall comply with the aforementioned notice, order or recommendation or submit objections and representations with respect to the aforementioned matters upon Pledgee’s reasonable request or upon consent of Pledgee;
6.1.3 promptly notify Pledgee of any event or notice received by Pledgor that may have an impact on Pledgee’s rights to the Equity Interest or any portion thereof, as well as any event or notice received by Pledgor that may have an impact on any guarantees and other obligations of Pledgor arising out of this Agreement.

 

     

 

  

6.2 Pledgor agrees that the rights acquired by Pledgee in accordance with this Agreement with respect to the Pledgee shall not be interrupted or harmed by Pledgor or any heirs or representatives of Pledgor or any other persons through any legal proceedings.
6.3 To protect or perfect the security interest granted by this Agreement for payment of the consulting and service fees under the Business Cooperation Agreement, Plegor hereby undertakes to execute all certificates, agreements, deeds and/or covenants required by Pledgee. Pledgor also undertakes to perform and to cause other parties who have an interest in the Pledge to perform actions required by Pledgee, to facilitate the exercise by Pledgee of its rights and authority granted thereto by this Agreement, and to enter into all relevant documents regarding ownership of Equity Interest with Pledgee or designee(s) of Pledgee (natural persons/legal persons). Pledgor undertakes to provide Pledgee within a reasonable time with all notices, orders and decisions regarding the Pledge that are required by Pledgee.
6.4 Pledgor hereby undertakes to comply with and perform all guarantees, promises, agreements, representations and conditions under this Agreement. In the event of failure or partial performance of its guarantees, promises, agreements, representations and conditions, Pledgor shall indemnify Pledgee for all losses resulting therefrom.
6.5 The Pledgor agrees that, during the term of this Agreement, any and all dividends obtained by the Pledgor from Party C shall constitute fructus of the pledged Equity Interest. The Pledgee shall have the right to collect the dividends on behalf of the Pledgor and such dividends shall constitute part of the Pledge and shall always be subject to the provisions under this Agreement in connection with the Pledge. The Pledgor further agrees to pledge such dividends to the Pledgee in the manner allowed by relevant laws and regulations and shall complete relevant registration procedures, if so required.

 

7、 Event of Breach

7.1 The following circumstances shall be deemed an Event of Default:
7.1.1 Party C fails to fully and timely fulfill any liabilities under the Business Cooperation Agreement, including without limitation failure to pay in full any of the consulting and service fees payable under the Business Cooperation Agreement or breaches any other obligations of Party C thereunder;
7.1.2 Pledgor or Party C has committed a material breach of any provisions of this Agreement;
7.1.3 Except as expressly stipulated in Section 6.1.1, Pledgor transfers or purports to transfer or abandons the Equity Interest pledged or assigns the Equity Interest pledged without the written consent of Pledgee; and
7.1.4 The successor or custodian of Party C is capable of only partially perform or refuses to perform the payment obligations under the Business Cooperation Agreement.
7.2 Upon notice or discovery of the occurrence of any circumstances or event that may lead to the aforementioned circumstances described in Section 7.1, Pledgor shall immediately notify Pledgee in writing accordingly.
7.3 Unless an Event of Default set forth in this Section 7.1 has been successfully resolved to Pledgee’s satisfaction within twenty (20) days after the Pledgee delivers a notice to the Pledgor requesting ratification of such Event of Default, Pledgee may issue a Notice of Default to Pledgor in writing at any time thereafter, demanding the Pledgor to immediately dispose of the Pledge in accordance with the provisions of Article 8 of this Agreement.

 

     

 

  

8、 Exercise of Pledge

8.1 Prior to the full payment of the consulting and service fees described in the Business Cooperation Agreement, without the Pledgee’s written consent, Pledgor shall not assign the Equity Interest in Party C.
8.2 Pledgee may issue a Notice of Default to Pledgor when exercising the Pledge.
8.3 Subject to the provisions of Section 7.3, Pledgee may exercise the right to enforce the Pledge at any time after the issuance of the Notice of Default in accordance with Section 7.2.
8.4 Pledgee is entitled to convert the Equity Interests of Party C hereunder, in whole or in part, into money for offset or have priority in satisfying his claim from the proceeds of auction or sale thereof in accordance with legal procedures, until the debts and all other liabilities of Party C under Business Cooperation Agreement are fully and completely repaid.
8.5 When Pledgee disposes of the Pledge in accordance with this Agreement, Pledgor and Party C shall provide necessary assistance to enable Pledgee to enforce the Pledge in accordance with this Agreement.

 

9、 Assignment

9.1 Without Pledgee’s prior written consent, Pledgor shall not have the right to assign its rights and obligations under this Agreement.
9.2 This Agreement shall be binding on Pledgor and tis successors and permitted assigns, and shall be valid with respect to Pledgee and each of its successors and assigns.
9.3 At any time, Pledgee may assign any and all of its rights and obligations under the Business Cooperation Agreement to its designee(s) (natural/legal persons), in which case the assigns shall have the rights and obligations of Pledgee under this Agreement, as if it were the original party to this Agreement. When the Pledgee assigns the rights and obligations under the Business Cooperation Agreement, upon Pledgee’s request, Pledgor shall execute relevant agreements or other documents relating to such assignment.
9.4 In the event of a change in Pledgee due to an assignment, Pledgor shall, at the request of Pledgee, execute a new pledge agreement with the new pledgee on the same terms and conditions as this Agreement, and register the same with the relevant AIC.
9.5 Pledgor shall strictly abide by the provisions of this Agreement and other contracts jointly or separately executed by the Parties hereto or any of them, including the Exclusive Option Agreement and the Power of Attorney granted to Pledgee, perform the obligations hereunder and thereunder, and refrain from any action/omission that may affect the effectiveness and enforceability thereof.

 

     

 

 

10、 Termination

Upon the full payment of the consulting and service fees under the Business Cooperation Agreement and upon termination of Party C’s obligations under the Business Cooperation Agreement, this Agreement shall be terminated, and Pledgee shall then cancel or terminate this Agreement as soon as reasonably practicable.

 

11、 Handling Fees and Other Expenses

All fees and out of pocket expenses relating to this Agreement, including but not limited to legal costs, costs of production, stamp tax and any other taxes and fees, shall be borne by Party C.

