Joy Spreader Group Inc. — Capital/Financing Update 2016

Jul 5, 2016

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, 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 announcement.

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AGTech Holdings Limited 亞博科技控股有限公司[*]

(incorporated in Bermuda with limited liability) (Stock Code: 8279)

ANNOUNCEMENT

PROPOSED SUBSCRIPTION OF SUBSCRIPTION SHARES AND CONVERTIBLE BONDS APPLICATION FOR WHITEWASH WAIVER SPECIAL DEAL AND CONNECTED TRANSACTION IN RELATION TO SETTLEMENT OF PRC TAX LIABILITY

References are made to the announcement of AGTech Holdings Limited (the “ Company ”) dated 4 March 2016 and the circular of the Company dated 25 May 2016 (the “ Circular ”) in relation to, among other things, the Subscription and the Whitewash Waiver. Reference is also made to the announcements of the Company dated 8 June 2016 and 10 June 2016 in relation to the adjournment of the SGM. Unless otherwise defined, capitalised terms used in this announcement shall have the same meaning as those defined in the Circular.

BACKGROUND

It has come to the attention of the Company and the Subscriber that the Group had, in the past, failed to withhold PRC individual income tax (“ IIT ”) that is payable under relevant PRC tax laws in respect of the exercise of share options granted by the Company to its PRC subsidiaries’ employees who are subject to PRC IIT (the “ PRC Employees ”) under the Share Option Schemes.

As advised by the Company’s PRC tax adviser, the income derived from the exercise of share options by the PRC Employees is considered as part of the employee benefits that are subject to the IIT as employment income, and the tax liability arises when the PRC Employees exercise their share options. The IIT payable is calculated based on the income derived from

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the share options, the formula of which is: (market price of a share on the date of exercise – exercise price of the share option) x the number of share options exercised (the “ Share Option Income ”). The PRC subsidiary of the Company which is the actual employer of the PRC Employees is required under the relevant PRC tax laws to withhold the IIT when the PRC Employees exercise their share options granted by the Company under the Share Option Schemes.

The Group has been granting share options to its employees (including the PRC Employees) under the Share Option Schemes since 2006. However, the Company was not aware that Share Option Income would be considered as part of the employee benefits that are subject to the IIT as employment income and thus it had not withheld the IIT payable by the PRC Employees upon their exercise of share options. Since becoming aware of this non-compliance issue, the Company has adopted a policy with effect from 18 December 2015 to ensure that the IIT is properly collected by the Group from the PRC Employees as required by the relevant PRC tax laws in relation to the share options granted by the Company to the PRC Employees and exercised by such employees. Under the new policy, the PRC Employees have to pay any IIT payable upon the exercise of share options. However, given the Group’s prior practice, such policy does not apply retrospectively to any share options that had been exercised before the implementation of such policy.

Under PRC tax laws, PRC tax authorities may pursue unpaid IIT within a period of five years from the date on which the relevant tax liability arisen, and if, in the case of being viewed as “tax evasion”, the time for tax claim would be unlimited.

During the period from 1 January 2011 (being approximately five years from the date of this announcement) to 17 December 2015 (being the day immediately before the new policy mentioned above took effect) (the “ Relevant Period ”), the Company had issued a total of 118,678,603 Shares to a total of 37 PRC employees (the “ Relevant Employees ”) upon exercise by such employees of the share options granted under the Share Option Schemes. As at the date of this announcement, 10 out of these 37 Relevant Employees have left the employment of the Group (the “ Previous Employees ”), and the remaining 27 Relevant Employees continue to be employed by the Group (the “ Continuing Employees ”). Two of the Relevant Employees (namely, Mr. Bai Jinmin and Mr. Liang Yu) are currently executive directors of the Company (the “ Concerned Directors ”) and two of the Relevant Employees (namely, Ms. Wang Liying and Mr. Yang Xinwei) are currently or was, during the past 12 months preceding the date of this announcement, directors of a subsidiary of the Company (other than an insignificant subsidiary within the meaning of the GEM Listing Rules) (the “ Concerned Subsidiary Directors ”, together with the Concerned Directors, the “ Connected Employees ”). Save as disclosed, none of the Relevant Employees is currently or was, during the last 12 months preceding the date of this announcement, a director of the Company or its subsidiaries (other than an insignificant subsidiary within the meaning of the GEM Listing Rules).

