500.com reported financial result and changes to the board

500.com Limited ("500.com" or the "Company"), a leading online sports lottery service provider in China, today reported its unaudited financial results for the first quarter of 2015.

Temporary Suspension of Online Lottery Sales

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

On February 24, 2015, the Company was informed by certain provincial sports lottery administration centers that as part of their respective self-inspection processes, such provincial sports lottery administration centers planned to temporarily suspend accepting online purchase orders for lottery products starting from February 25, 2015. On March 2, 2015, the Company was further informed by the remaining provincial sports lottery administration centers to which it provides sports lottery sales services that such provincial sports lottery administration centers also planned to temporarily suspend accepting online purchase orders for lottery products, in response to the Self-inspection Notice.

As a result of the provincial sport lottery administration centers' decision to temporarily suspend accepting online lottery orders, or the temporary suspension, 500.com's transaction volume decreased significantly. The Company recorded operating loss for the first quarter of 2015 and is currently not generating any revenue due to the temporary suspension.

Board and Management Changes

On May 15, 2015, the board of directors, or the Board, approved the following changes in the Board and the management of the Company, with immediate effect:

Mr. Zhengming Pan, the president of the Company, was appointed as the chief executive officer of the Company. Simultaneously, Mr. Man San Law resigned from his role as the chief executive officer and remains the Chairman of the Company.

Mr. Qi Li resigned as a director of the Company for personal reasons and Mr. Zhengming Pan was appointed as a director to fill the vacancy. Mr. Man San Law was appointed as the chairman of the compensation committee of the Board and Mr. Zhengming Pan was appointed as a member of the strategy committee of the Board."

Mr. Man San Law, the Founder and Chairman of 500.com, stated, "We voluntarily and temporarily suspended our online lottery sales operations in response to the promulgation of the Self-Inspection Notice. Such temporary and voluntary suspension materially and adversely impacted our results of operations and financial conditions of the first quarter of 2015. We want to restate that the Company was one of the two entities approved by the Ministry of Finance in 2012 to provide online lottery sales services on behalf of the China Sports Lottery Administration Center. In particular, such approval mandated that the China Sports Lottery Administration Center use its best effort to develop an online lottery sales management system as part of a pilot program for online lottery sales in China, and once such a management system is finished, the China Sports Lottery Administration Center should apply again for approval from the Ministry of Finance for official commencement of online lottery sales in China. The Company notes it has been working and will continue to work with the China Sports Lottery Administration Center to develop the management system. To the best of the Company's knowledge, the approval by the Ministry of Finance for the Company to provide online lottery sales services on behalf of the China Sports Lottery Administration Center is valid and has not been revoked or amended as of the date of this earnings release."

Mr. Man San Law added, "I would like to express my gratitude to Mr. Qi Li for his enormous contribution to the Company during his tenure as a director and I wish Mr. Qi Li all the best in his future endeavors."

First quarter 2015 Operational Results

Active Users

Active users decreased by 12.9% from approximately 984,000 in the fourth quarter of 2014 to approximately 857,000 during the first quarter of 2015, primarily due to the adverse impact caused by the temporary suspension.

New Active Users

The Company had a total of 485,000 new active users during the quarter, a decrease of 42.5% from 844,000 new active users during the fourth quarter of 2014, primarily due to the adverse impact of the temporary suspension. New active users accounted for 12.4% of the Company's total purchase amount during the first quarter of 2015, a decrease from 52.4% during the fourth quarter of 2014.

Active Users - Platforms

PC

The Company had a total of approximately 548,000 active PC users during the quarter, an increase of 3.0% from approximately 532,000 active PC users during the fourth quarter of 2014. Active PC users accounted for 44.5% of the Company's total purchase amount during the first quarter of 2015, decreasing from 54.0% during the fourth quarter of 2014.

Mobile App

The Company had a total of approximately 365,000 active mobile app users during the quarter, a decrease of 10.8% from approximately 409,000 active mobile app users during the fourth quarter of 2014. Active mobile app users accounted for 50.9% of the company's total purchase amount during the first quarter of 2015, increasing from 41.4% during the fourth quarter of 2014.

