500.com Ltd (WBAI) Responds To Muddy Waters

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500.com Ltd, which was (briefly) mentioned by Carson Block of Muddy Waters as a short at the Value Investing Congress has taken a beating from investors. Shares of the company are down 5% today in market trading after ValueWalk revealed the short idea. The company has issued a press release in response to the allegations. See the press release from the company below. For background see the following articles first.

Carson Block Goes Short 500.com (WBAI)

500.com Is A Leader In Sports Lottery But Risks Remain

 

SHENZHEN, China, Sept. 10, 2014 /PRNewswire/ — 500.com Ltd (NYSE:WBAI) (“500.com” or the “Company”), a leading online sports lottery service provider in China, today announced that it came to the Company’s attention that there was a recent online article which made several unsubstantiated speculations on various aspects of the Company’s business operations. The Company hereby refutes each of such unsubstantiated speculations and reiterates that (i) it has obtained all relevant and necessary licenses and approvals to legally provide online sports lottery services in China; and (ii) it has made accurate and full disclosures on its business operations.

500.com: Legality of providing online sports lottery services in China

The online article stated that the status of the authorization for 500.com Ltd (NYSE:WBAI) to operate its business is “not clear”. The Company wished to reiterate that,  as disclosed in the Company’s Form 20-F annual report for year 2013 and Form F-1 Registration Statements previously filed with the SEC, the Company has obtained the approval from the Ministry of Finance of the People’s Republic of China, or the MoF, to provide online sports lottery services on behalf of China Sports Lottery Administration Center, the government authority in charge of the issuance and sale of sports lottery products in China. The MoF is the ultimate regulator of China’s lottery industry and oversees the operation of China Sports Lottery Administration Center. This authorization can be confirmed through the MoF’s official website at the following link:

http://zhs.mof.gov.cn/zhuantilanmu/caipiaoguanli/201310/t20131030_1005120.html

The legality of the Company’s business is endorsed by its PRC legal counsel, whose opinion was included in the Company’s most recent F-1 registration statement filed with the SEC on April 2, 2014 and the Company’s F-1 registration statement in connection with its initial public offering filed with the SEC on October 22, 2013.

In addition, CCTV, the central and most watched television station in China, broadcasted a recent news clip that covered the current regulatory landscape of online lottery service industry in China, in which it confirmed that the Company is one of the two entities that were granted the authorization to operate online lottery service by the MoF. A link of such special report can be found at the following links:

http://v.qq.com/page/b/0/s/b01367y160s.html, or http://youtu.be/Xp4rX8RXb3g

Moreover, a news report issued by Xinhua News Agency in May 2014 contained an interview with a competent official from the MoF. The official confirmed that the Company has been approved by the MoF to operate an online sports lottery service in China. The official further clarified that such approval by the MoF, instead of issuing “licenses” to online lottery service providers, is implemented under the new regulatory regime. The news report can be found at the following link:

http://news.xinhuanet.com/fortune/2014-05/08/c_1110604153.htm

500.com: Prize money collected in pool purchase mode

The online article further stated that 500.com Ltd (NYSE:WBAI) also buys lottery products and wins prizes for itself. As disclosed in the Company’s Form 20-F annual report for year 2013 and Form F-1 Registration Statements previously filed with the SEC, the Company buys lottery products for the sole purposes of completing pool purchases when necessary and as a service to its users who participate in such pool purchases. As disclosed on page 52 and page 66 in the Form 20-F annual report for year 2013, the Company spent RMB13.7 million (approximately US$2.3 million) to complete pool purchases for its users and as a result was entitled to  RMB8.3 million (approximately US$1.4 million) in 2013, such purchase amount and resulting prize were recorded as deductibles to net revenue and  other operating income in the Company’s income statements, respectively.

500.com: Collection of prize money by using employees’ bank account

The online article pointed out that the Company collects prize money by using the employees’ bank accounts. As disclosed in the Company’s Form 20-F annual report for year 2013 and Form F-1 Registration Statements previously filed with the SEC, such arrangement was made due to the fact that under the current regulations and implementation procedures of national and provincial lottery products in China, prizes can only be claimed by natural persons who present the winning lottery tickets at the time of collection and the Company . Since the Company does not distribute physical tickets to individual users, it needs to collect prizes on behalf of such winning users. As disclosed on page 36 in the Form 20-F annual report for year 2013, 500.com Ltd (NYSE:WBAI) has adopted several measures to ensure that such individual employee accounts are under the strict control, such as strict record keeping, immediate transfer of prize money to the Company’s corporate account upon collection, and real-time monitoring of the employee bank accounts by accounting managers. Such measures are specifically designed to prevent any potential fraud and the Company has never had an incident where prize money deposited in an employee’s account was misappropriated in its 13 years of operating history.

500.com: Tax benefit recognized for fiscal year 2013

The online article pointed out that 72% of 500.com Ltd (NYSE:WBAI)’s 2013 net income came from tax benefit. As disclosed in the Form 20-F annual report for year 2013, such tax benefit was a reversal of deferred tax liabilities arising from the aggregate outside basis differences between the Company’s subsidiaries and VIEs in the amount of RMB88.8 million (approximately US$14.7 million). On December 28, 2013, the Company agreed to provide unlimited financial support to the VIEs and replaced one of its subsidiaries as the primary beneficiary of the VIEs. As the Company is indefinitely reinvesting the undistributed earnings of its subsidiaries, the deferred tax liabilities arising from the aggregate outside basis differences between its subsidiaries and VIEs of RMB88.8 million (approximately US$14.7 million) were reversed. As further disclosed in the Form 20-F annual report for year 2013, the Company’s adjusted non-GAAP net income, which excluded such tax benefit, among other thing, increased by 86.0% from RMB29.9 million in 2012 to RMB55.6 million (approximately US$9.2 million) in 2013.

500.com: Accumulative App download reached 20 million in the second quarter of 2014

The online article claimed that 500.com Ltd (NYSE:WBAI) stated it had over 20 million app download in the second quarter of 2014. Such claim was due to a mistake of fact.  Mr. Zhengming Pan clearly stated in the earning release called for the second quarter of 2014 held on August 11, 2014, that “accumulative downloads of our mobile apps exceeded 20 million during the quarter”, which means that the accumulative downloads of the Company’s mobile app since its launch in April 2011 reached 20 million in the second quarter of 2014.

In addition, the Company disclosed in its earning release for the second quarter of 2014 filed on Form 6-k with the SEC on August 11, 2014 that the Company had a total of 710,000 active mobile app users during the quarter, an increase of 193.4% from 242,000 active mobile app users during the first quarter of 2014.

The Company would like to reiterate that it operates a legitimate and growing business in China and is committed to providing full and accurate disclosures to investors and to vigorously rebutting any false speculations that attempt to undermine confidence in the Company’s business, management, and operations.

About 500.com Limited

500.com Ltd (NYSE:WBAI) is a leading online sports lottery service provider in China. The Company offers a comprehensive and integrated suite of online lottery services, information, user tools and virtual community venues to its users. 500.com was among the first companies to provide online lottery services in China, and is one of two entities that have been approved by the Ministry of Finance to provide online lottery sales services on behalf of the China Sports Lottery Administration Center, which is the government authority that is in charge of the issuance and sale of sports lottery products in China. According to iResearch, the Company had the largest market share among online lottery service providers for the first six months of 2013, in terms of the total purchase amount of sports lottery products.

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