The table below sets out the total number of Shares granted by the Company to the Previous Employees and the Continuing Employees pursuant to their exercise of share options during the Relevant Period, and the amount of IIT which the Group has failed to withhold in respect

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of these share options exercised during the Relevant Period (the “ Under-withheld IIT ”) as estimated by the Company’s tax adviser:

Previous Employees Continuing Employees Total:	Number of Shares issued as a result of exercise of share options 28,520,103 90,158,500 118,678,603	Under-withheld IIT Approximately RMB4.4 million (equivalent to approximately HK$5.1 million) Approximately RMB23.3 million (equivalent to approximately HK$27.2 million) Approximately RMB27.7 million (equivalent to approximately HK$32.4 million)

The Under-withheld IIT relating to share options exercised by the Concerned Directors and the Concerned Subsidiary Directors is estimated to amount to approximately RMB19.0 million (equivalent to approximately HK$22.2 million) and approximately RMB2.3 million (equivalent to approximately HK$2.7 million), respectively.

Having made enquiries with the Relevant Employees, the Company understands that, as at 30 June 2016:

• (a) 22 of the Continuing Employees (other than the Concerned Directors) collectively hold 31,606,500 Shares (representing approximately 0.64% of the issued share capital of the Company);

• (b) two Concerned Directors collectively hold 100,244,850 Shares (representing approximately 2.03% of the issued share capital of the Company);

• (c) six of the Previous Employees collectively hold 29,235,750 Shares (representing approximately 0.593% of the issued share capital of the Company); and

• (d) the remaining seven Relevant Employees do not hold any Shares.

THE PROPOSED SETTLEMENT

The Group is considering to agree upon a plan with the relevant PRC tax authorities for the settlement of the Under-withheld IIT, where such Under-withheld IIT will be borne and settled by the Group on a grossed-up basis (the “ Grossed-up Tax ”) (which means the Share Option Income received by the PRC Employees will be regarded as net income and the settlement by the employer of the IIT constitutes an employment benefit which, in itself, is a taxable employment benefit subject to IIT), together with any interest and penalty, if any (the “ Proposed Settlement ”).

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As a result of the Proposed Settlement, the Relevant Employees will be released from their respective personal liability under PRC tax laws for the Under-withheld IIT (the estimated total amount of which is approximately RMB27.7 million (equivalent to approximately HK$32.4 million)).

As advised by the Company’s PRC tax adviser, it is estimated that the Grossed-up Tax will be approximately RMB49.1 million (equivalent to approximately HK$57.3 million). Under applicable PRC tax laws, the Group may be subject to administrative penalties as a result of its failure to withhold IIT that should be withheld, as well as interests on the IIT underpayments. The Company will use its best endeavours to reduce the administrative penalty and interest payable to the relevant PRC tax authorities.

However, since the Proposed Settlement is subject to the further negotiation and agreement with the relevant PRC tax authorities, the above figures are only the estimations of the Company’s PRC tax adviser based on the applicable PRC tax laws, and are subject to change.

