Gridsum Holding Inc.
Annual Report 2017

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 20-F ☐REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIESEXCHANGE ACT OF 1934OR ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31, 2017OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934OR ☐SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934Commission file number: 001-37871 Gridsum Holding Inc.(Exact name of Registrant as specified in its charter) N/A(Translation of Registrant’s name into English)Cayman Islands(Jurisdiction of incorporation or organization)South Wing, High Technology BuildingNo. 229 North 4th Ring RoadHaidian District, Beijing 100083People’s Republic of China(Address of principal executive offices)Michael Peng Zhang, Co-Chief Financial OfficerSouth Wing, High Technology BuildingNo. 229 North 4th Ring RoadHaidian District, Beijing 100083People’s Republic of ChinaTelephone: (86-10) 8261-9988(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class Name of each exchange on which registeredAmerican Depositary Shares, each representing oneClass B Ordinary Share, par value US$0.001 per shareClass B Ordinary Shares, par value US$0.001 per share* The Nasdaq Stock Market LLCThe Nasdaq Stock Market LLC *Not for trading, but only in connection with the listing on The Nasdaq Stock Market of the American Depositary Shares.Securities registered or to be registered pursuant to Section 12(g) of the Act.NoneSecurities for which there is a reporting obligation pursuant to Section 15(d) of the Act.None Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annualreport.As of December 31, 2017, there were 30,823,828 ordinary shares outstanding, par value $0.001 per share, being the sum of 4,543,461 Class A ordinaryshares and 26,280,367 Class B ordinary shares.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.☐ Yes ☒ NoIf this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) ofthe Securities Exchange Act of 1934. ☐ Yes ☒ NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.☒ Yes ☐ NoIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit suchfiles).☒ Yes ☐ NoIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☒Non-accelerated filer ☐ Emerging growth company ☒If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant haselected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant toSection 13(a) of the Exchange Act. ☒ Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP ☒ International Financial Reporting Standards as issuedby the International Accounting Standards Board ☐ Other ☐If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected tofollow.Item 17 ☐ Item 18 ☐If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐ Yes ☒ No(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.☐ Yes ☐ No †The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its AccountingStandards Codification after April 5, 2012. Table of ContentsTABLE OF CONTENTS DEFINED TERMS 2 FORWARD-LOOKING STATEMENTS 3 PART I 4 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4 ITEM 3. KEY INFORMATION 4 ITEM 4. INFORMATION ON THE COMPANY 30 ITEM 4A. UNRESOLVED STAFF COMMENTS 52 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 52 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 69 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 79 ITEM 8. FINANCIAL INFORMATION 80 ITEM 9. THE OFFER AND LISTING 81 ITEM 10. ADDITIONAL INFORMATION 82 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 94 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 95 PART II 96 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 96 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 96 ITEM 15. CONTROLS AND PROCEDURES 97 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 98 ITEM 16B. CODE OF ETHICS 98 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 98 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 99 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 99 ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 99 ITEM 16G. CORPORATE GOVERNANCE 101 ITEM 16H. MINE SAFETY DISCLOSURE 101 PART III 101 ITEM 17. FINANCIAL STATEMENTS 101 ITEM 18. FINANCIAL STATEMENTS 101 ITEM 19. EXHIBITS 101 Table of ContentsEXPLANATORY NOTEOur annual consolidated financial statements for the years ended December 31, 2015, 2016 and 2017 have been audited by Shandong HaoxinCertified Public Accountants Co., Ltd. in accordance with the standards of the Public Company Accounting Oversight Board (United States). For moreinformation, see “Item 16.F. Change in Registrant’s Certifying Accountant.” Our consolidated financial statements for the years ended December 31,2015 and 2016 included in this annual report have been restated. Our previously issued consolidated financial statements (and the related auditopinion) included in our annual report on Form 20-F for the year ended December 31, 2016 should not be relied upon. The restatement of our financialstatements as of and for the years ended December 31, 2015 and 2016 has resulted in certain changes to the Company’s consolidated financialstatements. For more information on the effects of the restatement, see note 2(a) to the Company’s consolidated financial statements included in thisannual report.We have not amended, and we do not intend to amend, our previously filed annual report on Form 20-F for the year ended December 31, 2016 orour quarterly financial statements attached as exhibits to our current reports on Form 6-K previously furnished to the United States Securities andExchange Commission (the “SEC”). All financial information included in reports previously filed or furnished by us is superseded by the informationin this annual report. 1Table of ContentsDEFINED TERMSExcept where the context otherwise requires and for purposes of this annual report only: • “ADSs” refers to our American depositary shares, and each ADS represents one Class B ordinary share; • “China” and “PRC” refer to the People’s Republic of China, excluding Taiwan, Hong Kong and Macau; • “RMB” and “Renminbi” refer to the legal currency of the People’s Republic of China; • “shares” and “ordinary shares” refer to our Class A and Class B ordinary shares, US$0.001 par value per share; • “US$” and “U.S. Dollar” refer to the legal currency of the United States; and • “we,” “us,” and “our company” refer to Gridsum Holding Inc., a Cayman Islands company, and its predecessor Cayman Islands entity,subsidiaries and consolidated affiliated entities.We use RMB as our reporting currency in our financial statements and in this annual report. This annual report contains translations of RMBamounts into U.S. Dollars at specific rates solely for the convenience of the readers. Unless otherwise noted, any RMB amounts are translated into U.S.Dollars at the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 29, 2017, which was RMB6.5063 toUS$1.00. We make no representation that any RMB or U.S. Dollar amounts could have been, or could be, converted into U.S. Dollars or RMB, as thecase may be, at any particular rate, at the rate stated above, or at all. The exchange rate set forth in the H.10 statistical release of the Federal ReserveBoard on December 28, 2018 was RMB6.8755 to US$1.00. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rate Information.” 2Table of ContentsFORWARD-LOOKING STATEMENTSCertain statements contained in this annual report on Form 20-F, including those statements contained under the captions “Item 4. Informationon the Company” and “Item 5. Operating and Financial Review and Prospects” that are not statements of historical fact, are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, Section 21E of the Securities ExchangeAct of 1934, as amended, or Exchange Act, and within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can begenerally identified by the use of terms such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” orother similar expressions. In addition to the statements contained in this annual report, we (or our directors or executive officers authorized to speak onour behalf) from time to time may make forward-looking statements, orally or in writing, regarding us (including our subsidiaries and consolidatedaffiliated entities) and our business, including in press releases, oral presentations, filings under the Securities Act, the Exchange Act or securities lawsof other countries, and filings with The Nasdaq Stock Market, or other stock exchanges. These forward-looking statements include, but are not limitedto, statements about: • our goals and strategies; • our future business development, financial condition and results of operations; • expected changes in our revenues, costs or expenditures; • developments in the digital intelligence and related industries in China and globally; • the growth of social media, internet and mobile users and internet and mobile advertising in China; • competition in our industry; • fluctuations in general economic and business conditions in China; and • PRC governmental policies relating to media, software, big data, the internet and online advertising.You should not rely upon our forward-looking statements as predictors of future events. Such forward-looking statements represent our judgmentor expectations regarding the future, and are subject to risks and uncertainties that may cause actual events and our future results to be materiallydifferent than expected by us or indicated by such statements. See the information under “Item 3. Key Information—D. Risk Factors” and elsewhere inthis annual report for a discussion of these risks, assumptions and uncertainties. These risks, assumptions and uncertainties are not necessarily all of theimportant factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. We operate in anevolving environment and new risk factors and uncertainties emerge from time to time and it is not possible for us to predict all risk factors anduncertainties. Nor can we assess the impact of all factors on our business, or the extent to which any factor or combination of factors, may cause actualresults to differ materially from those contained in any forward-looking statements. We undertake no obligation, and specifically decline anyobligation, to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light ofthese risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur. We qualify all of our forward-looking statements by these cautionary statements. 3Table of ContentsPART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSNot applicable.ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLENot applicable.ITEM 3. KEY INFORMATIONA. Selected Financial DataThe following selected consolidated statement of operations data for the years ended December 31, 2015, 2016 and 2017, and selectedconsolidated balance sheet data as of December 31, 2015, 2016 and 2017, have been derived from our audited consolidated financial statementsincluded elsewhere in this annual report. The following selected consolidated statement of operations data for the years ended December 31, 2013 and2014, and selected consolidated balance sheet data as of December 31, 2013 and 2014, have been derived from our audited consolidated financialstatements not included in this annual report. The selected consolidated financial data should be read together with our consolidated financialstatements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Ourconsolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). Ourhistorical results are not necessarily indicative of results expected for future periods. For the Year Ended December 31, 2013 2014 2015 2016 2017 RMB RMB RMB RMB RMB US$ (Restated) (Restated) (in thousands, except for share, per share and per ADS data) Consolidated Statements of Operations Data: Revenues: Enterprise 57,025 104,891 208,385 311,106 377,013 57,946 e-Government and other 6,414 21,340 26,904 60,772 102,216 15,710 Less: Business tax and surcharges (892) (1,711) (3,092) (8,055) (9,696) (1,490) Net revenues 62,547 124,520 232,197 363,823 469,533 72,166 Cost of revenues(1) (13,810) (21,143) (33,392) (55,707) (94,640) (14,546) Gross profit 48,737 103,377 198,805 308,116 374,893 57,620 Operating expenses: Sales and marketing expenses(1) (29,012) (46,880) (88,364) (139,781) (192,413) (29,573) Research and development expenses(1) (20,385) (38,137) (97,553) (160,387) (257,921) (39,642) General and administrative expenses(1) (30,276) (54,931) (60,820) (88,108) (143,743) (22,093) Total operating expenses (79,673) (139,948) (246,737) (388,276) (594,077) (91,308) Loss from operations (30,936) (36,571) (47,932) (80,160) (219,184) (33,688) Other income/(expense): Foreign currency exchange gain/(loss) 296 (766) 1,339 (1,600) (8,552) (1,314) Interest income /(expense), net 87 180 80 (614) (5,430) (835) Other income /(expense), net 9 373 111 (1,452) (1,683) (259) Loss before income tax (30,544) (36,784) (46,402) (83,826) (234,849) (36,096) Income tax expense (130) (476) (15,371) (14,801) (4,275) (657) Net loss (30,674) (37,260) (61,773) (98,627) (239,124) (36,753) Less: Net loss attributable to non-controlling interests — — (16) (53) (128) (20) Net loss attributable to Gridsum Holding Inc. (30,674) (37,260) (61,757) (98,574) (238,996) (36,733) Accretion to preferred shares redemption value (3,849) (9,480) (19,707) (16,725) — — Cumulative dividend to preferred shareholders (8,215) (16,327) (16,642) (12,990) — — Net loss attributable to Gridsum’s ordinary shareholders (42,738) (63,067) (98,106) (128,289) (238,996) (36,733) Net loss (30,674) (37,260) (61,773) (98,627) (239,124) (36,753) 4Table of Contents For the Year Ended December 31, 2013 2014 2015 2016 2017 RMB RMB RMB RMB RMB US$ (Restated) (Restated) (in thousands, except for share, per share and per ADS data) Foreign currency translation adjustment, net of nil tax 850 (2,006) (19,330) 8,923 (20,452) (3,143) Comprehensive loss (29,824) (39,266) (81,103) (89,704) (259,576) (39,896) Less: Comprehensive loss attributable to non-controllinginterests — — (16) (53) (128) (20) Comprehensive loss attributable to Gridsum Holding Inc. (29,824) (39,266) (81,087) (89,651) (259,448) (39,876) Net loss per ordinary share: Basic and diluted (4.27) (6.31) (9.81) (8.52) (7.90) (1.21) Net loss per ADS:(2) Basic and diluted (4.27) (6.31) (9.81) (8.52) (7.90) (1.21) Weighted average number of ordinary shares used in per sharecalculations: Basic and diluted 10,000,000 10,000,000 10,000,000 15,054,865 30,243,250 30,243,250 Non-GAAP Financial Data:(3) Non-GAAP net loss attributable to Gridsum’s ordinaryshareholders (40,444) (59,185) (89,300) (117,659) (216,069) (33,210) Non-GAAP net loss per ordinary share attributable toGridsum’s ordinary shareholders: Basic and diluted (4.04) (5.92) (8.93) (7.82) (7.14) (1.10) Non-GAAP net loss per ADS attributable to Gridsum’sordinary shareholders: Basic and diluted (4.04) (5.92) (8.93) (7.82) (7.14) (1.10) EBITDA (26,885) (29,927) (33,382) (59,319) (197,945) (30,424) Adjusted EBITDA (24,591) (26,045) (24,576) (48,689) (175,018) (26,901) (1)Share-based compensation expenses were allocated in cost of revenues and operating expenses as follows: For the Year Ended December 31, 2013 2014 2015 2016 2017 RMB RMB RMB RMB RMB US$ (Restated) (Restated) (in thousands) Cost of revenues 32 71 335 319 501 77 Sales and marketing expenses 86 370 1,651 2,252 4,739 728 Research and development expenses 163 449 3,347 3,955 8,641 1,328 General and administrative expenses 2,013 2,992 3,473 4,104 9,046 1,390 Total 2,294 3,882 8,806 10,630 22,927 3,523 (2)Each ADS represents one Class B ordinary share.(3)See “—Non-GAAP Financial Measures.” As of December 31, 2013 2014 2015 2016 2017 RMB RMB RMB RMB RMB US$ (Restated) (Restated) (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents 77,960 61,830 198,523 520,452 166,690 25,620 Total assets 198,634 227,597 618,246 1,208,500 1,403,097 215,653 Total liabilities 121,982 182,192 357,652 431,251 859,406 132,090 Total mezzanine equity 163,324 176,941 476,018 — — — Ordinary shares 68 68 — — — — Class A ordinary shares — — 31 31 31 5 Class B ordinary shares — — 37 168 176 27 Additional paid-in capital 8,034 2,436 — 1,090,991 1,107,201 170,174 5Table of Contents As of December 31, 2013 2014 2015 2016 2017 RMB RMB RMB RMB RMB US$ (Restated) (Restated) (in thousands) Statutory reserve — — — 6,662 6,730 1,034 Accumulated deficit (97,100) (134,360) (196,866) (310,847) (549,911) (84,520) Total Gridsum’s shareholders’ equity /(deficit) (86,672) (131,536) (215,808) 776,918 533,688 82,026 Non-controlling interests — — 384 331 10,003 1,537 Total shareholders’ equity/(deficit) (86,672) (131,536) (215,424) 777,249 543,691 83,563 Number of outstanding ordinary shares 10,000,000 10,000,000 10,000,000 15,054,865 30,243,250 30,243,250 Non-GAAP Financial MeasuresIn evaluating our business, we consider and use the following non-GAAP financial measures as supplemental measures to review and assess ouroperating performance: non-GAAP net loss attributable to Gridsum’s ordinary shareholders, non-GAAP net loss per share attributable to Gridsum’sordinary shareholders, non-GAAP net loss per ADS attributable to Gridsum’s ordinary shareholders, EBITDA and adjusted EBITDA. The presentationof these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared inaccordance with U.S. GAAP. We define (i) non-GAAP net loss attributable to Gridsum’s ordinary shareholders as net loss attributable to Gridsum’sordinary shareholders before share-based compensation, (ii) non-GAAP net loss per share attributable to Gridsum’s ordinary shareholders as its pershare equivalent and (iii) non-GAAP net loss per ADS attributable to Gridsum’s ordinary shareholders as its per ADS equivalent. We define EBITDA asnet loss before interest income and expenses, income tax expenses and depreciation expenses, and adjusted EBITDA as EBITDA before share-basedcompensation.We present these non-GAAP financial measures because they are used by our management to evaluate our operating performance and formulateour business plans. These non-GAAP financial measures enable our management to assess our operating results without considering the impact ofnon-cash charges, including depreciation expenses and share-based compensation, and without considering the impact of non-operating items such asinterest income and expenses and income tax expenses. We also believe that the use of these non-GAAP measures facilitates investors’ assessment ofour operating performance.These non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. These non-GAAPfinancial measures have limitations as analytical tools. One of the key limitations of using these non-GAAP financial measures is that they do notreflect all items of income and expense that affect our operations. Interest income and expenses, income tax expenses, depreciation expenses and share-based compensation have been and may continue to be incurred in our business and are not reflected in the presentation of adjusted EBITDA. Further,these non-GAAP financial measures may differ from the non-GAAP financial measures used by other companies, including our peer companies, so theirutility for comparison purposes may be limited.We compensate for these limitations by reconciling our non-GAAP financial measures to the most directly comparable U.S. GAAP financialmeasures, which should be considered when evaluating our performance. We encourage you to review our financial information in its entirety and notrely on a single financial measure.The following tables reconcile our non-GAAP net loss attributable to Gridsum’s ordinary shareholders, EBITDA and adjusted EBITDA in 2013,2014, 2015, 2016 and 2017 to the most directly comparable financial measures calculated in accordance with U.S. GAAP, which are net lossattributable to Gridsum’s ordinary shareholders and net loss, respectively: For the Year Ended December 31, 2013 2014 2015 2016 2017 RMB RMB RMB RMB RMB US$ (Restated) (Restated) (in thousands, except for share, per share and per ADS data) Reconciliation of Net Loss Attributable to Gridsum’sOrdinary Shareholders to Non-GAAP Net LossAttributable to Gridsum’s Ordinary Shareholders: Net loss attributable to Gridsum’s ordinary shareholders (42,738) (63,067) (98,106) (128,289) (238,996) (36,733) Share-based compensation 2,294 3,882 8,806 10,630 22,927 3,523 Non-GAAP net loss attributable to Gridsum’s ordinaryshareholders (40,444) (59,185) (89,300) (117,659) (216,069) (33,210) Weighted average number of ordinary shares used in net lossper share attributable to Gridsum’s ordinary shareholdersand non-GAAP net loss per share attributable to Gridsum’sordinary shareholders calculations: Basic and diluted 10,000,000 10,000,000 10,000,000 15,054,865 30,243,250 30,243,250 6Table of Contents For the Year Ended December 31, 2013 2014 2015 2016 2017 RMB RMB RMB RMB RMB US$ (Restated) (Restated) (in thousands, except for share, per share and per ADS data) Net loss per ordinary share attributable to Gridsum’s ordinaryshareholders: Basic and diluted (4.27) (6.31) (9.81) (8.52) (7.90) (1.21) Net loss per ADS attributable to Gridsum’s ordinary shareholders:Basic and diluted(1) (4.27) (6.31) (9.81) (8.52) (7.90) (1.21) Non-GAAP net loss per ordinary share attributable to Gridsum’sordinary shareholders: Basic and diluted (4.04) (5.92) (8.93) (7.82) (7.14) (1.10) Non-GAAP net loss per ADS attributable to Gridsum’s ordinaryshareholders: Basic and diluted (4.04) (5.92) (8.93) (7.82) (7.14) (1.10) (1)Each ADS represents one Class B ordinary share. For the Year Ended December 31, 2013 2014 2015 2016 2017 RMB RMB RMB RMB RMB US$ (Restated) (Restated) (in thousands) Reconciliation of Net Loss to EBITDA and Adjusted EBITDA: Net loss (30,674) (37,260) (61,773) (98,627) (239,124) (36,753) Interest expense/(income), net (87) (180) (80) 614 5,430 835 Income tax expenses 130 476 15,371 14,801 4,275 657 Depreciation and amortization expenses 3,746 7,037 13,100 23,893 31,474 4,837 EBITDA (26,885) (29,927) (33,382) (59,319) (197,945) (30,424) Share-based compensation 2,294 3,882 8,806 10,630 22,927 3,523 Adjusted EBITDA (24,591) (26,045) (24,576) (48,689) (175,018) (26,901) Exchange Rate InformationOur reporting currency is RMB. Substantially all of our operations are conducted in China and substantially all of our revenues and costs aredenominated in RMB. This annual report contains translations of RMB amounts into U.S. Dollars at specific rates solely for the convenience of thereaders. The conversion of RMB into U.S. Dollars in this annual report is based on the exchange rate set forth in the H.10 statistical release of theFederal Reserve Board. Unless otherwise noted, any RMB amounts are translated into U.S. Dollars at the exchange rate on December 29, 2017 whichwas RMB6.5063 to US$1.00. We make no representation that any RMB or U.S. Dollar amounts could have been, or could be, converted into U.S.Dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all. The PRC government imposes control over its foreigncurrency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. Theexchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 28, 2018 was RMB6.8755 to US$1.00.The following table sets forth information concerning exchange rates between the RMB and the U.S. Dollar for the periods indicated. These ratesare provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation ofour periodic reports or any other information to be provided to you. Noon Buying Rate Period Period End Average(1) Low High (RMB Per US$1.00) 2013 6.0537 6.1412 6.2438 6.0537 2014 6.2046 6.1704 6.2591 6.0402 2015 6.4778 6.2869 6.4896 6.1870 2016 6.9430 6.6549 6.9580 6.4480 2017 6.5063 6.7350 6.9575 6.4773 7Table of Contents Noon Buying Rate Period Period End Average(1) Low High (RMB Per US$1.00) 2018 June 2018 6.6171 6.4651 6.6235 6.3850 July 2018 6.8038 6.7164 6.8102 6.6123 August 2018 6.8300 6.8467 6.9330 6.8018 September 2018 6.8680 6.8551 6.8880 6.8270 October 2018 6.9737 6.9191 6.9737 6.8680 November 2018 6.9558 6.9367 6.9558 6.8894 December 2018 (through December 28, 2018) 6.8755 6.8842 6.9077 6.8343 (1)Annual averages are calculated using the average of month-end rates of the respective periods. Monthly averages are calculated using theaverage of the daily rates during the respective periods.B. Capitalization and IndebtednessNot applicable.C. Reasons for the Offer and Use of ProceedsNot applicable.D. Risk FactorsThe following important risk factors, and other risks that may be described in other reports we submit to or file with the SEC, could affect ouractual results and cause those results to differ materially from what is expressed in forward-looking statements we make from time to time. If any ofthese risks actually occurs, our business, financial condition and results of operations could be materially adversely affected, the trading price of ourADSs could decline, and you could lose all or part of your investment.Risks Relating to Our Business We have a history of losses and we may not achieve or sustain profitability.We have incurred net losses in each year since our inception in 2005, including net losses of RMB61.8 million, RMB98.6 million andRMB239.1 million (US$36.8 million) in 2015, 2016 and 2017, respectively. We expect to continue to expend substantial financial and other resourceson, among other things: • investments in our research and development team and in the development of new solutions and enhancements of our existing solutions; • sales and marketing, including expanding our sales force, increasing our customer base, increasing market awareness of our solutions andenhancing our brand; • expanding of our operations and infrastructure; • hiring additional employees; and • general and administrative employees and executives, including administrative, legal, human resources, information technology, financeand accounting employees and executives, and other expenses related to being a public company.These efforts may prove more expensive than we currently anticipate and may not result in increased revenues or growth of our business. We alsoexpect that our revenue growth rate will decline over time and that our costs will increase. In 2018 we experienced a decline in the level of our businessactivity and related revenues. We may not be able to generate sufficient revenues to offset higher costs and achieve or sustain profitability. If we fail toachieve or sustain profitability, our business and operating results would be adversely affected. 8Table of ContentsOur limited operating history makes it difficult to evaluate our current business and future prospects, and increases the risk of your investment.We launched our first data analytics solution in 2009, and introduced our other solutions to the market more recently. This limited operatinghistory and the dynamic nature of the market in which we operate limit our ability to forecast future operating results and subject us to manyuncertainties, including our ability to plan for and anticipate future growth. Our historical revenue growth should not be considered indicative of ourfuture performance. We encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such asdetermining appropriate investments of our limited resources, market reception of our existing and future solutions, competition from other companies,attracting and retaining customers, hiring, integrating, training and retaining skilled personnel, developing new solutions, determining prices for oursolutions and unforeseen expenses. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect orchange, or if we do not address these risks successfully, our operating and financial results and our business could be adversely affected.We identified material weaknesses in our internal controls as of December 31, 2016 and 2017, and if we fail to establish and maintain effectiveinternal controls, our ability to report our financial results accurately or to prevent fraud may be adversely affected, and investor confidence and themarket price of the ADSs may be adversely affected.Prior to our initial public offering in September 2016, we were a private company with limited accounting personnel and other resources withwhich to address our internal controls. Our independent registered public accounting firm has not conducted an audit of our internal control overfinancial reporting.In the course of auditing our consolidated financial statements, we and our then independent registered public accounting firm identified twomaterial weaknesses in our internal control over financial reporting as of December 31, 2016 and 2017. A material weakness is a deficiency, orcombination of deficiencies, in internal controls, such that there is a reasonable possibility that a material misstatement of our annual or interimfinancial statements will not be prevented or detected on a timely basis. The material weaknesses in our internal controls identified as of December 31,2016 and 2017 related to: (1) our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and theSEC reporting requirements to properly address complex accounting issues and prepare and review our financial statements and related disclosures inaccordance with U.S. GAAP and SEC financial reporting requirements; and (2) the lack of written policies and procedures sufficient to timely recordrevenues and expenses in our financial statements.Following the identification of these material weaknesses, we have taken measures to remedy them and to remedy other control deficiencies. Theimplementation of these remedial measures may not fully address these deficiencies in our internal controls. Our failure to correct these controldeficiencies or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and could alsoimpair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business,financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially adversely affected.In addition, these control deficiencies could cause investors to lose confidence in our reported financial information, limiting our access tocapital markets, adversely affecting our operating results and leading to declines in the trading price of the ADSs. Additionally, ineffective internalcontrols could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on whichwe list or to other regulatory investigations and civil or criminal sanctions. We could also be required to restate our historical financial statements.We have been named as a defendant in a number of shareholder class action lawsuits that could have a material adverse impact on our business,financial condition, results of operation and cash flows, and our reputation.We have been named as a defendant in a number of shareholder class action lawsuits described in “Item 8. Financial Information—A.Consolidated Statements and Other Financial Information—Legal Proceedings,” and will have to defend against such suits, including any appeals ofsuch suits should our initial defense be unsuccessful. We are currently unable to estimate the possible loss or possible range of loss, if any, associatedwith the resolution of these suits. In the event that our initial defense of these suits is unsuccessful, there can be no assurance that we will prevail in anyappeal.We cannot predict the outcome of these lawsuits. The matters that led to our Audit Committee investigation and our financial restatement haveexposed us to increased risks of litigation, regulatory proceedings and government enforcement actions. We and our current and former directors andofficers may, in the future, be subject to additional litigation relating to such matters. Subject to certain limitations, we are obligated to indemnify ourcurrent and former directors and officers in connection with such lawsuits and any related litigation or settlements amounts. Regardless of the outcome,these lawsuits, and any other litigation that may be brought against us or our current or former directors and officers, could be time-consuming, result insignificant expense and divert the attention and resources of our management and other key employees. An unfavorable outcome in any of thesematters could exceed coverage provided under potentially applicable insurance policies, which is limited. Any such unfavorable outcome could have amaterial effect on our business, financial condition, results of operations and cash flows. Further, we could be required to pay damages or additionalpenalties or have other remedies imposed against us, or our current or former directors or officers, which could harm our reputation, business, financialcondition, results of operations or cash flows. 9Table of ContentsWe experienced rapid growth through 2017, which has placed demands on our management and operational and financial infrastructure.We experienced rapid growth in our customer base through 2017. We had 309 customers in 2015, 395 customers in 2016 and 505 customers in2017. Our employee headcount increased from 733 employees as of December 31, 2015 to 1,078 employees as of December 31, 2017. The majority ofour revenues in 2015, 2016 and 2017 were generated by sales to existing customers. There can be no assurance that this growth will continue, and suchgrowth has placed, and any further growth will place, significant demands on our management and our operational and financial infrastructure. In 2018we experienced a decline in the level of our business activity, the number of our customers, and related revenues.To manage any future growth effectively, we must improve our operational, financial and management systems and processes by, among otherthings: • attracting, training and integrating new employees, particularly for our sales and research and development teams; • improving our operational infrastructure to support our business; • developing our internal financial controls and disclosure controls to ensure timely and accurate reporting of our operational and financialresults; and • complying with applicable laws and regulations.If we fail to manage our growth, or if we fail to implement improvements or maintain effective internal controls, our costs and expenses mayincrease more than we plan and our abilities to expand our customer base, enhance our existing solutions, develop new solutions, satisfy existingcustomers, attract new customers, respond to competitive pressures or otherwise execute our business plan may be diminished, and our operating resultswould be adversely affected.For example, the filing of this annual report was delayed in part due to inadequate internal control over financial reporting and changes ofauditor. As a result, putative class action lawsuits have been filed against us and the market price of our ADSs has declined significantly, and ourability to secure new financing has declined. Some customers have reduced their level of business with us or not renewed their contracts, and ourinability to obtain financing at favorable rates has impacted our working capital and required us to cease doing business with some customers, whichwe expect to have an adverse effect on our financial results.We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs. If additional capital is notavailable, we may have to delay, reduce or cease operations, and we may not be able to meet our payment obligations under our indebtedness.We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. In the future, we may require additionalcapital to respond to business opportunities, including the need to develop new solutions or enhance our existing solutions, enhance our operatinginfrastructure or possible acquisitions of complementary businesses and technologies. We do not currently have any specific acquisition plans ortargets. We may also require additional capital to respond to declines in demand for our products or other unforeseen circumstances. We may not beable to timely secure additional debt or equity financing on favorable terms, or at all. Any debt financing obtained by us could involve restrictivecovenants relating to financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue businessopportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or othersecurities convertible into equity, our existing shareholders could suffer significant dilution in their percentage ownership of our company, and anynew equity securities we issue could have rights, preferences and privileges senior to those of holders of the ADSs.In May 2018, we issued and sold a convertible note in the principal amount of US$40 million, or the FutureX Convertible Note, to FutureXInnovation SPC, an affiliate of FutureX Capital Limited, or FutureX. The note is convertible in whole or in part at the holder’s option into our Class Bordinary shares at an initial conversion price of US$6.50, subject to customary adjustments in the case of share splits, share combinations, dividends,spin-offs, recapitalizations and certain other events. The note bears interest at 2.80% per annum. The principal amount of the FutureX Convertible Noteand all accrued and unpaid interest will become due on November 5, 2019, or earlier in the case of an event of default or certain fundamental changesof our company. The FutureX Convertible Note significantly increased our debt obligations, and any conversion of the FutureX Convertible Note maycause significant dilution to the interest of our existing shareholders and holders of the ADSs in our company.Our ability to make payments of the principal of or the interest on, or to refinance, our indebtedness, including the FutureX Convertible Note,depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may notgenerate cash flow from operations in the future sufficient to service our debt, and we may be required to obtain additional external financing. 10Table of ContentsIf we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to support our business andto respond to business opportunities and challenges could be significantly limited, our business, operating results, financial condition and prospectscould be adversely affected, and we may not be able to meet our payment obligations under the FutureX Convertible Note and other indebtedness thatwe may incur from time to time.Our solutions may become less useful, and our business may be harmed, if we fail to adapt and respond effectively to rapidly developing technology,evolving industry standards and practices, and changing customer needs, requirements or preferences.The software industry is subject to rapid technological development, evolving industry standards and practices and changing customer needs,requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on atimely basis. If we are unable to develop and sell new solutions that satisfy our customers and provide enhancements and new features for our existingsolutions that keep pace with rapid technological change and industry developments, our revenues and operating results could be adversely affected. Ifnew technologies emerge that are able to deliver competitive solutions and applications at lower prices, more efficiently, more conveniently or moresecurely than our solutions, those technologies could adversely impact our ability to compete and adversely affect our operating results.Our efforts to further develop our technology through increased research and development activities and investment in our platforms may not yieldsatisfactory results, if any.The software industry is rapidly evolving and becoming more competitive. We will need to invest significant financial resources in research anddevelopment and our platform to keep pace with technological advances in the software industry and to effectively compete in the future. We haveexpended and may continue to expend significant financial resources in research and development activities and investment in our platform andcommercialization of new technologies and platforms to effectively compete with other market players in the future. However, research anddevelopment activities and development in platform are inherently uncertain, and we might encounter practical difficulties in commercializing ourresearch results and platform. Technologies that other companies may develop could prove to be more cost-effective that we develop. Therefore, ourresearch and development efforts and investment in platform may be rendered obsolete by the technological advances of others.To grow our business, we must achieve a high level of customer satisfaction and contract renewals, extend our relationships with existing customersover time and sell our solutions to new customers.We have no long-term customer contracts, and most of our customer contracts may be renewed on an annual basis. In addition, our top 20customers accounted for 55%, 55% and 44% of our total revenues during the years ended December 31, 2015, 2016 and 2017, respectively. For ourbusiness to grow and succeed we must achieve a high level of customer satisfaction so that our customers will renew their contracts with us andincrease their utilization of the solutions they purchase from us. This requires that our solutions perform up to customer expectations and customersachieve the return on investment that they expect. Even if our products perform to specifications, customers may choose not to renew or to cancel early.Our success also depends on our ability to extend our relationships with existing customers, both by growing their utilization of solutions they havepurchased and by selling additional products in our solution suites. Finally, our ability to achieve significant revenue growth in the future alsodepends on our ability to attract new customers.Our ability to generate customer renewal, customer expansion and new customer sales depends on many factors, including customer satisfactionwith the performance of our solutions, our prices, the prices of competing solutions, mergers and acquisitions affecting our customer base, the effects ofglobal economic conditions and reductions in customer spending levels generally. Our success with customers also depends on our ability to maintaina consistently high level of customer service and technical support to retain existing customers and attract new customers. If we are unable to hire andtrain sufficient support resources to provide adequate and timely support to our customers, our customers’ satisfaction with our solutions will beadversely affected. To the extent that our customers do not renew their contracts, terminate early or renew on less favorable terms or if our efforts to selladditional solutions to existing customers or new customers are not successful, our revenues may decline and our operating results could be adverselyaffected.We depend upon sales of our marketing automation solutions to enterprise customers for a significant portion of our revenues. A portion of therevenue from our marketing automation solutions is generated based on the volume of keyword placements with a small number of premium searchengines in China. The loss of any of these customers or search engines, or the reduction in their activities, could materially adversely affect ourbusiness, results of operations and financial condition.In 2015, 2016 and 2017, revenue from our enterprise customers accounted for 90%, 86% and 80% of our net revenues, respectively. We expectthat we will continue to depend upon enterprise customers for a significant portion of our revenues for the foreseeable future. A decline in sales to thesecustomers would adversely affect our business, financial condition and operating results. 11Table of ContentsOur marketing automation solutions allow our customers to automate the bidding for and purchase of keywords on search engines. A relativelysmall number of premium search engines, such as Baidu, Sogou and Qihoo 360, have historically accounted for a significant portion of the keywordinventory that customers purchased through our marketing automation solutions. In 2015, 2016 and 2017, a majority of the search keywordimpressions placed by customers using our marketing automation solutions were placed on Baidu websites. We expect that we will continue for theforeseeable future to depend upon a relatively small number of premium search engines for a significant portion of our customers’ purchases of searchkeywords. Because we have no long-term commitments from these search engines, they may reduce the inventory they sell to our customers. Forexample, if Baidu were to change its incentive programs for keyword placements by our marketing automation customers, or to cease doing businesswith us for any reason, our revenues and our financial results could be materially adversely affected.Our strategic relationships are an important part of our ability to grow our revenues, and if we do not maintain and strengthen those relationships,our results of operations and financial condition could be adversely affected.In cooperation with the State Information Center of China, or the SIC, we have established a non-governmental entity, the Research Center fore-Government, and a joint venture company to serve the website and critical business application system needs of PRC local, municipal, provincialand central governmental agencies. Our ability to continue to sell our solutions to public sector agencies will depend on continued cooperation of theSIC and is subject to many uncertainties. For example, the SIC may change its focus and reduce or terminate its support for the e-Government initiative,and PRC public sector agencies may face funding reductions or delays, reducing sales of our solutions. In the event that any of these risks materialize,our revenues and results of operations could be materially adversely affected.In 2016, we entered into a strategic cooperation agreement with the PRC Supreme People’s Court Press, or People’s Court Press, whichestablished a framework for the application of our technology to legal information services. We have collaborated with the People’s Court Press todevelop new offerings such as the Chinese Legal Information Platform (or “Faxin” in Chinese), and, in cooperation with Tencent, a litigation serviceon WeChat’s micro application platform (Faxin Wei Su). There can be no assurance that these new offerings will be successful.Selling to public sector customers in the PRC involves special risks. These sales often require significant upfront time and expense without anyassurance that these efforts will generate a sale. Governmental agencies may require us to comply with various regulations that are not applicable tosales to commercial enterprises, and may require us to put in place controls and procedures that may be costly to administer. Failure to comply with anysuch regulations could adversely affect our business, operating results and financial condition, and sales to public sector customers may prove to beunprofitable.If we are not able to develop and introduce new solutions and enhancements of existing solutions that achieve market acceptance, our businesscould be adversely affected.Our ability to attract new customers and increase revenues from existing customers depends in large part on our ability to enhance and improveour existing solutions, increase adoption and usage of our solutions and introduce new solutions. As such, the continued growth in market demand ofthese solutions is critical to our continued success. In addition, our ability to grow our business depends in part on our ability to increase marketacceptance of our other solutions, which are unproven. The success of new solutions and enhancements of existing solutions depend on many factors,including timely completion, adequate quality testing, introduction and market acceptance. Any new solutions that we develop may not be introducedin a timely or cost-effective manner, may contain errors or defects or may not achieve the broad market acceptance necessary to generate sufficientrevenues. If we are unable to successfully enhance our existing solutions to meet customer requirements, increase adoption and usage of our solutionsor develop new solutions, our business and operating results will be adversely affected.Our quarterly operating results may fluctuate significantly due to a wide range of factors, which makes our results difficult to predict.Our revenues and operating results could vary significantly from quarter to quarter as a result of many factors that are outside of our control,including: • fluctuation in our customer base; • timing and size of renewal of customer agreements and sales of additional solutions to existing customers; • timing and size of sales to new customers; • timing of our business expenses, in particular those associated with hiring of new employees; 12Table of Contents • introduction of solutions and enhancements by existing or new competitors in our market and changes in pricing for solutions offered byus or our competitors; • changes in customer budgets; • seasonal business fluctuations, as reflected in revenues that have generally been highest in the fourth quarter of a calendar year and lowestin the first quarter; • our ability to control costs and expenses; • the timing of satisfaction of revenue recognition criteria, particularly with regard to large transactions; • our ability to provide software solutions on-demand, without network outages or security breaches; • fluctuations in our effective tax rate; and • general economic and political conditions, domestically and internationally, as well as economic conditions affecting the specificindustries in which our customers operate.Any of these factors could cause our revenues and operating results to fluctuate, so quarter-to-quarter comparisons of our revenues, operating resultsand cash flows may not necessarily be indicative of our future performance.We believe that quarter-to-quarter comparisons of our revenues, operating results and cash flows may not be meaningful and should not be reliedupon as an indication of future performance. If our revenues or operating results fall below the expectations of investors or securities analysts in aparticular quarter or below any guidance we may provide, the price of the ADSs could decline. At such time as we announce our results for interimperiods in the year ended December 31, 2018, those results may differ from previously announced interim results, as a result of factors similar to thosedescribed in note 2(a) to our consolidated financial statements included in this annual report and other trends in our business.If the market for our cloud-based SaaS offerings develops more slowly than we expect, our growth may slow or stall, and our operating results wouldbe adversely affected.The market for business software that is delivered as cloud-based software-as-a-service, or SaaS, offerings is less mature than traditionalon-premises software applications, and the adoption rate of SaaS business software may be slower among customers in industries with heightened datasecurity concerns or business practices requiring highly customizable application software. Our success will depend to a substantial extent on thewidespread adoption of SaaS business software in general, but we cannot be certain that the trend of adoption of SaaS solutions will continue in thefuture. In particular, many organizations have invested substantial personnel and financial resources in integrating legacy software into theirbusinesses over time, and some have been reluctant or unwilling to migrate to SaaS. It is difficult to predict customer adoption rates and demand for oursolutions, the future growth rate and size of the SaaS business software market or the entry of competitive applications. The expansion of the SaaSbusiness software market depends on a number of factors, including the cost, performance and perceived value associated with SaaS, as well as theability of SaaS providers to address data security and privacy concerns. If SaaS business software does not continue to achieve market acceptance, orthere is a reduction in demand for SaaS business software caused by a lack of customer acceptance, technological challenges, weakening economicconditions, data security or privacy concerns, governmental regulation, competing technologies and solutions or decreases in information technologyspending, it would result in decreased revenues and our business would be adversely affected.Our growth prospects will be adversely affected if we do not successfully execute our mobile strategy, including developing, maintaining andenhancing the capabilities of our mobile solutions.The use of mobile devices to access the online content that our customers offer to their users is growing rapidly and displacing personalcomputer-based access to those customer offerings. If we cannot provide effective functionality through our mobile solutions, as required by ourcustomers, we may experience difficulty retaining and attracting customers.To deliver high quality applications, it is important that our solutions integrate with a wide range of other mobile technologies, systems,networks and standards that we do not control. We may not be successful in developing solutions that operate effectively with these technologies,systems, networks or standards. We have devoted and we expect to continue to devote substantial resources to our mobile solutions, and we cannotguarantee that the capabilities of our mobile solutions will be attractive to existing or potential customers. If we do not succeed in continuing todevelop, maintain and enhance the capabilities of our mobile solutions, our growth prospects in the mobile sector will be adversely affected. 13Table of ContentsWe may continue to conduct acquisitions and enter into joint ventures, investments or other strategic alliances which may be unsuccessful.We may continue to grow our operations through acquisitions, as well as joint ventures or other strategic alliances when appropriateopportunities arise. Such acquisitions, joint ventures and strategic alliances may expose us to operational, regulatory and market risks as well as risksassociated with additional capital requirements and diversion of management attention. In particular, strategic alliances may expose us to unforeseenrisks relating to our counterparty’s business and operations or liabilities that were not discovered by us through our legal and business due diligenceprior to our investment, or failure to generate anticipated revenue or other benefits from the acquisition, joint venture or alliance. Any of these riskscould have a material adverse effect on our business, financial condition and results of operations.Our future growth, if any, depends on being able to expand our direct sales force and customer service and technical support team successfully.Our ability to increase our customer base, sell more of our solutions and achieve broader market acceptance of our solutions depends, to asignificant extent, on our ability to expand our marketing and sales operations. To date, most of our growth has been attributable to the efforts of ourdirect sales force, which consists of a limited number of quota-carrying sales personnel and a limited number of customer service consultants. Weintend to increase substantially the number of our direct sales personnel and customer service consultants. We believe there is significant competitionfor personnel with the skills and technical knowledge that we require, and from time to time we have experienced and expect to continue to experiencesignificant turnover within our sales force. To the extent we experience unusual levels of turnover within our sales force or lose particularly valuablecontributors, it may limit our ability to grow revenues and may harm our sales force productivity, which could lead to revenue declines. Our ability toachieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personneland customer service consultants to support our growth. New hires require significant training and may take significant time before they achieve fullproductivity. Newly hired personnel may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers ofqualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow rapidly, a large percentage of oursales force will be new to our company and our solutions, which may make it more difficult to train our sales force effectively and may adversely affectour sales. If we are unable to hire and train sufficient numbers of effective sales personnel and customer service consultants or if our sales force is notsuccessful in obtaining new customers or increasing sales to our existing customer base, our business will be adversely affected.We have not been in compliance with the Nasdaq requirements for continued listing and as a result our ADSs may be delisted from trading onNasdaq, which would have a material effect on us and our shareholders.We have been delinquent in the filing of our periodic reports with the SEC, as a result of which we are not in compliance with the rules of TheNasdaq Stock Market and are subject to having our ADSs delisted from trading there. We have attended the hearing with a Nasdaq Hearings Panel,seeking suspension of delisting. On January 4, 2019, we received a letter from the Nasdaq Hearings Panel granting our request to remain listed onNasdaq, subject to being current in our filings with the SEC on or before January 31, 2019 and certain other conditions. There can be no assurance thatwe will be able to comply with these conditions, in which case our ADSs may be subject to delisting by Nasdaq. If our ADSs are delisted, there can beno assurance whether or when it would again be listed for trading on Nasdaq or any other stock exchange. If our ADSs are delisted, the market price ofour ADSs will likely decline and become more volatile, and our shareholders may find that their ability to trade in our ADSs will be adversely affected.Furthermore, institutions whose charters do not allow them to hold securities in unlisted companies might sell our shares, which could have a furtheradverse effect on the price of our ADSs.As a result of the delayed filing of our periodic reports with the SEC, we are not currently eligible to use a registration statement on Form F-3 toregister the offer and sale of securities, which may adversely affect our ability to raise future capital or complete acquisitions.As a result of the delayed filing of our periodic reports with the SEC, we will not be eligible to register the offer and sale of our securities using aregistration statement on Form F-3 until we have timely filed all periodic reports required under the Securities Exchange Act of 1934 for twelvecalendar months immediately prior to filing of the Form F-3 and there can be no assurance that we will be able to timely file such reports in the future.Should we wish to register the offer and sale of our securities to the public, our transaction costs would increase and the amount of time required tocomplete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financialcondition.Our accounts receivable have increased, and our business and results of operations may be adversely affected if we fail to collect amounts owed, or ifour allowance for doubtful accounts increases.Our business depends on our ability to collect our accounts receivable, which mainly represent amounts owed to us from our customers. Failureto collect these accounts receivable in a timely manner may adversely affect our cash flows and results of operations. 