Crypto Flow Technology Limited - Proxy Solicitation & Information Statement 2018

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Loto Interactive Limited, you should at once hand this circular, together with the enclosed form of proxy, to the purchaser or to the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or to the transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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Loto Interactive Limited

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

CONTINUING CONNECTED TRANSACTIONS

AND NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

SOMERLEY CAPITAL LIMITED

A letter from the board of directors of Loto Interactive Limited is set out on pages 4 to 14 of this circular. A letter from the Independent Board Committee (as defined herein) is set out on page 15 of this circular. A letter from Somerley Capital Limited containing its advice to the Independent Board Committee and the Independent Shareholders (as defined herein) is set out on pages 16 to 35 of this circular.

A notice convening the extraordinary general meeting of Loto Interactive Limited to be held at 50th Floor, Bank of China Tower, 1 Garden Road, Central, Hong Kong on Monday, 8 October 2018 at 11:00 a.m. is set out on pages 44 to 45 of this circular. Whether or not you are able to attend the extraordinary general meeting in person, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the extraordinary general meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the extraordinary general meeting or any adjournment thereof (as the case may be) should you so wish.

This circular will remain on the “Latest Company Announcements” page of the GEM website at www.hkgem.com for a minimum period of 7 days from the date of its publication and on the Company’s website at www.lotoie.com.

Hong Kong, 14 September 2018

CHARACTERISTICS OF GEM

GEM has been positioned as a market designed to accommodate small and mid-sized companies to which a higher investment risk may be attached than other companies listed on the Stock Exchange. Prospective investors should be aware of the potential risks of investing in such companies and should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration.

Given that companies listed on GEM are generally small and mid-sized companies, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on GEM.

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	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Letter from Somerley. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Appendix – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Notice of EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	44

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DEFINITIONS

In this circular, unless the context requires otherwise, the following expressions have the following meanings:

“500.com Limited” a company incorporated in the Cayman Islands and the shares of which are listed on the New York Stock Exchange (stock code: WBAI), the controlling shareholder of the Company
“associate(s)” has the meaning ascribed to it under the GEM Listing Rules “Board” the board of Directors “Company” Loto Interactive Limited, a company incorporated in the Cayman Islands with limited liability, whose Shares are listed on GEM
“connected person(s)” has the meaning ascribed to it under the GEM Listing Rules “Cooperation Agreement” the cooperation agreement dated 3 August 2018 between Loto Shenzhen and E-Sun Sky for the provisions of services
“CSLA” China Sports Lottery Administration Centre, the exclusive sports lottery operator in the PRC
“CSLA Framework Agreement” the framework agreement dated 6 March 2018 between 500.com Limited and CSLA on the cooperation in development of physical channels to sell sports lottery tickets
“Director(s)” the director(s) of the Company
“E-Sun Sky” 深圳市易訊天空網絡技術有限公司 (Shenzhen E-sun Sky Network Technology Co., Ltd.**), a wholly-owned subsidiary of 500.com Limited
“Effective Date” the date of the Independent Shareholders’ approval of the Cooperation Agreement
“EGM” the extraordinary general meeting of the Company to be convened for, among other matters, approving the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps for the period from the Effective Date to 5 March 2021
“EGM Notice” the notice of the EGM dated 14 September 2018
“GEM” GEM operated by the Stock Exchange

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DEFINITIONS

“GEM Listing Rules”

the Rules Governing the Listing of Securities on GEM

“Group”

the Company and its subsidiaries

“HK$”

Hong Kong dollar(s), the lawful currency of Hong Kong

“Hong Kong”

the Hong Kong Special Administrative Region of the PRC

“Independent Board Committee”

the independent committee of the Board, comprising all the independent non-executive Directors, namely Dr. Lu Haitian, Mr. Yan Hao and Mr. Lin Sen, formed for the purpose of considering the terms of the Cooperation Agreement, the transactions contemplated thereunder and its proposed annual caps and advising and making recommendation to the Independent Shareholders as to how to vote at the EGM

“Independent Financial Adviser” or “Somerley”
Somerley Capital Limited, a corporation licensed to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO, being the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Cooperation Agreement and its related proposed annual caps for the period from the Effective Date to 5 March 2021
“Independent Shareholders”

the Shareholders excluding 500.com Limited and its associates

“Latest Practicable Date”
11 September 2018, being the latest practicable date for the purpose of ascertaining certain information contained in this circular
“Loto Shenzhen”
樂透互娛信息技術（深圳）有限公司 (Loto Interactive Information Technology (Shenzhen) Limited**), a wholly-owned subsidiary of the Company
“Lottery New Retail”
the business of new retail of lottery tickets brought by the CSLA Framework Agreement
“PRC” or “China” the People’s Republic of China and for the purposes of this circular excludes Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan
“Previous Announcement”
the Company’s announcement dated 2 May 2018
“RMB”
Renminbi, the lawful currency of the PRC

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DEFINITIONS

“Services” the services to be provided by Loto Shenzhen to E-Sum Sky pursuant to the Cooperation Agreement “SFO” the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) “Share(s)” ordinary share(s) of a par value of HK$0.01 each in the share capital of the Company “Shareholder(s)” the holder(s) of the Share(s) “Shenzhen GenLot” 深圳市穗彩科技開發有限公司 (Shenzhen General Lottery Technology Co., Ltd.**), a third party independent of the Group “Stock Exchange” The Stock Exchange of Hong Kong Limited “Terminal(s)” Android sports lottery terminal(s) “%” per cent.

** The English translation of Chinese name(s) in this circular, where indicated, is included for information only, and should not be regarded as the official English name(s) of such Chinese name(s).

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LETTER FROM THE BOARD

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Loto Interactive Limited

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

Directors:

Mr. Pan Zhengming* (Chairman)

Mr. Wang Bingzhong[#] (Chief Executive Officer)

Ms. Huang Lilan[#]

Mr. Yuan Qiang*

Dr. Lu Haitian[+]

Mr. Yan Hao[+] Mr. Lin Sen[+]

Executive Director
Non-executive Director
- Independent Non-executive Director

Registered office: P.O. Box 31119 Grand Pavilion, Hibiscus Way 802 West Bay Road Grand Cayman, KY1-1205 Cayman Islands

Head office and principal place of business in Hong Kong: 50th Floor Bank of China Tower 1 Garden Road, Central Hong Kong

14 September 2018

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF THE EXTRAORDINARY GENERAL MEETING

INTRODUCTION

Reference is made to the announcement of the Company dated 3 August 2018 in relation to the entering into of the Cooperation Agreement. Pursuant to the requirements under the GEM Listing Rules, the Company will seek the Independent Shareholders’ approval in relation to the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps for the period from the Effective Date to 5 March 2021 at the EGM.

The purposes of this circular are to provide you with (1) a letter from the Board containing further details of the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps; (2) a letter of recommendation from the Independent Board Committee to the Independent Shareholders in respect of the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps; (3) a letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps; (4) notice of convening the EGM; and (5) other information as required under the GEM Listing Rules.

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LETTER FROM THE BOARD

THE COOPERATION AGREEMENT

Date:

3 August 2018

Parties:

Loto Shenzhen, as provider of the Services

E-Sun Sky, as recipient of the Services

Term:

For the period commencing from the Effective Date to 5 March 2021.

Condition Precedent:

The taking effect of the Cooperation Agreement is conditional upon the Independent Shareholders’ approval of (i) the Cooperation Agreement and transactions contemplated thereunder; and (ii) the related proposed annual caps for the period from the Effective Date to 5 March 2021 at the EGM.

Subject Matter:

E-Sun Sky shall be responsible for entering into of cooperation agreements with provincial sports lotteries centers and the development of physical sports lottery sales channels and ticket consignment services in compliance with all applicable laws and regulations.

The Services to be provided by and obligations of Loto Shenzhen include:

(i) to lease Terminals to E-Sun Sky (the “ Lease of Terminals ”);
(ii) to refer offline lottery ticket sales outlets to E-Sun Sky and procure their cooperation (the “ Offline Channel Referral ”); and
(iii) to procure the strategic cooperation between websites with substantial online traffic and E-Sun Sky in order to set up lottery ticket sales channels and to direct online traffic to the app of 500 彩票網－體彩玩家的主場 (500.com Limited – The Home Field of Sports Lottery Players) so as to result in ticket sales (the “ Online Channel Referral** ”).

E-Sun Sky agrees that Loto Shenzhen may delegate its obligations to any subsidiaries of the Company at its sole discretion. In such case, Loto Shenzhen shall remain responsible for any services to be provided by such delegatees.

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LETTER FROM THE BOARD

Services Fees:

In consideration of the provision of the above Services, Loto Shenzhen shall be entitled to receive service fees from E-Sun Sky which include the following:

(i) In respect of the Lease of Terminals, a service fee representing 0.5% of the aggregate ticket sales revenue generated each month from all Terminals provided by Loto Shenzhen will be charged.
(ii) In respect of the Offline Channel Referral, a service fee will be charged based on the aggregate ticket sales revenue generated each year from any Terminal(s) located at such offline sales outlets as referred by Loto Shenzhen, which shall be calculated in accordance with the following formula:
5% of the aggregate ticket sales revenue if the annual aggregate ticket sales revenue is below RMB500,000;
6% of the aggregate ticket sales revenue if the annual aggregate ticket sales revenue is above RMB500,000 but below RMB1,000,000; and
7% of the aggregate ticket sales revenue if the annual aggregate ticket sales revenue is above RMB1,000,000.
(iii) In respect of the Online Channel Referral, a service fee representing 0.5% of the aggregate ticket sales revenue generated each month from users of such websites as referred by Loto Shenzhen will be charged.

PRICING POLICY

In determining the service fee for the Lease of Terminals, the parties have made reference to (i) the estimated costs of each Terminal which is expected to be not more than RMB4,000; and (ii) the estimated, average ticket sales generated by each Terminal, which is expected to be approximately RMB180,000 per year. In determining the service fee for the Offline Channel Referral, the parties have made reference to the pricing terms agreed between E-Sun Sky and other independent service providers. In determining the service fee for the Online Channel Referral, the parties have made reference to the price charged for similar referral/traffic directing function under a previous transaction between E-Sun Sky and a website which is an independent third party. Given that the transaction under the Cooperation Agreement is a package deal including services of the Lease of Terminals, the Offline Channel Referral and the Online Channel Referral, the last two of which are expected to generate higher revenue with minimal additional costs, it is considered that the pricing terms for the Services as a whole are on normal commercial terms.

E-Sun Sky undertakes that in the event that E-Sun Sky offers service fees at a more favourable rate to any third party in respect of the Lease of Terminals, the Offline Channel Referral and/or the Online Channel Referral, such more favourable rates shall be offered to Loto Shenzhen.

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LETTER FROM THE BOARD

PAYMENT TERM

Under the Lottery New Retail, CSLA will receive payments directly from individual lottery ticket purchasers and will issue an official data report on a monthly basis on the ticket sales revenue generated on each Terminal. With reference to the official data report, CSLA will make payments to 500.com Limited for services provided in the previous calendar month and 500.com Limited will in turn make payments to its business partners, including Loto Shenzhen, for service fees accrued in the previous calendar month. In the event that E-Sun Sky fails to settle the invoice on time, Loto Shenzhen will be entitled to terminate the Lease of Terminals and stop providing referral services to E-Sun Sky.

In respect of the Offline Channel Referral which sets the fee on a scale basis (5% to 7% of the aggregate ticket sales revenue), the parties will monitor the aggregate ticket sales revenue each month. In the event that the accumulated revenue crosses over a threshold at certain point, starting from the next month, the service fee will be charged on a higher level and E-Sun Sky shall also make up any shortfall for service fees for the previous months.

