Washington, D.C. 20549
(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:
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
None Securities for which there is
a reporting obligation pursuant to Section 15(d) of the Act:
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.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
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 such files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
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:
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.
(APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Unless otherwise indicated, references in
this annual report on Form 20-F to:
PART
I
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not Applicable.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not Applicable.
|
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,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for per share data)
|
|
Consolidated Statement of Comprehensive Income (Loss) Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
579,717
|
|
|
|
99,552
|
|
|
|
5,259
|
|
|
|
71,858
|
|
|
|
126,089
|
|
|
|
18,339
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
(53,909
|
)
|
|
|
(24,355
|
)
|
|
|
(12,749
|
)
|
|
|
(37,483
|
)
|
|
|
(80,017
|
)
|
|
|
(11,638
|
)
|
Sales and marketing
|
|
|
(173,883
|
)
|
|
|
(87,022
|
)
|
|
|
(43,398
|
)
|
|
|
(63,295
|
)
|
|
|
(92,465
|
)
|
|
|
(13,448
|
)
|
General and administrative
|
|
|
(156,309
|
)
|
|
|
(232,244
|
)
|
|
|
(247,408
|
)
|
|
|
(224,321
|
)
|
|
|
(251,384
|
)
|
|
|
(36,562
|
)
|
Service development expenses
|
|
|
(59,398
|
)
|
|
|
(63,296
|
)
|
|
|
(70,741
|
)
|
|
|
(58,592
|
)
|
|
|
(61,909
|
)
|
|
|
(9,004
|
)
|
Write-off of deferred offering expenses
|
|
|
(3,241
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(446,740
|
)
|
|
|
(406,917
|
)
|
|
|
(374,296
|
)
|
|
|
(383,691
|
)
|
|
|
(485,775
|
)
|
|
|
(70,652
|
)
|
Other operating income
|
|
|
17,414
|
|
|
|
6,910
|
|
|
|
2,731
|
|
|
|
1,204
|
|
|
|
12,638
|
|
|
|
1,838
|
|
Government grant
|
|
|
3,643
|
|
|
|
2,022
|
|
|
|
10,017
|
|
|
|
6,789
|
|
|
|
7,620
|
|
|
|
1,108
|
|
Indemnity cost
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,979
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other operating expenses
|
|
|
(4,527
|
)
|
|
|
(2,975
|
)
|
|
|
(1,915
|
)
|
|
|
(34,691
|
)
|
|
|
(5,060
|
)
|
|
|
(736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) from continuing operations
|
|
|
149,507
|
|
|
|
(301,408
|
)
|
|
|
(368,183
|
)
|
|
|
(338,531
|
)
|
|
|
(344,488
|
)
|
|
|
(50,103
|
)
|
Other income/(expenses), net
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
|
|
821
|
|
|
|
(43
|
)
|
|
|
(6
|
)
|
Interest income
|
|
|
17,009
|
|
|
|
20,589
|
|
|
|
23,859
|
|
|
|
20,032
|
|
|
|
15,308
|
|
|
|
2,226
|
|
Interest expense
|
|
|
(356
|
)
|
|
|
(2,138
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from equity method investments
|
|
|
—
|
|
|
|
(407
|
)
|
|
|
(406
|
)
|
|
|
(2,128
|
)
|
|
|
(15,025
|
)
|
|
|
(2,185
|
)
|
Impairment of equity method investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(28,781
|
)
|
|
|
(149,896
|
)
|
|
|
(21,801
|
)
|
Changes in fair value of the structured deposit
|
|
|
(1,124
|
)
|
|
|
1,124
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Changes in fair value of contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,384
|
)
|
|
|
—
|
|
|
|
—
|
|
Gain from disposal of subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
136,914
|
|
|
|
5,477
|
|
|
|
2,805
|
|
|
|
408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes from continuing operations
|
|
|
165,036
|
|
|
|
(282,240
|
)
|
|
|
(207,816
|
)
|
|
|
(345,494
|
)
|
|
|
(491,339
|
)
|
|
|
(71,461
|
)
|
Income taxes (expenses) benefit
|
|
|
(7,987
|
)
|
|
|
(41,969
|
)
|
|
|
(2,143
|
)
|
|
|
14,025
|
|
|
|
19,602
|
|
|
|
2,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
157,049
|
|
|
|
(324,209
|
)
|
|
|
(209,959
|
)
|
|
|
(331,469
|
)
|
|
|
(471,737
|
)
|
|
|
(68,610
|
)
|
income from discontinued operations, net of applicable income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
707
|
|
|
|
15,327
|
|
|
|
2,183
|
|
|
|
316
|
|
Gain on disposal of discontinued operations, net of applicable income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,160
|
|
|
|
1,478
|
|
Net income from discontinued operations, net of applicable income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
707
|
|
|
|
15,327
|
|
|
|
12,343
|
|
|
|
1,794
|
|
Net income (loss)
|
|
|
157,049
|
|
|
|
(324,209
|
)
|
|
|
(209,252
|
)
|
|
|
(316,142
|
)
|
|
|
(459,394
|
)
|
|
|
(66,816
|
)
|
Net loss from continuing operations attributable to noncontrolling interest and redeemable noncontrolling interest
|
|
|
—
|
|
|
|
(312
|
)
|
|
|
(6,633
|
)
|
|
|
(6,734
|
)
|
|
|
(8,820
|
)
|
|
|
(1,283
|
)
|
Net income from discontinued operations attributable to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
346
|
|
|
|
7,691
|
|
|
|
1,099
|
|
|
|
161
|
|
Less: Net (loss) income attributable to the noncontrolling interests
|
|
|
—
|
|
|
|
(312
|
)
|
|
|
(6,287
|
)
|
|
|
1,524
|
|
|
|
(4,486
|
)
|
|
|
(652
|
)
|
Less: Net (loss) attributable to redeemable noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(567
|
)
|
|
|
(3,235
|
)
|
|
|
(470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to 500.com Limited
|
|
|
157,049
|
|
|
|
(323,897
|
)
|
|
|
(202,965
|
)
|
|
|
(317,099
|
)
|
|
|
(451,673
|
)
|
|
|
(65,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
12,145
|
|
|
|
66,851
|
|
|
|
82,347
|
|
|
|
(55,805
|
)
|
|
|
23,023
|
|
|
|
3,349
|
|
Unrealized gain (loss) on available for sale investments
|
|
|
—
|
|
|
|
—
|
|
|
|
754
|
|
|
|
(733
|
)
|
|
|
—
|
|
|
|
—
|
|
Other Comprehensive income (loss), net of tax
|
|
|
12,145
|
|
|
|
66,851
|
|
|
|
83,101
|
|
|
|
(56,538
|
)
|
|
|
23,023
|
|
|
|
3,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (loss)
|
|
|
169,194
|
|
|
|
(257,358
|
)
|
|
|
(126,151
|
)
|
|
|
(372,680
|
)
|
|
|
(436,371
|
)
|
|
|
(63,467
|
)
|
Less: Comprehensive (loss) income attributable to redeemable noncontrolling interest and noncontrolling interest
|
|
|
—
|
|
|
|
(312
|
)
|
|
|
(6,287
|
)
|
|
|
1,348
|
|
|
|
(6,383
|
)
|
|
|
(928
|
)
|
Comprehensive income (loss) attributable to 500.com Limited
|
|
|
169,194
|
|
|
|
(257,046
|
)
|
|
|
(119,864
|
)
|
|
|
(374,028
|
)
|
|
|
(429,988
|
)
|
|
|
(62,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share attributable to 500.com Limited-Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
0.46
|
|
|
|
(0.84
|
)
|
|
|
(0.49
|
)
|
|
|
(0.80
|
)
|
|
|
(1.13
|
)
|
|
|
(0.164
|
)
|
Net income from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
0.001
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.004
|
|
Net income (loss)
|
|
|
0.46
|
|
|
|
(0.84
|
)
|
|
|
(0.489
|
)
|
|
|
(0.78
|
)
|
|
|
(1.10
|
)
|
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share attributable to 500.com Limited- Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
0.44
|
|
|
|
(0.84
|
)
|
|
|
(0.49
|
)
|
|
|
(0.80
|
)
|
|
|
(1.13
|
)
|
|
|
(0.164
|
)
|
Net income from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
0.001
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.004
|
|
Net income (loss)
|
|
|
0.44
|
|
|
|
(0.84
|
)
|
|
|
(0.489
|
)
|
|
|
(0.78
|
)
|
|
|
(1.10
|
)
|
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Class A and Class B ordinary shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
339,782,819
|
|
|
|
385,590,213
|
|
|
|
414,872,756
|
|
|
|
408,310,122
|
|
|
|
418,911,292
|
|
|
|
418,911,292
|
|
Diluted
|
|
|
357,848,704
|
|
|
|
385,590,213
|
|
|
|
414,872,756
|
|
|
|
408,310,122
|
|
|
|
418,911,292
|
|
|
|
418,911,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP financial data
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to 500.com Limited
|
|
|
157,049
|
|
|
|
(323,897
|
)
|
|
|
(202,965
|
)
|
|
|
(317,099
|
)
|
|
|
(451,673
|
)
|
|
|
(65,694
|
)
|
Adjustment for share-based compensation expenses
|
|
|
89,922
|
|
|
|
158,628
|
|
|
|
163,341
|
|
|
|
91,143
|
|
|
|
108,628
|
|
|
|
15,799
|
|
Adjustment for deferred tax expense relating to valuation allowance
|
|
|
—
|
|
|
|
40,105
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Adjusted net income (loss) attributable to 500.com Limited (non-GAAP)
|
|
|
246,971
|
|
|
|
(125,164
|
)
|
|
|
(39,624
|
)
|
|
|
(225,956
|
)
|
|
|
(343,045
|
)
|
|
|
(49,895
|
)
|
Adjusted net income (loss) from continuing operations attributable to 500.com Limited (non-GAAP)
|
|
|
246,971
|
|
|
|
(125,164
|
)
|
|
|
(39,985
|
)
|
|
|
(233,592
|
)
|
|
|
(354,289
|
)
|
|
|
(51,528
|
)
|
Adjusted net income from discontinued operations attributable to 500.com Limited (non-GAAP)
|
|
|
—
|
|
|
|
—
|
|
|
|
361
|
|
|
|
7,636
|
|
|
|
11,244
|
|
|
|
1,633
|
|
|
(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,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,256,403
|
|
|
|
1,712,086
|
|
|
|
1,707,032
|
|
|
|
737,022
|
|
|
|
601,585
|
|
|
|
87,496
|
|
Total assets
|
|
|
1,319,692
|
|
|
|
2,084,497
|
|
|
|
2,076,892
|
|
|
|
1,754,559
|
|
|
|
1,246,584
|
|
|
|
181,307
|
|
Total current liabilities
|
|
|
157,876
|
|
|
|
157,822
|
|
|
|
209,475
|
|
|
|
175,937
|
|
|
|
99,694
|
|
|
|
14,499
|
|
Total liabilities
|
|
|
202,070
|
|
|
|
218,161
|
|
|
|
268,849
|
|
|
|
223,197
|
|
|
|
111,634
|
|
|
|
16,235
|
|
Total 500.com Limited shareholders’ equity
|
|
|
1,117,622
|
|
|
|
1,767,863
|
|
|
|
1,709,531
|
|
|
|
1,409,774
|
|
|
|
1,116,605
|
|
|
|
162,404
|
|
Total shareholders’ equity
|
|
|
1,117,622
|
|
|
|
1,866,336
|
|
|
|
1,808,043
|
|
|
|
1,509,310
|
|
|
|
1,105,562
|
|
|
|
160,798
|
|
Total liabilities, redeemable noncontrolling interests and shareholders’ equity
|
|
|
1,319,692
|
|
|
|
2,084,497
|
|
|
|
2,076,892
|
|
|
|
1,754,559
|
|
|
|
1,246,584
|
|
|
|
181,307
|
|
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 RMB6.8755 to US$1.00, the noon buying rate in effect as of December 31, 2018. 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.
|
B.
|
Capitalization and Indebtedness
|
Not Applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not Applicable.
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.
|
|
·
|
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 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, Ireland and Sweden.
|
|
·
|
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. As of the date of this annual report, we
had entered into framework agreements with Tianjin, Hunan and several other provincial (including regional and municipal) sports
lottery centers and started trial operations in Tianjin, Hunan, Hubei, Guangxi and several other provinces and cities in China.
|
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 inspections 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.
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 18-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.
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 the 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 the 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 the 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 the 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.
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, Ireland and Sweden, 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 71% of TMG’s total revenue in 2018), but did not have a license requirement until January 2019.
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. The Swedish government began accepting license applications from interested operators in mid-2018,
and the new regulatory framework took effect on January 1, 2019. We operated in Sweden under the Curacao license before we obtained
the Swedish license on December 20, 2018.
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 the 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 2017, net revenue from Germany, Austria,
the Netherlands and Switzerland accounted for 3.6%, 0.4%, 1.5% and 0.9% of our total net revenue. In 2018, net revenue from Germany,
Austria, the Netherlands and Switzerland accounted for 5.4%, 0.4%, 2.0% and 0.7% of our total net revenue, respectively.
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 of 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 the 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.
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 the 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 the lottery pool contributed by
us to the lottery centers. Previously, we had a service agreement with Jiangxi Sports Lottery Administration Center that expired
in March 2018 and was not renewed. 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.
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 inspections 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.
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 entirely
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, if and when we are able to resume
our online lottery service 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.
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,
even though 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.
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 2016, 2017 and 2018, such payments to certain Internet companies accounted for nil, 7.2% and 0.3% 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, eight 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 arises 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 a 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.
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.
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.
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 17 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 are 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.
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:
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when and how we resume our online lottery sales services in the future;
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seasonality of sports events on which sports lotteries are based;
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change of lottery issuance schedules by the lottery issuance authorities;
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changes in government policies or regulations, or their enforcement;
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economic conditions in China and worldwide; and
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geopolitical events or natural disasters such as war, threat of war, earthquake or epidemics.
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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.
Our management has concluded that our internal
control over financial reporting was effective as of December 31, 2018. 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, 2018. 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.
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 previous online lottery services
were primarily provided through E-Sun Sky Network, the wholly-owned subsidiary of E-Sun Network, Lhasa Yicai, Hainan Jingli, Hainan
Panfeng and Hangzhou E-Sun Sky Network, the wholly-owned subsidiaries of E-Sun Sky Network, Hainan Jingli, Hainan Panfeng and Hangzhou
E-Sun Sky Network were established in 2018 to operate in the physical sales of sports lottery tickets business, and Guangyi Network
and Hainan Menghuanxingchen, the wholly-owned subsidiaries of E-Sun Sky Computer, Guangyi Network was disposed of in June 2018,
Hainan Menghuanxingchen was established in May 2018 to operate in the physical sales of sports lottery tickets business. 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, we disposed of Shenzhen Fenggu in June 2018, while Guangtiandi
Technology provides services to E-Sun Sky Network relating to the implementation of the technical interface with the provincial
lottery administration centers, and the maintenance of our lottery ticket database. 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, which was disposed of in February 2018. 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 Technology to provide online poker gaming services. We
disposed of our interest in Shenzhen 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 comply 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 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 “Item 3D. 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.
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.
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:
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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;
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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 the 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
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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.
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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.
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 will 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.
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.
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, 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.
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, 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, while the value of Renminbi
depreciated approximately 5.04% against the U.S. dollar in 2018. 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.
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.
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 and 500wan 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 and 500wan 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 (prior to its disposal in February
2018), 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.
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.
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 undergo 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 have 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.
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 former independent registered public accounting firm that issued 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, 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.
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.
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 2018, although there can be no assurances in this regard. Additionally,
it is possible that we may be a PFIC in 2019 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 2019 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.
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 17.5 % of the combined total outstanding ordinary shares (representing 68.0 % of the total voting rights) in our company
as of December 31, 2018. 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 the 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.
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.
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:
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we have failed to timely provide the depositary with
our notice of meeting and related voting materials;
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we have instructed the depositary that we do not wish
a discretionary proxy to be given;
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we have informed the depositary that there is substantial
opposition as to a matter to be voted on at the meeting;
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a matter to be voted on at the meeting would have
a material adverse impact on shareholders; or
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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.
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.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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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 RMB122.0 million.
In June 2017, we acquired a 40.65% equity
interest in Loto Interactive 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 distribution
of mobile gaming and 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.
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, Ireland and Sweden. 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 24 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 70% and
71% of TMG’s total revenue in 2017 and 2018, respectively), and we acquired an online gaming license of Sweden on December
20, 2018 through Multi Brand Gaming, a subsidiary of TMG.
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. As of the date of this
annual report, we had entered into framework agreements with Tianjin, Hunan and several other provincial (including regional and
municipal) sports lottery centers and started trial operations in Tianjin, Hunan, Hubei, Guangxi and several other provinces and
cities in China.
See “Item 4C. Organizational Structure”
for a diagram illustrating our corporate structure as of December 31, 2018.
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 6,350,050 newly issued ADSs, representing 63,500,500 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.
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 the China Sports Lottery Administration Center, the government authority in charge of the issuance and sale
of sports lottery products in China.
Through continued and significant investments
in the past 18 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) financial technology services through our controlled subsidiary, Shenzhen Kaisheng; and
(iii) physical channels for selling sports lottery tickets.
Our Services
Our current and certain past service offerings
are summarized as below:
Online Gaming Services
Licenses
In July 2017, we acquired a 93% equity interest
in TMG. TMG holds licenses from Malta, the United Kingdom, Ireland, Curacao and Sweden to operate online gaming sites. Through
these licenses, TMG provides gaming services in close to 200 countries worldwide. On December 20, 2018, TMG acquired a license
in Sweden through its subsidiary in response to a new license requirement effective January 1, 2019. Sweden is currently TMG’s
top European market (generating approximately 70% and 71% of TMG’s total revenue in 2017 and 2018, respectively).
Users
Headquartered in Malta, TMG serviced, in
2018, (i) approximately 11,000 monthly users in Germany and Malta (through its Malta remote gambling license) at multilotto.net;
(ii) approximately 5,000 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 36,000
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 2018, TMG’s
Secondary
Lottery Services generated
(based on gross gaming revenue): (i) approximately 45,000 euros per month, under the Malta remote gambling license; (ii) approximately
17,000 euros per month, under the UK remote operating license; (iii) approximately 4,500 euros per month, under the Irish remote
bookmaker’s license; and (iv) approximately 820,000 euros per month under the Curacao e-Gaming license.
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 2018, TMG’s remote casino services generated (based on
gross gaming revenue): (i) approximately 92,000 euros per month, under the Malta remote gambling license; (ii) approximately 99,000
euros per month, under the UK remote operating license; (iii) approximately 2,600 euros per month, under the Irish remote bookmaker’s
license; and (iv) approximately 540,000 euros per month under the Curacao e-Gaming license.
Revenues provided by Online Gaming Services
from TMG during the consolidating period of 2018 were RMB105.5 million (US$15.3 million).
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
Physical Sales of Sports Lottery Tickets
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.
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
worked 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.
As of the date of this annual report, we
had entered into framework agreements with Tianjin, Hunan and several other provincial (including regional and municipal) sports
lottery centers and started trial operations in Tianjin, Hunan, Hubei, Guangxi and several other provinces and cities in China.
Beginning in 2018, we began to generate a small amount of revenue from physical sales of sports lottery tickets.
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. We disposed of Caiyu in November 2017, and continue to provide this information
through our own service offerings named “Cai Xun Hao,” which was further ceased in March 2019.
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.
Revenues provided by sports information
during the consolidating period of 2018 were RMB16.0 million (US$2.3 million).
Financial Technology
With the increasing demand for more diversified
financial and investment instruments in China, the precious metals trading market has expanded 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.
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 formed 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
Between the fourth quarter of 2016 and the
first quarter of 2018 when we owned a 51% interest in Qufan, 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 addition 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.
Revenues generated from these games in 2018
were RMB7.4 million (US$1.1 million). As a result of the disposal of Qufan, we no longer generate revenues from these games (effective
since February 9, 2018). Our revenue from these games in 2018 was 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 2018 were RMB4.0
million (US$0.6 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 Services
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.
Physical Sales of Sports Lottery Tickets
As
of the date of this annual report, we had entered into cooperation agreements with Tianjin, Hunan and several other provincial
(including regional and municipal) sports lottery centers and started trial operations in Tianjin, Hunan, Hubei, Guangxi and several
other provinces and cities in China.
Under
this line of service, we generate net revenues from service fees paid to us by provincial sports lottery centers for physical purchase
orders of lottery products we direct to them from the lottery terminals. Each provincial lottery administration center pays us
a fixed percentage of the total purchase amount received from us as a service fee.
Sports Information Services
Our sports information portal is 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.
We have ceased offering this service in
March 2019.
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.
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 the 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 significantly reduced in 2018 as a result of our disposal of Qufan and cessation of
Quiz 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.
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.
Competition
We experience intense competition 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 108 employees as of December 31, 2018, representing 38.3% 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 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 server 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.
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) in TMG. 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.
In early 2019, we received a redemption
notice from Helmet, requesting us to purchase the 7% equity interest in TMG held by Helmet at a redemption price of EUR3,745,000.
We and Helmet failed to reach an agreement as to the purchase price for the TMG shares within 30 business days of the notice. Helmet
has referred the dispute to arbitration by a local court in Malta, and we have engaged attorneys to represent us in the arbitration.
The worst-case scenario is that we ultimately may be required to purchase the TMG shares held by Helmet at the redemption price
of EUR3,745,000. Accordingly, after receiving the redemption notice we adjusted the carrying amount of the 7% redeemable noncontrolling
interest to equal to the redemption amount of EUR3,745,000 as of December 31, 2018. Other than this adjustment as reflected and
disclosed in our consolidated financial statements for 2018, we do not expect to incur other liabilities in connection with the
aforementioned arbitration.
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.
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, Ireland and Sweden, 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 71% of TMG’s total revenue in 2018), but did not have a license requirement until January 2019.
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. The Swedish government began accepting license applications from interested operators in mid-2018,
and the new regulatory framework took effect on January 1, 2019. We operated in Sweden under the Curacao license before we obtained
the Swedish license on December 20, 2018.
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.
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 the China
Welfare Lottery Issuance and Administration Center and the 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 the China Sports Lottery Administration Center
to the MOF for approval. In October 2012, we were notified by the 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 inspections 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.
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 the China Welfare Lottery Issuance and Administration
Center and the 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.
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.
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.
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, 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, the 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.
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 companies undergo 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 the 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.
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 are 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.
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 contains ambiguous definitions, requirements and procedures, it remains uncertain how tax authorities will determine tax residency
status based on the facts of each case.
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.
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, Hainan Menghuanxingchen, Shenzhen Yicai, Hainan Jingli, Hainan Panfeng, Hangzhou E-Sun Sky Network, Youlanguang
Technology, E-Sun Network and Baifengrun Technology, which are subject to a 3% VAT.
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C.
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Organizational Structure
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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.
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:
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exercise effective control over E-Sun Network, Youlanguang
Technology, Guangtiandi Technology, Tongfu Technology and Shenzhen Qufan.;
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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;
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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
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·
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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.
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Accordingly, under U.S. GAAP, we consolidate
E-Sun Network, Youlanguang Technology, Guangtiandi Technology, Tongfu Technology, E-Sun Sky Network, Lhasa Yicai, Hainan Jingli,
Hainan Panfeng, Hangzhou E-Sun Sky Network, Shenzhen Yicai, Baifengrun Technology and Shenzhen Kaisheng, as our “subsidiaries
of variable interest entities” in our consolidated financial statements. We also consolidated Sumpay.cn, Shangmeng Services,
and Hangzhou Laiqi before their disposals in May 2016, consolidated Shenzhen Caiyu before its disposal in November 2017, consolidated
500Fu, Shenzhen Qufan and Beijing Daguoxiaoxian before their disposals in February 2018 and consolidated Shenzhen Fenggu before
its disposal in June 2018.
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 provides 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 representatives 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.
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.
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, the United States of America and Malta.
We lease our premises from unrelated third parties. Each of the lessors for the leased premises either has a 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 by 5% annually.
We also expected the total leasehold improvement expenses to be RMB79.6 million (US$11.6 million), and we have paid RMB76.6 million
(US$11.4 million) as of the annual report.
|
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
None.
|
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.
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. There were no net revenues provided by the sports lottery sales during 2016 and 2018.
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.
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, Ireland and Sweden to operate online gaming sites. We generated revenues of RMB49.4 million and RMB105.5 million
(US$15.3 million) from the provision of these services in 2017 and 2018.
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,
RMB13.2 million and RMB16.0 million (US$2.3million) in 2016, 2017 and 2018, respectively.
We generated RMB0.4 million and RMB0.4 million
(US$0.1 million) in 2017 and 2018 from trading commissions on the online spot commodity trading executed on our websites and mobile
applications through Shenzhen Kaisheng.