14Table of ContentsWe make allowance for the portion of our accounts receivable that we consider unrecoverable. The allowance is based on an assessment ofspecific evidence indicating doubtful collection, historical experience, account balance aging, prevailing economic conditions and relationships withour customers, among other factors. Changes in the amount can result from many factors, including the growth or changes in our customer base,turnover in personnel, changes in payment policies or practices of customers, or changes in the financial conditions of our customers.The amount of our accounts receivable (net of allowance for doubtful accounts) increased from RMB273.5 million as of December 31, 2015 toRMB355.9 million as of December 31, 2016 and RMB599.3 million (US$92.1 million) as of December 31, 2017, and represented 44.2%, 29.4% and42.7% of our total assets as of December 31, 2015, 2016 and 2017, respectively. Moreover, our allowance for doubtful accounts increased fromRMB1.3 million, or 0.5% of our total accounts receivable before allowance for doubtful accounts as of December 31, 2015, to RMB21.0 million, or5.6% of our total accounts receivable before allowance for doubtful accounts as of December 31, 2016 and RMB45.4 million (US$7.0 million), or 7.1%of our total accounts receivable before allowance for doubtful accounts as of December 31, 2017. Increases in our allowance for doubtful accounts mayadversely affect our business and results of operations.Failure to protect our customers’ proprietary data could expose us to risks of liability, loss of business and reputational damage.Our business depends upon the proper storage, transmission and processing of our customers’ proprietary data, including some personallyidentifiable information. Security breaches, computer malware and computer hacking attacks could expose us to risks of loss of important customerinformation, which could result in loss of business, reputational damage, regulatory investigations and orders, litigation, indemnity obligations,damages for contract breach, penalties for violation of applicable laws or regulations and significant costs for remediation and incentives to customersor other business partners in an effort to maintain business relationships after a breach.Cyberattacks and other malicious internet-based activity continue to increase generally. If our security measures are perceived as weak or arecompromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise,our customers may curtail or stop using our solutions, our reputation could be damaged, our business could be adversely affected, and we could incursignificant liability. We may be unable to anticipate or prevent techniques used to obtain unauthorized access or to sabotage systems because theychange frequently and generally are not detected until after an incident has occurred. As we increase our customer base and our brand becomes morewidely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorizedaccess to our customers’ data.Many of our contracts do not have limitation of liability provisions for a security lapse or breach, and we cannot assure you that any contractuallimitations of liability provisions would be enforceable or would otherwise protect us from any liabilities or damages with respect to any particularclaim. We do not have insurance to cover such liabilities and damages, and cannot be sure that insurance coverage will be available on acceptableterms, will be available in sufficient amounts to cover one or more large claims related to a security breach, or that the insurer will not deny coverage asto any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence ofchanges in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have amaterial adverse effect on our business, including expansion rates, financial condition, operating results and reputation.Our business collects and processes a large amount of data, and the improper use or disclosure of such data could harm our reputation as well ashave a material adverse effect on our business and prospects.In the course of performing data analysis for our customers, we collect and process a large quantity of personal, transactional, demographic andbehavioral data. Although we do not store any personally identifiable information, we nevertheless face risks inherent in handling large volumes ofdata and in protecting the security of such data. In particular, we face a number of challenges relating to data about internet users who visit ourcustomers’ websites: • protecting the data in and hosted on our system, including against attacks on our system by outside parties or fraudulent behavior orimproper use by our employees; • addressing concerns related to privacy and sharing, safety, security and other factors; and • complying with applicable laws, rules and regulations relating to the collection, use, disclosure or security of personal information,including any requests from regulatory and government authorities relating to such data.Any systems failure or security breach or lapse on our part that results in the release of user data could harm our reputation and brand and,consequently, our business, in addition to exposing us to potential legal liability. 15Table of ContentsSubstantial uncertainties exist with respect to China’s Cyber Security Law as well as any impact it may have on our business operations.China’s Cyber Security Law aims to establish stringent requirements for network operators in China, and applies to the construction, operation,maintenance and use of networks as well as the supervision and administration of cyber security. Under the Cyber Security Law, network operators,who are broadly defined as “owners and administrators of networks and network service providers,” are required to take necessary actions to preventsecurity attacks and data loss, including data classification, backup and encryption. Furthermore, the Cyber Security Law specifies requirements onuser information protection applicable to network operators, who are prohibited from disclosing without permission or selling individual informationwith limited exceptions. When network operators become aware of any information that is prohibited by laws and administrative regulations, they arerequired to immediately cease transmission of such information, and take measures such as deletion of relevant information to prevent itsdissemination. Network operators are also required to maintain a record of these incidents when they occur and report them to the relevant authorities.Where any information that comes from outside the territory of China is prohibited by law or regulation, the authorities may request relevantinstitutions to take measures to stop the flow of such prohibited information. The Cyber Security Law also emphasizes the protection of keyinformation infrastructure in important industries and fields, such as e-Government, and operators of such key information infrastructure will be subjectto stricter security obligations. For example, an operator of key information infrastructures is generally required to store in the PRC personalinformation and important business data collected and generated during its business operations within the PRC, and to assess its network security andidentify potential risks at least once a year.We may be deemed a “network operator” and thus subject to the various requirements applicable to network operators under the Cyber SecurityLaw. Furthermore, as a provider of e-Government solutions, we may be deemed an operator of key information infrastructure and subject to strictersecurity obligations. Compliance with the Cyber Security Law, as well as additional laws and regulations that PRC regulatory agencies may enact fromtime to time, may result in additional expenses to us, subject us to negative publicity which could harm our reputation with users and negatively affectthe trading price of our ADSs. There are also uncertainties with respect to how the Cyber Security Law will be implemented in practice. PRC regulatorshave been increasingly focused on regulation in the areas of data security and data protection. We expect that these areas will receive greater attentionand focus from regulators, as well as attract continued or greater public scrutiny and attention going forward, which could increase our compliancecosts and subject us to heightened risks and challenges associated with data security and protection. For example, in response to the heightened datasecurity requirements from our expanding e-Government customer base, in particular our customers in the judicial system, since 2016, we outsourcedsome of our software optimization and data security enhancement work to two China-based specialist companies in this field, and expect to continue toincur expenses for such outsourced services in the near future, until we obtain the necessary government certifications to handle such work in-house. Ifwe are unable to manage these risks, we could become subject to penalties, including fines, suspension of business and revocation of required licenses,and our reputation and results of operations could be materially adversely affected. For the summary of the Cyber Security Law, please see “Item 4.Information on the Company—B. Business Overview—Regulations—Regulations on Network Security.”If we lose key members of our management team or are unable to attract and retain executives and employees we need to support our operations andgrowth, our business could be adversely affected.Our success and future growth depend largely upon the continued services of our executive officers and other key employees in the areas ofresearch and development, marketing, sales, services and general administrative functions. From time to time, there may be changes in our executivemanagement team or other key employees resulting from the hiring or departure of these personnel. The loss of one or more of our executive officers,particularly our chief executive officer and chairman, Guosheng Qi, or the failure of our executive team to work with our employees and lead ourcompany effectively, could adversely affect our business.In addition, we must attract and retain highly qualified personnel to execute our growth plan. Competition for these personnel in Beijing, whereour headquarters and the majority of our research and development personnel are located, and in other locations where we maintain offices is intense,especially for engineers experienced in designing and developing data analysis and digital intelligence solutions software and experienced salesprofessionals. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees withappropriate qualifications. Many of the companies with which we compete for experienced personnel are larger and have greater resources than wehave. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees have breached theirlegal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of theequity awards they receive in connection with their employment. If the perceived value of our equity awards declines or experiences significantvolatility, it may be more difficult for us to recruit and retain key employees. If we fail to attract new personnel or fail to retain and motivate our currentpersonnel, our business and future growth prospects could be adversely affected. 16Table of ContentsThe market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be adversely affected.The market for digital intelligence solutions is rapidly evolving, fragmented and highly competitive, with relatively low barriers to entry in somesegments. Our competitors fall into three primary categories: • diversified technology companies such as Google, IBM, Microsoft and Oracle; • bid management companies such as adSage, CubeAd, MediaV and Adobe Media Optimizer; and • web analytics companies such as Adobe Omniture, WebTrends, Miaozhen Systems, AdMaster and Sensordata.Each of IBM, Oracle and Salesforce.com offer “marketing cloud” solutions to customers, and we believe these companies and Adobe are ourprimary competitors in the market for marketing automation solutions. Still in its infancy, China’s legal technology market is fast growing, highlyfragmented and intensely competitive; we face competition from startups and other companies, such as Beijing Thunisoft and Lawyee, in this market.Some of our competitors and potential competitors are larger and have greater name recognition, longer operating histories, more establishedcustomer relationships, larger budgets, significantly greater resources and more operating flexibility to bundle competing solutions and services withother software offerings at little or no perceived incremental cost, including offering them at a lower price as part of a larger sale. As a result, ourcompetitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customerrequirements. In addition, some competitors may offer solutions or services that address one or a limited number of functions at lower prices or withgreater depth than our solutions. Our current and potential competitors may develop and market new technologies with comparable functionality toour solutions, and this could lead to us having to decrease prices in order to remain competitive.With the introduction of new technologies and new market entrants, we expect competition to intensify. As we expand the scope of our solutions,we may face additional competition. Additionally, some existing and potential customers, particularly large enterprises, may elect to develop their owninternal solutions. If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscapecould also adversely affect our ability to compete effectively. If we are unable to maintain our current pricing due to the competitive pressures, ourmargins will be reduced and our operating results will be adversely affected. Pricing pressures and increased competition generally could result inreduced sales and margins, losses or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which couldadversely affect our business.Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.Our success depends in part on reliable customer access to our solutions and reliably high performance by our solutions. We may experiencedisruptions, outages and other performance problems due to a variety of factors, including downtime at leased data center facilities, infrastructurechanges, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users accessing oursolutions simultaneously, denial of service attacks or other security related incidents. In addition, the availability and performance of our solutions areimportant to our customers, but it may become more difficult over time to maintain and improve our performance levels, especially during peak usagetimes, and as our solutions become more complex and our usage volume increases. If our solutions are unavailable to customers when needed or oursolutions do not perform up to expected levels for any reason, our business will be adversely affected. Addressing these problems will require us toaddress capacity constraints, continually upgrade our systems and continually develop our technology and network architecture, which will increaseour costs and may adversely affect our operating results.Software errors, failures, vulnerabilities and bugs in our solutions could diminish demand for our solutions, adversely affect our financial resultsand subject us to liability.Our customers depend on our solutions for important aspects of their businesses, and any errors, defects or disruptions to our solutions or otherperformance problems with our solutions may damage our customers’ businesses and could hurt our brand and reputation. We provide regular updates,which may contain undetected errors when first introduced or released. In the past, we have discovered software errors, failures, vulnerabilities and bugsin our solutions after they have been released, and additional errors in our existing solutions may be detected in the future. Real or perceived errors,failures or bugs in our solutions could result in negative publicity, loss of or delay in market acceptance of our solutions, loss of competitive position,delay of payment to us, lower renewal rates or claims by customers for losses sustained by them. In such an event, we may be required, or may choosefor customer relations reasons or otherwise, to expend additional resources in order to help correct the problem. As a result, we could lose future salesand our reputation and our brand could be adversely affected. In addition, we currently do not and may not in the future carry insurance sufficient tocompensate us for any losses that may result from claims arising from defects or disruptions in our solutions. 17Table of ContentsAny failure to protect our intellectual property rights could impair our ability to protect our proprietary technology.Our success depends to a significant degree on our ability to protect our proprietary technology. We will not be able to protect our intellectualproperty if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. If we fail to protect our intellectualproperty rights adequately, our competitors may gain access to our technology and our business could be adversely affected.We rely on a combination of patents, trademarks, trade secrets, copyrights, service marks, contractual restrictions and other intellectual propertylaws and confidentiality procedures to establish and protect our proprietary rights. However, the steps we take to protect our intellectual property maybe inadequate. We may be unable to obtain any patent protection for our technology subject to the pending patent applications. Any patents,trademarks or other intellectual property rights that we obtain may be challenged by others or invalidated through administrative process or litigation.We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements withother parties. There is no assurance that these agreements will be effective in controlling access to and distribution of our proprietary information.Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. The lawsof the PRC are not as protective of intellectual property rights as those in the United States, and legal procedures for enforcement of intellectualproperty rights may be inadequate in China. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon ormisappropriating our intellectual property.We may be required to spend significant resources in monitoring and protecting our intellectual property rights. We may be required to pursuelitigation to protect our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual propertyrights could be costly, time-consuming and distracting to management, and it could also result in the impairment or loss of portions of our intellectualproperty. Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validityand enforceability of our intellectual property rights. Our failure to protect our proprietary technology against unauthorized copying or use, as well asany costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our solutions, impairthe functionality of our solutions, delay introductions of new solutions, result in our substituting less effective or more costly technologies into oursolutions or injure our reputation.We may be sued by third parties for alleged infringement of their proprietary rights.There are considerable patent, copyright, trademark, trade secret and other intellectual property development activities in our industry. Oursuccess depends in part on not infringing on the intellectual property rights of others. From time to time, our competitors or other third parties mayclaim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. Any claims or litigation,regardless of merit, could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damagesor ongoing royalty payments, prevent us from offering our solutions or require that we comply with other unfavorable terms.Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources spent in resolving them, coulddivert the resources of our management and adversely affect our business and operating results. We expect that the occurrence of infringement claims islikely to grow as the market for digital intelligence solutions grows. Accordingly, our exposure to damages resulting from infringement claims couldincrease and this could further divert our financial and management resources.Our use of open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.We use open source software in our solutions and expect to continue to use open source software in the future. We may face claims from othersclaiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the open source software,derivative works or our proprietary source code that was developed using such software. These claims could also result in litigation, require us topurchase a costly license or require us to devote additional research and development resources to change our technologies, any of which would have anegative effect on our business and operating results. In addition, if the license terms for the open source software we utilize change, we may be forcedto reengineer or discontinue our solutions or incur additional costs. We cannot be certain that we have incorporated open source software in oursolutions in a manner that is consistent with our policies. 18Table of ContentsNatural disasters and other events beyond our control could adversely affect our business.Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy,and thus could have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages,pandemics and other events beyond our control. We rely on our network and third-party data center infrastructure, customers’ internal technologysystems and our website for our development, marketing, operational support, hosted solutions and sales activities. Although we maintain crisismanagement and disaster response plans, in the event of a major earthquake, hurricane or other catastrophic event such as fire, power loss,telecommunications failure, cyber-attack, war or terrorism, we may be unable to continue operations without interruption and may suffer lost revenues,delays in developing important software, reputational harm, breaches of data security and loss of critical data, all of which could have an adverse effecton our results of operations.Risks Relating to Our Corporate StructureWe conduct our businesses in China through our variable interest entity and its subsidiaries by means of contractual arrangements. If the PRCgovernment determines that such arrangements do not comply with applicable PRC laws and regulations, our business could be materially adverselyaffected.PRC laws and regulations impose restrictions on foreign ownership of companies that engage in internet, market survey and other relatedbusinesses from time to time. Specifically, foreign ownership of an internet content provider may not exceed 50% and the primary foreign investor ofsuch provider must have a record of good performance and operating experience in managing internet content service.We are a company registered in the Cayman Islands and Dissector (Beijing) Technology Co., Ltd., our wholly owned PRC subsidiary that werefer to as the WFOE, is considered a foreign-invested enterprise, or FIE. To comply with PRC laws and regulations, we conduct our business in Chinathrough Gridsum Holding (Beijing) Co., Ltd., or Gridsum PRC Holding, and its subsidiaries, based on a series of contractual arrangements among theWFOE, Gridsum PRC Holding and its shareholders. The shareholders of Gridsum PRC Holding are our founders, Guosheng Qi and Guofa Yu, and aholding company owned by Guosheng Qi and other key employees. As a result of these contractual arrangements, we exert control over Gridsum PRCHolding, which is our variable interest entity, or VIE, and its subsidiaries, and we consolidate their operating results in our financial statements underU.S. GAAP. The subsidiaries of Gridsum PRC Holding hold the licenses and key assets that are essential for our business operations. For a detaileddescription of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangementswith Gridsum PRC Holding and its Shareholders.”There are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. If the contractualarrangements among the WFOE, Gridsum PRC Holding and the shareholders of Gridsum PRC Holding are determined to be illegal or invalid, therelevant governmental authorities would have broad discretion in dealing with such violation, including revoking our business and operating licenses,requiring us to discontinue or restrict operations, restricting our rights to collect revenues, confiscating our income, requiring us to restructure ourownership structure or operations, imposing additional conditions or requirements with which we may not be able to comply or levying fines. Theseactions could cause significant disruption to our business operations and may materially adversely affect our business, financial condition andoperating results.We rely on contractual arrangements with Gridsum PRC Holding and its shareholders for our operations in China, which may not be as effective inproviding operational control as direct ownership.We have relied and expect to continue to rely on contractual arrangements with Gridsum PRC Holding, in which we have no ownership interest,and the shareholders of Gridsum PRC Holding to conduct our business in China. These contractual arrangements are intended to provide us witheffective control over Gridsum PRC Holding and its subsidiaries and allow us to obtain economic benefits from them, but may not be as effective asdirect ownership. If Gridsum PRC Holding or its shareholders fail to perform their respective obligations under the contractual arrangements, we mayincur substantial costs and expend substantial resources to enforce our rights.All of these contractual arrangements are governed by and interpreted in accordance with PRC law, and disputes arising from these contractualarrangements will be resolved through arbitration in China. There are very few precedents and little official guidance as to how contractualarrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimateoutcome of arbitration should legal action become necessary. The relevant PRC arbitration panel may conclude that our contractual arrangementsviolate PRC law or are otherwise unenforceable. In addition, arbitration awards are final and can only be enforced in PRC courts through arbitrationaward recognition proceedings, which could cause additional expenses and delays. In the event that we are unable to enforce these contractualarrangements or we experience significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able toexert effective control over Gridsum PRC Holding, and may lose control over the assets owned by it and its subsidiaries. As a result, we may be unableto consolidate Gridsum PRC Holding and its subsidiaries in our consolidated financial statements, our ability to conduct our business may beadversely affected, and our business operations could be severely disrupted. 19Table of ContentsThe beneficial owners of Gridsum PRC Holding may have potential conflicts of interest with us, which may materially adversely affect our business.The beneficial owners of Gridsum PRC Holding, our VIE, include Guosheng Qi, Guofa Yu and other key employees. Conflicts of interest mayarise between the roles of these individuals as shareholders, directors and officers of our company on the one hand and as beneficial owners of GridsumPRC Holding on the other. We rely on these individuals to abide by the laws of the Cayman Islands, which provide that directors and officers owe afiduciary duty to our company to act in good faith and in the best interest of our company and not to use their positions for personal gain. We cannotassure you that when conflicts of interest arise, beneficial owners of Gridsum PRC Holding will act in the best interest of our company or that conflictswill be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and these shareholders, we would have to rely onlegal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcomeof any such legal proceedings.Contractual arrangements with our consolidated affiliated entities may result in adverse tax consequences to us.Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by thePRC tax authorities. We could face adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among the WFOE,Gridsum PRC Holding and the shareholders of Gridsum PRC Holding are not on an arm’s length basis and therefore constitute favorable transferpricing. The PRC tax authorities could require that Gridsum PRC Holding adjust its taxable income upward. Such an adjustment could adversely affectus by increasing Gridsum PRC Holding’s tax expenses without necessarily reducing the tax expenses of the WFOE, and subjecting Gridsum PRCHolding to late payment fees and other penalties for under-payment of taxes. As a result, our consolidated operating results could be adversely affected.We may lose the ability to use assets held by Gridsum PRC Holding or its subsidiaries that are important to the operation of our business if any ofthem goes bankrupt or becomes subject to a dissolution or liquidation proceeding.Gridsum PRC Holding and its subsidiaries hold assets and perform functions that are important to the operation of our business. In particular,Gridsum PRC Holding and its subsidiaries hold almost all patents for our proprietary technology, domain names, trademarks, copyrights and otherintellectual property rights. In the event that Gridsum PRC Holding or any of its subsidiaries enters into bankruptcy or undergoes a voluntary orinvoluntary liquidation proceeding, all or part of its assets will become subject to liens or rights of third-party creditors. As a result, we may be unableto continue some or all of our business operations, which could materially adversely affect our business, financial condition and operating results.Substantial uncertainties exist with respect to the enactment timetable and final content of a draft new PRC Foreign Investment Law and how it mayimpact the viability of our current corporate structure and business operations.In January 2015, the Ministry of Commerce of the PRC, or the MOFCOM, published a discussion draft of the Foreign Investment Law for publicreview and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principleof “actual control” in determining whether a company should be treated as an FIE. It specifically provides that entities established in China (withoutdirect foreign equity ownership) but “controlled” by foreign investors, through contract or trust for example, will be treated as FIEs. Once an entity fallswithin the definition of FIE, it may be subject to foreign investment “restrictions” or “prohibitions” set forth in a “negative list” to be separately issuedby the State Council later. If an FIE proposes to conduct business in an industry subject to foreign investment “restrictions” in the “negative list,” theFIE must go through a MOFCOM pre-approval process.Under the draft Foreign Investment Law, VIEs that are controlled via contractual arrangements would be deemed as FIEs if they are ultimately“controlled” by foreign investors, and any of their operations in the industry categories included in the “negative list” without MOFCOM pre-approvalmay be considered illegal. Conversely, for any companies with a VIE structure engaged in a “restricted” business included in the “negative list,” theVIE structure may be deemed legitimate if it is ultimately controlled by PRC nationals. The draft Foreign Investment Law is not specific on what willhappen to companies with an existing VIE structure. 20Table of ContentsThe internet content service and market survey businesses that we conduct through our VIE are subject to foreign investment restrictions set forthin the Special Administrative Measures (Negative List) for Foreign Investment Access (Edition 2018) issued by the MOFCOM and the NationalDevelopment and Reform Commission, or the Special Administrative Measures. It is unclear whether the new “negative list” will be different from therelevant categories in the Special Administrative Measures. Substantial uncertainties exist with respect to the enactment timetable and final content ofthe draft Foreign Investment Law. If the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions to be takenby us, such as a MOFCOM pre-approval process, there is no assurance that we can obtain such pre-approval on a timely basis, or at all.Risks Relating to Doing Business in ChinaAdverse changes in economic and political policies of the PRC government could have a material adverse effect on overall economic growth inChina, which could materially adversely affect our business.Substantially all of our operations are conducted in China and substantially all of our revenues are generated in China. Accordingly, ouroperating results, financial condition and prospects are influenced by the economic, political and legal conditions and developments in China. China’seconomy differs from the economies of most developed countries in many respects, including the amount of government involvement in the economy,the general level of economic development, growth rates, foreign exchange control and allocation of resources. The PRC government exercisessignificant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominatedobligations, setting monetary policies and providing preferential treatment to particular industries or enterprises. Any adverse changes in the policiesof the Chinese government or in PRC laws and regulations could have a material adverse effect on the overall economic growth of China, result indecreased demand for our solutions and adversely affect our business and operating results. In addition, our revenues are dependent on the number ofour customers and the scope of the solutions used by our customers. Historically, during economic downturns there have been reductions in spendingon digital intelligence as well as pressure for extended billing terms and other financial concessions. These conditions affect the level of informationtechnology spending and could adversely affect our customers’ ability or willingness to purchase our solutions, delay prospective customers’purchasing decisions, reduce the value or duration of their contracts or affect renewal rates, all of which could adversely affect our operating results.Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to our shareholders andus.The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited forreference but have limited precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulationsgoverning economic matters. Since then, the legislation has enhanced the protections of foreign investments in China. However, China has notdeveloped a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities inChina. The interpretation and enforcement of these laws and regulations involve uncertainties. Since the PRC administrative authorities and courtshave significant discretion in interpreting and implementing statutory and contractual terms, it may be difficult to evaluate the outcome ofadministrative and court proceedings and the level of legal protection available to our shareholders and us.Furthermore, the PRC legal system is partly based on government policies and internal rules, some of which are not published in a timely manneror at all, and some of which may have retroactive effects. As a result, we may not be aware of our violation of any of these policies or rules untilsometime after the violation. Such uncertainties, including the uncertainty over the scope and effect of our contractual, property (including intellectualproperty) and procedural rights could materially adversely affect our business and impede our ability to continue our operations.The PRC regulations on offshore holding companies providing loans to and making direct investments in PRC entities may delay or prevent us frommaking capital contributions or loans to our PRC subsidiary.From time to time, we may need to finance and transfer funds to the WFOE by means of shareholder loans or capital contributions to fund ourbusiness operations in the PRC. According to a notice issued by the People’s Bank of China regarding foreign debt on January 12, 2017, the maximumamount of foreign debt that the WFOE is allowed to borrow is two times of its net assets. Pursuant to this notice and other PRC laws and regulationsregarding foreign debt, within a one-year grace period starting from January 12, 2017, the statutory limit for the total amount of foreign debt of aforeign-invested company, which is subject to its own election, is either the difference between the amount of total investment and the amount ofregistered capital, or two times of their respective net assets. Although the one-year grace period has expired, the abovementioned statutory limit is stillapplicable to foreign-invested company in practice. Any loans we make to the WFOE cannot exceed statutory limits, and must be registered with theState Administration of Foreign Exchange, or SAFE, or its local counterparts. Any capital contributions we make to the WFOE must be approved byappropriate governmental agencies. We may not be able to obtain these approvals on a timely basis, if at all. If we fail to obtain such approvals, ourability to provide capital contributions or loans to the WFOE in a timely manner may be adversely affected, which could materially adversely affectour liquidity and our ability to fund and expand our business. 21Table of ContentsMoreover, the registered capital of the WFOE settled in RMB converted from foreign currencies may only be used within the business scoperegistered with the applicable governmental authority and may not be used to grant loans through entrustment arrangements with a bank, repay inter-company loans or repay bank loans that have been transferred to a third party. This may significantly limit our ability to fund our business operationsin China.The failure of our PRC-resident beneficial owners to comply with PRC foreign exchange regulations may subject the WFOE to liability or penalties,limit our ability to inject capital into the WFOE or limit the WFOE’s ability to distribute profits.On July 4, 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ OutboundInvestment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires a PRC residentto make SAFE registration prior to contributing assets or interests to an overseas special purpose vehicle, or SPV, that is directly established orindirectly controlled by such PRC resident for the purpose of conducting investment or financing. SAFE Circular 37 further requires the PRC residentto make amendment registrations in the event of any major changes or events with respect to the SPV, such as increase or decrease of capitalcontributed by PRC individuals, share transfer or exchange, merger or division. In the event that a PRC-resident shareholder holding interests in a SPVfails to complete the required SAFE Circular 37 registration, the PRC subsidiary of the SPV may be prohibited from making profit distributions to itsoffshore parent and from carrying out subsequent cross-border foreign exchange activities, and the SPV may be restricted in its ability to contributeadditional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements could result in liability underthe PRC law for evading foreign exchange controls.The beneficial owners of Generation Gospel Limited, Garden Enterprises Ltd. and Fairy Spirit Limited who are PRC residents have completedinitial registrations under SAFE Circular 37 with the local counterparts of SAFE relating to their investments in us. However, we may not be aware ofthe identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and cannot assure you that all ofour PRC-resident beneficial owners have complied and will comply with SAFE Circular 37 and subsequent implementation rules. The failure of ourexisting or future beneficial owners who are PRC residents to comply with the registration requirements and procedures set forth in SAFE Circular 37and subsequent implementation rules may subject the WFOE to fines and legal sanctions, limit our ability to contribute additional capital to the WFOEand limit the WFOE’s ability to distribute dividends or make other distributions to our company, which could adversely affect our business andprospects.We and our Hong Kong subsidiary may be classified as a “PRC resident enterprise” for PRC enterprise income tax purposes, which would likelyresult in unfavorable tax consequences to us and our non-PRC shareholders.The PRC Enterprise Income Tax Law, or the EIT Law, provides that an enterprise established outside China whose “de facto management body”is located in China is considered a “PRC resident enterprise” and will generally be subject to the uniform 25% PRC enterprise income tax on its globalincome. Under the implementation rules of the EIT Law, “de facto management body” is defined as the organizational body which effectively managesand controls the production and business operation, personnel, accounting, properties and other aspects of operations of an enterprise.An overseas incorporated enterprise controlled by PRC enterprises or PRC enterprise groups is considered a PRC resident enterprise if all of thefollowing conditions are met: (i) the senior management and core management departments in charge of daily operations are located mainly in thePRC; (ii) financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (iii) major assets,accounting books, company seals and minutes and files of board and shareholders’ meetings are located or kept in the PRC; and (iv) at least half of theenterprise’s directors or senior management with voting rights habitually reside in the PRC. Although these standards only apply to offshoreenterprises that are controlled by PRC enterprises or PRC enterprise groups, such standards may reflect the general view of the SAT in determining thetax residence of overseas incorporated enterprises.If the PRC tax authorities determine that our company or any of our non-PRC subsidiaries is a PRC resident enterprise for PRC enterprise incometax purposes, we or any such non-PRC subsidiary could be subject to PRC enterprise income tax at a rate of 25% on our or its global income, whichcould materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if thePRC tax authorities determine that our company is a PRC resident enterprise, dividends paid by us and gains realized on the sale or other disposition ofthe ADSs or our ordinary shares may be subject to PRC tax, at a rate of 10% if the shareholder is a non-PRC resident enterprise or 20% in the case of anon-PRC individual shareholder (in each case, subject to the provisions of any applicable tax treaty). Such tax may materially reduce the value of theADSs. 22Table of ContentsAny limitation on the ability of the WFOE to make distributions to us, or the tax implications thereof, could have a material adverse effect on ourbusiness or financial condition.We are a holding company, and we rely principally on dividends and other distributions from the WFOE for our cash needs, including the fundsnecessary to pay dividends to our shareholders or to service any debt we may incur. Current PRC regulations permit the WFOE to pay dividends onlyout of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, the WFOE is required toset aside at least 10% of its after tax profits each year, if any, to fund statutory reserve funds until the aggregate amount of such reserve funds reaches50% of its registered capital. Apart from these reserves, the WFOE may allocate a discretionary portion of its after-tax profits to staff welfare and bonusfunds at its discretion. These reserves and funds are not distributable as cash dividends. We cannot assure you that the WFOE will generate sufficientearnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interestand expenses or declare dividends.Since 2016, PRC governmental authorities began imposing more stringent restrictions on outbound capital flows, including through regulationsthat tightened the authentication and compliance verification of cross-border transactions and cross-border capital flow, such as by requiring banks toverify board resolutions, tax filing forms and audited financial statements before wiring foreign invested company’s foreign exchange dividenddistribution of over US$50,000. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on ForeignExchange.” Any restrictions on outbound capital flows may limit our ability to utilize revenue generated in the PRC to pay dividends in foreigncurrencies to our shareholders, including holders of our ADSs, or to fund our business activities or service any debt we may incur outside of the PRC.Distributions made by a PRC company to its offshore parent are generally subject to a 10% withholding tax under the EIT Law. Pursuant to theEIT Law and the Arrangement Between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation andPrevention of Fiscal Evasion With Respect to Taxes on Income, the withholding tax rate on dividends paid by the WFOE to Gridsum HK wouldgenerally be reduced to 5%, provided that Gridsum HK is the beneficial owner of the income sourced from China. However, on February 3, 2018, SATpromulgated the Announcement Regarding the Beneficial Owners in Tax Treaties, which provides that a comprehensive analysis should be carried outin the determination of a beneficial owner, and certain factors would put Gridsum HK in an unfavorable position in such determination, including butnot limited to its non-engagement in substantive business activities. If Gridsum HK is not regarded as a beneficial owner, it will not be entitled to the5% withholding tax rate with respect to any dividends or distributions made by the WFOE, which would be subject to 10% withholding tax and wouldreduce our ability to make distributions or dividends to holders of ADSs.Governmental control of currency conversion may limit our ability to pay dividends and other obligations and affect the value of your investment.The PRC government imposes controls on the convertibility of the RMB into foreign currencies and the remittance of currency out of China. Wereceive substantially all of our revenues in RMB, and substantially all of our cash inflows and outflows are denominated in RMB. We primarily rely ondividend payments from the WFOE to fund any cash and financing requirements we may have.Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and tradeand service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as routine proceduralrequirements are fulfilled. Therefore, the WFOE is allowed to pay dividends in foreign currency to us without pre-approval from SAFE. However,approval from or registration with competent government authorities is required where the RMB is to be converted into foreign currency and remittedout of China to pay capital account items such as the repayment of loans denominated in foreign currencies. Also, the PRC government may at itsdiscretion restrict access to foreign currencies for current account items in the future. If the foreign exchange control system in China prevents us fromobtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to ourshareholders, including holders of the ADSs.Failure to comply with PRC regulations regarding the registration requirements for share option plans may subject PRC plan participants or us tofines and other legal or administrative sanctions.Our employees and directors who are PRC residents and who participate in our equity incentive plans are required to register with SAFE andcomplete other procedures through a domestic qualified agent, and to retain an overseas entrusted institution to handle matters in connection with theirexercise or sale of share options. In addition, the PRC agent is required to make amendment registrations with respect to the share incentive plan ifthere is any material change to the share incentive plan, the PRC agent or the overseas entrusted institution or other material changes. Failure tocomply with such requirements will subject us or our PRC resident option holders to fines and other legal or administrative sanctions. To date, we havecompleted the SAFE foreign exchange registration with respect to our share incentive plans, but there can be no assurance that we will be able tocontinue to do so in the future, which would make it more difficult for us to incentivize our employees. 23Table of ContentsFurthermore, our employees working in the PRC who exercise share options, or whose restricted shares or restricted share units, or RSUs, vest,will be subject to PRC individual income tax. Our PRC subsidiary and controlled affiliated entities are required to file documents related to employeeshare options, restricted shares or RSUs with the relevant tax authorities and to withhold individual income taxes of those employees related to theirshare options, restricted shares or RSUs. If the employees fail to pay, and our PRC subsidiary and controlled affiliated entities fail to withhold, suchPRC individual income taxes, our PRC subsidiary and controlled affiliated entities may face sanctions imposed by the PRC tax authorities.Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment.The value of the RMB against the U.S. Dollar and other currencies is affected by changes in China’s political and economic conditions andChina’s foreign exchange policies. In 2017, the value of the RMB appreciated against the U.S. Dollar by approximately 6.7%. From the end of 2017through the end of November 2018, the value of the RMB depreciated by approximately 6.5% against the U.S. Dollar. There is no guarantee that thevalue of the RMB against the U.S. Dollar will not fluctuate significantly in the future.Substantially all of our revenues and costs are denominated in RMB, and substantially all of our financial assets are also denominated in RMB.Any significant depreciation of the RMB may materially adversely affect the value of, and any dividends payable on, our ADSs in U.S. Dollars. To theextent that we need to convert U.S. Dollars into RMB, appreciation of the RMB against the U.S. Dollar would reduce the RMB amount we wouldreceive from the conversion. Conversely, if we decide to convert RMB into U.S. Dollars, appreciation of the U.S. Dollar against the RMB would reducethe U.S. Dollar amount available to us.Any change in the preferential tax treatment we enjoy in the PRC may materially adversely impact our net income.Some of our consolidated affiliated entities have been granted the status of “high and new technology enterprise” by PRC government agencies.As a result, the income tax rate of these entities is reduced to a preferential rate of 15% for three-year terms that expire starting in 2019. The governmentagencies may decide not to renew the “high and new technology enterprise” status of these entities after the term expires, and therefore we cannotassure you that the preferential tax treatment will continue. The discontinuation of such preferential tax treatment could increase our tax expenses andadversely affect our net income.We may have to register our encryption software with Chinese regulatory authorities, and if they request that we change our encryption software, ourbusiness operations could be disrupted as we develop or license replacement software.Foreign and domestic companies operating in China are required to seek state approval for the commercial encryption products they use.Companies operating in China are allowed to use only commercial cipher code products approved by this authority and are prohibited from using self-developed or imported cipher code products without approval. In addition, all cipher code products shall be produced by those producers appointedand approved by this authority. Because applicable regulations do not specify what constitutes a cipher code product, we are unsure as to whether orhow they apply to us and the encryption software we utilize. We may be required to register or apply for permits for our current or future encryptionsoftware. If PRC authorities request that we register our encryption software or change our current encryption software to an approved cipher codeproduct produced by an appointed producer, it could disrupt our business operations.Risks Relating to Our Ordinary Shares and ADSsUncertainty concerning the proposed going private transaction may adversely affect our business and the market price of the ADSs.Our board of directors received a preliminary non-binding proposal letter dated May 8, 2018 from FutureX to acquire all of our outstandingordinary shares not already owned by it in a going private transaction for US$8.70 in cash per ADS. On May 11, 2018, our board of directors formed aspecial committee consisting of three independent directors, Messrs. Peter Andrew Schloss, Xudong Gao and Thomas A. Melcher, to evaluate theproposal and any other alternative transactions. Mr. Schloss has been appointed as chairman of the special committee. According to FutureX’s proposalletter, it intends to fund the going private transaction primarily with equity capital from itself and any additional members it accepts into a consortiumof buyers, and possibly some debt capital. As FutureX proceeds with its due diligence evaluation, it may consider inviting certain of our existingshareholders to participate in the transaction.In order for the proposed going private transaction to be consummated, we must first enter into a definitive merger agreement that is approved byour board of directors and later by our shareholders. If the going private transaction is consummated, it would cause us to be delisted from The NasdaqStock Market and become a private company, in which event our shareholders and holders of the ADSs, other than those in the approved buyer group,would not be able to participate in our future growth. If the proposed going private transaction is not approved by either our board of directors or ourshareholders, or is for any other reason not consummated, it could adversely affect the market price of our ADSs. There can be no assurance that theproposed going private transaction will continue to be pursued, approved or consummated. 24Table of ContentsWhether consummated or not, the proposed going private transaction risks diverting management focus, employee attention and other resourcesfrom strategic opportunities and from operational matters. Also, as the going private transaction develops, certain events such as the execution of anymerger agreement, completion of the merger or an amendment to or termination of any merger agreement, may increase the volatility of the tradingprice of the ADSs. Furthermore, we could be subject to potential lawsuits in connection with the proposed going private transaction.Provisions of the FutureX Convertible Note could discourage an acquisition of us by a third party.Provisions of the FutureX Convertible Note could make it more difficult, or more expensive, for us to be acquired by a third party. For example,holders of the FutureX Convertible Note have the right to require us to repurchase for cash the entire FutureX Convertible Note at a repurchase priceequal to 100% of the principal amount plus accrued and unpaid interest upon the occurrence of certain fundamental changes of our company,including an acquisition. Such “fundamental changes” include, among other things, (1) any person or group gaining control of our company, (2) ourcompany merging with or into another company or disposing of substantially all of our assets, (3) any recapitalization, reclassification or change of ourordinary shares or the ADSs as a result of which these securities would be converted into, or exchanged for, stock, other securities, property or assets, or(4) adoption of a plan to dissolve or liquidate our company or any of our significant subsidiaries.The market price for our ADSs is volatile, which could result in substantial losses to our shareholders.The trading price of our ADSs has been and is likely to continue to be volatile, fluctuating widely due to factors beyond our control. This mayhappen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance ordeteriorating financial results of other companies with business operations located mainly in China that have listed their securities in the United States.The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases,substantial price declines in the trading prices of their securities. The trading performances of other Chinese companies’ securities after their initialpublic offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the tradingperformance of the ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporategovernance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes ofinvestors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition,securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, whichmay have a material adverse effect on the market price of our ADSs.If securities or industry analysts do not publish research or reports about our business or if they publish inaccurate or unfavorable research aboutour business, the market price and trading volume of our ADSs could decline.The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or ourbusiness. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades ourADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of theseanalysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, couldcause the market price or trading volume for our ADSs to decline, which could result in substantial losses for our investors.Substantial future sales of our ADSs in the public market, or the perception that these sales could occur, could cause the price of our ADSs todecline.Substantial future sales or re-sales of our ADSs in the public market, or the perception that these sales could occur, could cause the market priceof our ADSs to decline. As of December 31, 2018, we had 4,543,461 Class A ordinary shares and 26,289,929 Class B ordinary shares outstanding,including 15,769,245 ADSs that are freely transferable without restriction. The remaining ordinary shares outstanding are available for re-sale subjectto volume and other restrictions as applicable under Rule 144 under the Securities Act.Certain holders of our Class B ordinary shares have the right to cause us to register under the Securities Act the re-sale of their shares.Additionally, in connection with our offer and sale of the FutureX Convertible Note, we entered into a registration rights agreement, under which weare required to register under the Securities Act the offer and sale of the Class B ordinary shares issued upon conversion of the FutureX ConvertibleNote no later than August 2019, and granted customary piggyback registration rights. Registration of these ordinary shares under the Securities Actwould result in ADSs representing these shares being freely tradable without restriction under the Securities Act immediately upon the effectiveness ofthe registration, and sales of those ADSs could cause the price of our ADSs to decline. 25Table of ContentsOur dual-class ordinary share structure limits the ability of holders of our Class B ordinary shares and ADSs to influence corporate matters andcould discourage others from pursuing change of control transactions that such holders may view as beneficial.Our ordinary shares are divided into Class A and Class B ordinary shares. Holders of Class A ordinary shares are entitled to ten votes per share,and holders of Class B ordinary shares are entitled to one vote per share. Generation Gospel Limited, which is owned and controlled by our chiefexecutive officer, held 4,543,461 Class A ordinary shares as of December 31, 2018. Class A ordinary shares are convertible at any time by the holderinto Class B ordinary shares on a one-for-one basis, whereas Class B ordinary shares are not convertible into Class A ordinary shares under anycircumstances.Due to the disparate voting powers attached to these two classes of shares, our founders, officers and directors beneficially held an aggregate of75.1% of the voting power of our outstanding ordinary shares as of December 31, 2018, and have considerable influence over matters requiringshareholder approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. Thisconcentrated control limits the ability of holds of our Class B ordinary shares and ADSs to influence corporate matters and could discourage othersfrom pursuing any potential merger, takeover or other change of control transactions that such holders may view as beneficial.Because we do not expect to pay dividends in the foreseeable future, investors are dependent on price appreciation of our ADSs for return on theirinvestment.We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business.As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, investors should not rely on an investment in our ADSs as asource for any future dividend income. Our Board of Directors has complete discretion as to whether to distribute dividends. Even if our Board decidesto declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future operating resultsand cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition,contractual restrictions and other factors deemed relevant by our Board. Accordingly, the return on investment in our ADSs, if any, will likely dependentirely upon any future price appreciation of the ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price atwhich the holders of our ADSs purchased the ADSs. The holders of our ADSs may not realize a return on their investment in our ADSs and the holdersof our ADSs may even lose their entire investment in the ADSs.Holders of our ADSs may not receive dividends or other distributions on our ADSs and the holders of our ADSs may not receive any value for them, ifit is illegal or impractical to make them available to the holders of our ADSs.The depositary of our ADSs has agreed to pay to holders of our ADSs the cash dividends or other distributions it or the custodian receives onClass B ordinary shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. The holders of our ADSs will receivethese distributions in proportion to the number of Class B ordinary shares our ADSs represent. However, the depositary is not responsible if it decidesthat it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to aholder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under anapplicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail.Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distributesuch property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through suchdistributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holdersof ADSs. This means that the holders of our ADSs may not receive distributions we make on our ordinary shares or any value for them if it is illegal orimpractical for us to make them available to the holders of our ADSs. These restrictions may cause a material decline in the value of the ADSs.Holders of our ADSs may experience dilution of their holdings due to inability to participate in rights offerings.We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, thedepositary will not distribute rights to holders of our ADSs unless the distribution and sale of rights and the securities to which these rights relate areeither exempt from registration under the Securities Act with respect to all holders of our ADSs or are registered under the provisions of the SecuritiesAct. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties and may allow the rights to lapse. We may beunable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respectto these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of our ADSs may beunable to participate in our rights offerings and may experience dilution of their holdings as a result. 26Table of ContentsHolders of our ADSs may be subject to limitations on transfer of the ADSs.Our ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when itdeems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons,including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADSholders on its books for a specified period. The depositary may also close its books in emergencies, on weekends and on public holidays. Thedepositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, atany time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body or underany provision of the deposit agreement, or for any other reason.Holders of our ADSs may have fewer rights than holders of our ordinary shares and must act through the depositary to exercise those rights.Holders of our ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlyingClass B ordinary shares in accordance with the provisions of the deposit agreement. Under our current memorandum and articles of association, theminimum notice period required to convene a general meeting is 14 days. When a general meeting is convened, the holders of our ADSs may notreceive sufficient notice of a shareholders’ meeting to permit them to withdraw their Class B ordinary shares to allow them to cast their vote withrespect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to them or carry out their votinginstructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to them in a timely manner, but wecannot assure the holders of our ADSs that they will receive the voting materials in time to ensure that they can instruct the depositary to vote theADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in whichany vote is cast or for the effect of any such vote. As a result, the holders of our ADSs may not be able to exercise their right to vote and they may lackrecourse if our ADSs are not voted as they requested. In addition, in their capacity as an ADS holder, they will not be able to call a shareholders’meeting.The depositary for our ADSs will give us a discretionary proxy to vote the Class B ordinary shares underlying their ADSs if the holders of our ADSsdo not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect their interests.Under the deposit agreement for the ADSs, if the holders of our ADSs do not vote, the depositary will give us a discretionary proxy to vote theClass B ordinary shares underlying their ADSs at shareholders’ meetings unless: • we have failed to timely provide the depositary with notice of meeting and related voting materials; • we have instructed the depositary that we do not wish a discretionary proxy to be given; • we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting; • a matter to be voted on at the meeting would have a material adverse impact on shareholders; or • the voting at the meeting is to be made on a show of hands.The effect of this discretionary proxy is that if the holders of our ADSs do not vote at shareholders’ meetings, they cannot prevent the Class Bordinary shares underlying their ADSs from being voted, except under the circumstances described above. This may make it more difficult forshareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.Holders of our ADSs may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may belimited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and substantially all of ourdirectors and officers reside outside the United States.We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our PRC subsidiary andconsolidated affiliated entities. Substantially all of our directors and officers reside outside the United States and a substantial portion of their assets arelocated outside of the United States. As a result, it may be difficult or impossible for the holders of our ADSs to bring an action against us or againstthese individuals in the United States in the event that they believe that their rights have been infringed under the U.S. securities laws or otherwise.Even if they are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render them unable to enforce ajudgment against our assets or the assets of our directors and officers. 27Table of ContentsThere are uncertainties as to whether Cayman Islands courts would: • recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws;and • impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securitieslaws that are penal in nature.There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islandswill in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by theCompanies Law (2018 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors,actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed bythe common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in theCayman Islands as well as from English common law, which provides persuasive, but not binding, authority in a court in the Cayman Islands. Therights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would beunder statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the UnitedStates and provides significantly less protection to investors. In addition, shareholders in Cayman Islands companies may not have standing to initiatea shareholder derivative action in U.S. federal courts.As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, ourdirectors or our major shareholders than would shareholders of a corporation incorporated in the United States.We may be classified as a passive foreign investment company, or PFIC, under U.S. federal income tax law, which could result in material adverseU.S. federal income tax consequences to U.S. holders of the ADSs.Depending upon the value of our assets, which is generally determined based on the market value of the ADSs, and the nature of our assets andincome over time, we could be classified as a PFIC for U.S. federal income tax purposes. Based on our current income and assets and the value of theADSs, we do not believe we were a PFIC for the 2017 taxable year or for prior years, and we do not expect to be classified as a PFIC for the currenttaxable year or in the foreseeable future. While we do not anticipate becoming a PFIC for the current taxable year, fluctuations in the market price ofour ADSs or changes in the composition of our income or assets may cause us to become a PFIC for the current or any subsequent taxable year.We will be classified as a PFIC for any taxable year if either (i) 75% or more of our gross income for the taxable year is passive income or (ii) 50%or more of the value of our assets (determined on the basis of a quarterly average) is attributable to assets that produce or are held for the production ofpassive income. Although the law in this regard is unclear, we intend to treat Gridsum PRC Holding as being owned by us for U.S. federal income taxpurposes, not only because we exercise effective control over the operation of this entity but also because we are entitled to substantially all of itseconomic benefits and burdens, and, as a result, we consolidate its operating results in our consolidated U.S. GAAP financial statements. If it weredetermined, however, that we are not the owner of Gridsum PRC Holding for U.S. federal income tax purposes, the PFIC tests would apply differentlyand we could be treated as a PFIC for our current taxable year and any subsequent taxable year. Because of the uncertainties in the application of therelevant rules in respect of our VIE structure and because PFIC status is a factual determination made annually after the close of each taxable year onthe basis of the composition of our income and the value of our active versus passive assets, there can be no assurance that we will not be a PFIC for thecurrent taxable year or any future taxable year.If we were to be or become classified as a PFIC, a U.S. holder of our ADSs or Class B ordinary shares generally would be taxed at ordinary incomerates on any sale of our ADSs or Class B ordinary shares and on any dividends treated as an “excess distribution” under the U.S. federal income taxrules. An interest charge also generally would apply if U.S. tax were deferred during the U.S. holder’s holding period. Further, if we were a PFIC for anyyear during which a U.S. holder held our ADSs or ordinary shares, we generally would continue to be treated as a PFIC for all succeeding years duringwhich such U.S. holder held our ADSs or ordinary shares. You are urged to consult your tax advisor concerning the U.S. federal income taxconsequences of acquiring, holding and disposing of ADSs or ordinary shares if we are or become classified as a PFIC. For more information see “Item10. Additional Information—E. Taxation—Material United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.” 28Table of ContentsChanges in our United States federal income tax classification, or that of our subsidiaries, could result in adverse tax consequences to our 10% orgreater U.S. shareholders.The U.S. tax reform act of December 2017 (the “2017 Act”) may have changed the consequences to U.S. shareholders that own, or are consideredto own as a result of certain stock ownership attribution rules, 10% or more of the voting power or value of the stock of a non-U.S. corporation (a “10%U.S. Shareholder”) under the U.S. Federal income tax law applicable to owners of U.S. controlled foreign corporations (“CFCs”). Prior to the 2017 Act,we did not believe we, or any of our non-U.S. subsidiaries, were CFCs, based on our 10% U.S. Shareholders (if any) together owning less than 50% ofour ordinary shares. The 2017 Act repealed Internal Revenue Code Section 958(b)(4), which, unless clarified in future regulations or other guidance,may result in our classification (or the classification of certain of our non-U.S. subsidiaries) as CFCs. This classification could cause significant andadverse U.S. tax consequences for our existing 10% U.S. Shareholders (if any) or any person who becomes a 10% U.S. Shareholder. Therefore, 10% U.S.Shareholders (if any) and persons considering becoming 10% U.S. Shareholders are strongly urged to consult with their tax advisors regarding the 2017Act revisions to the U.S. Federal income tax law applicable to owners of CFCs.We are a foreign private issuer, and as such we are exempt from certain disclosures that apply to U.S. domestic public companies.Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules andregulations in the United States that are applicable to U.S. domestic issuers, including: • the rules requiring filing quarterly reports on Form 10-Q and current reports on Form 8-K with the SEC; • Exchange Act provisions regulating the solicitation of proxies, consents or authorizations; • Exchange Act provisions requiring insiders to file public reports of their stock ownership and trading activities and liability for insiderswho profit from trades made in a short period of time; and • selective disclosure rules under Regulation FD governing issuer disclosure of material nonpublic information.As a result, our shareholders may not be afforded the same protections or information that would be made available to them were they investingin a U.S. domestic issuer.As a company incorporated in the Cayman Islands, we are permitted to adopt home country practices in relation to corporate governance mattersthat differ significantly from the Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than theywould enjoy if we complied fully with the Nasdaq corporate governance listing standards.As a Cayman Islands company listed on The Nasdaq Stock Market, we are subject to the Nasdaq corporate governance listing standards. Nasdaqrules permit us to follow the corporate governance practices of our home country, the Cayman Islands, which differ significantly from the Nasdaqcorporate governance listing standards. For example, neither the Companies Law of the Cayman Islands nor our memorandum and articles ofassociation requires a majority of our directors to be independent, and we could include non-independent directors as members of our nominating andcorporate governance committee. In addition, neither the Companies Law of the Cayman Islands nor our memorandum and articles of associationrequires us to solicit proxy and hold meetings of our shareholders every year. Furthermore, our independent directors would not necessarily holdregularly scheduled meetings at which only independent directors are present. If we choose to follow home country practice, our shareholders may beafforded less protection than they otherwise would receive under the Nasdaq corporate governance listing standards applicable to U.S. domesticissuers. As of the date of this annual report, we are relying on the home country practices stated above. As a result, we may have less independentoversight over the management of our company.Any requirement to obtain prior approval for our initial public offering could have a material adverse effect on our business, operating results,reputation and trading price of the ADSs.PRC regulatory agencies have promulgated Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&ARules, which became effective in September 2006. The M&A Rules purport to require offshore special purpose vehicles, or SPVs, that are formed foroverseas listing purposes through acquisition of PRC domestic companies and controlled by PRC companies or individuals, to obtain regulatoryapproval prior to publicly listing their securities on an overseas stock exchange. While the application of the M&A Rules remains unclear, we believethat no prior approval was required for our initial public offering. However, uncertainties exist as to how the M&A Rules will be interpreted andimplemented. If PRC regulatory agencies determine that we needed to obtain regulatory approval for our initial public offering, we may face sanctionsby the regulatory agencies, including fines and penalties or limits on our operations in the PRC, delays or restrictions on the repatriation of theproceeds from our initial public offering into the PRC or other actions that could have a material adverse effect on our business, financial condition,results of operations, reputation and prospects, any of which would harm the trading price of the ADSs. 29Table of ContentsWe are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companieswill make our ADSs less attractive to investors.We are an “emerging growth company,” as defined in the federal securities laws, and we may take advantage of certain exemptions from variousreporting requirements that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not beingrequired to provide auditor attestation of our internal control over financial reporting, reduced disclosure obligations regarding executivecompensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executivecompensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our ADSsless attractive because we may rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active tradingmarket for our ADSs and our stock price may be more volatile.We incur significant costs and devote substantial management time in order to operate as a Nasdaq-listed public company.As a public company, we incur significant legal, accounting and other expenses that are not incurred by a private company. For example, we aresubject to reporting requirements of the Exchange Act, and to other securities laws, rules and regulations implemented by the SEC and The NasdaqStock Market, are required to establish and maintain effective internal controls, disclosure controls and corporate governance practices. Compliancewith these requirements increases our legal and financial compliance costs and makes some activities more time consuming and costly. In addition,these public company requirements may divert management attention from operational and other business matters. We need to prepare and maintain aneffective contract tracking database, hire additional accounting and finance staff with sufficient U.S. GAAP accounting and SEC reporting experience.As a public company, it may be difficult for us to attract and retain qualified people to serve on our Board of Directors, or as executive officers.Shareholders of a public company often bring securities class action lawsuits against the company following periods of instability in the marketprice of that company’s securities. We have been, and may continue to be, involved in class action lawsuits, which could divert a significant amount ofour management’s attention and other resources from our business and operations, and harm our results of operations and require us to incur significantexpenses to defend the suits. Any such class action lawsuit could harm our reputation and restrict our ability to raise capital in the future, and, ifsuccessfully made against us, could have a material adverse effect on our business, financial condition and results of operations. See “Item 8. FinancialInformation—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”ITEM 4. INFORMATION ON THE COMPANYA. History and Development of the CompanyGridsum Holding Inc. is an exempted company incorporated under the laws of the Cayman Islands on July 21, 2014.Our principal executive offices are located at South Wing, High Technology Building, No. 229 North 4th Ring Road, Haidian District, Beijing100083, People’s Republic of China. Our telephone number at this address is (86-10) 8261-9988. Our registered office in the Cayman Islands is locatedat the offices of International Corporation Services Ltd., Harbour Place 2nd Floor, 103 South Church Street, P.O. Box 472, George Town, GrandCayman KY1-1106. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 801 2nd Avenue, Suite403, New York, NY 10017 and Cogency Global Inc., located at 10 East 40th Street, 10th Floor, New York, New York 10016.We commenced operations in December 2005 with the establishment of Beijing Gridsum Technology Co., Ltd., or Beijing Gridsum, in China.We have established or acquired some additional operating companies: Beijing Moment Everlasting Ad Co., Ltd., in January 2011, and its whollyowned subsidiary, Beijing Yunyang Ad Co., Ltd., in March 2013, and Guoxinjunhe (Beijing) Technology Co., Ltd., in April 2012, BeijingGuoxinwangyan Technology Co., Ltd., in August 2015, Beijing Gridsum Yizhun Technology Co., Ltd., in February 2016, Beijing ZhixunyilongSoftware Co., Ltd., which was acquired by Beijing Gridsum in May 2017, Beijing Gridsum Wang’an Technology Co., Ltd., in June 2017, and BeijingHainatianchuang Technology Development Co., Ltd., which is controlled by Beijing Gridsum, in August 2017. We refer to these operating companiesas Beijing Moment, Beijing Yunyang, Guoxinjunhe, Beijing Guoxinwangyan, Beijing Yizhun, Beijing Zhixunyilong, Beijing Gridsum Wang’an, andBeijing Hainatianchuang, respectively. 30Table of ContentsFrom July to December 2014, we undertook a reorganization of our group of companies in preparation for our proposed initial public offering inthe United States. We incorporated Gridsum Holding Inc., or Gridsum Cayman, under the laws of the Cayman Islands on July 21, 2014, as the parentholding company of our group of related companies. Gridsum Cayman established a wholly owned subsidiary in Hong Kong, Gridsum Holding(China) Limited, or Gridsum HK, which in turn established a wholly owned subsidiary in the PRC, Dissector (Beijing) Technology Co., Ltd., or theWFOE. Also as part of this reorganization, we established Gridsum PRC Holding in China, which acquired full ownership of Beijing Gridsum, BeijingMoment and Guoxinjunhe. The shareholders of Gridsum PRC Holding are our founders, Guosheng Qi and Guofa Yu, and Gridsum (Beijing)Management Consulting Co., Ltd., a holding company incorporated in the PRC and owned by Guosheng Qi and other key employees.To comply with applicable PRC laws and regulations, we conduct our operations in China principally through Beijing Gridsum, Guoxinjunhe,Beijing Moment, Beijing Yunyang, Beijing Guoxinwangyan, Beijing Zhixunyilong, Beijing Gridsum Wang’an, Beijing Hainatianchuang, andBeijing Yizhun. The WFOE entered into a series of contractual arrangements on December 22, 2014 with Gridsum PRC Holding, the parent of our PRCoperating companies, and the shareholders of Gridsum PRC Holding. These contractual arrangements allow us to exercise effective control overGridsum PRC Holding and receive substantially all of the economic benefits of Gridsum PRC Holding. As a result, we are the primary beneficiary ofGridsum PRC Holding and treat it as our variable interest entity, or VIE, under U.S. GAAP. We have consolidated the financial results of Gridsum PRCHolding and its subsidiaries in our consolidated financial statements.Prior to the reorganization in 2014, our group of companies was controlled by a predecessor Cayman Islands entity, whose wholly ownedsubsidiary in the PRC controlled our operating companies in China pursuant to a set of contractual arrangements, which contained substantially thesame terms as, and were replaced by, the contractual arrangements entered into among the WFOE, Gridsum PRC Holding and the shareholders ofGridsum PRC Holding in 2014.In June 2015, we entered into a framework agreement and a collaboration agreement with an entity that is wholly owned by the State InformationCenter of China, or the SIC Entity. Under these agreements, we and the SIC Entity have established a joint venture company, Beijing Guoxinwangyan,to oversee the business operations, sales and marketing and financial management of the Research Center. Beijing Gridsum and Guoxinjunhe each own40%, and the SIC Entity owns 20%, of the equity interest in Beijing Guoxinwangyan.On September 23, 2016, our ADSs commenced trading on The Nasdaq Stock Market under the symbol “GSUM.”On April 30, 2018, we entered into a convertible note purchase agreement with FutureX Innovation SPC, an affiliate of FutureX. On May 5, 2018,we completed the transactions contemplated by the convertible note purchase agreement and issued an US$40 million convertible note to FutureXInnovation SPC for a total consideration of US$40 million. In accordance with the convertible note purchase agreement, we also entered into aregistration rights agreement with FutureX Innovation SPC.Our board of directors received a preliminary non-binding proposal letter dated May 8, 2018 from FutureX to acquire all of our outstandingordinary shares not already owned by it in a going private transaction for US$8.70 in cash per ADS. If completed, the going private transaction willresult in us becoming a privately-held company and the ADSs will no longer be listed on The Nasdaq Stock Market. On May 11, 2018, our board ofdirectors formed a special committee consisting of three independent directors, Messrs. Peter Andrew Schloss, Xudong Gao and Thomas A. Melcher, toevaluate the proposal and any other alternative transactions. Mr. Schloss was appointed as chairman of the special committee. As of the date of thisannual report, the special committee is in the process of carefully considering and evaluating, with the assistance of the special committee’s legaladvisors, the proposal from FutureX, as well as our strategic alternatives. There can be no assurance that the proposed going private transaction willcontinue to be pursued, approved or consummated. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Ordinary Shares and ADSs—Uncertainty concerning the proposed going private transaction may adversely affect our business and the market price of the ADSs.”B. Business OverviewGridsum is a leading provider of sophisticated data analysis software for multinational and domestic enterprises and government agencies inChina. Our proprietary distributed data architecture allows our customers to efficiently collect and analyze vast amounts of information that iscollected, indexed and stored in an organized manner, or structured data, and information that is not organized, or unstructured data. Our coretechnology, the Gridsum Big Data Platform and the Gridsum Prophet: Enterprise Artificial Intelligence, or AI, Engine, with its machine learning and AIcapability, performs multi-dimensional correlation analysis and analyzes complex real-time events. With the support of our Big Data Platform and theGridsum Prophet, our customers use our data visualization and data-mining technologies to identify complex relationships within their data and gainnew insights that help them make better business decisions. 31Table of ContentsOur leading position is based on our solutions and our core technologies. Our software products are designed for a variety of commercial andgovernmental applications. To help our enterprise customers reach China’s large and growing online and mobile population, our initial products havefocused on digital marketing analytics and automation solutions. We were among the first companies to offer web analytics solutions based on datawarehouse technology, and we were among the first digital intelligence companies in China to build solutions entirely on a distributed data warehousearchitecture using the open-source Hadoop framework. By leveraging the analytic capabilities of our Big Data Platform and the Gridsum Prophet, wehave developed additional software solutions, including new media analytics and information discovery solutions, to address a broad range ofcustomer needs. In 2017, our customers included Fortune 500 and China 500 enterprises, comprising 505 customers across diverse industries,including 22 Chinese government agencies.Key Advantages of our SolutionsWe deliver our solutions as cloud-based software-as-a-service, or SaaS, offerings that are easy to deploy, easy to access, automatically updatedwithout disruption, and enable our customers to reduce IT support costs by outsourcing hardware and software maintenance and support. The keyadvantages of our solutions include:Fast and Efficient Multi-dimensional Drill-down—Our software is designed to enable customers to derive valuable intelligence from bothstructured and unstructured data quickly and easily. Our proprietary technology leverages our high performance correlation analysis engine to providereal-time response to customer data queries. Customers perform multi-dimensional data drill-down and correlation analysis with simple point-and-clickand fingertip gestures, thereby identifying issues and isolating causes.Simple and Customizable Visualization—We design our visualization to be simple, intuitive and user-friendly. Users learn and begin using ourproducts with little to no training required. Our dashboards are optimized for multiple industry verticals, and within each industry the visualization caneasily be customized based on specific customer needs. This ease of use allows users with little technical training or IT support to leverage our productsand achieve desired results for their work.Fully Integrated Solution Suites—All of the individual solutions in our solution suites share a common user interface, through which customersaccess the solutions they have purchased. Our solutions are accessible across all screen formats, from large multi-screen control centers to desktops andmobile devices.Easy and Rapid Deployment—Our solutions can typically be deployed and configured by our customers within a day, without specializedtraining, and readily integrate with customers’ management and operating systems. Easy implementation and reduced start-up time allow customers togain proficiency in our software quickly and to see results immediately. Updates such as software enhancements and new features can be delivered fromthe cloud without disruption to customers’ daily operation. Our highly flexible and extensible architecture delivers scalable and adjustable solutionsfor customers and allows us to offer specific solutions for specific customer needs. Customer dashboards are readily customizable based on customerneeds, with no special coding or reconfiguration required.Lower Total Cost of Ownership—Our cloud-based solutions enable our customers to access our software solutions anywhere, anytime and in realtime, and reduce upfront investment and total cost of ownership because our customers do not need to invest in additional hardware or IT infrastructureto utilize our products.Made in China, for China—Our solutions are designed with the China market in mind and are readily customizable or adaptable to addressspecific needs of domestic enterprise customers. Our natural language processing capabilities are designed to handle unstructured data in the Chineselanguage.Our Core TechnologyWe offer suites of solutions that are built on our core technology. These end-to-end solution suites address customer needs in marketingautomation, e-Government, new media, information discovery and visualization. Our solutions and core technologies are built on our distributed datawarehouse architecture using the open-source Hadoop framework. Our data architecture offers high scalability and high performance characteristics.Our core technology consists of our data visualization and interactive data mining technologies, the Gridsum Big Data Platform, Gridsum Prophet, andour data acquisition and data pre-processing technologies. 32Table of ContentsGridsum Big Data PlatformOur software solutions are built on the Gridsum Big Data Platform, our proprietary technology designed to acquire, store, process and analyzelarge and rapidly growing volumes of both structured and unstructured data, leveraging our highly scalable correlation analysis engine and complexevent processing capability. A distributed computing architecture is required in order to analyze in real time the rapidly growing volume andcomplexity of digital data. We were among the first digital intelligence companies in China to build solutions entirely on a distributed data warehousearchitecture using the open-source Hadoop framework, allowing us to perform multi-dimensional correlation analysis in real time, on data setsregardless of size, and to implement real-time interactive data mining at large scale.The core capabilities of the Gridsum Big Data Platform include: • Multi-dimensional correlation analysis—Our correlation analysis engine enables us to dynamically correlate large quantities of structuredand unstructured data on an unlimited number of dimensions. This high performance capability, enabled by our large-scale distributed datawarehouse architecture, allows us to run multi-dimensional data drill down and data correlation analysis in real time, on datasets regardlessof size. We perform this analysis on all of the data in the dataset, without resorting to sampling. Our correlation analysis capability isfurther enhanced by the size and quality of our datasets, including data acquired from consenting customers and third parties, publicinformation that we have collected from web crawling and data derived from these datasets. Our data includes the correlations that we haveretained from our past projects. Because we have been accumulating our datasets since 2009, with a focus on data closely related to ourcustomers’ business operations and customer interactions, we believe that our data assets are among China’s largest and highest quality. • Real-time complex event processing—Our complex event processing technology tracks all available data about events as they occur andapplies sophisticated rules to identify patterns that signify problems, threats and opportunities for our customers. This technology is wellsuited for analysis of large-scale concurrent streaming data in real time.All of these capabilities of the Gridsum Big Data Platform are easily extensible and are highly scalable, allowing us to enter into new industriesand serve new customers. 33Table of ContentsGridsum Prophet: Enterprise AI EngineIn May 2017, we launched Gridsum Prophet which is our enterprise AI engine. Gridsum Prophet is built on top of the Gridsum Big Data Platformand delivers the AI capabilities that powers Gridsum’s current and future products and solutions across industry verticals and applications. These AIcapabilities include machine learning, predictive modeling, natural language processing, speech and image recognition, and knowledge graph whichenable Gridsum’s solutions to deliver data driven insights, predictions, recommendations, and automations. • Machine learning capability powered by highly relevant large-scale historical data assets and industry experience—Our machine-learning algorithms learn from experience, identify patterns of interest and make data-driven predictions within their defined parameters.We leverage our data assets and industry expertise to design machine-learning algorithms that solve specific industry problems for ourcustomers. In conjunction with our natural language processing technology, machine learning is particularly suitable for processingunstructured data by recognizing patterns and connections through which the raw data can be structured and analyzed. • Natural language processing technologies—Natural language processing, or NLP, for the Chinese market is extremely complex due tofundamental characteristics of the Chinese language, including multiple meanings of the same Chinese characters, contextual associationof characters into words and lack of punctuation. We have solved these long-standing problems by developing proprietary NLPtechnologies based on algorithms and machine learning techniques that are designed to understand and analyze the complexity of theChinese language and its usage in various contexts. Our NLP technologies enable the extraction of information about entities, correlations,sentiments and emotions from vast amounts and variety of digitized documents, text converted from audio and video streams and otherdigital content in targeted industries such as legal and media. With our NLP technologies, we are able to extract structure from unstructureddata, so that it can be processed and analyzed effectively. • Knowledge Graph is fundamental in delivering human-like intelligent enterprise solutions. We developed China’s first knowledge graphfor the legal domain and it has been successfully used to provide intelligent recommendations in the Smart Push product and automaticverdict generation for the civil courts. The technology and methodology used in developing knowledge graphs is a key capability inGridsum Prophet.Visualization TechnologiesWe offer intuitive interactive visualization tools and dashboards that allow customers to display vital performance metrics in a highly flexibleand customizable way and allow users to interact directly with data by using simple fingertip and point-and-click gestures to perform analyses andanswer questions. Our visualization capabilities support a full range of formats, from live data displays on large multi-screen control centers, to reportsoptimized for mobile devices. Our visualization tools and dashboards are designed to be a rich interface that supports interactive data mining andintegrates across device formats. Visualization is an important component of our technology used in all of our solutions and is highly adaptable to therequirements of different industries and individual customers.Data Acquisition TechnologiesTime-stamping is a universal characteristic of all machine generated and reported data. Our technology gives us the ability to apply an analyticalframework to any raw data that is time stamped, whether the data is sourced from a single click on a website or from complex natural languagedocuments. This capability allows us to organize data and cross correlate it and to perform sequence analysis to determine causality of events. Wecollect and process massive volumes of time-stamped data at high speed using our proprietary Extract, Transform and Load, or ETL, technologies. OurETL technologies enable us to apply relevant analytical frameworks to raw data in various forms and give us the high performance required to analyzerapidly growing volumes of structured and unstructured data in real time, extracting intelligence critical to our customers. 34Table of ContentsOur Solutions We offer suites of solutions for marketing automation, e-Government, new media, information discovery, visualization, and Industrial Internet ofThings, or IIoT. Customers using our solutions are able to: • analyze user behavior online on the web and on mobile devices; • assess web design and conduct A/B testing of web and mobile web design; • manage massive scale search engine marketing campaigns; • measure the contribution of different marketing channels to user conversion; • monitor and analyze streaming media and optimize user experience; • correlate information in unstructured datasets using natural language processing; • gather and integrate data from diverse data sources online and offline, from the Web and IIoT; • visualize and interact with graphical information across multiple display sizes and formats; and • make data driven predictions, recommendations, and decisions.We deliver our solutions as cloud-based SaaS offerings designed for ease of use and rapid adoption within the customer’s organization.Intelligent CRM SolutionGridsum’s Intelligent CRM Solution is a cloud-based, marketing-centric CRM solution tailor-made for both multinational and local companiesoperating in China which allows our clients to leverage both online and offline data derived from their digital marketing and sales divisions andcustomers’ digital footprints, to drive sales and close orders in a more efficient and KPI-enhancing manner. The solution leverages Gridsum’s AIEngine, Gridsum Prophet, and our marketing automation suite, as well as Gridsum’s deep experience in seamlessly interfacing our marketingautomation suite with our clients’ sales infrastructure and systems, to create a ground breaking and tailor-made marketing-centric CRM solution for theChina market. 35Table of ContentsGridsum’s Intelligent CRM solution allows clients to automate and increase sales efficiency across their entire businesses by marketing toindividual customers rather than broader demographics. The solution is designed and optimized as a powerful and complete standalone CRM solution.It also has advanced “plug and play” capability allowing it to seamlessly integrate with a client’s legacy systems where necessary.With machine learning, Gridsum’s clients will be able to automate the identification, prioritization and “valuation” of promising leads andrelationships and sort through massive amounts of data related to multiple areas of their business—from marketing and sales, to loyalty programs,e-commerce, promotions, and more—to easily track customers throughout the different stages of the customer lifecycle.By seamlessly integrating multiple social platforms, Gridsum clients will also be able to create a “social map” of their customers’ professionaland social networks, matching this to their own organizations, to further drive the sales process.Marketing Automation SuiteAll of our marketing automation solutions are available as an integrated suite of solutions, which we call ADSUITE. The capabilities of eachsolution are described below.Web Dissector is used to analyze customer websites by monitoring and analyzing key performance indicators such as clicks, page views,sessions, conversion rates and sales. Web Dissector precisely measures the effectiveness of online promotional activities and detects click fraud. Thecapabilities and features of Web Dissector include: • online operational data analysis; • pixel-level interactive click and touch “heat maps”; • multi-dimension drill-down analysis; • click fraud detection; • online asset assessment; • user behavior analysis; • online performance optimization; and • online advertisement delivery and performance analysis.Mobile Dissector is used to understand mobile app user activity, gain insight into users’ interactive behavior, and improve user experience withthe application and retention rate. Mobile Dissector also helps advertisers monitor characteristics of mobile audiences on mobile web sites and apps,user behavior and the value of different mobile channels. The capabilities and features of Mobile Dissector include: • mobile application promotion and distribution analysis; • mobile apps data analysis; • error and exception tracking; • custom event analysis; • multi-dimensional drill-down analysis; • app life-cycle analysis; and • cross platform analysis. 36Table of ContentsSEM Dissector automates search engine marketing processes for advertisers, advertising agencies and advertising account managers, andprovides comprehensive, objective and transparent performance reports. SEM Dissector supports simultaneous management of multiple accounts andgrouping of customized keywords with major Chinese search engines, including Baidu, Sogou and Qihoo 360. Built-in analytical models guidecustomers to optimize keyword advertising, and automatic bidding algorithms monitor competitors’ advertising activities and make appropriate bidsautomatically. The capabilities and features of SEM Dissector include: • customer data integration and key performance indicator customization; • keyword advertising management; • report customization; • automatic advertising placement and bid management; and • attribution model.SEO Dissector is our search engine optimization tool. It analyzes website quality and the website’s level of accessibility to various searchengines. Customers use SEO Dissector to evaluate website performance, identify defects and make improvements. Customers also evaluate reports ofkeyword search results on different search engines, enabling them to optimize their websites to improve their organic rankings on search engine resultspages. The capabilities and features of SEO Dissector include: • website indexability analysis; • multi-dimensional analysis of keywords ranking; • rich and intuitive presentation of analysis results; • practical webmaster tools; and • flexible customization.Ad Dissector is our advertisement performance monitoring and optimization product. It monitors and analyzes banner, rich media and text linkand other advertising formats and leverages our core technology to provide optimization solutions. Advertisers and advertising agencies use AdDissector to measure performance of online advertising and allocate media resources to improve returns. The capabilities and features of Ad Dissectorinclude: • user-friendly placement management; • convenient landing page and scheduling management; • real-time data tracking; • powerful multi-source data correlation analysis; and • Gantt chart performance visualization.Contribution Dissector tracks and analyzes user behavior over the entire user life cycle from original access to ultimate conversion, tracing thatbehavior over years and various conversion data points and applying various attribution model algorithms to the data. Customers assess advertisementresults across media outlets, connect off-line conversion, analyze contribution from each channel to the ultimate conversion process and optimizeonline businesses. Website operators use Contribution Dissector to evaluate the performance of their advertising campaigns across media outlets,connect offline conversion, analyze historical channel contributions to the ultimate conversion or sale and allocate their advertising resourcesefficiently based on the results. The capabilities and features of Contribution Dissector include: • conversion path identification; • integration of online and offline data; • multiple attribution models; • multi-dimensional analysis; • marketing channel analysis; and 37Table of Contents • user behavior playback.Audience Dissector is our audience analysis product. It combines customer offline user data from customer relationship management systemswith our online user behavior data and digital intelligence capabilities to identify high value and high loyalty users and improve customer returns ontheir marketing investments. The capabilities and features of Audience Dissector include: • intelligent customer relationship maintenance system; • decision-making support and optimization; • flexible user behavior tagging management; • flexible application programming interface; and • data security and privacy.Recommendation Engine is our data driven content recommendation solution for customers delivering adaptive video, news and e-commercecontent on websites, mobile apps and Internet protocol television terminals. By accumulating user behavior data, Recommendation Enginecontinuously captures user preferences and improves the accuracy of its recommendations. The capabilities and features of Recommendation Engineinclude: • mainstream mobile operating system data collection and analysis; • optimization for industry verticals; • personalized recommendations for mobile application content; and • powerful content management platform.E-Government SuiteGovernment Web Dissector is our digital intelligence solution for public sector websites, providing government website operators at local,municipal, provincial and national levels with real-time website operating data and digital intelligence that is similar to what is provided tocommercial customers by our Web Dissector solution. Our public sector customers use Government Web Dissector to optimize the quality andefficiency of online public services, such as driver’s license applications and marriage certificate applications. In addition to the features available fromthe standard Web Dissector, the capabilities and features of Government Web Dissector include: • public service performance metrics; and • intelligent diagnostics across websites.Government Website Group Integrated Management Platform, which we refer to as the Integrated Management Platform, is our integrated bigdata visualization system used by government website operators that are responsible for managing groups of websites. It provides a visualizedintegrated display of website group operating status and data. The capabilities and features of the Integrated Management Platform include: • comprehensive overview of website groups; • performance overview; • visual comparison; • website correlation display; and • geographic distribution visualization.New Media SuiteStreaming Dissector is our real-time viewership analysis and operational efficiency monitor for digital online video. Unlike traditional methodsof measuring viewership, Streaming Dissector does not rely on viewer sampling, but continually monitors all viewers of the streaming video. Thecapabilities and features of Streaming Dissector include: 38Table of Contents • real-time streaming monitoring; • content delivery network monitoring; • reporting and alerting; • real-time rating analysis; and • multi-platform support.Video Dissector is our online video content analytics tool for discovering the most valuable or attractive parts in video content. It providesanalysis of viewer behavior and solutions for optimizing online video content. The capabilities and features of Video Dissector include: • online video operation analysis; • video content evaluation; • viewer analysis; and • online video performance analysis.TV Dissector is our analytics tool for internet protocol television, internet television, cable television, satellite television and digital television. Itmonitors and analyzes viewer behavior and provides solutions to optimize the business and operations of TV station operators. TV station operatorsuse TV Dissector to analyze the development and activity of users and viewership of live broadcast, play on-demand and playbacks, generate accuratestatistics about the conversion of their electronic program guide pages and advertising activities and optimize product packages and pay-per-viewbusinesses. The capabilities and features of TV Dissector include: • user development and activeness analysis; • viewership analysis; • play on-demand and playback analysis; • product package analysis; • electronic program guide analysis; and • user experience analysis.Rating Plus is our television viewing data analytics tool for traditional TV stations. Rating Plus automatically combines traditional viewershiplog data with the channels and programs of the TV stations and generates viewership analysis. The management and operation personnel of the TVstations easily access the analysis via computers and mobile phones. Rating Plus provides search functionality that supports complex multi-dimensiondata searches and alerting feature that provides monitoring and malfunction alerting related to program broadcasts. The capabilities and features ofRating Plus include: • automatic generation of viewership data; • viewership analysis; and • program analysis.Information Discovery SuiteMedia Dissector is our mass media, social media and user-generated content media monitoring and analytics tool. Media Dissector appliesdistributed cloud computing crawler technology to capture media information on the internet. It uses natural language processing technology such asword segmentation, named-entity recognition and Chinese information processing technology to process information and provides correlation analysisto enable drill downs for information discovery. The capabilities and features of Media Dissector include: • information overview; 39Table of Contents • item mentions and context analysis; • media event and public opinion analysis; and • sentiment analysis.Information Dissector is an insightful analytical system developed to provide stock price predictions based on market sentiment in Chineseequity markets. Information Dissector gathers information from many sources, such as news, blogs, forums and analyst reports, maps each piece ofinformation to particular industries and companies and processes the information into specific metrics used as input for complex time-series modelsand algorithms. The capabilities and features of Information Dissector include: • market sentiment analysis; • multiple metric measurement; and • intuitive visualization interface.Social Listening is our could-based social listening solution, which enables our enterprise clients to monitor and analyze web and social mediaposts regarding the brand, products, customer service of the client and its competitors. The Social Listening solution utilizes our advanced naturallanguage processing and machine learning technologies to analyze textual and image content and delivers the most relevant and actionable insight.The capabilities and features of Social Listening include: • broad coverage of search, vertical sites and social media data; • powerful data analytics and visualization; • sentiment and topic analysis with easy access to data sources; • alerts of noteworthy topics or posts; and • delivered via mobile app as well as web browser on personal computers.Legal Service Product SuiteLaw Dissector and Smart Push. Law Dissector is our search and statistical analysis tool for legal research. It utilizes our natural languageprocessing technology and applies data science methodology in the legal industry. Law Dissector summarizes the key attributes of legal cases andaggregates them for statistical analysis, which enables judges, lawyers and researchers to find implied patterns or rules that would be valuable for theirrespective professional objectives. Smart Push is our legal research tool that recommends relevant cases and legal information by keyword search ornatural language search. The capabilities and features of Law Dissector and Smart Push include: • information retrieval; • powerful aggregation and statistical research; • intelligent case analysis; and • recommendation of relevant judicial precedents and legal information.Intelligent Voice Recognition and Transcription System. The advanced AI-enabled Intelligent Voice Recognition and Transcription Systemconverts voice into text in real time during court proceedings. The system leverages both Gridsum’s vertically-focused enterprise-AI engine, optimizedfor the legal space, and Tencent’s world-leading consumer-focused Chinese-language speech recognition engine. Gridsum adapted Tencent’s speechrecognition technology to create a high-accuracy and high-reliability speech-to-text and text-to-speech application for the highly specialized legalspace. Key dynamics of the product include the following: • A highly focused AI optimized for the legal sector: it adopts industry-leading voice recognition modeling methods and acoustic modelingtechnologies. With an ultra-large-scale language model – and through the application of machine learning to the huge amount of contentcodified in laws and regulations, court verdicts and other corpus – a customized engine was created to effectively identify and recognizelegal terms and context. 