The above service fees shall be charged monthly and shall be paid by E-Sun Sky within 5 working days after receipt of Loto Shenzhen’s invoice for the previous calendar month. Loto Shenzhen will issue invoice to E-Sun Sky within 10 working days at the end of each calendar month. The Company considers that the payment term provided to E-Sun Sky is reasonable since it is generally shorter than the payment terms offered by the Company to its existing customers.

PROPOSED ANNUAL CAPS

The proposed annual caps for the maximum service fees to be received by Loto Shenzhen from E-Sun Sky in relation to the Services are as follows:

	From
	the Effective		From	From
	Date to	1	July 2019 to	1 July 2020 to
	30 June 2019	30 June 2020		5 March 2021
	(HK$)		(HK$)	(HK$)
The Services	30,000,000		36,000,000	32,400,000

Basis of Proposed Annual Caps:

The proposed annual caps for the services fees for the period from the Effective Date to 5 March 2021 are determined by reference to (a) the number of Terminals expected to be installed, which is expected to be approximately 4,000; and (ii) the estimated average sales revenue to be generated by each Terminal during the term of the Cooperation Agreement, which is expected to be approximately RMB180,000 per year. The annual caps are determined with reference to the existing sales revenue of Terminals which have already been installed by 500.com Limited in respect of the Lottery New Retail and the number of Terminals proposed by 500.com Limited to be installed in respect of the Lottery New Retail.

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LETTER FROM THE BOARD

INTERNAL CONTROL

The Group has adopted the following internal control procedures over the continuing connected transactions of the Company:

Before entering into a continuing connected transaction, the finance department of the Group will review and ensure that the pricing is fair and reasonable with reference to price quotes obtained from independent third parties for similar products or services. In addition to reviewing the pricing before entering into a transaction under the continuing connected transactions of the Company where the pricing terms under the relevant agreement are applied for the first time or the pricing terms are different from those used previously, the Board will engage an independent financial adviser to review the relevant terms.
The finance department of the Company is primarily responsible for reviewing and monitoring the continuing connected transactions to ensure that the annual caps of the relevant continuing connected transactions are not exceeded and the continuing connected transactions have been conducted in accordance with the pricing policies or mechanisms under the relevant agreement;
The finance department of the Company will consult with the Group’s chief finance officer in respect of continuing connected transaction compliance issues, who will report to the audit committee of the Company and also provide a confirmation to the audit committee that the continuing connected transactions of the Company which are subject to the annual review and disclosure requirements under the GEM Listing Rules have been entered into (a) in the ordinary and usual course of business of the Group; (b) on normal commercial terms or better; and (c) in accordance with the relevant agreements governing them on terms that are fair and reasonable and in the interests of the Shareholders as a whole; and that the Group’s internal control procedures applicable to continuing connected transactions are adequate and effective to ensure that such transactions were so conducted. The audit committee will consider this accordingly.
The Company’s external auditors will review the continuing connected transactions (which are subject to the annual review and disclosure requirements under the GEM Listing Rules) annually to check and confirm (among others) whether the pricing terms have been adhered to and whether the relevant caps have been exceeded.
The independent non-executive Directors will review the continuing connected transactions of the Company (which are subject to the annual review and disclosure requirements under the GEM Listing Rules) annually to check and confirm whether such continuing connected transactions are conducted in the ordinary and usual course of business of the Group, on normal commercial terms or better, in accordance with the relevant agreements governing them on terms that are fair and reasonable and in the interests of the Shareholders as a whole, and whether the internal control procedures put in place by the Company are adequate and effective to ensure that such continuing connected transactions were conducted in accordance with the pricing policies set out in such relevant agreements.

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LETTER FROM THE BOARD

INFORMATION ON THE PARTIES

Loto Shenzhen is a wholly-owned subsidiary of the Group. The Group is engaged in the provision of lottery-related technologies, systems and solutions to two state-run lottery operators in the PRC, namely the China Welfare Lottery Issuance Centre and CSLA. It is a distributor of high quality, versatile lottery terminals and parts for CSLA.

E-Sun Sky is a company established in the PRC and is principally engaged in internet lottery tickets sales activities. It is a wholly-owned subsidiary of 500.com Limited, the controlling shareholder of the Group. 500.com Limited is a company incorporated in the Cayman Islands, the shares of which are listed on the New York Stock Exchange (NYSE: WBAI). It is a leading online sports lottery service provider in the PRC. It offers a comprehensive and integrated suite of online lottery services, information, user tolls and virtual community venues to its users. 500.com Limited was among the first companies to provide online lottery services in the PRC.

As of 31 July 2018, the largest beneficial owner of 500.com Limited is Tsinghua Unigroup International Co., Ltd. which holds 125,964,060 ordinary shares, representing 29.80% of the total economic interests and, due to the differential ownership structure, 11.53% of the total voting rights. 500.com Limited is also beneficially owned by Sequoia Capital 2010 CGF Holdco, Ltd. as to 35,042,735 ordinary shares as of 31 July 2018, representing 8.29% of the total economic interests and 3.21% of the total voting rights. As of 31 July 2018, 500.com Limited is controlled by Mr. Man San Law, who together with his spouse own 42.87% of the total voting rights of 500.com Limited.

REASONS FOR AND BENEFITS OF ENTERING INTO OF THE COOPERATION AGREEMENT

Reference is made to the Previous Announcement. 500.com Limited entered into the CSLA Framework Agreement with CSLA on the cooperation in development of physical channels to sell sports lottery tickets. Pursuant to the CSLA Framework Agreement, 500.com Limited will seek to enter into cooperation agreements with provincial sports lotteries centers to assist in installing sports lottery terminals and provide relevant maintenance and operational services, in order to enhance the convenience of sports lottery ticket purchases, enlarge customer base and optimize user experience for lottery purchasers.

As one of the first companies to provide online lottery services in the PRC and one of the only two entities that had been approved by the Ministry of Finance to provide online lottery sales services on behalf of CSLA, 500.com Limited has extensive experience and full capacity in online lottery industry. Nonetheless, given the geographical coverage and financial commitment of the project contemplated under the CSLA Framework Agreement, it may not be commercially practicable for 500.com Limited to implement the entire project on its own without further cooperation with relevant physical channels, offline outlets and lottery terminal suppliers.

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LETTER FROM THE BOARD

The Group, as a distributor of high quality, versatile lottery terminals and parts for CSLA with nearly ten years of industry experience, is capable of supplying lottery terminals and providing related solutions and services. With years of experience established in the PRC gaming and lottery terminal market, the Group has accumulated extensive networks and resources in the PRC. The Group is desirous to capitalise on these networks and resources, broaden its source of revenue and expand its business operations with an aim to maximizing profit and return for the Company. Accordingly, in view of the business potential, Loto Shenzhen, E-Sun Sky and Shenzhen GenLot agreed to collaborate their existing channels and resources to expand their business in the end-market of sports lottery terminals in the PRC. As disclosed in the Previous Announcement, the Group intends to provide consultancy services and/or financing to 500.com Limited.

The existing business of the Group comprises (i) the trading of lottery terminals and parts; and (ii) the provision of services and solutions for the distribution of lottery products. As to the trading of lottery terminals and parts, the Group obtains orders from Beijing Intradak System Technology Co., Ltd, one of the six authorised providers of CSLA, and places orders with Wu Sheng Computer Technology (Shanghai) Co., Ltd. As to the provision of services and solutions for the distribution of lottery products, the Group provides system maintenance services and game upgrading technology for the rapid-draw game “Shi Shi Cai” in the Chongqing Municipality. This existing business model can be traced back to 2008.

The management of the Company are fully aware of the uncertainty and seasonality of the procurement cycle of lottery terminals by CSLA, the low profit margin of its traditional terminals trading business and the risks of heavy reliance on a major customer and a major supplier. As such, the management of the Company has been actively exploring new opportunities to expand its existing business. However, the lottery industry in the PRC is heavily regulated by the Chinese government, so the Company has to operate with other market participants to fully utilise any opportunities under the current regulatory regime.

In order to further expand its lottery business, the Company intends to cooperate with 500.com Limited in developing the Lottery New Retail. The Lottery New Retail allows the public to select lottery games and decide their combination of lottery numbers online. A QR code representing their selection will be generated virtually and sent to their mobile devices. With the QR code, the holder may find a nearby self-service Terminals to extract his selection of lottery game and number combination, and complete the ticket purchase with electronic payment. The Terminals will print out the lottery tickets automatically and instantly upon receipt of electronic payment. To the best knowledge of the Company, 500.com Limited has started pilot projects in respect of the Lottery New Retail in Tianjin, Hunan and Guangxi since March 2018. As at the Latest Practicable Date, the pilot projects in Hunan and Guangxi are still in testing stage and only the pilot project in Tianjin has recorded revenue.

Shenzhen GenLot is the first terminal manufacturer whose upgrade Terminals have been approved by CSLA for the Lottery New Retail. To the best knowledge of the Company, there has been other terminal manufacturers approved by CSLA to produce upgrade Terminals. Upon comparison between the unit prices quoted by each manufacturer, Loto Shenzhen chooses to purchase Terminals from Shenzhen GenLot. To the best knowledge of the Company, Shenzhen GenLot has been directly supplying Terminals for the Lottery New Retail to E-Sun Sky under the framework agreement between the Company, 500.com Limited and Shenzhen GenLot dated 2 May 2018 as disclosed in the Previous Announcement. In light of the demand for Terminals by E-Sun Sky under the CSLA Framework Agreement, it is expected that E-Sun Sky will continue to purchase Terminals for the Lottery New Retail from Shenzhen GenLot or other terminal manufacturers in addition to the Terminals installed by Loto Shenzhen. After the Effective Date, there are not expected to be any changes to the terms of the framework agreement dated 2 May 2018 as disclosed in the Previous Announcement.

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LETTER FROM THE BOARD

In respect of the Lease of Terminals, the Group will be supplying terminals of an upgrade version procured from Shenzhen GenLot. Loto Shenzhen shall pay for the cost of the Terminals. The Terminals will remain as Loto Shenzhen’s assets after they are delivered to E-Sun Sky. Loto Shenzhen chooses to lease the Terminals to E-Sun Sky in order to obtain the Offline Channel Referral and Online Channel Referral businesses which are expected to generate more income and have higher return rate than the outright sale of Terminals. The Group will have flexibility in arranging the location of each Terminal based on the ticket sales conditions leveraging on its experience and market knowledge. In respect of the Online Channel Referral and the Offline Channel Referral, the Group will be responsible for referring online channels and offline channels to E-Sun Sky and procuring their cooperation. The main difference between the transactions contemplated under the Cooperation Agreement and the Group’s existing lottery terminal trading business is that the transactions contemplated under the Cooperation Agreement involves an online element whereas the Group’s existing lottery terminal trading business only relates to offline trading and sales. The Company’s technical expertise and business network meet 500.com Limited’s requirements for a service provider under the Lottery New Retail. The management of the Company includes a group of people with over ten years’ experience in China lottery market who are knowledgeable about the licensed lottery business in the PRC. In addition, the CEO of the Company is a seasoned investor in both online and offline business and has strong connection with both online and offline market players, which is a valuable complement to the skill sets of the management of the Company. As such, the Company does not foresee any particular new set of management skill set required in carrying out the transactions contemplated under the Cooperation Agreement.