Between the fourth quarter of 2015 and the
second quarter of 2016, we 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, RMB59.5
million and RMB7.4 million (US$1.1 million) in 2016, 2017 and 2018, respectively. We deconsolidated Qufan as of February 2018 following
our disposal of it. Accordingly, the consolidated statements of comprehensive loss for the full years ended December 31, 2016,
2017 and 2018 have been reclassified to reflect the Qufan business segment as a discontinued operation. Also, we generated revenues
from mobile gaming services through Guangtiandi Technology, which accounted for nil, RMB8.9 million and RMB4.0 million (US$0.6
million) in 2016, 2017 and 2018, respectively.
Our net revenues from continuing operations
were RMB5.3 million, RMB71.9 million and RMB126.1 million (US$18.3 million) in 2016, 2017 and 2018, respectively, representing
an increase of 1,256.6% from 2016 to 2017 and an increase of 75.4% from 2017 to 2018, respectively. The Company acquired the TMG
in July 2017, which contributed significantly to the net revenues.
Net loss from continuing operations attributable
to 500.com Limited were RMB203.3 million in 2016, RMB324.7 million in 2017 and 462.9 million (US$67.3 million), representing an
increase of 59.7% from 2016 to 2017, and an increase of 42.6% from 2017 to 2018, respectively. Net loss from continuing operations
attributable to 500.com Limited in 2016, 2017 and 2018 were adversely impacted by share-based compensation expenses of RMB163.3
million, RMB91.1 million and RMB108.6 million (US$15.8 million) in 2018, respectively. Aside from the material adverse impact of
our voluntary suspension of sports lottery sales starting from April 2015, our net loss in 2018 was adversely impacted by an impairment
provision of RMB149.9 million (US$21.8 million) provided for long-term investment.
Description of Key Statement of Operations Items from Continuing
Operation
Net revenues
In 2016, 2017 and 2018, 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,”
which was ceased in March 2019.
(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 to 2018;
(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 Guangtiandi Technology; and
(vi) Financial technology services through
our investment in Shenzhen Kaisheng.
Our net revenues from continuing operations
were RMB5.3 million, RMB71.9 million and RMB126.1 million (US$18.3 million) in 2016, 2017 and 2018, respectively, representing
an increase of 1,256.6% from 2016 to 2017 and an increase of 75.4% from 2017 to 2018, respectively. The table below sets forth
our net revenues in aggregate and derived from services specified therein for the periods indicated:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Payment processing and other services
|
|
|
3,459
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Online gaming services in Europe and beyond
|
|
|
—
|
|
|
|
49,370
|
|
|
|
105,511
|
|
|
|
15,346
|
|
Mobile gaming
|
|
|
8
|
|
|
|
8,906
|
|
|
|
3,954
|
|
|
|
575
|
|
Sports information services
|
|
|
1,792
|
|
|
|
13,229
|
|
|
|
16,036
|
|
|
|
2,332
|
|
Financial technology services
|
|
|
—
|
|
|
|
353
|
|
|
|
401
|
|
|
|
59
|
|
Physical sales of sports lottery tickets
|
|
|
—
|
|
|
|
—
|
|
|
|
187
|
|
|
|
27
|
|
Total revenues
|
|
|
5,259
|
|
|
|
71,858
|
|
|
|
126,089
|
|
|
|
18,339
|
|
Deductibles
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net revenues
|
|
|
5,259
|
|
|
|
71,858
|
|
|
|
126,089
|
|
|
|
18,339
|
|
Online gaming services in Europe and beyond
provided by TMG accounted for nil, 68.7% and 83.7% of net revenues in 2016, 2017 and 2018, respectively. On July 17, 2017, the
Company acquired a 93% interest in TMG, one of the top online lottery betting and online casino platforms operating out of Malta
with a significant market share in the Nordic countries. This acquisition has contributed significantly to the increase of the
Company’s revenue.
The table below sets forth our operating
expenses from continuing operations for the periods indicated:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
12,749
|
|
|
|
37,483
|
|
|
|
80,017
|
|
|
|
11,638
|
|
Sales and marketing
|
|
|
43,398
|
|
|
|
63,295
|
|
|
|
92,465
|
|
|
|
13,448
|
|
General and administrative
|
|
|
247,408
|
|
|
|
224,321
|
|
|
|
251,384
|
|
|
|
36,562
|
|
Service development expenses
|
|
|
70,741
|
|
|
|
58,592
|
|
|
|
61,909
|
|
|
|
9,004
|
|
Total operating expenses
|
|
|
374,296
|
|
|
|
383,691
|
|
|
|
485,775
|
|
|
|
70,652
|
|
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:
|
·
|
amortization fees, which consist primarily of amortization
of intangible assets arising from business combination, were nil, RMB13.7 million and RMB31.5 million (US$4.6 million) in 2016,
2017 and 2018, 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 a 93% equity interest in TMG
in July 2017, were RMB7.0 million and RMB20.4 million (US$3.0 million) in 2017 and 2018;
|
|
·
|
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 a 93% equity interest in TMG in July 2017, were RMB4.5 million and 12.1
million (US$1.8 million) in 2017 and 2018;
|
|
·
|
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 RMB0.6 million, RMB2.9 million and RMB6.8 million (US$1.0 million)
in 2016, 2017 and 2018, respectively;
|
|
·
|
server leasing and maintenance expenses, which consist primarily of leasing expense of servers and other equipment used in
providing online services, were RMB8.3 million, RMB8.2 million and RMB6.1 million (US$0.9 million) in 2016, 2017 and 2018, respectively;
|
|
·
|
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 a 93% equity interest in TMG in July 2017, were
RMB0.6 million and RMB2.0 million (US$0.3 million) in 2017 and 2018;
|
|
·
|
salary and benefit expenses for our lottery ticket processing employees were RMB0.5 million, nil and nil in 2016, 2017 and
2018, respectively; and
|
|
·
|
share-based compensation expenses, which were RMB3.0 million, nil and nil in 2016, 2017 and 2018, respectively.
|
Sales and marketing expenses
Our sales and marketing expenses consist
primarily of:
|
·
|
promotional and marketing expenses, which primarily consist of expenses associated with various promotional events, were RMB7.5
million, RMB31.3 million and RMB54.1 million (US$7.9 million) in 2016, 2017 and 2018, respectively;
|
|
·
|
salary and benefit expenses for sales and marketing employees, which were RMB17.8 million, RMB14.8 million and RMB19.2 million
(US$2.8 million) in 2016, 2017 and 2018, respectively;
|
|
·
|
share-based compensation expenses, which were RMB14.0 million, RMB9.2 million and RMB11.4 million (US$1.7 million) in 2016,
2017 and 2018, respectively;
|
|
·
|
advertising expenses, which consist primarily of expenses associated with advertisements we placed on TV channels and other
media, were RMB0.3 million, RMB1.0 million and RMB2.4 million (US$0.3 million) in 2016, 2017 and 2018, respectively; and
|
|
·
|
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 nil, RMB5.2 million and RMB0.3 million (US$0.1 million) in 2016, 2017 and 2018, respectively.
|
General and administrative expenses
Our general and administrative expenses
consist primarily of:
|
·
|
share-based compensation expenses, which were RMB121.4 million, RMB65.5 million and RMB76.9 million (US$11.2 million) in 2016,
2017 and 2018, respectively;
|
|
·
|
salary and benefit expenses for our management and general administrative employees, which were RMB44.4 million, RMB57.0 million
and RMB69.7 million (US$10.1 million) in 2016, 2017 and 2018, respectively;
|
|
·
|
third-party professional service fees, which consist primarily of professional service fees paid to third-party professionals,
were RMB27.1 million, RMB41.2 million and RMB33.3 million (US$4.8 million) in 2016, 2017 and 2018, respectively;
|
|
·
|
depreciation expenses mainly for improvement of leasehold, which were RMB16.9 million, RMB13.3 million and RMB30.1 million
(US$4.4 million) in 2016, 2017 and 2018, respectively;
|
|
·
|
office expenses, which consist primarily of office rental and other office administrative expenses, were RMB18.8 million, RMB31.6
million and RMB28.0 million (US$4.1 million) in 2016, 2017 and 2018, respectively; and
|
|
·
|
travel, communication and other business expenses, which consist primarily of expenses associated with business travels, were
RMB12.9 million, RMB12.5 million and RMB12.0 million (US$1.7 million) in 2016, 2017 and 2018, respectively.
|
Service development expenses
Our service development expenses consist
primarily of:
|
·
|
salary and benefit expenses for our research and development employees, which were RMB34.5 million, RMB32.8 million and RMB26.1
million (US$3.8 million) in 2016, 2017 and 2018, respectively;
|
|
·
|
share-based compensation expenses, which were RMB25.0 million, RMB16.4 million and RMB20.3 million (US$3.0 million) in 2016,
2017 and 2018, respectively; and
|
|
·
|
rental expenses, which were RMB3.8 million, RMB3.9 million and RMB12.9 million (US$1.9 million) in 2016, 2017 and 2018, 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 RMB2.7 million, RMB1.2 million and RMB12.6 million (US$1.8 million) in 2016, 2017 and 2018, respectively.
Government Grant
In 2016, 2017 and 2018, we recognized grants
from Shenzhen local government in an aggregate amount of RMB10.0 million, RMB6.8 million and RMB7.6 million (US$1.1 million), respectively.
We might recognize 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.
Impairment of equity method investments
Impairment of equity method investments
were nil, RMB28.8 million and RMB149.9 million (US$21.8 million) in 2016, 2017 and 2018, respectively. The impairment loss in 2017
and 2018 were primarily related to our 40.65% equity interest in Loto Interactive, which we acquired in June 2017.
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, after deduction of the net
loss arising from Shenzhen Caiyu.
In connection with our disposal of 500Fu
in February 2018, we recognized in 2018 a disposition gain of RMB1.8 million (US$0.3 million), after deduction of the net loss
arising from 500Fu.
Taxation
Our
group includes entities incorporated in various jurisdictions throughout the world including the Cayman Islands, the British Virgin
Islands, the United States, the United Kingdom, Malta, Curacao, Cyprus, Australia, Hong Kong, Japan and the 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 six-sevenths (6/7) of the profits tax paid as a refund, which may effectively reduce the income tax
rate to 5%.
Curacao
Multi Pay N.V. is incorporated
in Curacao. Under the current laws, profits tax in Curacao is generally assessed at the rate of 2% of taxable income.
Hong Kong
500wan HK Limited is incorporated in Hong
Kong. Under the current laws, profits tax in Hong Kong is generally assessed at the rate of 16.5% of taxable income. As 500wan
HK Limited does not conduct any substantive operations of its own, no provision for Hong Kong income tax has been made in the financial
statements as 500wan HK Limited had no assessable income for the year ended December 31, 2016, 2017 and 2018.
People’s Republic of China
The 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, E-Sun Sky Computer, E-Sun Sky Network, Shenzhen Yicai, Baifengrun Technology, Tongfu Technology and Shenzhen Kaisheng
were subject to the EIT rate of 25% in 2016, 2017 and 2018. Hainan Menghuanxingchen, Hainan Jingli, Hainan Panfeng and Hangzhou
E-Sun Sky Network were subject to the EIT rate of 25% in 2018 since their inception. Guangtiandi Technology obtained a certificate
of “Software Enterprise” and was granted a half reduction in tax rate in 2016 and 2017, and was subject to the EIT
rate of 12.5% in 2016 and 2017, and 25% in 2018, respectively.
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 2016, 2017 and 2018. Additionally, Lhasa Yicai is also exempt from provincial allocated corporate
income tax from January 1, 2015 to December 31, 2017 in accordance with local tax regulations.
As of December 31, 2018, we had also recognized
a total amount of RMB2.1 million (US$0.3 million) as an accrual for uncertain tax positions and associated interest and penalties
related to certain unrecognized tax positions.
During the years ended December 31, 2016,
2017 and 2018, the Group recognized approximately RMB4,932,000, RMB5,098,000 and nil in interest on these unrecognized tax positions
and reversed approximately RMB1,827,000, RMB7,667,000 and RMB7,420,000 (US$1,079,000) in interest. The Group had accrued approximately
RMB9,989,000, RMB7,420,000 and nil for the interest on these uncertain tax positions as of December 31, 2016, 2017 and 2018, 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, 2018, the PRC subsidiaries 2015 to 2018 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.
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 the 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; and
(v) recognize revenue when (or as) each performance obligation is satisfied.
The Company applied the new revenue standard
beginning on January 1, 2018, and adopted a modified retrospective approach upon adoption. The Group has set up an implementation
schedule and analyzed 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 websites 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 voluntary 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 the total purchase amount. Revenue
is recognized when users are 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.
Mobile Gaming Services
Before disposing of Qufan and ceasing operations
of our designated mobile application Quiz in the first quarter of 2018, the Group formerly provided mobile gaming services through
designated mobile applications Night of Texas Hold’em Poker, Paiyou for Texas Hold’em Poker and Quiz, and derived revenues
from in-game virtual tokens and other virtual items in its game development operations. Once the users purchased virtual tokens
or other virtual items through the Group’s own charging system, the Group had 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 recorded
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 recognized 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 recognized 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 recognized revenue ratably over the average
life of durable virtual items for the applicable game, which the Group made best estimates to be average playing period of paying
players. The Group tracked each paying player’s log-in history to estimate the average playing period of paying players,
and believed its estimates to be reasonable based on sufficient available paying player information.
The Super VIP incentive
Certain qualified end users (“Super
VIP”) are entitled to receive incentives from the Group based on the 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, as 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 (s)he initiates 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 to 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 the total purchase amount before the lottery pool purchase deadline, the Group contributes the remaining
outstanding purchase amount (i.e., residual amount of the 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 the distribution is retained by the Group.
Since the Group contributes the residual
amount of the 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 the 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 the distribution
of the prizes is 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.
Online spot commodity trading services
The Group provides online spot commodity trading services through
our designated website and mobile application in Shenzhen Kaisheng. The Group provides customers with reliable online spot commodity
trading for gold trade and delay products across PC and mobile devices. The Group processes customer orders through a commercial
bank, and later formed a joint venture with Shenzhen Gold Exchange on May 11, 2018 to provide online spot commodity trading services.
Trading commissions are received from the commercial bank based on the pre-determined commission fee rate and the total amount
of the processed orders. The Group began to generate a small amount of revenue from trading commissions on the online spot commodity
trading services since 2017.
Online gaming services
The Group also provides online lottery betting
and online casino platforms through our designated website in TMG. We earn the spread by exploiting the price 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 agree to be bound by 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 whenever 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.
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 are 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 positions 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.
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 the 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
Short-term investments
of the Company are comprised of an investment in a targeted asset management plan with a fixed rate. The Company accounts for all
highly liquid investments with original maturities of greater than three months, but less than 12 months, in accordance with ASC
320-10, “Investments—Debt and Equity Securities,” which are classified as short-term investments. Dividend and
interest income, including amortization of the premium and discount arising at acquisition for all categories of investments in
securities, are included in earnings. Any realized gains or losses on the sale of the short-term investments are determined on a
specific identification method, and such gains and losses are reflected in earnings during the period in which gains or losses
are realized.
The Company evaluates
whether a decline in fair value below the amortized cost basis is other-than-temporary in accordance with ASC 320. Other-than-temporary
impairment loss is recognized in earnings equal to the entire excess of the debt security’s amortized cost basis over its
fair value at the balance sheet date of the reporting period for which the assessment is made.
Long-term investments
The Company’s
long-term investments consist of equity investments with and equity investments without readily determinable fair value and equity
method investments.
Prior to adopting
ASC Topic 321, Investments Equity Securities (“ASC 321”) on January 1, 2018, the Company carried at cost its investments
in investees that do not have readily determinable fair value and over which the Company does not have significant influence, in
accordance with ASC Subtopic 325-20, “Investments-Other: Cost Method 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.
Pursuant to ASC 321,
equity investments, except for those accounted for under the equity method, those that result in consolidation of the investee
and certain other investments, are measured at fair value, and any changes in fair value, are recognized in earnings. For equity
securities without readily determinable fair value and do not qualify for the existing practical expedient in ASC Topic 820, “Fair
Value Measurements and Disclosures” (“ASC 820”) to estimate fair value using the net asset value per share (or
its equivalent) of the investment, the Company elected to use the measurement alternative to measure those investments at cost,
less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar
investments of the same issuer, if any. Equity securities with readily determinable fair value are measured at fair values, and
any changes in fair value are recognized in earnings. For those equity investments that the Company elects to use the measurement
alternative, the Company makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative
assessment indicates that the investment is impaired, the entity has to estimate the investment’s fair value in accordance
with the principles of ASC 820. If the fair value is less than the investment’s carrying value, the entity has to recognize
an impairment loss in net income equal to the difference between the carrying value and fair value.
As the Company’s
investments in investees do not have readily determinable fair value and over which the Company does not have significant influence,
when adopting ASC 321 on January 1, 2018, the Company elected to use the measurement alternative to measure those investments at
cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical
or similar investments of the same issuer, if any. There was no effect on the Company’s consolidated financial statements
subsequent to the adoption of ASC 321.
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 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 whenever events or changes in circumstances indicate that the carrying amount of the investment
might not be recoverable. Factors considered by the Company when determining whether an investment has been other-than-temporarily-impaired,
include, but are not limited to, the length of the time and the extent to which the market value has been less than cost, the financial
performance and near-term prospect of the investee, and the Company’s intent and ability to retain the investment until the
recovery of its cost. 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, impairment losses of RMB28.8 million and RMB149.9 million (US$ 21.8 million) for the long-term investments were
recognized during the years of 2017 and 2018, respectively.
Investments in limited
partnerships greater than 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, an investment in a targeted asset management
plan with a fixed rate (Note 6), other receivables, and accounts payable. As of December 31, 2017 and 2018, the carrying values
of these financial instruments, approximate their fair values due to their short-term maturities.
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.
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 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.
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.
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
5,259
|
|
|
|
71,858
|
|
|
|
126,089
|
|
|
|
18,339
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
(12,749
|
)
|
|
|
(37,483
|
)
|
|
|
(80,017
|
)
|
|
|
(11,638
|
)
|
Sales and marketing
|
|
|
(43,398
|
)
|
|
|
(63,295
|
)
|
|
|
(92,465
|
)
|
|
|
(13,448
|
)
|
General and administrative
|
|
|
(247,408
|
)
|
|
|
(224,321
|
)
|
|
|
(251,384
|
)
|
|
|
(36,562
|
)
|
Service development expenses
|
|
|
(70,741
|
)
|
|
|
(58,592
|
)
|
|
|
(61,909
|
)
|
|
|
(9,004
|
)
|
Total operating expenses
|
|
|
(374,296
|
)
|
|
|
(383,691
|
)
|
|
|
(485,775
|
)
|
|
|
(70,652
|
)
|
Other operating income
|
|
|
2,731
|
|
|
|
1,204
|
|
|
|
12,638
|
|
|
|
1,838
|
|
Government grant
|
|
|
10,017
|
|
|
|
6,789
|
|
|
|
7,620
|
|
|
|
1,108
|
|
Indemnity cost
|
|
|
(9,979
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other operating expenses
|
|
|
(1,915
|
)
|
|
|
(34,691
|
)
|
|
|
(5,060
|
)
|
|
|
(736
|
)
|
Operating loss from continuing operations
|
|
|
(368,183
|
)
|
|
|
(338,531
|
)
|
|
|
(344,488
|
)
|
|
|
(50,103
|
)
|
Other income/(expenses), net
|
|
|
-
|
|
|
|
821
|
|
|
|
(43
|
)
|
|
|
(6
|
)
|
Interest income
|
|
|
23,859
|
|
|
|
20,032
|
|
|
|
15,308
|
|
|
|
2,226
|
|
Loss from equity method investments
|
|
|
(406
|
)
|
|
|
(2,128
|
)
|
|
|
(15,025
|
)
|
|
|
(2,185
|
)
|
Impairment of equity method investments
|
|
|
-
|
|
|
|
(28,781
|
)
|
|
|
(149,896
|
)
|
|
|
(21,801
|
)
|
Gain from disposal of subsidiaries
|
|
|
136,914
|
|
|
|
5,477
|
|
|
|
2,805
|
|
|
|
408
|
|
Changes in fair value of contingent considerations
|
|
|
-
|
|
|
|
(2,384
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss before income taxes from continuing operations
|
|
|
(207,816
|
)
|
|
|
(345,494
|
)
|
|
|
(491,339
|
)
|
|
|
(71,461
|
)
|
Income taxes (expenses) benefit
|
|
|
(2,143
|
)
|
|
|
14,025
|
|
|
|
19,602
|
|
|
|
2,851
|
|
Net loss from continuing operations
|
|
|
(209,959
|
)
|
|
|
(331,469
|
)
|
|
|
(471,737
|
)
|
|
|
(68,610
|
)
|
income from discontinued operations, net of applicable income taxes
|
|
|
707
|
|
|
|
15,327
|
|
|
|
2,183
|
|
|
|
316
|
|
Gain on disposal of discontinued operations, net of applicable income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
10,160
|
|
|
|
1,478
|
|
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of applicable income taxes
|
|
|
707
|
|
|
|
15,327
|
|
|
|
12,343
|
|
|
|
1,794
|
|
Net loss
|
|
|
(209,252
|
)
|
|
|
(316,142
|
)
|
|
|
(459,394
|
)
|
|
|
(66,816
|
)
|
Net loss from continuing operations attributable to noncontrolling interest and redeemable noncontrolling interest
|
|
|
(6,633
|
)
|
|
|
(6,734
|
)
|
|
|
(8,820
|
)
|
|
|
(1,283
|
)
|
Net income from discontinued operations attributable to noncontrolling interest
|
|
|
346
|
|
|
|
7,691
|
|
|
|
1,099
|
|
|
|
161
|
|
Less: Net (loss) income attributable to the noncontrolling interests
|
|
|
(6,287
|
)
|
|
|
1,524
|
|
|
|
(4,486
|
)
|
|
|
(652
|
)
|
Less: Net (loss) attributable to redeemable noncontrolling interest
|
|
|
-
|
|
|
|
(567
|
)
|
|
|
(3,235
|
)
|
|
|
(470
|
)
|
Net loss attributable to 500.com Limited
|
|
|
(202,965
|
)
|
|
|
(317,099
|
)
|
|
|
(451,673
|
)
|
|
|
(65,694
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
82,347
|
|
|
|
(55,805
|
)
|
|
|
23,023
|
|
|
|
3,349
|
|
Unrealized gain (loss) on available for sale investments
|
|
|
754
|
|
|
|
(733
|
)
|
|
|
-
|
|
|
|
-
|
|
Other comprehensive income (loss) net of tax
|
|
|
83,101
|
|
|
|
(56,538
|
)
|
|
|
23,023
|
|
|
|
3,349
|
|
Comprehensive loss
|
|
|
(126,151
|
)
|
|
|
(372,680
|
)
|
|
|
(436,371
|
)
|
|
|
(63,467
|
)
|
Less: Comprehensive (loss) income attributable to redeemable noncontrolling interest and noncontrolling interests
|
|
|
(6,287
|
)
|
|
|
1,348
|
|
|
|
(6,383
|
)
|
|
|
(928
|
)
|
Comprehensive loss attributable to 500.com Limited
|
|
|
(119,864
|
)
|
|
|
(374,028
|
)
|
|
|
(429,988
|
)
|
|
|
(62,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses per share for Class A and Class B ordinary shares outstanding-Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(0.49
|
)
|
|
|
(0.80
|
)
|
|
|
(1.13
|
)
|
|
|
(0.164
|
)
|
Net income from discontinued operations
|
|
|
0.001
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.004
|
|
Net loss
|
|
|
(0.489
|
)
|
|
|
(0.78
|
)
|
|
|
(1.10
|
)
|
|
|
(0.16
|
)
|
Losses per American Depositary Share (“ADS”) (1 ADS represents 10 Class A ordinary shares)-Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(4.90
|
)
|
|
|
(7.95
|
)
|
|
|
(11.28
|
)
|
|
|
(1.64
|
)
|
Net income from discontinued operations
|
|
|
0.01
|
|
|
|
0.19
|
|
|
|
0.27
|
|
|
|
0.04
|
|
Net loss
|
|
|
(4.89
|
)
|
|
|
(7.76
|
)
|
|
|
(11.01
|
)
|
|
|
(1.60
|
)
|
Weighted average number of Class A and Class B ordinary shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
414,872,756
|
|
|
|
408,310,122
|
|
|
|
418,911,292
|
|
|
|
418,911,292
|
|
Diluted
|
|
|
414,872,756
|
|
|
|
408,310,122
|
|
|
|
418,911,292
|
|
|
|
418,911,292
|
|
Non-GAAP financial data
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to 500.com Limited
|
|
|
(202,965
|
)
|
|
|
(317,099
|
)
|
|
|
(451,673
|
)
|
|
|
(65,694
|
)
|
Adjustment for share-based compensation expenses
|
|
|
163,341
|
|
|
|
91,143
|
|
|
|
108,628
|
|
|
|
15,799
|
|
Adjusted net loss attributable to 500.com Limited (non-GAAP)
|
|
|
(39,624
|
)
|
|
|
(225,956
|
)
|
|
|
(343,045
|
)
|
|
|
(49,895
|
)
|
Adjusted net income (loss) from continuing operations attributable to 500.com Limited (non-GAAP)
|
|
|
(39,985
|
)
|
|
|
(233,592
|
)
|
|
|
(354,289
|
)
|
|
|
(51,528
|
)
|
Adjusted net income from discontinued operations attributable to 500.com Limited (non-GAAP)
|
|
|
316
|
|
|
|
7,636
|
|
|
|
11,244
|
|
|
|
1,633
|
|
|
(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, 2018 compared with the
year ended December 31, 2017
Net revenues
Our net revenues increased by 75.4% from
RMB71.9 million in 2017 to RMB126.1 million (US$18.3 million) in 2018, primarily attributable to revenues generated from online
gaming services and sports information services. The Company acquired the TMG in July 2017, which contributed significantly to
the net revenues.