 

12、 Confidentiality

The Parties acknowledge that the existence and the terms of this Agreement and any oral or written information exchanged between the Parties in connection with the preparation and performance this Agreement are regarded as confidential information. Each Party shall maintain confidentiality of all such confidential information, and without obtaining the written consent of the other Party, it shall not disclose any relevant confidential information to any third parties, except for the information that: a) is or will be in the public domain (other than through the receiving Party’s unauthorized disclosure); b) is under the obligation to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange, or orders of the court or other government authorities; or c) is required to be disclosed by any Party to its shareholders, investors, legal counsels or financial advisors regarding the transaction contemplated hereunder, provided that such shareholders, investors, legal counsels or financial advisors shall be bound by the confidentiality obligations similar to those set forth in this Section. Disclosure of any confidential information by the staff members or agencies hired by any Party shall be deemed disclosure of such confidential information by such Party, which Party shall be held liable for breach of this Agreement. This Section shall survive the termination of this Agreement for any reason.

 

13、 Governing Law and Resolution of Disputes

13.1 The execution, effectiveness, construction, performance, amendment and termination of this Agreement and the resolution of disputes hereunder shall be governed by the laws of China.
13.2 In the event of any dispute with respect to the construction and performance of this Agreement, the Parties shall first resolve the dispute through friendly negotiations. In the event the Parties fail to reach an agreement on the dispute within 30 days after either Party’s request to the other Parties for resolution of the dispute through negotiations, either Party may submit the relevant dispute to the South China International Economic and Trade Arbitration Commission for arbitration, in accordance with its Arbitration Rules. The arbitration shall be conducted in Shenzhen, and the language used in arbitration shall be Chinese. The arbitration award shall be final and binding on all Parties.
13.3 Upon the occurrence of any disputes arising from the construction and performance of this Agreement or during the pending arbitration of any dispute, except for the matters under dispute, the Parties to this Agreement shall continue to exercise their respective rights under this Agreement and perform their respective rights under this Agreement and perform their respective obligations under this Agreement.

 

     

 

  

14、 Notices

14.1 All notices and other communications required or permitted to be given pursuant to this Agreement shall be delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile transmission to the address of such party set forth below. A confirmation copy of each notice shall also be sent by E-mail. The dates on which notices shall be deemed to have been effectively given shall be determined as follows.
14.2 Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be deemed effectively given on the date of receipt or refusal at the address specified for notices.
14.3 Notices given by facsimile transmission shall be deemed effectively given on the date of successful transmission (as evidenced by an automatically generated confirmation of transmission).

14.4 For the purpose of notices, the addresses of the Parties are as follows:

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd

Address: Room B01, Floor 8, Building 7B, Shenzhen Bay ecological science and Technology Park, Nanshan District, Shenzhen

 

Party B: Zhang Han

Address: No. 1116, Lianhua Road, Futian District, Shenzhen

 

Party C: Shenzhen E-Sun Network Co., Ltd .

Address: Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

14.5 Any Party may at any time change its address for notice by a notice delivered to the other Parties in accordance with the terms hereof.

 

15、 Severability

In the event that one or several of the provisions of this Contract are found to be invalid, illegal or unenforceable in any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of this Contract shall not be affected or compromised in any respect. The Parties shall strive in good faith to replace such invalid, illegal or unenforceable provisions with effective provision that accomplish to the greatest extent permitted by law and the intentions of the Parties, and the economic effect of such effective provisions shall be as close as possible to the economic effect of those invalid, illegal or unenforceable provisions.

 

16、 Attachments

The attachments set forth herein shall be an integral part of this Agreement.

 

17、 Effectiveness

The Parties have the requisite power and authority to enter into and perform this Agreement; the execution and delivery of, and performance by any Party of its obligations under this Agreement have all been duly authorized and approved by such Party.

 

     

 

 

Any amendments, changes and supplements to this Agreement shall be in writing and shall become effective upon completion of the governmental filing procedures (if applicable) after the affixation of the signature or seals of the Parties.

This Agreement is written in Chinese and English in three copies. Pledgor, Pledgee and Party C shall hold one copy respectively. Each copy of this Agreement shall have equal validity. In case there is any conflict between the Chinese version and the English version, the Chinese version shall prevail.

 

This page was intentionally left blank.

 

     

 

 

IN WITNESS WHEREOF, the Parties have caused their authorized representative to execute this Equity Interest Pledge Agreement as of the date first above written.

 

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd  
By: /s/Yu Bo  
Name: Yu Bo  
Title: Legal Representative  
   
Party B: Zhang Han  
By: /s/ Zhang Han  
   
Party C: Shenzhen E-Sun Network Co., Ltd .  
By: /s/Yu Bo  
Name: Yu Bo  
Title: Legal Representative  

 

     

 

 

Exhibit 4.100

 

Confirmation Letter

 

To: 500WAN HK Limited (“ 500WAN HK ”)

 

Whereas:

 

500WAN HK is the sole shareholder of E-Sun Sky Computer (Shenzhen) Co., Ltd. (“E-Sun Sky Computer”) and holds 100% of the equity interest in E-Sun Sky Computer;

 

E-Sun Sky Computer accepted a Power of Attorney respectively from Yu Bo (Chinese Identification No.: 420106196805034857) on July 3, 2017 and Zhang Han(Chinese Identification No.: 422802198708030014) on July 3, 2017 (collectively referred to as the “ POA ”). Pursuant to the POA , Yu Bo and Zhang Han respectively delegate and authorize E-Sun Sky Computer to exercise their voting powers and all other shareholder rights in respect of Shenzhen E-Sun Network Co., Ltd on their behalf (the “ Rights ”).

 

Now therefore, with respect to the exercise of the Rights, E-Sun Sky Computer hereby confirms as follows:

 

1 、 E-Sun Sky Computer hereby confirms that, in exercising the Rights under the POA , it shall obtain the consent from 500WAN HK in the manner allowed by the PRC Laws.

 

2 、 E-Sun Sky Computer further confirms that it shall exercise the Rights in accordance with the instructions from the third party designated by 500WAN HK within the scope allowed by the PRC Laws.

 

3 、 This confirmation letter shall become effective upon execution, and maintain effective unless the POA is terminated in accordance with the provisions thereof.