The Cooperation Agreement was therefore entered into by Loto Shenzhen and E-Sun Sky to put their cooperation into practice and bring mutual benefits to each party. The Directors (including the independent non-executive Directors after taking into account of advice of the Independent Financial Adviser) considered that:

(a) the terms and conditions of the Cooperation Agreement were negotiated between the parties on an arm’s length basis and are on normal commercial terms, which are fair and reasonable;
(b) the proposed annual caps in respect of the transactions contemplated under the Cooperation Agreement for the period from the Effective Date to 5 March 2021 are fair and reasonable; and
(c) the transactions contemplated therein will be conducted in the ordinary and usual course of business of the Group and in the interest of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

RELATIONSHIP WITH 500.COM LIMITED

The Group is keen on tapping into the Lottery New Retail because of the business potential and future development of such business model. Given that 500.com Limited is so far the only entity which entered into agreement with CSLA to carry out the Lottery New Retail, it is not practicable for the Group to find other customers as substitutes to 500.com Limited. In addition, the experience, skills and network of the management of the Group accumulated during its past ten years’ presence in the China lottery industry will fit the needs of 500.com Limited. In the event that there are additional entities authorised by CSLA under the Lottery New Retail, the Group will be open to any cooperation opportunities with such entities to diversify the Group customer base in respect of the Lottery New Retail.

The Group is familiar with the CSLA regulatory framework given our track record supplying lottery ticket terminals in light of the rigid regulatory regime of the industry, the number of authorised providers and parties with sound understanding of 500.com Limited’s needs are limited. Due to the new features of the business model under the Lottery New Retail, it will take more time and efforts for 500.com Limited to engage other market players who are ready to provide a full set of services. In addition, the Group has a management team which has solid understanding of and network with both online and offline businesses in the PRC, which is quite rare among other market players. Given the time frame and likely costs and expenses related to the development of and negotiation with other potential service providers, it is believed that 500.com Limited will commit to its business relationship with the Group.

It is expected that the Group’s sources of income after the implementation of the Cooperation Agreement will consist of three major sections, (i) the provision of lottery terminals and parts including both the traditional trading of lottery terminals with Intradak as well as the Lease of Terminals, (ii) the provision of technology services and solutions, and (iii) the provision of gaming and online services including, among others, the Online Channel Referral and Offline Channel Referral under the Lottery New Retail. The revenue to be generated from 500.com Limited will only constitute part of the income of the Group and its contribution is unlikely to increase substantially in the future as the Group’s other businesses are expected to grow at a relatively faster pace.

Given that the Lottery New Retail is a new business model introduced to the market and in light of the potential of online and offline channels, the Group considers the Lottery New Retail will occupy a substantial market share. It is expected that the annual revenue of the Group to be generated from 500.com Limited under the Cooperation Agreement will not exceed 40% for each of the years ending 31 December 2018, 2019, 2020 and 2021.

Based on the above factors, the Company does not consider it has excessive reliance on 500.com Limited. The concentration of revenue from 500.com Limited generated from the Lottery New Retail is due to the regulatory framework of the Lottery New Retail which is supervised by CSLA. Once additional participants are authorised to enter into the market, there will be increasing opportunities for the Company to diversify its customer base in respect of the Lottery New Retail. As 500.com Limited is a public company listed on the New York Stock Exchange, there is sufficient transparency on its business operations and financial performance for the market to assess its Lottery New Retail business. In the meantime, the Company is also developing its business in games, e-sports and blockchain technology and applications which are not related to 500.com Limited.

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LETTER FROM THE BOARD

GEM LISTING RULES IMPLICATIONS

As at the Latest Practicable Date, E-Sun Sky is a wholly-owned subsidiary of 500.com Limited, which is interested in 1,278,714,329 Shares, representing approximately 40.65% of the total issued share capital of the Company, and is a controlling Shareholder of the Company. Accordingly, E-Sun Sky is a connected person of the Company pursuant to the GEM Listing Rules and the transactions contemplated under the Cooperation Agreement will constitute continuing connected transactions on the part of the Company pursuant to Chapter 20 of the GEM Listing Rules, and are subject to the reporting, announcement, annual review and Independent Shareholders’ approval requirements. The Company will seek the Independent Shareholders’ approval for the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps for the period from the Effective Date to 5 March 2021 at the EGM.

The entering into of the Cooperation Agreement and the transactions contemplated thereunder are of a revenue nature in the ordinary and usual course of business of the Group, and will not be subject to Chapter 19 of the GEM Listing Rules.

Two of the non-executive Directors, Mr. Pan Zhengming and Mr. Yuan Qiang, who are also director or senior manager of 500.com Limited respectively and thus, are materially interested in the transactions contemplated under the Cooperation Agreement, had abstained from voting on the relevant Board resolutions approving the aforesaid transactions. Save as disclosed above, none of the Directors has a material interest in the transactions contemplated under the Cooperation Agreement or is required to abstain from voting on the Board resolutions for considering and approving the Cooperation Agreement and the transactions contemplated thereunder pursuant to the GEM Listing Rules.

An Independent Board Committee comprising all the independent non-executive Directors has been formed to advise the Independent Shareholders in respect of the terms of the Cooperation Agreement.

500.com Limited and its associates will abstain from voting on the resolution(s) approving the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps at the EGM. To the best knowledge, information and belief of the Directors, as at the date of this announcement, no Shareholder (excluding 500.com Limited and its associates) is required to abstain from voting on the resolution(s) approving the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps at the EGM.

The Independent Financial Advisor has been appointed to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Cooperation Agreement and the transactions contemplated thereunder.

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LETTER FROM THE BOARD

EXTRAORDINARY GENERAL MEETING

A notice convening the EGM is set out on pages 44 to 45 of this circular for the purpose of considering and, if thought fit, passing the ordinary resolution in relation to the Cooperation Agreement and its proposed annual caps. 500.com Limited, being the controlling Shareholder of the Company, together with its associates, and all parties involved or interested in the Cooperation Agreement are required to abstain from voting with respect to the resolution for approving the Cooperation Agreement and its proposed annual caps. Save as disclosed above, no other shareholder has any material interest in the Cooperation Agreement or is required to abstain from voting at the EGM.

The ordinary resolution to be proposed at the EGM will be determined by way of poll by the

Independent Shareholders.

A form of proxy for use at the EGM is enclosed with this circular. Whether or not a Shareholder is able to attend the EGM, he is requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return the same as soon as possible to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the extraordinary general meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude a Shareholder from attending and voting in person at the extraordinary general meeting or any adjournment thereof (as the case may be) should he so wish.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee set out on page 15 of this circular which contains the recommendation from the Independent Board Committee to the Independent Shareholders and the letter from the Independent Financial Advisor set out on pages 16 to 35 of this circular which contains its advice to the Independent Shareholders.

The Board (including the Independent Board Committee having taken into account the advice of the Independent Financial Adviser) considers that the Cooperation Agreement and the transactions contemplated thereunder are in the ordinary and usual course of business of the Group and on normal commercial terms, and the terms are fair and reasonable and no less favourable to the Group than those of independent third parties and in the interests of the Company and the Shareholders as a whole, and the related proposed annual caps for the period from the Effective Date to 5 March 2021 for the transactions contemplated under the Cooperation Agreement are fair and reasonable.

Accordingly, the Board (including the Independent Board Committee having taken into account the advice of the Independent Financial Adviser) recommends the Independent Shareholders to vote in favour of the ordinary resolution set out in the notice of the EGM enclosed to this circular.

By order of the Board Loto Interactive Limited Wang Bingzhong

Chief Executive Officer and Executive Director

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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Loto Interactive Limited

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

14 September 2018

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular issued by the Company to the Shareholders dated 14 September 2018 (the “ Circular ”) which this letter forms a part of. Unless the context otherwise requires, terms used in this letter shall have the same meanings given to them in the Circular.

As we have no interests in the continuing connected transaction with 500.com Limited, we have been appointed by the Board as the members of the Independent Board Committee to consider, and to advise the Independent Shareholders as to the fairness and reasonableness of, the terms of the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps for the period from the Effective Date to 5 March 2021 and to recommend how the Independent Shareholders should vote at the EGM. Somerley Capital Limited has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

We wish to draw your attention to the letter from the Board, as set out on pages 4 to 14 of the Circular, and the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders containing its advise in respect of the terms of the Cooperation Agreement, the transactions contemplated thereunder and the related proposed annual caps for the period from the Effective Date to 5 March 2021, as set out on pages 16 to 35 of the Circular.

Having taken into account the principal factors and reasons considered by the Independent Financial Advisor and its conclusion and advice, we are of the opinion that the transactions contemplated under the Cooperation Agreement are on normal commercial terms and in the ordinary and usual course of business of the Group, and that the terms of the transactions contemplated under the Cooperation Agreement and the respective proposed annual caps for the period from the Effective Date to 5 March 2021 are fair and reasonable and in the interests of the Company and its Shareholders as a whole.

Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the transactions contemplated under the Cooperation Agreement and the respective proposed annual caps of such transactions for the period from the Effective Date to 5 March 2021.

Yours faithfully, Independent Board Committee Dr. Lu Haitian, Mr. Yan Hao, Mr. Lin Sen Independent Non-executive Directors

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LETTER FROM SOMERLEY

The following is the full text of the letter of advice from Somerley to the Independent Board Committee and the Independent Shareholders prepared for the purpose of inclusion in this circular.

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SOMERLEY CAPITAL LIMITED

20th Floor China Building 29 Queen’s Road Central Hong Kong

14 September 2018

To: the Independent Board Committee and the Independent Shareholders of Loto Interactive Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in respect of the Cooperation Agreement and the transactions contemplated thereunder (the “ Continuing Connected Transactions ”), including the proposed annual caps for the Continuing Connected Transactions (the “ Annual Caps ”), for the period from the Effective Date to 5 March 2021. Details of the Continuing Connected Transactions are set out in the letter from the Board contained in the circular of the Company to the Shareholders dated 14 September 2018 (the “ Circular ”), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Circular unless the context requires otherwise.

As stated in the letter from the Board in the Circular, the Company announced on 3 August 2018 that the Cooperation Agreement was entered into between Loto Shenzhen, a wholly-owned subsidiary of the Company, and E-Sun Sky, a wholly-owned subsidiary of 500.com Limited, pursuant to which Loto Shenzhen conditionally agreed to provide the Services to E-Sun Sky subject to the terms and conditions provided therein for the period from the Effective Date to 5 March 2021.

As at the Latest Practicable Date, 500.com Limited was the controlling shareholder of the Company. Accordingly, E-Sun Sky was a connected person of the Company pursuant to the GEM Listing Rules and the transactions contemplated under the Cooperation Agreement constitute continuing connected transactions for the Company under Chapter 20 of the GEM Listing Rules. As one or more applicable percentage ratios (as defined in the GEM Listing Rules) in relation to the Annual Caps exceeds 5%, the Continuing Connected Transactions are subject to the reporting, announcement, annual review and Independent Shareholders’ approval requirements under the GEM Listing Rules.

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LETTER FROM SOMERLEY

The Independent Board Committee, comprising all of the independent non-executive Directors, namely Dr. Lu Haitian, Mr. Yan Hao and Mr. Lin Sen, has been formed to advise and make recommendation to the Independent Shareholders on the terms of the Cooperation Agreement, the Continuing Connected Transactions and the Annual Caps. We, Somerley Capital Limited, have been appointed to advise the Independent Board Committee and the Independent Shareholders in the same regard.

We are not associated with the Company, Loto Shenzhen, 500.com Limited, E-Sun Sky or their respective core connected persons, close associates or associates and accordingly are considered to be eligible to give independent advice on the Continuing Connected Transactions (including the Annual Caps). Apart from normal professional fee payable to us in connection with this appointment, no arrangement exists whereby we will receive any fees or benefits from the Company, Loto Shenzhen, 500.com Limited, E-Sun Sky or their respective core connected persons, close associates or associates.

In formulating our opinion, we have reviewed, amongst other things, the Previous Announcement, the announcement of the Company dated 3 August 2018 in relation to the Continuing Connected Transactions, the Cooperation Agreement, the CSLA Framework Agreement, the Annual Caps together with the relevant supporting documents, the annual reports of the Company for the two years ended 31 December 2016 and 2017 (the “ 2017 Annual Report ”), the interim report of the Company for the six months ended 30 June 2018 (the “ 2018 Interim Report ”) and the information contained in the Circular. We have also discussed with and reviewed information provided by management of the Group (the “ Management ”) regarding the businesses of the Group and the prospects of conducting the Continuing Connected Transactions.