Revenues generated from mobile gaming services
decreased by 55.1% from RMB8.9 million in 2017 to RMB4.0 million (US$0.6 million) in 2018. We started generating revenues from
mobile gaming services at the end of 2016 with the development of our app “Quiz.” In February 2018, we ceased Quiz,
and stopped generating mobile gaming revenues since then.
Revenues generated from online gaming services
increased by 113.6% from RMB49.4 million after the acquisition of 93% equity interest in TMG in July 2017 to RMB105.5 million (US$15.3
million) in 2018. On a pro forma basis, had the acquisition of this equity interest in TMG been completed on January 1,2017, it
would have contributed a full-year total net revenue of RMB93.3 million to the Company, which would have brought the total net
revenue of the Company to RMB115.8 million for the year 2017. The increase in net revenue on pro forma basis would have been only
13.1%.
Revenues generated from sports information
services increased by 21.2% from RMB13.2 million in 2017 to RMB16.0 million (US$2.3 million) in 2018, primarily due to the 2018
FIFA World Cup, which led to an increase in the number of users and user payment 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, we continued to generate revenues from sports information services through our own service
offerings “Cai Xun Hao,” which was ceased in March 2019.
Operating expenses
Our operating expenses increased by 26.6%
from RMB383.7 million in 2017 to RMB485.8 million (US$70.7 million) in 2018. Our operating expenses consisted of the following:
Cost of Services
. Our cost of services
increased by 113.3% from RMB37.5 million in 2017 to RMB80.0 million (US$11.6 million) in 2018. The increase was primarily due to
(i) an increase in amortization expenses relating to the licenses through the acquisition of a 93% equity interest in TMG in July
2017, from RMB13.7 million in 2017 to RMB31.5 million (US$4.6 million) in 2018; (ii) an increase in business insurance costs of
TMG associated with online lottery betting, from RMB7.0 million to RMB20.4 million (US$3.0 million) in 2018; (iii) an increase
in platform service fees of TMG associated with online casino platforms, from RMB4.5 million to RMB12.1 million (US$1.8 million)
in 2018; and (iv) an increase in account handling expenses relating to our mobile distribution channels from RMB2.9 million in
2017 to RMB6.8 million (US$1.0 million) in 2018, slightly offset by a decrease in server leasing and maintenance expenses from
RMB8.2 million in 2017 to RMB6.1 million (US$0.9 million) in 2018.
Sales and marketing expenses
. Sales
and marketing expenses increased by 46.1% from RMB63.3 million in 2017 to RMB92.5 million (US$13.5 million) in 2018: The increase
was mainly due to: (i) an increase in promotional and marketing expenses from RMB31.3 million in 2017 to RMB54.1 million (US$7.9
million) in 2018, which was primarily due to the operation of mobile gaming services, online gaming services and sports information
services in 2018 and (ii) an increase in salary and benefit expenses for employees from RMB14.8 million in 2017 to RMB19.2 million
(US$2.8 million) in 2018.
General and administrative expenses
.
General and administrative expenses increased by 12.1% from RMB224.3 million in 2017 to RMB251.4 million (US$36.6 million) in 2018.
The increase primarily consisted of:
|
·
|
an increase in share-based compensation expenses associated
with share options granted to our directors and employees from RMB65.5 million in 2017 to RMB76.9 million (US$11.2 million) in
2018, which was primarily related to the share options granted in 2018;
|
|
·
|
an increase in salary and benefit expenses for employees
from RMB57.0 million in 2017 to RMB69.7 million (US$10.1 million) in 2018, which was primarily related to the increased number
of employees of the newly acquired subsidiary, TMG; and
|
|
·
|
an increase in depreciation expenses from RMB13.3
million in 2017 to RMB30.1 million (US$4.4 million) in 2018, which was primarily related to the leasehold improvements for the
Company’s new offices which were put into use at the end of 2017.
|
The increase in general and administrative
expenses was slightly offset by a decrease in third-party professional service fees from RMB41.2 million in 2017 to RMB33.3 million
(US$4.8 million) in 2018, which was primarily due to the acquisition activities conducted in 2017.
Service development expenses
. Service
development expenses increased by 5.6% from RMB58.6 million in 2017 to RMB61.9 million (US$9.0 million) in 2018. The increase was
primarily due to (i) an increase in share-based compensation expenses associated with the share options granted to our service
development employees from RMB16.4 million in 2017 to RMB20.3 million (US$3.0 million) in 2018; and (ii) an increase in rental
expense in from RMB3.9 million in 2017 to RMB12.9 million (US$1.9 million) in 2018. The increase in service development expenses
was slightly offset by a decrease in salary and benefit expenses for employees from RMB32.8 million in 2017 to RMB26.1 million
(US$3.8 million) in 2018, due to the decrease in the number of employees.
Other operating income
Other operating income increased by 950.0%
from RMB1.2 million in 2017 to RMB12.6 million (US$1.8 million) in 2018. The increase was mainly due to: (i) gain from exchange
rate of U.S. dollars to Renminbi of RMB6.4 million in 2018 and (ii) an increase in technical and management services fees received
from third parties from RMB0.7 million in 2017 to RMB3.6 million (US$0.5 million) in 2018.
Operating loss
As a result of the foregoing factors,
we recorded operating loss from continuing operations of RMB344.5 million (US$50.1 million) in 2018, an increase of RMB6.0
million compared with operating loss from continuing operations of RMB338.5 million in 2017.
Impairment of equity method investments.
Impairment of equity method investments
increased by 420.5% from RMB28.8 million in 2017 to RMB149.9 million (US$21.8 million) in 2018, the impairment loss in 2017 and
2018 being primarily related to our 40.65% equity interest in Loto Interactive, which we acquired in June 2017;
Gain from disposal of subsidiaries
Gain from disposal of subsidiaries was RMB2.8
million (US$0.4 million) in 2018, a decrease of RMB2.7 million compared with gain from disposal of “Caiyu” of RMB5.5
million in 2017.
Loss before income taxes
Loss before income taxes was RMB491.3 million
(US$71.5 million) in 2018, an increase of RMB145.8 million compared with loss before income taxes of RMB345.5 million in 2017.
Income tax benefit
We recorded income tax benefit of RMB19.6
million (US$2.9 million) in 2018, an increase of RMB5.6 million compared with income tax benefit of RMB14.0 million in 2017. Income
tax benefit was primarily due to a reversal of uncertain tax liabilities of RMB20.7 million in 2018.
Net loss
As a result of the forgoing factors,
we recorded net loss from continuing operations of RMB471.7 million (US$68.6 million) in 2018, as compared to net loss from
continuing operations of RMB331.5 million in 2017.
Net loss attributable to 500.com Limited
We recorded net loss from
continuing operations attributable to 500.com Limited of RMB462.9 million (US$67.3 million) in 2018, as compared to net loss
from continuing operations attributable to 500.com Limited of RMB324.7 million in 2017. We also recorded non-GAAP net
loss from continuing operations attributable to 500.com Limited of RMB354.3 million (US$51.5 million) in 2018, as compared to
non-GAAP net loss from continuing operations attributable to 500.com Limited of RMB233.6 million in 2017.
The year ended December 31, 2017 compared with the
year ended December 31, 2016
Net revenues
Our net revenues increased by 1,256.6% from
RMB5.3 million in 2016 to RMB71.9 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
from nil in 2016 to RMB8.9 million in 2017, primarily due to an increase in the number of users and user payment for these services.
We started generating revenues from mobile gaming services in the fourth quarter of 2016 upon the
development of our app “Quiz.” In February 2018, we 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 in
2017.
Revenues generated from sports information
services increased by 633.3% from RMB1.8 million in 2016 to RMB13.2 million in 2017, primarily due to an increase in the number
of users and user payment 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, and “Cai
Xun Hao” was ceased in March 2019.
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 2.5%
from RMB374.3 million in 2016 to RMB383.7 million in 2017. Our operating expenses consisted of the following:
Cost of Services
. Our cost of services
increased by 195.3% from RMB12.7 million in 2016 to RMB37.5 million in 2017. The increase was primarily due to (i) amortization
expenses relating to the licenses through the acquisition of a 93% equity interest in TMG in July 2017 of RMB13.7 million in 2017;
(ii) an increase in business insurance costs of TMG associated with online lottery betting of RMB7.0 million in 2017; (iii) an
increase in platform service fees of TMG associated with online casino platforms of RMB4.5 million in 2017; and (iv) an increase
in account handling expenses relating to our mobile distribution channels from RMB0.6 million in 2016 to RMB2.9 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 45.9% from RMB43.4 million in 2016 to RMB63.3 million in 2017: The increase mainly due to:
|
·
|
an increase in promotional and marketing expenses
from RMB7.5 million in 2016 to RMB31.3 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 in 2017, which was primarily due to the expiration of share options granted in
2014.
General and administrative expenses
.
General and administrative expenses decreased by 9.3% from RMB247.4 million in 2016 to RMB224.3 million in 2017. The decrease primarily
due to:
|
·
|
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 in 2017, which was
primarily due to the expiration of share options granted in 2014.
|
The decrease in general and administrative
expenses was slightly offset by: (i) an increase in third-party professional service fees from RMB27.1 million in 2016 to RMB41.2
million in 2017, which was primarily related to the acquisition activities conducted in 2017; (ii) an increase in salary and benefit
expense for employees from RMB44.4 million in 2016 to RMB57.0 million in 2017, which was primarily related to the increased number
of employees of the newly acquired subsidiary, TMG; (iii) and an increase in rental expenses from RMB11.7 million in 2016 to RMB24.8
million in 2017, which was primarily related to our newly rented offices located in Hong Kong and Shenzhen starting late 2016.
Service development expenses
. Service
development expenses decreased by 17.1% from RMB70.7 million in 2016 to RMB58.6 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 in 2017; and (ii) a decrease in technical services fee from RMB2.0 million in 2016
to RMB1.0 million in 2017. (iii) a decrease in salary and benefit expenses for employees from RMB34.5 million in 2016 to RMB32.8
million in 2017.
Other operating income
Other operating income decreased slightly
from RMB2.7 million in 2016 to RMB1.2 million in 2017.
Operating loss
As a result of the foregoing factors,
we recorded operating loss from continuing operations of RMB338.5 million in 2017, a decrease of RMB29.7 million compared
with operating loss from continuing operations of RMB368.2 million in 2016.
Impairment of equity method investments.
Impairment loss on equity investment increased
from nil in 2016 to RMB28.8 million in 2017, the impairment loss in 2017 being primarily related to our 40.65% equity interest
in Loto Interactive, which we acquired in June 2017;
Gain from disposal of subsidiaries
Gain from disposal of subsidiaries was RMB5.5
million in 2017, a decrease of RMB131.4 million compared with gain from disposal of Sumpay.cn of RMB136.9 million in 2016.
Loss before income taxes
Loss before income taxes was RMB345.5 million
in 2017, an increase of RMB137.7 million compared with loss before income taxes of RMB207.8 million in 2016.
Income tax expense
We recorded income tax benefit of RMB14.0
million in 2017, as compared to income tax expense of RMB2.1 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 from continuing operations of RMB331.5 million in 2017, as compared to net loss from continuing
operations of RMB210.0 million in 2016.
Net loss attributable to 500.com Limited
We recorded net loss from continuing
operations attributable to 500.com Limited of RMB324.7 million in 2017, as compared to net loss from continuing operations
attributable to 500.com Limited of RMB203.3 million in 2016. We also recorded non-GAAP net loss from continuing operations
attributable to 500.com Limited of RMB233.6 million in 2017, as compared to non-GAAP net loss from continuing operations
attributable to 500.com Limited of RMB40.0 million in 2016.
|
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, 2018, we had RMB435.1 million (US$63.3 million) in cash and cash equivalents and RMB100.0 million (US$14.5 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 subsidiary, TMG, can be self-sufficient without requiring additional capital from us. We disposed
of Qufan and received a significant amount of cash from that disposal. All these factors combined will have a positive impact on
our cash flows for at least the 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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash used in operating activities
|
|
|
(114,341
|
)
|
|
|
(199,875
|
)
|
|
|
(160,506
|
)
|
|
|
(23,346
|
)
|
Net cash provided by (used in) investing activities
|
|
|
496,938
|
|
|
|
108,355
|
|
|
|
(9,486
|
)
|
|
|
(1,379
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(117,094
|
)
|
|
|
(11,700
|
)
|
|
|
54,791
|
|
|
|
7,969
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
47
|
|
|
|
(43,224
|
)
|
|
|
21,226
|
|
|
|
3,087
|
|
Cash, cash equivalents and restricted cash at the beginning of the year
|
|
|
411,256
|
|
|
|
676,806
|
|
|
|
530,362
|
|
|
|
77,138
|
|
Cash, cash equivalents and restricted cash at the end of the year
|
|
|
676,806
|
|
|
|
530,362
|
|
|
|
436,387
|
|
|
|
63,469
|
|
Net cash provided by (used in) operating activities
Net cash used in operating activities in
2018 was RMB160.5 million (US$23.3 million), which was primarily attributable to (i) net loss of RMB459.4 million (US$66.8 million)
adjusted by subtracting RMB108.6 million (US$15.8 million) of share-based compensation; (ii) depreciation and amortization expenses
of RMB64.0 million (US$9.3 million); (iii) impairment loss on equity investment of RMB149.9 million (US$21.8 million); (iv) loss
from equity method investments of RMB15.0 million (US$2.2 million); and (v) a decrease in prepayments and other receivables of
RMB7.9 million (US$1.2 million). Net cash provided by operating activities in 2018 was partially offset by (i) a decrease in accrued
expenses and other current liabilities of RMB1.4 million (US$0.2 million); (ii) a decrease in long-term payables of RMB24.7 million
(US$3.6 million); (iii) a gain on disposal of subsidiary of RMB13.0 million (US$1.9 million); (iv) investment income from short-term
investments of RMB6.1 million (US$0.9 million), and (v) a decrease in accrued salary and benefit expenses for employees of RMB1.8
million (US$0.3 million).
Net cash used in operating activities in
2017 was RMB199.9 million, which was primarily attributable to (i) net loss of RMB316.1 million adjusted by subtracting RMB91.1
million of share-based compensation; (ii) depreciation and amortization expenses of RMB39.5 million; (iii) impairment loss on equity
investment of RMB28.8 million; (iv) loss from equity method investments of RMB2.1 million; (v) provision for bad debt of RMB1.5
million, and (vi) an increase in accrued expenses and other current liabilities of RMB11.6 million. Net cash provided by operating
activities in 2017 was partially offset by (i) an increase in prepayments and other receivables of RMB32.2 million; (ii) a decrease
in long-term payables of RMB19.6 million; (iii) a gain from disposal of subsidiary of RMB5.5 million; and (iv) a decrease in income
tax payable of RMB2.1 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) an increase in accrued payroll and welfare payables of RMB1.8 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; (iii) an increase in prepayments and other receivables of RMB4.3 million; (iv) an increase
in accounts receivables of RMB4.4 million; and (v) a decrease in long-term payables of RMB2.5 million.
Net cash provided by (used in) investing activities
Net cash used in investing activities in
2018 was RMB9.5 million (US$1.4 million), which was primarily attributable to (i) cash distribution from short-term investments
of RMB6.1 million (US$0.9 million); (ii) cash received from return of other long-term investments of RMB7.6 million (US$1.1 million),
(iii) cash proceeds from disposal of other long-term assets of RMB5.8 million (US$0.9 million); (iv) repayment of loans provided
to third-parties of RMB5.0 million (US$0.7 million); and (v) cash received from disposal of subsidiaries and VIEs, net of cash
disposed of RMB23.7 million (US$3.4 million); which was partially offset by (i) cash paid for acquisition of other non-current
assets of RMB11.1 million (US$1.6 million); (ii) cash paid for acquisition of property and equipment of RMB35.6 million (US$5.2
million); (iii) cash paid for loans provided to third-parties of RMB10.0 million (US$1.5 million), and (iv) cash paid for acquisition
of intangible asset of RMB1.1 million (US$0.2 million).
Net cash provided by investing activities
in 2017 was RMB108.4 million, which was primarily attributable to (i) cash received from return of time deposits of RMB804.7 million;
(ii) cash received from disposal of subsidiaries and VIEs, net of cash of RMB71.8 million, and (iii) cash received from disposal
of property and equipment of RMB3.5 million; which was partially offset by (i) net cash paid for business combination, net of cash
of RMB374.3 million; (ii) cash paid for acquisition of other non-current assets (primarily attributable to investment in Loto Interactive)
of RMB302.3 million; (iii) cash paid for acquisition of property and equipment of RMB72.9 million; (iv) cash paid for short-term
investments of RMB20.0 million, and (v) cash paid for acquisition of intangible asset of RMB2.1 million.
Net cash provided by investing activities
in 2016 was RMB496.9 million, which was primarily attributable to (i) cash received from return 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 subsidiaries and VIEs, net of cash proceeds 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 non-current
assets of RMB28.4 million; (iv) cash paid for business combination with Sumpay.cn of RMB6.7 million; and (v) cash paid for acquisition
of property and equipment of RMB26.9 million.
Net cash provided by (used in) financing activities
Net cash provided by financing activities
in 2018 was RMB54.8 million (US$8.0 million) which was primarily attributable to (i) withdrawal of prepayment for share repurchase
of RMB13.3 million (US$1.9 million); and (ii) proceeds from the exercise of share options of RMB41.5 million (US$6.0 million).
Net cash used in financing activities in
2017 was RMB11.7 million which was primarily attributable to payment for repurchase of shares of RMB17.3 million; which was partially
offset by proceeds from the exercise of share options of RMB5.6 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 and reimbursement of ADR program-related expenses of RMB1.4
million.
Capital Expenditures
We made capital expenditures, including
for property and equipment and intangible assets, of RMB26.7 million, RMB75.0 million and RMB36.7 million (US$5.3 million) in 2016,
2017 and 2018, respectively. In addition, our capital expenditures in 2016, 2017 and 2018 primarily consisted of purchases of additional
information technology-related equipment and leasehold improvement of our new office. 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 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.
The Company has adopted ASU 2016-02 on January
1, 2019 using a modified retrospective method and will not restate comparable periods. The Company elected the package of practical
expedients permitted under the transition guidance, which allow the Company to carry forward the historical lease classification,
the assessment whether a contract is or contains a lease and initial direct costs for any leases that exist prior to the adoption
of the new standard. The Company also elected the practical expedient not to separate lease and non-lease components for certain
classes of underlying assets and the short-term lease exemption for contracts with lease terms of 12 months or less. Certain operating
leases related to offices which are subject to ASU 2016-02 and right-of-use assets and lease liabilities are recognized on the Company’s
consolidated balance sheet. The Company currently believes the most significant change is related to the recognition of right-of-use
assets and lease liabilities on the Company’s balance sheet for certain in-scope operating leases. There is no material impact
on net assets and the consolidated statement of comprehensive income as a result of adopting the new standard.
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 in
the process of evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
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 fiscal years beginning
after December 15, 2019. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adopting
ASU 2017-04 on its consolidated financial statements.
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. The Group is currently in the process of evaluating the impact of the 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. 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 Tax Cuts and Jobs 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 Tax Cuts and Jobs 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 13).
In June 2018, the FASB issued ASU No. 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting to simplify the accounting
for share-based payments to nonemployees (“ASU 2018-07”) by aligning it with the accounting for share-based payments
to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed
at the grant date, which may lower their cost and reduce volatility in the income statement. The guidance is effective for public
business entities in annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is
permitted, including in an interim period. The ASU 2018-07 will impact the accounting of the share-based awards granted to non-employees
and the Company does not expect a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU 2018-13”) which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Under
the guidance, public companies will be required to disclose the range and weighted average used to develop significant unobservable
inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal years beginning after December
15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard
or only the provisions that eliminate or modify the requirements. The Company does not expect a significant impact on its 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 sports
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”,
“youqiu”, “youqiubiying” and “500gold” 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 45
trademarks relating to “500wan”, 46 trademarks relating to “500.com“ and 5 trademarks relating to “youqiu”,
4 trademarks relating to “youqiubiying”, 13 trademarks relating to “fengkuangcaiqiu”, and 1 trademark relating
to “500gold” 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 Japan Patent 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 87 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.
Other than as disclosed elsewhere in this
annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year 2018 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
financial 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, 2018
|
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
|
(in thousands)
|
|
2019
|
|
|
25,661
|
|
|
|
3,780
|
|
2020
|
|
|
26,892
|
|
|
|
3,961
|
|
2021
|
|
|
21,952
|
|
|
|
3,234
|
|
2022
|
|
|
16,499
|
|
|
|
2,430
|
|
Total
|
|
|
91,004
|
|
|
|
13,405
|
|
As of December 31, 2018, we did not have
any long-term debt obligations or purchase obligations.
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;
|
|
·
|
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
|
|
|
|
|
|
Huixuan Wang
|
|
[52]
|
|
Chairman
|
Bo Yu
|
|
[51]
|
|
Director
|
Qian Sun
|
|
[44]
|
|
Independent Director
|
Honghui Deng
|
|
[48]
|
|
Independent Director
|
Yu Wei
|
|
[48]
|
|
Independent Director
|
Angel Yan Ki Wong
|
|
[48]
|
|
Independent Director
|
Zhengming Pan
|
|
[40]
|
|
Director and Chief Executive Officer
|
Qiang Yuan
|
|
[46]
|
|
Chief Financial Officer
|
Zhaofu Tian
|
|
[43]
|
|
Chief Technology Officer
|
Mr. Huixuan Wang
has served as a
director and Chairman of the Board since August 2018. Mr. Wang has been the director and Co-President of Tsinghua Unigroup since
July 2016. Prior to joining Tsinghua Unigroup, Mr.Wang was the director of the management committee of Midong New Zone in Xinjiang,
the Vice President of Xinjiang Branch of China Life Insurance Company Ltd., Person Chiefly in Charge of Guangdong Branch, General
Manager of Shandong Branch and Executive Director and Vice President of head office of Chinese People’s Life Insurance Company
Ltd., and Chairman of Board of Directors, Director and Principal Member of the Investment Decision-Making Committee of Life Insurance
Capital Investment Management Company Ltd. Mr. Wang received a bachelor of Laws degree from Central China Normal University in
1987, and EMBA and a Ph.D. degree in Technological Economics and Management from Tianjin University in 2005.
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.
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 a 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 a 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. Zhaofu Tian
has served as our
chief technology officer since October 2012. Mr. Tian has over 11 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.
Compensation of Directors and Executive Officers
In 2018, the aggregate cash compensation
to all our directors and our executive officers was RMB5.5 million (US$0.8 million). For share-based compensation, see “Item
6B. Compensation—Share Incentive Plans.” We did not have any amount accrued in 2018 for pension, retirement or other
similar benefits to our directors and our executive officers.
Share Incentive Plans
We have adopted our 2011 share incentive
plan to attract and retain the best available personnel, provide additional incentives to our employees, directors and consultants,
and promote the success of our business. The 2011 share incentive plan provides for the grant of options, restricted shares and
other share-based awards, collectively referred to as “awards.” The board has authorized under the plan the issuance
of up to 12% of our issued and outstanding ordinary shares from time to time, on an as-exercised and fully diluted basis, upon
exercise of awards granted under our 2011 share incentive plan.
The following table summarizes the share
options and restricted shares granted to our employees under the 2011 share incentive plan that was outstanding as of the date
of this annual report, respectively.