 

4 、 The execution, effectiveness, construction, performance, amendment and termination of this confirmation letter and the resolution of disputes hereunder shall be governed by PRC Laws.

 

5 、 This confirmation letter is written in both Chinese and English language; in case there is any conflict between the Chinese version and the English version, the Chinese version shall prevail.

 

【 Signature Page Follows 】

 

E-Sun Sky Computer (Shenzhen) Co., Ltd  
   
By: /s/ Yu Bo  
Name: Yu Bo  
Title: Legal Representative  
Date: 2017.7.3  

 

 

 

 

Exhibit 4.101

 

Financial Support Agreement

 

This Financial Support Agreement (hereinafter referred to as the “Agreement”) is made and entered into by and among the following parties on July 3, 2017 in Shenzhen, the People’s Republic of China (hereinafter referred to as the “PRC”):

 

500.COM LIMITED (hereinafter referred to as “500.COM”), a company incorporated and existing under the laws of Cayman Islands, with its address at PO BOX 309, Ugland House, Grand Cayman, KYI-1104, Cayman Island;

 

E-Sun Sky Computer (Shenzhen) Co., Ltd. (hereinafter referred to as “E-sun Sky Computer”), a wholly foreign owned company incorporated and existing under the PRC laws, with its address at Room B01, Floor 8, Building 7B, Shenzhen Bay ecological science and Technology Park, Nanshan District, Shenzhen;

 

Yu Bo, a Chinese citizen with ID Card number of 420106196805034857; and

 

Zhang Han, a Chinese citizen with ID Card number of 422802198708030014.

 

WHEREAS

 

Yu Bo and Zhang Han are shareholders of Shenzhen E-Sun Network Co., Ltd. (a limited liability company incorporated and existing under the PRC laws, with its address at No. 1-C, Complex Building (including the affiliated equipment room) Shenxianling Sports Center, Central City, Longgang District, Shenzhen, hereinafter referred to as “E-Sun Network”);

 

E-sun Sky Computer is a wholly owned subsidiary of 500.COM in the PRC;

 

The Parties hereby confirm the finance and other matters of E-Sun Network as follows:

 

500.COM confirms and undertakes that, from the date of this Agreement (hereinafter referred to as the “Effective Date”), when needed by E-Sun Network, 500.COM agrees to unconditionally provide financial support (hereinafter referred to as “Financial Support”) to Yu Bo and Zhang Han by itself or through E-sun Sky Computer in the way permitted by PRC laws and regulations. Yu Bo and Zhang Han agree to accept such Financial Support in the way permitted by PRC laws and regulations, and undertake to unconditionally use such Financial Support they receive to fund E-Sun Network so as to support the operation and development of E-Sun Network.

 

To the extent permitted by PRC laws and regulations and other applicable laws, at the request of E-Sun Network, 500.COM agrees to instruct Yu Bo and Zhang Han to release E-Sun Network from the obligation of repayment of such Financial Support; if Yu Bo and Zhang Han release E-Sun Network from the obligation of repayment of the Financial Support under the instruction of 500.COM, then 500.COM agrees to release Yu Bo and Zhang Han from the obligation of repayment of the Financial Support correspondingly by itself or instructing E-sun Sky Computer to do so.

 

Where 500.COM provides financial support to E-Sun Network by itself or through E-sun Sky Computer, the specific provisions shall be otherwise negotiated and solved by the Parties hereto.

 

   

 

 

(The remainder of this page is intentionally left blank.)

 

 

 

 

[This is the signature page of the Financial Support Agreement.]

 

IN WITNESS WHEREOF, this Agreement has been executed by the Parties on the date first written above.

 

500.COM Limited  
   
By: /s/ Pan Zhengming  
Name: Pan Zhengming  
Title: CEO  
   
E-Sun Sky Computer (Shenzhen) Co., Ltd.  
   
By: /s/ Yu Bo  
Name: Yu Bo  
Title: Legal Representative  
   
Yu Bo  
   
By: /s/ Yu Bo  
   
Zhang Han  
   
By: /s/ Zhang Han  

 

 

 

Exhibit 4.102

 

Shareholder’s Voting Power Assignment Agreement

 

This Shareholder’s Voting Power Assignment Agreement (hereinafter referred to as the “Agreement”) is made and entered into by the following parties on July 3, 2017 in Shenzhen, the People’s Republic of China (hereinafter referred to as the “PRC”, which excludes, for the purpose of this Agreement, Hong Kong, Macau and Taiwan):

 

Party A:

E-Sun Sky Computer (Shenzhen) Co., Ltd.

Registered Address: Room B01, Floor 8, Building 7B, Shenzhen Bay ecological science and Technology Park, Nanshan District, Shenzhen

 

Party B:

Yu Bo , ID Card No.: 420106196805034857;

Zhang Han , ID Card No.: 422802198708030014

 

Party C:

Shenzhen E-Sun Network Co., Ltd.

Registered Address: Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

 

Party A, Party B and Party C shall be hereinafter referred to collectively as the “Parties” and individually as a “Party” .

 

WHEREAS

 

1. Party B are Chinese citizens, and as shareholders of Party C hold 100% equity of Party C (hereinafter referred to as “Party B’s Equity”), of which, Yu Bo holds 50% equity of Party C and Zhang Han holds 50% equity of Party C.

 

2. Party B agrees to entrust Party A to exercise its shareholder’s rights in Party C in accordance with the terms and conditions agreed herein and Party A agrees to accept such entrustment in accordance with the terms and conditions agreed herein.

 

THEREFORE, the Parties hereby agree as follows:

 

 

 

 

Article 1

 

On the effective date of this Agreement, Party B irrevocably entrusts Party A to exercise all of its shareholder’s voting power and other shareholder’s rights under the laws and the articles of association on the shareholders’ meeting of Party C on behalf of Party B, which include but not limited to the right to sell, transfer, pledge or dispose any or all of the equity held by Party B in Party C; the right to convene, attend or preside over the shareholders’ meeting of Party C as an authorized representative of Party C’s shareholder; the right to elect and replace executive director, director, supervisor, manager and other senior executive; the right to deliberate and approve the profits distribution scheme and loss make-up scheme of Party C and resolve on Party C’s merger, split, liquidation or change of corporate form; and the right to decide the operation policy and investment plan of Party C and amend the articles of association, etc.