We have relied on the information and facts supplied, and the opinions expressed to us, by the Directors and the Management and have assumed that the information and facts provided and opinions expressed to us are true, accurate and complete in all material aspects at the time they were made. We have also sought and received confirmation from the Directors that no material facts have been omitted from the information supplied and opinions expressed to us. We have relied on such information and consider that the information we have received to be sufficient for us to reach an informed view and have no reason to believe that any material information has been withheld, nor doubt the truth or accuracy of the information provided. We have not, however, conducted any independent investigation into the business and affairs of the Group, nor have we carried out any independent verification of the information supplied.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our recommendation with regard to the Continuing Connected Transactions (including the Annual Caps), we have taken into account the principal factors and reasons set out below.

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LETTER FROM SOMERLEY

1. Information on the Group

(a) The Company

(i) Business

The Company, formerly known as MelcoLot Limited, is principally engaged in the provision of lottery-related technologies, systems and solutions to two state-run lottery operators in the PRC, namely the China Welfare Lottery Issuance Centre and CSLA. It is a distributor of high quality, versatile lottery terminals and parts for CSLA. As set out in the 2017 Annual Report, 500.com Limited became the holding company of the Company after completion of the conditional mandatory cash offers on 10 July 2017.

The Group continues to engage in the lottery business as the single operating segment. The revenue of the Group derives mainly from: (i) the trading of lottery terminals and parts (the “ Distribution Business ”); and (ii) the provision of services and solutions for the distribution of lottery products (the “ Game Business ”). For the Distribution Business, the Group obtains orders from Beijing Intradak System Technology Co., Ltd, one of the six authorised providers of CSLA, and places orders with Wu Sheng Computer Technology (Shanghai) Co., Ltd. For the Game Business, the Group provides system maintenance services and game upgrading technology for the rapid-draw game “Shi Shi Cai” in the Chongqing Municipality.

(ii) Financial performance of the Group

Set out below is the summarised consolidated financial results of the Group for the two years ended 31 December 2016 and 2017 and the six months ended 30 June 2017 and 2018, as extracted from the 2017 Annual Report and the 2018 Interim Report, respectively:

	For the six months	For the six months	ended	For the year ended	For the year ended
	30	June		31 December
	2018		2017	2017	2016
	(HK$ million)	(HK$	million)	(HK$ million)	(HK$ million)
					(restated)
Revenue
– the Distribution
Business	3.0		9.6	47.8	59.4
– the Game Business	0.3		0.5	1.0	0.9
	3.3		10.1	48.8	60.3
Gross profit/(loss)	(0.3)		1.0	2.3	3.9
Loss before taxation	(13.2)		(6.2)	(18.4)	(19.4)
Loss attributable to
shareholders
of the Company	(12.8)		(5.9)	(17.9)	(2.3)

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LETTER FROM SOMERLEY

Revenue of the Group dropped from approximately HK$60.3 million for the year ended 31 December 2016 to approximately HK$48.8 million for the year ended 31 December 2017, representing a decrease of approximately 19.1%. As set out in the 2017 Annual Report, the decrease in revenue was mainly due to the fall in revenue of the Distribution Business by 19.5%. On the contrary, the revenue of the Game Business for the year ended 31 December 2017 increased by approximately 11.1% from approximately HK$0.9 million for the year ended 31 December 2016 to approximately HK$1.0 million for the year ended 31 December 2017. Moreover, the Group recorded loss attributable to shareholders of the Company of approximately HK$17.9 million for the year ended 31 December 2017, worsened by approximately 6.8 times, from approximately HK$2.3 million for the year ended 31 December 2016. We note from the 2017 Annual Report that the decline in profitability was mainly due to the combined effect of (i) absence of reversal of provision for capital gain tax on the disposal of the PRC subsidiaries amounting to approximately HK$17.2 million for the year ended 31 December 2016; (ii) decrease in share-based payments from approximately HK$6.8 million for the year ended 31 December 2016 to approximately HK$0.4 million for the year ended 31 December 2017; (iii) payout of loyalty bonus of approximately HK$5.8 million and retention bonus of approximately HK$0.9 million for the year ended 31 December 2017; and (iv) increase in rental expense of approximately HK$1.0 million since November 2017.

For the six months ended 30 June 2018, the revenue generated from the Distribution Business decreased significantly from approximately HK$9.6 million for the six months ended 30 June 2017 to approximately HK$3.0 million for the six months ended 30 June 2018. The significant drop was mainly due to the procurement cycle of CSLA for lottery terminals. As set out in the management discussion and analysis in the 2018 Interim Report, the sale of the lottery terminals depends largely on the demand on the replacement of old lottery terminals and the pace of opening of new CSLA lottery halls. While the duration of the procurement cycle of CSLA for lottery terminals is approximately 5 to 7 years, the Group has limited control on the procurement cycle on the lottery terminals. The Group recorded loss attributable to shareholders of the Company of approximately HK$12.8 million for the six months ended 30 June 2018, representing an increase in loss by approximately 116.9% compared to a loss of approximately HK$5.9 million for the corresponding period in 2017. The increase in loss was mainly attributable to the increase in share-based compensation of HK$4.0 million and the increase in rental expenses and depreciation for decoration for the Group’s new office in Hong Kong of approximately HK$3.5 million.

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LETTER FROM SOMERLEY

(iii) Financial position of the Group

Set out below is the summary of the financial position of the Group as at 30 June 2018, 31 December 2017 and 31 December 2016:

Non-current assets Loan receivable Structured notes Other non-current assets Current assets Trade and other receivables Bank balance and cash Other current assets Total assets Current liabilities Trade and other payables Other current liabilities Total equity attributable to equity holders of the Company	As at 30 June 2018 (HK$ million) 97.1 50.1 25.1 172.3 75.3 165.9 – 241.2 413.5 22.8 5.7 28.5 378.3	As at 31 December 2017 2016 (HK$ million) (HK$ million) (Restated) 94.2 – 50.1 50.0 2.1 0.5 146.4 50.5 25.0 0.9 208.1 87.5 50.1 301.0 283.2 389.4 429.6 439.9 29.7 9.8 4.9 17.6 34.6 27.4 388.4 404.6	As at 31 December 2017 2016 (HK$ million) (HK$ million) (Restated) 94.2 – 50.1 50.0 2.1 0.5 146.4 50.5 25.0 0.9 208.1 87.5 50.1 301.0 283.2 389.4 429.6 439.9 29.7 9.8 4.9 17.6 34.6 27.4 388.4 404.6
			50.5 0.9 87.5 301.0
			389.4 439.9 9.8 17.6
			27.4 404.6

As at 30 June 2018, the assets of the Group mainly consisted of loan receivable from an independent third party at the interest rate of 6% per annum for a term of two years of approximately HK$97.1 million, structured notes of a financial institution of approximately HK$50.1 million and bank balances and cash of approximately HK$165.9 million, which together represented approximately 75.7% of the total assets. The liabilities of the Group mainly consisted of trade and other payables.

The total equity attributable to equity holders of the Company has been declining since 1 January 2017 due to the continuing loss attributable to shareholders of the Company recorded for the year ended 31 December 2017 and for the six months ended 30 June 2018.

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LETTER FROM SOMERLEY

(b) Loto Shenzhen

Loto Shenzhen is a company established in the PRC and is a wholly-owned subsidiary of the Company. It is principally engaged in the provision of lottery-related technologies, systems and solutions to state-run lottery operators in the PRC.

2. Information on the counterparties

(a) 500.com Limited

500.com Limited is a company incorporated in the Cayman Islands, the shares of which are listed on the New York Stock Exchange (stock code: WBAI). It is a leading online sports lottery service providers in the PRC. It offers a comprehensive and integrated suite of online lottery services, information, user tolls and virtual community venues to its users. 500.com Limited was among the first companies to provide online lottery services in the PRC.

(b) E-Sun Sky

E-Sun Sky is a company established in the PRC and is principally engaged in internet lottery tickets sales activities. It is a wholly-owned subsidiary of 500.com Limited.

3. Reasons for and benefits of entering into of the Cooperation Agreement

As mentioned in the letter from the Board in the Circular, 500.com Limited entered into the CSLA Framework Agreement with CSLA on the cooperation in development of physical channels to sell sports lottery tickets. Pursuant to the CSLA Framework Agreement, 500.com Limited will seek to enter into cooperation agreements with provincial sports lotteries centers to assist in installing sports lottery terminals and provide relevant maintenance and operational services. Nonetheless, given the geographical coverage and financial commitment of the project as contemplated under the CSLA Framework Agreement, it may not be commercially practicable for 500.com Limited to implement the entire project on its own without further cooperation with relevant physical channels, offline outlets and lottery terminal suppliers.

The Group, a distributor of high quality, versatile lottery terminals and parts for CSLA with nearly ten years of industry experience, is capable of supplying lottery terminals and providing related solutions and services. With years of experience established in the PRC gaming and lottery terminal market, the Group has accumulated extensive networks and resources in the PRC. The Group is desirous to capitalise on these networks and resources, broaden its source of revenue and expand its business operations with an aim to maximising profit and return for the Company. Accordingly, in view of the business potential, Loto Shenzhen, E-Sun Sky and Shenzhen GenLot agreed to collaborate their existing channels and resources to expand their business in the end-market of sports lottery terminals in the PRC. As disclosed in the Previous Announcement, the Group intends to provide consultancy services and/or financing to 500.com Limited.

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LETTER FROM SOMERLEY

The Management is fully aware of the uncertainty and seasonality of the procurement cycle of lottery terminals by CSLA, the low profit margin of its traditional terminals trading business and the risks of heavy reliance on a major customer and a major supplier. As such, the Management has been actively exploring new opportunities to expand its existing business. However, the lottery industry in the PRC is heavily regulated by the Chinese government, so the Company has to operate with other market participants to fully utilise any opportunities under the current regulatory regime.

In order to further expand its lottery business, the Company intends to cooperate with 500.com Limited in developing the Lottery New Retail. The Lottery New Retail allows the public to select lottery games and decide their combination of lottery numbers online. A QR code representing their selection will be generated virtually and sent to their mobile devices. With the QR code, the holder may find a nearby self-service lottery terminal to extract his selection of lottery game and number combination, and complete the ticket purchase with electronic payment. The lottery terminal will print out the lottery tickets automatically and instantly upon receipt of electronic payment. To the best knowledge of the Company, 500.com Limited has started pilot projects in respect of the Lottery New Retail in Tianjin, Hunan and Guangxi since March 2018. As at the Latest Practicable Date, the pilot projects in Hunan and Guangxi are still in testing stage and only the pilot project in Tianjin has recorded revenue.

Currently, CSLA has not approved any party to operate the Lottery New Retail except for 500.com Limited. As such, no other party can conduct the Lottery New Retail unless they cooperate with 500.com Limited. 500.com Limited will be responsible for negotiation with local authority in respect of the implementation of the Lottery New Retail and will act as the coordinator for all participants in the Lottery New Retail. Shenzhen GenLot has been directly supplying Terminals for the Lottery New Retail to E-Sun Sky. In light of the demand for Terminals by E-Sun Sky under the CSLA Framework Agreement, it is expected that E-Sun Sky will continue to purchase Terminals for the Lottery New Retail from Shenzhen GenLot or other terminal manufacturers in addition to the Terminals installed by Loto Shenzhen.