REASONS AND BENEFITS OF THE PROPOSED SETTLEMENT

Reduction of the Company’s tax and related financial liability exposure

As advised by the Company’s legal adviser as to PRC laws, the withholding entity (i.e. the relevant employer) may be subject to an administrative penalty at a rate ranging from 50% to 300% of the under-withheld IIT as a result of its failure to withhold IIT that should have been withheld. In addition to the pecuniary penalty, the withholding entity is required by law to comply with its tax withholding and settlement obligations on a going forward basis. Although the employee as taxpayer is responsible for the IIT underpayment, as advised by the Company’s tax adviser, in practice, the relevant PRC tax authorities normally pursue the defaulting employer for IIT underpayments and interest (calculated at a rate of 0.05% per day), instead of the defaulting employees, due to (i) the practical difficulty for the tax authorities to pursue individuals and (ii) the reason that administrative penalties that the Group may be subject to as a result of its failure to withhold and settle the Under-withheld IIT cannot be considered to have been incurred by the employees.

Since the amount of the administrative penalty arising from a failure to withhold IIT can be greater than the IIT underpayment and tax authorities have the discretion to determine the rate of the administrative penalty, it is a common practice for the withholding entities to actively cooperate with the relevant PRC tax authorities to settle, and where it is difficult for the withholding entities to seek reimbursement from the employees for the IIT underpayment, bear all the IIT underpayment in a timely manner in order to be assessed a lower rate of penalty. In case of voluntary disclosure, as advised by the Company’s tax adviser, the relevant PRC tax authorities may, subject to their discretion, reduce or waive the administrative penalty.

As the Company is considering to negotiate a settlement with the relevant PRC tax authorities and to reduce the penalty and interest payable, the Company considers that any further delay to rectify this non-compliance may affect the extent of reduction of interest and penalty payable. In addition, if the Group does not settle the liability, interest will continue to accrue. Therefore, it is the interests of the Group to bear and settle the Under-withheld IIT on a grossed-up basis (i.e. the Grossed-up Tax) the soonest possible in order to limit its potential tax and related financial exposure. After full payment of the Grossed-up Tax, the relevant PRC tax authorities would possibly reduce the administrative penalty payable by the withholding entity so that the administrative penalty may no longer be a large amount.

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Therefore, the Proposed Settlement is an arrangement with the relevant PRC tax authorities to reduce the tax and related financial liability exposure of the Group.

Practical difficulty to seek recourse from the Relevant Employees

Under the PRC IIT regime, an employer (i.e. a withholding entity) has the primary responsibility to withhold any IIT payable in respect of employees’ salary and benefits. As advised by the Company’s PRC legal adviser, in the absence of an agreement with the employees, an employer (as the withholding agent) is not entitled to seek reimbursement or compensation from the employees upon its payment of any unpaid tax amount. PRC tax authorities are the only relevant authorities to demand settlement of unpaid tax under PRC tax laws, and such demand is seen as an administrative action under applicable laws. The employers are not entitled under relevant PRC tax laws, nor do they have any contractual right, to demand repayment of unpaid tax amount from employees.

Although the Share Option Schemes provide that the Company shall not be responsible for any tax to which a grantee may become subject as a result of his participation in the Share Option Schemes, the Group had not implemented any procedures to ensure compliance by the Group’s PRC subsidiaries with its own withholding obligations under PRC tax laws, and none of the Group’s subsidiaries provided guidance to its employees to inform them that their Share Option Income derived under the Share Option Schemes constitute employment benefits that are subject to PRC IIT. According to PRC salary payment regulations and/or conventions, employers are required to expressly state the amount of IIT withheld and the actual salary released to employees. Therefore, employees have a reasonable belief that all their salaries received are paid on an “after tax” basis, and any subsequent request for tax after their receipt of the salaries is unlikely to be accepted by such employees.

Adverse impact on staff morale and stability of the Group

The Group also considers that the seeking of reimbursement from the employees would have an adverse impact on staff morale, which will affect the stability of the Group and thus not in the interests of the Company and its shareholders as a whole.