40Table of Contents • Outstanding performance: with real-time speech-to-text transcription in courts, text is generated in milliseconds with accuracy ofapproximately 95%, significantly improving the efficiency of the trial process. It supports custom “hot” words recognition, allowing theaccuracy for names of people and organizations, and special words to reach approximately 90%. • Highly secured and reliable data: deployed on the private network of the PRC courts, its data packets adopt unique encryption formats andalgorithms from Tencent Cloud, which ensure highly secured audio data packet transmission. In addition, it has an improved accessauthorization mechanism on the client end to manage and control the security of services and business, and it supports multiple backupstorage of audio files, which enhances data security and reliability.Faxin Wei Su, a litigation service on WeChat’s micro application platform and powered by Gridsum’s Chinese legal information platform andknowledge base Faxin, delivers the China’s first integrated online litigation and remote trial handling service and offers the following capabilities: • Our Faxin Wei Su platform provides both the courts and litigants with a fast and secure channel to match similar cases, make case statusinquiries, submit files, and set appointments during the litigation process. • All parties can join a trial remotely through our Faxin Wei Su platform and produce and question evidence throughout the process. • All documents, including trial records, settlement agreements and other related files can also be accessed online after the trial is over. • Our Faxin Wei Su platform’s diversified dispute resolution system provides efficient and flexible tools for remote trials and should helpease congestion in a highly crowded court system.Industrial Internet of Things (IIoT) SolutionsIn August 2017, Gridsum began to assemble a team of industrial experts and experienced data scientists and engineers to develop our IndustrialAI and IIoT platform and applications on top of the Gridsum Big Data Platform and Gridsum Prophet. This effort brings Gridsum’s AI and data sciencecapabilities to the industrial verticals and helps our industrial clients optimize processes, reduce cost, and improve quality throughout the productdesign, manufacturing, and operations cycle. Some of the initial applications include: • Smart fuel/power consumption prediction for new energy automobiles; • Airport aviation fuel supply optimization; • Oil drilling equipment failure prediction and preventive maintenance; and • Automatic product defect detection.Visualization SuiteGridsum Dashboard is our data visualization tool for our digital intelligence solutions. It is used for interactive data mining and visualized dataanalysis. Gridsum Dashboard integrates charts, graphics and tables from various data sources and displays them on a single multi-screen interface. Itoffers pre-configured data visualization templates and provides customers with options to customize their data displays. Gridsum Dashboard improvesvisualization of customer digital intelligence data, so that customers understand the business operations in a timely and intuitive manner and providesbusiness intelligence support for decision-makers. The capabilities and features of Gridsum Dashboard include: • real-time connection to data; • visualization templates; • access control; and • user-friendly interface. 41Table of ContentsGridsum Report Center is our automated report generation and distribution tool, which supports data reporting for all of our solutions, aggregatesdata from multiple dimensions, customizes and creates report templates and configures report distribution. The data integrity verification capabilitymakes report preparation convenient and improves the visual quality and accuracy of reports. The capabilities and features of Gridsum Report Centerinclude: • seamless integration; • data integrity verification; • multiple methods for report distribution; • reusable report templates; and • customizable and data combination from multiple dimensions.Intellectual PropertyWe rely on a combination of trademark, fair trade practice, copyright and trade secret protection laws and patent protection in China and otherjurisdictions, as well as contractual restrictions, to protect our intellectual property. We control access to our proprietary technology and algorithms byentering into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with thirdparties. As of November 30, 2018, we had 507 issued patents in China, which will expire between 2024 and 2035, 2,154 patent applications pending inChina and 39 patent applications pending in various other countries and jurisdictions.Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized parties may attempt to copy or obtainand use our technology to develop applications with the same functionality as our products. Policing unauthorized use of our technology andintellectual property rights is difficult.We expect that software in our industry may be subject to third-party infringement claims as the number of competitors grows and thefunctionality of applications in different industry segments overlaps. Any of these third parties might make a claim of infringement against us at anytime.Legal ProceedingsFrom time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business.We are involved with shareholder class action lawsuits described in “Item 8. Financial Information—A. Consolidated Statements and OtherFinancial Information—Legal Proceedings.” Otherwise, we are not presently a party to any legal proceedings that in the opinion of our management, ifdetermined adversely to us, would have a material adverse effect on our business, financial condition, operating results or cash flows. Regardless of theoutcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.RegulationsOur business operations are primarily in the PRC and are primarily subject to PRC laws and regulations. The following is a summary of the mostsignificant PRC laws and regulations affecting our business or our shareholders’ rights to receive dividends and other distributions from us.Regulations on Internet Information ServiceThere are several principal regulations on internet information service business with respect to foreign investment restriction and qualificationrequirement, including (i) the Telecommunications Regulations of the People’s Republic of China, promulgated by the State Council onSeptember 25, 2000, as most recently amended on February 6, 2016, (ii) the Administrative Measures on Internet Information Services, promulgated bythe State Council on September 25, 2000, as most recently amended on January 8, 2011, or the Internet Measures, (iii) the Administrative Rules forForeign Investment in Telecommunications Enterprises issued by the State Council effective on January 1, 2002, as most recently amended onFebruary 6, 2016, and (iv) Special Administrative Measures (Negative List) for Foreign Investment Access (Edition 2018), promulgated by theMOFCOM and the National Development and Reform Commission effective on June 28, 2018, or the Special Administrative Measures. 42Table of ContentsThe Telecommunications Regulations of the People’s Republic of China, the Administrative Rules for Foreign Investment inTelecommunications Enterprises and the Special Administrative Measures prescribe line between different types of telecommunications businessactivities, including basic telecommunications services and value-added telecommunications services, and internet information service is categorizedas value-added telecommunications service which shall be subject to the special administrative measures. Under these regulations, the proportion offoreign investment in companies conducting value-added telecommunications services (excluding e-commerce) shall not exceed 50%, and the foreigninvestor must have experience in providing value-added telecommunications services overseas and maintain a good track record. Due to theserestrictions on foreign investment, we operate our internet information service business through Gridsum PRC Holding, our VIE, and its subsidiariesthrough contractual arrangements.The Internet Measures divide internet information services into two categories: services of an operative nature and services of a non-operativenature. Our business conducted through our website (under domain name www.gridsumdissector.com) involves operative internet information services,which requires us to obtain an ICP license. Our affiliated PRC entity and a subsidiary of our VIE, Beijing Gridsum, obtained an ICP license issued byBeijing Communications Administration, a local branch of the Ministry of Industry and Information Technology, or the MIIT, in July 2015.Regulations on Market Survey BusinessThere are several principal regulations on market survey business in terms of foreign investment restriction and qualification requirement,including (i) the Special Administrative Measures and (ii) the Measures on the Administration of Foreign-related Surveys, promulgated by the PRCNational Bureau of Statistics on October 13, 2004.The Special Administrative Measures classifies market surveys as subjecting to the special administrative measures, stating that market surveysshall be limited to Sino-foreign equity or cooperative joint venture operations, and specifically, Chinese parties shall be controlling shareholders forsurvey of television and radio program ratings. We conduct our market survey business of television and radio program ratings in the PRC throughcontractual arrangements with our VIE in compliance with the Special Administrative Measures.The Measures on the Administration of Foreign-related Surveys define foreign-related market surveys as those including (i) market and socialsurveys conducted under the entrustment or with the financial aid of, or in cooperation with, any overseas organization, individual or any overseasorganization’s agency in the PRC, (ii) market surveys conducted by any overseas organization’s agency in the PRC in accordance with applicable lawsand (iii) market and social surveys wherein survey materials and results are to be provided to any overseas organization, individual or overseasorganization’s agency in the PRC. Such surveys must be conducted through a survey institution possessing a foreign-related survey permit inaccordance with applicable laws. We conduct foreign-related market surveys primarily through Beijing Moment, a subsidiary of our VIE, and obtaineda foreign-related survey permit in November 2015, which expired in November 2018. Beijing Moment has applied for the renewal of its foreign-relatedsurvey permit and expects to obtain the renewed permit in early 2019.Regulations on Advertising BusinessThe Advertising Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s Congress onOctober 27, 1994, as most recently amended on October 26, 2018, and the Interim Measures on the Administration of Internet Advertising,promulgated by the State Administration for Industry and Commerce (currently, the State Administration for Market Regulation) on July 4, 2016, arethe principal law and regulation regulating our advertising business. These laws require the media platform operators to (i) verify the identitydocuments, name, address, contact details and other related information of a counterparty when entering an advertising contract, establish informationfiles and update such files on a regular basis, and (ii) delete, block, broken links of any advertisement or take other similar technical measures andmanagement measures to prevent such advertisement from spreading if they know or should know such advertisement is illegal. Our advertisingbusiness is required to comply with these rules and requirements.Regulations on Government ProcurementOn June 29, 2002, the Standing Committee of the National People’s Congress promulgated the Government Procurement Law of the People’sRepublic of China, which came into effect on January 1, 2003 and was amended on August 31, 2014. This law was enacted for purposes of regulatinggovernment procurement activities and applies to government procurement activities conducted within the PRC. It prohibits suppliers from(i) providing false materials in an attempt to win a bid, (ii) defaming or excluding other suppliers by illegitimate means, (iii) colluding with theprocuring entity or agency, or other suppliers, (iv) bribing or providing illegitimate benefits to the procuring entity or agency, (v) in the course ofprocurement through bid invitation, engaging in consultation or negotiation with the procuring entity or (vi) refusing to subject themselves tosupervision by the relevant department or providing false information. Our business with the government is required to comply with these rules andrequirements. 43Table of ContentsRegulations on Intellectual Property RightsChina has adopted legislation governing intellectual property rights, including copyrights, trademarks and patents. China is a signatory to majorinternational conventions on intellectual property rights and is subject to the Agreement on Trade Related Aspects of Intellectual Property Rights as aresult of its accession to the World Trade Organization in December 2001.Computer Software CopyrightOn March 1, 2013, the Regulations for the Protection of Computer Software promulgated by the State Council came into effect. Theseregulations are formulated for protecting the rights and interests of computer software copyright owners, encouraging the development and applicationof computer software and promoting the development of software business. As of November 30, 2018, we had 177 registered copyrights, including 166registered computer software copyrights in the PRC.PatentPatents in the PRC are principally protected under the Patent Law of the People’s Republic of China, which was amended by the StandingCommittee of the National People’s Congress as of December 27, 2008. This law is formulated for protecting the rights and interests of patentees,encouraging invention, promoting the application of inventions, enhancing innovation capacity, and facilitating the advancement of science andtechnology and the economic and social development. Under this law, the duration of a patent right is either 10 years or 20 years from the date ofapplication, depending on the type of patent right. As of November 30, 2018, we had 507 patents granted in the PRC, 2,154 patent applicationspending in the PRC and 39 patent applications pending in various other countries and jurisdictions.TrademarkThe PRC Trademark Law, effective in 1983 and most recently amended in 2013, protects the proprietary rights with respect to registeredtrademarks. The Trademark Office under the State Administration for Industry and Commerce (currently, the State Administration for MarketRegulation) handles trademark registrations and may grant a term of 10 years for registered trademarks, which may be extended for another 10 yearsupon request. Trademark license agreements shall be filed with the Trademark Office for record. In addition, if a registered trademark is recognized as awell-known trademark, the protection of the proprietary right of the trademark holder may reach beyond the specific class of the relevant products orservices. As of November 30, 2018, we had 275 registered trademarks in different trademark categories and 382 trademark applications in the PRC.Domain NameOn November 1, 2017, the Administrative Measures for Internet Domain Names promulgated by the Ministry of Information came into effect,replacing the Measures for the Administration of Internet Domain Names of the PRC promulgated by the Ministry of Information on December 20,2004. These measures are formulated with reference to the norms on administration of internet domain names worldwide, for the purposes of regulatingservices regarding internet domain, safeguarding users’ legitimate rights and interests, guaranteeing the safe and reliable operation of the system ofinternet domain names, promoting the development and application of Chinese domain names and top-level domains of the state, and promoting thehealthy development of the PRC Internet network. As of November 30, 2018, we had 89 registered domain names.Regulations on Network SecurityOperation SecurityOn November 7, 2016, the Standing Committee of the National People’s Congress promulgated the Cyber Security Law, which came into effecton June 1, 2017. The Cyber Security Law aims to establish more stringent requirements for network operators in China, and applies to the construction,operation, maintenance and use of networks as well as the supervision and administration of cyber security. Under the Cyber Security Law, networkoperators, who are broadly defined as “owners and administrators of networks and network service providers,” are required to take necessary actions toprevent security attacks and data loss, such as: • formulating internal security management systems and operation manual, to specify the person in charge of cyber security and to defineresponsibilities in cyber security protection; • taking technical measures to prevent computer virus, network attacks, network intrusions and other activities that endanger cyber security; • taking technical measures to monitor and record network operation and cyber security status, and maintaining relevant logs for no less thansix months as required; 44Table of Contents • taking measures such as data classification, and backup and encryption of important data, etc.; and • performing other obligations required by relevant laws and administrative regulations.In addition, the Cyber Security Law specifies that network products and services shall satisfy the mandatory requirements set forth in applicablenational standards. Any provider of network products or services shall not install malwares. In case of identifying any cyber security risk such assecurity defect or bug, relevant product/service provider is required to take immediate remedial actions, timely inform users of the risk, and report theevent to the competent authority.Furthermore, the Cybersecurity Law specifies requirements on user information protection applicable to network operators, and requires that anetwork operator should establish and improve its user information protection system. Network operators shall collect, store, and use individualinformation with consent from such individuals by lawful and proper means on a necessary basis. Network operators cannot collect individual userinformation that is not relevant to the services it provides, or distort or destroy individual information collected by it. Network operators are prohibitedfrom disclosing without permission or selling individual information unless individual specifics are unidentifiable or irretrievable. In addition, anetwork operator shall strengthen its management of information released by its users. Where any information that comes from outside the territory ofChina is prohibited by law or regulation, the authorities may request relevant institutions to take measures to stop the flow of such prohibitedinformation. Also, a network operator is required to establish network information security complaint and reporting mechanisms, and to release thecomplaint and reporting channels to promptly accept and settle complaints and reports concerning network information security.The Cyber Security Law also emphasizes the protection of key information infrastructure in important industries and fields, such ase-Government, and operators of such key information infrastructure will be subject to stricter security obligations. For example, an operator of keyinformation infrastructures is generally required to store in the PRC personal information and important business data collected and generated duringits business operations within the PRC, and to assess its network security and identify potential risks at least once a year. Failure to comply with thisrequirement may lead to the confiscation of illegal gains, fines, revocation of the business permit or even the business license.Information SecurityAs an internet content provider and a network operator, we are subject to regulations relating to the protection of privacy. Under the InternetMeasures, internet content providers are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatoryto others or that infringes on the lawful rights and interests of others. Internet content providers that violate the prohibition could face criminal chargesor administrative sanctions by the PRC security authorities. In addition, relevant authorities may suspend their services, revoke their licenses ortemporarily suspend or close down their websites. Under the Several Provisions on Regulating the Market Order of Internet Information Services,issued by the MIIT in December 2011, internet content providers are prohibited from collecting any user-related information that can reveal theidentity of the user whether by itself or when used in combination with other information, or providing any such information to third parties withoutthe consent of a user. Internet content providers must expressly inform the users of the method, content and purpose of the collection and processing ofsuch user personal information and may only collect such information necessary for their services. Internet content providers are also required toproperly maintain the user personal information and, in case of any leakage or likely leakage of user personal information, must take remedial measuresimmediately and report any material leakage to the telecommunications regulatory authority. In addition, the Decision on Strengthening NetworkInformation Protection promulgated by the Standing Committee of the National People’s Congress in December 2012 emphasizes the need to protectelectronic information that contains personal identification information and other private data. The decision requires internet content providers toestablish and publish policies regarding the collection and use of personal electronic information and to take necessary measures to ensure the securityof the information and to prevent leakage, damage or loss. Furthermore, the MIIT’s Rules on Protection of Personal Information of Telecommunicationsand Internet Users issued in July 2013 contain detailed requirements on the use and collection of personal information as well as the security measuresto be taken by internet content providers. The PRC government retains the power and authority to order internet content providers to provide aninternet user’s personal information if such user posts any prohibited content or engages in any illegal activities through the internet. The CyberSecurity Law reiterates the abovementioned regulations and specifies the administrative penalties.Regulations on EmploymentThere are several principal rules and regulations in the PRC with respect to rights and obligations of employers and labors, including (i) theLabor Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s Congress effective on January 1, 1995,as most recently amended on August 27, 2009, or the Labor Law, (ii) the Labor Contract Law of the People’s Republic of China, promulgated by theStanding Committee of the National People’s Congress effective on January 1, 2008, as most recently amended on December 28, 2012 or the LaborContract Law, (iii) the Social Insurance Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’sCongress effective on July 1, 2011, or the Social Insurance Law, and (iv) the Regulations on the Management of Housing Provident Fund, promulgatedby the State Council on April 3, 1999, as most recently amended on March 24, 2002. 45Table of ContentsAccording to the Labor Law and the Labor Contract Law, employers must execute written labor contracts with full-time employees. Allemployers must compensate their employees with wages equal to at least the local minimum wage standards. All employers are required, among otherthings, to establish a system for labor safety and workplace sanitation and provide employees with workplace safety training. Violations of the LaborLaw and the Labor Contract Law may result in the imposition of fines and other administrative penalties. For serious violations, criminal liability mayarise. In addition, pursuant to the Social Insurance Law, employers in the PRC are required to provide employees with welfare schemes coveringpension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.Regulations on TaxationPRC Enterprise Income TaxPRC enterprise income tax is calculated based on taxable income, which is determined under (i) the PRC Enterprise Income Tax Law,promulgated by the National People’s Congress of China effective on January 1, 2008, as most recently amended on February 24, 2017, or the EITLaw, and (ii) the implementation rules to the EIT Law promulgated by the State Council effective on January 1, 2008. The EIT Law imposes a uniformenterprise income tax rate of 25% on all resident enterprises in the PRC, including foreign-invested enterprises and domestic enterprises, unless theyqualify for certain exceptions. According to the EIT Law and its implementation rules, the income tax rate of an enterprise that has been determined tobe a high and new technology enterprise may be reduced to 15% with the approval of relevant tax authorities.In addition, according to the EIT Law, enterprises registered in countries or regions outside the PRC but have their “de facto managementbodies” located within China may be considered as PRC resident enterprises and are therefore subject to PRC enterprise income tax at the rate of 25%on their worldwide income. Though the implementation rules of the EIT Law define “de facto management bodies” as “establishments that carry outsubstantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of anenterprise,” the only detailed guidance currently available for the definition of “de facto management body” as well as the determination andadministration of tax residency status of offshore-incorporated enterprises are set forth in the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, and theAdministrative Measures for Enterprise Income Tax of Chinese-Controlled Overseas Incorporated Resident Enterprises (Trial Version), or BulletinNo. 45, both issued by the State Administration of Taxation, or the SAT, which provide guidance on the administration as well as determination of thetax residency status of a Chinese-controlled offshore-incorporated enterprise, defined as an enterprise that is incorporated under the law of a foreigncountry or territory and that has a PRC company or PRC corporate group as its primary controlling shareholder.According to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC tax resident by virtue of having its “defacto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions aremet: • the primary location of the day-to-day operational management and the places where they perform their duties are in the PRC; • decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval of organizations or personnelin the PRC; • the enterprise’s primary assets, accounting books and records, company seals and board and shareholder resolutions are located ormaintained in the PRC; and • 50% or more of voting board members or senior executives habitually reside in the PRC.Bulletin No. 45 further clarifies certain issues related to the determination of tax resident status and competent tax authorities. It also specifiesthat when provided with a copy of Recognition of Residential Status from a resident Chinese-controlled offshore-incorporated enterprise, a payer doesnot need to withhold a 10% income tax when paying certain PRC-sourced income such as dividends, interest, royalties and income from the transfer ofassets to such Chinese-controlled offshore-incorporated enterprise. In the event that we are considered a PRC resident enterprise, we would be subjectto the PRC enterprise income tax at the rate of 25% on our worldwide income. 46Table of ContentsThe Arrangement Between the PRC and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention ofFiscal Evasion With Respect to Taxes on Income is promulgated by the SAT and implemented on December 8, 2006. This arrangement reduceswithholding tax rate in respect of the payment of dividends by a PRC enterprise to a Hong Kong enterprise from a standard rate of 10% to 5% if theHong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issuesconcerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81 a Hong Kong resident enterprise must meet the followingconditions, among others, in order to enjoy the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentageof equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC residententerprise throughout the 12 months prior to receiving the dividends. Furthermore, the Administrative Measures for Non-Resident Taxpayers to EnjoyTreatments under Tax Treaties, or Non-Resident Tax Treatments Measures, which became effective in November 2015, require that non-residenttaxpayers must report and submit the relevant statements and materials specified in this measure and be administrated and supervised subsequently bythe relevant tax authority in order to enjoy the reduced withholding tax rate. There are also other conditions for enjoying the reduced withholding taxrate pursuant to other applicable tax rules and regulations.Income Tax for Share TransfersAccording to the Announcement of the State Administration of Taxation on Matters Concerning Withholding of Enterprise Income Tax ofNon-Resident Enterprises at Source, or SAT Circular 37, promulgated by the SAT on October 17, 2017, and the Announcement of the StateAdministration of Taxation on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises, orCircular 7, promulgated by the SAT on February 3, 2015, as most recently amended on December 29, 2017, if a non-resident enterprise transfers theequity interests of a PRC resident enterprise indirectly by transfer of the equity interests of an offshore holding company (other than a purchase andsale of shares issued by a PRC resident enterprise in public securities market) without a reasonable commercial purpose, the PRC tax authorities havethe power to reassess the nature of the transaction and the indirect equity transfer will be treated as a direct transfer. As a result, the gain derived fromsuch transfer, which means the equity transfer price less the net value of equity, will be subject to PRC withholding tax at a rate of up to 10%. Underthe terms of Circular 7, the transfer which meets all of the following circumstances shall be directly deemed as having no reasonable commercialpurposes: (i) over 75% of the value of the equity interests of the offshore holding company are directly or indirectly derived from PRC taxableproperties; (ii) at any time during the year before the indirect transfer, over 90% of the total properties of the offshore holding company are investmentswithin PRC territory, or in the year before the indirect transfer, over 90% of the offshore holding company’s revenue is directly or indirectly derivedfrom PRC territory; (iii) the function performed and risks assumed by the offshore holding company are insufficient to substantiate its corporateexistence; or (iv) the foreign income tax imposed on the indirect transfer is lower than the PRC tax imposed on the direct transfer of the PRC taxableproperties.There is uncertainty as to the application of SAT Circular 37 and Circular 7. SAT Circular 37 and Circular 7 may be determined by the PRC taxauthorities to be applicable to our prior private equity financing transactions that involved non-resident investors, if any of such transactions weredetermined by the tax authorities to lack reasonable commercial purpose. As a result, we and our non-resident investors in such transactions maybecome at risk of being taxed under SAT Circular 37 and Circular 7, and we may be required to expend valuable resources to comply with Circular 698and Circular 7 or to establish that we should not be taxed under the general anti-avoidance rule of the EIT Law, which may have a material adverseeffect on our financial condition and results of operations.Value Added Tax and Business TaxPursuant to the Provisional Regulations on Value-Added Tax of the PRC (Revision 2017), and its implementation regulations, unless otherwisespecified by relevant laws and regulations, any entity or individual engaged in the sales of goods or processing, repairs and replacement services, saleof services, intangible assets, immovables, and importation of goods into China is generally required to pay a value-added tax, or VAT, for revenuesgenerated from sales of products, while qualified input VAT paid on taxable purchase can be offset against such output VAT.In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-AddedTax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice onFully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax, which became effective on May 1, 2016. In November 2017, the StateCouncil promulgated the Decision of State Council on Abolition of the Provisional Regulations of the People’s Republic of China on Business Taxand Revision of the Provisional Regulations of the People’s Republic of China on Value-added Tax, or the Decision. Pursuant to the pilot plan andrelevant notices and the Decision, VAT is generally imposed in the modern service industries on a nationwide basis and the Provisional Regulations ofthe People’s Republic of China on Business Tax has been abolished. VAT of a rate of 6% applies to revenue derived from the provision of somemodern services. If the services provided are related to technology development and transfer, such VAT may also be exempted subject to the approvalof relevant tax authorities. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the outputVAT chargeable on the modern services provided. 47Table of ContentsDividends Withholding TaxWe are a Cayman Islands holding company and substantially all of our income may come from dividends we receive from our PRC subsidiary.Pursuant to the EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiary aresubject to withholding tax at a rate of 10%.As uncertainties remain regarding the interpretation and implementation of the EIT Law and its implementation rules, we cannot assure you that,if we are deemed a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would not be subjectto any PRC withholding tax.Regulations on Foreign ExchangeThe Regulations of the People’s Republic of China on Foreign Exchange Control, promulgated by the State Council on January 29, 1996 and asmost recently amended on August 5, 2008, are principal regulations on foreign currency exchange in the PRC. Under these regulations, the RMB isfreely convertible for current account items after due process, including distribution of dividends, trade-related foreign exchange transactions andservice-related foreign exchange transactions, whereas foreign exchange for capital account items, such as direct investments or loans, requires priorapproval of and registration with the SAFE.Capital Settlement and Overseas Remittance of Foreign-Invested EnterprisesOn June 1, 2015, the Notice of the State Administration of Foreign Exchange on Reforming the Administrative Approach Regarding theSettlement of the Foreign Exchange Capitals of Foreign-invested Enterprises came into effect and then was specified by the Notice of the StateAdministration of Foreign Exchange on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlementpromulgated on June 9, 2016, which helps further deepen the reform of the foreign exchange administration system and better satisfy and facilitate theneeds of FIEs for business and fund operations. This notice allows FIEs to settle their foreign exchange capitals on a discretionary basis. Moreover, theProvisions on Foreign Exchange Administration Over Direct Investment Made by Foreign Investors in the PRC were promulgated by the SAFE onMay 13, 2013 in order to promote and facilitate foreign investors to make direct investment in the PRC, which allow a FIE that needs to remit fundsabroad to purchase and remit foreign exchange with the relevant bank due to capital reduction, liquidation, advance recovery of investment, profitdistribution, etc. after due registration.SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Authenticity andCompliance Verification, or SAFE Circular 3, effective on January 26, 2017. SAFE Circular 3 relaxes the policy restriction on foreign exchange inflowto further enhance trade and investment facilitation, including expanding the scope of foreign exchange settlement for domestic foreign exchangeloans, allowing the capital repatriation for offshore financing backed by domestic guarantee, facilitating the centralized management of foreignexchange funds of multinational companies, and allowing the offshore institutions within pilot free trade zones to settle foreign exchange in domesticforeign exchange accounts. SAFE Circular 3 also tightens the authenticity and compliance verification process of cross-border transactions and cross-border capital flow, such as requiring banks to verify board resolutions, tax filing form, and audited financial statements before wiring foreign investedcompanies’ foreign exchange distribution above US$50,000.Outbound Investment, Financing and Roundtrip InvestmentOn July 4, 2014, the Circular on the Relevant Issues Concerning Foreign Exchange Control on Domestic Residents Outbound Investment andFinancing and Roundtrip Investment though Special Purpose Vehicles came into effect, which was promulgated by the SAFE to make full use ofdomestic and international resources and markets. This circular prescribes operational procedures and registration requirements for roundtripinvestment though special purpose companies and others. In particular, it states that a domestic resident shall apply to the relevant local branch of theSAFE for foreign exchange registration of overseas investment, prior to making contribution to a special purpose company with legitimate domestic oroverseas assets or interests. 48Table of ContentsEquity Incentive PlansOn February 15, 2012, the Circular of SAFE on Relevant Issues Concerning the Foreign Exchange Administration for Domestic Individuals’Participation in Equity Incentive Plans of Overseas-Listed Companies came into effect. This notice prescribes foreign exchange proceduralrequirements for domestic individuals such as directors, supervisors, officials and other employees in relation to equity incentive plans of companieslisted abroad, including employee stock ownership plans, employee stock option plans and other equity incentive programs permitted by applicablelaws and regulations. Under the notice, individuals who participate in equity incentive plans of the same overseas listed company shall, through thedomestic companies they serve, collectively entrust a domestic agency to handle matters such as foreign exchange registration with the SAFE, accountopening, and funds transfer and remittance, and entrust an overseas institution to handle matters such as exercise of options, purchasing and sale ofrelated equity and funds transfer. Besides, an individual may use his/her own foreign currency funds in his/her personal foreign currency depositaccount, RMB funds or other legitimate domestic funds to participate in an equity incentive plan.Regulations on Dividend DistributionThe principal legislation with respect to payment or distribution of dividends by wholly foreign-owned enterprises includes (i) the CompanyLaw of the People’s Republic of China, most recently amended by the Standing Committee of the National People’s Congress as of October 26, 2018,and (ii) Wholly Foreign-Owned Enterprise Law of the People’s Republic of China, promulgated on April 12, 1986 and most recently amended onSeptember 3, 2016 by the Standing Committee of the National People’s Congress, and its implantation rules. Under these laws, wholly foreign-ownedenterprises in the PRC may pay dividends only out of accumulated profits, after setting aside annually at least 10% of accumulated after-tax profits asreserve fund, if any, until such time as the accumulative amount of such fund reaches 50% of the enterprise’s registered capital. A wholly foreign-owned enterprise may allocate a portion of its after-tax profits to its employee welfare and bonus funds at its discretion. These reserve funds may not bedistributed as cash dividends.SeasonalityWe have experienced seasonality in the sale of our solutions. Historically, we believe a pattern of increased sales in the fourth fiscal quarter as aresult of seasonal buying patterns had positively impacted net revenues in that period, which resulted in low or negative sequential net revenue growthin the first quarter as compared to the prior quarter. Such seasonality has resulted in a decrease in quarterly net revenues from the fourth quarter of ayear to the first quarter of the subsequent year. Our gross margins and operating income (losses) have also been affected by these trends because themajority of our expenses are relatively fixed in the short term. In addition, sales and marketing expenses typically increase towards the end of the yearas a result of year-end commissions. Overall, the historical seasonality of our business has been relatively mild due to our rapid growth but mayincrease further in the future. Due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to, or beindicative of, our future operating results.C. Organizational StructureThe following diagram illustrates our corporate structure, including our significant subsidiaries and consolidated affiliated entities: 49Table of ContentsGridsum Holding Inc. (Cayman Islands) ("Gridsum Cayman") 100% Gridsum Holding (China) Limited (Hong Kong) ("Gridsum HK") Outside PRC Inside PRC 100% Dissector (Beijing) Technology Co., Ltd. ("WFOE") Guosheng Qi Guofa Yu Gridsum (Beijing) Management Consulting Co., Ltd.(1) 51% 7% 42% Gridsum Holding (Beijing) Co., Ltd. ("Gridsum PRC Holding") 100% 100% 100% 100% 100% 100% Beijing Gridsum Technology Co., Ltd. ("Beijing Gridsum") Guoxinjunhe (Beijing) Technology Co., Ltd. ("Guoxinjunhe") Beijing Moment Everlasting Ad Co., Ltd. ("Beijing Moment") Beijing Gridsum Yizhun Technology Co., Ltd. ("Beijing Yizhun") Beijing Zhixunyilong Software Co., Ltd. ("Beijing Zhixunyilong") Beijing Gridsum Wang'an Technology Co., Ltd. ("Beijing Gridsum Wang'an") 51% 40% 40% 100% Beijing Hainatianchuang Technology Development Co., Ltd. ("Beijing Hainatianchuang") Beijing Guoxinwangyan Technology Co., Ltd. ("Beijing Guoxinwangyan") Beijing Yunyang Ad Co., Ltd. ("Beijing Yunyang") Equity interest Contractual arrangements including an Exclusive Business Cooperation Agreement, Exclusive Option Agreements, Shareholders’ VotingRights Proxy Agreements and Equity Pledge Agreements (1) Gridsum (Beijing) Management Consulting Co., Ltd. is a holding company owned by Guosheng Qi and other key employees, who own57.34% and 42.66% of this entity, respectively 50Table of ContentsContractual Arrangements with Gridsum PRC Holding and its ShareholdersThe following is a summary of the currently effective contractual arrangements among the WFOE, Gridsum PRC Holding and the shareholders ofGridsum PRC Holding:Exclusive Business Cooperation AgreementUnder the Exclusive Business Cooperation Agreement dated December 22, 2014 between the WFOE and Gridsum PRC Holding, Gridsum PRCHolding has appointed the WFOE as its exclusive provider of complete technical support, business support and related consulting services, and,without prior written consent of the WFOE, may not accept the same or similar services provided by, or establish similar cooperation relationship with,any other party. In consideration of the services provided by the WFOE, Gridsum PRC Holding shall pay the WFOE, on a quarterly basis, service feesequal to 90% of Gridsum PRC Holding’s net income (which equals gross income less mutually agreed costs). The parties can reasonably adjust thecalculation ratio of such service fees. The WFOE shall have exclusive and proprietary rights and interests in all rights, ownership, interests andintellectual properties owned and used by WFOE during the performance of the agreement. The term of the agreement is 10 years and may be extendedif confirmed in writing by the WFOE prior to expiration (and Gridsum PRC Holding shall unconditionally accept such extension). Gridsum PRCHolding shall not terminate the agreement prior to its expiration, unless the WFOE commits gross negligence or fraudulent act against Gridsum PRCHolding, whereas the WFOE may terminate the agreement upon giving 30 days’ prior written notice to Gridsum PRC Holding at any time.Exclusive Option AgreementsUnder the Exclusive Option Agreements, each dated December 22, 2014, among the WFOE, Gridsum PRC Holding and the shareholders ofGridsum PRC Holding, the shareholders of Gridsum PRC Holding granted to the WFOE an irrevocable and exclusive right to purchase, or designateother person(s) to purchase, to the extent permitted by PRC laws, at any time all or part of such shareholders’ equity interests in Gridsum PRC Holding.The purchase price shall be equal to RMB10.00 multiplied by the ratio of the equity interests to be purchased to the total registered capital of GridsumPRC Holding, or, if there is any mandatory provision regarding the purchase price under PRC laws, then at the election of the WFOE or its designatedperson, the lowest price permitted by PRC laws. Without the WFOE’s prior written consent, Gridsum PRC Holding shall not: (i) supplement, change oramend its articles of association, increase or decrease its registered capital or change its capital structure in any manner, (ii) sell, transfer, mortgage ordispose of, or create security interest on, any of its assets, business or legal right to collect interests, (iii) create, succeed to, guarantee or permit anydebt, except for debts arising in the course of ordinary or daily business operation, (iv) enter into any material contract (i.e., any contract with a valueexceeding RMB1,000,000), (v) provide loan or credit to any person, (vi) merge or combine with, buy or invest in, any other person or (vii) distributedividends to its shareholders; and the shareholders of Gridsum PRC Holding shall not sell, transfer, mortgage or dispose of, or create security intereston, such shareholders’ legal or beneficial interest in the equity interests in Gridsum PRC Holding without the prior written consent of the WFOE,except in accordance with the terms of the Equity Pledge Agreements described below. The term of each of the agreements is 10 years and may berenewed at the WFOE’s election.Shareholders’ Voting Rights Proxy AgreementsUnder the Shareholders’ Voting Rights Proxy Agreements, each dated December 22, 2014, among the WFOE, Gridsum PRC Holding and theshareholders of Gridsum PRC Holding, the shareholders of Gridsum PRC Holding irrevocably authorized the WFOE or its designee to act on theirbehalf as their exclusive agent and attorney with respect to all matters concerning their shareholder rights, as shareholders of Gridsum PRC Holding,including without limitation to propose, convene and attend shareholder meetings as proxy of such shareholders, and to exercise all of suchshareholder’s voting rights provided under PRC laws or the articles of association of Gridsum PRC Holding. Each agreement will remain effective untilall equity interests of the respective shareholder in Gridsum PRC Holding have been transferred to the WFOE and the related regulatory process hasbeen completed.Equity Pledge AgreementsUnder the Equity Pledge Agreements, each dated December 22, 2014, among the WFOE, Gridsum PRC Holding and the shareholders of GridsumPRC Holding, the shareholders of Gridsum PRC Holding pledged all of their equity interests in Gridsum PRC Holding to the WFOE as security for,among other things, the performance of the obligations of Gridsum PRC Holding and its shareholders under the Exclusive Business CooperationAgreement, the Exclusive Option Agreements and the Shareholders’ Voting Rights Proxy Agreements. In the event of any breach of any securedobligations by Gridsum PRC Holding or the respective shareholder, the WFOE is entitled to all remedial rights and powers afforded under PRC laws,including to be repaid in priority with proceeds from auctions or sale-offs of the pledged equity. Dividends may only be paid to the shareholders ofGridsum PRC Holdings in respect of the pledged equity with the prior consent of the WFOE, and the dividends received by the shareholders shall firstbe applied to satisfy the secured obligations. The pledges will be released upon the full and complete performance of the secured obligations and thefull payment of losses and fees resulting from a breach of those agreements by Gridsum PRC Holding or its shareholders. The equity pledges have beenregistered with local registration authority in accordance with PRC laws. 51Table of ContentsIn the opinion of Merits & Tree Law Offices, our PRC counsel, (a) the ownership structures of the WFOE, Gridsum PRC Holding and thesubsidiaries of Gridsum PRC Holding do not violate applicable PRC laws; and (b) each agreement pertaining to the contractual arrangements amongthe WFOE, Gridsum PRC Holding and its shareholders is valid, binding and enforceable in accordance with its terms under applicable PRC laws, anddoes not violate applicable PRC laws. However, there are substantial uncertainties regarding the interpretation and application of current and futurePRC laws and regulations, and there can be no assurance that the PRC government will take a view that is not contrary to or otherwise different fromthe opinion of our PRC counsel. If the PRC government finds that the agreements that establish the structure for operating our business do not complywith PRC government restrictions on foreign investment in the business we engage in, we could be subject to severe penalties, including beingprohibited from continuing operations. See “Item. 3 Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—We conduct ourbusinesses in China through our variable interest entity and its subsidiaries by means of contractual arrangements. If the PRC government determinesthat such arrangements do not comply with applicable PRC laws and regulations, our business could be materially adversely affected.” and “Item. 3Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Uncertainties in the interpretation and enforcement of PRC laws andregulations could limit the legal protections available to our shareholders and us.”D. Property, Plants and EquipmentFacilitiesOur corporate headquarters, which includes sales, marketing, business operations and executive offices, is located in Beijing, China and consistsof approximately 9,933 square meters of office space under 18 leases that will expire beginning in November 29, 2019. In addition to our headquarters,we lease space in Shanghai, Guangzhou, Shenzhen, Chengdu and Xi’an. In addition, we maintain data centers in Beijing and Shanghai.We lease all of our facilities and do not own any real property. We intend to procure additional space as we add employees and expandgeographically. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternativespace will be available to accommodate any such expansion of our operations.ITEM 4A. UNRESOLVED STAFF COMMENTSNone.ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSThe following discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction withour audited consolidated financial statements included elsewhere in this annual report. This discussion contains forward-looking statements thatinvolve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” and elsewhere in thisannual report.A. Operating ResultsOverviewGridsum is a leading provider of sophisticated data analysis software for multinational and domestic enterprises and government agencies inChina. Our proprietary distributed data architecture allows our customers to efficiently collect and analyze vast amounts of information that iscollected, indexed and stored in an organized manner, or structured data, and information that is not organized, or unstructured data. Our coretechnology, the Gridsum Big Data Platform and the Gridsum Prophet: Enterprise AI Engine, with its machine learning and AI capability, performsmulti-dimensional correlation analysis and analyzes complex real-time events. With the support of our Big Data Platform and the Gridsum Prophet, ourcustomers use our data visualization and data-mining technologies to identify complex relationships within their data and gain new insights that helpthem make better business decisions. 52Table of ContentsOur leading position is based on our solutions and our core technologies. Our software products are designed for a variety of commercial andgovernmental applications. To help our enterprise customers reach China’s large and growing online and mobile population, our initial products havefocused on digital marketing analytics and automation solutions. We were among the first companies to offer web analytics solutions based on datawarehouse technology, and we were among the first digital intelligence companies in China to build solutions entirely on a distributed data warehousearchitecture using the open-source Hadoop framework. By leveraging the analytic capabilities of our Big Data Platform and the Gridsum Prophet, wehave developed additional software solutions, including new media analytics and information discovery solutions, to address a broad range ofcustomer needs. In 2017, our customers included Fortune 500 and China 500 enterprises, comprising 505 customers across diverse industries,including 22 Chinese government agencies.We are exclusively dedicated to developing proprietary technologies and solutions in digital intelligence. In 2009, we launched Web Dissector,our first digital intelligence solution, and our first Web Dissector customer remains a customer today. Since 2009, we have released a series of solutionsbased on our Big Data Platform, including SEM Dissector, SEO Dissector, Mobile Dissector, Contribution Dissector, Streaming Dissector, VideoDissector, Government Web Dissector, Media Dissector and Law Dissector. In 2014, we launched ADSUITE, a fully integrated package through whichcustomers can access all our marketing automation solutions. In October 2016, we officially launched our social listening solution. It is a cloud-basedservice that enables an enterprise customer to monitor and analyze web and social media posts regarding the brand, products, customer service of thecustomer and its competitors. It also provides sentiment analysis and generates alerts from those posts. In November 2017, we, in cooperation withTencent and the PRC People’s Court Press, launched our Faxin Wei Su Platform, a litigation service on WeChat’s micro application platform. Itprovides integrated online litigation and remote trial handling services in China, enabling both the courts and litigants to join a trial remotely throughour Faxin Wei Su platform. In December 2017, we launched our Intelligent CRM Solution. The Intelligent CRM Solution is a cloud-based, marketing-centric CRM solution tailor-made for both multinational and local companies operating in China, enabling our clients to leverage both online andoffline data derived from their digital marketing and sales divisions and customers’ digital footprints, to drive sales and close orders in a more efficientand KPI-enhancing manner.We have grown rapidly in recent periods, with net revenues of RMB232.2 million, RMB363.8 million and RMB469.5 million (US$72.2 million)in 2015, 2016 and 2017, respectively, representing year-over-year growth of 57% and 29%. We have continued to make expenditures and investments,including in our technologies, personnel, sales and marketing, infrastructure and operations, and incurred net losses of RMB61.8 million,RMB98.6 million and RMB239.1 million (US$36.8 million) in 2015, 2016 and 2017, respectively. Our employee headcount has increased from 733employees as of December 31, 2015 to 1,078 employees as of December 31, 2017. We had 309 customers, 395 customers and 505 customers in 2015,2016 and 2017, respectively. In 2018 we experienced a decline in the level of our business activity and related revenue. We had 1,148 employees andapproximately 500 customers as of December 31, 2018.We deliver our solutions as cloud-based software-as-a-service, or SaaS, offerings that are easy to deploy, easy to access, automatically updatedwithout disruption, and enable our customers to reduce IT support costs by outsourcing hardware and software maintenance and support. We accountfor our revenues on a net basis, based on the fees our customers pay us without including any amounts they pay third parties for advertising or otherservices. We charge the majority of our customers based on percentage of their spending on our system in the bid management application or thevolume of data being processed (e.g., page views or viewer views). When we provide our data analytics solutions with bid management functionality,we charge customers based on a percentage of their ad spending with the search engine providers. For example, a customer utilizing our bidmanagement software to optimize the performance of its search engine marketing campaign would pay us a negotiated percentage of its ad spendingthrough our software, as a service fee. When we offer our data analytics solutions to customers without reference to ad spending, we typically chargethem negotiated variable amounts based on the monthly volume of data processed. We arrive at an annual data volume estimate before the engagementcommences, and charge a fee for a predetermined base number of page views or viewer views. If the volume of the data processed exceeds the base, wecharge progressively for the additional usage. To satisfy some of our customers’ needs, we set a fee cap based on negotiation, subject to annualadjustment, or negotiate fixed-fee based contracts with them. In 2017, 44% of our revenues were recognized based on capped or fixed-feearrangements, and 56% of our revenues were recognized based on arrangements that do not involve a fee cap or fixed fee. For our marketingautomation solutions, we earn and record service fee revenues over the contractual period, in proportion to ad spending or the completion ofmilestones that are stipulated in the contracts. In addition, we receive revenues from the incentive programs of search engine providers based on factorsdetermined by them, such as yearly growth in the amount of advertising on the provider’s search engine platform that our customers purchase throughour solutions and other factors selected at the discretion of these providers. Revenues from these programs are received on both a quarterly and anannual basis. A majority of our customer contracts have terms of one year or more and may be renewed. Our gross margin in 2015, 2016 and 2017 was86%, 85% and 80%, respectively. 