In respect of the Lease of Terminals (as defined below), the Group will be supplying terminals of an upgrade version procured from Shenzhen GenLot. Loto Shenzhen shall pay for the cost of the Terminals. The Terminals will remain as Loto Shenzhen’s assets after they are delivered to E-Sun Sky. Loto Shenzhen chooses to lease the Terminals to E-Sun Sky in order to obtain the Offline Channel Referral (as defined below) and Online Channel Referral (as defined below) businesses which are expected to generate more income and have higher return rate than the outright sale of Terminals. The Group will have flexibility in arranging the location of each Terminal based on the ticket sales conditions leveraging on its experience and market knowledge. In respect of the Online Channel Referral and the Offline Channel Referral, the Group will be responsible for referring online channels and offline channels to E-Sun Sky and procuring their cooperation.

Further details of the reasons for and benefits of entering into of the Cooperation Agreement are set out in the section headed “Reasons for and benefits of entering into of the Cooperation Agreement” in the letter from the Board in the Circular.

Historically, the Group has engaged mainly in the Distribution Business, which derives revenue from outright trading and sales of lottery terminals and parts. On the other hand, the Services to be provided by Loto Shenzhen under the Cooperation Agreement derive revenue from sharing certain percentages of the lottery sales revenue to be generated from the Terminals in the future. Furthermore, the Group shall retain ownership of the Terminals supplied by Loto Shenzhen during the relevant period.

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LETTER FROM SOMERLEY

Having considered (i) the background of the project as contemplated under the CSLA Framework Agreement; (ii) the Group’s experience and capability to supply terminals and provide related solutions and services; and (iii) the opportunity to expand business especially when the PRC lottery industry is a closed and heavily regulated market by the Chinese government, we concur with the views of the Directors that the entering into of the Cooperation Agreement is in the ordinary and usual course of business of the Group and is in the interests of the Company and the Shareholders as a whole.

4. Principal terms of the Cooperation Agreement

Date

3 August 2018

Parties

(i) Loto Shenzhen, as provider of the Services
(ii) E-Sun Sky, as recipient of the Services

Term

For the period commencing from the Effective Date to 5 March 2021.

Subject matter

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LETTER FROM SOMERLEY

The Services to be provided by and obligations of Loto Shenzhen include:

(i) Offline Channel Referral – to refer offline lottery ticket sales outlets to E-Sun Sky and procure their cooperation

As discussed in the section headed “Reasons for and benefits of entering into of the Cooperation Agreement” in above, 500.com Limited entered into the CSLA Framework Agreement with CSLA, the sport lottery issuance agency established by the General Administration of Sports and the government authority in charge of the issuance and organising sales of sports lottery products in China, to develop physical sales channel to sell sports lottery tickets. To fulfill its obligation in the CSLA Framework Agreement, 500.com Limited planned to install not less than 10,000 Terminals across China. 500.com Limited would separately seek to enter into cooperation agreements with respective provincial (including regional and municipal) bureau sports lottery administration centres (the “ Sports Lottery Administration Centre(s) ”) to assist in installing sports lottery terminals.

Following the entering into of the CSLA Framework Agreement earlier this year, E-Sun Sky has subsequently entered into cooperation agreements with six provincial Sports Lottery Administration Centres, pursuant to which the Sports Lottery Administration Centres shall support E-Sun Sky to assist in developing physical sales channels and E-Sun Sky shall develop and operate physical sales channels in accordance with local development plans for sport lottery business. Pursuant to the six cooperation agreements, E-Sun Sky has committed to provide not less than a certain number of Terminals in the sales outlets in the corresponding province. Loto Shenzhen shall procure the installation of the Terminals to fulfill 500.com Limited’s commitment.

In view of the potential business opportunity brought by the CSLA Framework Agreement, the Company considers that it could take leverage on its experience and extensive network established in the PRC lottery terminal market to develop physical sales channel to sell sports lottery tickets by introducing suitable outlets for installation of the Terminals. As advised by the Management, the Group is currently in negotiations with a national renowned sports economy platform in the PRC (the “ Business Partner ”), which has connections with approximately 10,000 sales outlets including gym rooms and internet cafés, to explore the possibility of installing lottery terminals in sales outlets. We have reviewed certain correspondences between the Management and the Business Partner and we note that the negotiations in relation to the proposed cooperation with the Business Partner are still in progress.

In the event that the proposed cooperation with the Business Partner and/or other parties materialises, Loto Shenzhen will be entitled to a service fee in respect of the lottery ticket sales revenue generated from the lottery terminals installed at such offline sales outlets of the Business Partner and/or other parties as referred by Loto Shenzhen.

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LETTER FROM SOMERLEY

(ii) Online Channel Referral – to procure the strategic cooperation between websites with substantial online traffic and E-Sun Sky in order to set up lottery ticket sales channels and to direct online traffic to the app of 500 彩票網 – 體彩玩家的主場 (500.com Limited – The Home Field of Sports Lottery Players) (the “ 500.com App** ”) so as to result in ticket sales

Similar to the Offline Channel Referral above, the Company is of the view that the potential business opportunity brought by the CSLA Framework Agreement could also be extended to online platforms. As advised by the Management, the Group is currently exploring the possibility to procure cooperation between websites with substantial online traffic in the PRC and E-Sun Sky in order to set up lottery ticket sales channels and to direct online traffic of the aforesaid websites to the 500.com App.

When a customer selects lottery games and numbers through the 500.com App, he will receive a QR code representing his selection in his mobile device. With the QR code, he can go to a nearby Terminal installed at one of the offline business partners located at, among others, lottery centres, convenience stores and supermarkets to complete the ticket purchase with electronic payment.

In the event that the proposed cooperation materialises and upon the customer selects lottery games and number through the 500.com App (via the aforesaid websites) and completes the ticket purchase with electronic payment, Loto Shenzhen will be entitled to a service fee in respect of the lottery ticket sales revenue.

(iii) Lease of Terminals to E-Sun Sky

As mentioned in the paragraph headed “Offline Channel Referral – to refer offline lottery ticket sales outlets to E-Sun Sky and procure their cooperation” in above, E-Sun Sky has entered into cooperation agreements with six provincial Sports Lottery Administration Centres. Pursuant to the six cooperation agreements, E-Sun Sky has committed to supply certain Terminals in the six provinces. It is the current intention of E-Sun Sky to meet the aforesaid demand for Terminals by leasing the Terminals from Loto Shenzhen and installing the Terminals at the sale outlets designated by Loto Shenzhen. While Loto Shenzhen will not receive any outright sale proceeds from the supply of the Terminals, it will receive a service fee in respect of the lottery ticket sales revenue generated from its Terminals, regardless of the methods of lottery ticket sales (i.e. online, offline or any other means).

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LETTER FROM SOMERLEY

Service fees

In consideration of the provision of the above Services, Loto Shenzhen shall be entitled to receive service fees from E-Sun Sky which include the following:

(i) In respect of the Offline Channel Referral, a service fee will be charged based on the aggregate ticket sales revenue generated each year from any Terminal(s) located at such offline sales outlets as referred by Loto Shenzhen, which shall be calculated in accordance with the following formula:
5% of the aggregate ticket sales revenue if the annual aggregate ticket sales revenue is below RMB500,000;
6% of the aggregate ticket sales revenue if the annual aggregate ticket sales revenue is above RMB500,000 but below RMB1,000,000; and
7% of the aggregate ticket sales revenue if the annual aggregate ticket sales revenue is above RMB1,000,000.

The annual aggregate ticket sales revenue shall be calculated annually starting from the date of the Cooperation Agreement. As the CSLA Framework Agreement shall end on 5 March 2021, the above-mentioned thresholds shall be adjusted on a pro-rata basis if the relevant period is less than one year.

(ii) In respect of the Online Channel Referral, a service fee representing 0.5% of the aggregate ticket sales revenue generated each month from users of such websites as referred by Loto Shenzhen will be charged.
(iii) In respect of the Lease of Terminals, a service fee representing 0.5% of the aggregate ticket sales revenue generated each month from all Terminals provided by Loto Shenzhen will be charged.

As stated in the letter from the Board in the Circular, E-Sun Sky undertakes that in the event that E-Sun Sky offers services fees at a more favourable rate to any third party in respect of the Lease of Terminals, the Offline Channel Referral and/or the Online Channel Referral, such more favourable rates shall be offered to Loto Shenzhen (the “ Undertaking ”).

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LETTER FROM SOMERLEY

Pricing policy

(i) the Offline Channel Referral

In determining the service fee for the Offline Channel Referral, the parties have made reference to the pricing terms agreed between E-Sun Sky and other independent service providers. We have obtained and reviewed two cooperation agreements entered into between E-Sun Sky and independent third parties which, as advised by the Management, represent all recently signed cooperation agreements entered by E-Sun Sky for similar referral services. We note that pursuant to the two cooperation agreements, the independent third parties shall receive a fee equivalent to certain percentages of aggregate sales revenue of the lottery terminals installed in the sales outlets referred by these parties and the scope of cooperation, in our view, to be similar to that in the Offline Channel Referral. Also, we note that the pricing terms of the two cooperation agreements are comparable to the terms of the Offline Channel Referral under the Cooperation Agreement.

(ii) the Online Channel Referral

When a customer purchases lottery tickets from terminals after making an online lottery transaction at the 500.com App via a website as referred by Loto Shenzhen, Loto Shenzhen is entitled to receive a fee equivalent to 0.5% of the sales revenue of the lottery transaction. In determining the service fee for the Online Channel Referral, the parties have made reference to the price charged for similar referral/traffic directing function under a previous transaction between E-Sun Sky and a website which is an independent third party. We have obtained and reviewed an agreement with services similar to the Online Channel Referral entered into between E-Sun Sky and an operator of a website in China, pursuant to which service fees were calculated based on a percentage of aggregate sales and we note that the terms agreed with the operator are comparable to the terms of the Online Channel Referral under the Cooperation Agreement.

As advised by the Management, only one agreement with such sharing arrangement was signed by them. The Management further advised that a charge rate based on the actual completed transactions (i.e. the sales of sport lottery tickets as directed by a website) is less commonly found in network referral/traffic directing functions. Instead, a charge rate based on the click rate (i.e. amount of network traffic referred by a website) is a more common basis of service fee for such referral. Given an Online Channel Referral will only be completed when a customer actually purchases and pays for a sport lottery ticket, we concur with the Management that a charge rate based on completed sport lottery ticket sales to be more reflective to the service rendered by Loto Shenzhen.

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LETTER FROM SOMERLEY

Given the limited number of signed agreement to establish a meaningful analysis of the prevailing market price of the Online Channel Referral, E-Sun Sky provided the Undertaking to Loto Shenzhen, pursuant to which the service fee to be received by Loto Shenzhen shall be consistent with those to be paid to independent third parties by 500.com Limited for similar services. As advised by the Management, in the event E-Sun Sky enters into a service agreement, in which the service fee to be paid is higher than that to be received by Loto Shenzhen, E-Sun Sky and Loto Shenzhen shall enter into supplemental agreement(s), pursuant to which the service fee shall align with that to be paid to the independent third parties. In this regard, we consider the Undertaking shall ensure Loto Shenzhen to receive the prevailing market service fee.

(iii) the Lease of Terminals

In determining the service fee for Lease of Terminals, Loto Shenzhen has made reference to (i) the estimated costs of each Terminal which is expected to be not more than RMB4,000; and (ii) the estimated average ticket sales generated by each Terminal, which is expected to be approximately RMB180,000 per year.

As set out in the 2017 Annual Report, the duration of the procurement cycle of CSLA for lottery vending machines is approximately 5 to 7 years. In other words, the estimated useful life of the Terminals is generally approximately 5 to 7 years. Given the Terminal is a new model compared with those previously sold by the Group, it is possible that the procurement cycle may be affected by other factors such as software upgrade in addition to the useful life of the Terminals. Having said the above, in view of the CSLA Framework Agreement has a term of three years, the Management will adopt a 3-year useful life for the Terminals for accounting purpose in the Group’s financial statements.