Name
|
|
Number of
Ordinary Shares
Underlying
Options
|
|
|
Exercise Price
(1)
(US$/Share)
|
|
|
Vesting
Commencement Date
|
|
Date of Grant
|
|
Date of Expiration
|
Man San Law
|
|
|
660,000
|
|
|
|
0.2
|
|
|
April 8, 2012
|
|
April 8, 2011
|
|
April 8, 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 6, 2016
|
|
November 22, 2019
|
Zhengming Pan
|
|
|
2,483,330
|
|
|
|
1
|
|
|
June 19, 2015
|
|
June 19, 2014
|
|
June 19, 2019
|
|
|
|
100,000
|
|
|
|
1.851
|
|
|
November 21, 2016
|
|
January 6, 2016
|
|
November 22, 2019
|
|
|
|
100,000
|
|
|
|
1.35
|
|
|
November 21, 2017
|
|
December 16, 2016
|
|
November 22, 2019
|
Zhaofu Tian
|
|
|
*
|
|
|
|
1
|
|
|
June 19, 2015
|
|
June 19, 2014
|
|
June 19, 2019
|
Qiang Yuan
|
|
|
*
|
|
|
|
1
|
|
|
June 19, 2015
|
|
June 19, 2014
|
|
June 19, 2019
|
Honghui Deng
|
|
|
*
|
|
|
|
1
|
|
|
November 22, 2014
|
|
June 19, 2014
|
|
November 22, 2019
|
|
|
|
|
|
|
|
1.851
|
|
|
November 21, 2016
|
|
January 6, 2016
|
|
November 22, 2019
|
|
|
|
|
|
|
|
1.35
|
|
|
November 21, 2017
|
|
December 16, 2016
|
|
November 22, 2019
|
Yu Wei
|
|
|
*
|
|
|
|
1
|
|
|
November 22, 2014
|
|
June 19, 2014
|
|
November 22, 2019
|
|
|
|
|
|
|
|
1.851
|
|
|
November 21, 2016
|
|
January 6, 2016
|
|
November 22, 2019
|
|
|
|
|
|
|
|
1.35
|
|
|
November 21, 2017
|
|
December 16, 2016
|
|
November 22, 2019
|
Qian Sun
|
|
|
*
|
|
|
|
1
|
|
|
November 22, 2014
|
|
June 19, 2014
|
|
November 22, 2019
|
|
|
|
|
|
|
|
1.851
|
|
|
November 21, 2016
|
|
January 6, 2016
|
|
November 22, 2019
|
|
|
|
|
|
|
|
1.35
|
|
|
November 21, 2017
|
|
December 16, 2016
|
|
November 22, 2019
|
Angel Yan Ki Wong
|
|
|
*
|
|
|
|
1.851
|
|
|
November 21, 2016
|
|
January 6, 2016
|
|
November 22, 2019
|
|
|
|
|
|
|
|
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
|
|
|
660,000
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
1,400,000
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
7,946,680
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
|
|
1.851
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
1.35
|
|
|
|
|
|
|
|
Other Individuals as a group
|
|
|
1,073,500
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
41,350
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
14,302,410
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
2.545
|
|
|
|
|
|
|
|
|
*
|
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.
|
|
(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 sports 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
|
|
|
Vesting
Commencement Date
|
|
Date of Grant
|
|
Date of Expiration
|
Zhengming Pan
|
|
|
300,000
|
|
|
June 1, 2019
|
|
August 15, 2017
|
|
August 15, 2027
|
Zhaofu Tian
|
|
|
*
|
|
|
June 1, 2019
|
|
August 15, 2017
|
|
August 15, 2027
|
Qiang Yuan
|
|
|
*
|
|
|
June 1, 2019
|
|
August 15, 2017
|
|
August 15, 2027
|
Bo Yu
|
|
|
*
|
|
|
June 1, 2019
|
|
August 15, 2017
|
|
August 15, 2027
|
Directors and officers as a group
|
|
|
500,000
|
|
|
|
|
|
|
|
Other Individuals as a group
|
|
|
14,130,740
|
|
|
|
|
|
|
|
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.
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.
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;
|
|
·
|
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, Huixuan Wang, 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;
|
|
·
|
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 Huixuan Wang, Qian Sun and Zhengming Pan. Huixuan Wang 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.
|
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).
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 366, 408 and 282 employees as of December
31, 2016, 2017 and 2018, respectively. The table below sets forth the number of employees categorized by function as of December
31, 2018.
Function
|
|
Number of employees
|
|
Management and Administration
|
|
|
9
|
|
Sales, Marketing and Website Operation
|
|
|
87
|
|
Service and User Support
|
|
|
17
|
|
Technology and Product Development
|
|
|
108
|
|
Administrative Support
|
|
|
61
|
|
Total
|
|
|
282
|
|
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.
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.
|
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 373,088,212 Class A ordinary shares and 54,400,299 Class B ordinary
shares.
|
|
Shares Beneficially
Owned
|
|
|
|
|
|
Percentage of
Votes
Held
|
|
|
|
Number
|
|
|
Percent
|
|
|
Percent
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhengming Pan
(1)
|
|
|
6,033,330
|
|
|
|
1.40
|
%
|
|
|
0.66
|
%
|
Zhaofu Tian
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Qiang Yuan
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Honghui Deng
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Yu Wei
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Qian Sun
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Angel Yan Ki Wong
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Bo Yu
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Huixuan Wang
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tsinghua Unigroup International Co., Ltd.
(2)
|
|
|
136,343,110
|
|
|
|
31.89
|
%
|
|
|
14.87
|
%
|
Man San Law
(3)
|
|
|
44,413,854
|
|
|
|
10.27
|
%
|
|
|
30.19
|
%
|
Sequoia Capital 2010 CGF Holdco, Ltd.
(4)
|
|
|
35,042,735
|
|
|
|
8.20
|
%
|
|
|
3.82
|
%
|
The business address of our directors
and executive officers is 12F, West Side, Block B, Building No.7, Shenzhen Bay Eco-Technology Park, Nanshan District, Shenzhen,
518115, People’s Republic of China.
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*
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Less than 1% of our outstanding ordinary shares.
|
|
(1)
|
represents (i) 240,000 ADSs which represent 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, and (iii) 65,000 ADSs which represent 650,000 Class A ordinary
shares.
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|
(2)
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represents (i) 63,500,500 Class A ordinary shares, and
(ii) 6,456,905 ADSs which represent 64,569,050 Class A ordinary shares, owned by Tsinghua Unigroup International Co., Ltd. (iii)
827,356 ADSs which represent 8,273,560 Class A ordinary shares, owned by Unis Technology Strategy Investment Limited. The address
of Tsinghua Unigroup International Co., Ltd. is Floor 6, Unis Plaza, Tsinghua Science Park, Haidian District, Beijing, China.
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|
(3)
|
represents (i) 21,000,006 Class B ordinary shares and (ii)
800,883 ADSs which represent 8,008,830 Class A ordinary shares owned by Delite Limited, (iii) 5,000,008 Class B ordinary shares
and (iv) 526,501 ADSs which represent 5,265,010 Class A ordinary shares owned by Smart Mega Holdings Limited, as well as (v) 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. Delite Limited is 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 Guernsey 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 21,000,006 Class B ordinary shares and 800,883 ADSs owned by Delite
Limited are held by Credit Suisse Trust Limited as trustee of The Jackpot Trust. Smart Mega Holdings Limited is 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 Guernsey 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 5,000,008 Class B ordinary shares and 526,501 ADSs owned by Smart Mega Holdings Limited
are held by Credit Suisse Trust Limited as trustee of The Vibrant Jade Trust.
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(4)
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represents (i) 5 Class B ordinary shares, and (ii) 3,504,273 Restricted ADSs which represent 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.
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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.
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ITEM 7.
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MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Please refer to “Item 6E. Share Ownership.”
|
B.
|
Related Party Transactions
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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, 2016, 2017 and 2018, there were no outstanding balance due from these related parties.
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.”
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.”
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C.
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Interests of Experts and Counsel
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Not applicable.
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ITEM 8.
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FINANCIAL INFORMATION
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A.
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Consolidated Statements and Other Financial Information
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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.”
We have not experienced any significant
changes since the date of our audited consolidated financial statements included in this annual report.
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ITEM 9.
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THE OFFER AND LISTING
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A.
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Offering and Listing Details
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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.”
As of the date of this annual report, a
total of 37,308,821 ADSs representing 373,088,212 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.
Not applicable.
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.”
Not applicable.
Not applicable.
Not applicable.
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ITEM 10.
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ADDITIONAL INFORMATION
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Not applicable.
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B.
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Memorandum and Articles of Association
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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.
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. As of the date of this annual report, we have received the redemption notice from Helmet, which requested the Company
to repurchase the 7% equity interest held by Helmet at the redemption price of EUR3,745,000. Both parties have not yet reached
an agreement on the repurchase price. See “Item 4B. Business Overview— Legal and Administrative Proceedings.”
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.
See “Item 4. B. Business Overview—Regulation
of Our Industry.”
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.
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.
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:
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·
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an individual citizen or resident of the United States;
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·
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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;
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·
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an estate the income of which is subject to United States federal income taxation regardless of its source; or
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·
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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.
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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:
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·
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a dealer in securities or currencies;
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·
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a financial institution;
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·
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a regulated investment company;
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·
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a real estate investment trust;
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·
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a tax-exempt organization;
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·
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a person holding our ADSs or ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale
or a straddle;
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·
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a trader in securities that has elected the mark-to-market method of accounting for your securities;
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·
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a person liable for alternative minimum tax;
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·
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a person who owns or is deemed to own 10% or more of our stock (by vote or value);
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·
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a partnership or other pass-through entity for United States federal income tax purposes;
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·
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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
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|
·
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a person whose “functional currency” is not the United States dollar.
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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.
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.
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 2018 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 2019 or future taxable years.
In general, we will be a PFIC for any taxable
year in which:
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·
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at least 75% of our gross income is passive income, or
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·
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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.
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:
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·
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the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares,
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·
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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
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·
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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.
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 other disposition 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 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.
|
F.
|
Dividends and Paying Agents
|
Not applicable.
Not applicable.
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.
|
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. However, the value of Renminbi appreciated approximately 5.81% against the U.S. dollar in 2017, while the value of the
Renminbi depreciated approximately 5.04% against the U.S. dollar in 2018. 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, 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.
As of December 31, 2018, we had Renminbi
denominated cash and cash equivalents, time deposits, restricted cash and short term investments of RMB178.4 million, EUR denominated
cash and cash equivalents of EUR2.4 million, and U.S. dollar denominated cash and cash equivalents of US$48.8 million. Assuming
we had converted RMB178.4 million into U.S. dollars at the exchange rate of RMB6.8755 for US$1.00 and EUR2.4 million into U.S.
dollars at the exchange rate of EUR0.8729 for US$1.00 as of the end of 2018, our total U.S. dollar cash balance would have been
US$77.5 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$74.9 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
2.0% in 2016, 1.6% in 2017 and 2.1% in 2018. 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
|
Not applicable
Not applicable
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 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;
|
|
·
|
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 the 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.
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
31,2017
|
|
|
As of
December
31,2018
|
|
|
As of
December
31,2018
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
487,266
|
|
|
|
435,133
|
|
|
|
63,287
|
|
Restricted cash
|
|
|
|
|
|
|
1,238
|
|
|
|
1,254
|
|
|
|
182
|
|
Short-term investments
|
|
|
6
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
14,544
|
|
Prepayments and other receivables
|
|
|
8
|
|
|
|
81,316
|
|
|
|
65,198
|
|
|
|
9,483
|
|
Current assets for discontinued operations
|
|
|
|
|
|
|
67,202
|
|
|
|
-
|
|
|
|
-
|
|
Total current assets
|
|
|
|
|
|
|
737,022
|
|
|
|
601,585
|
|
|
|
87,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
9
|
|
|
|
105,502
|
|
|
|
97,195
|
|
|
|
14,136
|
|
Intangible assets, net
|
|
|
10
|
|
|
|
243,261
|
|
|
|
214,962
|
|
|
|
31,265
|
|
Goodwill
|
|
|
5
|
|
|
|
129,752
|
|
|
|
129,752
|
|
|
|
18,872
|
|
Deposits
|
|
|
8
|
|
|
|
5,750
|
|
|
|
5,152
|
|
|
|
749
|
|
Long-term investments
|
|
|
6
|
|
|
|
347,073
|
|
|
|
194,375
|
|
|
|
28,271
|
|
Other non-current assets
|
|
|
|
|
|
|
6,257
|
|
|
|
3,563
|
|
|
|
518
|
|
Non-current assets for discontinued operations
|
|
|
|
|
|
|
179,942
|
|
|
|
-
|
|
|
|
-
|
|
Total non-current assets
|
|
|
|
|
|
|
1,017,537
|
|
|
|
644,999
|
|
|
|
93,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
1,754,559
|
|
|
|
1,246,584
|
|
|
|
181,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST 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 RMB9,875 and RMB7,854 (US$1,142) as of December 31, 2017 and 2018, respectively)
|
|
|
|
|
|
|
11,855
|
|
|
|
9,779
|
|
|
|
1,422
|
|
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to 500.com Limited of RMB51,658 and RMB54,200 (US$7,883) as of December 31, 2017 and 2018, respectively)
|
|
|
11
|
|
|
|
146,233
|
|
|
|
88,149
|
|
|
|
12,820
|
|
Income tax payable (including income tax payable of the consolidated VIEs without recourse to 500.com Limited of RMB615 and RMB1,313 (US$191) as of December 31, 2017 and 2018, respectively)
|
|
|
|
|
|
|
2,223
|
|
|
|
1,766
|
|
|
|
257
|
|
Current liabilities for discontinued operations
|
|
|
|
|
|
|
15,626
|
|
|
|
-
|
|
|
|
-
|
|
Total current liabilities
|
|
|
|
|
|
|
175,937
|
|
|
|
99,694
|
|
|
|
14,499
|
|
The accompanying notes are
an integral part of the consolidated financial statements.
500.COM LIMITED
CONSOLIDATED BALANCE SHEETS
(continued)
(Amounts in thousands of Renminbi
(“RMB”) and U.S. dollars (“US$”), except for number of shares)
|
|
Notes
|
|
|
As of
December
31,2017
|
|
|
As of
December
31,2018
|
|
|
As of
December
31,2018
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term payables (including long-term payables of the consolidated VIEs without recourse to 500.com Limited of RMB27,673 and RMB 4,196 (US$610) as of December 31, 2017 and 2018, respectively)
|
|
|
|
|
|
|
27,785
|
|
|
|
4,196
|
|
|
|
610
|
|
Deferred tax liabilities (including deferred tax liabilities of the consolidated VIEs without recourse to 500.com Limited of nil and nil as of December 31, 2017 and 2018, respectively)
|
|
|
13
|
|
|
|
6,754
|
|
|
|
7,744
|
|
|
|
1,126
|
|
Non-Current liabilities for discontinued operations
|
|
|
|
|
|
|
12,721
|
|
|
|
-
|
|
|
|
-
|
|
Total non-current liabilities
|
|
|
|
|
|
|
47,260
|
|
|
|
11,940
|
|
|
|
1,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
|
|
|
|
223,197
|
|
|
|
111,634
|
|
|
|
16,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
|
|
5
|
|
|
|
22,052
|
|
|
|
29,388
|
|
|
|
4,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A ordinary shares, par value US$0.00005 per share, 700,000,000 shares authorized as of December 31, 2017 and December 31, 2018; 333,787,552 and 350,804,532 shares issued and outstanding as of December 31, 2017 and December 31, 2018, respectively
|
|
|
18
|
|
|
|
115
|
|
|
|
121
|
|
|
|
18
|
|
Class B ordinary shares, par value US$0.00005 per share; 300,000,000 shares authorized as of December 31, 2017 and December 31, 2018; 74,400,299 and 74,400,299 shares issued and outstanding as of December 31, 2017 and December 31, 2018, respectively
|
|
|
18
|
|
|
|
28
|
|
|
|
28
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
18
|
|
|
|
2,295,111
|
|
|
|
2,431,924
|
|
|
|
353,709
|
|
Treasury shares
|
|
|
|
|
|
|
(143,780
|
)
|
|
|
(143,780
|
)
|
|
|
(20,912
|
)
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
116,051
|
|
|
|
137,736
|
|
|
|
20,033
|
|
Accumulated deficit and statutory reserve
|
|
|
12
|
|
|
|
(857,751
|
)
|
|
|
(1,309,424
|
)
|
|
|
(190,448
|
)
|
Total 500.com Limited shareholders’ equity
|
|
|
|
|
|
|
1,409,774
|
|
|
|
1,116,605
|
|
|
|
162,404
|
|
Noncontrolling interests
|
|
|
|
|
|
|
99,536
|
|
|
|
(11,043
|
)
|
|
|
(1,606
|
)
|
Total shareholders' equity
|
|
|
|
|
|
|
1,509,310
|
|
|
|
1,105,562
|
|
|
|
160,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
1,754,559
|
|
|
|
1,246,584
|
|
|
|
181,307
|
|
The accompanying notes are
an integral part of the consolidated financial statements
500.COM LIMITED
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(Amounts in thousands of Renminbi
(“RMB”) and U.S. dollars (“US$”), except for number of
shares and per share (or ADS) data)
|
|
|
|
|
For the years ended December 31,
|
|
|
|
Notes
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
|
|
|
|
5,259
|
|
|
|
71,858
|
|
|
|
126,089
|
|
|
|
18,339
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
(12,749
|
)
|
|
|
(37,483
|
)
|
|
|
(80,017
|
)
|
|
|
(11,638
|
)
|
Sales and marketing
|
|
|
|
|
|
|
(43,398
|
)
|
|
|
(63,295
|
)
|
|
|
(92,465
|
)
|
|
|
(13,448
|
)
|
General and administrative
|
|
|
|
|
|
|
(247,408
|
)
|
|
|
(224,321
|
)
|
|
|
(251,384
|
)
|
|
|
(36,562
|
)
|
Service development expenses
|
|
|
|
|
|
|
(70,741
|
)
|
|
|
(58,592
|
)
|
|
|
(61,909
|
)
|
|
|
(9,004
|
)
|
Total operating expenses
|
|
|
|
|
|
|
(374,296
|
)
|
|
|
(383,691
|
)
|
|
|
(485,775
|
)
|
|
|
(70,652
|
)
|
Other operating income
|
|
|
|
|
|
|
2,731
|
|
|
|
1,204
|
|
|
|
12,638
|
|
|
|
1,838
|
|
Government grant
|
|
|
|
|
|
|
10,017
|
|
|
|
6,789
|
|
|
|
7,620
|
|
|
|
1,108
|
|
Indemnity cost
|
|
|
16
|
|
|
|
(9,979
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other operating expenses
|
|
|
|
|
|
|
(1,915
|
)
|
|
|
(34,691
|
)
|
|
|
(5,060
|
)
|
|
|
(736
|
)
|
Operating loss from continuing operations
|
|
|
|
|
|
|
(368,183
|
)
|
|
|
(338,531
|
)
|
|
|
(344,488
|
)
|
|
|
(50,103
|
)
|
Other income/(expenses), net
|
|
|
|
|
|
|
-
|
|
|
|
821
|
|
|
|
(43
|
)
|
|
|
(6
|
)
|
Interest income
|
|
|
|
|
|
|
23,859
|
|
|
|
20,032
|
|
|
|
15,308
|
|
|
|
2,226
|
|
Loss from equity method investments
|
|
|
6
|
|
|
|
(406
|
)
|
|
|
(2,128
|
)
|
|
|
(15,025
|
)
|
|
|
(2,185
|
)
|
Impairment of equity method investments
|
|
|
6
|
|
|
|
-
|
|
|
|
(28,781
|
)
|
|
|
(149,896
|
)
|
|
|
(21,801
|
)
|
Gain from disposal of subsidiaries
|
|
|
|
|
|
|
136,914
|
|
|
|
5,477
|
|
|
|
2,805
|
|
|
|
408
|
|
Changes in fair value of contingent considerations
|
|
|
|
|
|
|
-
|
|
|
|
(2,384
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss before income taxes from continuing operations
|
|
|
|
|
|
|
(207,816
|
)
|
|
|
(345,494
|
)
|
|
|
(491,339
|
)
|
|
|
(71,461
|
)
|
Income taxes (expenses) benefits
|
|
|
13
|
|
|
|
(2,143
|
)
|
|
|
14,025
|
|
|
|
19,602
|
|
|
|
2,851
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
(209,959
|
)
|
|
|
(331,469
|
)
|
|
|
(471,737
|
)
|
|
|
(68,610
|
)
|
Income from discontinued operations, net of income taxes
|
|
|
|
|
|
|
707
|
|
|
|
15,327
|
|
|
|
2,183
|
|
|
|
316
|
|
Gain on disposal of discontinued operations, net of income taxes
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,160
|
|
|
|
1,478
|
|
Net income from discontinued operations, net of income taxes
|
|
|
|
|
|
|
707
|
|
|
|
15,327
|
|
|
|
12,343
|
|
|
|
1,794
|
|
Net loss
|
|
|
|
|
|
|
(209,252
|
)
|
|
|
(316,142
|
)
|
|
|
(459,394
|
)
|
|
|
(66,816
|
)
|
Net loss from continuing operations attributable to noncontrolling interest and redeemable
noncontrolling interest
|
|
|
|
|
|
|
(6,633
|
)
|
|
|
(6,734
|
)
|
|
|
(8,820
|
)
|
|
|
(1,283
|
)
|
Net income from discontinued operations attributable to noncontrolling interest
|
|
|
|
|
|
|
346
|
|
|
|
7,691
|
|
|
|
1,099
|
|
|
|
161
|
|
Less: Net (loss) income attributable to the noncontrolling interest
|
|
|
|
|
|
|
(6,287
|
)
|
|
|
1,524
|
|
|
|
(4,486
|
)
|
|
|
(652
|
)
|
Less: Net (loss) attributable to redeemable noncontrolling interest
|
|
|
|
|
|
|
-
|
|
|
|
(567
|
)
|
|
|
(3,235
|
)
|
|
|
(470
|
)
|
Net loss attributable to 500.com Limited
|
|
|
|
|
|
|
(202,965
|
)
|
|
|
(317,099
|
)
|
|
|
(451,673
|
)
|
|
|
(65,694
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
|
|
|
|
82,347
|
|
|
|
(55,805
|
)
|
|
|
23,023
|
|
|
|
3,349
|
|
Unrealized gain (loss) on available for sale investments
|
|
|
|
|
|
|
754
|
|
|
|
(733
|
)
|
|
|
-
|
|
|
|
-
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
83,101
|
|
|
|
(56,538
|
)
|
|
|
23,023
|
|
|
|
3,349
|
|
Comprehensive loss
|
|
|
|
|
|
|
(126,151
|
)
|
|
|
(372,680
|
)
|
|
|
(436,371
|
)
|
|
|
(63,467
|
)
|
Less: Comprehensive (loss) income attributable to redeemable noncontrolling interest and noncontrolling interest
|
|
|
|
|
|
|
(6,287
|
)
|
|
|
1,348
|
|
|
|
(6,383
|
)
|
|
|
(928
|
)
|
Comprehensive loss attributable to 500.com Limited
|
|
|
|
|
|
|
(119,864
|
)
|
|
|
(374,028
|
)
|
|
|
(429,988
|
)
|
|
|
(62,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses per share for Class A and Class B ordinary shares outstanding-Basic and Diluted:
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
(0.49
|
)
|
|
|
(0.80
|
)
|
|
|
(1.13
|
)
|
|
|
(0.164
|
)
|
Net income from discontinued operations
|
|
|
|
|
|
|
0.001
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.004
|
|
Net loss
|
|
|
|
|
|
|
(0.489
|
)
|
|
|
(0.78
|
)
|
|
|
(1.10
|
)
|
|
|
(0.16
|
)
|
Losses per American Depositary Share (“ADS”) (1 ADS represents 10 Class A ordinary shares)-Basic and Diluted
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
(4.90
|
)
|
|
|
(7.95
|
)
|
|
|
(11.28
|
)
|
|
|
(1.64
|
)
|
Net income from discontinued operations
|
|
|
|
|
|
|
0.01
|
|
|
|
0.19
|
|
|
|
0.27
|
|
|
|
0.04
|
|
Net loss
|
|
|
|
|
|
|
(4.89
|
)
|
|
|
(7.76
|
)
|
|
|
(11.01
|
)
|
|
|
(1.60
|
)
|
Weighted average number of Class A and Class B ordinary shares outstanding:
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
414,872,756
|
|
|
|
408,310,122
|
|
|
|
418,911,292
|
|
|
|
418,911,292
|
|
Diluted
|
|
|
|
|
|
|
414,872,756
|
|
|
|
408,310,122
|
|
|
|
418,911,292
|
|
|
|
418,911,292
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
500.COM LIMITED
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Amounts in thousands of Renminbi
(“RMB”) and U.S. dollars (“US$”))
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(209,252
|
)
|
|
|
(316,142
|
)
|
|
|
(459,394
|
)
|
|
|
(66,816
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
12,865
|
|
|
|
13,400
|
|
|
|
31,069
|
|
|
|
4,519
|
|
Amortization of intangible assets
|
|
|
6,846
|
|
|
|
26,102
|
|
|
|
32,910
|
|
|
|
4,787
|
|
Deferred tax (benefit) expense
|
|
|
(496
|
)
|
|
|
405
|
|
|
|
(6
|
)
|
|
|
(1
|
)
|
Share-based compensation
|
|
|
163,341
|
|
|
|
91,143
|
|
|
|
108,628
|
|
|
|
15,799
|
|
Losses on disposal of property and equipment
|
|
|
15
|
|
|
|
171
|
|
|
|
-
|
|
|
|
-
|
|
Impairment loss on long-term investments
|
|
|
3,440
|
|
|
|
28,781
|
|
|
|
149,896
|
|
|
|
21,801
|
|
Provision for bad debt
|
|
|
200
|
|
|
|
1,500
|
|
|
|
-
|
|
|
|
-
|
|
Loss from equity method investments
|
|
|
406
|
|
|
|
2,128
|
|
|
|
15,025
|
|
|
|
2,185
|
|
Investment income from short-term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,118
|
)
|
|
|
(890
|
)
|
Reimbursement of American Depositary Receipt (“ADR”) program related expenses
|
|
|
(1,390
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gain on disposal of subsidiaries
|
|
|
(136,914
|
)
|
|
|
(5,477
|
)
|
|
|
(12,965
|
)
|
|
|
(1,886
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account payable
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable
|
|
|
(4,360
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Prepayments and other receivables
|
|
|
(4,347
|
)
|
|
|
(32,208
|
)
|
|
|
7,946
|
|
|
|
1,156
|
|
Deposits
|
|
|
(4,759
|
)
|
|
|
46
|
|
|
|
612
|
|
|
|
89
|
|
Accrued expenses and other current liabilities
|
|
|
55,359
|
|
|
|
11,619
|
|
|
|
(1,395
|
)
|
|
|
(203
|
)
|
Accrued payroll and welfare payable
|
|
|
1,807
|
|
|
|
413
|
|
|
|
(1,800
|
)
|
|
|
(262
|
)
|
Long-term payables
|
|
|
(2,456
|
)
|
|
|
(19,623
|
)
|
|
|
(24,690
|
)
|
|
|
(3,591
|
)
|
Income tax payable
|
|
|
5,336
|
|
|
|
(2,133
|
)
|
|
|
(224
|
)
|
|
|
(33
|
)
|
Net cash used in operating activities
|
|
|
(114,341
|
)
|
|
|
(199,875
|
)
|
|
|
(160,506
|
)
|
|
|
(23,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(26,888
|
)
|
|
|
(72,892
|
)
|
|
|
(35,623
|
)
|
|
|
(5,181
|
)
|
Acquisition of intangible assets
|
|
|
-
|
|
|
|
(2,142
|
)
|
|
|
(1,053
|
)
|
|
|
(153
|
)
|
Disposal of subsidiaries and VIEs, net of cash disposed
|
|
|
224,392
|
|
|
|
71,820
|
|
|
|
23,683
|
|
|
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of other long-term investments
|
|
|
(28,385
|
)
|
|
|
(302,317
|
)
|
|
|
(11,059
|
)
|
|
|
(1,608
|
)
|
Cash paid for business combination, net of cash
|
|
|
(6,671
|
)
|
|
|
(374,342
|
)
|
|
|
-
|
|
|
|
-
|
|
Cash paid for short-term investments
|
|
|
(213,460
|
)
|
|
|
(20,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Cash received from return of short-term investments
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash distribution from short-term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
6,118
|
|
|
|
890
|
|
Cash paid for time deposits
|
|
|
(938,928
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash received from return of time deposits
|
|
|
1,386,854
|
|
|
|
804,692
|
|
|
|
-
|
|
|
|
-
|
|
Cash received from return of other long-term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
7,593
|
|
|
|
1,104
|
|
Proceeds from disposal of property and equipment
|
|
|
24
|
|
|
|
3,536
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds from disposal of other long-term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
5,843
|
|
|
|
850
|
|
Loans provided to third-parties
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,009
|
)
|
|
|
(1,456
|
)
|
Repayment of loans provided to third-parties
|
|
|
-
|
|
|
|
-
|
|
|
|
5,021
|
|
|
|
730
|
|
Net cash provided by (used in) investing activities
|
|
|
496,938
|
|
|
|
108,355
|
|
|
|
(9,486
|
)
|
|
|
(1,379
|
)
|
The accompanying notes are
an integral part of the consolidated financial statements.