 

Article 2

 

Party A agrees to accept the proxy granted by Party B in Article 1 hereof, and will exercise such voting power and shareholder’s rights on behalf of Party B in accordance with the provisions of this Agreement.

 

Article 3

 

Party B hereby confirms that it will entrust Party A to exercise all shareholder’s voting power and other shareholder’s rights regardless of any change in Party C’s equity.

 

Article 4

 

During the term of this Agreement, Party B hereby waives all rights it has granted to Party A through this Agreement in connection with Party B’s Equity, and will no longer exercise such rights by itself or entrusting other parties other than Party A.

 

Article 5

 

This Agreement shall be signed by the Parties personally or their respective legal representatives or authorized representatives on the date first written above, and become effective on the same day. Unless otherwise explicitly specified herein or except Party A determines to terminate this Agreement in writing, this Agreement shall be in full effect and force during the period when Party B holds any equity of Party C. During the term of this Agreement, unless otherwise provided for by laws, Party B shall in no case revoke, terminate in advance or rescind this Agreement. Notwithstanding the foregoing, Party A may at any time issue a written notice to Party B thirty (30) days in advance to terminate this Agreement.

 

 

 

 

Article 6

 

Unless otherwise provided herein, the amendment to and/or termination of this Agreement must be consented by the Parties in writing. The amendments and supplementary agreements to this Agreement which are duly signed by the Parties shall be integral parts of this Agreement and have the same legal effect with this Agreement.

 

Article 7

 

If any provision of this Agreement is invalid or unenforceable due to inconsistency with relevant laws, such provision shall be deemed invalid only to the extent where the relevant laws apply, and will not affect the legal validity of other provisions of this Agreement.

 

Article 8

 

Any notice or other communication given by any Party as required hereunder shall be written in Chinese and delivered by personal delivery, mail or fax to the following address of other Parties or other address as may be designated by other Parties to such Party from time to time. The date on which the notice is deemed to have been properly served shall be determined as follows: (a) in case of notice sent by personal delivery, it shall be deemed to have been properly served on the same date of personal delivery; (b) in case of notice sent by letter, it shall be deemed to have been properly served on the tenth (10 th ) day upon the date of mailing by the registered airmail, postage prepaid (and the mailing date shall be the one indicated on the postmark), or the fourth (4 th ) day upon delivery to an internationally recognized courier service agency; and (c) in case of notice sent by fax, it shall be deemed to have been properly served at the time of receipt showed on the confirmation of transmission of relevant documents.

 

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd.

Address:

Attn.:

Fax:

Tel:

 

Party B: Yu Bo

Address:

Fax:

Tel:

 

 

 

 

Party C: Shenzhen E-Sun Network Co., Ltd.

Address: Room 1-C, Complex Building (including affiliated equipment room), Shenxianling Sports Center, Central City, Longgang District, Shenzhen

Attn.:

Fax:

Tel:

 

Article 9

 

Without prior written consent of Party A, Party B may not assign its rights and obligations hereunder to any third party. Party B hereby agrees that Party A may assign its rights and obligations hereunder to any other third party whenever necessary. Party A shall only be required to issue a written notice to Party B when such assignment occurs, without the need to obtain consent from Party B on such assignment.

 

Article 10

 

The Parties acknowledge and confirm that any oral or written material mutually exchanged in connection with this Agreement shall be Confidential Information. The Parties shall keep in confidential all such information, and without written consent of other Parties, they may not disclose any relevant information to any third party except under the following circumstances: (a) where such information is or will be known by the general public (for reasons other than the unauthorized disclosure to the public by any Party receiving such information); (b) where the disclosure of such information is required by the applicable laws or stock exchange rules or regulations; or (c) where any Party needs to disclose such information to its legal or financial advisor for the purpose of the transaction contemplated herein, and such legal or financial advisor also needs to assume confidentiality liability similar to that provided in this Article. The breach of confidentiality by the staff of or agency retained by any Party shall be deemed as breach of confidentiality by such Party, and such Party shall assume the liabilities for breach of contract in accordance with this Agreement. This Article will survive the invalidity, change, termination, rescission or inoperability of this Agreement due to any reason.

 

Article 11

 

The conclusion, validity, interpretation, performance, revision and termination and dispute resolution of this Agreement shall be governed by the PRC laws. In case of any dispute between the Parties hereto arising out of the interpretation and performance of this Agreement, the Parties shall negotiate to solve such dispute in good faith. In case of failure to do so, either Party may submit such dispute to the South China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules then in force. The seat of arbitration shall be Shenzhen, and the language of arbitration shall be Chinese. The arbitration award shall be final and binding upon the Parties.

 

 

 

 

Article 12

 

Once effective, this Agreement shall constitute the entire agreement among the Parties hereto with respect to the content of this Agreement and thoroughly supersede all oral and written agreements and understandings among the Parties with respect to the content hereof prior to the conclusion of this Agreement.

 

Article 13

 

This Agreement shall be made in four original copies, with each Party holding one copy with the same legal effect.

 

(The remainder of this page is intentionally left blank.)

 

 

 

 

(Signature Page.)

 

IN WITNESS WHEREOF, this Agreement has been executed by the Parties on the date first written above.

 

Party A: E-Sun Sky Computer (Shenzhen) Co., Ltd.  
By: /s/ Yu Bo  
Name: Yu Bo  
Title: Legal Representative  
   
Party B: Yu Bo  
By: /s/ Yu Bo  
   
Zhang Han  
By: /s/ Zhang Han  
   
Party C: Shenzhen E-Sun Network Co., Ltd.  
By: /s/ Yu Bo  
Name: Yu Bo  
Title: Legal Representative  

 

 

 

 

Exhibit 4.103

 

Power of Attorney

 

I, Yu Bo , a Chinese citizen with Chinese Identification Card No. 420106196805034857 , and a holder of 50% of the entire registered capital in Shenzhen E-Sun Network Co., Ltd (the “Company”) (“My Shareholding”), hereby irrevocably authorize E-Sun Sky Computer (Shenzhen) Co., Ltd. (“WFOE”) to exercise the following rights relating to My Shareholding during the term of this Power of Attorney:

 

WFOE is hereby authorized to act on behalf of myself as my exclusive agent and attorney with respect of all matters concerning My Shareholding, including without limitation to: 1) attend shareholder’s meetings of Company; 2) exercise all the shareholders’ rights and shareholders’ voting rights I am entitled to under the laws of China and Company’s Articles of Association during the shareholders’ meeting, including but not limited to decide on the sale or transfer or pledge or disposition of My Shareholding in part or in whole and execute relevant legal documents; and 3) designate and appoint on behalf of myself the legal representative, the executive director, supervisor, the manager and other senior management members of Company.