53Table of ContentsFinancial RestatementOur consolidated financial statements for the years ended December 31, 2015 and 2016 have been restated, as described in note 2(a) to ourconsolidated financial statements included in this annual report.Factors Affecting Our Results of OperationsInvestment in Expansion and Further Penetration of Our Customer BaseOur performance depends on our ability to continue to attract new customers and to accelerate and expand usage of our products by existingcustomers. For the foreseeable future, we expect that our revenue growth will be primarily driven by the pace of adoption and penetration of ourproducts and we will incur significant expenses associated with educating the market about the benefits of our products. In order to support this effort,we have grown our sales and marketing team, which consists of our sales personnel and customer service consultants, from a total of 358 employees asof December 31, 2015 to 393 employees as of December 31, 2016 and 410 employees as of December 31, 2017. We intend to expand our marketingefforts to increase our brand awareness.Investment in Innovation and Advancement of Our ProductsOur performance is significantly dependent on the investments we make in research and development to continue to innovate, improvefunctionality, develop new technologies or adapt to new technologies or changes to existing technologies. Our product innovation and developmentallows our customers to analyze growing volumes and variety of data in new ways. Our investments in this area include growing our research anddevelopment team from 279 employees as of December 31, 2015 to 418 employees as of December 31, 2016 and 546 employees as of December 31,2017. We intend to continue to invest in product innovation and leadership, including hiring top technical talent, focusing on core technologyinnovation and product development and new industry verticals. One area of focus in the near term is development of solutions in the legal andfinancial services verticals and IIoT based on our Gridsum Big Data Platform and Gridsum Prophet. Another area of focus is the development ofintegrated solutions in data analytics, information discovery, and data visualization. We do not expect to realize material revenues from thesedevelopment initiatives in the near term.Investment in InfrastructureWe have made and expect to continue to make substantial investments in our infrastructure in enhancing and expanding our operations. Forexample, we expect to make investments in infrastructure such as data centers, network bandwidth and technical operations personnel. In response tothe heightened data security requirements from our e-Government customer base and others, particularly customers in the judicial system, in 2016 and2017 we outsourced some of our software optimization and data security enhancement work to two China-based specialist companies in this field. Weexpect to continue to incur expenses relating to such outsourced service in the near future. We also expect to make additional investments in ourinfrastructure as we continue to develop our capabilities across our product range.Overall Development of the SaaS Enterprise Software Industry in ChinaOur revenues are significantly affected by the growth in demand for enterprise SaaS software in China. Such demand is dependent on manyfactors, including the economic growth rates in the industries in which our customers operate and the overall adoption of SaaS solutions amongenterprises and government agencies in China. Our performance will also depend on the emergence of future competition from multinational anddomestic software providers in China. In addition, government policy and regulation of China’s software industry may affect our results of operations.Trends in Key Performance IndicatorsWe review the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulatebusiness plans and make strategic decisions:Average Customer ContributionWe calculate average customer contribution by dividing total net revenues in a period by the total number of customers for the same period. Wemonitor average customer contribution as a measure of our cross selling and upselling of our new solutions. Our average customer contribution wasRMB0.8 million, RMB0.9 million and RMB0.9 million (US$0.1 million) in 2015, 2016 and 2017, respectively, representing increases of 23% and 1%year over year in 2016 and 2017, respectively. We believe that average customer contribution declined slightly in 2018 from 2017. 54Table of ContentsCustomersWe define a customer in a period as a single organization that purchases our products and solutions and with respect to which we recognizerevenue during such period. A single customer may have multiple paid business accounts for separate divisions, segments or subsidiaries, but allentities that are part of the same corporate structure are counted as a single customer. We periodically review and optimize our customer portfolio. In2015, 2016 and 2017, we had 309, 395 and 505 customers. No single customer represented 10% or more of our total net revenues in 2015, 2016 or2017.Key Components of Results of OperationsNet RevenuesNet revenues consist of revenues recognized from customers who used our software solutions during the period, including net revenues that wereceive from the incentive programs of search engine providers, less business tax and surcharge. From our inception to the end of 2017, we haveincreased net revenues through our ability to increase the number of customers, retain high quality customers and increase the average customercontribution by upselling and cross selling new solutions. In the near term, we may experience slower growth or temporary declines in net revenue insome periods, due to customer attrition associated with delayed filing of our required SEC reports and general economic conditions in China. Weexpect our net revenues to increase over the long term as more customers adopt our solutions and demand more business intelligence to improve theiroperational efficiency, and as we continue to bring more innovative solutions to market and serve our customers.Cost of RevenuesCost of revenues consists primarily of personnel and personnel-related expenses for our customer service consultants, who work closely with ourcustomer sales, marketing, IT and other operating professionals to help customers optimize the performance of their accounts, and periodically providein-depth analyses for customers. Personnel costs consist of salaries, benefits, bonuses and share-based compensation. Cost of revenues also includesdata center expenses, office and overhead costs, outsourcing cost, bandwidth costs, and depreciation expenses related directly to providing services tocustomers. We plan to continue increasing the capacity, capability and reliability of our infrastructure to support the growth of our customer base andthe number of products we offer. In 2017 and 2018, as part of operational strategy change, we increased our use of outsourcing for some optimizationservices, so that we can allocate more internal resources to critical research and development, which change is likely to increase our cost of revenues.We expect that, for the foreseeable future, our cost of revenues will increase in absolute amount but fluctuate as a percentage of our net revenues.Gross Profit and Gross MarginGross profit is net revenues less cost of revenues. Gross margin is gross profit expressed as a percentage of net revenues. Our gross margin hasbeen, and will continue to be, affected by a number of factors, including the timing and extent of our investments in our operations and personnel,outsourcing cost, hosting-related costs and other depreciation expense allocations. The increased utilization of outsourcing is likely to reduce ourgross margins. We expect that our gross margin will fluctuate from period to period.Operating ExpensesOur operating expenses consist of sales and marketing, research and development, and general and administrative expenses. For each category,the most significant component of our operating expenses are personnel costs, which consist of salaries, benefits, bonuses, share-based compensation,and for sales and marketing expenses, sales commissions. We also incur other non-personnel costs such as an allocation of our general overheadexpenses, and collaboration with third partied to develop and launch new solutions in our legal services and IIoT sector.Sales and Marketing ExpensesSales and marketing expenses consist primarily of personnel costs for our sales, marketing and business development employees and executives.Commissions are expensed in the period when a customer contract is executed. Sales and marketing expenses also include the costs of our marketingand brand awareness programs. We plan to continue investing in sales and marketing by increasing the number of our sales personnel, expanding ourmarketing activities, building brand awareness and sponsoring additional marketing events. We expect our sales and marketing expenses to continueto increase in absolute amount. However, we expect our sales and marketing expenses to decrease as a percentage of net revenues over the long term,although our sales and marketing expenses may fluctuate from period to period depending on fluctuations in net revenues and the timing of our salesand marketing expenses. 55Table of ContentsResearch and Development ExpensesResearch and development expenses consist primarily of personnel costs, an allocation of our general overhead expenses and outsourcingexpenses, and increasing collaboration with third-party vertical specialists. We continue to focus our research and development efforts on adding newfeatures and products and on increasing the functionality and enhancing the ease of use of our existing products. In addition, we invest aggressively inthe research and development of the infrastructure layer of software technologies, which will benefit us in the long run. We expense all our softwaredevelopment costs as they are incurred. We plan to continue to hire employees for our engineering, product management and consulting teams tosupport our research and development efforts, particularly in our legal services, intelligent CRM and IIoT solutions, three relatively new verticalswhere we intend to replace the incumbents with more advanced solutions or develop the new solutions in a greenfield. As a result, we expect ourresearch and development expenses to continue to increase in absolute amount for the foreseeable future, and the increase will be significant in thenear term. We expect our research and development expenses to decrease modestly as a percentage of net revenues over the long term, although it mayfluctuate from period to period depending on fluctuations in net revenues and the timing and extent of our research and development expenses.General and Administrative ExpensesGeneral and administrative expenses consist primarily of personnel costs for our administrative, legal, human resources, information technology,finance and accounting employees and executives. Also included are non-personnel costs, such as legal and other professional fees. We plan tocontinue to expand our business in China, and we expect to increase the size of our general and administrative function to support the growth of ourbusiness. We also expect that we will continue to incur additional general and administrative expenses as a result of being a publicly traded company.As a result, we expect our general and administrative expenses to continue to increase in absolute amount for the foreseeable future. We expect ourgeneral and administrative expenses as a percentage of net revenues in 2018 to increase due to our significant professional expenses relating to ourinternal investigation, changes of auditor and class action lawsuits. We expect our general and administrative expenses as a percentage of net revenuesto decrease modestly over the long term, although it may fluctuate from period to period depending on fluctuations in our net revenues and the timingand extent of our general and administrative expenses.Other Income/(Expense), NetOther income/(expense), net consists primarily of interest income, net, and foreign exchange gain or loss.TaxationWe generate the majority of our operating loss from our PRC operations and have recorded income tax provisions for the periods presented. On aconsolidated basis, we have not been profitable yet and have an operating loss carried forward. However, some of our operating entities have taxableincome in the past, due to the profit before tax or permanent difference incurred by non-deductible expenses, which resulted in the income tax paymentand liability. Income tax liability is calculated based on a separate return basis as if we had filed separate tax returns for all the periods presented.Cayman IslandsWe are not subject to income or capital gains tax under the current laws of the Cayman Islands. There are no other taxes likely to be material to uslevied by the government of the Cayman Islands.Hong KongOur subsidiary incorporated in Hong Kong, Gridsum Holding (China) Limited, is subject to Hong Kong profit tax at a rate of 16.5%. Hong Kongdoes not impose a withholding tax on dividends.ChinaOur subsidiaries, VIEs and VIE subsidiaries in the PRC are subject to enterprise income tax on their taxable income in China at a standard rate of25% if they are not eligible for any preferential tax treatment. Taxable income is based on the entity’s global income as determined under PRC tax lawsand accounting standards. According to the PRC Enterprise Income Tax Law and relevant regulations, with approval of relevant tax authorities, theincome of Beijing Gridsum, Beijing Moment, Beijing Yunyang, Guoxinjunhe and the WFOE, which is determined to be generated from a high andnew technology enterprise, is taxed at a preferential rate of 15%. 56Table of ContentsOur subsidiaries, VIEs and VIE subsidiaries in the PRC are also subject to Value Added Tax (“VAT”) at rate of 6% and related surcharges.Dividends that the WFOE, our wholly owned subsidiary in China, pays to Gridsum HK, our intermediary holding company in Hong Kong, willbe subject to PRC withholding tax at a rate of 10%, unless they qualify for a special exemption. If Gridsum HK satisfies all the requirements under theArrangement Between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of FiscalEvasion with Respect to Taxes on Income and receives approval from the relevant tax authority, then dividends paid by the WFOE to Gridsum HK willbe subject to a withholding tax rate of 5% instead. See “Item. 3 Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Anylimitation on the ability of the WFOE to make distributions to us, or the tax implications thereof, could have a material adverse effect on our businessor financial condition.”If our holding company in the Cayman Islands, Gridsum Cayman, were deemed to be a “PRC resident enterprise” under the Enterprise IncomeTax Law, it would be subject to enterprise income tax on its global income at a rate of 25%. See “Item. 3 Key Information—D. Risk Factors—RisksRelating to Doing Business in China—We and our Hong Kong subsidiary may be classified as a ‘PRC resident enterprise’ for PRC enterprise incometax purposes, which would likely result in unfavorable tax consequences to us and our non-PRC shareholders.”Critical Accounting Policies and EstimatesOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which havebeen prepared in accordance with U.S. GAAP, appearing elsewhere in this annual report. The preparation of these consolidated financial statementsrequires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and relateddisclosure of contingent assets and liabilities. We evaluate these estimates, judgments and assumptions on an on-going basis for taxes.Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Theseestimates form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actualresults may differ materially from such estimates under different assumptions or conditions.We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of ourconsolidated financial statements:Consolidation of Variable Interest EntitiesTo comply with applicable PRC laws and regulations, we conduct operations in China principally through our PRC-based variable interest entityand its operating subsidiaries. One of our wholly owned subsidiaries has entered into a series of contractual arrangements with our PRC-based variableinterest entity and its shareholders. These contractual arrangements allow us to exercise effective control over, and receive substantially all of theeconomic benefits, of our PRC-based variable interest entity and its operating subsidiaries, and we treat it and its operating subsidiaries as variableinterest entities under U.S. GAAP, the financial results of which are included in our consolidated financial statements. See “Item. 4 Information on theCompany—C. Organizational Structure.”Revenue RecognitionRevenues are generated from sales of our marketing automation and e-Government and other solutions. The targeted customers for marketingautomation solutions are enterprise customers and the targeted customers for e-Government and other solutions are governmental agencies and state-owned entities.We recognize revenues when the following four criteria are met: • persuasive evidence of an arrangement exists; • our platform is made available and services have been delivered to the customer; • the fee is fixed or determinable; and 57Table of Contents • collection is reasonably assured.Revenues received from incentive programs of search engine providers are based on factors determined by these providers, such as yearly growthin the amount of advertising on the provider’s search engine platform that our customers purchase through our solutions, and other factors selected atthe discretion of these providers. Revenues are recorded net of value-added taxes and surcharges.In accordance with ASC 605-45, Revenue Recognition: Principal Agent Considerations, we consider several factors in determining whether weact as the principal or as an agent in the arrangement of merchandise sales and provision of various related services and thus whether it is appropriate torecord our revenues and the related cost of sales on a gross basis or record the net amount earned as service fees.Where customers purchase multiple solutions in a single contract, we allocate the total consideration to the various elements based on therelative selling price method and recognize revenues as services are rendered. In accordance with ASC 605-25, Revenue Recognition—Multiple-Element Arrangements, the following hierarchy are followed when determining the appropriate selling price for each element: (1) vendor specificobjective evidence, or VSOE, (2) third party evidence, or TPE and (3) best estimate of selling price, or BESP. We recognize revenues based on theelements delivered and defer the recognition of revenues for the fair value of the undelivered elements until the remaining obligations have beensatisfied. Where all of the elements within an arrangement are delivered uniformly over the agreement period, revenues are recognized on a straight linebasis over the contract period.EnterpriseWe generate enterprise revenue primarily by providing our marketing automation solutions, including bid management and data analysissolutions, to enterprise customers. We earn and record service fee revenues over the contractual period, in proportion to ad spending or the completionof milestones that are stipulated in the contracts. Sometimes, we receive revenues from the incentive programs of search engine providers based onfactors determined by them, such as yearly growth in the amount of advertising on the provider’s search engine platform that our customers purchasethrough our solutions and other factors selected at the discretion of these providers. Revenues from these programs are received on both a quarterly andan annual basis and are calculated in accordance with our customers’ usage of the search engine providers.In addition, we sell distribution rights of public sentiment tracking service provided by certain third-party search engine to sub-distributor, dueto uncertainty of collection, the revenue is recognized when fees are collected.With respect to the bid management services, we considered that: (i) the search engines are responsible for providing the advertisements serviceto the customers; (ii) we lack the latitude to determine the prices charged by the search engine providers and earns only a fixed service fee from thecustomers; (iii) the hosting and maintenance of the advertisements are the responsibilities of the search engine providers; (iv) the customers have thediscretion in choosing the search engines; and (v) we receive revenues from incentive programs based on the search engines providers’ policies. It isour responsibility to manage the customer’s advertising campaign on the search engines providers, according to the terms of the customer contract, sowe view ourselves as an agent and record revenues related to these services on a net basis.e-Government and OtherWe generate revenue by entering into service contracts with governmental agencies for our e-Government solutions, including Law Dissectorbeginning in 2015. We also generate revenue by entering into contracts with state-owned television stations for our new media solutions, including TVDissector, Streaming Dissector and Video Dissector.Fair Value of our Ordinary SharesPrior to our initial public offering in September 2016, we were a private company with no quoted market prices for our ordinary shares. Wetherefore needed to make estimates of the fair value of our ordinary shares at various dates for the purposes of: (i) determining the fair value of ourordinary shares at the date of issuance of convertible instruments as one of the inputs into determining the intrinsic value of the beneficial conversionfeatures, if any; (ii) determining the fair value of preferred shares and ordinary shares at the respective issuance date; and (iii) determining the fair valueof our ordinary shares at the date of grant of a share-based compensation award to our employees as one of the inputs into determining the grant datefair value of the award.The following table sets forth the fair value of our ordinary shares estimated at different times with the assistance from an independent valuationfirm. 58Table of ContentsValuation Dates Fair valueper share Discount rate DLOM Type of valuation December 31, 2012 US$1.51 22.5% 30% Retrospective October 1, 2013 US$2.64 21.5% 25% Retrospective December 31, 2013 US$2.75 20.0% 20% Retrospective July 1, 2014 US$5.47 20.0% 20% Retrospective December 31, 2014 US$6.82 20.0% 15% Retrospective January 30, 2015 US$7.93 19.5% 10% Contemporaneous March 1, 2015 US$7.94 19.0% 10% Contemporaneous June 30, 2015 US$11.80 18.5% 7% Contemporaneous September 30, 2015 US$11.84 18.5% 8% Contemporaneous November 18, 2015 US$11.84 18.5% 9% Contemporaneous In determining the fair value of our ordinary shares, we applied the income approach/discounted cash flow analysis based on our best estimate ofprojected cash flow as of the valuation date. The determination of the fair value of our ordinary shares requires complex and subjective judgments to bemade regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history andprospects at the time of valuation.The major assumptions used in calculating the fair value of ordinary shares included: • Discount rates. The discount rates listed in the table above were based on the weighted average cost of capital, which was determined basedon a consideration of the factors including risk-free rate, comparative industry risk, equity risk premium, company size and non-systematicrisk factors. • Comparable companies. In deriving the weighted average cost of capital used as the discount rates under the income approach, ten publiclytraded companies were selected for reference as our guideline companies. The guideline companies were selected based on the followingcriteria: (i) they operate in digital marketing and big data analytics industry; and (ii) their shares are publicly traded in developed capitalmarkets, including the United States. • Discount for lack of marketability, or DLOM. DLOM was quantified by the Finnerty’s (2012) Average-Strike Put Option model. Under thisoption pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, wasconsidered as a basis to determine the DLOM. This option pricing method is one of the methods commonly used in estimating DLOM as itcan take into consideration factors like timing of a liquidity event, such as an initial public offering, and estimated volatility of our shares.The farther the valuation date is from an expected liquidity event, the higher the put option value and thus the higher the implied DLOM.The lower DLOM is used for the valuation, the higher is the determined fair value of the ordinary shares. • The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. Ourrevenues and earnings growth rates, as well as major milestones that we have achieved, contributed to the increase in the fair value of ourordinary shares from December 2012 to November 2015. However, these fair values are inherently uncertain and highly subjective. Theassumptions used in deriving the fair values were consistent with our business plan. These assumptions included: no material changes inthe existing political, legal and economic conditions in the PRC; our ability to retain competent management, key personnel and staff tosupport our ongoing operations; and no material deviation in market conditions from economic forecasts. These assumptions are inherentlyuncertain. • Option pricing method was used to allocate enterprise value to preferred and ordinary shares, taking into account the guideline prescribedby the AICPA Audit and Accounting Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation. Themethod treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidationpreference of the preferred stock. • The option pricing method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of ourcompany or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plansof our board of directors and management. Estimating the volatility of the share price of a privately held company is complex because thereis no readily available market for the shares. We estimated the volatility of our shares to range from 37.7% to 51.3% based on the historicalvolatilities of comparable publicly traded companies engaged in similar lines of business. Had we used different estimates of volatility, theallocations between preferred and ordinary shares would have been different.Share-based CompensationAll share-based awards to employees and directors, including stock option awards, are measured at the grant date based on the fair value of theawards. Share-based compensation, net of forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is thevesting period. We used the binominal option pricing model to determine the fair value of stock options and account for share-based compensationexpenses using an estimated forfeiture rate at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initialestimates. Share-based compensation expenses were recorded net of estimated forfeitures such that expenses were recorded only for those share-basedawards that are expected to vest. Historically, our share-based compensation expenses were relatively low. 59Table of ContentsThe following table sets forth information regarding the stock options we granted as of December 31, 2017. Date of Tranche Number ofOptionsGranted ExercisePrice Fair Value ofthe Optionsas of theGrant Date Fair Value ofthe UnderlyingOrdinary Sharesas of theGrant Date Intrinsic Valueas of theGrant Date September 1, 2013 78,125 US$0.42 US$2.26 US$2.64 US$2.22 January 1, 2014 31,250 US$0.42 US$2.38 US$2.75 US$2.33 February 10, 2014 198,893 US$0.42 US$2.37 US$2.75 US$2.33 July 1, 2014 164,000 US$0.42 US$5.08 US$5.47 US$5.05 December 10, 2014 198,893 US$0.42 US$6.43 US$6.82 US$6.40 March 1, 2015 223,000 US$0.42 US$7.55 US$7.94 US$7.52 June 30, 2015 30,000 US$0.42 US$11.41 US$11.80 US$11.38 September 30, 2015 24,000 US$0.42 US$11.44 US$11.84 US$11.42 October 16, 2015 25,000 US$0.42 US$11.44 US$11.84 US$11.42 November 18, 2015 29,000 US$0.42 US$11.44 US$11.84 US$11.42 January 17, 2017 1,320,000 US$10.11 US$4.93 US$11.35 US$1.24 The fair value of each option grant is estimated on the date of grant. The following table summarizes assumptions used in the fair value estimateson the dates indicated. Date of Tranche ExpectedVolatility(1) Risk-FreeInterest Rate(Per Annum)(2) ExpectedDividendYield(3) ExpectedTerm(in Years)(4) ExpectedForfeitureRate(5)September 1, 2013 47% 3.56% — 2.2 3%January 1, 2014 52% 3.63% — 2.2 3%February 10, 2014 52% 3.27% — 2.2 3%July 1, 2014 52% 3.17% — 2.2 3%December 10, 2014 50% 2.77% — 2.2 3%March 1, 2015 49% 2.59% — 2.2 3%June 30, 2015 48% 2.95% — 2.2 3%September 30, 2015 47% 2.64% — 2.2 3%October 16, 2015 46% 2.63% — 2.2 3%November 18, 2015 46% 2.87% — 2.2 3%January 17, 2017 46% 3.14% — 2.2 3% (1)We estimated expected volatility based on the annualized standard deviation of the daily return embedded in historical share prices ofcomparable companies with a time horizon close to the expected expiration of the term.(2)We estimated the risk-free interest rate based on the yield of U.S. Treasury bills with maturity terms similar to the expected terms on the share-based awards.(3)We have never declared or paid any cash dividends on our capital stock, and we do not anticipate any dividend payments on our ordinary sharesin the foreseeable future.(4)Expected term (in years) represents the weighted average period of time that share-based awards granted are expected to be outstanding givingconsideration to historical exercise patterns. We used the simplified method to calculate the expected term.(5)Expected forfeiture rate is estimated based on historical employee turnover rate after each option grant. 60Table of ContentsFor the purpose of determining the estimated fair value of our stock options, we believe the expected volatility and the estimated fair value of ourordinary shares are the most critical assumptions. Changes in these assumptions could significantly affect the fair value of stock options and hence theamount of share-based compensation we recognize in our combined and consolidated financial statements. Since we did not have a trading history forour shares sufficient to calculate our own historical volatility, the expected volatility of our future ordinary share price was estimated based on theprice volatility of the shares of comparable public companies that operate in the same or similar business.The following table sets forth information regarding the RSUs we granted as of December 31, 2017. Date of Tranche Number ofRSUsGranted Fair Value ofthe RSUsas of theGrant Date Intrinsic Valueas of theGrant Date January 3, 2017 19,782 US$10.11 US$10.11 January 11, 2017 300 US$11.24 US$11.24 August 28, 2017 3,217 US$9.37 US$9.37 October 1, 2017 862,900 US$9.80 US$9.80 October 10, 2017 20,000 US$9.40 US$9.40 October 16, 2017 3,000 US$8.87 US$8.87 October 23, 2017 10,000 US$8.20 US$8.20 November 1, 2017 8,500 US$8.40 US$8.40 November 7, 2017 3,000 US$8.64 US$8.64 November 15, 2017 3,000 US$8.69 US$8.69 December 1, 2017 3,000 US$8.57 US$8.57 The grant date fair value of the RSUs is equal to the closing price of our ADSs on the grant date with the cost of US$0.001 per RSU.Income TaxesCurrent income taxes are provided on the basis of net income/(loss) for financial reporting purposes, and adjusted for income and expense itemswhich are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred incometaxes are provided using the liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporarydifferences and are determined by applying enacted statutory tax rates that will be in effect in the period in which the temporary differences areexpected to reverse to the temporary differences between the financial statements’ carrying amounts and the tax bases of assets and liabilities. Avaluation allowance is provided to reduce the amount of deferred tax assets if, based on the weight of available evidence, it is more likely than not thatsome portion, or all, of the deferred tax assets will not be realized.We apply a “more likely than not” recognition threshold in the evaluation of uncertain tax positions. We recognize the benefit of a tax positionin our consolidated financial statements if the tax position is “more likely than not” to prevail based on the facts and technical merits of the position.Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fiftypercent likelihood of being realized upon settlement. Unrecognized tax benefits may be affected by changes in interpretation of laws, rulings of taxauthorities, tax audits and expiry of statutory limitations. In addition, changes in facts, circumstances and new information may require us to adjust therecognition and measurement estimates with regard to individual tax positions. Accordingly, unrecognized tax benefits are periodically reviewed andre-assessed. Adjustments, if required, are recorded in our consolidated financial statements in the period in which the change that necessities theadjustments occur. The ultimate outcome for a particular tax position may not be determined with certainty prior to the conclusion of a tax audit and,in certain circumstances, a tax appeal or litigation process.Recently Issued Accounting PronouncementsSee Item 18 of Part III, “Financial Statements—Note 2—Principal Accounting Policies—(dd) Recent Accounting Pronouncements.” 61Table of ContentsResults of OperationsThe following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be readtogether with our consolidated financial statements and related notes included elsewhere in this annual report. Due to our limited operating history,period-to-period comparisons discussed below may not be meaningful and are not indicative of our future trends. For the Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (Restated) (Restated) (in thousands) Consolidated Statements of Operations Data: Revenues: Enterprise 208,385 311,106 377,013 57,946 e-Government and other 26,904 60,772 102,216 15,710 Less: Business tax and surcharges (3,092) (8,055) (9,696) (1,490) Net revenues 232,197 363,823 469,533 72,166 Cost of revenues(1) (33,392) (55,707) (94,640) (14,546) Gross profit 198,805 308,116 374,893 57,620 Operating expenses: Sales and marketing expenses(1) (88,364) (139,781) (192,413) (29,573) Research and development expenses(1) (97,553) (160,387) (257,921) (39,642) General and administrative expenses(1) (60,820) (88,108) (143,743) (22,093) Total operating expenses (246,737) (388,276) (594,077) (91,308) Loss from operations (47,932) (80,160) (219,184) (33,688) Other income/(expense): Foreign currency exchange gain/(loss) 1,339 (1,600) (8,552) (1,314) Interest income/(expense), net 80 (614) (5,430) (835) Other income/(expense), net 111 (1,452) (1,683) (259) Loss before income tax (46,402) (83,826) (234,849) (36,096) Income tax expenses (15,371) (14,801) (4,275) (657) Net loss (61,773) (98,627) (239,124) (36,753) (1)Share-based compensation was allocated in costs and operating expenses as follows: For the Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (Restated) (Restated) (in thousands) Cost of revenues 335 319 501 77 Sales and marketing expenses 1,651 2,252 4,739 728 Research and development expenses 3,347 3,955 8,641 1,328 General and administrative expenses 3,473 4,104 9,046 1,390 Total 8,806 10,630 22,927 3,523 Year Ended December 31, 2016 Compared to Year Ended December 31, 2017Net Revenues For the Year Ended December 31, Change 2016 2017 Amount % RMB RMB US$ RMB (Restated) (in thousands, except for percentages) Revenues: Enterprise 311,106 377,013 57,946 65,907 21% e-Government and other 60,772 102,216 15,710 41,444 68% Less: Business tax and surcharges (8,055) (9,696) (1,490) (1,641) 20% Net revenues 363,823 469,533 72,166 105,710 29% 62Table of ContentsNet revenues increased by RMB105.7 million, or 29%, from 2016 to 2017, with 21% growth in enterprise revenues and 68% growth ine-Government and other revenues. This growth was attributable to increased demand for our solutions from new and existing customers. Totalcustomers increased 28%, to 505 customers in 2017 from 395 customers in 2016. Enterprise revenues increased RMB65.9 million due to a 35%increase in the number of enterprise customers from 331 to 447. The average enterprise customer contribution in 2016 and 2017 were consistentlyaround RMB0.9 million and RMB0.8 million, respectively. E-Government and other revenues increased by RMB41.4 million, due to an increase inaverage e-Government and other customer contribution from approximately RMB0.9 million to RMB1.8 million, which was primarily driven byhigher demand for our solutions, although the number of customers decreased from 64 to 58.Cost of Revenues For the Year Ended December 31, Change 2016 2017 Amount % RMB RMB US$ RMB (Restated) (in thousands, except for percentages) Cost of revenues (55,707) (94,640) (14,546) (38,933) 70% Cost of revenues increased by RMB38.9 million, or 70%, from 2016 to 2017. The increase was primarily as a result of a RMB26.6 millionincreased outsource service fee and technical service fee and RMB3.7 million increased staff and other cost. The increase in the cost of outsourceservice fee primarily reflects our incremental investment to satisfy the increasing data security demand from our customers.Gross Profit For the Year Ended December 31, Change 2016 2017 Amount % RMB RMB US$ RMB (Restated) (in thousands, except for percentages) Gross profit 308,116 374,893 57,620 66,777 22% Gross profit increased by RMB66.8 million, or 22%, from 2016 to 2017, due to net revenues increasing at a higher pace than cost of revenues,reflecting higher average customer contribution in 2017 over 2016 and better leveraging of customer support personnel. Gross margin decreased from85% in 2016 to 80% in 2017. The lower gross margin was primarily attributable to increased cost associated with greater use of outsourcing services.Operating Expenses For the Year Ended December 31, Change 2016 2017 Amount % RMB RMB US$ RMB (Restated) (in thousands, except for percentages) Operating expenses: Sales and marketing expenses (139,781) (192,413) (29,573) (52,632) 38% Research and development expenses (160,387) (257,921) (39,642) (97,534) 61% General and administrative expenses (88,108) (143,743) (22,093) (55,635) 63% Total operating expenses (388,276) (594,077) (91,308) (205,801) 53% Sales and Marketing ExpensesSales and marketing expenses increased by RMB52.6 million, or 38%, from 2016 to 2017, primarily due to a RMB24.6 million increase inadvertising, marketing conferences, promotional events and related meals and entertainment expense, a RMB11.9 million increase in staff and relatedcosts, including a RMB2.5 million increase in share-based compensation, and a RMB11.6 million increase in spending on industry research forbusiness expansion.Research and Development ExpensesResearch and development expenses increased by RMB97.5 million, or 61%, from 2016 to 2017, primarily due to a RMB42.8 million increase inpersonnel and other costs resulting from a headcount increase from 418 to 546, a RMB35.1 million increase in outsourced cost and technical servicefee, a RMB6.3 million increase in office lease fees, a RMB5.6 million increase in the depreciation and amortization expense mainly related to thecomputer and software acquired, and a RMB4.7 million increase in share-based compensation in 2017. Research and development expenses in 2017remained the largest component of our operating expenses. 63Table of ContentsGeneral and Administrative ExpensesGeneral and administrative expenses increased by RMB55.6 million, or 63%, from 2016 to 2017, including a RMB19.1 million increase inpersonnel cost mainly due to a transfer of some of our senior sales employees with higher salaries to our administrative department in 2017, aRMB15.2 million increase in professional fee incurred for accounting and legal matters, a RMB7.1 million increase in allowance for doubtfulaccounts, and a RMB4.9 million increase in share-based compensation.Year Ended December 31, 2015 Compared to Year Ended December 31, 2016Net Revenues For the Year Ended December 31, Change 2015 2016 Amount % RMB RMB RMB (Restated) (Restated) (in thousands, except for percentages) Revenues: Enterprise 208,385 311,106 102,721 49% e-Government and other 26,904 60,772 33,868 126% Less: Business tax and surcharges (3,092) (8,055) (4,963) 161% Net revenues 232,197 363,823 131,626 57% Net revenues increased by RMB131.6 million, or 57%, from 2015 to 2016, with 49% growth in enterprise revenues and 126% growth ine-Government and other revenues. This growth was attributable to increased demand for our solutions from new and existing customers. Totalcustomers increased by 28%, to 395 customers in 2016 from 309 customers in 2015. Enterprise revenues increased by RMB102.7 million due to a 36%increase in the number of enterprise customers from 244 to 331. The average enterprise customer contribution remained consistent at RMB0.9 millionin 2015 and 2016. E-Government and other revenues increased by RMB33.8 million, due to an increase in average e-Government and other customercontribution from RMB0.4 million to RMB0.9 million, which was primarily driven by higher demand for our solutions, although the number ofcustomers decreased from 65 to 64.Cost of Revenues For the Year Ended December 31, Change 2015 2016 Amount % RMB RMB RMB (Restated) (Restated) (in thousands, except for percentages) Cost of revenues (33,392) (55,707) (22,315) 67% Cost of revenues increased by RMB22.3 million, or 67%, from 2015 to 2016. The increase was primarily as a result of a RMB10.0 millionincrease in the cost of software optimization services and increased overhead allocation, and a RMB8.3 million increase in cost of customer serviceconsultants. The increase in the cost of software optimization services primarily reflects our incremental investment amounting to RMB10.1 million tosatisfy the increasing data security demand from our customers, in particular those in the judicial system.Gross Profit For the Year Ended December 31, Change 2015 2016 Amount % RMB RMB RMB (Restated) (Restated) (in thousands, except for percentages) Gross profit 198,805 308,116 109,311 55% 64Table of ContentsGross profit increased by RMB109.3 million, or 55%, from 2015 to 2016, due to net revenues increasing at a higher pace than cost of revenues,reflecting higher average customer contribution in 2016 over 2015 and better leveraging of customer support personnel. Gross margin slightlydecreased from 86% in 2015 to 85% in 2016.Operating Expenses For the Year Ended December 31, Change 2015 2016 Amount % RMB RMB RMB (Restated) (Restated) (in thousands, except for percentages) Operating expenses: Sales and marketing expenses (88,364) (139,781) (51,417) 58% Research and development expenses (97,553) (160,387) (62,834) 64% General and administrative expenses (60,820) (88,108) (27,288) 45% Total operating expenses (246,737) (388,276) (141,539) 57% Sales and Marketing ExpensesSales and marketing expenses increased by RMB51.4 million, or 58%, from 2015 to 2016, primarily due to a RMB23.9 million increase in salespersonnel costs resulting from a headcount increase from 240 to 282, a RMB14.1 million increase in advertising, marketing conferences, promotionalevents and related meals and entertainment expense, and a RMB12.7 million increase in professional fees mainly due to increased spending onindustry research for business expansion.Research and Development ExpensesResearch and development expenses increased by RMB62.8 million, or 64%, from 2015 to 2016, primarily due to a RMB38.5 million increase inpersonnel costs resulting from a headcount increase from 279 to 418, a RMB11.0 million increase in the depreciation and amortization expense mainlyrelated to the computer hardware and software acquired, a RMB8.8 million increase in outsourcing cost and overhead allocation, and a RMB8.5million increase in office lease fees, and partially offset by a RMB2.8 million decrease in scientific research projects funding. Research anddevelopment expenses in the full year of 2016 remained as the largest component of our operating expenses.General and Administrative ExpensesGeneral and administrative expenses increased by RMB27.3 million, or 45%, from 2015 to 2016, primarily due to a RMB18.6 million increase inallowance for doubtful accounts and overhead allocation and a RMB7.5 million increase in personnel cost resulting from a headcount increase from 96to 118 in 2016.B. Liquidity and Capital ResourcesCash Flows and Working CapitalThe following table sets forth the movements of our cash and cash equivalents for the periods presented: For the Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (Restated) (Restated) (in thousands) Net cash used in operating activities (97,377) (235,177) (306,704) (47,141) Net cash used in investing activities (23,454) (116,388) (198,521) (30,512) Net cash provided by financing activities 257,500 650,539 190,948 29,348 Effect of exchange rate changes on cash and cash equivalents 24 22,955 (39,485) (6,067) Net increase/(decrease) in cash and cash equivalents 136,693 321,929 (353,762) (54,372) Cash and cash equivalents at the beginning of the year 61,830 198,523 520,452 79,992 Cash and cash equivalents at the end of the year 198,523 520,452 166,690 25,620 Cash and Cash EquivalentsAs of December 31, 2016 and 2017, our total cash and cash equivalents were RMB520.4 million and RMB166.7 million (US$25.6 million),respectively. Our cash and cash equivalents decreased by RMB353.8 million from December 31, 2016 to December 31, 2017, primarily due to our cashused in operating activities and investing activities. 65Table of ContentsIn 2016 and 2017, we entered into several short-term guaranteed loan agreements. Each of the loan agreements provides for a RMB revolvingcredit facility with a maturity term of twelve months. The guarantees on these loans were provided by Guosheng Qi, our chief executive officer andchairman, or Beijing Haidian Sci-tech Enterprises Financing Guarantee Co., Ltd., a third-party guarantor.Short-term bank loans as of December 31, 2017 amounted to RMB266.0 million (US$40.9 million), which consisted of several bank borrowingsdenominated in RMB. All of these bank borrowings were repayable within one year. The weighted average interest rate for the outstanding borrowingsas of December 31, 2017 was approximately 4.68%.On May 5, 2018, we completed the transactions contemplated by our April 30, 2018 convertible note purchase agreement with FutureXInnovation SPC, an affiliate of FutureX. In accordance with the convertible note purchase agreement, we received US$40 million and issued theFutureX Convertible Note that is convertible, in whole or in part, into our Class B ordinary shares at a conversion price of US$6.50 per share, subject tocustomary adjustments. The FutureX Convertible Note has a term of 18 months and bears interest at 2.80% per annum. The FutureX Convertible Noteincludes other customary terms and covenants, including certain events of default after which the FutureX Convertible Note may be due and payableimmediately. Additionally, in the event of a fundamental change, as defined in the FutureX Convertible Note, the holder of the note may require us torepurchase the FutureX Convertible Note at a price equal to 100% of the principal amount of the FutureX Convertible Note, plus accrued and unpaidinterest. FutureX Innovation SPC agreed not to transfer or sell the FutureX Convertible Note, the Class B ordinary shares or any of our other securities,or enter into any swap, short sale or similar arrangements relating to such securities, for a period of six months after the issuance of the FutureXConvertible Note. In connection with this transaction, we and FutureX Innovation SPC entered into a registration rights agreement, pursuant whichFutureX Innovation SPC has the right to require us, within 15 months following the issuance of the FutureX Convertible Note, to file a registrationstatement with the SEC covering the offer and sale of the Class B ordinary shares issued upon conversion of the FutureX Convertible Note, as well ascertain customary piggyback registration rights.As of December 31, 2018, our total cash and cash equivalents were approximately RMB96.4 million (US$14.0 million). For this calculation, theRMB amount is translated into U.S. Dollars at the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 28,2018, which was RMB6.8755 to US$1.00. Our cash and cash equivalents decreased substantially from December 31, 2017 primarily due to our use ofcash in operating activities, continued investments in new market opportunities, funding our net loss and increased expenses incurred for professionalaccounting and legal fees. We believe that we can meet our future liquidity and capital requirements for at least next twelve months from the date ofthis annual report. However, in the near term we may need to suspend certain customer relationships that consume working capital, reduce operatingexpenses through restructuring, or increase our working capital through additional sales of equity or debt securities, or other borrowing arrangements.Any such restructuring activities may adversely affect our revenues, and any issuance and sale of additional equity would result in further dilution toour shareholders. The incurrence of additional indebtedness would result in increased fixed obligations and could result in operating covenants thatwould restrict our operations. Failure to increase our working capital would have a material adverse effect on our business.Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support researchand development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced products, and the continuedmarket acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financingon terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial conditionwould be adversely affected.In utilizing the proceeds we received from our initial public offering, the issuance of the FutureX Convertible Note, and the other cash that wehold offshore, we may (i) make additional capital contributions to our PRC subsidiary, (ii) establish new PRC subsidiaries and make capitalcontributions to these new PRC subsidiaries, (iii) make loans to our PRC subsidiary or consolidated affiliated entities or (iv) acquire offshore entitieswith business operations in China in offshore transactions. However, most of these uses are subject to PRC regulations and approvals. For example: • capital contributions to our PRC subsidiary or consolidated affiliated entities, whether existing or newly established ones, must beapproved by the MOFCOM or its local counterparts; and • loans by us to finance the activities of our PRC subsidiary, which is a foreign-invested enterprise, cannot exceed statutory limits and mustbe registered with SAFE or its local branches.See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Foreign Exchange.”Substantially all of our future revenues are likely to continue to be in the form of RMB. Under existing PRC foreign exchange regulations,payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can bemade in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaryis allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However,approval from or registration with competent government authorities is required where the RMB is to be converted into foreign currency and remittedout of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretionrestrict access to foreign currencies for current account transactions in the future. See “Item. 3 Key Information—D. Risk Factors—Risks Relating toDoing Business in China—Governmental control of currency conversion may limit our ability to pay dividends and other obligations and affect thevalue of your investment.” 66Table of ContentsOperating ActivitiesNet cash used in operating activities in 2017 was RMB306.7 million (US$47.1 million), reflecting a net loss of RMB239.1 million (US$36.8million), an increase of RMB267.6 million (US$41.1 million) in accounts receivable, and an increase of RMB102.4 million (US$15.7 million) inprepayments and other current assets, partially offset by an increase of RMB158.6 million (US$24.4 million) in accounts payable, an increase ofRMB36.5 million (US$5.6 million) in tax payable, and an increase of RMB18.6 million (US$2.9 million) in salary and welfare payable. The principalnon-cash items accounting for the difference between the net loss and the cash used in operating activities in 2017 were RMB24.5 million (US$3.8million) in provision for allowance for doubtful accounts, RMB31.5 million (US$4.8 million) in depreciation and amortization expenses,RMB22.9 million (US$3.5 million) in share-based compensation expense, and RMB20.5 million (US$3.1 million) in foreign currency exchange loss.Compared to 2016, net cash used in operating activities in 2017 increased from RMB235.2 million to RMB306.7 million (US$47.1 million). Theincreased cash outflow was primarily attributable to investment in working capital for certain low risk customers, to which a longer credit period wasgranted.The amount of payments to search engine service providers on behalf of customers included in accounts receivable was RMB280.9 million andRMB449.4 million (US$69.1 million) as of December 31, 2016 and December 31, 2017, respectively. When we provide the bid management servicesto our customers, customer spending on search engine service providers will pass through our accounts. The flow of the funds impacts on severalaccounts, including accounts receivable, accounts payable, deferred revenues and advance from customers.Net cash used in operating activities in 2016 was RMB235.2 million, reflecting a net loss of RMB98.6 million, an increase of RMB102.0 millionin accounts receivable and an increase of RMB88.5 million in prepayments and other current asset, which was in line with the increase of our revenues,and a decrease of RMB45.5 million in accounts payable and deferred revenues, advance from customers, accrued expenses and other current liabilities,partially offset by an increase of RMB40.7 million in tax payable, an increase of RMB9.3 million in salary and welfare payable. The principalnon-cash items accounting for the difference between the net loss and the cash used in operating activities in 2016 were RMB23.9 million indepreciation and amortization expenses, RMB10.6 million in share-based compensation expense, RMB19.7 million in provision for allowance fordoubtful accounts, and RMB1.6 million in foreign currency exchange loss.Net cash used in operating activities in 2015 was RMB97.4 million, reflecting a net loss of RMB61.8 million, an increase of RMB183.8 millionin accounts receivable and an increase of RMB54.8 million in prepayments and other current assets, offset partially by an increase ofRMB180.9 million in total current liabilities. The principal non-cash items accounting for the difference between the net loss and the cash used inoperating activities in 2015 were RMB13.1 million in depreciation and amortization expenses, and RMB8.8 million in share-based compensationexpense.Investing ActivitiesNet cash used in investing activities in 2017 was RMB198.5 million (US$30.5 million), primarily due to investment in a restricted cash ofRMB241.3 million (US$37.1 million) as collateral of bank borrowing and purchases of property and equipment of RMB23.0 million (US$3.5 million),and partly offset by maturity of time deposit of RMB67.6 million (US$10.4 million).Net cash used in investing activities in 2016 was RMB116.4 million, representing investment in a time deposit of RMB66.4 million andpurchases of property and equipment of RMB46.0 million.Net cash used in investing activities in 2015 was RMB23.5 million, representing purchase of property and equipment of RMB23.5 million.Financing ActivitiesNet cash provided by financing activities in 2017 was RMB190.9 million (US$29.3 million), primarily due to RMB266.0 million (US$40.9million) proceeds from bank loans and net proceeds of RMB3.1 million (US$0.5 million) from issuance of ordinary shares for options exercised, partlyoffset by RMB65.0 million (US$10.0 million) in repayment of our bank loans.Net cash provided by financing activities in 2016 was RMB650.5 million, primarily due to net proceeds of RMB615.0 million from our initialpublic offering and RMB65.0 million drawdown under our revolving credit facilities. 