Mobile Website

The Company had a total of approximately 193,000 active mobile website users during the quarter, a decrease of 43.4% from approximately 341,000 active mobile website users during the fourth quarter of 2014. Active mobile website users accounted for 4.6% of the Company's total purchase amount during the first quarter of 2015, which stayed the same as during the fourth quarter of 2014.

Active Users - Direct and Third Party Channels

Direct Active Users

The Company had a total of approximately 459,000 direct active users who placed purchase orders through the Company's websites or mobile app during the quarter, a decrease of 19.8% from approximately 572,000 direct active users during the fourth quarter of 2014. Direct active users accounted for 95.3% of the Company's total purchase amount during the first quarter of 2015, a decrease from 96.3% during the fourth quarter of 2014.

Active User from Third Party Channels

The Company had a total of approximately 398,000 third party channel active users during the quarter, a decrease of 3.4% from approximately 412,000 third party channel active users during the fourth quarter of 2014. Third party channel active users accounted for 4.7% of the company's total purchase amount during the first quarter of 2015, an increase from 3.7% during the fourth quarter of 2014.

Total Purchase Amount and Service Fees

Total purchase amount was RMB1,305.5 million(US$210.6 million), an increase of 23.8% from RMB1,054.9 million during the first quarter of 2014, and a decrease of 25.7% from RMB1,757.9 million during the fourth quarter of 2014. The sequential decrease was primarily due to the adverse impact of the temporary suspension.

Total service fees received from provincial sports lottery administration centers and third party aggregators were RMB112.9 million (US$18.2 million), representing a slight increase of 0.7% from RMB112.1 million during the first quarter of 2014, and a decrease of 35.2% from RMB174.2 million during the fourth quarter of 2014.

First Quarter 2015 Financial Results

Net Revenues

Net revenues were RMB98.8 million (US$15.9 million), representing an increase of 10.0% from RMB89.8 million during the first quarter of 2014, and a decrease of 32.4% from RMB146.2 million during the fourth quarter of 2014. The sequential decrease was primarily due to the adverse impact of the temporary suspension.

Operating Expenses

Operating expenses were RMB152.8 million (US$24.6 million), representing an increase of 152.6% from RMB60.5 million in the first quarter of 2014, and an increase of 11.3% from RMB137.3 million during the fourth quarter of 2014.The increases were partially attributable to a bad debt provision of RMB30.3 million the Company made during the first quarter of 2015, after assessing the collectability of the account receivables. The year-over-year and sequential increase was also attributable to increased share-based compensation expenses associated with the share options granted to the Company's employees during the second quarter of 2014.

Cost of services was RMB12.4 million (US$2.0 million), representing an increase of 45.9% from RMB8.5 million during the first quarter of 2014, and a decrease of 15.6% from RMB14.7 million during the fourth quarter of 2014. Cost of services represented 12.6% of net revenues, compared with 9.5% in the first quarter of 2014 and 10.1% in the fourth quarter of 2014. The year-over-year increase was mainly a result of the increase in account handling expenses for the Company's mobile distribution channels while the sequential decrease was mainly due to accrual of bonuses during the fourth quarter of 2014.

Sales and marketing expenses were RMB45.6 million (US$7.4 million), representing an increase of 118.2% from RMB20.9 million during the first quarter of 2014, and an increase of 4.3% from RMB43.7 million during the fourth quarter of 2014. Sales and marketing expenses represented 46.2% of net revenues, compared with 23.3% in the first quarter of 2014 and 29.9% in the fourth quarter of 2014. The year-over-year increase in sales and marketing expenses as a percentage of net revenue was mainly due to the increase in headcount of the Company's sales and marketing department while the sequential increase was mainly a result of advertisement expenses associated with the Company's marketing campaign on TV and other media.