As advised by the Management, 500.com Limited commenced trial operation of an average of 80 Terminals installed in the sales outlets in Tianjin, the PRC in June 2018. Based on the actual aggregate revenue of approximately RMB1.7 million recorded for approximately 1.5 months from mid-June to end of July 2018, the projected average ticket sales to be generated by each Terminal will be approximately RMB170,000 per year. For the purpose of estimating the Annual Caps as discussed below, the Management has adopted projected average ticket sales to be generated by each Terminal of RMB180,000, which includes a buffer for potential upside in ticket sales. Although the projected average ticket sales to be generated by each Terminal was derived from the operating figures for approximately 1.5 months in a single city only, we consider the actual results of the trial operation is an objective proxy in projecting the average ticket sales to be generated by each Terminal.

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LETTER FROM SOMERLEY

Based on the above and assuming (i) the estimated costs of each Terminal are not more than RMB4,000; and (ii) the service fees of approximately 5.5% (i.e. being the aggregate rate of service fees for the Offline Channel Referral and the Lease of Terminals as further explained below) on the average ticket sales generated by each Terminal of RMB180,000, the expected revenue generated from the Lease of Terminals will be approximately RMB9,900 per Terminal per year, representing a payback period of less than half year and a rate of annual return of approximately 147.5%, which is significantly higher than the gross profit margin of the Group of approximately 4.8% for the year ended 31 December 2017. Based on the payback period as calculated above, it is possible for Loto Shenzhen to recover the costs of a Terminal before the expiry of the CSLA Framework Agreement.

As it takes time for the Group to receive the fees from the Lease of Terminals, there will be additional financing costs to the Group as compared to the existing Distribution Business, which is principally the outright sales of lottery terminals. Nevertheless, having considered the payback period for the Lease of Terminals is less than half year, the cash position of the Group with bank balances and cash of approximately HK$165.9 million and no borrowings as at 30 June 2018 as well as the relatively low prevailing deposit rate, we are of the view that the financing costs to the Lease of Terminals, being the foregone interest income, will not be significant.

As stated in the letter from the Board in the Circular, the transactions under the Cooperation Agreement is a package deal including services of the Lease of Terminals, the Offline Channel Referral and the Online Channel Referral, the last two of which are expected to generate higher revenue with minimal additional costs, the Management considered that the pricing terms for the Services as a whole are on normal commercial terms.

Based on our discussions with the Management, we note that the Offline Channel Referral, the Online Channel Referral and the Lease of Terminal under the Cooperation Agreement are inter-related. The Group shall derive revenue from the following situations: (a) the Offline Channel Referral and the Lease of Terminals; (b) the Offline Channel Referral, the Online Channel Referral and the Lease of Terminals; and (c) the Online Channel Referral only. The following illustrate the services may be provided by Loto Shenzhen under the three situations:

(a) if a customer completes his purchase of lottery tickets at the Terminals installed in the sales outlets referred by Loto Shenzhen, Loto Shenzhen shall receive the service fees for both the Offline Channel Referral and the Lease of Terminals (i.e. 5.5% or above);
(b) if a customer completes his purchase of lottery tickets at the Terminals installed in the sales outlets referred by Loto Shenzhen after conducting an online lottery transaction in the 500.com App through the website referred by Loto Shenzhen, Loto Shenzhen shall receive service fees for the Lease of Terminals, the Offline Channel Referral and the Online Channel Referral (i.e. 6% or above); or

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LETTER FROM SOMERLEY

(c) if a customer purchases lottery tickets from terminals in the outlets which are not related to Loto Shenzhen after conducting an online lottery transaction in the 500.com App through the website referred by Loto Shenzhen, Loto Shenzhen shall receive service fee for the Online Channel Referral only (i.e. 0.5%).

Based on our discussions with the Management, there will be no circumstances that Loto Shenzhen will receive the Lease of Terminals service fee (i.e. 0.5% of the lottery sales revenue) on a stand-alone basis, given placement of the Terminals will be at the discretion of Loto Shenzhen (and in no circumstances that Loto Shenzhen will be obliged to lease and install the Terminals at sales outlets not referred by Loto Shenzhen under the Offline Channel Referral arrangement) and it is the current intention of the Management to lease and install the Terminals only at the sales outlets referred by Loto Shenzhen under the Offline Channel Referral arrangement. Accordingly, if a customer completes his purchase of lottery tickets at Terminals installed by Loto Shenzhen, Loto Shenzhen will be entitled to service fees of at least 5.5% of the lottery sales revenue as mentioned in situations (a) and (b) above.

In situation (c), if a customer completes his purchase of lottery tickets at Terminals not installed by Loto Shenzhen, Loto Shenzhen will be entitled to a service fee of 0.5% of the lottery sales revenue (i.e. the service fee under the Online Channel Referral arrangement). In this circumstances, Loto Shenzhen will not incur any significant additional cost as the Terminals are not provided by Loto Shenzhen.

Payment term

The service fees shall be charged monthly and shall be paid by E-Sun Sky within 5 working days after receipt of Loto Shenzhen’s invoice for the previous calendar month. In respect of the Offline Channel Referral which set the fee on a scale basis (5% to 7% of the aggregate ticket sales revenue), the parties will monitor the aggregate ticket sales revenue each month. In the event that the accumulated revenue crosses over a threshold at certain point, starting from next month, the service fee will be charged on a higher level and E-Sun Sky shall also make up any shortfall for service fees for the previous month. Further details of the payment term are set out in the section headed “Payment term” in the letter from the Board in the Circular.

Internal control

The Group has adopted the following internal control procedures over the continuing connected transactions of the Company including the reviews by: (i) the Group’s chief financial officer; (ii) the audit committee of the Company; (iii) the Company’s external auditor; and (iv) the independent non-executive Directors. Details of the internal control procedures are set out in the section headed “Internal control” in the letter from the Board in the Circular.

We have reviewed the Cooperation Agreement and note that the pricing and other terms of the Services are determined based on the basis as mentioned above. Having considered (i) the service fees for the Lease of Terminals, the Offline Channel Referral and the Online Channel Referral were determined on the reasonable bases; and (ii) the Group’s established pricing policy as mentioned above, we consider the terms of the Cooperation Agreement to be on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned.

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LETTER FROM SOMERLEY

5. The Annual Caps

Set out below are the Annual Caps for the service fee to be received by Loto Shenzhen from E-Sun Sky in relation to the Services with a breakdown into the Office Channel Referral, the Online Channel Referral and the Lease of Terminals for the period from the Effective Date to 30 June 2019, for the year ended 1 July 2019 to 30 June 2020 and for the period from 1 July 2020 to 5 March 2021 (the “ Cap Period ”):

	From the	From	From
	Effective Date	1 July 2019	1 July 2020
	to 30 June 2019	to 30 June 2020	to 5 March 2021
	RMB (million)	RMB (million)	RMB (million)
Offline Channel Referral	13.5	16.2	14.6
Online Channel Referral	9.0	10.8	9.7
Lease of Terminals	3.6	4.3	3.9
Total	26.1	31.3	28.2
	(equivalent to	(equivalent to	(equivalent to
	approximately	approximately	approximately
	HK$30.0 million)	HK$36.0 million)	HK$32.4 million)

In order to assess the fairness and reasonableness of the Annual Caps, we have reviewed by way of following:

(a) Offline Channel Referral

As advised by the Management, the Annual Caps in relation to the Offline Channel Referral are determined by: (a) the number of Terminals to be installed at the offline outlets; (b) the estimated average sales revenue to be generated by each Terminal during the term of the Cooperation Agreement; and (c) a service fee representing 5% of the aggregate ticket sales revenue generated from the Terminals.

(i) Number of Terminals to be installed at the offline outlets

As discussed in the paragraph headed “Offline Channel Referral – to refer offline lottery ticket sales outlets to E-Sun Sky and procure their cooperation” above, the Group is currently in negotiations with the Business Partner, which has connections with approximately 10,000 sales outlets, including gym rooms and internet cafés, to explore the possibility of installing lottery terminals. According to the Management, the Group intends to commence trial operation at approximately 1,500 locations out of the aforesaid sales outlets once the Group confirms its cooperation with the Business Partner.

The Terminals to be installed in the 1,500 sales outlets will be located in the provinces in the PRC, including in the six provinces that agreed with E-Sun Sky and other provinces to be negotiated and agreed with E-Sun Sky for leasing of Terminals.

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LETTER FROM SOMERLEY

For the purpose of the determination of the Annual Caps, 1,500 Terminals are estimated to be installed throughout the entire Cap Period (i.e. from the Effective Date to 5 March 2021)

Given it is the intention of the Management to install a limited number of selected sales outlets for trial operation, we consider adopting 1,500 Terminals out of 10,000 potential sales outlets for the purpose of determining the Annual Caps to be acceptable but not excessive.

(ii) The estimated average sales revenue to be generated by each Terminal during the term of the Cooperation Agreement

As discussed in the paragraph headed “Pricing policy’ above, 500.com Limited commenced trial operation of Terminals installed in the sales outlets in Tianjin, the PRC in June. Based on the actual revenue recorded during the period from mid-June to end of July 2018, it is projected that the lottery ticket sale revenue to be generated by each of the Terminal to be approximately RMB180,000 per year.

(iii) 5% service fee of the aggregate ticket sales revenue generated from the Terminals

As set out in the Cooperation Agreement, a service fee will be charged at 5% of the aggregated ticket sales revenue generated from the Terminals located at the offline sales outlets as referred by Loto Shenzhen, if the annual aggregate ticket sales revenue is below RMB500,000. Details of the formula in relation to the calculation of the service fee are set out in the paragraph headed “Service fees” above.

(b) Online Channel Referral

As advised by the Management, the Annual Caps in relation to the Online Channel Referral are determined by: (a) the number of Terminals to be installed in accordance with the CSLA Framework Agreement; (b) the estimated average sales revenue to be generated by each Terminal during the term of the Cooperation Agreement; and (c) a service fee representing 0.5% of the aggregate ticket sales revenue generated from the Terminals.

(i) Number of Terminals to be installed in accordance with the CSLA Framework Agreement

For the purpose of the CSLA Framework Agreement, E-Sun Sky planned to install not less than 10,000 lottery terminals in the designated outlets in China. We have obtained and reviewed the CSLA Framework Agreement and the announcement made by 500.com Limited dated 3 May 2018 and note that E-Sun Sky planned to procure 10,000 Terminals for the purpose of fulfilling its commitment under the CSLA Framework Agreement.

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LETTER FROM SOMERLEY

As mentioned in the section headed “4. Principal terms of the Cooperation Agreement” above, although the Online Channel Referral is related to the sales of lottery tickets through the 500.com App via various websites, completion of payment and issue of the physical lottery tickets must be completed at the Terminals. The revenue generated from the Online Channel Referral therefore shall be correlated to the number of Terminals installed. Given the above, we considered using the number of Terminals planned to be installed by E-Sun Sky as one of the factors to determine the Annual Caps in relation to the Online Channel Referral to be appropriate.

Given that 10,000 Terminals were planned to be delivered by 500.com Limited under the CSLA Framework Agreement, we considered adopting 10,000 Terminals for the purpose of estimating the Annual Caps in relation to the Online Channel Referral to be reasonable.

(ii) The estimated average sales revenue to be generated by each Terminal during the term of the Cooperation Agreement

As discussed in the paragraph headed “Pricing policy” above, the ticket sales revenue to be generated by each Terminal is expected to be RMB180,000 per year.

(iii) 0.5% service fee of the aggregate ticket sales revenue generated from the Terminals

As mentioned in the section headed “Service fees” above, a service fee will be charged at 0.5% of the aggregated ticket sales revenue generated from users of such websites as referred by Loto Shenzhen as agreed in the Cooperation Agreement.