PROPOSED SETTLEMENT IS A MATTER OF THE COMPANY ONLY

The Company wishes to emphasise that the reason for implementing the Proposed Settlement is to rectify its historical non-compliance, which the Company would have pursued and implemented regardless of the Subscription, and the Subscriber is not providing any benefit to the Relevant Employees (or the Group) in connection with the Proposed Settlement. The Subscriber is only involved in the Proposed Settlement in so far as the Subscription Agreement contains customary pre-closing covenants governing the Group’s conduct between signing and closing of the Subscription which, among other things, require the Company to agree upon a plan with the relevant PRC tax authorities to the reasonable satisfaction of the Subscriber regarding the settlement of the IIT underpayment and its associated interests and penalties.

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LISTING RULES IMPLICATIONS

The Connected Employees are connected persons of the Company by virtue of being a director of the Company and/or its subsidiaries (other than an insignificant subsidiary within the meaning of the GEM Listing Rules) currently or during the past 12 months preceding the date of this announcement. Accordingly, as the release of the personal liability of the Connected Employees under the applicable PRC tax laws in respect of their relevant Underwithheld IIT (the “ Release of Connected Employees’ Tax Liability ”) constitutes a benefit to the Connected Employees, the Release of Connected Employees’ Tax Liability constitutes a non-exempt connected transaction for the Company pursuant to Rule 20.21 of the GEM Listing Rules. Accordingly, the Release of Connected Employees’ Tax Liability is subject to reporting, announcement and independent shareholders’ approval requirements under Chapter 20 of the GEM Listing Rules. The Company will therefore seek the approval from Independent Shareholders for the Release of Connected Employees’ Tax Liability at the adjourned SGM.

An independent board committee comprising all the independent non-executive Directors (the “ CT Independent Board Committee ”) has been established by the Company to advise the Independent Shareholders (as defined below) regarding the Release of Connected Employees’ Tax Liability. Somerley has been appointed by the Company to advise the CT Independent Board Committee and the Independent Shareholders as to whether the Release of Connected Employees’ Tax Liability is fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole.

TAKEOVERS CODE IMPLICATIONS

So far as the Company is aware after making all reasonable enquiries with the Continuing Employees, 24 of the Continuing Employees (inclusive of the Concerned Directors and the Concerned Subsidiary Directors) and six of the Previous Employees are Shareholders as at the date of this announcement. As the Proposed Settlement will result in the release of the personal liability of the Relevant Employees who are currently Shareholders (the “ EmployeeShareholders ”) under the applicable PRC tax laws in respect of the Under-withheld IIT (the “ Release of Tax Liability ”), thereby conferring a benefit on the Employee-Shareholders, the Release of Tax Liability constitutes a special deal of the Company under Rule 25 of the Takeovers Code (the “ Special Deal ”). An application has been made by the Company for the consent of the Executive to the Special Deal. The Special Deal requires (i) the consent of the Executive; (ii) the opinion of the Independent Financial Adviser that the terms of the Special Deal are fair and reasonable; and (iii) the approval of the Shareholders (other than the Subscriber, its associates or parties acting in concert with it and Mr. Sun, the EmployeeShareholders and their respective associates who are involved or interested in the Subscription, the Whitewash Waiver, the Special Deal and/or the Release of Connected Employees’ Tax Liability) (the “ Independent Shareholders ”) by way of poll at the adjourned SGM.

The Company will use all its reasonable endeavours to obtain an irrevocable undertaking from each of the Relevant Employees to the effect that none of them nor their respective associates will vote in respect of the resolutions approving the Subscription Agreement and the Whitewash Waiver, the Special Deal and the Release of Connected Employees’ Tax Liability at the adjourned SGM.

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The ordinary resolutions to be put forward by the Company at the adjourned SGM seeking shareholders’ approval of, among other things, the Subscription Agreement and the Whitewash Waiver will be made conditional upon the passing of the resolutions approving the Special Deal and the Release of Connected Employees’ Tax Liability. Accordingly, the completion of the Subscription Agreement is subject to the passing of the resolutions approving the Special Deal and the Release of Connected Employees’ Tax Liability.