 

Without limiting the generality of the powers granted hereunder, WFOE shall have the power and authority under this Power of Attorney to execute the Transfer Contracts stipulated in Exclusive Option Agreement, to which I am required to be a party, on behalf of myself, and to effect the terms of the Share Pledge Agreement and Exclusive Option Agreement, both dated the date hereof, to which I am a party.

 

All the actions associated with My Shareholding conducted by WFOE shall be deemed as my own actions, and all the documents related to My Shareholding executed by WFOE shall be deemed to be executed by me. I hereby acknowledge and ratify those actions and/or documents by WFOE.

 

WFOE is entitled to re-authorize or assign its rights related to the aforesaid matters to any other person or entity at its own discretion and without giving prior notice to me or obtaining my consent.

 

This Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this Power of Attorney, so long as I am a shareholder of Company.

 

This Power of Attorney is written in Chinese and English; in case there is any conflict between the Chinese version and the English version, the Chinese version shall prevail.

 

  By: /s/ Yu Bo  
  Date: July 3, 2017  

 

 

 

 

Exhibit 4.104

 

Power of Attorney

 

I, Zhang Han , a Chinese citizen with Chinese Identification Card No. 422802198708030014 , and a holder of 50% of the entire registered capital in Shenzhen E-Sun Network Co., Ltd (the “Company”) (“My Shareholding”), hereby irrevocably authorize E-Sun Sky Computer (Shenzhen) Co., Ltd. (“WFOE”) to exercise the following rights relating to My Shareholding during the term of this Power of Attorney:

 

WFOE is hereby authorized to act on behalf of myself as my exclusive agent and attorney with respect of all matters concerning My Shareholding, including without limitation to: 1) attend shareholder’s meetings of Company; 2) exercise all the shareholders’ rights and shareholders’ voting rights I am entitled to under the laws of China and Company’s Articles of Association during the shareholders’ meeting, including but not limited to decide on the sale or transfer or pledge or disposition of My Shareholding in part or in whole and execute relevant legal documents; and 3) designate and appoint on behalf of myself the legal representative, the executive director, supervisor, the manager and other senior management members of Company.

 

Without limiting the generality of the powers granted hereunder, WFOE shall have the power and authority under this Power of Attorney to execute the Transfer Contracts stipulated in Exclusive Option Agreement, to which I am required to be a party, on behalf of myself, and to effect the terms of the Share Pledge Agreement and Exclusive Option Agreement, both dated the date hereof, to which I am a party.

 

All the actions associated with My Shareholding conducted by WFOE shall be deemed as my own actions, and all the documents related to My Shareholding executed by WFOE shall be deemed to be executed by me. I hereby acknowledge and ratify those actions and/or documents by WFOE.

 

WFOE is entitled to re-authorize or assign its rights related to the aforesaid matters to any other person or entity at its own discretion and without giving prior notice to me or obtaining my consent.

 

This Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this Power of Attorney, so long as I am a shareholder of Company.

 

This Power of Attorney is written in Chinese and English; in case there is any conflict between the Chinese version and the English version, the Chinese version shall prevail.

 

  By: /s/ Zhang Han  
  Date: July 3, 2017  

 

 

 

 

Exhibit 8.1

 

Subsidiaries:

Fine Brand Limited, a British Virgin Islands company

500wan HK Limited, a Hong Kong company

500.com Nihon Co., Ltd, a Japan company

500.com USA Corporation, a U.S. company

500.com Gaming UK Limited, a UK company

E-Sun Sky Computer (Shenzhen) Co., Ltd., a PRC company

Shenzhen Guangyi Network Technology Co., Ltd., a PRC company

Qufan Internet Technology Inc, a Cayman company

Qufan Internet Technology (HK) Limited, a Hong Kong company

Qufan Internet Technology (Malta) Ltd, a Malta company

Qufan Information Technology (Shenzhen) Co., Ltd, a PRC company

The Muliti Group Ltd, a Malta company

Multi Warehouse Ltd, a Malta company

Multi Brand Gaming Ltd, a Malta company

Multilotto UK Ltd, a Malta company

Lotto Warehouse Ltd, a Malta company

Wasp Media Ltd, a Malta company

Round Spot Services Ltd, a Cyprus company

Multi Pay N.V., a Curacao company

Multilotto Australia PTY Ltd, an Australia company

 

Consolidated Affiliated Entities:

Shenzhen E-Sun Network Co., Ltd., a PRC company

Shenzhen E-Sun Sky Network Technology Co., Ltd., a PRC company

Shenzhen Youlanguang Technology Co., Ltd., a PRC company

Shenzhen Guangtiandi Technology Co., Ltd., a PRC company

Shenzhen Tongfu Technology Co., Ltd., a PRC company

Shenzhen Wubai Zhifu Co., Ltd, a PRC company

Lhasa Yicai Network Technology Co., Ltd., a PRC company

Shenzhen Yicai Network Technology Co., Ltd., a PRC company

Shenzhen Fenggu Network Technology Co., Ltd., a PRC company

Beijing Baifengrun Science and Technology Co., Ltd., a PRC company

Shenzhen Kaisheng Jinfu Enterprise Management Co., Ltd., a PRC company

Shenzhen Qufan Network Technology Co., Ltd., a PRC company

Beijing Daguo Xiaoxian Culture Media Co., Ltd, a PRC company

 

 

 

 

Exhibit 12.1

 

Chief Executive Officer Certification

Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

 

I, Zhengming Pan, Chief Executive Officer of 500.com Limited (the “ Company ”), certify that:

 

1. I have reviewed this annual report of the Company;

 

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;

 

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
   
  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
   
  (c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
   
  (d) disclosed in this annual report any change in the Company’s internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting;

 

   

 

 

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent function):
   
  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
   
  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: April 27, 2018

     
By:

/s/ Zhengming Pan

 
  Name: Zhengming Pan  
  Title:   Chief Executive Officer  

 

    2

 

Exhibit 12.2

 

Chief Financial Officer Certification

Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

 

I, Qiang Yuan, Chief Financial Officer of 500.com Limited (the “Company”), certify that:

 

1. I have reviewed this annual report of the Company;

 

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;

 

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
   
  (c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
   
  (d) disclosed in this annual report any change in the Company’s internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting;

 

   

 

 

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent function):

 

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
   
  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: April 27, 2018

     
By:

/s/ Qiang Yuan

 
  Name: Qiang Yuan  
  Title:   Chief Financial Officer  

 

    2

 

Exhibit 13.1

 

Chief Executive Officer Certification

Pursuant to Section 906 of the Sarbanes Oxley Act of 2002

 

In connection with the Annual Report on Form 20-F of 500.com Limited (the “ Company ”) for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), I, Zhengming Pan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, that to my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 27, 2018

     
By:

/s/ Zhengming Pan

 
  Name: Zhengming Pan  
  Title: Chief Executive Officer  

 

   

 

Exhibit 13.2

 

Chief Financial Officer Certification

Pursuant to Section 906 of the Sarbanes Oxley Act of 2002

 

In connection with the Annual Report on Form 20-F of 500.com Limited (the “Company”) for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Qiang Yuan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, that to my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 27, 2018

     
By:

/s/ Qiang Yuan

 
  Name: Qiang Yuan  
  Title:   Chief Financial Officer  

 

   

 

 

Exhibit 15.1

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-193462) pertaining to the 2011 Share Incentive Plan of 500.com Limited of our reports dated April 28, 2017, with respect to the consolidated financial statements of 500.com Limited and the effectiveness of internal control over financial reporting of 500.com Limited included in its Annual Report (Form 20-F) for the year ended December 31, 2016, filed with the Securities and Exchange Commission.

 

Ernst & Young Hua Ming LLP

 

/s/Shenzhen, the People’s Republic of China  
April 27, 2018  

 

 

 

Exhibit 15.2

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in this Registration Statement on Form S-8 of our report dated April 27, 2018, with respect to the consolidated financial statements of 500.com Limited, and the effectiveness of internal control over financial reporting of 500.com Limited included in its Annual Report on Form 20-F for the year ended December 31, 2017.

 

/s/ Friedman LLP  
   
New York, New York  
April 27, 2018  

 

 

     

 

Exhibit 15.3

 

 

北京 上海 深圳 杭州 廣州 昆明 天津 成都 寧波 福州 西安 南京 南寧 濟南 重慶
BEIJING  SHANGHAI  SHENZHEN  HANGZHOU  GUANGZHOU  KUNMINTG  TIANJIN  CHENGDU  NINGBO  FUZHOU  XI’AN  NANJING  NANNING  JINAN  CHONGQING
蘇州 長沙 太原 武漢 貴陽 烏魯木齊 鄭州 石家莊 香港 巴黎 馬德裡 硅谷 斯德哥尔摩
SUZHOU CHANGSHA TAIYUAN WUHAN GUIYANG URUMQI ZHENGZHOU SHIJIAZHUANG  HONG KONG  PARIS  MADIDRID  SILICON VALLEY STOCKHOLM
 
深圳市深南大道6008號特區報業大廈22/24/31層  郵編：518009
22/24/31/F, Tequbaoye Building, 6008 Shennan Avenue, Shenzhen, Guangdong Province 518009, China
電話/Tel: (+86)(755) 8351 5666  傳真/Fax: (+86)(755) 8351 5333
網址/Website:http://www.grandall.com.cn  郵箱/Email: grandallsz@grandall.com.cn

 

April 25, 2018

 

To: 500.com LIMITED

500.com Building

Shenxianling Sports Center

Longgang District, Shenzhen 518115

People’s Republic of China

 

Re: Legal Opinion on Certain PRC Law Matters

 

Dear Sirs or Madams,

 

A. Introduction

 

We are lawyers qualified in the People’s Republic of China (the “ PRC ”, which, for the purpose of this legal opinion, does not include the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan) and as such are qualified to issue a legal opinion on the PRC Laws, regulations or rules effective on the date hereof (the “ PRC Laws ”).

 

We are acting as PRC legal counsel for 500.com LIMITED (the “ Company ”), a company incorporated under the laws of the Cayman Islands to be listed on New York Stock Exchange(“ NYSE ”), to provide this legal opinion with regard to the Corporate Structure Contracts of the Company.

 

This legal opinion (the “ Opinion ”) is furnished pursuant to the instructions of the Company on the captioned matters, and is delivered to the Company for the purposes of the Annual Report of 2017 (the “ Annual Report ”). The Company may not, without our prior written consent, use this opinion for any other purpose.

 

B. Definitions and Assumptions

 

In addition to the terms defined in the context of this opinion, the following capitalized terms used in this opinion shall have the meanings ascribed to them as follows.

 

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“E-Sun Sky Computer” means E-Sun Sky Computer (Shenzhen) Co., Ltd. (易讯天空计算机技术（深圳）有限公司)， a company incorporated under the PRC Laws, as wholly owned subsidiary of 500wan HK Limited
   
“E-Sun Network” means Shenzhen E-Sun Network Co., Ltd.(深圳市易讯网络有限公司) ， a company incorporated under the PRC Laws, as the variable interest entity of the Company
   
“Governmental Authorizations” means all approvals, consents, certificates, authorizations, filings, registrations, permissions, annual inspections, qualifications, permits and licenses required by any PRC Authorities pursuant to any PRC Laws
   
“Government Agencies” means any competent government authorities, courts or regulatory bodies of the PRC
   
“Guangtiandi Technology” means Shenzhen Guangtiandi Science and Technology Co., Ltd. （深圳市广天地科技有限公司）, a company incorporated under the PRC Laws, as the variable interest entity of the Company
   
“PRC Authorities” means any national, provincial or local governmental, regulatory or administrative authority, agency or commission in the PRC, or any court, tribunal or any other judicial body in the PRC
   
“PRC Laws” means all laws, statutes, regulations, orders, decrees, notices, circulars, judicial interpretations and other legislations of the PRC effective and available to the public as of the date hereof
   