500.COM LIMITED
CONSOLIDATED STATEMENTS OF
CASH FLOWS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and U.S. dollars (“US$”))
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of share options
|
|
|
12,558
|
|
|
|
5,583
|
|
|
|
41,473
|
|
|
|
6,032
|
|
Repurchase of ordinary shares
|
|
|
(131,042
|
)
|
|
|
(17,283
|
)
|
|
|
-
|
|
|
|
-
|
|
Withdraw of prepayment for share repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
13,318
|
|
|
|
1,937
|
|
Reimbursement of ADR program related expenses
|
|
|
1,390
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net cash (used in) provided by financing activities
|
|
|
(117,094
|
)
|
|
|
(11,700
|
)
|
|
|
54,791
|
|
|
|
7,969
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
|
|
47
|
|
|
|
(43,224
|
)
|
|
|
21,226
|
|
|
|
3,087
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
265,550
|
|
|
|
(146,444
|
)
|
|
|
(93,975
|
)
|
|
|
(13,669
|
)
|
Cash, cash equivalents and restricted cash at beginning of the year
|
|
|
411,256
|
|
|
|
676,806
|
|
|
|
530,362
|
|
|
|
77,138
|
|
Cash, cash equivalents and restricted cash at end of the year
|
|
|
676,806
|
|
|
|
530,362
|
|
|
|
436,387
|
|
|
|
63,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
|
(51
|
)
|
|
|
(8,931
|
)
|
|
|
-
|
|
|
|
-
|
|
Interest received
|
|
|
18,977
|
|
|
|
19,416
|
|
|
|
16,000
|
|
|
|
2,327
|
|
The accompanying notes are
an integral part of the consolidated financial statements.
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, 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
|
)
|
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
|
)
|
|
|
(500
|
)
|
|
|
(2,824
|
)
|
Net (loss)
income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(317,099
|
)
|
|
|
1,524
|
|
|
|
(315,575
|
)
|
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
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
500.COM LIMITED
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY (continued)
(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
|
|
Disposal of VIE
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(107,419
|
)
|
|
|
(107,419
|
)
|
Adjustment
to redemption value of redeemable noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,559
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,559
|
)
|
Net (loss)
income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(451,673
|
)
|
|
|
(4,486
|
)
|
|
|
(456,159
|
)
|
Foreign
currency translation gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,685
|
|
|
|
-
|
|
|
|
1,326
|
|
|
|
23,011
|
|
Issuance of ordinary shares
from exercise of share options
|
|
|
17,016,980
|
|
|
|
-
|
|
|
|
6
|
|
|
|
38,744
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,750
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,628
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,628
|
|
Balance
as of December 31, 2018
|
|
|
350,804,532
|
|
|
|
74,400,299
|
|
|
|
149
|
|
|
|
2,431,924
|
|
|
|
(143,780
|
)
|
|
|
137,736
|
|
|
|
(1,309,424
|
)
|
|
|
(11,043
|
)
|
|
|
1,105,562
|
|
Balance
as of December 31, 2018, in US$
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
353,709
|
|
|
|
(20,912
|
)
|
|
|
20,033
|
|
|
|
(190,448
|
)
|
|
|
(1,606
|
)
|
|
|
160,798
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
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, 2018, 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, 2018, 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 Nihon Co., Ltd. (“500.com JP”)
|
|
July 27, 2017
|
|
Japan
|
|
|
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
|
Hainan Menghuanxingchen Computer Co., Ltd. (“Hainan Menghuanxingchen”)
|
|
May 3, 2018
|
|
PRC
|
|
|
100
|
%
|
|
Software Service
|
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******
|
|
September1, 2016
|
|
Malta
|
|
|
93
|
%
|
|
Online Gaming
|
Lotto Warehouse Ltd******
|
|
September1, 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******
|
|
December13,2016
|
|
Australia
|
|
|
93
|
%
|
|
Online Gaming
|
Oddson Europe Ltd******
|
|
January10, 2018
|
|
Malta
|
|
|
93
|
%
|
|
Online Gaming
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Hainan Jingli Network
Technology Co., Ltd. (“Hainan Jingli”) **
|
|
May 3, 2018
|
|
PRC
|
|
|
-
|
|
|
Software Service
|
Hainan Panfeng Network Technology Co., Ltd. (“Hainan Panfeng”)
**
|
|
July 18, 2018
|
|
PRC
|
|
|
-
|
|
|
Software Service
|
Hangzhou E-Sun Sky Network Technology Co., Ltd. (“Hangzhou
E-Sun Sky Network”) **
|
|
June 21, 2018
|
|
PRC
|
|
|
-
|
|
|
Software Service
|
Shenzhen Yicai Network Technology Co., Ltd. (“Shenzhen Yicai”)
***
|
|
July 21, 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
|
* A subsidiary of E-Sun Network
** A subsidiary of E-Sun Sky Network
*** A subsidiary of Youlanguang
Technology
**** A subsidiary of Guangtiandi
Technology
****** A subsidiary of The Multi
Group
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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: The Multi Group and its subsidiaries and the VIEs or subsidiaries of E-Sun Sky Computer.
The Group provides mobile gaming services, sports information services, online spot commodity trading services and
physical channel services
to sell sports lottery tickets
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 (which has been ceased since March 2015) 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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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)
|
On
January 10, 2017, as a result of the acquisition of Qufan Internet Technology Inc., the Company also entered into the contractual
arrangements with Shenzhen Qufan Network Technology Co., Ltd., through Qufan Information Technology (Shenzhen) Co., Ltd, which
obligates Qufan Information Technology (Shenzhen) Co., Ltd to absorb a majority of the expected losses from the activities of Shenzhen
Qufan Network Technology Co., and entitles Qufan Information Technology(Shenzhen) Co., Ltd to receive a majority of residual returns
from Shenzhen Qufan Network Technology Co., Ltd. The Company has disposed of Qufan Internet Technology Inc., together with its
subsidiaries and related VIEs in February 2018. In February 2018, the above contractual arrangements between Qufan Information
Technology (Shenzhen) Co., Ltd and Shenzhen Qufan Network Technology Co., Ltd were terminated.
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:
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
1.
|
ORGANIZATION (continued)
|
|
|
As of
December
31, 2017
|
|
|
As of
December
31, 2018
|
|
|
As of
December
31, 2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
85,161
|
|
|
|
123,482
|
|
|
|
17,960
|
|
Restricted cash
|
|
|
1,237
|
|
|
|
1,253
|
|
|
|
182
|
|
Amounts due from intergroup companies
|
|
|
2,555
|
|
|
|
2,627
|
|
|
|
382
|
|
Prepayments and other current assets
|
|
|
33,692
|
|
|
|
28,934
|
|
|
|
4,209
|
|
Current assets for discontinued operations
|
|
|
40,193
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
162,838
|
|
|
|
156,296
|
|
|
|
22,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
99,138
|
|
|
|
67,349
|
|
|
|
9,796
|
|
Intangible assets, net
|
|
|
1,734
|
|
|
|
1,623
|
|
|
|
236
|
|
Deposits
|
|
|
4,248
|
|
|
|
4,484
|
|
|
|
652
|
|
Long-term investments
|
|
|
53,044
|
|
|
|
51,332
|
|
|
|
7,466
|
|
Other non-current assets
|
|
|
6,296
|
|
|
|
3,563
|
|
|
|
518
|
|
Non-current assets for discontinued operations
|
|
|
179,932
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
344,392
|
|
|
|
128,351
|
|
|
|
18,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
507,230
|
|
|
|
284,647
|
|
|
|
41,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to intergroup companies
|
|
|
71,168
|
|
|
|
209,384
|
|
|
|
30,454
|
|
Accrued payroll and welfare payable
|
|
|
9,875
|
|
|
|
7,854
|
|
|
|
1,142
|
|
Accrued expenses and other current liabilities
|
|
|
51,658
|
|
|
|
54,200
|
|
|
|
7,883
|
|
Income tax payable
|
|
|
615
|
|
|
|
1,313
|
|
|
|
191
|
|
Current liabilities for discontinued operations
|
|
|
15,626
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
148,942
|
|
|
|
272,751
|
|
|
|
39,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term payables
|
|
|
27,673
|
|
|
|
4,196
|
|
|
|
610
|
|
Non-current liabilities for discontinued operations
|
|
|
12,721
|
|
|
|
-
|
|
|
|
-
|
|
Total non-current liabilities
|
|
|
40,394
|
|
|
|
4,196
|
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
189,336
|
|
|
|
276,947
|
|
|
|
40,280
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
1.
|
ORGANIZATION (continued)
|
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues for continuing operations
|
|
|
5,259
|
|
|
|
22,489
|
|
|
|
20,578
|
|
|
|
2,993
|
|
Net revenues for discontinued operations
|
|
|
5,669
|
|
|
|
59,465
|
|
|
|
7,398
|
|
|
|
1,076
|
|
Net loss for continuing operations
|
|
|
(9,557
|
)
|
|
|
(138,991
|
)
|
|
|
(103,383
|
)
|
|
|
(15,036
|
)
|
Net income for discontinued operations
|
|
|
706
|
|
|
|
14,957
|
|
|
|
2,183
|
|
|
|
317
|
|
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Net cash (used in) operating activities
|
|
(50,876)
|
|
|
(162,328)
|
|
|
(77,280)
|
|
|
(11,240)
|
|
Net cash provided by investing activities
|
|
|
166,222
|
|
|
|
6,350
|
|
|
|
11,164
|
|
|
|
1,624
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
104,453
|
|
|
|
15,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 provided a loan of US$15.8 million in financial support to
its VIEs, E-Sun Sky Network, as of December 31, 2018.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of presentation
and use of estimates
The accompanying
consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles
(“U.S. GAAP”).
The preparation
of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and
the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in
the Group’s consolidated financial statements include, but are not limited to, revenue recognition, allowance for doubtful
accounts, useful lives of property and equipment, impairment of long-lived assets, long-term investments and goodwill, the purchase
price allocation and fair value of non-controlling interests with respect to business combinations and acquisition of equity method
investees, realization of deferred tax assets, uncertain income tax positions and share-based compensation. Actual results could
materially differ from those estimates.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Changes in Presentation
of Comparative Information
Certain comparative
amounts have been reclassified to conform with the current year’s presentation. These reclassifications had no effect on
the reported results of operations.
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$1.00 to RMB6.8755 on
December 31, 2018 in the city of New York for wire transfers of RMB as certified for customs purposes by the Federal Reserve Bank
of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.
Foreign currency
translation
The functional
currency of the Company, BVI, 500wan HK, 500.com UK, 500.com USA and 500.com JP is the US$. The functional currency of The Multi
Group and its subsidiaries is EUR. E-Sun Sky Computer with its VIEs determined their functional currencies to be the RMB, which
is their respective local currencies based on the criteria of ASC 830, “
Foreign Currency Matters”
. The Group
uses the monthly average exchange rate for the year and the spot exchange rate at the balance sheet date to translate the operating
results and financial position, respectively. Translation differences are recorded in accumulated other comprehensive income as
a component of shareholders’ equity. The Group uses the RMB as its reporting currency.
Transactions denominated
in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Exchange
gains and losses resulting from foreign currency transactions are included in the consolidated statements of comprehensive income
(loss).
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) 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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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.
In November 2016,
the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which
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 presented in the statement of cash flows. The Company adopted
the new standard effective January 1, 2018, using the retrospective transition method. All restricted cash was presented on
the face of the consolidated balance sheet as “Restricted cash.”
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).
Accounts receivable
and allowance for doubtful accounts
Accounts receivable
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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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
|
|
|
Licenses and brand name
|
|
10 years
|
Mobile applications and software
|
|
5 years
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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 2018, 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, 2018.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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
Short-term
investments of the Company are comprised of an investment
in targeted
asset management plan with fixed rate
. The Company accounts for all highly liquid
investments with original maturities of greater than three months, but less than 12 months, in accordance with ASC 320-10,
“Investments—Debt and Equity Securities”, which are classified as short-term investments. Dividend and
interest income, including amortization of the premium and discount arising at acquisition for all categories of investments
in securities are included in earnings. Any realized gains or losses on the sale of the short-term investments are determined
on a specific identification method, and such gains and losses are reflected in earnings during the period in which gains or
losses are realized.
The Company evaluates
whether a decline in fair value below the amortized cost basis is other-than-temporary in accordance with ASC 320. Other-than-temporary
impairment loss is recognized in earnings equal to the entire excess of the debt security’s amortized cost basis over its
fair value at the balance sheet date of the reporting period for which the assessment is made.
Long-term investments
The Company’s
long-term investments consist of equity investments with and equity investments without readily determinable fair value and equity
method investments.
Prior to adopting
ASC Topic 321, Investments Equity Securities (“ASC 321”) on January 1, 2018, the Company carries at cost its investments
in investees that do not have readily determinable fair value and over which the Company does not have significant influence, in
accordance with ASC Subtopic 325-20, Investments-Other: Cost Method Investments.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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.
Pursuant to
ASC 321, equity investments, except for those accounted for under the equity method, those that result in consolidation of
the investee and certain other investments, are measured at fair value, and any changes in fair value are recognized in
earnings. For equity securities without readily determinable fair value and do not qualify for the existing practical
expedient in ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) to estimate fair value using the
net asset value per share (or its equivalent) of the investment, the Company elected to use the measurement alternative to
measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in
orderly transactions for identical or similar investments of the same issuer, if any. Equity securities with readily
determinable fair value are measured at fair values, and any changes in fair value are recognized in earnings. For those
equity investments that the Company elects to use the measurement alternative, the Company makes a qualitative assessment of
whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is
impaired, the entity has to estimate the investment’s fair value in accordance with the principles of ASC 820. If the
fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in net income
equal to the difference between the carrying value and fair value.
As the Company’s
investments in investees do not have readily determinable fair value and over which the Company does not have significant influence,
when adopting ASC 321 on January 1, 2018, the Company elected to use the measurement alternative to measure those investments at
cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical
or similar investments of the same issuer, if any. There was no effect on the Company’s consolidated financial statements
subsequent to the adoption of ASC 321.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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)
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 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 whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable.
Factors considered by the Company when determining whether an investment has been other-than-temporarily-impaired, includes, but
not limited to, the length of the time and the extent to which the market value has been less than cost, the financial performance
and near-term prospect of the investee, and the Company’s intentand ability to retain the investment until the recovery of
its cost. 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 and RMB149.9 million (US$ 21.8 million) for the long-term investments was
recognized during the year of 2017 and 2018, respectively.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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)
Investments in
limited partnerships greater than 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, investment
in targeted
asset management plan with fixed rate
(Note 6), other receivables,
and accounts payable. As of December 31, 2017 and 2018, the carrying values of these financial instruments, approximate their fair
values due to their short-term maturities.
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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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. The Group adopted ASC
Topic 606 Revenue from Contracts with Customers (“ASC 606”), from January 1, 2018, using the modified retrospective
method. Revenues for the year ended December 31, 2018 were presented under ASC 606, and revenues for the years ended December 31,
2017 and 2016 were not adjusted and continue to be presented under ASC Topic 605, Revenue Recognition.
The Group set up
an implementation schedule and analyzed each of the Group’s revenue streams in accordance with ASC 606 to determine the impact
on the Group’s consolidated financial statements. After the analyzation, we concluded that there was no substantial impact
on the Group’s consolidated financial statements upon the adoption of ASC 606. The Group’s revenue recognition policies
effective on the adoption date of ASC 606 are as follows:
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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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”
. The Group did not generate any
revenue from this source since April 2015, and it is uncertain when we will be able to generate this fee again in the future.
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. 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.
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 Group disposed of a group of components that engage in the
mobile gaming services by sale on February 9, 2018, which is reported as discontinued operations for the year ended December 31,
2018.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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)
|
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
. The Group provides customers with reliable online spot commodity trading for gold trade and delay
products across PC and mobile devices. The Group processes customer orders through a commercial bank, and later formed a
joint venture with Shenzhen Gold Exchange on May 11, 2018 to provide online spot commodity trading services.
Trading commissions
are received from the
commercial bank
based
on the pre-determined
commission
fee rate and the total amount of the processed orders.
The
Group began to generate a small amount of revenue from trading commissions on the online spot commodity trading services
since 2017.
Online gaming
services
The
Group also provides online lottery betting and online casino platforms through the Group’s designated website after the acquisition
of TMG in July 2017. The Group earns 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 the Group. Lottery and Casino purchase orders are placed by users through the Group’s
online platforms view website. Then the Group process these orders. Prior to processing orders, users prepay all purchase amounts.
The Group pays users prizes when there are any winnings attributable to users. The Group 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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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 RMB0.6 million, RMB2.9 million and RMB6.8 million (US$1.0 million) in 2016, 2017 and 2018,
respectively. These costs are expensed as incurred.
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 RMB8.3 million, RMB8.2 million and RMB6.1 million (US$0.9 million) in 2016, 2017 and 2018, respectively. These costs
are expensed as incurred.
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 and RMB20.4 million
(US$3.0 million) in 2017 and 2018, respectively. These costs are expensed as incurred.
Platform
fee
Platform fees,
are consist of fees payable to online gaming software suppliers for providing various online casino games on TMG’s websites
after the acquisition of TMG in July 2017, were RMB4.5 million and RMB12.1 million (US$1.8 million) in 2017 and 2018, respectively.
These costs are expensed as incurred.
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 and RMB2.0 million (US$0.3 million)
in 2017 and 2018, respectively. These costs are expensed as incurred.
Amortization
fees
Amortization fees,
which consist primarily of amortization of intangible assets arising from business combinations, were RMB3 million, RMB13.7 million
and RMB31.5 million (US$4.6 million) in 2016, 2017 and 2018, respectively. These costs are recorded in consolidated comprehensive
loss over a straight-line basis with the useful life of the intangible assets.
Cost of services
also comprises employee costs, business tax and surcharges and other direct costs incurred in providing services. These costs are
expensed as incurred.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) 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, 2016, 2017 and 2018 were approximately RMB0.3 million, RMB1.0
million and RMB2.4 million (US$0.3 million), respectively.
Sponsorship
expenses
The Group’s
sales and marketing expenses also consist of payments under a sponsorship contract. Accounting for sponsorship payments is based
upon specific contract provisions.
Generally, sponsorship
payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance provisions
of the contract. Prepayments made under the contract are included in prepayments based on the period to which the prepayments apply.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) 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 in accordance with ASC 605-50, “Customer Payments and Incentives” during the years ended
December 31, 2016 and 2017, and ASC 606 during the year ended December 31, 2018. 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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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, 2016, 2017 and 2018.
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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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 position 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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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 Company
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 Company’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 Company’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.
The Company treated the excess amount of redemption price of the redeemable noncontrolling interests over its fair value as
being akin to a dividend, which indirectly affected in the calculation of loss available to ordinary shareholders of the Company
used in the loss per share calculation.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Government grants
Government
grants are recognized when there is reasonable assurance that the attached conditions will be complied with. When the grant relates
to an expense item, it is recognized in the consolidated statements of comprehensive income (loss) over the period necessary to
match the grant on a systematic basis to the
related
costs. Where the grant relates to an asset
acquisition, it is recognized in the consolidated statements of comprehensive income (loss) in proportion to the depreciation of
the related assets.
Treasury shares
The Group accounts for treasury
shares using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury shares account
on the consolidated balance sheets. At retirement, the ordinary shares account is charged only for the aggregate par value of the
shares. The excess of the acquisition cost of treasury shares over the aggregate par value is allocated between additional paid-in
capital (up to the amount credited to the additional paid-in capital upon original issuance of the shares) and retained earnings.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Recent accounting
pronouncements
In 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. The Company
has adopted ASU 2016-02 on January 1, 2019 using a modified retrospective method and will not restate comparable periods. The Company
elected the package of practical expedients permitted under the transition guidance, which allow the Company to carry forward the
historical lease classification, the assessment whether a contract is or contains a lease and initial direct costs for any leases
that exist prior to adoption of the new standard. The Company also elected the practical expedient not to separate lease and non-lease
components for certain classes of underlying assets and the short-term lease exemption for contracts with lease terms of 12 months
or less. Certain operating leases related to offices which are subject to ASU 2016-02 and right-of-use assets and lease liabilities
are recognized on the Company’s consolidated balance sheet. The Company currently believes the most significant change is
related to the recognition of right-of-use assets and lease liabilities on the Company’s balance sheet for certain in-scope
operating leases. There is no material impact on net assets and the consolidated statement of comprehensive income as a result
of adopting the new standard.