The Independent Board Committee will advise the Independent Shareholders as to whether the Special Deal is fair and reasonable and in the interests of the Company and the Independent Shareholders. Somerley has been appointed to advise the Independent Board Committee and the Independent Shareholders in this regard.

(i) The Subscriber, its associates or parties acting in concert with it; and (ii) Mr. Sun, the Employee-Shareholders and their respective associates who are involved or interested in the Subscription, the Whitewash Waiver, the Special Deal and/or the Release of Connected Employees’ Tax Liability are required to abstain from voting for the resolutions in respect of the Subscription, the Whitewash Waiver, the Special Deal and the Release of Connected Employees’ Tax Liability at the adjourned SGM.

RECOMMENDATION OF THE BOARD

In light of the factors set out above, the Directors (excluding the members of the Independent Board Committee and the CT Independent Board Committee who will express their opinion after considering the advice of the Independent Financial Adviser in respect of the Special Deal and the Release of Connected Employees’ Tax Liability) consider that the Special Deal and the Release of Connected Employees’ Tax Liability are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

GENERAL

The Group is an integrated lottery technology and services company in the PRC lottery market which principal business include: (i) the development and supply of lottery games, related software and underlying supporting systems to Lottery Sales Agencies, (ii) the development, sale and maintenance of lottery hardware (terminals and other lottery-related equipment), (iii) the sales and distribution of lottery games and (iv) the provision of ancillary services to Lottery Sales Agencies.

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, all the Relevant Employees (other than the Connected Employees) are third parties independent of the Company and its connected persons.

CIRCULAR

In addition to the resolutions relating to the Special Deal and the Release of Connected Employees’ Tax Liability, the adjourned SGM will be convened for the Shareholders to also consider and, if thought fit, pass the resolutions to approve, among other things: (i) the execution, delivery and performance of the Subscription Agreement; (ii) the allotment and issue of the Subscription Shares and the Convertible Bonds in accordance with the Subscription Agreement; (iii) the specific mandate under which the Subscription Shares and,

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upon conversion of the Convertible Bonds, the Conversion Shares will be issued; (iv) the Whitewash Waiver; (v) the Authorised Share Capital Increase and (vi) the appointment of the Subscriber’s nominees as Directors to the Board.

A supplemental circular containing, amongst other things, (i) details of the Special Deal and the Release of Connected Employees’ Tax Liability; (ii) a letter of advice on the Special Deal and the Release of Connected Employees’ Tax Liability from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders; (iii) a letter of advice on the Release of Connected Employees’ Tax Liability from the CT Independent Board Committee to the Independent Shareholders; (iv) a letter of advice on the Special Deal from the Independent Board Committee to the Independent Shareholders; and (v) a notice of the adjourned SGM will be despatched to the Shareholders on or before 25 July 2016 in compliance with the Takeovers Code (including Rule 8.5 thereof) and the GEM Listing Rules.

By order of the Board AGTech Holdings Limited Sun Ho Chairman & CEO

Hong Kong, 4 July 2016

In this announcement, the exchange rate of HK$1.168 to RMB1.00 has been used for reference only.

As at the date of this announcement, the Board comprises (i) Mr. Sun Ho, Mr. Bai Jinmin, Mr. Liang Yu and Mr. Cheng Guoming as executive Directors; (ii) Mr. Ho King Fung, Eric as non-executive Director; and (iii) Ms. Monica Maria Nunes, Mr. Feng Qing and Dr. Gao Jack Qunyao as independent non-executive Directors.

The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this announcement and confirm having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this announcement have been arrived at after due and careful consideration and there are no other facts not contained in this announcement the omission of which would make any statement in this announcement misleading.

This announcement, 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 issuer. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this announcement 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 announcement misleading.

This announcement will remain on the “Latest Company Announcements” page of the GEM website at www.hkgem.com for at least seven days from the day of its posting and will be published on the website of the Company at www.agtech.com.

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