“PRC Group Entities” means E-Sun Sky Computer, E-Sun Network, Guangtiandi Technology, Youlanguang Technology, and Tongfu Technology
   
“Tongfu Technology” means Shenzhen Tongfu Technology Co., Ltd. (深圳市统付科技有限公司)， a company incorporated under the PRC Laws, as the variable interest entity of the Company
   
“Youlanguang Technology” means Shenzhen Youlanguang Science and Technology Co., Ltd. (深圳市优蓝光科技有限公司)， a company incorporated under the PRC Laws, as the variable interest entity of the Company

 

For the purpose of rendering this opinion, we have reviewed the originals or copies, certified or otherwise identified, of the documents provided to us by the Company and the PRC Group Entities and such other documents, corporate records, certificates, Governmental Authorizations and other instruments as we have deemed necessary or advisable for the purpose of rendering this opinion, including, without limitation, the organizational structure of the Company listed in Appendix A hereof, originals or copies of the agreements listed in Appendix B hereof (the “ Corporate Structure Contracts ”) and the certificates issued by the PRC Authorities and officers of the Company and the relevant PRC Group Entities (collectively, the “ Documents ”).

 

In reviewing the Documents and for the purpose of this opinion, we have assumed without further inquiry:

 

i. the genuineness of all the signatures, seals and chops;

 

ii. the authenticity of the Documents submitted to us as originals and the conformity with the originals of the Documents provided to us as copies and the authenticity of such originals;

 

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iii. the truthfulness, accuracy, completeness and fairness of all the Documents, as well as the factual statements contained in such Documents;

 

iv. that the Documents provided to us remain in full force and effect up to the date of this opinion and have not been revoked, amended, varied or supplemented except as otherwise indicated in such Documents;

 

v. that all information provided to us by the Company and the PRC Group Entities in response to our enquiries for the purpose of this opinion is true, accurate, complete and not misleading, and that the Company and the PRC Group Entities have not withheld anything that, if disclosed to us, would reasonably cause us to alter this opinion in whole or in part;

 

vi. that all parties other than the PRC Group Entities have the requisite power and authority to enter into, execute, deliver and perform the Documents to which they are parties;

 

vii. that all parties other than the PRC Group Entities have duly executed, delivered and performed the Documents to which they are parties, and all parties will duly perform their obligations under the Documents to which they are parties;

 

viii. that all Governmental Authorizations and other official statement or documentation are obtained from competent PRC Authorities by lawful means in due course; and

 

ix. that all the Documents are legal, valid, binding and enforceable under all such laws as govern or relate to them other than PRC Laws.

 

C. Opinion

 

Based on our review of the Documents and our understanding of the current PRC Laws and subject to the assumptions above and the Qualifications (as defined below), we are of the opinion that, as of the date hereof, so far as PRC Laws are concerned:

 

i. Each of the PRC Group Entities is validly existing with limited liability under the PRC Laws and has full power, authority, legal right and has taken all necessary company actions to authorize to enter into, execute, assume, deliver and perform its obligations under each of the Corporate Structure Contracts to which it is a party and has duly authorized, executed and delivered each of the Corporate Structure Contracts.

 

ii. Each of the Corporate Structure Contracts is valid and legally binding under the PRC Laws. All Governmental Authorizations required for the PRC Group Entities to perform their respective obligation under the Corporate Structure Contracts have been obtained; and the obligations undertaken by and the rights granted to each party to the Corporate Structure Contracts are legally permissible under PRC Laws.

 

iii. The execution, delivery and performance by each of the parties of each of the Corporate Structure Contracts does not and will not: (a) conflict with or result in a breach or violation of any terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument governed by the PRC Laws to which it is a party or by which it or any of its properties or assets are bound, except for such conflict, breach, violation or default would not have a Material Adverse Effect; (b) result in any violation of any provision of its articles of association or other constituent documents or business license; or (c) to the best of our knowledge after due inquiry, result in any violation of any of the PRC Laws.

 

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iv. To our best knowledge after due inquiry, there are no legal, administrative, arbitration or other proceedings which has challenged the legality, effectiveness or validity of the Corporate Structure Contracts and/or the transactions contemplated thereby, individually or taken as a whole, and no such proceedings are threatened or contemplated by any Government Agencies or by any other persons in PRC.

 

This opinion is subject to the following qualifications (the “ Qualifications ”):

 

i. Our opinion is limited to the PRC Laws of general application on the date hereof. We have made no investigation of, and do not express or imply any views on, the laws of any jurisdiction other than the PRC.

 

ii. The PRC Laws referred to herein are laws and regulations publicly available and currently in force on the date hereof and there is no guarantee that any of such laws and regulations, or the interpretation or enforcement thereof, will not be changed, amended or revoked in the future with or without retrospective effect.

 

iii. Our opinion is subject to the effects of (a) certain legal or statutory principles affecting the enforceability of contractual rights generally under the concepts of public interest, social ethics, national security, good faith, fair dealing, and applicable statutes of limitation; (b) any circumstances in connection with formulation, execution or performance of any legal documents that would be deemed materially mistaken, clearly unconscionable, fraudulent or coercionary; (c) judicial discretion with respect to the availability of specific performance, injunctive relief, remedies or defenses, or calculation of damages; and (d) the discretion of any competent PRC legislative, administrative or judicial bodies in exercising their authority in the PRC.

 

iv. This opinion is issued based on our understanding of the current PRC Laws. For matters not explicitly provided under the current PRC Laws, the interpretation, implementation and application of the specific requirements under the PRC Laws are subject to the final discretion of competent PRC legislative, administrative and judicial authorities. There are uncertainties regarding the interpretation and application of the PRC Laws, and there can be no assurance that the Government Agencies will ultimately take a view that is not contrary to our opinion stated above.

 

v. We may rely, as to matters of fact (but not as to legal conclusions), to the extent we deem proper, on certificates and confirmations of responsible officers of the PRC Group Entities and PRC government officials.

 

This opinion is intended to be used in the context which is specifically referred to herein and each paragraph should be looked at as a whole and no part should be extracted and referred to independently. We hereby consent to the use of this opinion in the Annual Report. This opinion is delivered solely to the Company and solely for the purpose of and in connection with the Annual Report on the date of this opinion and may not be relied upon by any other person or used for any other purpose without our prior written consent.