(c) Lease of Terminals

As advised by the Management, the Annual Caps in relation to the Lease of Terminals are determined by: (a) the number of Terminals to be supplied by Loto Shenzhen; (b) the estimated average sales revenue to be generated by each Terminal during the term of the Cooperation Agreement; and (c) a service fee representing 0.5% of the aggregate ticket sales revenue generated from the Terminals supplied by Loto Shenzhen.

(i) Number of Terminals to be supplied by Loto Shenzhen

Following the entering into of the CSLA Framework Agreement earlier this year, 500.com Limited planned to install not less than 10,000 Terminals across China in three years, E-Sun Sky has subsequently entered into cooperation agreements with six provincial Sports Lottery Administration Centres in the last few months to fulfil its commitment under the CSLA Framework Agreement. Pursuant to the six cooperation agreements entered into as at the Latest Practicable Date, E-Sun Sky has committed to supply not less than 5,800 Terminals in aggregate in four provinces in three years and has yet to agree the number of Terminals to be supplied in the remaining two provinces. We have obtained and reviewed three cooperation agreements and note that the number of Terminals committed to supply is as discussed above.

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LETTER FROM SOMERLEY

Furthermore, as advised by the Management, in addition to the cooperation agreements entered into with the six provincial Sports Lottery Administration Centres, E-Sun Sky is in discussion with a number of provincial and municipal Sport Lottery Centres in relation to the entering into cooperation agreement pursuant to the CSLA Framework Agreement. The Management estimated approximately 500 to 2,000 Terminals in three years will be installed in each province once the cooperation agreement is agreed.

On this basis, the Management anticipated the number of Terminals to be supplied by Loto Shenzhen to E-Sun Sky will be 4,000 for the period from the Effective Date to 30 June 2019, being the first period of the Cap Period. Given that the number of Terminals committed by E-Sun Sky and the potential number of Terminals to be installed at other provinces currently in negotiations with E-Sun Sky, we consider the estimate of delivering 4,000 Terminals per year to be appropriate but not excessive.

(ii) The estimated average sales revenue to be generated by each Terminal during the term of the Cooperation Agreement

As discussed in the paragraph headed “Pricing policy” above, the ticket sales revenue to be generated by each Terminal is expected to be RMB180,000 per year.

(iii) 0.5% service fee of the aggregate ticket sales revenue generated from the Terminals

As mentioned in the section headed “Service fees” above, a service fee representing 0.5% of the aggregated ticket sales revenue generated each month from all Terminals provided by Loto Shenzhen will be charged to E-Sun Sky as agreed in the Cooperation Agreement.

(d) A growth rate of 20% in the sports lottery market for 2020 and 2021

As advised by the Management, a growth rate of 20% per year is applied for each of the Annual Caps for the year ending 30 June 2020 and for the period from 1 July 2020 to 5 March 2021 to accommodate the potential growth of the sports lottery ticket sales. Although the transactions contemplated under the CSLA Framework Agreement is a trial arrangement and a new form of sales, the subject matter is still the same as the traditional sports lottery. Accordingly, the aggregate sales under the Cooperation Agreement is expected to have a correlation with the overall sports lottery market.

According to the Ministry of Finance of the PRC, the aggregate sports lottery sales for the year ended 31 December 2017 was approximately RMB209.7 billion, representing a year-on-year increase of approximately 11.4% and a compounded annual growth rate (“ CAGR ”) of approximately 13.7% as compared to the aggregate sales for the year ended 31 December 2012 of approximately RMB110.5 billion. The 20% annual growth rate estimated by the Management, although is higher than the 5-year CAGR of aggregate sales, includes a buffer for any unanticipated growth of the sales of sports lottery tickets. For example, the aggregate sports lottery sales for the six months ended 30 June 2018 further increased to approximately RMB134.6 billion, representing a year-on-year growth of approximately 36.1%, which was mainly attributable to the increase in sports lottery betting for the 2018 World Cup. Overall, the continuous increase in the aggregate sports lottery sales is expected to boost the service fees to be received by Loto Shenzhen.

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LETTER FROM SOMERLEY

Given the above, we are of the view that the annual growth rate of 20% for the purpose of the determination of the Annual Caps to be acceptable.

Having considered the bases on which the Annual Caps were determined as described above, we are of the view that the Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned.

OPINION AND RECOMMENDATION

Having taken into account the above principal factors and reasons, we consider that (i) the Cooperation Agreement and the transactions contemplated thereunder are in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole; and (ii) the terms of the Cooperation Agreement (including the Annual Caps) are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned.

Accordingly, we recommend the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM in relation to the Cooperation Agreement and the transactions contemplated thereunder (including the Annual Caps).

Yours faithfully, for and on behalf of SOMERLEY CAPITAL LIMITED Danny Cheng Director

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the GEM Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTERESTS OF DIRECTORS AND CHIEF EXECUTIVE

As at the Latest Practicable Date, the interests and short positions held by the Directors and the chief executive of the Company in the Shares, underlying Shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which are required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short position which they are taken or deemed to have taken under such provisions of the SFO), or which are required to be entered into the register kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules, were as follows:

(i) Long Positions in the Shares and Underlying Shares of the Company

Share options granted by the Company

	Number of	Approximate
	underlying shares	percentage of
	held pursuant to	total issued Shares
Name of Director	share options	of the Company
	(Note 2)	(Note 1)
Mr. Pan Zhengming	6,000,000	0.19%
Mr. Wang Bingzhong	31,000,000	0.99%
Ms. Huang Lilan	10,000,000	0.32%
Mr. Yuan Qiang	31,000,000	0.99%
Dr. Lu Haitian	2,000,000	0.06%
Mr. Yan Hao	2,000,000	0.06%
Mr. Lin Sen	2,000,000	0.06%

Notes:

As at the Latest Practicable Date, the total number of issued Shares of the Company was 3,145,935,836.
This represents interests held by the relevant Director as beneficial owner.

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GENERAL INFORMATION

APPENDIX

(ii) Long Positions in the Shares and Underlying Shares of Associated Corporations of the Company
500.com Limited (a listed holding company of the Company)
(a) American depository shares (“ADS”) of 500.com Limited

		Approximate
		percentage of
		total issued and
	Number of	outstanding shares
Name of Director	ADS held	of 500.com Limited
	(Note 2)	(Note 1)
Mr. Pan Zhengming	300,000	0.71%
Ms. Huang Lilan	5,922	0.01%
Mr. Yuan Qiang	28,073	0.07%

(b) American depository shares options (“ADS Options”) and awarded shares granted by 500.com Limited

				Approximate
				percentage of
				total issued
	Number of			and
	underlying			outstanding
	shares held	Number of		shares of
	pursuant to	awarded		500.com
Name of Director	ADS Options	shares held	Total	Limited
	(Notes 2 & 3)	(Notes 2 & 4)		(Note 1)
Mr. Pan Zhengming	268,333	35,000	303,333	0.71%
Ms. Huang Lilan	15,500	2,334	17,834	0.04%
Mr. Yuan Qiang	26,667	6,666	33,333	0.08%

Notes:

As at the Latest Practicable Date, the total number of issued and outstanding shares of 500.com Limited was 42,468,983.
This represents interests held by the relevant Director as beneficial owner.
Details of the 268,333 ADS Options held by Mr. Pan Zhengming are as follows:
99,333 ADS Options granted on 19 June 2014 at exercise price of US$10.00 may be exercised from 19 June 2016 to 19 June 2019
149,000 ADS Options granted on 19 June 2014 at exercise price of US$10.00 may be exercised from 19 June 2017 to 19 June 2019
10,000 ADS Options granted on 6 January 2016 at exercise price of US$18.51 may be exercised from 21 November 2016 to 22 November 2019
10,000 ADS Options granted on 16 December 2016 at exercise price of US$13.50 may be exercised from 21 November 2017 to 22 November 2019

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GENERAL INFORMATION

APPENDIX

Details of the 15,500 ADS Options held by Ms. Huang Lilan are as follows:

167 ADS Options granted on 19 June 2014 at exercise price of US$10.00 may be exercised from 19 June 2015 to 19 June 2019
2,000 ADS Options granted on 19 June 2014 at exercise price of US$10.00 may be exercised from 19 June 2016 to 19 June 2019
8,333 ADS Options granted on 19 June 2014 at exercise price of US$10.00 may be exercised from 19 June 2017 to 19 June 2019
5,000 ADS Options granted on 19 June 2014 at exercise price of US$10.00 may be exercised from 19 June 2018 to 19 June 2020

Details of the 26,667 ADS Options held by Mr. Yuan Qiang are as follows:

1,667 ADS Options granted on 19 June 2014 at exercise price of US$10.00 may be exercised from 19 June 2016 to 19 June 2019
25,000 ADS Options granted on 19 June 2014 at exercise price of US$10.00 may be exercised from 19 June 2017 to 19 June 2019
Details of the 35,000 awarded shares held by Mr. Pan Zhengming are as follows:
5,000 awarded shares granted on 22 November 2017 will vest on 21 November 2018
30,000 awarded shares granted on 15 August 2017 will vest on 1 June 2019

Details of the 2,334 awarded shares held by Ms. Huang Lilan are as follows:

2,334 awarded shares granted on 15 August 2017 will vest on 1 June 2019

Details of the 6,666 awarded shares held by Mr. Yuan Qiang are as follows:

– 6,666 awarded shares granted on 15 August 2017 will vest on 1 June 2019

Save as disclosed above, as at Latest Practicable Date, none of the directors, chief executive of the Company or their respective associates had any interests or short positions in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which will be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short position which they are taken or deemed to have taken under such provisions of the SFO), or which will be required to be entered into the register kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the minimum standards of dealing by directors of the Company as referred to in Rules 5.46 to 5.67 of the GEM Listing Rules.

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GENERAL INFORMATION

APPENDIX

3. DIRECTORS’ INTERESTS IN ASSETS OR CONTRACTS OR ARRANGEMENT SIGNIFICANT TO THE GROUP

As at the Latest Practicable Date, none of the Directors has any direct or indirect interests in any assets which have been acquired or disposed of by, or leased to, or are proposed to be acquired or disposed of by, or leased to, the Company or any of its subsidiaries since 31 December 2017, the date to which the latest published audited consolidated financial statements of the Company were made up.

As at the Latest Practicable Date, none of the Directors is materially interested in any contract or arrangement which is significant in relation to the business of the Group.

4. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors has any existing or proposed service contracts, excluding contract expiring or determinable by the Group within one year without payment of compensation (other than statutory compensation), between any of the Directors or supervisors of the Company and any member of the Group.

5. COMPETITION AND CONFLICT OF INTERESTS

As at the Latest Practicable Date, none of the Directors, the management Shareholders or substantial Shareholders or any of their respective associates has engaged in any business that competes or may compete with the business of the Group or has any other conflict of interests with the Group.