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 in the process of evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
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 fiscal
years beginning after December 15, 2019. Early adoption is permitted. The Company is currently in the process of evaluating the
impact of adopting ASU 2017-04 on its consolidated financial statements.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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. The Group is currently in the process of evaluating the impact of 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. The Group does not expect that the adoption of this guidance will have a material impact on its
consolidated financial statements.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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 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 13).
In June 2018, the FASB issued ASU No.
2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting to simplify the
accounting for share-based payments to nonemployees (“ASU 2018-07”) by aligning it with the accounting for share-based
payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will
be fixed at the grant date, which may lower their cost and reduce volatility in the income statement. The guidance is effective
for public business entities in annual periods beginning after December 15, 2018, and interim periods within those years. Early
adoption is permitted, including in an interim period. The ASU 2018-07 will impact the accounting of the share-based awards granted
to non-employees and the Company does not expect a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes
to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”) which eliminates, adds and modifies certain
disclosure requirements for fair value measurements. Under the guidance, public companies will be required to disclose the range
and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective
for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities
are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company
does not expect a significant impact on its consolidated financial statements.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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,
restricted cash, time deposits and accounts receivable. As of December 31, 2018, substantially all of the Group’s cash
and cash equivalents and time deposits were deposited in financial institutions located in the PRC, Hong Kong and Malta,
which management believes are of high credit quality.
Certain Risks
and Uncertainties
The Group
acquired the Multi Group in July 2017, the operations of which 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, the remote bookmaker’s license from Ireland and the license from Sweden. 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‘s reporting currency
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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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, 2018, the online lottery sales business is still not resumed.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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.
|
DISCONTINUED OPERATIONS
|
Disposition
of Qufan
On February 9, 2018, the Company entered into a share disposal agreement with the founding shareholders of
Qufan and disposed of its 51% equity interest in Qufan Internet Technology Inc., and Shenzhen Qufan Network Technology Co., Ltd,
together with their subsidiaries (together “Qufan”) for a total consideration of USD19.4 million (RMB122.0 million).
From February 9, 2018, the Company no longer retained any financial interest over Qufan and accordingly deconsolidated
the Qufan’s financial statements from the Company’s consolidated financial statements. The disposal of Qufan represented
a strategic shift and has a major effect on the Company’s result of operations. Accordingly, assets, liabilities, revenues,
expenses and cash flows related to Qufan have been reclassified in the consolidated financial statements as discontinued operations
for all periods presented.
On February 9, 2018, the Company calculated a gain resulting from such disposition as follows:
|
|
As of February 9, 2018
|
|
|
|
RMB
|
|
Consideration
|
|
|
121,964
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
41,699
|
|
Short-term investments
|
|
|
20,000
|
|
Prepayments and other receivables
|
|
|
6,428
|
|
Property and equipment, net
|
|
|
1,490
|
|
Intangible assets, net
|
|
|
45,847
|
|
Goodwill
|
|
|
130,613
|
|
Long-term investments
|
|
|
2,000
|
|
Other non-current assets
|
|
|
14
|
|
Accrued payroll and welfare payable
|
|
|
(5,104
|
)
|
Accrued expenses and other current liabilities
|
|
|
(756
|
)
|
Income tax payable
|
|
|
(4,927
|
)
|
Deferred revenue
|
|
|
(5,527
|
)
|
Deferred tax liabilities
|
|
|
(12,554
|
)
|
|
|
|
|
|
Net assets of Qufan
|
|
|
219,223
|
|
Equity interest percentage
|
|
|
51
|
%
|
|
|
|
|
|
Less: Net assets of Qufan attributable to the Company
|
|
|
111,804
|
|
|
|
|
|
|
Gain on disposal of Qufan
|
|
|
10,160
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
4.
|
DISCONTINUED OPERATIONS (Continued)
|
The condensed cash
flows of Qufan were as follows for the years ended December 31, 2016, 2017 and 2018:
|
|
For the years ended December
31,
|
|
|
|
2016*
|
|
|
2017
|
|
|
2018**
|
|
|
2018**
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Net cash (used in) provided by operating activities
|
|
|
(351
|
)
|
|
|
11,010
|
|
|
|
839
|
|
|
|
122
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(22,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
510
|
|
|
|
52,250
|
|
|
|
-
|
|
|
|
-
|
|
The operating results
from discontinued operations included in the Company’s consolidated statements of comprehensive loss were as follows for
the years ended December 31, 2016, 2017 and 2018:
|
|
For the years ended December
31,
|
|
|
|
2016*
|
|
|
2017
|
|
|
2018**
|
|
|
2018**
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Major classes of line items constituting pretax profit of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
5,669
|
|
|
|
59,465
|
|
|
|
7,398
|
|
|
|
1,074
|
|
Cost of services
|
|
|
(1,392
|
)
|
|
|
(15,613
|
)
|
|
|
(1,885
|
)
|
|
|
(274
|
)
|
Sales and marketing
|
|
|
(1,523
|
)
|
|
|
(13,682
|
)
|
|
|
(1,938
|
)
|
|
|
(282
|
)
|
General and administrative
|
|
|
(280
|
)
|
|
|
(3,977
|
)
|
|
|
(443
|
)
|
|
|
(64
|
)
|
Service development expenses
|
|
|
(854
|
)
|
|
|
(9,749
|
)
|
|
|
(688
|
)
|
|
|
(100
|
)
|
Other income and (expenses) that are not major
|
|
|
1
|
|
|
|
542
|
|
|
|
77
|
|
|
|
11
|
|
Income from discontinued operations, before income tax
|
|
|
1,621
|
|
|
|
16,986
|
|
|
|
2,521
|
|
|
|
365
|
|
Income tax expense
|
|
|
(914
|
)
|
|
|
(1,659
|
)
|
|
|
(338
|
)
|
|
|
(49
|
)
|
Income from discontinued operations, net of income tax
|
|
|
707
|
|
|
|
15,327
|
|
|
|
2,183
|
|
|
|
316
|
|
Gain on deconsolidation of the subsidiary, net of income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
10,160
|
|
|
|
1,478
|
|
Net income from discontinued operations, net of income tax
|
|
|
707
|
|
|
|
15,327
|
|
|
|
12,343
|
|
|
|
1,794
|
|
* Included financial
results of discontinued operations from November 25, 2016 to December 31, 2016.
** Included financial
results of discontinued operations from January 1, 2018 to February 9, 2018.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
Business Combination
in 2017:
Acquisition
of Daguoxiaoxian
On May 8, 2017,
Shenzhen Qufan entered into a share purchase agreement with the shareholder of Daguoxiaoxian, named Fu Rong, to acquire 70% equity
interests of Daguoxiaoxian with the consideration of RMB2.0 million (“Purchase agreement”). Previously, Daguoxiaoxian
mainly operates market promotion business and also owns a gaming cooperation agreement (“cooperation agreement”) with
Tianjin Zhongqiweiye Sports development Co., Ltd.
By obtaining the
cooperation agreement, Daguoxiaoxian is authorized to operate China Competitive Poker Championship, from May 14, 2017 to May 14,
2018, with one-year extension upon the expiration if no objection between both parties. The Group acquired Daguoxiaoxian primarily
for the cooperation agreement.
The
Group has subsequently disposed Shenzhen Qufan together with its subsidiary Daguoxiaoxian in February 2018 due to a change of
business strategy.
Acquisition
of The Multi Group
On July 17, 2017
(“the acquisition date”), the Company acquired 93.0% equity interest of The Multi Group (“TMG”) through
500.com Limited for a total consideration of approximately EUR49.8 million. The Multi Group engages in operating Multilotto.com
(“Multilotto”) which is considered one of the top online lottery betting and online casino platforms in the Nordic
countries where it holds substantial market share.
As of July 17,
2017, the Group settled payment of EUR49,754 cash consideration for the acquisition.
The Group recognized
RMB18,766 of acquisition-related costs that were expensed in 2017. These costs are included in the line item “General and
administrative expenses” in the statement of comprehensive income (loss).
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
5.
|
BUSINESS COMBINATION (continued)
|
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
|
|
|
Amortization
Years
|
|
|
|
EUR
|
|
|
RMB
|
|
|
|
|
License
|
|
|
19,400
|
|
|
|
150,377
|
|
|
|
10.0
|
|
Brand name
|
|
|
11,100
|
|
|
|
86,041
|
|
|
|
10.0
|
|
Software
|
|
|
900
|
|
|
|
6,976
|
|
|
|
5.0
|
|
Others
|
|
|
7,116
|
|
|
|
55,156
|
|
|
|
|
|
Total identifiable assets acquired
|
|
|
38,516
|
|
|
|
298,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(1,164
|
)
|
|
|
(9,023
|
)
|
|
|
|
|
Other current liabilities
|
|
|
(1,422
|
)
|
|
|
(11,022
|
)
|
|
|
|
|
Total liabilities assumed
|
|
|
(2,586
|
)
|
|
|
(20,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net identifiable assets acquired
|
|
|
35,930
|
|
|
|
278,505
|
|
|
|
|
|
Noncontrolling interests
#
|
|
|
2,915
|
|
|
|
22,595
|
|
|
|
|
|
Total Consideration
|
|
|
49,754
|
|
|
|
385,662
|
|
|
|
|
|
Goodwill
|
|
|
16,739
|
|
|
|
129,752
|
|
|
|
|
|
#
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 was
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 appraiser on the acquisition
day. 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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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.
|
BUSINESS COMBINATION (continued)
|
The redeemable noncontrolling
interest was subsequently adjusted by recording ASC 810-10 attribution based on the earnings or losses of the investment allocable
to the noncontrolling interest. On January 1, 2019, the Company received the repurchase notice from the noncontrolling interest
shareholder, which requested the Company to repurchase all of the 7% shares at a total amount of EUR3,745. As of December 31, 2018,
it is determined that the noncontrolling interest will probably become redeemable and the redemption
amount will be higher than the carrying amount after ASC 810-10 attribution adjustment. The Company subsequently recognized the
changes in the redemption value immediately and adjusted the carrying amount of the redeemable noncontrolling interest to equal
the redemption amount of EUR3,745. The excess amount of redemption amount in excess of fair value as of December 31, 2018 was treated
as being akin to a dividend (in accordance with footnote 17 of ASC 480-10-S99-3A), which was recorded into Retained earnings (APIC
in absence of Retained earnings). For the difference between fair value and the carrying amount after ASC 810-10 attribution adjustment,
it is accounted for as equity transactions and classified this portion into APIC based on the guidance in ASC 810-10-45-23.
The
fair value of redeemable noncontrolling interest was assessed by the third-party appraiser on December 31, 2018. As of December
31, 2018, the fair value of the 7% noncontrolling interest in The Multi Group is estimated to be EUR2,
5
04.
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 17.5%; (b) a long-term sustainable
growth rate of 2%; (c)adjustment of risk premium of 5.5%; and (d) financial multiples of companies in the same industry as The
Multi Group.
Accordingly, the
carrying value of the noncontrolling interest as of December 31, 2017 and 2018 is stated as follows:
|
|
EUR
|
|
|
RMB
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest-valuation*
|
|
|
2,915
|
|
|
|
22,595
|
|
|
|
|
|
Total comprehensive loss attributable to noncontrolling interest in 2017
|
|
|
(70
|
)
|
|
|
(543
|
)
|
|
|
|
|
Redeemable noncontrolling interest as of December 31, 2017
|
|
|
2,845
|
|
|
|
22,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss attributable to noncontrolling interest
|
|
|
(413
|
)
|
|
|
(3,223
|
)
|
|
|
(469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to redemption value**
|
|
|
1,313
|
|
|
|
10,559
|
|
|
|
1,536
|
|
Redeemable noncontrolling interest as of December 31, 2018
|
|
|
3,745
|
|
|
|
29,388
|
|
|
|
4,274
|
|
*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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(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.
|
BUSINESS COMBINATION (continued)
|
**
Adjustment to redemption value including two portions: 1)
the excess amount of redemption amount in
excess of fair value as of December 31, 2018, 2) the difference between fair value and the carrying amount after ASC 810-10 attribution
adjustment. The fair value as of December 31, 2018 was evaluated by third party appraiser on December 31, 2018. The calculation
of RMB amount was based on the exchange rate of 1.00 EUR to 7.8473 RMB on December 31, 2018.
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
|
Since
the acquisition date, The Multi Group contributed revenues of RMB49,370 (EUR6,447) and RMB105,511(EUR13,507) to the Group for the
year ended 2017 and 2018, respectively, and contributed net income of RMB2,959 (EUR386) and net loss of RMB18,050(EUR2,311) to
the Group for the years ended 2017 and 2018, respectively.
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
|
|
|
|
EUR
|
|
|
RMB
|
|
|
EUR
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma total revenues
|
|
|
11,686
|
|
|
|
76,893
|
|
|
|
12,188
|
|
|
|
93,334
|
|
Pro forma net income (loss)
|
|
|
2,519
|
|
|
|
16,576
|
|
|
|
(1,614
|
)
|
|
|
(12,360
|
)
|
Pro forma net income (loss) attributable to 500.com Limited
|
|
|
2,343
|
|
|
|
15,416
|
|
|
|
(1,501
|
)
|
|
|
(11,495
|
)
|
These
amounts have been calculated after applying the Company’s accounting policies.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
Short-term Investments
Short-term
investments of the Group comprised of an investment in targeted asset management plan with fixed rate. The investment was carried at fair value of RMB100,000 and RMB100,000 (US$14,544) as of December 31, 2017 and 2018,
respectively.
Long-term
Investments
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Carrying amount of Equity investments at fair value without readily determinable fair value
|
|
|
66,237
|
|
|
|
69,357
|
|
|
|
10,088
|
|
Carrying amount of equity method investments
|
|
|
280,836
|
|
|
|
125,018
|
|
|
|
18,183
|
|
Carrying amount of long-term investments
|
|
|
347,073
|
|
|
|
194,375
|
|
|
|
28,271
|
|
Equity investments
at fair value without readily determinable fair value
Equity investments
at fair value without readily determinable fair value consisted of the following:
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Equity investments at fair value without readily determinable fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Private companies
|
|
|
47,214
|
|
|
|
49,990
|
|
|
|
7,271
|
|
Limited partnerships
|
|
|
22,290
|
|
|
|
22,634
|
|
|
|
3,292
|
|
Cost of Equity investments at fair value without readily determinable fair value
|
|
|
69,504
|
|
|
|
72,624
|
|
|
|
10,563
|
|
Impairment loss on Equity investments at fair value without readily determinable fair value
|
|
|
(3,267
|
)
|
|
|
(3,267
|
)
|
|
|
(475
|
)
|
Carrying amount of Equity investments at fair value without readily determinable fair value
|
|
|
66,237
|
|
|
|
69,357
|
|
|
|
10,088
|
|
Private companies
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$2,000. In March 2016, the
Group transferred 10% of the share capital of Hzone Holding Company, to its VIEs Beijing Huizhong wealth investment management
Co., Ltd.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
6.
|
INVESTMENTS (continued)
|
Long-term Investments
(continued)
Equity investments
at fair value without readily determinable fair value (continued)
Private companies
(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. The equity
interest was subsequently diluted to 0.83% in 2018 due to increase in shareholder of Beijing Weisaishidai Sports Technology Co.,
Ltd.
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 February 2018, the Group
made an additional investment of US$300 in Techelix Co., Ltd. In June 2018, the Group transferred the equity investment of US$50
to a third party. The equity interest was diluted to 1.98% in 2018 due to increase in shareholder of Techelix Co., Ltd.
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. The equity
interest was subsequently diluted to 3.92% in 2018 due to increase in shareholder of Cheerful Interactive Limited.
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$1,000, which entitles the Group an aggregate equity
interest of approximately 1.1% in the Fund. The Group has fully funded the subscription to the Fund in installments as of December
31, 2016. There was no unfunded commitment to the Fund as of December 31, 2018.
The Fund’s investment strategy
is primarily to invest in emerging companies operating in the USA and PRC. The Fund’s investments are focused in the technology,
media and telecommunications sectors. The Fund is scheduled to be in existence until November 15, 2021, unless terminated sooner
or extended in accordance with the amended and restated limited partnership agreement.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
6.
|
INVESTMENTS (continued)
|
Long-term Investments
(continued)
Equity investments
at fair value without readily determinable fair value (continued)
Limited partnerships
(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 2018, the
Group received RMB587 in dividend and RMB120 in return of principal from Heimatuoxin. The Group paid the subscription in full to
Heimatuoxin in 2015, and there was no outstanding payment as of December 31, 2018.
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. As of December 31, 2018, the limited
partnership interest was diluted to 4.31% because of the joining of additional limited partners. The Group has fully funded the
subscription to Jingyan in installments as of December 31, 2018. There was no unfunded commitment to the Jingyan as of December
31, 2018.
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. As of December 31, 2018, the limited partnership interest
was diluted to 1.75% 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, 2018. As of the end of December 2018, the Group received US$28 in dividend
and US$15 in return of principal from zPark.
zPark’s investment strategy
is primarily to make venture capital investments, principally by investing in and holding equity and equity-oriented securities
of privately held early-stage technology companies, with an emphasis on companies with a connection to China, Japan and other Asia
markets. The general purposes of zPark are to buy, hold, sell and otherwise invest in Securities, whether readily marketable or
not; to exercise all rights, powers, privileges and other incidents of ownership or possession with respect to Securities held
or owned by zPark; to enter into, make and perform all contracts and other undertakings. zPark is scheduled to be in existence
until the tenth anniversary of the Initial Contribution Date, unless terminated sooner or extended in accordance with the amended
and restated limited partnership agreement.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
6.
|
INVESTMENTS (continued)
|
Long-term Investments
(continued)
Equity investments
at fair value without readily determinable fair value (continued)
Limited partnerships
(continued)
All of these above-mentioned equity
investments without readily determinable fair value were classified as cost method investments prior to adopting ASC 321. As of
December 31, 2017, the carrying amount of the Group’s cost method investments was RMB47,214, net of RMB3,267 in accumulated
impairment. In accordance with ASC 321, the Group elected to use the measurement alternative to measure such investments at cost,
less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar
investments of the same issuer, if any. As of December 31, 2018, the carrying amount of the Company’s equity investments
measured at fair value using the measurement alternative was RMB49,990 (US$7,271), net of RMB3,267 (US$475) in accumulated impairment.
Impairment charges recognized on equity investment in Big Stomach Limited was RMB3,267 for the year end December 31, 2016
and no additional impairment recognized for the years ended December 31, 2017 and 2018.
Equity method
investments
Equity method investments
consisted of the following:
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Equity Method Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Private company
|
|
|
-
|
|
|
|
9,000
|
|
|
|
1,309
|
|
Listed company
|
|
|
283,655
|
|
|
|
297,938
|
|
|
|
43,333
|
|
Limited partnership
|
|
|
27,331
|
|
|
|
20,381
|
|
|
|
2,964
|
|
Cost of equity method investments
|
|
|
310,986
|
|
|
|
327,319
|
|
|
|
47,606
|
|
Impairment loss on equity investment
|
|
|
(27,893
|
)
|
|
|
(184,377
|
)
|
|
|
(26,816
|
)
|
Loss from equity method investment
|
|
|
(2,257
|
)
|
|
|
(17,924
|
)
|
|
|
(2,607
|
)
|
Carrying amount of equity method investments
|
|
|
280,836
|
|
|
|
125,018
|
|
|
|
18,183
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
6.
|
INVESTMENTS (continued)
|
Long-term Investments
(continued)
Equity method
investments (continued)
Private company
I
n
May 2018, the Group acquired 45% of the share capital of Shenzhen Jinyingzaixian Technology Service Co., Ltd. (“Jinyingzaixian”), a non-listed company, through Shenzhen KaishengJinfu Enterprise Management Co., Ltd., for a cash consideration of RMB9,000.
Jinyingzaixian is principally engaged
in spot commodity trading services in China. The Group’s proportionate share of Jinyingzaixian’s net loss recognized
in the Statements of Comprehensive loss was RMB5,948 (US$865) during the year ended December 31, 2018.
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 distribution of mobile gaming and 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 and RMB12,233(US$1,779) during the year ended December 31, 2017 and 2018, respectively.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
6.
|
INVESTMENTS (continued)
|
Long-term Investments
(continued)
Equity method
investments (continued)
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, and was extended to February
9, 2020 in 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 and RMB2,833 (US$412) during
the year ended December 31, 2017 and 2018, respectively.
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.
Sparkland’s investments are
focused in the Virtual Reality and Augmented Reality industries. The Group’s proportionate share of Sparkland’s net
income recognized in earnings was RMB323 (US$47) during the year ended December 31, 2018.
All of these above-mentioned investments
were classified as equity method investments as the Group does have significant influence over the entities. The net operating
losses from these equity method investments recognized for the years ended December 31, 2017 and 2018 were RMB2,128 and RMB15,025
(US$2,185), respectively. The Group recognized an impairment of RMB28,781 and RMB149,896 (US$21,801) in Loto Interactive for the
year ended December 31, 2017 and 2018, respectively.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
Accounts receivable and the related
allowance for doubtful accounts are summarized as follows:
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
19,847
|
|
|
|
19,847
|
|
|
|
2,887
|
|
Less: Allowance for doubtful accounts
|
|
|
(19,847
|
)
|
|
|
(19,847
|
)
|
|
|
(2,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
After voluntary suspension of online
lottery sales 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 recorded full allowance of the outstanding accounts receivable
at the end of year 2015.
500.COM LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)
(Amounts in thousands of Renminbi
(“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or ADS) data)
|
8.
|
PREPAYMENTS, OTHER RECEIVABLES AND DEPOSITS
|
Prepayments and other receivables
consist of the following:
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from third party payment service providers
|
|
|
757
|
|
|
|
9,730
|
|
|
|
1,415
|
|
Interest receivables
|
|
|
718
|
|
|
|
540
|
|
|
|
79
|
|
Deposit for share repurchase *
|
|
|
13,318
|
|
|
|
-
|
|
|
|
-
|
|
Deferred sponsorship and advertising expenses
|
|
|
1,993
|
|
|
|
1,019
|
|
|
|
148
|
|
Prepaid insurance
|
|
|
5,344
|
|
|
|
3,740
|
|
|
|
544
|
|
Deferred expense**
|
|
|
13,702
|
|
|
|
10,608
|
|
|
|
1,543
|
|
Receivables for disposal of long-term investments***
|
|
|
9,322
|
|
|
|
4,332
|
|
|
|
630
|
|
Deductible value-added input tax
|
|
|
12,611
|
|
|
|
12,585
|
|
|
|
1,830
|
|
Others
|
|
|
23,551
|
|
|
|
22,644
|
|
|
|
3,294
|
|
|
|
|
81,316
|
|
|
|
65,198
|
|
|
|
9,483
|
|
* Deposit for share repurchase represents
cash paid in advance by the Group under the share repurchase program commenced in 2015. The Group has withdrawn the repurchase
and collected the deposit in Feb 2018.