 

Yours sincerely,  
   
Grandall Law Firm (Shenzhen)  

 

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Appendix A

 

Organizational Structure of the Company up to Dec. 31, 2017

 

 

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Appendix B

 

List of Corporate Structure Contracts of the Company

 

1. Exclusive Business Cooperation Agreement entered into between E-Sun Sky Computer and E-Sun Network dated June 1, 2011.
2. Exclusive Option Agreement entered into among E-Sun Sky Computer, E-Sun Network, Yu Bo and Zhang Han dated July 3, 2017.
3. Equity Interest Pledge Agreement entered into among E-Sun Sky Computer, E-Sun Network and Yu Bo dated July 3, 2017.
4. Equity Interest Pledge Agreement entered into among E-Sun Sky Computer, E-Sun Network and Zhang Han dated July 3, 2017.
5. Confirmation Letter issued by E-Sun Sky Computer to 500wan HK Limited dated July 3, 2017.
6. Financial Support Agreement entered into among 500.com LIMITED, E-Sun Sky Computer, Yu Bo and Zhang Han dated July 3, 2017.
7. Shareholder’s Voting Power Assignment Agreement entered into among E-Sun Sky Computer, E-Sun Network, Yu Bo and Zhang Han dated July 3, 2017.
8. Power of Attorney regarding Shareholder Voting Right issued by Yu Bo to E-Sun Sky Computer dated July 3, 2017.
9. Power of Attorney regarding Shareholder Voting Right issued by Zhang Han to E-Sun Sky Computer dated July 3, 2017.
10. Exclusive Business Cooperation Agreement entered into between E-Sun Sky Computer and Guangtiandi Technology dated June 1, 2011.
11. Exclusive Option Agreement entered into among E-Sun Sky Computer, Guangtiandi Technology and Wang Ying dated June 1, 2011.
12. Equity Interest Pledge Agreement entered into among E-Sun Sky Computer, Guangtiandi Technology and Wang Ying dated June 1, 2011.
13. Exclusive Option Agreement entered into among E-Sun Sky Computer, Guangtiandi Technology and Yuan Liangdong dated May 2, 2013.
14. Equity Interest Pledge Agreement entered into among E-Sun Sky Computer, Guangtiandi Technology and Yuan Liangdong dated May 2, 2013.
15. Financial Support Agreement among 500.com LIMITED, E-Sun Sky Computer and Wang Ying dated Dec. 28, 2013.
16. Financial Support Agreement among 500.com LIMITED, E-Sun Sky Computer and Yuan Liangdong dated Dec. 28, 2013.
17. Power of Attorney regarding Shareholder Voting Right issued by Wang Ying to E-Sun Sky Computer dated June 1, 2011.
18. Power of Attorney regarding Shareholder Voting Right issued by Yuan Liangdong to E-Sun Sky Computer dated May 2, 2013.
19. Exclusive Business Cooperation Agreement entered into between E-Sun Sky Computer and Youlanguang Technology dated June 1, 2011.
20. Exclusive Option Agreement entered into among E-Sun Sky Computer, Youlanguang Technology, Yin Zhiwei dated Nov. 18, 2015.

 

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21. Exclusive Option Agreement entered into among E-Sun Sky Computer, Youlanguang Technology, Yu Bo dated Nov. 18, 2015.
22. Equity Interest Pledge Agreement entered into among E-Sun Sky Computer, Youlanguang Technology and Yu Bo dated Nov. 18, 2015.
23. Equity Interest Pledge Agreement entered into among E-Sun Sky Computer, Youlanguang Technology and Yin Zhiwei dated Nov. 18, 2015.
24. Shareholder's Voting Power Assignment Agreement entered into among E-Sun Sky Computer, E-Sun Network, Yu Bo and Yin Zhiwei dated Nov. 18, 2015.
25. Confirmation Letter issued by E-Sun Sky Computer to 500wan HK Limited dated Nov. 18, 2015.
26. Financial Support Agreement entered into among 500.com LIMITED, E-Sun Sky Computer, Yu Bo and Yin Zhiwei dated Nov. 18, 2015.
27. Power of Attorney regarding Shareholder Voting Right issued by Yin Zhiwei to E-Sun Sky Computer dated Nov. 9, 2015.
28. Power of Attorney regarding Shareholder Voting Right issued by Yu Bo to E-Sun Sky Computer dated Nov. 9, 2015.
29. Exclusive Business Cooperation Agreement entered into between E-Sun Sky Computer and Tongfu Technology dated Dec. 20, 2015.
30. Exclusive Option Agreement entered into among E-Sun Sky Computer, Tongfu Technology, Zhang Jing and Zhang Han dated Dec. 20, 2015.
31. Equity Interest Pledge Agreement entered into among E-Sun Sky Computer, Tongfu Technology, Zhang Han dated Dec. 20, 2015.
32. Equity Interest Pledge Agreement entered into among E-Sun Sky Computer, Tongfu Technology, Zhang Jing dated Dec. 20, 2015.
33. Shareholder's Voting Power Assignment Agreement entered into among E-Sun Sky Computer, Tongfu Technology, Zhang Jing and Zhang Han dated Dec. 20, 2015.
34. Confirmation Letter issued by E-Sun Sky Computer to 500wan HK Limited dated Dec. 20, 2015.
35. Financial Support Agreement entered into among 500.com LIMITED, E-Sun Sky Computer, Zhang Han and Zhang Jing dated Dec. 22, 2015.
36. Power of Attorney regarding Shareholder Voting Right issued by Zhang Han to E-Sun Sky Computer dated Dec. 20, 2015.
37. Power of Attorney regarding Shareholder Voting Right issued by Zhang Jing to E-Sun Sky Computer dated Dec. 20, 2015.

 

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Exhibit 16.1

 

 

April 27, 2018

 

Securities and Exchange Commission

 

100 F Street, N.E.

 

Washington, DC 20549

 

 

 

Ladies and Gentlemen:

 

We have read “Item 16F” on page 116 of Form 20-F dated April 27, 2018 of 500.com and are in agreement with the statements contained in the first, second, third and fourth paragraphs of that section. We have no basis to agree or disagree with other statements of the registrant contained therein.

 

/s/Ernst & Young Hua Ming LLP

 

Shenzhen, the People’s Republic of China