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GENERAL INFORMATION

APPENDIX

6. INTERESTS DISCLOSEABLE UNDER SFO AND SUBSTANTIAL SHAREHOLDERS’ INTEREST

So far as is known to the Directors, as at Latest Practicable Date, persons (other than directors or chief executive of the Company) who had interests or short positions in the Shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were required pursuant to Section 336 of the SFO, to be entered into the register referred to therein, or, who is directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group were as follows:

Long Positions in the Shares

			Approximate
			percentage of
		Number of	total issued
		Shares held/	Shares of
Name	Capacity/Nature	interested in	the Company
			(Note 1)
500.com Limited (Note 2)	Beneficial owner	1,278,714,329	40.65%
Mr. Law Man San Vincent	Interest in controlled	1,278,714,329	40.65%
(“Mr. Law”) (Note 2)	corporation
Ms. Yuan Ping (“Mrs. Law”)	Interest of spouse	1,278,714,329	40.65%
(Note 3)

Notes:

As at the Latest Practicable Date, the total number of issued Shares of the Company was 3,145,935,836.
As at the Latest Practicable Date, (i) Delite Limited (“ Delite ”), a company incorporated in the British Virgin Islands (“ BVI ”), is interested in a total of 24.4% voting power in 500.com Limited; (ii) Smart Mega Holdings Limited (“ Smart Mega ”), a company incorporated in the BVI, is interested in a total of 19.04% voting power in the general meetings of 500.com Limited. Delite is wholly owned by Jackpot International Limited, which is held by companies set up by Credit Suisse Trust Limited (“ Credit Suisse ”) as trustee of The Jackpot Trust, an irrevocable discretionary trust established by Mr. Law who is the settlor, protector and one of the beneficiary subjects. Smart Mega is wholly owned by Vibrant Jade Limited, which is held by companies set up by Credit Suisse of The Vibrant Jade Trust, an irrevocable discretionary trust established by Mrs. Law as settlor and protector with Mr. Law being one of the beneficiary subjects. The total shares of 500.com Limited held by The Jackpot Trust and the total shares of 500.com Limited held by The Vibrant Jade Trust (together, the “ 500.com Shares ”) are held by Credit Suisse as trustee of both trusts. Mr. Law, by virtue of the relationships described above, is deemed to beneficially own the 500.com Shares which would entitle him to exercise approximately 43.44% voting rights in the general meetings of 500.com Limited. Accordingly, Mr. Law is deemed to be interested in all the shares of the Company held by 500.com Limited pursuant to the SFO.
Mrs. Law is deemed to be interested in all shares of the Company held by Mr. Law pursuant to the SFO.

Save as disclosed above, as at Latest Practicable Date, the Directors were not aware of any other person (other than directors or chief executive of the Company) who had an interest or short position in the Shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were required, pursuant to Section 336 of the SFO, to be entered into the register referred to therein.

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GENERAL INFORMATION

APPENDIX

7. MATERIAL ADVERSE CHANGE

As disclosed in the interim results announcement and the interim report of the Company for the six months ended 30 June 2018, the revenue of the Company decreased from HK$10.1 million for the six months ended 30 June 2017 to HK$3.3 million for the six months ended 30 June 2018, and the net loss of the Company increased from HK$6.3 million for the six months ended 30 June 2017 to HK$13.2 million for the six months ended 30 June 2018.

Save as disclosed above, as at the Latest Practicable Date, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2017, the date to which the latest published audited consolidated financial statements of the Company were made up.

8. QUALIFICATIONS AND CONSENT OF EXPERT

The following is the qualification of the expert which has given its opinion or advice which is contained in this circular:

Name Qualification Somerley a corporation licensed to carry on Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO

As at the Latest Practicable Date, Somerley was not interested in any Shares or shares in any member of the Group nor did it have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, Somerley did not have any direct or indirect interest in any asset which had been, since 31 December 2017, being the date to which the latest published audited financial statements of the Company were made up, acquired or disposed of by or leased, or are proposed to be acquired or disposed of by or leased to any member of the Group.

Somerley has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and reference to its name in the form and context in which they respectively appear.

The letter and recommendation given by Somerley is given as of the date of this circular for incorporation herein.

– 41 –

GENERAL INFORMATION

APPENDIX

9. MATERIAL CONTRACTS

In the two years immediately preceding the date of this circular and up to the Latest Practicable Date, the following contracts, not being contracts entered into in the ordinary course of business, were entered into by the Company or any of its subsidiaries which are or may be material:

(i) on 18 October 2017, the Company granted a loan to an independent third party Yourich Inc Limited in the principal amount of HK$99,000,000 at the interest rate of 6% per annum for a term of two years, which was guaranteed by Ms. Liu He and was secured by 95% of the entire equity interest of Artix Investment Co., Ltd; and
(ii) on 24 July 2017, the Company subscribed at par for HK$50 million in principal amount of 24-month puttable step-up coupon notes issued by BOCI Financial Products Limited.

10. LITIGATION

As at the Latest Practicable Date, no member of the Group was engaged in any litigation or claim of material importance and, so far as the Directors are aware, no litigation or claim of material importance was pending or threatened against any member of the Group.

11. GENERAL

(a) As at the Latest Practicable Date, none of the Directors had any director or indirect interest in any asset which had been acquired, or disposed of by, or leased to any member of the Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Group since 31 December 2017, the date to which the latest published audited financial statements of the Group were made up.
(b) As at the Latest Practicable Date, none of the Directors was materially interested, directly or indirectly, in any contract or arrangement entered into by an member of the Group since 31 December 2017, being the date to which the latest published audited financial statements of the Company were made up, and which was significant in relation to the business of the Group.
(c) As at the Latest Practicable Date, Mr. Pan Zhengming and Mr. Yuan Qiang were director or senior manager of 500.com Limited. 500.com Limited had interest in the Shares which fell to be disclosed under Divisions 2 and 3 of Part XV of the SFO, details of which are set out in paragraph 6 above of this Appendix. Save as disclosed in this paragraph, none of the Directors or proposed Director was a director or employee of a company which had an interest in the Shares and underlying Shares of the Company which would fall to be disclosed under the provisions of Divisions 2 and 3 of Part XV of the SFO.

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GENERAL INFORMATION

APPENDIX

(d) The registered office of the Company is at P.O. Box 31119, Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands and the principal place of business of the Company in Hong Kong is at 50th Floor, Bank of China Tower, 1 Garden Road, Central, Hong Kong.
(e) The branch share registrar and transfer office of the Company in Hong Kong is Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong.
(f) The company secretary of the Company is Ms. Chow Chiu Man, Mandy, an associate member of both The Hong Kong Institute of Chartered Secretaries and The Institute of Chartered Secretaries and Administrators.
(g) In the event of any inconsistency, the English language text of this circular shall prevail over the Chinese language text.

12. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the principal place of business of the Company in Hong Kong at 50th Floor, Bank of China Tower, 1 Garden Road, Central, Hong Kong during normal business hours up to and including the date of the EGM:

(a) the articles of association of the Company;
(b) the Cooperation Agreement;
(c) the letter from Board, the text of which is set out in this circular;
(d) the letter from the Independent Board Committee, the text of which is set out in this circular;
(e) the letter from Somerley, the text of which is set out in this circular;
(f) the consent letter of Somerley as referred to in the section headed “Qualifications and Consent of Expert” in this Appendix;
(g) the annual reports of the Company for the two financial years ended 31 December 2017; and
(h) this circular.

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NOTICE OF EGM

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Loto Interactive Limited

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “ EGM ”) of Loto Interactive Limited (the “ Company ”) will be held at 50th Floor, Bank of China Tower, 1 Garden Road, Central, Hong Kong on Monday, 8 October 2018 at 11:00 a.m. for the purposes of considering and, if thought fit, passing, with or without modification, the following resolution as ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT:

(a) the Cooperation Agreement (as defined in the circular to the shareholders of the Company dated 14 September 2018) be and is hereby approved;
(b) the proposed annual caps in relation to the transactions contemplated under the Cooperation Agreement for the period from the Effective Date (as defined in the circular to the shareholders of the Company dated 14 September 2018) to 5 March 2021 be and are hereby approved;
(c) any one director of the Company be and is hereby authorised to do all such acts or things, as he/she may in his/her absolute discretion consider necessary or desirable, to give effect to the Cooperation Agreement and the transactions contemplated thereunder.”

By order of the Board Loto Interactive Limited

Wang Bingzhong

Chief Executive Officer and Executive Director

Hong Kong, 14 September 2018

Registered office: P.O. Box 31119 Grand Pavilion, Hibiscus Way 802 West Bay Road Grand Cayman, KY1-1205 Cayman Islands

Head office and principle place of business in Hong Kong: 50th Floor Bank of China Tower 1 Garden Road, Central Hong Kong

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NOTICE OF EGM

Notes:

(1) A shareholder entitled to attend and vote at the EGM is entitled to appoint one or more proxies to attend and vote instead of him. A proxy need not be a shareholder of the Company.
(2) Where there are joint holders of any Share, any one of such joint holders may vote at the EGM, either personally or by proxy, in respect of such Shares as if he was solely entitled thereto, but if more than one of such joint holders be present at the EGM personally or by proxy, that one of the said persons so present whose name stands first on the register of members of the Company in respect of such Share shall alone be entitled to vote in respect thereof.
(3) The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of such power of attorney or authority, must be lodged with the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong for registration not less than 48 hours before the time appointed for holding the EGM (or any adjournment thereof).
(4) For determining the entitlement to attend and vote at the EGM, the register of members of the Company will be closed from 3 October 2018 to 8 October 2018 (both days inclusive), during which period no share transfers will be registered. In order to be eligible to attend and vote at the EGM, all transfer forms accompanied by relevant share certificates must be lodged with the Company’ branch share registrar in Hong Kong, Computershare Hong Kong Investors Services Limited at Shop 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong for registration no later than 4:30 p.m. on 2 October 2018.
(5) Completion and return of the form of proxy will not preclude a shareholder from attending the EGM and voting in person at the EGM or any adjournment thereof is he so desire. If a shareholder attends the EGM after having deposited the form of proxy, his form of proxy will be deemed to have been revoked.
(6) According to Rule 17.47 (4) of the Rules Governing the Listing of Securities on GEM, any voting of the shareholders of the Company at the general meeting will be taken by way of a poll and an announcement of the voting results will be made after the general meeting. Accordingly, the resolutions will be taken by way of a poll at the EGM.
(7) The translation into Chinese language of this notice is for reference only. In case of any inconsistency, the English version shall prevail.

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AI assistant

Crypto Flow Technology Limited — Proxy Solicitation & Information Statement 2018

51323_rns_2018-09-13_36dd741c-6557-44ca-a6b1-1e41e1fc755e.pdf

Loto Interactive Limited

CONTINUING CONNECTED TRANSACTIONS

AND NOTICE OF THE EXTRAORDINARY GENERAL MEETING

SOMERLEY CAPITAL LIMITED

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

Loto Interactive Limited

Executive Director

CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF THE EXTRAORDINARY GENERAL MEETING

INTRODUCTION

THE COOPERATION AGREEMENT

Date:

Parties:

Term:

Condition Precedent:

Subject Matter:

Services Fees:

PRICING POLICY

PAYMENT TERM

PROPOSED ANNUAL CAPS

Basis of Proposed Annual Caps:

INTERNAL CONTROL

INFORMATION ON THE PARTIES

REASONS FOR AND BENEFITS OF ENTERING INTO OF THE COOPERATION AGREEMENT

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

RELATIONSHIP WITH 500.COM LIMITED

GEM LISTING RULES IMPLICATIONS

EXTRAORDINARY GENERAL MEETING

RECOMMENDATION

Loto Interactive Limited

CONTINUING CONNECTED TRANSACTIONS

LETTER FROM SOMERLEY

SOMERLEY CAPITAL LIMITED

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM SOMERLEY

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Information on the Group

(a) The Company

(i) Business

(ii) Financial performance of the Group

LETTER FROM SOMERLEY

LETTER FROM SOMERLEY

(iii) Financial position of the Group

(b) Loto Shenzhen

2. Information on the counterparties

(a) 500.com Limited

(b) E-Sun Sky

3. Reasons for and benefits of entering into of the Cooperation Agreement

LETTER FROM SOMERLEY

LETTER FROM SOMERLEY

4. Principal terms of the Cooperation Agreement

Date

Parties

Term

Subject matter

LETTER FROM SOMERLEY

(iii) Lease of Terminals to E-Sun Sky

Service fees

Pricing policy

(i) the Offline Channel Referral

(ii) the Online Channel Referral

LETTER FROM SOMERLEY

(iii) the Lease of Terminals

LETTER FROM SOMERLEY

LETTER FROM SOMERLEY

Payment term

Internal control

5. The Annual Caps

(a) Offline Channel Referral

LETTER FROM SOMERLEY

(b) Online Channel Referral

LETTER FROM SOMERLEY

Crypto Flow Technology Limited Proxy Solicitation & Information Statement 2018