** 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 Qufan as of December 31, 2018.
Deposits are made for offices and
other leases, and will be refunded upon the end of the leases, which are expected to be over 1 year.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands
of Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share
(or ADS) data)
|
9.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment consist
of the following:
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronics and office equipment
|
|
|
43,315
|
|
|
|
54,615
|
|
|
|
7,943
|
|
Motor vehicles
|
|
|
11,804
|
|
|
|
11,893
|
|
|
|
1,730
|
|
Leasehold improvements
|
|
|
106,904
|
|
|
|
118,925
|
|
|
|
17,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, cost
|
|
|
162,023
|
|
|
|
185,433
|
|
|
|
26,970
|
|
Less: Accumulated depreciation
|
|
|
(56,521
|
)
|
|
|
(88,238
|
)
|
|
|
(12,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
105,502
|
|
|
|
97,195
|
|
|
|
14,136
|
|
Depreciation expenses from continuing
operations for the years ended December 31, 2016, 2017 and 2018 were approximately RMB12,860, RMB13,181 and RMB31,027 (US$4,513),
respectively. Depreciation expenses from discontinued operations were approximately RMB 5, RMB 219 and RMB 42(US$26) for the years
ended December 31, 2016, 2017 and 2018, respectively.
|
10.
|
INTANGIBLE ASSETS, NET
|
Intangible assets consist of
the following:
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer software
|
|
|
24,639
|
|
|
|
25,726
|
|
|
|
3,742
|
|
License agreement
|
|
|
151,177
|
|
|
|
151,177
|
|
|
|
21,988
|
|
Internet domain name
|
|
|
2,907
|
|
|
|
2,907
|
|
|
|
423
|
|
Brand name
|
|
|
86,041
|
|
|
|
86,049
|
|
|
|
12,515
|
|
|
|
|
264,764
|
|
|
|
265,859
|
|
|
|
38,668
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer software
|
|
|
(8,058
|
)
|
|
|
(13,585
|
)
|
|
|
(1,976
|
)
|
License agreement
|
|
|
(7,693
|
)
|
|
|
(22,730
|
)
|
|
|
(3,306
|
)
|
Internet domain name
|
|
|
(1,808
|
)
|
|
|
(2,034
|
)
|
|
|
(296
|
)
|
Brand name
|
|
|
(3,944
|
)
|
|
|
(12,548
|
)
|
|
|
(1,825
|
)
|
|
|
|
(21,503
|
)
|
|
|
(50,897
|
)
|
|
|
(7,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
243,261
|
|
|
|
214,962
|
|
|
|
31,265
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
10.
|
INTANGIBLE ASSETS, NET (continued)
|
Amortization expenses from continuing
operations for the years ended December 31, 2016, 2017 and 2018 were approximately RMB5,658, RMB13,695 and RMB31,511 (US$4,583),
respectively. Amortization expenses from discontinued operations were approximately RMB1,188, RMB12,407 and RMB1,399 (US$203)
for the years ended December 31, 2016, 2017 and 2018, respectively. Annual estimated amortization expense for each of the five
succeeding years is as follows:
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
2019
|
|
|
29,338
|
|
|
|
4,267
|
|
2020
|
|
|
27,242
|
|
|
|
3,962
|
|
2021
|
|
|
26,123
|
|
|
|
3,799
|
|
2022
|
|
|
25,294
|
|
|
|
3,679
|
|
2023 and thereafter
|
|
|
106,965
|
|
|
|
15,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,962
|
|
|
|
31,265
|
|
|
11.
|
ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current
liabilities consist of the following:
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Advance from end users*
|
|
|
35,888
|
|
|
|
44,006
|
|
|
|
6,400
|
|
Business tax and other taxes payable
|
|
|
4,118
|
|
|
|
4,276
|
|
|
|
623
|
|
Deferred government grant
|
|
|
2,807
|
|
|
|
3
|
|
|
|
-
|
|
Professional fees payable
|
|
|
12,039
|
|
|
|
8,160
|
|
|
|
1,187
|
|
Promotional events payables
|
|
|
7,753
|
|
|
|
8,290
|
|
|
|
1,206
|
|
Decoration payables
|
|
|
5,328
|
|
|
|
3,096
|
|
|
|
450
|
|
Unpaid consideration for business combination**
|
|
|
54,550
|
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
23,750
|
|
|
|
20,318
|
|
|
|
2,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,233
|
|
|
|
88,149
|
|
|
|
12,820
|
|
* Advance from end users represents
payments received by the TMG in advance from the end users prior to the services to be provided.
**
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 USD19.4 million (RMB122.0 million), which has been offset by the unpaid contingent consideration
of RMB54.6 million as of the disposal date.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(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.
|
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, being foreign-invested enterprises established in the PRC, is 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 is required to allocate at least 10% of its after-tax profits to
the general reserve fund until such fund has reached 50% of its 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.
In accordance with the China
Company Laws, the Company’s VIEs are PRC domestic companies (i.e. Hainan Menghuanxingchen, E-Sun Network, E-Sun Sky Network,
Youlanguang Technology, Guangtiandi Technology, Tongfu Technology, Hainan Jingli, Hainan Panfeng, Hangzhou E-Sun Sky Network, Lhasa
Yicai, Shenzhen Yicai, Baifengrun Technology and Shenzhen Kaisheng), 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,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
PRC statutory reserved funds
|
|
|
30,882
|
|
|
|
30,882
|
|
|
|
4,491
|
|
Unreserved accumulated deficit
|
|
|
(888,633
|
)
|
|
|
(1,340,306
|
)
|
|
|
(194,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(857,751
|
)
|
|
|
(1,309,424
|
)
|
|
|
(190,448
|
)
|
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
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(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.
|
ACCUMULATED DEFICIT AND STATUTORY RESERVE (continued)
|
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 RMB113,588
(US$16,521) as of December 31, 2018. Therefore, in accordance with Rules 504 and 4.08(e)(3) of Regulation S-X, the condensed parent
company only financial statements as of December 31, 2017 and 2018 and for each of the three years in the period ended December
31, 2018 are disclosed in Note 22.
Furthermore, cash transfers from
the Company’s PRC subsidiary to its subsidiaries outside of China are subject to PRC government control of currency conversion.
Shortages in the availability of foreign currency may restrict the ability of the PRC subsidiary and consolidated affiliated entities
to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency
denominated obligations.
Cayman Islands
Under the current laws of the
Cayman Islands, the Company is not subject to tax on income or capital gains. In addition, upon payments of dividends by the Company
to its shareholders, no Cayman Islands withholding tax will be imposed.
USA
500.com USA is incorporated in
the USA and does not conduct any substantive operations of its own. No provision for USA income tax has been made in the financial
statements as 500.com USA had no assessable income for the years ended December 31, 2016, 2017 and 2018.
British Virgin Islands
Under the current laws of the
British Virgin Islands, BVI is not subject to tax on income or capital gains.
United Kingdom
500.com UK is incorporated in
the UK and does not conduct any substantive operations of its own. No provision for UK income tax has been made in the financial
statements as 500.com UK had no assessable income for the year ended December 31, 2016, 2017 and 2018.
Curacao
Multi Pay N.V. is incorporated
in the Curacao, Under the current laws, profits tax in Curacao is generally assessed at the rate of 2% of taxable income.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
13.
|
INCOME TAXES (continued)
|
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%.
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 and 2018.
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 and 2018.
Hong Kong
500wan HK is incorporated in
Hong Kong, under the current laws, profits tax in Hong Kong is generally assessed at the rate of 16.5% of taxable income. As 500wan
HK does not conduct any substantive operations of its own, no provision for Hong Kong income tax has been made in the financial
statements as 500wan HK had no assessable income for the year ended December 31, 2016, 2017 and 2018.
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 and 2018.
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, E-Sun Sky Computer, E-Sun Sky Network, Shenzhen Yicai, Baifengrun Technology, Tongfu Technology and Shenzhen Kaisheng
are subject to the EIT rate of 25% in 2016, 2017 and 2018.Hainan Menghuanxingchen, Hainan Jingli, Hainan Panfeng and Hangzhou E-Sun
Sky Network are subject to the EIT rate of 25% in 2018 since the inception. Guangtiandi Technology obtained a certificate of “Software
Enterprise” and was granted for a half reduction in tax rate in 2016 and 2017, therefore, it is subject to the EIT rate of
12.5% in 2016, 2017 and 25% in 2018, respectively.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
13.
|
INCOME TAXES (continued)
|
Lhasa Yicai was established in
Tibet in 2014 and qualified as a “Western Area Encouraged Industry”. According to local government policy, qualified
entities were granted a preferential tax rate of 15% from January 1, 2011 to December 31, 2020. Therefore, Lhasa Yicai is entitled
to a preferential tax rate of 15% in 2016, 2017 and 2018. Additionally, Lhasa Yicai is also exempt from provincial allocated corporate
income tax during January 1, 2015 to December 31, 2017 according to local tax law.
Loss before income taxes from
continuing operations consists of:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cayman Islands
|
|
|
(179,348
|
)
|
|
|
(162,884
|
)
|
|
|
(166,710
|
)
|
|
|
(24,245
|
)
|
British Virgin Islands
|
|
|
(31
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
USA
|
|
|
(3,809
|
)
|
|
|
(4,703
|
)
|
|
|
(4,058
|
)
|
|
|
(590
|
)
|
Hong Kong
|
|
|
(10,524
|
)
|
|
|
(10,922
|
)
|
|
|
(7,740
|
)
|
|
|
(1,126
|
)
|
Japan
|
|
|
-
|
|
|
|
(174
|
)
|
|
|
(1,592
|
)
|
|
|
(232
|
)
|
Malta
|
|
|
-
|
|
|
|
(4,321
|
)
|
|
|
(7,949
|
)
|
|
|
(1,156
|
)
|
Curacao
|
|
|
-
|
|
|
|
7,449
|
|
|
|
(12,752
|
)
|
|
|
(1,855
|
)
|
Cyprus
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
(8
|
)
|
|
|
(1
|
)
|
Australia
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PRC
|
|
|
(14,104
|
)
|
|
|
(169,923
|
)
|
|
|
(290,530
|
)
|
|
|
(42,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
(207,816
|
)
|
|
|
(345,494
|
)
|
|
|
(491,339
|
)
|
|
|
(71,461
|
)
|
The current and deferred components
of the income tax expense appearing in the consolidated statements of loss are as follows:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
|
(3,553
|
)
|
|
|
15,935
|
|
|
|
19,258
|
|
|
|
2,801
|
|
Deferred tax benefit (expense)
|
|
|
1,410
|
|
|
|
(1,910
|
)
|
|
|
344
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
(2,143
|
)
|
|
|
14,025
|
|
|
|
19,602
|
|
|
|
2,851
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
13.
|
INCOME TAXES (continued)
|
The reconciliation of tax computed
by applying the statutory income tax rate applicable to PRC operations to income tax (benefit) expense is as follows:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss before income taxes
|
|
|
(207,816
|
)
|
|
|
(345,494
|
)
|
|
|
(491,339
|
)
|
|
|
(71,461
|
)
|
Income tax computed at applicable tax rates (25%)
|
|
|
(51,954
|
)
|
|
|
(86,374
|
)
|
|
|
(122,835
|
)
|
|
|
(17,866
|
)
|
Effect of different tax rates in different jurisdictions
|
|
|
4,743
|
|
|
|
693
|
|
|
|
979
|
|
|
|
142
|
|
Non-deductible expenses
|
|
|
54,588
|
|
|
|
92,960
|
|
|
|
127,291
|
|
|
|
18,514
|
|
Effect of tax rate changes
|
|
|
(1,841
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(5,144
|
)
|
|
|
-
|
|
|
|
1,637
|
|
|
|
238
|
|
Changes in interest and penalties on unrecognized tax position
|
|
|
3,105
|
|
|
|
5,098
|
|
|
|
-
|
|
|
|
-
|
|
Effect of EIT reversal for previous years
|
|
|
2,760
|
|
|
|
(19,704
|
)
|
|
|
(20,726
|
)
|
|
|
(3,014
|
)
|
Research and development super-deduction
|
|
|
(2,947
|
)
|
|
|
(6,692
|
)
|
|
|
(5,942
|
)
|
|
|
(864
|
)
|
Others
|
|
|
(1,167
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
|
2,143
|
|
|
|
(14,025
|
)
|
|
|
(19,602
|
)
|
|
|
(2,851
|
)
|
A reconciliation of the beginning
and ending amount of unrecognized tax position is as follows:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
42,983
|
|
|
|
38,457
|
|
|
|
24,298
|
|
|
|
3,534
|
|
Increase relating to current year tax positions
|
|
|
3,630
|
|
|
|
5,194
|
|
|
|
-
|
|
|
|
-
|
|
Decrease relating to prior year tax positions
|
|
|
(3,204
|
)
|
|
|
(1,595
|
)
|
|
|
(7,420
|
)
|
|
|
(1,079
|
)
|
Decrease relating to expiration of applicable statute of limitations
|
|
|
(4,952
|
)
|
|
|
(17,758
|
)
|
|
|
(14,745
|
)
|
|
|
(2,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
38,457
|
|
|
|
24,298
|
|
|
|
2,133
|
|
|
|
310
|
|
The Group recognizes interest
accrued related to unrecognized tax position in taxation expenses. During the years ended December 31, 2016, 2017 and 2018, the
Group recognized approximately RMB4,932, RMB5,098 and nil in interest on these unrecognized tax position and reversed approximately
RMB1,827, RMB7,667 andRMB7,420(US$1,079) in interest. The Group had accrued approximately RMB9,989, RMB7,420 and nil for the interest
on these uncertain taxes as of December 31, 2016, 2017 and 2018, respectively. In general, the PRC tax authorities have up to three
to five years to conduct examinations of the Group’s tax filings. As of December 31, 2018, the PRC subsidiaries 2015 to 2018
tax returns remain open to examination.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
13.
|
INCOME TAXES (continued)
|
The components of deferred taxes are as follows:
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising expenditure deductible in future years
|
|
|
61,191
|
|
|
|
63,386
|
|
|
|
9,219
|
|
Deferred revenue
|
|
|
307
|
|
|
|
306
|
|
|
|
45
|
|
Deferred government grants
|
|
|
2,417
|
|
|
|
2,417
|
|
|
|
352
|
|
Loss from equity method investment
|
|
|
203
|
|
|
|
203
|
|
|
|
30
|
|
Bad debt provision
|
|
|
5,097
|
|
|
|
5,097
|
|
|
|
741
|
|
Accrued rental expense
|
|
|
817
|
|
|
|
817
|
|
|
|
119
|
|
Impairment loss
|
|
|
1,250
|
|
|
|
1,250
|
|
|
|
182
|
|
Net operating losses (“NOLs”)
|
|
|
34,700
|
|
|
|
109,850
|
|
|
|
15,977
|
|
Less: valuation allowance
|
|
|
(105,982
|
)
|
|
|
(183,326
|
)
|
|
|
(26,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Apps and other licenses arisen from business combination
|
|
|
(6,754
|
)
|
|
|
(7,744
|
)
|
|
|
(1,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(6,754
|
)
|
|
|
(7,744
|
)
|
|
|
(1,126
|
)
|
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, 2018, the
Group had NOLs of approximately RMB346,623(US$50,414) 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, 2018 will expire in years 2019 to 2023 if not utilized.
The cumulative amount of the
temporary differences in respect of investments in foreign subsidiaries is RMB255,333 and RMB113,588 (US$16,521) as of December
31, 2017 and 2018, 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 RMB25,533 and RMB11,359 (US$1,652) as of December 31, 2017 and 2018, respectively.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
14.
|
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 RMB15,481, RMB12,707 and RMB12,682 (US$1,845) for the years ended December 31,
2016, 2017 and 2018, respectively.
On March 28, 2011, the shareholders
and board of directors of the Company approved the 2011 Share Incentive Plan (the “Plan”). The Plan provides for the
grant of options, restricted shares and other share-based awards. These options were granted with exercise prices denominated in
US$, 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 were vested upon the first anniversary of the grant date, 5,225,800 options were vested upon the second anniversary of
the grant date, 1,565,800 options were vested upon the third anniversary of the grant date, and 1,565,800 options were 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.
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 were
vested on 180 days after the grant date, 1,620,000 options were vested upon the first anniversary of the grant date, 220,000 options
were vested upon the second anniversary of the grant date, and 220,000 options were 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$32.32 per ADS). For awards to directors, 666,690 options were vested on November 22, 2014, 666,690 options were
vested on November 22, 2015, and 666,620 options were vested on November 22, 2016. For awards to employees, 5,437,820 options
were vested upon the first anniversary of the grant date, 10,843,080 options were vested upon the second anniversary of the
grant date. On June 19, 2017, the last vest date of the remaining unexercised options was extended by our board of directors
from June 19, 2017 to June 19, 2018. On June 19, 2018, the last vest date of the remaining unexercised options was extended
by our board of directors from June 19, 2018 to June 19, 2019. On November 22, 2018, the last vest date of the remaining
unexercised options was extended by our board of directors from November
22, 2018 to November 22, 2019.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
15.
|
SHARE-BASED PAYMENT (continued)
|
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 were
vested upon the first anniversary of the grant date, 66,670 options were vested upon the second anniversary of the grant date,
and 66,660 options were vested upon the third anniversary of the grant date. On June 29, 2018, the last vest date of the remaining
unexercised options was extended by our board of directors from June 29, 2018 to June 29, 2019.
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 were vested on June 19, 2017.
All of the vested options were gave up by employees at the end of the third quarter of 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 November 22, 2018, the last vest date of the remaining unexercised options was extended by our board of directors from November
22, 2018 to November 22, 2019.
On January 16, 2016, the Company
granted 15,900,000 share options to employees with an exercise price of US$1.743 per share, among which, 10,000,000 share options
were gave up by employees after the grant, for the remaining awards, 985,300 options were vested on January 16, 2017, 1,964,700
options were vested on January 16, 2018, and 2,950,000 options were vested on January 16, 2019. All of the vested options were
gave up by employees in January, 2019.
On December 16, 2016, the Company
granted 600,000 share options to directors with an exercise price of US$1.35 per share, which were vested on November 21, 2017.
On August 15, 2017, the Company
granted 12,230,280 restricted share units ("RSUs") to employees. For these rewards, the first 4,035,994 options were
vested on March 1, 2018, the second 4,035,994 options were vested on December 31, 2018, and the third 4,158,292 options will be
vested on December 1, 2019. On April 30, 2018, the vest dates of the second and third options were changed by our board of directors
from December 31, 2018 to June 1, 2018 and from December 1, 2019 to June 1, 2019, respectively.
On November 22, 2017, the Company
granted 350,000 RSUs to directors, which were vested on November 21, 2018.
On June 28, 2018, the Company
granted 5,000,000 RSUs to employees. For these rewards, 2,000,000 options were vested on September 1, 2018, and 3,000,000 options
were vested on March 1, 2019.
A summary of share option and
restricted shares activity and related information for the year ended December 31, 2018 are as follows:
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
15.
|
SHARE-BASED PAYMENT (continued)
|
Share options granted to
employees and directors
|
|
Number of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value per
share
|
|
|
Weighted
average
remaining
contractual
year
|
|
|
Aggregated
intrinsic
value
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
(Years)
|
|
|
US$’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2018
|
|
|
41,987,560
|
|
|
|
1.04
|
|
|
|
1.18
|
|
|
|
1.59
|
|
|
|
3,986
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,513,460
|
)
|
|
|
0.92
|
|
|
|
1.28
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
35,474,100
|
|
|
|
1.07
|
|
|
|
1.17
|
|
|
|
0.94
|
|
|
|
2,078
|
|
Vested and expected to vest at December 31, 2018
|
|
|
35,248,669
|
|
|
|
1.07
|
|
|
|
1.17
|
|
|
|
0.87
|
|
|
|
1,953
|
|
Exercisable at December 31, 2018
|
|
|
32,524,100
|
|
|
|
1.00
|
|
|
|
1.19
|
|
|
|
0.84
|
|
|
|
2,078
|
|
Restricted shares granted
to employees and directors
|
|
Number of
options
|
|
|
Weighted
average
grant date
fair value per
share
|
|
|
Weighted
average
remaining
contractual
year
|
|
|
Aggregated
intrinsic
value
|
|
|
|
|
|
|
US$
|
|
|
(Years)
|
|
|
US$’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2018
|
|
|
12,580,280
|
|
|
|
0.96
|
|
|
|
9.63
|
|
|
|
12,719
|
|
Granted
|
|
|
5,000,000
|
|
|
|
1.41
|
|
|
|
9.49
|
|
|
|
3,790
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10,503,520
|
)
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
7,076,760
|
|
|
|
1.15
|
|
|
|
8.99
|
|
|
|
5,364
|
|
Vested and expected to vest at December 31, 2018
|
|
|
7,076,760
|
|
|
|
1.15
|
|
|
|
8.99
|
|
|
|
5,364
|
|
Exercisable at December 31, 2018
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value
in the table above represents the difference between the fair value of Company’s common share as of December 31, 2018 and
the exercise price. Total intrinsic value of options granted to employees and directors exercised for the years ended December
31, 2016, 2017 and 2018 were RMB11,051, RMB479 and RMB2,284 (US$332), respectively. No share options granted to the consultants
were exercised during the years ended December 31, 2018. Total intrinsic value of restricted shares granted to employees and directors
exercised for the year ended December 31, 2018 was RMB7,962(US$1,158).
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
15.
|
SHARE-BASED PAYMENT (continued)
|
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.
The incremental compensation
cost of US$213 for vested options was recognized immediately at the Second Modification Date, while the compensation cost of US$39,616
for unvested options is being amortized on an accelerated basis over the remaining vesting term of the original award.
On June 19, 2017 (the “Third
Modification Date”), the Company extended the maturity date of
the remaining unexercised share
options granted on June 19, 2014
from June 19, 2017 to June 19, 2018. The modification was intended to provide additional
incentives for these employees.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
15.
|
SHARE-BASED PAYMENT (continued)
|
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 June 19, 2017 to June 19, 2018.
On June 19, 2018 (the “Fourth
Modification Date”), the Company extended the maturity date of
the remaining unexercised share
options granted on
June
19, 2014
from June 19, 2018 to June 19, 2019. 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$4,764, which was measured as the one extending year of
the fair value of the modified award of 7,594,240 shares.
On May 1, 2018 (the “Fifth
Modification Date”), the Company extended the maturity date of the remaining unexercised share options granted on June 19,
2014 from November 22, 2018 to November 22, 2019. The modification was intended to provide additional incentives for the directors.
In accordance with ASC 718, the
effects of a modification resulted in incremental compensation cost of US$32, which was measured as the one extending year of the
fair value of the modified award of 233,350 shares.
On May 1, 2018 (the “Sixth
Modification Date”), the Company extended the maturity date of the remaining unexercised share options granted on June 29,
2015 from June 29, 2018 to June 29, 2019. The modification was intended to provide additional incentives for the directors.
In accordance with ASC 718, the
effects of a modification resulted in incremental compensation cost of US$6, which was measured as the one extending year of the
fair value of the modified award of 66,600 shares.
On May 1, 2018 (the “Seventh
Modification Date”), the Company extended the maturity date of the remaining unexercised share options granted on January
6, 2016 from November 22, 2018 to November 22, 2019. The modification was intended to provide additional incentives for the directors.
In accordance with ASC 718, the
effects of a modification resulted in incremental compensation cost of US$18, which was measured as the one extending year of the
fair value of the modified award of 600,000 shares.
As of December 31, 2018, there
was RMB15,986 (US$2,325) of unvested share-based compensation costs related to equity awards granted to employees and directors
that is expected to be recognized over a weighted-average vesting period of 0.47 years. To the extent the actual forfeiture rate
is different from the original estimate, actual share-based compensation costs related to these awards may be different from the
expectation.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
15.
|
SHARE-BASED PAYMENT (continued)
|
As of December 31, 2018, there
was RMB13,490 (US$1,962) of unvested restricted share compensation costs related to equity awards granted to employees that is
expected to be recognized over a weighted-average vesting period of 0.31 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:
|
|
For the years ended December 31
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
70.80%~77.52
|
%
|
|
|
54.83
|
%
|
|
|
54.27%~60.15
|
%
|
Risk-free interest rate
|
|
|
1.13%~1.62
|
%
|
|
|
1.20
|
%
|
|
|
2.26%~2.62
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Forfeiture rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Suboptimal early exercise factor
|
|
|
2.2~2.8
|
|
|
|
2.2
|
|
|
|
2.2~2.8
|
|
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, 2016 was RMB127,333, there were
no vested equity share options granted to the employees and directors during the years ended December 31, 2017 and 2018.
The total fair value of the restricted
shares granted to the employees and directors during the years ended December 31, 2016, 2017 and 2018 were nil, RMB78,902 and RMB48,575
(US$7,065), respectively.
The exercise price of share options
granted to the employees and directors equaled the market price of the ordinary shares on the grant date. No share options were
granted during the year ended December 31, 2017 and 2018. The weighted-average grant-date fair value per share granted to employees
and directors during the year ended December 31, 2016 was US$0.89.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
15.
|
SHARE-BASED PAYMENT (continued)
|
The Company granted restricted
shares to employees and directors during the year ended December 31, 2017 and 2018 with free exercise price. The weighted-average
grant-date fair value per restricted shares granted to employees and directors during the year ended December 31, 2017 and 2018
were US$0.96 and US$1.41, respectively.
Total share-based compensation
expenses relating to options and restricted shares granted to employees and directors for the years ended December 31, 2016, 2017
and 2018 are included in:
|
|
For the year ended December 31, 2016
|
|
|
|
Employees
|
|
|
Directors
|
|
|
Total
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
For the year ended December 31, 2018
|
|
|
|
Employees
|
|
|
Directors
|
|
|
Total
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
351
|
|
|
|
-
|
|
|
|
351
|
|
|
|
51
|
|
Sales and marketing
|
|
|
11,361
|
|
|
|
-
|
|
|
|
11,361
|
|
|
|
1,652
|
|
General and administrative
|
|
|
74,227
|
|
|
|
2,346
|
|
|
|
76,573
|
|
|
|
11,137
|
|
Service development expenses
|
|
|
20,343
|
|
|
|
-
|
|
|
|
20,343
|
|
|
|
2,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,282
|
|
|
|
2,346
|
|
|
|
108,628
|
|
|
|
15,799
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
16.
|
COMMITMENTS AND CONTINGENCIES
|
Operating lease commitments
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
2019
|
|
|
25,661
|
|
|
|
3,780
|
|
2020
|
|
|
26,892
|
|
|
|
3,961
|
|
2021
|
|
|
21,952
|
|
|
|
3,234
|
|
2022
|
|
|
16,499
|
|
|
|
2,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,004
|
|
|
|
13,405
|
|
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, 2016, 2017 and 2018, total rental expenses for all operating leases amounted to approximately RMB11,293, RMB28,695
and RMB35,144 (US$5,111), respectively.