General and administrative expenses were RMB80.2 million (US$12.9 million), representing an increase of 235.6% from RMB23.9 million during the first quarter of 2014 and an increase of 48.8% from RMB53.9 million during the fourth quarter of 2014. The year-over-year increase was mainly a result of increased share-based compensation expenses associated with the share options granted to the Company's employees during the second quarter of 2014. The sequential increase was mainly due to a provision of bad debt impairment of RMB30.3 million. As a result, general and administrative expenses accounted for 81.1% of net revenues during the first quarter of 2015, an increase from 26.6% during the first quarter of 2014 and 36.9% in the fourth quarter of 2014.

Service development expenses were RMB14.6 million (US$2.4 million), representing an increase of 105.6% from RMB7.1 million during the first quarter of 2014 and a decrease of 41.6% from RMB25.0 million during the fourth quarter of 2014. The year-over-year increase was mainly due to an increase in share-based compensation expenses associated with the share options granted to the Company's research and development employees, while the sequential decrease was mainly due to the accrued bonus in the fourth quarter of 2014, and decreased consulting fees we paid on certain research and development programs. As a result, service development expenses represented 14.8% of net revenues during the quarter, an increase from 7.9% in the first quarter of 2014 and 17.1% in the fourth quarter of 2014.

Operating Loss

Operating loss was RMB53.5 million (US$8.6 million), as compared to operating profit of RMB31.7 million during the first quarter of 2014, and operating profit of RMB19.0 million during the fourth quarter of 2014. The year-over-year decrease was primarily due to increases in operating expenses, while the sequential decrease was in line with the decrease of net revenue, and increase in operating expenses.

Non-GAAP operating loss was RMB14.6 million (US$2.4 million), as compared to Non-GAAP operating profit of RMB36.6 million during the first quarter of 2014, and Non-GAAP operating profit of RMB56.3 million in the fourth quarter of 2014.

Net Loss

Net loss was RMB52.0 million (US$8.4 million), as compared to net profit of RMB27.5 million during the first quarter of 2014 and net profit of RMB14.5 million during the fourth quarter of 2014. The changes were primarily attributable to the material adverse impact of the temporary suspension and increased operating expenses.

Non-GAAP net loss was RMB13.2 million (US$2.1 million), compared with Non-GAAP net income excluding share-based compensation expenses of RMB32.4 million during the first quarter of 2014 and RMB51.8 million during the fourth quarter of 2014.

Basic and Diluted Net Loss per ADS

Basic and diluted net loss per ADS were US$0.24 and US$0.24, respectively.

Non-GAAP basic and diluted net loss per ADS excluding share-based compensation expenses were US$0.06 and US$0.06, respectively.

Cash and Cash Equivalents

As of March 31, 2015, the Company had cash and cash equivalents of RMB495.5 million (US$79.9 million), restricted cash of RMB12.3 million (US$2.0 million) and time deposits of RMB254.2 million (US$41.0 million) compared with cash and cash equivalents of RMB485.6 million, restricted cash of RMB12.7 million and time deposits of RMB415.9 million as of December 31, 2014.

Account Receivables

As of March 31, 2015, the Company had account receivables of RMB30.3 million (US$4.9 million), compared with RMB74.4 million as of December 31, 2014. The Company made a bad debt provision of RMB30.3 million during the first quarter of 2015, after assessing the collectability of the account receivables.

Prepayments and Other Current Assets

As of March 31, 2015, the balance of prepayment and other current assets was RMB244.8 million (US$39.5 million), compared with RMB157.9 million as of December 31, 2014. The balance as of March 31, 2015 mainly included: (i) RMB192.7 million (US$31.1 million) of prepayments deposited with lottery administration centers for future lottery ticket purchases. As of the date of this report, we have collected back approximately RMB160.8 million prepayments from lottery administration centers; (ii) RMB2.0 million (US$0.3 million) of receivables from third party payment service providers; (iii) RMB39.1 million (US$6.3 million) of the current portion of deferred expenses; and (iv) RMB11.0 million (US$1.8 million) of other receivables.