Uncertain Income tax position
As of December 31, 2017 and 2018,
the Group has recognized approximately RMB24,298 and RMB2,133 (US$310), respectively, as an accrual for unrecognized tax position,
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, 2017, and
2018, the Group classified the accrual of RMB24,298 and RMB2,133 (US$310), respectively, as a long-term payable.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
16.
|
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.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(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.
|
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,
2017 and 2018.
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 and 2018.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
Basic and diluted losses per
share for each of the years presented is calculated as follows:
|
|
For
the years ended
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
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 from continuing operations—basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net loss from continuing operations attributable to 500.com Limited’s ordinary shareholders used in calculating income
per ordinary share—basic
|
|
|
(166,352
|
)
|
|
|
(36,974
|
)
|
|
|
(265,563
|
)
|
|
|
(59,172
|
)
|
|
|
(380,701
|
)
|
|
|
(55,371
|
)
|
|
|
(82,216
|
)
|
|
|
(11,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares outstanding used in calculating basic losses per share
|
|
|
339,429,946
|
|
|
|
75,442,810
|
|
|
|
333,909,823
|
|
|
|
74,400,299
|
|
|
|
344,510,993
|
|
|
|
344,510,993
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
Denominator
used for losses per share
|
|
|
339,429,946
|
|
|
|
75,442,810
|
|
|
|
333,909,823
|
|
|
|
74,400,299
|
|
|
|
344,510,993
|
|
|
|
344,510,993
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
Losses
per share from continuing operations — basic
|
|
|
(0.49
|
)
|
|
|
(0.49
|
)
|
|
|
(0.80
|
)
|
|
|
(0.80
|
)
|
|
|
(1.13
|
)
|
|
|
(0.164
|
)
|
|
|
(1.13
|
)
|
|
|
(0.164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
per share from continuing operations—diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net loss from continuing operations attributable to 500.com Limited’s ordinary shareholders used in calculating loss
per ordinary share— diluted
|
|
|
(166,352
|
)
|
|
|
(36,974
|
)
|
|
|
(265,563
|
)
|
|
|
(59,172
|
)
|
|
|
(380,701
|
)
|
|
|
(55,371
|
)
|
|
|
(82,216
|
)
|
|
|
(11,958
|
)
|
Reallocation
of net loss from continuing operations attributable to 500.com Limited’s ordinary shareholders as a result of conversion
of Class B to Class A shares
|
|
|
(36,974
|
)
|
|
|
-
|
|
|
|
(59,172
|
)
|
|
|
-
|
|
|
|
(82,216
|
)
|
|
|
(11,958
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
loss from continuing operations attributable to ordinary shareholders
|
|
|
(203,326
|
)
|
|
|
(36,974
|
)
|
|
|
(324,735
|
)
|
|
|
(59,172
|
)
|
|
|
(462,917
|
)
|
|
|
(67,329
|
)
|
|
|
(82,216
|
)
|
|
|
(11,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares outstanding used in calculating basic losses per share
|
|
|
339,429,946
|
|
|
|
75,442,810
|
|
|
|
333,909,823
|
|
|
|
74,400,299
|
|
|
|
344,510,993
|
|
|
|
344,510,993
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
Conversion
of Class B to Class A ordinary shares
|
|
|
75,442,810
|
|
|
|
-
|
|
|
|
74,400,299
|
|
|
|
-
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
|
|
-
|
|
|
|
-
|
|
Share
options
|
|
|
—
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Denominator
used for losses per share
|
|
|
414,872,756
|
|
|
|
75,442,810
|
|
|
|
408,310,122
|
|
|
|
74,400,299
|
|
|
|
418,911,292
|
|
|
|
418,911,292
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
Losses
per share from continuing operations—diluted
|
|
|
(0.49
|
)
|
|
|
(0.49
|
)
|
|
|
(0.80
|
)
|
|
|
(0.80
|
)
|
|
|
(1.13
|
)
|
|
|
(0.164
|
)
|
|
|
(1.13
|
)
|
|
|
(0.164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
from continuing operations per ADS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
used for losses per ADS - basic
|
|
|
33,942,995
|
|
|
|
-
|
|
|
|
33,390,982
|
|
|
|
-
|
|
|
|
34,451,099
|
|
|
|
34,451,099
|
|
|
|
-
|
|
|
|
-
|
|
Denominator
used for losses per ADS - diluted
|
|
|
41,487,276
|
|
|
|
-
|
|
|
|
40,831,012
|
|
|
|
-
|
|
|
|
41,891,129
|
|
|
|
41,891,129
|
|
|
|
-
|
|
|
|
-
|
|
Losses
from continuing operations per ADS – basic
|
|
|
(4.90
|
)
|
|
|
-
|
|
|
|
(7.95
|
)
|
|
|
-
|
|
|
|
(11.28
|
)
|
|
|
(1.64
|
)
|
|
|
-
|
|
|
|
-
|
|
Losses
from continuing operations per ADS – diluted
|
|
|
(4.90
|
)
|
|
|
-
|
|
|
|
(7.95
|
)
|
|
|
-
|
|
|
|
(11.28
|
)
|
|
|
(1.64
|
)
|
|
|
-
|
|
|
|
-
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
17.
|
LOSSES PER SHARE (continued)
|
|
|
For
the years ended
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
A
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share from discontinued operations—basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net income from discontinued operations attributable to 500.com Limited’s ordinary shareholders used in calculating
income per ordinary share—basic
|
|
|
295
|
|
|
|
66
|
|
|
|
6,245
|
|
|
|
1,391
|
|
|
|
9,247
|
|
|
|
1,345
|
|
|
|
1,997
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares outstanding used in calculating basic income per share
|
|
|
339,429,946
|
|
|
|
75,442,810
|
|
|
|
333,909,823
|
|
|
|
74,400,299
|
|
|
|
344,510,993
|
|
|
|
344,510,993
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
Denominator
used for income per share
|
|
|
339,429,946
|
|
|
|
75,442,810
|
|
|
|
333,909,823
|
|
|
|
74,400,299
|
|
|
|
344,510,993
|
|
|
|
344,510,993
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
Income
per share from discontinued operations — basic
|
|
|
0.001
|
|
|
|
0.001
|
|
|
|
0.02
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.004
|
|
|
|
0.03
|
|
|
|
0.004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share from discontinued operations—diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net income from discontinued operations attributable to 500.com Limited’s ordinary shareholders used in calculating
income per ordinary share— diluted
|
|
|
295
|
|
|
|
66
|
|
|
|
6,245
|
|
|
|
1,391
|
|
|
|
9,247
|
|
|
|
1,345
|
|
|
|
1,997
|
|
|
|
290
|
|
Reallocation
of net income from discontinued operations attributable to 500.com Limited’s ordinary shareholders as a result of conversion
of Class B to Class A shares
|
|
|
66
|
|
|
|
-
|
|
|
|
1,391
|
|
|
|
-
|
|
|
|
1,997
|
|
|
|
290
|
|
|
|
-
|
|
|
|
-
|
|
Net
income from discontinued operations attributable to ordinary shareholders
|
|
|
361
|
|
|
|
66
|
|
|
|
7,636
|
|
|
|
1,391
|
|
|
|
11,244
|
|
|
|
1,635
|
|
|
|
1,997
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares outstanding used in calculating basic income per share
|
|
|
339,429,946
|
|
|
|
75,442,810
|
|
|
|
333,909,823
|
|
|
|
74,400,299
|
|
|
|
344,510,993
|
|
|
|
344,510,993
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
Conversion
of Class B to Class A ordinary shares
|
|
|
75,442,810
|
|
|
|
-
|
|
|
|
74,400,299
|
|
|
|
-
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
|
|
-
|
|
|
|
-
|
|
Share
options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Denominator
used for income per share
|
|
|
414,872,756
|
|
|
|
75,442,810
|
|
|
|
408,310,122
|
|
|
|
74,400,299
|
|
|
|
418,911,292
|
|
|
|
418,911,292
|
|
|
|
74,400,299
|
|
|
|
74,400,299
|
|
Losses
per share from discontinued operations—diluted
|
|
|
0.001
|
|
|
|
0.001
|
|
|
|
0.02
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.004
|
|
|
|
0.03
|
|
|
|
0.004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations per ADS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
used for income per ADS - basic
|
|
|
33,942,995
|
|
|
|
-
|
|
|
|
33,390,982
|
|
|
|
-
|
|
|
|
34,451,099
|
|
|
|
34,451,099
|
|
|
|
-
|
|
|
|
-
|
|
Denominator
used for income per ADS - diluted
|
|
|
41,487,276
|
|
|
|
-
|
|
|
|
40,831,012
|
|
|
|
-
|
|
|
|
41,891,129
|
|
|
|
41,891,129
|
|
|
|
-
|
|
|
|
-
|
|
Income
from discontinued operations per ADS – basic
|
|
|
0.01
|
|
|
|
-
|
|
|
|
0.19
|
|
|
|
-
|
|
|
|
0.27
|
|
|
|
0.04
|
|
|
|
-
|
|
|
|
-
|
|
Income
from discontinued operations per ADS – diluted
|
|
|
0.01
|
|
|
|
-
|
|
|
|
0.19
|
|
|
|
-
|
|
|
|
0.27
|
|
|
|
0.04
|
|
|
|
-
|
|
|
|
-
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
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$2,999. As of December 31, 2017, 333,787,552 and 74,400,299 Class A and Class B ordinary shares were issued and outstanding,
respectively.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
18.
|
EQUITY TRANSACTIONS (continued)
|
In 2018, 6,513,460
share options were exercised at the exercise prices of US$0.2 to US$1.0 per share, resulting in the issuance of 6,513,460 Class
A ordinary shares at US$0.00005 each for an aggregate consideration of US$6,014. And 10,503,520 restricted shares were vested and
exercised without exercise prices. As of December 31, 2018, 350,804,532 and 74,400,299 Class A and Class B ordinary shares were
issued and outstanding, respectively.
|
19.
|
FAIR VALUE MEASUREMENT
|
In accordance
with ASC 820-10, the Group measures available-for-sale investments, contingent consideration payable at fair value on a recurring
basis. The fair value of the available-for-sale investments are measured based on the market price in an active market.
The Group measures
certain financial assets, including cost method investments and equity method investments at fair value on a nonrecurring basis
only if an impairment charge were to be recognized. The Group’s non-financial assets, such as intangible assets and fixed
assets, would be measured at fair value only if they were determined to be impaired on an other-than-temporary basis.
Assets measured
or disclosed at fair value are summarized below:
|
|
|
|
|
|
|
|
Fair
value measurement
at December 31, 2017
|
|
|
|
|
|
|
|
|
|
Total
fair
value at
December 31,
2017
|
|
|
Quoted
prices
in active
markets for
identical
assets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Total
losses
|
|
|
|
|
RMB
|
|
|
|
US$
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
US$
|
|
Fair
value disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
investments
|
|
|
289,304
|
|
|
|
44,465
|
|
|
|
-
|
|
|
|
289,304
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjustable-rate
investments
|
|
|
89,604
|
|
|
|
13,772
|
|
|
|
-
|
|
|
|
89,604
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
378,908
|
|
|
|
58,237
|
|
|
|
-
|
|
|
|
378,908
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in targeted asset management plan with fixed rate (Note 6)
|
|
|
100,000
|
|
|
|
15,370
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Available-for-sale
investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
733
|
|
|
|
113
|
|
Non-recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,781
|
|
|
|
4,424
|
|
Total
assets measured at fair value
|
|
|
100,000
|
|
|
|
15,370
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
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
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
19.
|
FAIR VALUE MEASUREMENT (continued)
|
Assets and liabilities
measured or disclosed at fair value are summarized below:
|
|
|
|
|
|
|
|
Fair
value measurement
at
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Total
fair
value at
December
31,
2018
|
|
|
Quoted
prices
in active
markets for
identical
assets
(Level
1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Total
losses
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Fair
value disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
investments
|
|
|
246,560
|
|
|
|
35,861
|
|
|
|
-
|
|
|
|
246,560
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjustable-rate
investments
|
|
|
27,580
|
|
|
|
4,011
|
|
|
|
-
|
|
|
|
27,580
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
274,140
|
|
|
|
39,872
|
|
|
|
-
|
|
|
|
274,140
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in targeted asset management plan with fixed rate (Note 6)
|
|
|
100,000
|
|
|
|
14,544
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Available-for-sale
investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments
|
|
|
98,391
|
|
|
|
14,310
|
|
|
|
98,391
|
|
|
|
-
|
|
|
|
-
|
|
|
|
149,896
|
|
|
|
21,801
|
|
Total
assets measured at fair value
|
|
|
198,391
|
|
|
|
28,854
|
|
|
|
98,391
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
149,896
|
|
|
|
21,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
liabilities measured at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
19.
|
FAIR VALUE MEASUREMENT (continued)
|
There were no transfers of fair value
measurements into or out of Level 3 for the years ended December 31, 2016, 2017 and 2018.
The Group has measured the contingent
consideration payable at fair value on a recurring basis using significant unobservable inputs (Level 3) as of the years ended
December 31, 2017. The significant unobservable inputs used in the fair value measurement and the corresponding impacts to the
fair values are presented below:
|
|
Valuation
techniques
|
|
Unobservable
inputs
|
|
Estimation
as of
December
31, 2017
|
|
|
Change in
unobservable
inputs
|
|
Change in fair value
|
Contingent
consideration payable
|
|
Monte Carlo simulation technique
|
|
Spot value of net income
|
|
|
31,698
|
|
|
Increase / (decrease)
|
|
Increase / (decrease)
|
|
|
|
|
Volatility of net income
|
|
|
10.00
|
%
|
|
Increase / (decrease)
|
|
(Decrease) / increase
|
|
|
|
|
Expected annual growth rate of net income
|
|
|
0.00
|
%
|
|
Increase / (decrease)
|
|
Increase / (decrease)
|
|
|
|
|
Discount factor
|
|
|
0.95
|
|
|
Increase / (decrease)
|
|
(Decrease) / increase
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
19.
|
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, 2018:
|
|
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
|
|
Settled during the year
|
|
|
(54,550
|
)
|
Balance as of December 31, 2018
|
|
|
-
|
|
Balance as of December 31, 2018 in US$
|
|
|
-
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
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 segments, including the PRC and Europe.
The following table presents
summary information by segment for the years ended December 31, 2016, 2017 and 2018, respectively.
|
|
For the year ended December 31, 2016
|
|
|
|
PRC
|
|
|
Europe
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
5,259
|
|
|
|
-
|
|
|
|
5,259
|
|
Depreciation and Amortization
|
|
|
18,518
|
|
|
|
-
|
|
|
|
18,518
|
|
Operating loss from continuing operations
|
|
|
368,183
|
|
|
|
-
|
|
|
|
368,183
|
|
Interest income
|
|
|
23,859
|
|
|
|
-
|
|
|
|
23,859
|
|
Income tax expense
|
|
|
2,143
|
|
|
|
-
|
|
|
|
2,143
|
|
Segment net loss from continuing operations
|
|
|
209,959
|
|
|
|
-
|
|
|
|
209,959
|
|
Segment assets
|
|
|
2,063,328
|
|
|
|
-
|
|
|
|
2,063,328
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
PRC
|
|
|
Europe
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
22,488
|
|
|
|
49,370
|
|
|
|
71,858
|
|
Depreciation and Amortization
|
|
|
12,814
|
|
|
|
14,062
|
|
|
|
26,876
|
|
Operating (loss) income from continuing operations
|
|
|
(341,286
|
)
|
|
|
2,755
|
|
|
|
(338,531
|
)
|
Interest income
|
|
|
20,032
|
|
|
|
-
|
|
|
|
20,032
|
|
Income tax (benefit) expense
|
|
|
(14,181
|
)
|
|
|
156
|
|
|
|
(14,025
|
)
|
Segment net (loss) income from continuing operations
|
|
|
(334,428
|
)
|
|
|
2,959
|
|
|
|
(331,469
|
)
|
Segment assets
|
|
|
1,696,024
|
|
|
|
58,535
|
|
|
|
1,754,559
|
|
|
|
For the year ended December 31, 2018
|
|
|
|
PRC
|
|
|
Europe
|
|
|
Total
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
20,578
|
|
|
|
105,511
|
|
|
|
126,089
|
|
|
|
18,339
|
|
Depreciation and Amortization
|
|
|
31,027
|
|
|
|
31,511
|
|
|
|
62,538
|
|
|
|
9,096
|
|
Operating loss from continuing operations
|
|
|
327,850
|
|
|
|
16,638
|
|
|
|
344,488
|
|
|
|
50,103
|
|
Interest income
|
|
|
15,308
|
|
|
|
-
|
|
|
|
15,308
|
|
|
|
2,226
|
|
Income tax (benefit) expense
|
|
|
(21,014
|
)
|
|
|
1,412
|
|
|
|
(19,602
|
)
|
|
|
(2,851
|
)
|
Segment net loss from continuing operations
|
|
|
453,687
|
|
|
|
18,050
|
|
|
|
471,737
|
|
|
|
68,610
|
|
Segment assets
|
|
|
1,204,057
|
|
|
|
42,527
|
|
|
|
1,246,584
|
|
|
|
181,307
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
Discontinue
to provide Sports Information Services from "Cai Xun Hao”
On March 25, 2019, the management
of the Company decided to discontinue the Sports Information Services provided by “Cai Xun Hao”
.
Revenue generated from
“Cai Xun Hao” was nil, RMB2,332 and RMB16,036 (US$2,332) for the year ended
December 31, 2016, 2017 and 2018, respectively, which accounted for nil, 3.2%, and 12.7% of total net revenues for the years ended
December 31, 2016, 2017 and 2018, respectively. The discontinuation of the Sports Information Services provided by “Cai Xun Hao”
has no major effect on the Group’s operations and financial results.
Restricted
stock units incentive plan
On January 2, 2019, the Compensation
Committee of the Board of Directors of the Company reached an agreement to issue the number of Class A ordinary shares of 7,553,980
to grant to the employees of the Company, which will be vested in January 1, 2020.
7% Redeemable
Noncontrolling Interest in Arbitration related to TMG
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) in TMG. 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.
In early 2019, we received a
redemption notice from Helmet, requesting us to purchase the 7% equity interest in TMG held by Helmet at a redemption price of
EUR3,745. We and Helmet failed to reach an agreement as to the purchase price for the TMG shares within 30 business days of the
notice. Helmet has referred the dispute to arbitration by a local court in Malta, and we have engaged attorneys to represent us
in the arbitration. After receiving of the redemption notice, we adjusted the carrying amount of the 7% redeemable noncontrolling
interest to equal to the redemption amount of EUR3,745 as of December 31, 2018. The worst-case scenario is that we ultimately may
be required to purchase the TMG shares held by Helmet at the redemption price of EUR3,745, other than this adjustment as reflected
and disclosed in our consolidated financial statements for 2018, we do not expect to incur other liabilities in connection with
the aforementioned arbitration.
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
22.
|
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 RMB113,588 (US$16,521)
as of December 31, 2018.
The following is the condensed
financial information of the Company on a parent company only basis.
Condensed balance sheets
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,304
|
|
|
|
12,338
|
|
|
|
1,795
|
|
Time deposits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other current assets
|
|
|
20,257
|
|
|
|
7,348
|
|
|
|
1,069
|
|
Amounts due from intergroup companies
|
|
|
400,659
|
|
|
|
506,418
|
|
|
|
73,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
422,220
|
|
|
|
526,104
|
|
|
|
76,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries and VIEs
|
|
|
1,060,273
|
|
|
|
605,167
|
|
|
|
88,018
|
|
Property and equipment, net
|
|
|
241
|
|
|
|
167
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
1,060,514
|
|
|
|
605,334
|
|
|
|
88,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
1,482,734
|
|
|
|
1,131,438
|
|
|
|
164,562
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
22.
|
CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (continued)
|
Condensed balance sheets
(continued)
|
|
As of
December 31,
2017
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll and welfare payable
|
|
|
544
|
|
|
|
369
|
|
|
|
54
|
|
Accrued expenses and other liabilities
|
|
|
68,015
|
|
|
|
9,452
|
|
|
|
1,375
|
|
Amounts due to intergroup companies
|
|
|
4,401
|
|
|
|
5,012
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
72,960
|
|
|
|
14,833
|
|
|
|
2,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
72,960
|
|
|
|
14,833
|
|
|
|
2,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 333,787,552 and 350,804,532 shares issued and outstanding as of December 31, 2017 and 2018, respectively
|
|
|
115
|
|
|
|
121
|
|
|
|
18
|
|
Class B Ordinary shares, par value US$0.00005 per share; 300,000,000 shares authorized as of December 31, 2017 and 2018; 74,400,299 and 74,400,299 shares issued and outstanding as of December 31,2017 and 2018, respectively
|
|
|
28
|
|
|
|
28
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
2,295,111
|
|
|
|
2,431,924
|
|
|
|
353,709
|
|
Treasury shares
|
|
|
(143,780
|
)
|
|
|
(143,780
|
)
|
|
|
(20,912
|
)
|
Accumulated other comprehensive income
|
|
|
116,051
|
|
|
|
137,736
|
|
|
|
20,033
|
|
Accumulated deficit and statutory reserve
|
|
|
(857,751
|
)
|
|
|
(1,309,424
|
)
|
|
|
(190,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholder’s equity
|
|
|
1,409,774
|
|
|
|
1,116,605
|
|
|
|
162,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
1,482,734
|
|
|
|
1,131,438
|
|
|
|
164,562
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
22.
|
CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (continued)
|
Condensed
statements of comprehensive income (loss)
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
(402
|
)
|
|
|
(497
|
)
|
|
|
(1,784
|
)
|
|
|
(259
|
)
|
General and administrative
|
|
|
(15,934
|
)
|
|
|
(68,260
|
)
|
|
|
(177,455
|
)
|
|
|
(25,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(16,336
|
)
|
|
|
(68,757
|
)
|
|
|
(179,239
|
)
|
|
|
(26,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnity cost
|
|
|
(9,979
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other operating income
|
|
|
39
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(26,276
|
)
|
|
|
(68,757
|
)
|
|
|
(179,239
|
)
|
|
|
(26,069
|
)
|
Interest income
|
|
|
10,269
|
|
|
|
4,818
|
|
|
|
2
|
|
|
|
-
|
|
Equity in (loss) profits of subsidiaries and VIEs
|
|
|
(186,958
|
)
|
|
|
(253,160
|
)
|
|
|
(272,436
|
)
|
|
|
(39,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(202,965
|
)
|
|
|
(317,099
|
)
|
|
|
(451,673
|
)
|
|
|
(65,692
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(202,965
|
)
|
|
|
(317,099
|
)
|
|
|
(451,673
|
)
|
|
|
(65,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
82,347
|
|
|
|
(56,196
|
)
|
|
|
21,685
|
|
|
|
3,155
|
|
Change in fair value of AFS
|
|
|
754
|
|
|
|
(733
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(119,864
|
)
|
|
|
(374,028
|
)
|
|
|
(429,988)
|
|
|
|
(62,537)
|
|
500.COM LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(Amounts in thousands of
Renminbi (“RMB”) and United States dollars (“US$”) and EUR,
except for number of shares and per share (or
ADS) data)
|
22.
|
CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (continued)
|
Condensed
statements of cash flows
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used in) by operating activities
|
|
|
25,679
|
|
|
|
(270,965
|
)
|
|
|
(91,547
|
)
|
|
|
(13,315
|
)
|
Net cash provided (used in) by investing activities
|
|
|
413,401
|
|
|
|
3,065
|
|
|
|
(56,941
|
)
|
|
|
(8,282
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(118,484
|
)
|
|
|
(11,945
|
)
|
|
|
159,456
|
|
|
|
23,192
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
481
|
|
|
|
(60,522
|
)
|
|
|
66
|
|
|
|
10
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
321,077
|
|
|
|
(340,367
|
)
|
|
|
11,034
|
|
|
|
1,605
|
|
Cash and cash equivalents at beginning of the year
|
|
|
20,594
|
|
|
|
341,671
|
|
|
|
1,304
|
|
|
|
190
|
|
Cash and cash equivalents at end of the year
|
|
|
341,671
|
|
|
|
1,304
|
|
|
|
12,338
|
|
|
|
1,795
|
|
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.
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