67Table of ContentsNet cash provided by financing activities in 2015 was RMB257.5 million, primarily due to the sale and issuance of Series C preferred shares toprivate investors for RMB262.6 million, offset by RMB1.1 million of transaction-related expenses and RMB4.0 million repayment of bank loan.Capital ExpendituresOur capital expenditures were RMB23.5 million, RMB46.0 million and RMB23.0 million (US$3.5 million) in 2015, 2016 and 2017,respectively, primarily related to purchase of servers, computers and other equipment for our business. We intend to continue to incur capitalexpenditures as our business continues to grow, and we may make acquisitions of businesses and properties that complement our operations whensuitable opportunities arise. We expect to fund our future capital expenditures with our current cash, cash equivalents and time deposits andanticipated cash flow from operations.Holding Company StructureWe are a holding company with no material operations of our own. We conduct our operations primarily through our wholly owned subsidiaryand consolidated affiliated entities established in the PRC. As a result, our ability to pay dividends depends upon dividends paid to us by the WFOE,our PRC subsidiary. If the WFOE, or any other newly formed subsidiary of ours, incurs debt on its own behalf in the future, the instruments governingits debt may restrict its ability to pay dividends to us. In addition, the WFOE is permitted to pay dividends to us only out of its retained earnings, ifany, as determined in accordance with PRC accounting standards and regulations. Under PRC law, the WFOE is required to set aside at least 10% of itsafter-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, theWFOE may allocate a portion of its after-tax profits to staff welfare and bonus funds, a discretionary surplus fund and an enterprise expansion fund atits discretion or in accordance with its articles of association.These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. In addition, registered capital and capital reserveaccounts are restricted from withdrawal in the PRC, up to the amount of net assets held in such entity. As of December 31, 2017, the total restricted netassets was RMB110.9 million (US$17.0 million). The WFOE has never paid dividends and will not be able to pay dividends until it generatesaccumulated profits and has satisfied the requirements for statutory reserve funds.C. Research and Development, Patents and Licenses, etc.Our research and development organization is responsible for the design, development and testing of all aspects of our dashboard and suite ofsolutions. We invest heavily in these efforts to continuously improve, innovate and add new features to our solutions.We deploy new features, functionality and technologies through periodic software releases or updates in order to minimize disruption andprovide for constant improvement. Our product managers regularly engage with customers, partners and industry analysts, as well as other stakeholders,in functions such as sales, customer success, marketing and business development to understand customer needs as well as general trends in ourindustry. Once product improvements are identified, the development organization works closely together to design, develop, test and launch asolution.The majority of our research and development team is based in our Beijing office and to a lesser degree in Shanghai, Shenzhen, Chengdu andXi’an. To foster rapid innovation, our team is further apportioned into small agile development teams.Our research and development expenses were RMB97.6 million, RMB160.4 million and RMB257.9 million (US$39.6 million) for the yearsended December 31, 2015, 2016 and 2017, respectively.D. Trend InformationOther than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for theperiod from January 1, 2017 to December 31, 2017 that are reasonably likely to have a material effect on our net revenues, income, profitability,liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results orfinancial conditions.E. Off-Balance Sheet ArrangementsAs of December 31, 2017, we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of anythird parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, orthat are not reflected in our consolidated combined financial statements. Furthermore, we do not have any retained or contingent interest in assetstransferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variableinterest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or researchand development services with us. 68Table of ContentsF. Tabular Disclosure of Contractual ObligationsThe following sets forth information regarding our aggregate payment obligations under our contracts and commercial commitments as ofDecember 31, 2017: Payments Due by Period Total Less than 1 year 1-3 years 3-5 years More than 5 years RMB US$ RMB US$ RMB US$ RMB US$ RMB US$ (in thousands) Operating lease obligations 38,162 5,865 25,792 3,964 10,990 1,689 1,380 212 — — Other commitments 30,305 4,658 10,080 1,549 16,233 2,495 3,992 614 — — Total 68,467 10,523 35,872 5,513 27,223 4,184 5,372 826 — — ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESA. Directors and Senior ManagementThe following table sets forth information regarding our directors and executive officers as of the date of this annual report. The business addressof each of our directors and executive officers is Beijing Gridsum Technology Co., Ltd., South Wing, High Technology Building, No. 229 North 4thRing Road, Haidian District, Beijing 100083, People’s Republic of China. Directors and Executive Officers Age Position/TitleGuosheng Qi 34 Chairman of the Board, Chief Executive OfficerGuofa Yu 44 Director, Chief Operating OfficerXiang Fan 42 DirectorYanchun Bai 52 DirectorXudong Gao 53 DirectorThomas A. Melcher 55 DirectorPeter Andrew Schloss 58 DirectorMichael Peng Zhang 49 Co-Chief Financial OfficerRavi Sarathy 48 Co-Chief Financial OfficerJohn Jiyang Liu 54 Chief Technology OfficerAaron Feng Li 45 Co-PresidentMichael Yang Xu 47 Co-PresidentXijian Liu 61 Chief Strategy OfficerGuosheng Qi is one of our co-founders and has served as our chief executive officer and chairman of our Board of Directors since our inception.Mr. Qi founded Beijing Gridsum in 2005 when he was a student at Tsinghua University. Mr. Qi holds a bachelor’s degree in computer software fromTsinghua University.Guofa Yu is one of our co-founders and has served as our chief operating officer and a member of our Board of Directors since 2005. Mr. Yuserved as the operation director of Dyne Junhui, an information technology company, in 2005. Prior to that, Mr. Yu served as a project director ofFounder Group, an information technology company, from 2002 to 2005. From 2000 to 2002, Mr. Yu served in technology and management roles inseveral small technology companies. From 1998 to 2000, Mr. Yu served as a software engineer at Neusoft Group, a software company. Mr. Yu holds abachelor’s degree in management information systems from Central South University.Xiang Fan has served as a member of our Board of Directors since 2015. Mr. Fan is a Managing Director of Goldman Sachs, an investmentbanking firm, which he joined in 2007. Mr. Fan was an associate of KKR, a private equity investment firm, from 2006 to 2007, and an associate atGoldman Sachs from 2004 to 2006. Mr. Fan currently serves on the boards of directors of a number of portfolio companies of Goldman Sachs. Mr. Fanholds a bachelor’s degree in economics and computer science from Yale University and an MBA degree from University of Pennsylvania. 69Table of ContentsYanchun Bai has served as a member of our Board of Directors since 2012. Mr. Bai has been a partner at the Commerce & Finance Law Offices, alaw firm, since May 2013. Prior to that, Mr. Bai was a partner at King & Wood Mallesons, a law firm, from 1993 to May 2013. Mr. Bai currently servesas a member of the board of directors of Baoshan Iron & Steel Co. Ltd., a company listed on Shanghai Stock Exchange, NETAC Technology Co., Ltd.,a company listed on Shenzhen Stock Exchange, Shijiazhuang Changshan Beiming Technology Co., Ltd., a company listed on Shenzhen StockExchange, and certain other private company. Mr. Bai holds a bachelor’s degree in law from China University of Political Science and Law and anLLM degree from Stanford Law School.Xudong Gao has served as a member of our Board of Directors since 2006. Mr. Gao has served as the vice director of Tsinghua UniversityResearch Center for Technological Innovation since June 2011. Mr. Gao has been a member of the Ministry of Industry and Information Technology’sExpert Committee of Telecom Economy since January 2010. Mr. Gao also served as a director of the Tsinghua MBA program from 2008 to June 2011.Mr. Gao is currently a professor at the School of Economics and Management and the Schwarzman College of Tsinghua University. Mr. Gao holds abachelor’s degree in industrial engineering from Harbin Institute of Technology, a master’s degree in economics from Renmin University of China anda Ph.D. degree in management from Massachusetts Institute of Technology.Thomas A. Melcher has served as a member of our Board of Directors since 2008. Mr. Melcher has served as the chief executive officer of F-101,Inc., an internet media company, since February 2015. Mr. Melcher served as the interim chief marketing officer of MongoDB, Inc., a software andservices company, from June 2014 to February 2015, and as the senior vice president, international of Chegg Inc., an education services company, fromSeptember 2011 to September 2012. Mr. Melcher served as the chairman of the board of Zinch China, Inc., an education services company, from 2009to 2011. Mr. Melcher serves on the boards of directors of a number of private companies. Mr. Melcher holds a bachelor’s degree in political sciencefrom Yale University and an MBA degree from Harvard University.Peter Andrew Schloss has served as a member of our Board of Directors since 2016. Mr. Schloss has served as the managing partner and chiefexecutive officer of CastleHill Partners since November 2015. Mr. Schloss has been serving as a director and audit committee chairman of BrightScholar Education Holdings Limited, an operator of international and bilingual K-12 schools in China listed on the New York Stock Exchange, sinceMay 2017, and a director and the audit committee chairman of YY, Inc., an interactive social platform listed on The Nasdaq Stock Market, since 2012.Previously, Mr. Schloss was a director and the audit committee chairman of Giant Interactive Group Inc., a China-based online game developer andoperator, from 2007 to 2015, and a partner at Phoenix Media Fund L.P., a private equity fund established by Phoenix Television Group to invest inmedia and culture-related companies in China, from 2012 to May 2016. From 2009 to 2012, Mr. Schloss served as the founder and chief executiveofficer of Allied Pacific Sports Network Limited, a leading over-the-top provider of live and on-demand sports in Asia. Prior to joining Allied PacificSports Network Limited, Mr. Schloss worked at TOM Online Inc., serving as the chief financial officer from 2003 to 2005, as an executive director from2004 to 2007 and as the chief legal officer from 2005 to 2007. Mr. Schloss holds a bachelor’s degree in political science and a juris doctor degree fromTulane University.Michael Peng Zhang has served as our co-chief financial officer since April 2017 and was our chief financial officer from February 2014 to April2017. Prior to joining us, Mr. Zhang served as a managing director of Cowen & Company, an investment banking firm, from 2008 to January 2013.Prior to that, Mr. Zhang served as a principal of ThinkEquity Partners LLC, an investment banking firm, from 2005 to 2007. Mr. Zhang also heldmanagement and operational positions at China Guangdong Nuclear Power Holding, a clean energy company, Shenzhen Techlink Science &Technologies, a technology company, and Stephens Inc., a financial services firm, from 1992 to 2005. Mr. Zhang holds a bachelor’s degree ineconomics from Renmin University of China and a master’s degree in business administration from Wake Forest University. Mr. Zhang is a CertifiedPublic Accountant and a CFA charterholder.Ravi Sarathy has served as our co-chief financial officer since April 2017 and was our chief strategy officer from October 2016 to April 2017.Prior to joining us, Mr. Sarathy served as a managing director and the head of APAC Internet and software equity research at Citigroup from 2010. Priorto that, Mr. Sarathy was the co-founder and served as president of iRealityGroup, a leading Asia-focused TMT corporate finance, M&A and investmentboutique since 2000. Mr. Sarathy also served as the head of global internet research and also the head of Asia internet, media and telecommunicationsresearch at Lehman Brothers from 1996 to 2000. Ravi holds a bachelor’s degree and a master’s degree, both in economics, from Peterhouse, CambridgeUniversity.John Jiyang Liu has served as our chief technology officer since December 2014. Prior to joining us, Mr. Liu was an engineer, research managerand R&D director of Microsoft Corporation, a software company, from 1998 to December 2014, and an engineer at Hewlett-Packard Company, acomputer company, from 1994 to 1998. Mr. Liu served as a researcher at University of Paderborn from 1989 to 1990. Mr. Liu holds a bachelor’s degreein computer science from Tsinghua University and a master’s degree in computer science from University of Pittsburgh. 70Table of ContentsAaron Feng Li has served as our co-president since 2009. Prior to joining us, Mr. Li served as the general manager of the key account divisionand general manager of the East China branch of Baidu, Inc. from 2004 to 2008. Prior to that, Mr. Li was the sales director of China eNet Internet Co.,an internet media company, from 2000 to 2004. Mr. Li served as the chief representative of the Beijing region of Xiamen Powerlong Industrial Co.,Ltd., a technology company, from 1991 to 1995. Mr. Li holds a bachelor’s degree in industrial analysis from Qiqihar University and a GlobalExecutive MBA degree from China Europe International Business School.Michael Yang Xu has served as our co-president since April 2008. Prior to that, Mr. Xu served as the general manager of multiple divisions ofSinochem Tianjin Co Limited, a subsidiary of Sinochem Group, from 2005 to 2007. Mr. Xu also held various investment and management positions atSinochem Group, a Chinese state-owned chemical enterprise, from 1994 to 1999, including serving as financial controller of Zhonghuan Jinyuan RealEstate Co Limited, a subsidiary of Sinochem Group. Mr. Xu is currently the International Ambassador of Search Engine Marketing ProfessionalOrganization, also known as SEMPO, and the chairman of SEMPO’s Greater China working group. Mr. Xu holds a bachelor’s degree in accountingfrom Renmin University of China, a master’s degree in telecommunication systems from California State University, East Bay, and an MBA degreefrom California State University, East Bay.Xijian Liu has served as our chief strategy officer since August 2017. Prior to joining us, Mr. Liu served as the director of the informationmanagement department of China National Petroleum Corporation and the general manager of the information management department of PetroChinaCompany Limited from September 2005 to July 2017. Mr. Liu was the general manager of the technology and information management department ofPetroChina Company Limited from October 1999 to August 2005. Mr. Liu holds a bachelor’s degree in engineering from Daqing Petroleum Institute,and a master’s degree in business administration from the School of Management of University at Buffalo.B. CompensationFor 2017, we paid an aggregate of approximately RMB10.8 million (US$1.7 million) in cash to our executive officers and directors as a group.Our PRC subsidiary and consolidated affiliated entities are required by law to make contributions equal to certain percentages of each employee’ssalary for his or her pension insurance, medical insurance, housing fund, unemployment and other statutory benefits. For details on the share incentivegrants to our executive officers and directors, see “—Share Incentive Plans.”Share Incentive PlansGridsum Holding Inc. Stock Option PlanOur stock option plan was originally adopted in 2011 and amended in 2014 and 2017. This plan, which we refer to as our Stock Option Plan, isintended to promote our success and shareholder value by attracting, motivating and retaining selected employees and other eligible participantsthrough awards of stock options.A maximum of 2,500,000 ordinary shares were issuable pursuant to awards under our Stock Option Plan. As of December 31, 2018, 1,305,261Class B ordinary shares were issuable pursuant to stock options outstanding under our Stock Option Plan. After the completion of our initial publicoffering, awards were no longer made under the Stock Option Plan, and were made under a successor equity plan known as Gridsum Holding Inc.Equity Incentive Plan, or our Equity Incentive Plan.Eligibility. Our Stock Option Plan provides for the grant of stock options to our employees or employees of related entities, such as a parent orsubsidiary corporation.Administration. Subject to the terms of our Stock Option Plan, either our Board of Directors or the Compensation Committee has the discretion tomake all decisions implementing our Stock Option Plan.Stock Options. Stock options are granted pursuant to stock option agreements. In general, the Board or Compensation Committee determined thepurchase price and the vesting and exercise schedule of each stock option, which are set forth in the stock option agreements with each optionee. Stockoptions may not be transferred, except by will or by the laws of descent or distribution, unless the Board or Compensation Committee otherwisedetermines.Changes to Capitalization. In the event that there is a specified type of change in our capital structure not involving the receipt of considerationby us, our Stock Option Plan provides for the proportional adjustment of the number of shares reserved under our Stock Option Plan and the number ofshares and exercise or purchase price, if applicable, of all outstanding options. 71Table of ContentsChange in Control Transactions. Unless otherwise provided in the option agreement or provided by the Board of Directors or CompensationCommittee, in the event of certain change in control transactions, any or all outstanding stock options under our Stock Option Plan may be assumed orreplaced by any surviving entity or will otherwise terminate without vesting acceleration.Additional Provisions. Our Board of Directors has the authority to amend, alter, suspend or terminate our Stock Option Plan. However, noamendment or termination of the plan may adversely affect any rights under awards already granted to a participant without the affected participant’sconsent and certain changes may require shareholder approval.Gridsum Holding Inc. Equity Incentive PlanWe adopted our Equity Incentive Plan upon the completion of our initial public offering in September 2016, and the Equity Incentive Plan wasamended in 2017. The maximum number of shares which may be issued pursuant to all awards under our Equity Incentive Plan was 2,500,000 initially.The number of shares reserved for issuance under our Equity Incentive Plan has increased automatically in January 1, 2017, 2018 and 2019, and willincrease automatically on January 1 of each of 2020 through 2026 by the number of shares equal to 2.5% of the aggregate number of outstandingClass B ordinary shares as of the immediately preceding December 31. However, our Board of Directors may reduce the amount of the increase in anyparticular year. In addition, the following Class B ordinary shares will again be available for grant and issuance under our Equity Incentive Plan: • ordinary shares subject to options or share appreciation rights granted under our Equity Incentive Plan that cease to be subject to theoption or stock appreciation right for any reason other than exercise of the option or share appreciation right; • ordinary shares subject to awards granted under our Equity Incentive Plan that are subsequently forfeited or repurchased by us at theoriginal issue price; • ordinary shares subject to awards granted under our Equity Incentive Plan that otherwise terminate without ordinary shares being issued;and • ordinary shares surrendered, cancelled or exchanged for cash or a different award (or combination thereof).Shares that otherwise become available for grant and issuance because of the provisions above will not include shares subject to awards thatinitially became available due to our substitution of outstanding awards granted by another company in an acquisition of that company or otherwise.As of December 31, 2018, 1,490,000 Class B ordinary shares may be issued pursuant to outstanding stock options and 1,407,236 Class Bordinary shares may be issued pursuant to outstanding RSUs under our Equity Incentive Plan, and there were 889,305 Class B ordinary shares reservedfor future issuance.Eligibility. Our Equity Incentive Plan provides for the grant of incentive stock options to our employees and any parent and subsidiarycorporations’ employees and for the grant of nonqualified share options, restricted shares, RSUs, share appreciation rights, share bonuses andperformance awards to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. No more than5,000,000 shares may be issued as incentive stock options under our Equity Incentive Plan.Administration. Our Equity Incentive Plan will be administered by the Board of Directors or by our Compensation Committee; in this plandescription we refer to the Board of Directors or Compensation Committee as the plan administrator. The plan administrator determines the terms of allawards.Types of Awards. Our Equity Incentive Plan will allow for the grant of options, restricted shares, RSUs, share appreciation rights, share bonusesand performance awards.Award Agreements. All awards under our Equity Incentive Plan will be evidenced by an award agreement which shall set forth the number ofordinary shares subject to the award and terms and conditions of the award, which shall be consistent with our Equity Incentive Plan.Term of Awards. The term of awards granted under our Equity Incentive Plan shall not exceed ten years from the date of grant. Subject to theforegoing, the plan administrator will be authorized to extend the term of any outstanding award.Vesting Schedule and Price. The plan administrator will have sole discretion in setting the vesting period and, if applicable, exercise schedule ofan award, determining that an award may not vest for a specified period after it is granted and accelerating the vesting period of an award. The planadministrator determines the exercise or purchase price of each award, to the extent applicable. 72Table of ContentsTransferability. Unless the plan administrator provides otherwise, our Equity Incentive Plan does not allow for the transfer of awards other thanby will or the laws of descent and distribution. Unless otherwise permitted by the plan administrator, options may be exercised during the lifetime ofthe optionee only by the optionee or the optionee’s guardian or legal representative.Changes in Capitalization. In the event there is a specified type of change in our capital structure without our receipt of consideration, such as ashare split, or if required by applicable law, appropriate adjustments will be made to the share maximums and exercise prices, as applicable, ofoutstanding awards under our Equity Incentive Plan.Change in Control Transactions. In the event of specified types of mergers or consolidations, a sale, lease, or other disposition of all orsubstantially all of our assets or a corporate transaction, outstanding awards under our Equity Incentive Plan may be assumed or replaced by anysurviving or acquiring corporation; the surviving or acquiring corporation may substitute similar awards for those outstanding under our EquityIncentive Plan; outstanding awards may be settled for the full value of such outstanding award (whether or not then vested or exercisable) in cash, cashequivalents, or securities (or a combination thereof) of the successor entity with payment deferred until the date or dates the award would have becomeexercisable or vested; or outstanding awards may be terminated for no consideration. The plan administrator, may, on a discretionary basis, accelerate,in full or in part, the vesting and exercisability of the awards.Compliance with Law. Ordinary shares will not be issued under an award unless the issuance is permitted by applicable law.Amendment and Termination. Our Equity Incentive Plan will terminate ten years from the date it is adopted by our Board of Directors, unless it isterminated earlier by our Board of Directors. Our Board of Directors may amend or terminate our Equity Incentive Plan at any time. Our Board ofDirectors generally may amend our Equity Incentive Plan, without shareholder approval unless required by applicable law.The following table summarizes outstanding options held by our executive officers and directors as of December 31, 2018. Name Class B OrdinaryShares UnderlyingOptions Awarded Exercise Price(US$/Share) Date of Grant Date of Expiration Guosheng Qi 500,000 10.11 January 3, 2017 January 3, 2027 Xudong Gao * 0.42 January 1, 2011 January 1, 2021 * 0.42 July 1, 2011 July 1, 2021 Yanchun Bai * 0.42 September 1, 2012 September 1, 2022 * 0.42 September 1, 2013 September 1, 2023 Michael Peng Zhang * 0.42 February 10, 2014 February 10, 2024 * 10.11 January 3, 2017 January 3, 2027 Ravi Sarathy * 10.11 January 3, 2017 January 3, 2027 John Jiyang Liu * 0.42 December 10, 2014 December 10, 2024 * 10.11 January 3, 2017 January 3, 2027 * Upon exercise of all options granted and vesting of all restricted share units, would beneficially own less than 1% of our outstanding ordinaryshares.The following table summarizes outstanding RSUs held by our executive officers and directors under our Equity Incentive Plan as of December31, 2018. Name Class B Ordinary SharesUnderlying RSUsAwarded Date of Grant Date of Expiration Peter Andrew Schloss * January 3, 2017 January 3, 2027 * January 2, 2018 January 2, 2028 Xijian Liu * August 28, 2017 August 28, 2027 * August 28, 2018 August 28, 2028 * Upon exercise of all options granted and vesting of all restricted share units, would beneficially own less than 1% of our outstanding ordinaryshares. 73Table of ContentsAs of December 31, 2018, other employees as a group hold options to purchase 1,124,975 Class B ordinary shares, with a weighted averageexercise price of US$2.23 per ordinary share; other employees as a group hold RSUs for 1,357,844 Class B ordinary shares upon vesting.C. Board PracticesBoard of DirectorsOur Board of Directors currently consists of seven directors. Under Cayman Islands law, a director is not required to hold any shares in thecompany to qualify to serve as a director. A director may vote in respect of any contract or transaction in which he or she is interested, provided that thedirector shall disclose the nature of his or her interest in such contract or transaction at or prior to its consideration and any vote thereon. Our Board ofDirectors may exercise all the powers of our company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or anypart thereof, and to issue debentures whether outright or as security for any debt, liability or obligation of our company or of any third party. We haveno service contract with any of our directors providing for benefits upon termination of employment.Committee of the Board of DirectorsWe have established three committees of the Board of Directors. The committees are the Audit Committee, the Compensation Committee and theNominating and Corporate Governance Committee. We have adopted a charter for each of these committees. We are relying on home country practiceswhereby our Compensation Committee and Nominating and Corporate Governance Committee need not consist of all independent directors. Eachcommittee’s members and functions are described below:Audit CommitteeOur Audit Committee consists of Mr. Gao, Mr. Melcher and Mr. Schloss, and is chaired by Mr. Schloss. We have determined that Mr. Gao,Mr. Melcher and Mr. Schloss each satisfy the independence requirements of The Nasdaq Stock Market and Rule 10A-3 under the Exchange Act.Mr. Schloss meets the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC.The Audit Committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. It isresponsible for, among other things: • appointing the independent auditor and pre-approving all auditing and non-auditing services permitted to be performed by theindependent auditor; • reviewing with the independent auditor any audit problems or difficulties and management’s response; • reviewing and approving all proposed related party transactions; • reviewing and discussing audited annual financial statements with management and the independent auditor; • reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material controldeficiencies; • annually reviewing and reassessing the adequacy of our Audit Committee charter; • meeting separately and periodically with management and the independent auditor; and • reporting regularly to the Board of Directors.Compensation CommitteeOur Compensation Committee consists of Mr. Gao and Mr. Schloss, and is chaired by Mr. Gao. We have determined that Mr. Gao and Mr. Schlosseach satisfy the independence requirements of The Nasdaq Stock Market for compensation committee members set forth in Rule 5605(d)(2)(A).The Compensation Committee assists the Board of Directors in reviewing and approving the compensation structure, including all forms ofcompensation, relating to our directors and executive officers. The Compensation Committee is responsible for, among other things: 74Table of Contents • reviewing and approving, or recommending to the Board of Directors for its approval, the compensation of our chief executive officer andother executive officers; • reviewing and approving, or recommending to the Board of Directors for its approval, the compensation of our directors; and • reviewing periodically and making recommendations to the Board of Directors regarding any long-term incentive compensation or equityplans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans; and • selecting compensation consultant, legal counsel or other advisers for the committee after taking into consideration all factors relevant tothat person’s independence from management.Nominating and Corporate Governance CommitteeOur Nominating and Corporate Governance Committee consists of Mr. Gao, Mr. Melcher and Mr. Qi, and is chaired by Mr. Melcher. We havedetermined that Mr. Gao and Mr. Melcher each satisfy the independence requirements of The Nasdaq Stock Market. The Nominating and CorporateGovernance Committee assists the Board of Directors in selecting individuals qualified to serve on the Board of Directors and in determining thecomposition of the Board of Directors and its committees. The Nominating and Corporate Governance Committee is responsible for, among otherthings: • identifying and recommending to the Board nominees for election by the shareholders or appointment by the Board of Directors; • reviewing annually with the Board of Directors the current composition of the Board of Directors with regard to characteristics such asindependence, knowledge, skills, experience and diversity; • making recommendations on the frequency and structure of Board of Directors meetings and monitoring the functioning of Board ofDirectors committees; and • advising the Board of Directors periodically about significant developments in the law and practice of corporate governance as well as ourcompliance with applicable laws and regulations and making recommendations to the Board of Directors on all matters of corporategovernance.Special CommitteeOn May 11, 2018, in response to a preliminary non-binding proposal letter from FutureX regarding a proposed going private transaction of ourcompany, our board of directors formed a special committee consisting of three independent directors, Peter Andrew Schloss, Xudong Gaoand Thomas A. Melcher, to evaluate the proposal and any other alternative transactions. Mr. Schloss was appointed chairman of the special committee.Duties of DirectorsUnder Cayman Islands law, our directors have a fiduciary duty to act honestly in good faith with a view to our best interests. Our directors alsohave a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparablecircumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. Ashareholder may have the right to seek damages if a duty owed by our directors is breached. See “Item 10. Additional Information—B. Memorandumand Articles of Association—Differences in Corporate Law” for additional information on our standard of corporate governance under Cayman Islandslaw.Terms of Directors and OfficersOur officers are elected by and serve at the discretion of the Board of Directors. Our directors are not subject to a term of office and hold officeuntil such time as they resign or are removed from office by a special resolution of our shareholders. A director will be removed from officeautomatically if, among other things, the director becomes bankrupt or makes any arrangement or composition with his creditors generally, or dies or isfound by our company to be of unsound mind.Employment Agreements and Indemnification Agreements 75Table of ContentsWe have entered into employment agreements with each of our executive officers. Under these agreements, we may terminate employment forcause, at any time, without advance notice or remuneration, for certain acts of the executive officer, such as conviction of a criminal offense, fraud ordishonesty, material misconduct or material failure to discharge the officer’s duties to our detriment. An executive officer may terminate hisemployment at any time with a thirty-day prior written notice.Each executive officer has agreed to hold in strict confidence and not to use or disclose to any person, corporation or other entity any of ourproprietary information or trade secrets. Each executive officer has also agreed to assign to our company all inventions and works of authorship whichthe executive officer develops during the period of his or her employment with us that are either related to the scope of the employment or make use ofthe resources of our company. In addition, all executive officers have agreed to be bound by non-competition restrictions set forth in their agreementsduring the term of employment.We have entered into indemnification agreements with each of our directors and executive officers, under which we agree to indemnify themagainst certain liabilities and expenses they may incur in connection with claims made by reason of their being our directors or executive officers.D. EmployeesWe had 733, 929 and 1,078 employees as of December 31, 2015, 2016 and 2017, respectively. All of our employees are based in China.The following table sets out the breakdown of our employees by function as of December 31, 2017: Function Number ofemployees Research and development 546 Sales and marketing 410 General and administrative 122 Total 1,078 We enter into standard employment agreements and standard confidentiality agreements with all of our employees. We also entered intonon-competition agreement with certain of our key employees upon termination of their employment agreement, which provide with a non-competerestricted period typically expiring one year after the termination of employment, and we agreed to provide reasonable compensation to the employeesduring the restricted period.In accordance with Chinese regulations, we participate in various employee social security plans that are organized by municipal and provincialgovernments, including pension insurance, medical insurance, unemployment insurance, maternity insurance, job-related injury insurance and housingfund. We are required by PRC laws to make contributions to employee social security plans at specified percentages of the salaries, bonuses and certainallowances of our employees, up to a maximum amount specified by the local government from time to time.None of our employees are covered by collective bargaining agreements, and we consider our relations with our employees to be good.E. Share OwnershipThe following table sets forth information concerning the beneficial ownership of our ordinary shares, as of December 31, 2018, by: • each of our directors and executive officers; and • each person known to us to beneficially own more than 5% of our ordinary shares.The calculations in the table below are based on 30,833,390 ordinary shares outstanding as of December 31, 2018, comprising of (i) 4,543,461Class A ordinary shares, and (ii) 26,289,929 Class B ordinary shares (excluding 101,776 Class B ordinary shares issued to our depositary bank for bulkissuance of ADSs reserved for future issuances upon the exercise or vesting of awards granted under our share incentive plans). 76Table of ContentsBeneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficiallyowned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days ofDecember 31, 2018, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however,are not included in the computation of the percentage ownership of any other person. Ordinary shares beneficially owned Class Aordinary shares Class Bordinaryshares Total ordinaryshares on as-converted basis % of total ordinaryshares on as-converted basis % of aggregatevoting power(2) Directors and Executive Officers:(1) Guosheng Qi(3) 4,543,461 4,761,417 9,304,878 29.9 69.7 Guofa Yu(4) — 1,393,038 1,393,038 4.5 1.9 Xiang Fan(5) — 2,209,925 2,209,925 7.2 3.1 Yanchun Bai — * * * * Xudong Gao — * * * * Thomas A. Melcher — — — — — Peter Andrew Schloss — * * * * Michael Peng Zhang — * * * * Ravi Sarathy — * * * * John Jiyang Liu — * * * * Aaron Feng Li(6) — 1,200,000 1,200,000 3.9 1.7 Michael Yang Xu(7) — 515,000 515,000 1.7 * Xijian Liu — * * * * All directors and executive officers as a group (13persons) 4,543,461 9,331,563 13,875,024 43.3 75.1 Principal Shareholders: Generation Gospel Limited(8) 4,543,461 1,138,020 5,681,481 18.3 64.7 FutureX Innovation SPC (9) — 6,153,846 6,153,846 20.0 8.6 Fairy Spirit Limited(10) — 3,563,501 3,563,501 11.6 5.0 Steamboat Ventures Asia, L.P.(11) — 3,470,052 3,470,052 11.3 4.8 Moon Capital Management LP (12) — 2,360,859 2,360,859 7.7 3.3 Entities affiliated with Goldman Sachs(13) — 2,209,925 2,209,925 7.2 3.1 Light Street Capital Management, LLC (14) — 1,752,657 1,752,657 5.7 2.4 Garden Enterprises Ltd.(15) — 1,393,038 1,393,038 4.5 1.9 *Represents less than 1%.(1)The business address of our directors and executive officers is South Wing, High Technology Building, No. 229 North 4th Ring Road, HaidianDistrict, Beijing 100083, People’s Republic of China.(2)For each person or group included in this column, the percentage of total voting power represents voting power based on all ordinary sharesbeneficially owned by such person or group. Each Class A ordinary share is entitled to ten votes and is convertible at any time into one Class Bordinary share. Each Class B ordinary share is entitled to one vote and is not convertible into Class A ordinary shares under any circumstances.(3)Represents (i) 4,543,461 Class A ordinary shares held by Generation Gospel Limited, as described in footnote (8); (ii) 937,500 Class B ordinaryshares directly held by Mr. Qi or held by Generation Gospel Limited, as described in footnote (8); (iii) 3,563,501 Class B ordinary shares held byFairy Spirit Limited, as described in footnote (10) below; and (iii) 260,416 Class B ordinary shares that Mr. Qi or Generation Gospel Limited isentitled to acquire upon exercise of options held by it under our Stock Option Plan, as described in footnote (8) below.(4)Represents 1,393,038 Class B ordinary shares held by Garden Enterprises Ltd., as described in footnote (15) below.(5)Represents 2,209,925 Class B ordinary shares held by certain entities affiliated with Goldman Sachs. See footnote (13) below. Mr. Fan is amanaging director of Goldman Sachs. 77Table of Contents(6)Represents 1,200,000 Class B ordinary shares beneficially owned by Mr. Li through Fairy Spirit Limited, as described in footnote (10) below.(7)Represents 515,000 Class B ordinary shares beneficially owned by Mr. Xu through Fairy Spirit Limited, as described in footnote (10) below.(8)Represents (i) 4,543,461 Class A ordinary shares, (ii) 890,625 Class B ordinary shares, and (ii) 247,395 Class B ordinary shares that GenerationGospel Limited is entitled to acquire upon exercise of options held by it under our Stock Option Plan. Generation Gospel Limited, a BritishVirgin Islands company, is wholly owned by Guosheng Qi, our chief executive officer and chairman. The registered address of Generation GospelLimited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands.(9)Represents 6,153,846 Class B ordinary shares issuable upon conversion of the US$40,000,000 convertible note issued by us to FutureXInnovation SPC (on behalf of and for the account of New Technology Fund II SP as one of its segregated portfolios), as reported in a Schedule13D jointly filed on May 15, 2018 by FutureX Innovation SPC (on behalf of and for the account of New Technology Fund II SP as one of itssegregated portfolios), FutureX Capital Limited, FutureX Asset Management Limited, Qian Zhang and Yuqian Rong. According to the Schedule13D filing, FutureX Capital Limited is the sole management shareholder of FutureX Innovation SPC and the sole shareholder of FutureX AssetManagement Limited. FutureX Asset Management Limited acts as the investment manager of FutureX Innovation SPC. Qian Zhang is a directorof FutureX Innovation SPC, and a director and the sole shareholder of FutureX Capital Limited. Yuqian Rong is a director of FutureX CapitalLimited and the sole director of FutureX Asset Management Limited. The business address of these entities and persons is Unit 1602, CheungKong Center, 2 Queen’s Road, Central, Hong Kong.(10)Represents 3,563,501 Class B ordinary shares held by Fairy Spirit Limited, a British Virgin Islands company owned by certain key employees ofour company, including Aaron Feng Li and Michael Yang Xu, and controlled by Guosheng Qi, our chief executive officer and chairman. Theregistered address of Fairy Spirit Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands.(11)Represents 1,735,000 Class B ordinary shares held in the form of ADSs and 1,735,052 Class B ordinary shares directly owned by SteamboatVentures Asia, L.P., as reported in a Schedule 13G jointly filed on February 13, 2018 by Steamboat Ventures Asia, L.P., Steamboat Ventures AsiaManager, L.P., Steamboat Ventures Asia GP, Ltd., John R. Ball and Liping Fan. According to the Schedule 13G filing, the general partner ofSteamboat Ventures Asia, L.P. is Steamboat Ventures Asia Managers, L.P. The general partner of Steamboat Ventures Asia Managers, L.P. isSteamboat Ventures Asia GP, Ltd. John R. Ball and Liping Fan are directors of Steamboat Ventures Asia GP, Ltd., and may be deemed to haveshare power to vote and dispose of these shares. The business address of these entities and persons is Steamboat Ventures Asia, c/o Campbell’sCorporate Services Limited, Floor 4, Willow House, Cricket Square, P.O. Box 268, Grand Cayman KY1-9010, Cayman Islands.(12)Represents 497,197 Class B ordinary shares directly owned by Moon Capital Master Fund Ltd., or the Flagship Fund, and 1,863,662 Class Bordinary shares owned directly by Moon Capital Partners Master Fund Ltd., or the Partners Fund, as reported in a Schedule 13G jointly filed onMay 1, 2018 by Moon Capital Management LP, JWM Capital LLC, John W. Moon, the Flagship Fund and the Partnership Fund. According tothe Schedule 13G filing, Moon Capital Management LP serves as the investment manager of the Flagship Fund and the Partners Fund. JWMCapital LLC serves as the general partner to Moon Capital Management LP, with respect to the Class B ordinary shares directly owned by theFlagship Fund and the Partners Fund. John W. Moon serves as the managing member of JWM Capital LLC with respect to the Class B ordinaryshares directly owned by the Flagship Fund and the Partners Fund. The business address for these entities and persons is 499 Park Avenue, 8thFloor, New York, NY 10022.(13)The number of ordinary shares beneficially owned is as of December 31, 2017, as reported in a Schedule 13G jointly filed on February 14, 2018by The Goldman Sachs Group, Inc., Goldman, Sachs & Co. LLC and certain other entities. The ordinary shares beneficially owned by entitiesaffiliated with Goldman Sachs include (i) 1,657,444 Class B ordinary shares held by Broad Street Principal Investments, L.L.C., (ii) 258,332Class B ordinary shares held by Bridge Street 2015, L.P., (iii) 96,231 Class B ordinary shares held by Bridge Street 2015 Offshore, L.P., (iv)66,539 Class B ordinary shares held by MBD 2015, L.P., (v) 23,933 Class B ordinary shares held by MBD 2015 Offshore, L.P., (vi) 75,377Class B ordinary shares held by Stone Street 2015, L.P. and (vii) 32,069 Class B ordinary shares held by Stone Street 2015 Offshore L.P. TheGoldman Sachs Group, Inc. is the parent holding company of these entities. The business address of these entities is 200 West Street, New York,NY 10282. 78Table of Contents(14)Represents (i) 1,698,171 Class B ordinary shares held in the form of ADSs for the account of Light Street Mercury Master Fund, L.P., or Mercury,and (ii) 54,486 Class B ordinary shares held in the form of ADSs for the account of Light Street Tungsten Master Fund, L.P., or Tungsten, asreported in a Schedule 13G jointly filed on April 6, 2018 by Light Street Capital Management, LLC, or LSCM, Glen Thomas Kacher andMercury. LSCM serves as investment adviser and general partner to each of Mercury and Tungsten, and, in such capacity, exercises voting andinvestment power over the shares held in the accounts for each of Mercury and Tungsten. Glen Thomas Kacher is the chief investment officer ofLSCM. The business address for these entities and persons is 525 University Avenue, Suite 300, Palo Alto, CA 94301.(15)Represents 1,393,038 Class B ordinary shares held by Garden Enterprises Ltd., a British Virgin Islands company wholly owned by Guofa Yu, ourdirector and chief operating officer. The registered address of Garden Enterprises Ltd. is Geneva Place, Waterfront Drive, PO Box 3469, RoadTown, Tortola, British Virgin Islands.To our knowledge, as of December 31, 2018, four shareholders in the United States held an aggregate of 900,248 Class B ordinary shares,representing approximately 2.9% of our total outstanding ordinary shares on record as of December 31, 2018, and none of our outstanding Class Aordinary shares were held by record holders in the United States. In addition, Citi (Nominees) Limited, the custodian of our depositary bank, held15,769,245 Class B ordinary shares on record (excluding 101,776 Class B ordinary shares issued to it for bulk issuance of ADSs reserved for futureissuances upon the exercise or vesting of awards granted under our share incentive plans), representing approximately 51.1% of our total outstandingshares on record as of December 31, 2018. The number of beneficial owners of our ADSs in the United States is likely to be much larger than thenumber of record holders of our ordinary shares in the United States. We are not aware of any arrangement that may, at a subsequent date, result in achange of control of our company, other than the proposed going private transaction described in “Item 4. Information on the Company—A. Historyand Development of the Company—Proposed Going Private Transaction.” ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSA. Major ShareholdersSee “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”B. Related Party TransactionsContractual ArrangementsSee “Item 4. Information on the Company—C. Organizational Structure” for a description of the contractual arrangements between the WFOE,Gridsum PRC Holding and the shareholders of Gridsum PRC Holding.Shareholders AgreementOn June 30, 2015, we entered into a second amended and restated shareholders agreement with our then existing shareholders. Pursuant to theagreement, we have granted certain registration rights to holders of our registrable securities, which include our ordinary shares issued or issuable uponconversion of preferred shares, ordinary shares owned or acquired by the holders of our preferred shares, and ordinary shares issued as a dividend ordistribution of, in exchange for, or in replacement of, the ordinary shares mentioned above. Set forth below is a description of the registration rightsgranted under the agreement.Demand Registration Rights. Holders of at least 25% of then outstanding registrable securities have the right to demand in writing that we file aregistration statement covering the offer and sale of their securities. We, however, are not obligated to effect more than two demand registrations, unlessthe sale of all registrable securities sought to be included in such registration is not consummated for reasons not attributable to the requesting holders.Form F-3 or Form S-3 Registration Rights. When we are eligible for registration on Form F-3 or Form S-3, any holder of our then outstandingregistrable securities has the right to request that we file a registration statement under Form F-3. We, however, are not obligated to effect more than tworegistrations within any 12-month period pursuant to this registration right, unless the sale of all registrable securities sought to be included in suchregistration is not consummated for reasons not attributable to the requesting holders.Deferral of Registration. We are not obligated to effect the above demand registration or Form F-3 or Form S-3 registration, (i) if, within ten daysof the receipt of any registration request, we give notice to the requesting holders of our intention to effect the filing for our own account of aregistration statement of ordinary shares within 60 days of receipt of such request, and we are actively employing in good faith our best efforts to causesuch registration statement to become effective within such 60-day period or (ii) during the period starting with the date of filing by us of, and endingsix months following the effective date of, any registration statement pertaining to our ordinary shares, provided that in either case, the holders ofregistrable securities are entitled to join such registration subject to the piggyback registration rights described below. Furthermore, we have the rightto defer filing of a registration statement for up to 90 days if we provide the requesting holders a certificate signed by our chief executive officer statingthat in the good faith judgment of our Board of Directors that filing of a registration statement in the near future will be materially detrimental to us andour shareholders, but we cannot exercise the deferral right more than once in any 12-month period, nor can we register any other securities during theperiod the requested registration is deferred. 79Table of ContentsPiggyback Registration Rights. If we propose to file a registration statement for a public offering of our equity securities, either for our ownaccount or for the account of any shareholder other than a holder of registrable securities, other than, among other things, relating to the sale ofsecurities to participates in our share plan or a corporate reorganization, then we must use our best efforts to include in the registration any registrablesecurities requested by their holder to be registered. The underwriters of any underwritten offering will have the right to limit the number of shareshaving registration rights to be included in the registration statement.Expenses of Registration. We will pay all expenses, other than underwriting discounts and commissions, relating to any demand, Form F-3 orForm S-3 or piggyback registration. We are not required to pay for any expenses of any registration proceeding begun in response to holders’ exerciseof their registration rights if the registration request is subsequently withdrawn at the request of the holders of a majority of the registrable securities tobe registered.Termination of Obligations. The registration rights described above shall terminate on the earlier of (i) the date that is five years after the closingof our initial public offering or (ii) with respect to any holder of registrable securities, the date on which such holder may sell all of such holder’sregistrable securities under Rule 144 of the Securities Act in any 90-day period without registration.All of the rights provided to our preferred shareholders under the shareholders agreement, except for registration rights, have automaticallyterminated upon the completion of our initial public offering in September 2016.Loan GuaranteeIn 2016 and 2017, we entered into several short-term guaranteed loan agreements and credit facility agreements. Each of the loan agreements andcredit facility agreements provides for a RMB revolving credit facility with a maturity term within twelve months. Guosheng Qi, our chief executiveofficer and chairman, provided guarantees for some of these credit facility facilities.Employment Agreements and Indemnification AgreementsSee “Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements and Indemnification Agreements.”Share IncentivesSee “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plans.”C. Interests of Experts and CounselNot applicable.ITEM 8. FINANCIAL INFORMATIONA. Consolidated Statements and Other Financial InformationFinancial StatementsPlease see “Item 18. Financial Statements.”Legal ProceedingsFrom time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business.On April 25, 2018 and June 25, 2018, purported securities class action complaints were filed in the United States District Court for the SouthernDistrict of New York against Gridsum Holding Inc., Guosheng Qi, our chief executive officer and chairman, and Michael Peng Zhang, our co-chieffinancial officer, among other defendants. These lawsuits, which are captioned Xu v. Gridsum Holding Inc., et al., Case No. 18-CV-3655, and Li v.Gridsum Holding Inc., et al., Case No. 18-CV-5749, alleged, among other things, that “false and/or misleading statements” were made “and/or” wefailed to disclose our lack of effective controls over financial reporting, in connection with our announcement on April 23, 2018 that our financialstatements for the year ended December 31, 2016 should no longer be relied upon. On September 17, 2018, the court appointed a lead plaintiffpursuant to the Private Securities Litigation Reform Act of 1995 and ordered the lawsuits consolidated. A consolidated amended complaint was filedon November 30, 2018 that variously alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, Rule 10b-5 of theSecurities Exchange Act of 1934, and Sections 11 and 15 of the Securities Act for a putative class period between September 22, 2016 to April 20,2018. 80Table of ContentsOn July 2, 2018, a third purported securities class action complaint was filed in the Supreme Court of the State of New York against us andcertain of our current and former directors and executive officers, among other defendants, variously alleging violations of Sections 11, 12(a)(2) and 15of the Securities Act against them. The lawsuit, captioned, Gordon v. Gridsum Holding Inc., et al., Index No. 18-653342, is brought on behalf of aputative class of shareholders who “purchased or otherwise acquired” ADSs in our initial public offering on September 23, 2016, and are based onsubstantially the same allegations as the consolidated proceeding described above.We believe that the claims against us are without merit and intend to vigorously defend against the litigation.Except for the shareholder class action lawsuits described above, there were no legal or arbitration proceedings that have had in the recent past,or to our knowledge may have, a material adverse effect on our financial position, profitability or cash flows.Dividend PolicyWe have not previously declared or paid cash dividends and have no plan to declare or pay any dividends on our shares or ADSs for theforeseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiary for our cashrequirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividendsto us. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Any limitation on the ability of the WFOE tomake distributions to us, or the tax implications thereof, could have a material adverse effect on our business or financial condition.”Our Board of Directors has discretion as to whether to distribute dividends, subject to applicable laws. Even if our Board of Directors decides topay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, generalfinancial condition, contractual restrictions and other factors that the Board of Directors may deem relevant. If we pay any dividends, we will pay theADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expensespayable thereunder. See “Item 12. Description of Securities Other Than Equity Securities —D. American Depositary Shares.” Cash dividends on ourordinary shares, if any, will be paid in U.S. Dollars.B. Significant ChangesExcept as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidatedfinancial statements included in this annual report.ITEM 9. THE OFFER AND LISTINGA. Offer and Listing DetailsOur ADSs have been quoted on The Nasdaq Stock Market under the symbol “GSUM” since September 23, 2016. Each ADS represents oneClass B ordinary share. On January 4, 2019, the last reported sale price of our ADSs on The Nasdaq Stock Market was US$1.99. 81Table of ContentsThe table below sets forth, for the periods indicated, the highest and lowest trading prices on The Nasdaq Stock Market for our ADSs representingClass B ordinary shares. High Low Annual Highs and Lows 2016 (since September 23, 2016) 18.29 9.90 2017 13.94 6.76 2018 13.99 2.01 2019 (through January 4, 2019) 2.25 1.82 Quarterly Highs and Lows First Quarter 2017 13.73 9.90 Second Quarter 2017 13.94 8.02 Third Quarter 2017 11.60 6.76 Fourth Quarter 2017 10.95 7.44 First Quarter 2018 13.99 8.021 Second Quarter 2018 8.73 3.68 Third Quarter 2018 7.00 4.93 Fourth Quarter 2018 6.60 2.01 Monthly Highs and Lows July 2018 7.00 6.03 August 2018 6.55 4.93 September 2018 6.60 5.28 October 2018 6.60 5.20 November 2018 6.17 4.02 December 2018 4.48 2.01 January 2019 (through January 4, 2019) 2.25 1.82 B. Plan of DistributionNot applicable.C. MarketsOur ADSs have been listed on The Nasdaq Stock Market under the symbol “GSUM” since September 23, 2016.D. Selling ShareholdersNot applicable.E. DilutionNot applicable.F. Expenses of the IssueNot applicable.ITEM 10. ADDITIONAL INFORMATIONA. Share CapitalNot applicable.B. Memorandum and Articles of AssociationCompany Objects and PurposesWe are a Cayman Islands exempted company and our affairs are governed by our memorandum and articles of association, as amended andrestated from time to time, the Companies Law (2018 Revision) of the Cayman Islands, which is referred to below as the Companies Law, and thecommon law of the Cayman Islands. A Cayman Islands exempted company is a company that conducts its business outside of the Cayman Islands, isexempted from certain requirements of the Companies Law, including a filing of an annual return of its shareholders with the Registrar of Companies,does not have to make its register of shareholders open to inspection and may obtain an undertaking against the imposition of any future taxation. 82Table of ContentsAccording to our fifth amended and restated memorandum and articles of association, the objects for which we are established are unrestrictedand we have full power and authority to carry out any object not prohibited by the Companies Law or any other law of the Cayman Islands.The following are summaries of material terms and provisions of our fifth amended and restated memorandum and articles of association and theCompanies Law insofar as they relate to the material terms of our ordinary shares. These summaries are not complete, and you should read our fifthamended and restated memorandum and articles of association, which was filed as exhibits to our registration statement on Form F-1 (file number:333-213348).The holders of our ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal fromthe depositary facility in which the ordinary shares are held in order to exercise shareholders’ rights in respect of the ordinary shares. The depositarywill agree, so far as it is practical, to vote or cause to be voted the amount of ordinary shares represented by ADSs in accordance with thenon-discretionary written instructions of the holder of such ADSs.Registered OfficeOur registered office in the Cayman Islands is located at the offices of International Corporation Services Ltd., Harbour Place 2nd Floor, 103South Church Street, P.O. Box 472, George Town, Grand Cayman KY1-1106.Board of DirectorsSee “Item 6. Directors, Senior Management and Employees—C. Board Practices.”Ordinary SharesGeneralAs of the date of this annual report, our authorized share capital is US$200,000 divided into 200,000,000 ordinary shares, par value of US$0.001per share, which is divided into 20,000,000 Class A ordinary shares, par value of US$0.001 per share, and 180,000,000 Class B ordinary shares, parvalue of US$0.001 per share. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversionrights. All of our outstanding ordinary shares are fully paid up and non-assessable. Certificates representing the ordinary shares are issued in registeredform. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares.DividendsThe holders of our ordinary shares are entitled to such dividends as may be declared by our Board of Directors. Holders of Class A ordinary sharesand Class B ordinary shares are entitled to the same amount of dividends, if declared.Voting RightsIn respect of all matters subject to a shareholders’ vote, each Class A ordinary share is entitled to ten votes, and each Class B ordinary share isentitled to one vote, voting together as one class. Voting at any shareholders’ meeting is by show of hands unless a poll is demanded. A poll may bedemanded by the chairman or any shareholder(s) present in person or by proxy holding at least 10% of the voting share capital of our company.Actions that may be taken at a general meeting may also be taken by a unanimous resolution of the shareholders in writing.A quorum of shareholders for a general meeting consists of the holders of at least 50% of the aggregate voting power of all outstanding ordinaryshares, being entitled to vote, attend and vote at the general meeting. An ordinary resolution to be passed at a general meeting requires the affirmativevote of a simple majority of the votes cast, while a special resolution requires the affirmative vote of at least two-thirds of votes cast at a generalmeeting. A special resolution will be required for important matters.An annual general meeting may be held each year. Extraordinary general meetings may be held at such times as may be determined by our boardof directors, and must be held upon requisition by shareholders holding at least one-third of the aggregate voting power of our issued and outstandingshares. Advance notice of at least 14 calendar days is required for any general meetings. 83Table of ContentsConversionEach Class A ordinary share is convertible into one Class B ordinary share at any time by the holder thereof. Class B ordinary shares are notconvertible into Class A ordinary shares under any circumstances. Upon any transfer of Class A ordinary shares by the holder or beneficial ownerthereof to any person that is not affiliated with such holder or beneficial owner, such Class A ordinary shares will be automatically and immediatelyconverted into an equal number of Class B ordinary shares.Transfer of Ordinary SharesSubject to the restrictions set out below, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transferin the usual or common form or any other form approved by our Board of Directors.Our Board of Directors may, in its sole discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which wehave a lien. Our directors may also decline to register any transfer of any ordinary share unless (a) the instrument of transfer is lodged with us,accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our Board of Directors may reasonably require toshow the right of the transferor to make the transfer; (b) the instrument of transfer is in respect of only one class of ordinary shares; (c) the instrument oftransfer is properly stamped, if required; (d) in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to betransferred does not exceed four; and (e) any fee related to the transfer has been paid to us.If our directors refuse to register a transfer, they shall, within three months after the date on which the instrument of transfer was lodged, send toeach of the transferor and the transferee notice of such refusal.The registration of transfers may, with 14 days’ prior notice, be suspended and the register closed at such times and for such periods as our Boardof Directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed formore than 30 days in any year.LiquidationOn a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distributionamong the holders of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available fordistribution are insufficient to repay all of the paid up capital, the assets will be distributed so that the losses are borne by our shareholdersproportionately.Calls on Ordinary Shares and Forfeiture of Ordinary SharesOur Board of Directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served tosuch shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called upon and remain unpaid on thespecified time are subject to forfeiture.Redemption of SharesWe may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner asmay be determined by our Board of Directors.Variations of Rights of SharesAll or any of the special rights attached to any class of shares may, be varied with the sanction of a special resolution passed at a general meetingof the holders of the shares of that class. Consequently, the rights of any class of shares cannot be altered without a majority of two-thirds of the votescast at such meeting.Inspection of Books and RecordsHolders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or ourcorporate records. However, we will provide our shareholders with annual audited financial statements.Issuance of Additional SharesOur fifth amended and restated memorandum and articles of association authorizes our Board of Directors to issue additional ordinary shares fromtime to time as our Board of Directors shall determine, to the extent of available authorized but unissued shares. 84Table of ContentsOur fifth amended and restated memorandum and articles of association also authorizes our Board of Directors to establish from time to time oneor more series of preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series, including: • the designation of the series; • the number of shares of the series; • the dividend rights, dividend rates, conversion rights, voting rights; and • the rights and terms of redemption and liquidation preferences.Our Board of Directors may issue preferred shares without action by our shareholders to the extent authorized but unissued. Issuance of theseshares may dilute the voting power of holders of ordinary shares.Differences in Corporate LawThe Companies Law is derived, to a large extent, from the older Companies Acts of England but does not follow recent United Kingdomstatutory enactments, and accordingly there are significant differences between the Companies Law and the current Companies Act of England. Inaddition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of thesignificant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the UnitedStates and their shareholders.Mergers and Similar ArrangementsThe Companies Law permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies andnon-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of theirundertaking, property and liabilities in one of such companies as the surviving company and (b) a “consolidation” means the combination of two ormore constituent companies into a combined company and the vesting of the undertaking, property and liabilities of such companies to theconsolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan ofmerger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each constituent company and (b) such otherauthorization, if any, as may be specified in such constituent company’s articles of association. The written plan of merger or consolidation must befiled with the Registrar of Companies together with a certificate of good standing, a declaration as to the solvency of the consolidated or survivingcompany and a further director declaration that the merger or consolidation is bona fide and covering such other matters as required by the CompaniesLaw, including a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger orconsolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation will bepublished in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed betweenthe parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is notrequired for a merger or consolidation which is effected in compliance with these statutory procedures.In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement isapproved by a majority in number of each class of shareholders or creditors with whom the arrangement is to be made, and who must in additionrepresent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or byproxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned bythe Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not tobe approved, the court can be expected to approve the arrangement if it determines that: • the statutory provisions as to the required majority vote have been met; • the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion ofthe minority to promote interests adverse to those of the class; • the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and • the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. 85Table of ContentsWhen a takeover offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may, within a two-monthperiod commencing on the expiration of such four-month period, require the holders of the remaining shares to transfer such shares on the terms of theoffer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been soapproved unless there is evidence of fraud, bad faith or collusion.If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, whichwould otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for thejudicially determined value of the shares.Shareholders’ SuitsGenerally legal proceedings can be originated in the Grand Court of the Cayman Islands. In principle, we will normally be the proper plaintiff tosue for a wrong done to us as a company and a derivative action may ordinarily not be brought by a minority shareholder. However, based on Englishauthority, which would in all likelihood be of persuasive authority in the Cayman Islands, the Cayman Islands courts can be expected (and have hadoccasion) to follow and apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) so that a non-controllingshareholder may be permitted to commence a class action against, or derivative actions in the name of, our company to challenge: • an act which is illegal or ultra vires and is therefore incapable of ratification by the shareholders; • an act which requires a resolution with a qualified or special majority which has not been obtained; and • an act which constitutes a fraud against the minority where the wrongdoers are themselves in control of the company.Indemnification of Directors and Executive Officers and Limitation of LiabilityCayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification ofofficers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as toprovide indemnification against civil fraud or the consequences of committing a crime. Our fifth amended and restated memorandum and articles ofassociation require us to indemnify our officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless suchlosses or damages arise from dishonesty, willful default or fraud of such directors or officers. This standard of conduct is generally the same as permittedunder the Delaware General Corporation Law for a Delaware corporation.In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons with additionalindemnification beyond that provided in our fifth amended and restated memorandum and articles of association.Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling usunder the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed inthe Securities Act and is therefore unenforceable.Directors’ Fiduciary DutiesUnder Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has twocomponents: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudentperson would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all materialinformation reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he or she reasonablybelieves to be in the best interests of the corporation. He or she must not use his corporate position for personal gain or advantage. This duty prohibitsself-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by adirector, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have beenmade on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, thispresumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by adirector, the director must prove the procedural fairness of the transaction and that the transaction was of fair value to the corporation. 86Table of ContentsAs a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company andtherefore it is considered that he or she owes the following duties to the company—a duty to act in good faith in the best interests of the company, aduty not to make a personal profit based on his position as director (unless the company permits him to do so), a duty not to put himself in a positionwhere the interests of the company conflict with his personal interest or his duty to a third party and a duty to exercise powers for the purpose for whichsuch powers were intended. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previouslyconsidered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person ofhis knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the requiredskill and care and these authorities are likely to be followed in the Cayman Islands.Shareholder Action by Written ConsentUnder the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment toits certificate of incorporation. Cayman Islands law and our fifth amended and restated articles of association provide that shareholders may approvecorporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on suchmatter at a general meeting without a meeting being held.Shareholder ProposalsUnder the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders,provided it complies with the notice provisions in the governing documents. A special meeting may be called by the Board of Directors or any otherperson authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.Cayman Islands law provides shareholders with only limited rights to requisition a general meeting and does not provide shareholders with anyright to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our fifth amendedand restated articles of association allow our shareholders holding at least one-third of the aggregate voting power of our issued and outstanding sharesto requisition a general meeting. However, our fifth amended and restated articles of association do not provide our shareholders with any right to putproposal before a general meeting.As a Cayman Islands exempted company, we are not obliged by the Companies Law to call shareholders’ annual general meetings. Our fifthamended memorandum and articles of association provide that we may (but are not obliged to) in each year hold a general meeting at such time andplace as may be determined by our directors.Cumulative VotingUnder the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate ofincorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directorssince it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’svoting power with respect to electing such director. As permitted under Cayman Islands law, our fifth amended and restated articles of association donot provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of aDelaware corporation.Removal of DirectorsUnder the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with theapproval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our fifth amendedand restated articles of association, directors may be removed with or without cause, by a special resolution of our shareholders.Transactions with Interested ShareholdersThe Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless thecorporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engagingin certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interestedshareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding votingshares within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which allshareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes aninterested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming aninterested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with thetarget’s board of directors. 87Table of ContentsCayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delawarebusiness combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significantshareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and for a proper purpose and notwith the effect of constituting a fraud on the minority shareholders.Dissolution; Winding UpUnder the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved byshareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it beapproved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate ofincorporation a supermajority voting requirement in connection with dissolutions initiated by the board.Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of itsmembers or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to orderwinding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. Under the CompaniesLaw, our company may be dissolved, liquidated or wound up by a special resolution of our shareholders or by an ordinary resolution on the basis thatour company is unable to pay its debts as they fall due.Variation of Rights of SharesUnder the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of theoutstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our fifth amended andrestated articles of association, the rights attached to any class or series of our shares may be varied with a special resolution passed at a generalmeeting of the holders of the shares of that class or series.Amendment of Governing DocumentsUnder the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended only if adopted and declaredadvisable by the board of directors and approved by a majority of the outstanding shares entitled to vote, and the bylaws may be amended with theapproval of a majority of the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by theboard of directors. Under the Companies Law, our memorandum and articles of association may only be amended by special resolution or theunanimous written resolution of all shareholders.Rights of Non-resident or Foreign ShareholdersThere are no limitations imposed by our fifth amended and restated memorandum and articles of association on the rights of non-resident orforeign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our fifth amended and restated memorandumand articles of association governing the ownership threshold above which shareholder ownership must be disclosed.C. Material ContractsWe have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4.Information on the Company,” “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” or elsewhere in thisannual report.D. Exchange ControlsForeign Currency ExchangeSee “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Foreign Exchange.”Dividend DistributionSee “Item 4. Information on the Company—B. Business Overview— Regulations—Regulations on Dividend Distribution.”E. TaxationThe following is a summary of material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our ADSs or Class Bordinary shares. It is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change.This summary does not deal with all possible tax consequences relating to an investment in our ADSs or Class B ordinary shares, such as the taxconsequences under state, local and other tax laws. 88Table of ContentsCayman Islands TaxationThe Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is notaxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the CaymanIslands except for stamp duties which may be applicable on instruments executed in, or brought within, the jurisdiction of the Cayman Islands. TheCayman Islands is not party to any double tax treaties which are applicable to any payments made by or to our company. There are no exchangecontrol regulations or currency restrictions in the Cayman Islands.People’s Republic of China TaxationThe PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008 and was most recently amended onFebruary 24, 2017, provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” islocated in the PRC is treated as a PRC resident enterprise for PRC tax purposes and consequently is subject to PRC enterprise income tax at the rate of25% on its global income. On April 22, 2009, the State Administration of Taxation, or SAT, issued the Notice Regarding, the Determination ofChinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82,which provides certain specific criteria for determining whether the “de facto management body” of a PRC controlled enterprise that is incorporatedoffshore is located in the PRC. Furthermore, the SAT issued the Administrative Measures for Enterprise Income Tax of Chinese-Controlled OverseasIncorporated Resident Enterprises (Trial Version), or Bulletin No. 45, which became effective on September 1, 2011 and was most recently amended onJune 15, 2018, to provide more guidance on the implementation of Circular 82. Bulletin No. 45 clarified certain issues in the areas of resident statusdetermination, post-determination administration and competent tax authorities procedures. According to Circular 82, an offshore incorporatedenterprise controlled by a PRC enterprise or a PRC enterprise group will be considered as a PRC tax resident enterprise by virtue of having its “de factomanagement body” in the PRC only if all of the following conditions are met: (a) the senior management and core management departments in chargeof its daily operations are located mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval bypersons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings arelocated or kept in the PRC; and (d) at least half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC.Although Circular 82 and Bulletin No. 45 only apply to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups andnot those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect the SAT’s general position on how theterm “de facto management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they arecontrolled by PRC enterprises, individuals or foreigners.We believe that neither Gridsum Cayman nor Gridsum HK is a PRC resident enterprise for PRC tax purposes, because neither of them meets all ofthe criteria described above. Neither is controlled by a PRC enterprise or PRC enterprise group. Their records (including the resolutions of the board ofdirectors and the resolutions of shareholders) are maintained outside the PRC. However, an enterprise’s tax resident status is subject to determinationby the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” when applied to ouroffshore entities.If the PRC tax authorities determine that we are a PRC resident enterprise, we will be subject to PRC enterprise income tax at 25% on our globalincome. In addition, dividends paid by us to our non-PRC shareholders may be subject to PRC withholding tax, and gains realized on the sale or otherdisposition of our ADSs or Class B ordinary shares may be subject to PRC tax, at a rate of 0% in the case of non-PRC corporate shareholders that aredeemed PRC resident enterprises, 10% in the case of non-PRC corporate shareholders that are deemed non-resident enterprises or 20% in the case ofnon-PRC individual shareholders (in each case, subject to any applicable tax treaty), if such dividends or gains are deemed to be from sources withinthe PRC. A holder of our Class B ordinary shares or our ADSs (other than our depositary bank who is a nominee shareholder) may be deemed a“non-resident enterprise” if (a) its “de facto management body” is outside the PRC, and (b) it meets one of the following conditions: (i) it hasestablishment or place of business within the PRC, or (ii) it does not have establishment or place of business within the PRC but has received incomefrom PRC sources. As a result, you may be subject to PRC withholding tax on dividends distributed by us or gains realized on the disposition of ourADSs or Class B ordinary shares, unless the jurisdiction of your incorporation has a tax treaty with China that provides for a different withholdingarrangement. The Cayman Islands does not have such tax treaty with China. Any such tax may reduce the returns on your investment in the ADSs.Furthermore, if we are a PRC resident enterprise and the dividends paid by us to our non-PRC shareholders are subject to PRC withholding tax, we willbe obligated to withhold and pay such tax in respect of the dividends actually paid by us to our non-PRC shareholders, and failure to so withhold andpay may subject us to a penalty of up to three times of the unpaid tax imposed by the relevant PRC tax authority. 89Table of ContentsIf we are deemed a “non-resident enterprise” by the PRC tax authorities, the dividends paid to us by our PRC subsidiary will be subject to a 10%withholding tax (or a 5% withholding tax in certain circumstances discussed below). The EIT Law imposes a withholding income tax of 10% ondividends distributed by an FIE to its immediate holding company outside of the PRC, if such immediate holding company is considered as anon-resident enterprise without any establishment or place of business within the PRC or if the received dividends have no connection with theestablishment or place of business of such immediate holding company within the PRC, unless such immediate holding company’s jurisdiction ofincorporation has a tax treaty with the PRC that provides for a different withholding arrangement. Under the Arrangement Between the PRC and theHong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion With Respect to Taxes on Income,the dividend withholding tax rate may be reduced to 5%, if a Hong Kong resident enterprise that receives the dividends is considered a “non-residententerprise” and holds at least 25% of the equity interests in the PRC enterprise distributing the dividends, subject to approval of the PRC local taxauthority. However, if the Hong Kong resident enterprise is not considered to be the beneficial owner of such dividends under applicable PRC taxregulations, such dividends may remain subject to withholding tax at a rate of 10%. Accordingly, dividends received by Gridsum HK from our PRCsubsidiary will be subject to PRC withholding tax, the rate of which might be reduced from 10% to 5% if Gridsum HK satisfies the relevant conditionsunder applicable PRC tax regulations and obtains the approvals as required.Material United States Federal Income Tax ConsiderationsThe following is a discussion of material U.S. federal income tax considerations relating to the acquisition, ownership and disposition of ourADSs or Class B ordinary shares by U.S. Holders (as defined below) that hold our ADSs or Class B ordinary shares as “capital assets” (generally,property held for investment) as of the date hereof and under the U.S. Internal Revenue Code of 1986, as amended, or the Code. This discussion isbased upon applicable provisions of the Code, Treasury regulations promulgated thereunder, pertinent judicial decisions, interpretive rulings of theInternal Revenue Service, or the IRS, and such other authorities as are relevant, all as of the date hereof, and all of which are subject to change, possiblywith retroactive effect. In addition, this discussion is based, in part, upon representations made by the depositary to us and assumes that the depositagreement, and all other related agreements, will be performed in accordance with their terms. This discussion does not address all aspects of U.S.federal income taxation that may be important to particular investors in light of their individual investment circumstances, including investors subjectto special tax rules (for example, certain financial institutions, insurance companies, broker-dealers, pension plans, regulated investment companies,real estate investment trusts, cooperatives, tax-exempt organizations (including private foundations), holders who are not U.S. Holders, holders whoown (directly, indirectly or constructively) 10% or more of our stock by vote or value, investors that hold our ADSs or Class B ordinary shares as part ofa straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes, investors that are traders insecurities that have elected the mark-to-market method of accounting or investors that have a functional currency other than the U.S. Dollar), all ofwhom may be subject to tax rules that differ significantly from those discussed below.In addition, this discussion does not address any non-U.S., state, local or any U.S. federal estate, gift or alternative minimum tax considerations.Each U.S. Holder is urged to consult its tax advisors regarding the U.S. federal, state, local and non-U.S. income and other tax considerations of aninvestment in ADSs or Class B ordinary shares.GeneralThe discussion below of U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of our ADSs orClass B ordinary shares and you are, for U.S. federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) acorporation, or other entity treated as a corporation for U.S. federal income tax purposes, created in or organized under the law of the United States orany state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for U.S. federal income tax purposesregardless of its source or (iv) a trust (A) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S.persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a U.S. personunder the Code.If you are a partner in a partnership or other entity treated as a partnership for U.S. federal income tax purposes that holds our ADSs or Class Bordinary shares, your tax treatment generally will depend on your status (including, for example, whether you are a U.S. Holder) and the activities ofthe partnership. Partners in a partnership holding our ADSs or Class B ordinary shares should consult their tax advisers regarding the tax consequencesof an investment in our ADSs or Class B ordinary shares.If you own (directly, indirectly or constructively) 10% or more of our stock by vote or value, due to changes in U.S. tax laws under the 2017 Act,you could be subject to unexpected and extremely unfavorable U.S. tax consequences. Such holders should consult their tax advisers regarding the taxconsequences of an investment in our stock. 90Table of ContentsADSsIf you hold ADSs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying Class B ordinary shares thatare represented by such ADSs. Accordingly, deposits or withdrawals of Class B ordinary shares for ADSs, or vice versa, will not be subject to U.S.federal income tax.DividendsSubject to the discussion under “—Passive Foreign Investment Company Rules” below, any cash distributions (including the amount of anyPRC tax withheld if we are deemed to be a PRC resident enterprise under PRC tax law) paid on our ADSs or Class B ordinary shares out of our currentor accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in your gross income asdividend income on the day actually or constructively received by you, in the case of Class B ordinary shares, or by the depositary, in the case ofADSs. Dividends received on our ADSs or Class B ordinary shares will not be eligible for the dividends received deduction allowed to corporationsunder the Code.A non-corporate recipient of dividends will be subject to tax at the reduced tax rate applicable to “qualified dividend income,” provided thatcertain conditions are satisfied, including that (1) our ADSs are readily tradable on an established securities market in the United States, or, in the eventthat we are deemed to be a PRC resident enterprise under the PRC tax law, we are eligible for the benefit of the United States-PRC income tax treaty, orthe Treaty, (2) we are neither a passive foreign investment company nor treated as such with respect to a U.S. Holder (as discussed below) for thetaxable year in which the dividend was paid or the preceding taxable year and (3) certain holding period requirements are met.Our ADSs are listed on the Nasdaq Global Select Market. United States Treasury Department guidance indicates that the ADSs, when they arelisted on the Nasdaq Global Select Market, are readily tradable on an established securities market in the United States. Thus, provided we are notclassified as a PFIC subject to the U.S. federal income tax rules governing PFICs summarized in the discussion below under “—Passive ForeignInvestment Company Rules” and certain holding period requirements are met, we believe that dividends we pay on our ADSs will meet the conditionsrequired for the reduced tax rate applicable to “qualified dividend income.” However, since we do not expect that our Class B ordinary shares will belisted on an established securities market, we do not believe that dividends that we pay on our Class B ordinary shares that are not represented by ADSscurrently meet the conditions required for these reduced tax rates (unless we are eligible for the benefit of the Treaty as discussed below).In the event that we are deemed to be a PRC resident enterprise under PRC tax law, you may be subject to PRC withholding taxes on dividendspaid on our ADSs or Class B ordinary shares. If we are deemed to be a PRC resident enterprise, we may, however, be eligible for the benefits of theTreaty. If we are eligible for such benefits, dividends we pay on our Class B ordinary shares, regardless of whether such shares are represented by theADSs, would be eligible for the reduced rates of taxation applicable to qualified dividend income, as discussed above. Determining eligibility forbenefits under U.S. income tax treaties is complex. You should consult your tax advisor if you intend to rely on our eligibility for the benefits of theTreaty to claim a reduced rate of tax on dividends.For U.S. foreign tax credit purposes, dividends generally will be treated as income from foreign sources and generally will constitute passivecategory income. Depending on your particular circumstances, you may be eligible, subject to a number of complex limitations, to claim a foreign taxcredit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or Class B ordinary shares. If you do not elect to claim aforeign tax credit for foreign tax withheld, you are permitted instead to claim a deduction, for U.S. federal income tax purposes, for the foreign taxwithheld, but only for a year in which you elect to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex.You are urged to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determinedunder U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis ofour ADSs or Class B ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gainrecognized on a sale or exchange. Because we do not intend to determine our earnings and profits under U.S. federal income tax principles, anydistribution paid will generally be treated as a “dividend” for U.S. federal income tax purposes (as discussed above). Consequently, your taxabledividend income may be greater than it would be if we determined our earnings and profits under U.S. federal income tax purposes. 91Table of ContentsSale or Other Disposition of ADSs or Class B Ordinary SharesSubject to the discussion under “—Passive Foreign Investment Company Rules” below, you generally will recognize capital gain or loss uponthe sale or other disposition of our ADSs or Class B ordinary shares in an amount equal to the difference, if any, between the amount realized upon thedisposition and your adjusted basis in such ADSs or Class B ordinary shares. Any capital gain or loss will be long-term capital gain or loss if you haveheld our ADSs or Class B ordinary shares for more than one year and will generally be U.S.-source gain or loss for U.S. foreign tax credit purposes. Inthe event that we are deemed to be a PRC resident enterprise under PRC tax law and gain from the disposition of our ADSs or Class B ordinary shareswould be subject to tax in the PRC, you generally can elect to treat the gain as PRC-source gain for U.S. foreign tax credit purposes under the Treaty.The deductibility of a capital loss may be subject to limitations. You are urged to consult your tax advisor regarding the tax consequences if a foreigntax is imposed on a disposition of our ADSs or Class B ordinary shares, including any election to treat the gain on disposition as having a PRC sourceunder the Treaty and the availability of the foreign tax credit under your particular circumstances.Passive Foreign Investment Company RulesA non-U.S. corporation, such as our company, will be classified as a “passive foreign investment company,” or PFIC, for U.S. federal income taxpurposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% ormore of the value of its assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passiveincome. Passive income generally includes dividends, interest, royalties, rents, annuities, net gains from the sale or exchange of property producingsuch income and net foreign currency gains. For this purpose, cash is categorized as a passive asset and the company’s unbooked intangiblesassociated with active business activity are taken into account as a non-passive asset. We will be treated as owning our proportionate share of the assetsand earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.Although the law in this regard is unclear, we intend to treat our VIE as being owned by us for U.S. federal income tax purposes, not only becausewe exercise effective control over the operation of such entity but also because we are entitled to substantially all of its economic benefits and burdens,and, as a result, we consolidate its results of operation in our consolidated financial statements. If it were determined, however, that we are not theowner of our VIE for U.S. federal income tax purposes, the PFIC rules would apply differently to us, and as a result, we could be treated as a PFIC for ourcurrent taxable year and/or future taxable years.Assuming we are the owner of our VIE for U.S. federal income tax purposes, based on our current income and assets and the value of our ADSsand Class B ordinary shares, we do not believe we were a PFIC for the 2017 taxable year or for prior years, and we presently do not expect to beclassified as a PFIC for the current taxable year and we do not anticipate becoming a PFIC in future taxable years. While we do not anticipate becominga PFIC, changes in the nature of our income or assets or the value of our ADSs and Class B ordinary shares may cause us to become a PFIC for thecurrent or any subsequent taxable year. Under circumstances where revenues from activities that produce passive income significantly increase relativeto our revenues from activities that produce non-passive income or where we determine not to deploy significant amounts of cash, our risk of becomingclassified as a PFIC may substantially increase.The discussion above under “—Dividends” and “—Sale or Other Disposition of ADSs or Class B Ordinary Shares” assumes that we will not beclassified as a PFIC for U.S. federal income tax purposes.If we were classified as a PFIC in any year with respect to which a U.S. Holder holds ADSs or Class B ordinary shares, we would continue to betreated as a PFIC with respect to the U.S. Holder in all succeeding years during which the U.S. Holder owns our ADSs or Class B ordinary shares,regardless of whether we continue to meet the tests described above.If we were treated as a PFIC for any taxable year during which a taxable U.S. Holder held the ADS or Class B ordinary shares, gain recognized bythe U.S. Holder on a sale or other disposition (including certain pledges) of our ADSs or Class B ordinary shares would be allocated ratably over theU.S. Holder’s holding period for our ADSs or Class B ordinary shares. The amounts allocated to the taxable year of the sale or other disposition and toany year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at thehighest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the amountallocated to that taxable year. Further, to the extent that any dividend or other distribution received by a U.S. Holder on its ADSs or Class B ordinaryshares exceeded 125% of the average of the annual distributions received by the U.S. Holder on its ADSs or Class B ordinary shares during thepreceding three years or the U.S. Holder’s holding period, whichever is shorter, that distribution (referred to as “excess distribution”) would be subjectto taxation in the same manner as gain, described immediately above.Thus, if we were treated as a PFIC, gains on disposition of ADSs or Class B ordinary shares, and excess distributions thereon, would be taxed atordinary income rates and subject to an interest charge, which generally results in a significantly greater amount of U.S. tax than would otherwise beimposed if the PFIC rules did not apply. 92Table of ContentsCertain elections may be available that would result in alternative treatments of our ADSs or Class B ordinary shares. However, we do not expectthat we will prepare or provide to U.S. Holders a “PFIC annual information statement,” which would enable a U.S. Holder to make one type of election,a “qualified electing fund” or “QEF” election.If our ADSs were considered “marketable stock” (as defined below), U.S. Holders generally would be eligible to make a different type of election,a “mark-to-market” election, to elect out of the tax treatment discussed in the preceding paragraphs. If you make a valid mark-to-market election for theADSs, you generally will include in income for each year we are a PFIC, as ordinary income, an amount equal to the excess of the fair market value ofour ADSs at the end of the year over your adjusted tax basis, and you will be allowed an ordinary deduction for any excess of your adjusted tax basisover the fair market value of the ADSs at the end of the year. However, deductions will be allowable only to the extent of any net mark-to-marketincome you reported on our ADSs in prior years. Gain on the sale or other disposition of our ADSs will also be treated as ordinary income. Loss on salewill be treated as ordinary loss to the extent of any net mark-to-market gains you reported on the ADSs. Your basis in our ADSs will be adjusted toreflect any annual mark-to-market income or loss amounts. If you make a mark-to-market election, any distributions we make would generally besubject to the rules discussed above under “—Dividends,” except the lower rate applicable to qualified dividend income would not apply.The mark-to-market election is available only for “marketable stock” which is stock that is traded in other than de minimis quantities on at least15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market, as defined in applicable Treasury regulations. OurADSs are listed on the Nasdaq Global Select Market, which is a qualified exchange for these purposes, and, consequently, assuming that our ADSs areregularly traded, if you are a holder of ADSs, it is expected that the mark-to-market election would be available to you if we were to become a PFIC. Itshould be noted that only our ADSs and not the Class B ordinary shares are listed on the Nasdaq Global Select Market. Consequently, if you are a U.S.Holder of Class B ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election if we are orwere to become a PFIC.Each U.S. Holder of a PFIC is generally required to file an annual report containing such information as the U.S. Department of the Treasury mayrequire.U.S. Holders are strongly urged to consult their own tax advisors regarding the details of the PFIC rules and any elections that may be available.Medicare TaxU.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds will generally be subject to a 3.8% Medicare tax(in addition to the regular income tax) on certain investment income, including dividends and gains from the sale, exchange or other taxabledisposition of an ADS or Class B ordinary share. You are urged to consult your tax advisors regarding the applicability of the Medicare tax to yourincome and gains in respect of an investment in our ADSs or Class B ordinary shares.Information Reporting and Backup WithholdingYou may be required to submit to the IRS certain information with respect to your beneficial ownership of our ADSs or Class B ordinary shares, ifsuch ADSs or Class B ordinary shares are not held on your behalf by a financial institution. This law also imposes penalties if you are required tosubmit such information to the IRS and fail to do so.Dividend payments with respect to ADSs or Class B ordinary shares and proceeds from the sale, exchange or redemption of ADSs or Class Bordinary shares may be subject to information reporting to the IRS and possible U.S. backup withholding. Backup withholding will not apply,however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exemptfrom backup withholding and in the case of dividend payments, reports the full amount of dividend income. U.S. Holders who are required to establishtheir exempt status must provide such certification on IRS Form W-9.Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income taxliability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refundwith the IRS and furnishing any required information. You are urged to consult your tax advisors regarding the application of the U.S. informationreporting and backup withholding rules.F. Dividends and Paying AgentsNot applicable.G. Statement by ExpertsNot applicable. 93Table of ContentsH. Documents on DisplayWe file annual reports with and furnish other information to the SEC as may be applicable from time to time. You may read and copy anydocuments filed or furnished by us at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for furtherinformation on the public reference room.In accordance with Nasdaq Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at www.gridsum .com. Inaddition, we will provide physical copies of our annual report free of charge to shareholders and ADS holders upon request.I. Subsidiary InformationNot applicable.ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKForeign Exchange RiskSubstantially all of our revenues and costs are denominated in RMB, and substantially all of our financial assets are also denominated in RMB.We do not believe that we currently have any significant direct foreign exchange risk and we have not entered into any hedging transactions in aneffort to reduce our exposure to foreign currency exchange risk. Although in general our exposure to foreign exchange risks should be limited, thevalue of your investment in our ADSs will be affected by the exchange rate between the U.S. Dollar and the RMB because the value of our business iseffectively denominated in RMB, while our ADSs will be traded in U.S. Dollars.The value of the RMB against the U.S. Dollar and other currencies is affected by changes in China’s political and economic conditions andChina’s foreign exchange policies, among other things. On July 21, 2005, the PRC government changed its decades-old policy of pegging the value ofthe RMB to the U.S. Dollar, and the RMB appreciated by more than 20% against the U.S. Dollar over the following three years. Between July 2008 andJune 2010, this appreciation halted and the exchange rate between the RMB and the U.S. Dollar remained within a narrow band. Since June 2010, theRMB has fluctuated against the U.S. Dollar, at times significantly and unpredictably, and in recent years the RMB has depreciated significantly againstthe U.S. Dollar. Since October 1, 2016, the RMB has joined the International Monetary Fund’s basket of currencies that make up the Special DrawingRight (SDR), along with the U.S. Dollar, Euro, Japanese yen and British pound. In 2016 and 2017, the value of the RMB depreciated by approximately7.2% and appreciated by approximately 6.7% against the U.S. Dollar, respectively. From the end of 2017 through the end of November 2018, the valueof the RMB depreciated by approximately 6.5% against the U.S. Dollar. With the development of the foreign exchange market and progress towardsinterest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate systemand there is no guarantee that the RMB will not appreciate or depreciate significantly in value against the U.S. Dollar in the future. It is difficult topredict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. Dollar in the future.To the extent that we need to convert U.S. Dollars into RMB for our operations, appreciation of the RMB against the U.S. Dollar would have anadverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB into U.S. Dollars for the purpose ofmaking payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. Dollar against the RMB wouldhave a negative effect on the U.S. Dollar amounts available to us.As of December 31, 2017, we had RMB-denominated cash and cash equivalents of RMB103.8 million, and U.S. Dollar-denominated cash andcash equivalents of US$9.7 million. Assuming we had converted RMB103.8 million into U.S. Dollars at the exchange rate of RMB6.5063 for US$1.00as of December 29, 2017, our U.S. Dollar cash and cash equivalents would have been US$25.6 million. If the RMB had depreciated by 10% against theU.S. Dollar, our U.S. Dollar cash and cash equivalents would have been US$24.1 million instead. Assuming we had converted US$9.7 million intoRMB at the exchange rate of RMB6.5063 for US$1.00 as of December 29, 2017, our RMB cash and cash equivalents would have beenRMB166.7 million. If the RMB had depreciated by 10% against the U.S. Dollar, our RMB cash and cash equivalents would have beenRMB173.7 million instead.Interest Rate RiskOur exposure to interest rate risk primarily relates to interest expenses incurred by our short-term borrowings and the interest income generatedby excess cash, which is mostly held in interest-bearing bank deposits. We have not used derivative financial instruments in our investment portfolio.Interest earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks dueto changes in market interest rates. However, due to changes in market interest rates, our future interest expense may increase and our future interestincome may fall short of expectations. 94Table of ContentsInflation RiskTo date, inflation in China has not materially impacted our results of operations. According to the PRC National Bureau of Statistics, the year-over-year percent changes in the consumer price index for December 2015, 2016 and 2017 were increases of 1.6%, 2.1% and 1.8%, respectively.Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higherrates of inflation in China.ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESA. Debt SecuritiesNot applicable.B. Warrants and RightsNot applicable.C. Other SecuritiesNot applicable.D. American Depositary SharesFees and ChargesOur ADS holder will be required to pay the following fees under the terms of the deposit agreement: Service Fees•  Issuance of ADSs (i.e., an issuance of ADS upon a deposit of shares orupon a change in the ADS-to-share ratio), excluding ADS issuances as aresult of distributions of shares Up to US$5.00 per 100 ADSs issued•  Cancellation of ADSs (i.e., a cancellation of ADSs for delivery ofdeposited property or upon a change in the ADS-to-share ratio) Up to US$5.00 per 100 ADSs cancelled•  Distribution of cash dividends or other cash distributions (i.e., upon asale of rights and other entitlements) Up to US$5.00 per 100 ADSs held•  Distribution of ADSs pursuant to (i) stock dividends or other free stockdistributions, or (ii) exercise of rights to purchase additional ADSs Up to US$5.00 per 100 ADSs held•  Distribution of securities other than ADSs or rights to purchaseadditional ADSs (i.e., upon a spin-off) Up to US$5.00 per 100 ADSs held•  ADS Services Up to US$5.00 per 100 ADSs held on the applicable record date(s)established by the depositary bankAs an ADS holder you will also be responsible to pay certain charges such as: • taxes (including applicable interest and penalties) and other governmental charges; 95Table of Contents • the registration fees as may from time to time be in effect for the registration of shares or other deposited securities on the share register andapplicable to transfers of shares or other deposited securities to or from the name of the custodian, the depositary bank or any nomineesupon the making of deposits and withdrawals, respectively; • certain cable, telex and facsimile transmission and delivery expenses; • the expenses and charges incurred by the depositary bank in the conversion of foreign currency; • the fees and expenses incurred by the depositary bank in connection with compliance with exchange control regulations and otherregulatory requirements applicable to shares, deposited securities, ADSs and ADRs; and • the fees and expenses incurred by the depositary bank, the custodian, or any nominee in connection with the servicing or delivery ofdeposited property.ADS fees and charges payable upon (i) the issuance of ADSs, and (ii) the cancellation of ADSs are charged to the person to whom the ADSs areissued (in the case of ADS issuances) and to the person whose ADSs are cancelled (in the case of ADS cancellations). In the case of ADSs issued by thedepositary bank into DTC, the ADS issuance and cancellation fees and charges may be deducted from distributions made through DTC, and may becharged to the DTC participant(s) receiving the ADSs being issued or the DTC participant(s) holding the ADSs being cancelled, as the case may be, onbehalf of the beneficial owner(s) and will be charged by the DTC participant(s) to the account of the applicable beneficial owner(s) in accordance withthe procedures and practices of the DTC participants as in effect at the time. ADS fees and charges in respect of distributions and the ADS service feeare charged to the holders as of the applicable ADS record date. In the case of distributions of cash, the amount of the applicable ADS fees and chargesis deducted from the funds being distributed. In the case of (i) distributions other than cash and (ii) the ADS service fee, holders as of the ADS recorddate will be invoiced for the amount of the ADS fees and charges and such ADS fees and charges may be deducted from distributions made to holdersof ADSs. For ADSs held through DTC, the ADS fees and charges for distributions other than cash and the ADS service fee may be deducted fromdistributions made through DTC, and may be charged to the DTC participants in accordance with the procedures and practices prescribed by DTC andthe DTC participants in turn charge the amount of such ADS fees and charges to the beneficial owners for whom they hold ADSs.In the event of refusal to pay the depositary bank fees, the depositary bank may, under the terms of the deposit agreement, refuse the requestedservice until payment is received or may set off the amount of the depositary bank fees from any distribution to be made to the ADS holder. The feesand charges holders of ADSs may be required to pay may vary over time and may be changed by us and the depositary bank. Holders of ADSs willreceive prior notice of such changes.The obligations of holders of ADSs to pay ADS fees and charges will survive the termination of the deposit agreement. Upon the resignation orremoval of the depositary bank, the depositary bank will retain the right to collect ADS fees and charges incurred prior to such resignation or removal.Fees and Payments from the Depositary to UsThe depositary bank may reimburse us for certain expenses incurred by us in respect of the ADR program, by making available a portion of theADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time.We did not receive any reimbursement from the depositary for the expenses related to the administration and maintenance of the facility for the yearended December 31, 2017.PART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESNone.ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSSee “Item 10. Additional Information—B. Memorandum and Articles of Association—Ordinary Shares” for a description of the rights ofsecurities holders, which remain unchanged. 96Table of ContentsUse of ProceedsThe following “Use of Proceeds” information relates to the registration statement on Form F-1 (file number: 333-213348), which was declaredeffective by the SEC on September 22, 2016, in relation to our initial public offering. The aggregate price of shares issued and sold in our initial publicoffering was approximately US$100.2 million, of which we received net proceeds of approximately US$87.1 million, after deducting underwritingdiscounts and commissions and estimated offering expenses payable by our company.For the period from September 22, 2016, the date that the F-1 registration statement was declared effective by the SEC, to December 31, 2017, wehave used approximately US$65.6 million net proceeds from our initial public offering for general corporate purposes which include working capital,improvement of corporate facilities, sales and marketing activities, business acquisition and other general and administrative matters. None of the netproceeds from our initial public offering were directly or indirectly paid to the directors, officers, general partners of our company or their associates,persons owning 10% or more of our Class A or Class B ordinary shares, or our affiliates.ITEM 15. CONTROLS AND PROCEDURESDisclosure Controls and ProceduresUnder the supervision and with the participation of our management, including our chief executive officer and our co-chief financial officers, wecarried out an evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rule 13a-15(e) of the Exchange Act, as ofDecember 31, 2017.Based upon that evaluation, our management has concluded that, due to the outstanding material weaknesses and other control deficienciesdescribed below, as of December 31, 2017, our disclosure controls and procedures were not effective in ensuring that the information required to bedisclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the timeperiods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under theExchange Act was accumulated and communicated to our management, including our chief executive officer and co-chief financial officers, asappropriate, to allow timely decisions regarding required disclosure.Management’s Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inExchange Act Rule 13a-15(f), for our company. Internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally acceptedaccounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of consolidated financial statements in accordance with U.S. GAAP and that a company’s receipts and expenditures are being made only inaccordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of our assets that could have a material effect on our consolidated financial statements.Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect toconsolidated financial statements preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, ourmanagement including our chief executive officer and co-chief financial officers assessed the effectiveness of internal control over financial reportingas of December 31, 2017 using the criteria set forth in the report “Internal Control—Integrated Framework” published by the Committee of SponsoringOrganizations of the Treadway Commission (known as COSO).Based on this evaluation, our management identified two material weaknesses and certain other control deficiencies in our internal controls, asdefined in the standards established by U.S. Public Company Accounting Oversight Board, in our internal control over financial reporting as ofDecember 31, 2017. A material weakness is a deficiency, or combination of deficiencies, in internal controls, such that there is a reasonable possibilitythat a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.The two material weaknesses relate to: (1) our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S.GAAP and the SEC reporting requirements to properly address complex accounting issues and prepare and review our financial statements and relateddisclosures in accordance with U.S. GAAP and SEC financial reporting requirements; and (2) the lack of written policies and procedures sufficient totimely record revenues and expenses in our financial statements. 97Table of ContentsBased on this assessment, our management has concluded that our internal control over financial reporting was not effective as of December 31,2017. These material weaknesses resulted in the restatement of our financial statements as of and for the years ended December 31, 2015 and 2016. Formore information about the restatement and the related adjustments, see Note 2(a) “Restatement of previously issued financial statements” to ourconsolidated financial statements included elsewhere in this annual report on Form 20-F.Changes in Internal Control over Financial ReportingSince January 1, 2017, we have taken initiatives to improve our internal control over financial reporting to address the material weaknesses andcertain other control deficiencies that have been identified, including: • In 2017 we hired a new Co-Chief Financial Officer with responsibility for public disclosures, investor relations, and acquisitions; • In 2017 we replaced our prior U.S. GAAP reporting team with a new U.S. GAAP reporting team; in 2018 we hired additional employeeswith U.S. GAAP expertise and experience with major international accounting firms; • In 2017 we engaged an external consulting firm to assist us to assess Section 404 of the Sarbanes-Oxley Act of 2002 compliance readinessand improve overall internal controls and this external consulting firm also provided a Section 404 of the Sarbanes-Oxley Act of 2002training session to our senior employees; • In 2017 we implemented new software modules for office automation, including contract management, procurement management andcustomer account management, and a vendor management and expense approval system requiring multi-level authorization and pre-approval of vendors (including audited financial statements if payments exceed RMB200,000); • In 2018 we engaged the founder and chairman of one of China’s largest audit and consulting firms as our advisor; • In 2018 we distributed internal policies and handbooks on topics such as contract management, vendor management, reimbursementmanagement and risk control management to our employees, and conducted training seminars to ensure effective implementation; • In 2018 we engaged an independent external consulting firm with extensive U.S. GAAP reporting experience to assist our U.S. GAAPreporting team in preparation of this annual report; • In 2018 we conducted a comprehensive “as is” and gap analysis of our IT systems and approved procurement of a customized ERP system.A committee consisting of all our senior executives was organized to facilitate the assessment and implement any necessary changes; and • In 2018 we engaged an independent third-party consultant to provide accounting and financial training to our senior employees.Except for the matters described above to improve our internal control over financial reporting, there were no changes in our internal control overfinancial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTOur Board of Directors has determined that Mr. Schloss, the chairman of our Audit Committee and an independent director, qualifies as an “auditcommittee financial expert” as defined in Item 16A of Form 20-F.ITEM 16B. CODE OF ETHICSWe have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. We have never granted awaiver for non-compliance with the policies and procedures set forth in the code of ethics for any director, officer or employee of our company or anyof our subsidiaries.A copy of our Code of Business Conduct and Ethics is available on our website at www.gridsum.com.ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe following table sets forth the aggregate fees in connection with professional services rendered by PricewaterhouseCoopers Zhong Tian LLP,an independent registered public accounting firm, for the periods indicated. 98Table of Contents For the Year Ended December 31, 2016 2017 (in thousands) (in thousands) Audit Fees US$893 US$1,068 Audit-Related Fees US$576 US$283 Tax Fees — — All Other Fees — — Total US$1,469 US$1,351 Audit Fees means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for theaudit of our annual financial statements and assistance with and review of documents filed with the SEC.Audit-Related Fees means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditorsfor the assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and not reportedunder “Audit Fees.”Tax Fees means the aggregate fees billed in each of the fiscal years listed for the professional services rendered by our principal auditors for taxcompliance, tax advice and tax planning.All Other Fees. There were no other fees billed for the fiscal years ended December 31, 2016 and 2017, respectively.The policy of our Audit Committee is to pre-approve all audit and non-audit services provided by our independent registered public accountingfirms, including audit services, audit-related services, tax services and other services as described above, other than those for de minimis services whichare approved by the Audit Committee prior to the completion of the audit.ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESNot applicable.ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSNone. ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTOn June 28, 2018, we dismissed PricewaterhouseCoopers Zhong Tian LLP, or PwC China, and engaged Marcum Bernstein & Pinchuk LLP, orMarcumBP, as our independent registered public accounting firm in connection with the audit of our consolidated financial statements for the yearsended December 31, 2015, 2016 and 2017.The decision to authorize the dismissal of PwC China and the engagement of MarcumBP was recommended by our Audit Committee andapproved by our Board of Directors.Prior to the dismissal, PwC China informed us of certain issues it had identified in conducting its audit of our financial statements for the yearended December 31, 2017. Those issues related to certain revenue recognition, cash flow, cost, expense items, and their underlying documentation.PwC China also advised us that certain of these issues would materially impact our financial statements for the year ended December 31, 2016, andaccordingly, PwC China’s audit report for our financial statements for the year ended December 31, 2016 should no longer be relied upon. PwC Chinaalso advised that the issues identified raised questions related to its ability to rely upon the representations of management. PwC China has notdelivered an audit report with respect to our financial statements for the year ended December 31, 2017.In response to the issues raised by PwC China, our Audit Committee commenced an investigation of such issues with assistance from externallegal and accounting advisors. In October 2018, the Audit Committee concluded this investigation. We authorized PwC China to respond fully toinquiries from MarcumBP.PwC China’s report on our financial statements for the years ended December 31, 2015 and 2016 (which was subsequently withdrawn) containedno adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.During each of the years ended December 31, 2015 and 2016, and through June 28, 2018, there were no disagreements between us and PwCChina on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any of which, if not resolvedto PwC China’s satisfaction, would have caused PwC China to make reference to the subject matter of the disagreement in its audit report.During each of the years ended December 31, 2015 and 2016, and through June 28, 2018, there were no “reportable events,” as defined below,requiring disclosure by us pursuant to Item 16F(a)(1)(v) of Form 20-F, other than as disclosed in this Item 16F. As previously disclosed in our annualreport on Form 20-F for the year ended December 31, 2016, prior to our initial public offering in September 2016, we were a private company withlimited accounting personnel and other resources with which to address our internal controls. Our independent registered public accounting firm hasnot conducted an audit of our internal controls over financial reporting. 99Table of ContentsPwC China was unable to assess what additional audit work it would need to plan and perform in order to complete to its satisfaction an audit ofour 2017 financial statements. PwC China was unable to assess what additional audit work it would need to plan and perform in order be in a positionto reissue its audit opinion (or issue a new opinion) with respect to our 2016 financial statements. Because such matters were not resolved to thesatisfaction of PwC China as of the date of its dismissal, such matters constitute reportable events under Item 16F(a)(1)(v).In the course of auditing our consolidated financial statements for the year ended December 31, 2015, two material weaknesses in internal controlover financial reporting were identified, specifically: (1) a lack of sufficient financial reporting and accounting personnel with appropriate knowledgeof U.S. GAAP and the SEC reporting requirements to properly address complex accounting issues and to prepare and review our financial statementsand related disclosures in accordance with U.S. GAAP and SEC financial reporting requirements; and (2) our lack of sufficient written policies andprocedures for capturing certain services received before contracts were signed to timely record the related expenses in the financial statements. Thesesame two material weaknesses were identified during the course of auditing our consolidated financial statements for the year ended December 31,2016. These material weaknesses remain unresolved and require disclosure as a reportable event under Item 16F.For purposes of this Item 16F, the term “reportable events” means any of the following events:(A) The accountant’s having advised the registrant that the internal controls necessary for the registrant to develop reliable financial statementsdo not exist;(B) The accountant’s having advised the registrant that information has come to the accountant’s attention that has led it to no longer be able torely on management’s representations, or that has made it unwilling to be associated with the financial statements prepared by management;(C)(1) The accountant’s having advised the registrant of the need to expand significantly the scope of its audit, or that information has come tothe accountant’s attention during the time period covered by Item 16F(a)(1)(iv), that if further investigated may: (i) Materially impact the fairness orreliability of either: a previously issued audit report or the underlying financial statements; or the financial statements issued or to be issued coveringthe fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that may prevent itfrom rendering an unqualified audit report on those financial statements); or (ii) Cause it to be unwilling to rely on management’s representations or beassociated with the registrant’s financial statements; and (2) Due to the accountant’s resignation (due to audit scope limitations or otherwise) ordismissal, or for any other reason, the accountant did not so expand the scope of its audit or conduct such further investigation; or(D)(1) The accountant’s having advised the registrant that information has come to the accountant’s attention that it has concluded materiallyimpacts the fairness or reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statementsissued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (includinginformation that, unless resolved to the accountant’s satisfaction, would prevent it from rendering an unqualified audit report on those financialstatements); and (2) Due to the accountant’s resignation, dismissal or declination to stand for reelection, or for any other reason, the issue has not beenresolved to the accountant’s satisfaction prior to its resignation, dismissal or declination to stand for re-election.In accordance with PRC regulations, MarcumBP was required to cooperate with a qualified PRC local accounting firm to support its audit workin China. For these purposes, MarcumBP engaged Shandong Haoxin Certified Public Accountants Co., Ltd., or Shandong Haoxin, which has beenPCAOB registered since 2010. The process of auditing our financial statements also required the engagement of a specialist technology audit firm tohelp verify certain of our revenue generating activities. That firm conducted the work to test our information technology systems to support ourrevenues and certain expenses. However, the firm could not agree to share its work and cooperate with PCAOB due to PRC cybersecurity and dataprivacy regulations that would have prohibited certain information from being provided to PCAOB. As a result, MarcumBP could not use the firm’sreport and underlying work in its audit. Therefore, to complete the audit work, on January 6, 2019 we dismissed MarcumBP and engaged ShandongHaoxin as our independent registered public accounting firm to audit our consolidated financial statements for the years ended December 31, 2015,2016 and 2017. On January 6, 2019 we also retained MarcumBP to provide substantial assistance to Shandong Haoxin in the performance of its auditactivities.MarcumBP did not deliver a report on our consolidated financial statements for the years ended December 31, 2015, 2016 and 2017. Thedecision to authorize the dismissal of MarcumBP and the engagement of Shandong Haoxin, as our independent registered public accounting firm wasrecommended by our Audit Committee and approved by our Board of Directors.There were no disagreements between us and MarcumBP on any matter of accounting principles or practices, financial statement disclosure, orauditing scope or procedure, any of which, if not resolved to MarcumBP’s satisfaction, would have caused MarcumBP to make reference to the subjectmatter of the disagreement in its audit report.From June 28, 2018 through January 6, 2019, there were no reportable events requiring disclosure by us pursuant to Item 16F(a)(1)(v) of Form 20-F. 100Table of ContentsWe did not consult with MarcumBP or Shandong Haoxin, prior to their respective engagements, on either (1) the application of accountingprinciples to specific transaction or the type of audit opinion that might be rendered on our financial statements, and no written report was provided tous or oral advice provided that the new accountant concluded was an important factor considered by us in reaching a decision on the accounting,auditing or financial reporting issue, or (2) any matter that was the subject of a disagreement or reportable event described above.We provided PwC China and MarcumBP with a copy of the foregoing disclosure, and requested that PwC China and MarcumBP each furnish uswith a letter addressed to the SEC stating whether it agrees with the above statements that relate to them, and if not, stating the respects in which it doesnot agree. We have received the requested letters from PwC China and MarcumBP, copies of which are included as Exhibits 15.3 and 15.4 to thisannual report on Form 20-F.ITEM 16G. CORPORATE GOVERNANCEWe are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman Islands law. In addition,because our ADSs are listed on The Nasdaq Stock Market, we are subject to Nasdaq’s corporate governance requirements.Nasdaq Marketplace Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices in lieu of certain requirements ofRule 5600, provided that such foreign private issuer discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does notfollow and describes the home country practice followed in lieu of such requirement.We currently follow our home country practices that does not require a majority of our directors to be independent and that does not require us tosolicit proxy and hold meetings of our shareholders every year. In addition, our Chief Executive Officer, who is not an independent director, serves as amember of our nominating and corporate governance committee, and our independent directors do not hold regularly scheduled meetings at whichonly independent directors are present. As a result, we may have less independent oversight over the management that other companies that are listedon The Nasdaq Stock Market. Other than the practices described above, there are no significant differences between our corporate governance practicesand those followed by U.S. domestic companies under the rules of The Nasdaq Stock Market.ITEM 16H. MINE SAFETY DISCLOSURENot applicable. PART IIIITEM 17. FINANCIAL STATEMENTSWe have elected to provide financial statements pursuant to Item 18.ITEM 18. FINANCIAL STATEMENTSThe consolidated financial statements of Gridsum Holding Inc., its subsidiaries and its consolidated affiliated entities are included at the end ofthis annual report.ITEM 19. EXHIBITSEXHIBIT INDEX ExhibitNumber Exhibit Title Incorporated by Reference Form File No. ExhibitNo. Filing Date 1.1 Fifth Amended and Restated Memorandum and Articles of Association of theregistrant F-1 333-213348 3.3 August 26, 2016 2.1 Specimen Certificate for Class B ordinary shares F-1 333-213348 4.2 August 26, 2016 2.2 Deposit Agreement among the registrant, the depositary and all holders andbeneficial owners of the American Depositary Shares issued thereunder S-8 333-216798 4.3 March 17, 2017 101Table of Contents 2.3 Specimen American Depositary Receipt (included in Exhibit 2.2) 2.4 Second Amended and Restated Shareholders’ Agreement dated June 30, 2015 amongthe registrant and certain other parties F-1 333-213348 4.4 August 26, 2016 2.5 Registration Rights Agreement dated May 5, 2018 between the registrant and FutureXInnovation SPC 6-K 001-37871 99.3 May 7, 2018 4.1 Gridsum Holding Inc. Stock Option Plan 6-K 001-37871 99.1 March 17, 2017 4.2 Gridsum Holding Inc. Equity Incentive Plan 6-K 001-37871 99.2 March 17, 2017 4.3 Form of Indemnification Agreement between the registrant and members of its boardof directors and its executive officers F-1 333-213348 10.3 August 26, 2016 4.4 Form of Employment Agreement between the registrant and its executive officers F-1 333-213348 10.4 August 26, 2016 4.5 Exclusive Business Cooperation Agreement dated December 22, 2014 betweenDissector (Beijing) Technology Co., Ltd. and Gridsum Holding (Beijing) Co., Ltd. F-1 333-213348 10.5 August 26, 2016 4.6 Exclusive Option Agreements dated December 22, 2014 among Dissector (Beijing)Technology Co., Ltd., Gridsum Holding (Beijing) Co., Ltd. and the shareholders ofGridsum Holding (Beijing) Co., Ltd. F-1 333-213348 10.6 August 26, 2016 4.7 Shareholders’ Voting Rights Proxy Agreements dated December 22, 2014 amongDissector (Beijing) Technology Co., Ltd., Gridsum Holding (Beijing) Co., Ltd. andthe shareholders of Gridsum Holding (Beijing) Co., Ltd. F-1 333-213348 10.7 August 26, 2016 4.8 Equity Pledge Agreements dated December 22, 2014 among Dissector (Beijing)Technology Co., Ltd., Gridsum Holding (Beijing) Co., Ltd. and the shareholders ofGridsum Holding (Beijing) Co., Ltd. F-1 333-213348 10.8 August 26, 2016 4.9 English Translation of the Cooperation Agreement, dated March 16, 2012, by andbetween Beijing Gridsum Technology Co., Ltd. and the State Information Center ofChina F-1 333-213348 10.9 August 26, 2016 4.10 English Translation of the Framework Agreement, dated June 25, 2015, by and amongBeijing Gridsum Technology Co., Ltd., Guoxinjunhe (Beijing) Technology Co., Ltd.and Beijing Guoxin Xinchuang Investment Co., Ltd. F-1 333-213348 10.10 August 26, 2016 4.11 English Translation of the Collaboration Agreement, dated June 25, 2015, by andamong Beijing Gridsum Technology Co., Ltd., Guoxinjunhe (Beijing) TechnologyCo., Ltd. and Beijing Guoxin Xinchuang Investment Co., Ltd. F-1 333-213348 10.11 August 26, 2016 102Table of Contents 4.12 US$40 Million Convertible Note issued by the registrant, dated May 5, 2018 6-K 001-37871 99.2 May 7, 2018 4.13* Convertible Note Purchase Agreement dated April 30, 2018 by and between GridsumHolding Inc. and FutureX Innovation SPC (on behalf of and for the account of NewTechnology Fund II SP as one of its segregated portfolios) 8.1* List of significant subsidiaries and consolidated affiliated entities 12.1* CEO Certification required by Rule 13a-14(a) 12.2* Co-CFO Certification required by Rule 13a-14(a) 12.3* Co-CFO Certification required by Rule 13a-14(a) 13.1** CEO Certification required by Rule 13a-14(b) 13.2** Co-CFO Certification required by Rule 13a-14(b) 13.3** Co-CFO Certification required by Rule 13a-14(b) 15.1* Consent of Independent Registered Public Accounting Firm 15.2* Consent of Merits & Tree Law Offices 15.3* Letter dated January 7, 2019 from PricewaterhouseCoopers Zhong Tian LLP, pertainingto Item 16F 15.4* Letter dated January 7, 2019 from Marcum Bernstein & Pinchuk LLP, pertaining toItem 16F 101.INS* XBRL Instance Document. 101.SCH* XBRL Taxonomy Extension Schema Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. *Filed herewith**Furnished herewith 103Table of ContentsSIGNATURESThe registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized theundersigned to sign this annual report on its behalf. Gridsum Holding Inc.By: /s/ Guosheng QiName: Guosheng QiTitle: Chief Executive Officer and ChairmanDate: January 7, 2019Table of ContentsGridsum Holding Inc.Index to Consolidated Financial Statements Page Audited Consolidated Financial Statements Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2015, 2016 and 2017 F-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2015, 2016 and 2017 F-5 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2015, 2016 and 2017 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2016 and 2017 F-7 Notes to the Consolidated Financial Statements for the Years Ended December 31, 2015, 2016 and 2017 F-8 F-1Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of Gridsum Holding Inc.:We have audited the accompanying consolidated balance sheets of Gridsum Holding Inc. and its subsidiaries (the “Company”) as of December 31,2017, December 31, 2016 and December 31, 2015, and the related consolidated statements of operations and comprehensive loss, shareholders’ equityand cash flows for the years ended December 31, 2017, December 31, 2016 and December 31, 2015. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gridsum HoldingInc. and its subsidiaries at December 31, 2017, December 31, 2016 and December 31, 2015, and the consolidated results of its operations and its cashflows for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, in conformity with accounting principles generallyaccepted in the United States of America./s/ Shandong Haoxin Certified Public Accountants Co., Ltd.Shandong Haoxin Certified Public Accountants Co., Ltd.Weifang, the People’s Republic of ChinaJanuary 7, 2019 F-2Table of ContentsGridsum Holding Inc.CONSOLIDATED BALANCE SHEETSAs of December 31, 2015, 2016 and 2017(In thousands, except for share and per share data) As of December 31, 2015 2016 2017 2017 RMB RMB RMB US$ (Restated) (Restated) ASSETS Current assets: Cash and cash equivalents 198,523 520,452 166,690 25,620 Time deposit — 69,430 — — Restricted cash — 4,002 245,320 37,705 Notes Receivable — — 6,000 922 Accounts receivable, net 273,536 355,880 599,280 92,108 Prepayments and other current assets 105,387 189,740 306,092 47,045 Total current assets 577,446 1,139,504 1,323,382 203,400 Non-current assets: Property and equipment, net 35,840 52,618 50,873 7,819 Intangible assets, net 402 5,313 9,426 1,449 Goodwill — — 537 83 Deferred tax assets — 7,118 18,392 2,827 Other non-current assets 4,558 3,947 487 75 Total non-current assets 40,800 68,996 79,715 12,253 Total assets 618,246 1,208,500 1,403,097 215,653 LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY Current liabilities: Short-term bank loans — 65,000 266,019 40,886 Accounts payable 99,559 49,564 208,152 31,994 Salary and welfare payables 33,539 42,820 60,696 9,329 Taxes payable 26,112 66,851 103,331 15,882 Deferred revenues 18,368 21,057 13,391 2,058 Advances from customers 112,782 109,381 116,847 17,959 Accrued expenses and other current liabilities 67,292 76,578 90,721 13,944 Total current liabilities 357,652 431,251 859,157 132,052 Non-current liabilities: Deferred tax liabilities — — 249 38 Total non-current liabilities — — 249 38 Total liabilities 357,652 431,251 859,406 132,090 F-3Table of ContentsGridsum Holding Inc.CONSOLIDATED BALANCE SHEETSAs of December 31, 2015, 2016 and 2017(In thousands, except for share and per share data) As of December 31, 2015 2016 2017 2017 RMB(Restated) RMB(Restated) RMB US$ Commitments and contingencies Mezzanine equity Series A convertible preferred shares (US$0.001 par value; 3,125,000 shares authorized, issued andoutstanding as of December 31, 2015; aggregate liquidation value of nil as of December 31,2015; none issued and outstanding as of December 31, 2016 and 2017) 40,181 — — — Series A-1 convertible preferred shares (US$0.001 par value; 1,302,084 shares authorized, issuedand outstanding as of December 31, 2015; aggregate liquidation value of nil as of December 31,2015; none issued and outstanding as of December 31, 2016 and 2017) 28,492 — — — Series B convertible preferred shares (US$0.001 par value; 2,962,239 shares authorized, issued andoutstanding as of December 31, 2015; aggregate liquidation value of nil as of December 31,2015; none issued and outstanding as of December 31, 2016 and 2017) 126,641 — — — Series C convertible preferred shares (US$0.001 par value; 4,640,843 shares authorized, issued andoutstanding as of December 31, 2015; aggregate liquidation value of nil as of December 31,2015; none issued and outstanding as of December 31, 2016 and 2017) 280,704 — — — Total mezzanine equity 476,018 — — — Shareholders’ equity: Ordinary shares—Class A (US$0.001 par value; 20,000,000 shares authorized, 4,543,461 sharesissued and outstanding as of December 31, 2016 and 2017) 31 31 31 5 Ordinary shares—Class B (US$0.001 par value; 180,000,000 shares authorized; 25,191,705 and26,280,367 shares issued and outstanding as of December 31, 2016 and 2017, respectively) 37 168 176 27 Additional paid-in capital — 1,090,991 1,107,201 170,174 Statutory reserve — 6,662 6,730 1,034 Accumulated other comprehensive loss (19,010) (10,087) (30,539) (4,694) Accumulated deficit (196,866) (310,847) (549,911) (84,520) Total Gridsum’s shareholders’ equity (215,808) 776,918 533,688 82,026 Non-controlling interests 384 331 10,003 1,537 Total shareholders’ equity (215,424) 777,249 543,691 83,563 Total liabilities, mezzanine equity and shareholders’ equity 618,246 1,208,500 1,403,097 215,653 The accompanying notes are an integral part of these consolidated financial statements. F-4Table of ContentsGridsum Holding Inc.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSFor the Years Ended December 31, 2015, 2016 and 2017(In thousands, except for share and per share data) For the Year EndedDecember 31, 2015 2016 2017 2017 RMB RMB RMB US$ (Restated) (Restated) Revenues: Enterprise 208,385 311,106 377,013 57,946 e-Government and other 26,904 60,772 102,216 15,710 Less: Business tax and surcharges (3,092) (8,055) (9,696) (1,490) Net revenues 232,197 363,823 469,533 72,166 Cost of revenues(1) (33,392) (55,707) (94,640) (14,546) Gross profit 198,805 308,116 374,893 57,620 Operating expenses(1): Sales and marketing expenses (88,364) (139,781) (192,413) (29,573) Research and development expenses (97,553) (160,387) (257,921) (39,642) General and administrative expenses (60,820) (88,108) (143,743) (22,093) Total operating expenses (246,737) (388,276) (594,077) (91,308) Losses from operations (47,932) (80,160) (219,184) (33,688) Other income/(expense): Foreign currency exchange gain/(loss) 1,339 (1,600) (8,552) (1,314) Interest income/(expense), net 80 (614) (5,430) (835) Other income/(expense), net 111 (1,452) (1,683) (259) Loss before income tax (46,402) (83,826) (234,849) (36,096) Income tax expense (15,371) (14,801) (4,275) (657) Net loss (61,773) (98,627) (239,124) (36,753) Less: Net loss attributable to non-controlling interests (16) (53) (128) (20) Net loss attributable to Gridsum Holding Inc. (61,757) (98,574) (238,996) (36,733) Accretion to preferred shares redemption value (19,707) (16,725) — — Cumulative dividend to preferred shareholders (16,642) (12,990) — — Net loss attributable to Gridsum’s ordinary shareholders (98,106) (128,289) (238,996) (36,733) Net loss (61,773) (98,627) (239,124) (36,753) Foreign currency translation adjustment, net of tax (19,330) 8,923 (20,452) (3,143) Comprehensive loss (81,103) (89,704) (259,576) (39,896) Less: Comprehensive loss attributable to non-controlling interests (16) (53) (128) (20) Comprehensive loss attributable to Gridsum Holding Inc. (81,087) (89,651) (259,448) (39,876) Net loss per share attributable to Gridsum’s ordinary shareholders, basic and diluted (9.81) (8.52) (7.90) (1.21) Weighted average shares outstanding used in computing net loss per share attributable toGridsum’s ordinary shareholders 10,000,000 15,054,865 30,243,250 30,243,250 Note:(1) Share-based compensation expenses were allocated in cost of revenues and operating expenses as follows: For the Year EndedDecember 31, 2015 2016 2017 2017 RMB RMB RMB US$ (Restated) (Restated) Cost of revenues 335 319 501 77 Sales and marketing expenses 1,651 2,252 4,739 728 Research and development expenses 3,347 3,955 8,641 1,328 General and administrative expenses 3,473 4,104 9,046 1,390 The accompanying notes are an integral part of these consolidated financial statements. F-5Table of ContentsGridsum Holding Inc.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT)/EQUITYFor the Years Ended December 31, 2015, 2016 and 2017(In thousands, except for share and per share data) Additional AccumulatedOther Total Ordinary Shares Paid-in Statutory Comprehensive Accumulated Non-controlling Shareholders’ Shares Amount Capital reserve Income /(Loss) Deficit Interests Equity/(Deficit) RMB RMB RMB RMB RMB RMB RMB Balances as of January 1, 2015 10,000,000 68 2,436 — 320 (126,644) — (123,820) Preferred shares accretion — — (11,242) — — (8,465) — (19,707) Share-based compensationexpenses — — 8,806 — — — — 8,806 Net loss — — — — — (61,757) (16) (61,773) Capital injection in a subsidiaryby non-controlling interestsshareholder — — — — — — 400 400 Foreign currency translationadjustments, net of tax — — — — (19,330) — — (19,330) Balances as of December 31,2015 (Restated) 10,000,000 68 — — (19,010) (196,866) 384 (215,424) Preferred shares accretion — — (7,980) — — (8,745) — (16,725) Share-based compensationexpenses — — 10,630 — — — — 10,630 Appropriation of statutoryreserves — — — 6,662 — (6,662) — — Net loss — — — — — (98,574) (53) (98,627) Issuance of ordinary shares uponInitial public offering (“IPO”) 7,705,000 51 614,981 — — — — 615,032 Initial public offering costs — — (33,887) — — — — (33,887) Conversion of preferred shares toClass B ordinary shares 12,030,166 80 507,247 — — — — 507,327 Foreign currency translationadjustments, net of tax — — — — 8,923 — — 8,923 Balances as of December 31,2016 (Restated) 29,735,166 199 1,090,991 6,662 (10,087) (310,847) 331 777,249 Share-based compensationexpenses — — 22,927 — — — — 22,927 Appropriation of statutoryreserves — — — 68 — (68) — — Net loss — — — — — (238,996) (128) (239,124) Issuance of ordinary shares uponexercise of share options andrestricted stock units 1,088,662 8 3,083 — — — — 3,091 Consolidation ofHainatianchuang — — (9,800) — — — 9,800 — Foreign currency translationadjustments, net of tax — — — — (20,452) — — (20,452) Balances as of December 31,2017 30,823,828 207 1,107,201 6,730 (30,539) (549,911) 10,003 543,691 The accompanying notes are an integral part of these consolidated financial statements. F-6Table of ContentsGridsum Holding Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands, except for share and per share data) For the Year EndedDecember 31, 2015 2016 2017 2017 RMB(Restated) RMB(Restated) RMB US$ Cash flows from operating activities: Net Loss (61,773) (98,627) (239,124) (36,753) Adjustments to reconcile net loss to net cash used in operating activities: Provision for allowance for doubtful accounts 1,172 19,695 24,490 3,764 Share-based compensation expenses 8,806 10,630 22,927 3,523 Depreciation and amortization expenses 13,100 23,893 31,474 4,837 Deferred tax expenses (7,118) (11,296) (1,736) Foreign currency exchange (gain)/loss, net (1,339) 1,600 20,452 3,143 Loss on disposal of equipment and leasehold improvement 310 786 138 21 Changes in operating assets and liabilities: Accounts receivable (183,792) (102,039) (267,554) (41,122) Notes receivable — — (6,000) (922) Prepayments and other current assets (54,809) (88,546) (102,361) (15,733) Accounts payable 80,996 (49,996) 158,588 24,375 Amounts due to related parties (313) — — — Salary and welfare payable 15,405 9,281 18,570 2,854 Taxes payable 24,849 40,739 36,473 5,606 Deferred revenues (7) 2,689 (7,666) (1,178) Advances from customers 48,029 (3,401) 7,465 1,147 Accrued expenses and other current liabilities 11,989 5,237 6,720 1,033 Net cash used in operating activities (97,377) (235,177) (306,704) (47,141) Cash flows from investing activities: Purchase of property, equipment and software (23,471) (45,980) (22,951) (3,528) Proceeds from disposal of property, equipment and software 17 12 31 5 Transfer to time deposit — (66,418) — — Transfer to restricted cash — (4,002) (241,318) (37,090) Maturity of time deposit — — 67,574 10,386 Acquisition of subsidiaries, net of cash acquired — — (1,857) (285) Net cash used in investing activities (23,454) (116,388) (198,521) (30,512) Cash flows from financing activities: Proceeds from issuance of Series C preferred shares 262,561 — — — Payment of financing costs in connection with the issuance of Series C preferred shares (1,061) — — — Proceeds of bank loans — 65,000 266,019 40,886 Repayment of bank loan (4,000) — (65,000) (9,990) Proceeds from issuance of ordinary shares — 615,031 3,091 475 Payment for IPO costs — (29,892) (3,362) (517) Capital injection from non-controlling interests — 400 (9,800) (1,506) Net cash provided by financing activities 257,500 650,539 190,948 29,348 Effect of exchange rate changes on cash and cash equivalents 24 22,955 (39,485) (6,067) Net increase/(decrease) in cash and cash equivalents 136,693 321,929 (353,762) (54,372) Cash and cash equivalents at the beginning of the year 61,830 198,523 520,452 79,992 Cash and cash equivalents at the end of the year 198,523 520,452 166,690 25,620 Supplemental disclosures of cash flow information: Cash paid for income taxes 476 182 1,820 280 Cash paid for interest — 707 5,614 863 Supplemental schedule of non-cash investing activities: Fixed asset purchases financed by accrued expenses and other current liabilities 3,176 2,144 6,033 927 Fixed asset purchases transferred from other non-current assets — 611 3,460 532 Supplemental schedule of non-cash financing activities: Accretions to preferred shares redemption value 19,707 16,725 — — The accompanying notes are an integral part of these consolidated financial statements F-7Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except for share and per share data) 1.Organization and Principal Activities (a)Principal activitiesGridsum Holding Inc. (“Company”), through its consolidated subsidiaries and variable interest entities (“VIEs”) (collectively referred to as the“Group”), provides sophisticated data analysis software for multinational and domestic enterprises and government agencies in the People’s Republicof China (“PRC”).The accompanying consolidated financial statements include the financial statements of the Company, its subsidiaries, VIEs and VIEsubsidiaries. As of December 31, 2017, the Company’s operating subsidiaries, operating VIE and operating VIE subsidiaries were as follows: Operating Subsidiaries Equityinterests held Place and Date of IncorporationGridsum Holding (China) Limited 100% Hong Kong, July 2014Dissector (Beijing) Technology Co., Ltd. 100% PRC, October 2014 Operating VIE Economicinterests held Place and Date of IncorporationGridsum Holding (Beijing) Co., Ltd 100% PRC, August 2014 Operating VIE Subsidiaries Economicinterests held Place and Date of IncorporationBeijing Gridsum Technology Co., Ltd. 100% PRC, December 2005Beijing Moment Everlasting Ad Co., Ltd. 100% PRC, January 2011Guoxinjunhe (Beijing) Technology Co., Ltd. 100% PRC, April 2012Beijing Yunyang Ad Co., Ltd. 100% PRC, March 2013Beijing Guoxinwangyan Technology Co., Ltd. 80% PRC, August 2015Beijing Gridsum Yizhun Technology Co., Ltd. 100% PRC, February 2016Beijing Zhixunyilong Software Co., Ltd. 100% PRC, May 2017Beijing Gridsum Wang’an Technology Co., Ltd. 100% PRC, June 2017Beijing Hainatianchuang Technology Development Co., Ltd. 51% PRC, August 2017 (b)ReorganizationThe Company was incorporated in the Cayman Islands on July 21, 2014.The Group began operations in December 2005 through Beijing Gridsum Technology Co., Ltd (“Beijing Gridsum”), a PRC domestic companyestablished by our founders. Beijing Gridsum established two wholly owned subsidiaries, Beijing Moment Everlasting Ad Co., Ltd. (“BeijingMoment”) and Guoxinjunhe (Beijing) Technology Co., Ltd. (“Guoxinjunhe”), in January 2011 and April 2012, respectively. Beijing Momentestablished a wholly owned subsidiary, Beijing Yunyang Ad Co., Ltd. (“Beijing Yunyang”) in March 2013.From July to December 2014, the Group undertook a reorganization (“2014 Restructuring”) and established the Company under the laws of theCayman Islands; the Company established a wholly owned Hong Kong subsidiary, Gridsum Holding (China) Limited (“Gridsum HK”), which in turnestablished a wholly owned subsidiary in China, Dissector (Beijing) Technology Co. Ltd. (“WFOE”). Also as part of this 2014 Restructuring, GridsumHolding (Beijing) Co., Ltd. (“Gridsum PRC Holding”) was established to acquire full ownership of Beijing Gridsum, Beijing Moment andGuoxinjunhe from Beijing Gridsum.On December 22, 2014, the WFOE entered into a series of contractual agreements (“VIE agreements”) with Gridsum PRC Holding and theshareholders of Gridsum PRC Holding, as a result of which Gridsum PRC Holding became a VIE of which the Company is the primary beneficiary, andthe Company consolidates the financial results of Gridsum PRC Holding and its subsidiaries. Prior to the 2014 Restructuring, the Group was controlledby a predecessor Cayman Islands entity, which through another restructuring in 2010 (“2010 Restructuring”) controlled the Group entities in Chinaaccording to a set of contractual arrangements containing terms and conditions identical to those of the VIE agreements. The 2010 Restructuring wasundertaken in order to facilitate an international financing completed in September 2010 as well as to comply with relevant government regulationsand policies in the PRC. The VIE agreements have superseded the 2010 contractual arrangements. Prior to the 2010 Restructuring, the Group’sfounders and management held 100% of the beneficial ownership interest in Beijing Gridsum. In the 2010 Restructuring, the predecessor CaymanIslands entity was established with the same beneficial ownership structure as Beijing Gridsum. Therefore, the Group’s founders and management held100% of the beneficial ownership interests in, and maintained control of, the Group immediately before and after the 2010 restructuring. F-8Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 1.Organization and Principal Activities (continued) In the 2014 Restructuring, the Company was established with the same beneficial ownership structure as the predecessor Cayman Islands entity.Therefore, the Group’s founders, management and the then outstanding Preferred Shareholders held 100% of the beneficial ownership interests in, andmaintained control of, the Group immediately before and after the 2014 Restructuring.The entities included in the 2010 Restructuring and 2014 Restructuring were under common control and the two reorganizations have beenaccounted for in a manner akin to a pooling of interest as if the Company, through its wholly owned subsidiaries, had been in existence and been theprimary beneficiary of the VIEs throughout the periods presented in the consolidated financial statements. (c)Contracts with Variable Interest EntitlesTo comply with applicable PRC laws and regulations, the Group conducts operations in China principally through Beijing Gridsum, BeijingMoment, Guoxinjunhe, Beijing Yunyang, Beijing Guoxinwangyan Technology Co., Ltd. and Beijing Gridsum Yizhun Technology Co., Ltd. TheWFOE has entered into a series of contractual arrangements with the parent of these companies, Gridsum PRC Holding, and the shareholders ofGridsum PRC Holding. These contractual arrangements allow the Company to exercise effective control over Gridsum PRC Holding and to receivesubstantially all of the economic benefits of Gridsum PRC Holding. As a result of these contractual arrangements, the Company is the primarybeneficiary of Gridsum PRC Holding, and the Company treats it as a VIE in accordance with accounting principles generally accepted in the UnitedStates of America (“U.S. GAAP”). The following is a summary of the currently effective contractual arrangements among the WFOE, Gridsum PRCHolding and the shareholders of Gridsum PRC Holding:Exclusive Business Cooperation Agreement. Under the Exclusive Business Cooperation Agreement dated December 22, 2014, between theWFOE and Gridsum PRC Holding, Gridsum PRC Holding has appointed the WFOE as its exclusive provider of technical support, business support andrelated consulting services and has agreed to accept all consultations and services provided by the WFOE and, without prior written consent of theWFOE, not to accept the same or any similar consultations and/or services provided by, or establish similar cooperation relationships with, any thirdparty. In consideration of the services provided by the WFOE, Gridsum PRC Holding has agreed to pay the WFOE, on a quarterly basis, service feesequal to 90% of Gridsum PRC Holding’s net income (which equals gross income less mutually agreed costs). The parties can reasonably adjust thecalculation of such service fees. The WFOE shall have exclusive and proprietary rights and interests in all rights, ownership, interests and intellectualproperty owned and used by the WFOE during the performance of the agreement. The term of the agreement is 10 years and may be extended ifconfirmed in writing by the WFOE prior to expiration (and Gridsum PRC Holding shall unconditionally accept such extension). Gridsum PRC Holdingshall not terminate the agreement prior to its expiration, unless the WFOE commits gross negligence or fraudulent act against Gridsum PRC Holding,whereas the WFOE may terminate the agreement upon giving 30 days’ prior written notice to Gridsum PRC Holding at any time.Exclusive Option Agreements. Under the Exclusive Option Agreements dated December 22, 2014, between the WFOE, Gridsum PRC Holdingand the shareholders of Gridsum PRC Holding, the shareholders of Gridsum PRC Holding granted to the WFOE an irrevocable and exclusive right topurchase, or designate other person(s) to purchase, to the extent permitted by PRC laws, at any time all or part of such shareholders’ equity interests inGridsum PRC Holding. The purchase price shall be equal to the registered capital of Gridsum PRC Holding multiplied by the portion of equityinterests to be purchased and RMB10.00, or, if there is any mandatory provision regarding the purchase price under PRC laws, the lowest pricepermitted by PRC laws. Without prior written consent of the WFOE, Gridsum PRC Holding shall not: (i) supplement, change or amend its articles ofassociation, increase or decrease its registered capital or change its capital structure in any manner, (ii) sell, transfer, mortgage or dispose of or createsecurity interest on, its assets, business or legal right to collect interests, (iii) create, succeed to, guarantee or permit any debt, except for debts arising inthe course of the ordinary or daily business operation, (iv) enter into any material contract (i.e., any contract with a value exceeding RMB1,000,000),or (v) provide loan or credit to Gridsum PRC Holding’s shareholders in any form; and the shareholders of Gridsum PRC Holding shall not sell, transfer,mortgage or dispose of or create security interest on, such shareholders’ legal or beneficial interest in the equity interests in Gridsum PRC Holding. Theterm of these agreements is 10 years and may be renewed at the WFOE’s election.Shareholders’ Voting Rights Proxy Agreements. Under the Shareholders’ Voting Rights Proxy Agreements dated December 22, 2014, betweenthe WFOE, Gridsum PRC Holding and the shareholders of Gridsum PRC Holding, the shareholders of Gridsum PRC Holding irrevocably authorize theWFOE or its designee to act on their behalf as their exclusive agent and attorney with respect to all matters concerning their shareholder rights,including, without limitation, to propose, convene and attend shareholder meetings as the proxy of such shareholders and to exercise all of suchshareholder’s voting rights provided under PRC laws or the articles of association of Gridsum PRC Holding. Each agreement will remain effective untilthe equity interest of the respective shareholder in Gridsum PRC Holding is transferred to the WFOE. F-9Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 1.Organization and Principal Activities (continued) Equity Pledge Agreements. Under the Equity Pledge Agreements dated December 22, 2014, between the WFOE, Gridsum PRC Holding and theshareholders of Gridsum PRC Holding, the shareholders of Gridsum PRC Holding pledge all of their equity interests in Gridsum PRC Holding to theWFOE as security for the performance of the obligations of Gridsum PRC Holding and its shareholders under the Exclusive Business CooperationAgreement, the Exclusive Option Agreements and the Shareholders’ Voting Rights Proxy Agreements. In the event of breach of any secured obligationby Gridsum PRC Holding or the respective shareholder, the WFOE is entitled to all remedial rights and powers afforded under PRC laws, including toreceive proceeds from auctions or sale-offs of the pledged equity. No dividend or distribution can be paid or made to the shareholders in respect of thepledged equity unless consented by the WFOE, and the dividends or distributions received by the shareholders shall first be applied to satisfy thesecured obligations. The pledges will be released upon the full and complete performance of the secured obligations and the full payment of losses andfees resulted from a breach of those agreements by Gridsum PRC Holding or its shareholders. The equity pledges have been registered with theregistration authorities of industry and commerce in accordance with PRC laws.In addition to the contractual agreements described above, the Company has entered into an Exclusive Rights Arrangement with the predecessorCayman Islands entity on December 22, 2014. Under this agreement, the Company exercises effective control over the predecessor Cayman Islandsentity and receives substantially all of the economic benefits of the predecessor Cayman Islands entity. As a result of this agreement, the Company isthe primary beneficiary of the predecessor Cayman Islands entity, and the Company treats it as a VIE. The Company consolidates the financial resultsof the predecessor Cayman Islands entity and its subsidiaries in the Company’s consolidated financial statements. The following is a summary of theExclusive Rights Arrangement among the Company, the predecessor Cayman Islands entity and the shareholders of the predecessor Cayman Islandsentity that was in effect until termination on August 10, 2015 in connection with the completion of the 2014 Restructuring.All the shareholders agreed to irrevocably assign and entrust to the Company any and all of their respective voting rights and dividends rightswith respect to any and all of the equity securities they held in the predecessor Cayman Islands entity. All the actions associated with any shareholder’svoting rights conducted by the Company shall be deemed as such shareholders’ own actions, and all the shareholders’ resolutions executed by theCompany shall be deemed to be executed by all of the shareholders themselves. Each shareholder agreed to refrain from exercising any of the votingrights associated with its shareholding in the predecessor Cayman Islands entity, all of which have been authorized and entrusted to the Company. If adividend or other distribution is declared, paid or set aside, each shareholder shall immediately transfer to the Company any and all of such dividend ordistribution. No dividend or distribution, whether in cash, in property or in any other equity securities of the predecessor Cayman Islands entity, shallbe declared, paid, set aside or made without the written consent of the Company.Risks in relation to the VIE structureIn the opinion of the Company’s management, the contractual arrangements discussed above have resulted in the Company and the WFOEhaving the power to direct activities that most significantly impact the VIEs and VIE subsidiaries, including appointing key management, setting upoperating policies, exerting financial controls and transferring profit or assets out of the VIEs and VIE subsidiaries at its discretion. The Company andthe WFOE believe they have the right to receive all the benefits and assets of the VIEs and VIE subsidiaries, except for registered capital of the VIEsand VIE subsidiaries totaling RMB124,000, RMB124,000 and RMB146,000 as of December 31, 2015, 2016 and 2017, respectively. As the VIEs andVIE subsidiaries organized in the PRC were established as limited liability companies under PRC law, their creditors do not have recourse to thegeneral credit of the WFOE for the liabilities of these VIEs and VIE subsidiaries, and the WFOE does not have the obligation to assume the liabilities ofthese VIEs and VIE subsidiaries.The Company believes that its contractual arrangements with the VIEs are in compliance with PRC law and are legally enforceable. In addition,the shareholders of Gridsum PRC Holding are also beneficial owners of the Company and therefore have no current interest in seeking to act contraryto the contractual arrangements. However, uncertainties in the PRC legal system could limit the Group’s ability to enforce the VIE agreements. F-10Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 1.Organization and Principal Activities (continued) On January 19, 2015, the Ministry of Commerce (“MOFCOM”), released for public comment a proposed PRC law, the Draft FIE Law, that appearsto include VIEs within the scope of entities that could be considered to be foreign invested enterprises, or FIEs, that would be subject to restrictionsunder existing PRC law on foreign investment in certain categories of industry. Specifically, the Draft FIE Law introduces the concept of “actualcontrol” for determining whether an entity is considered to be an FIE. In addition to control through direct or indirect ownership or equity, the DraftFIE Law includes control through contractual arrangements within the definition of “actual control.” If the Draft FIE Law is passed by the People’sCongress of the PRC and goes into effect in its current form, these provisions regarding control through contractual arrangements could be construed toreach our VIE arrangements, and as a result our PRC-organized VIEs could become explicitly subject to the current restrictions on foreign investmentin certain categories of industry. The Draft FIE Law includes provisions that would exempt from the definition of foreign invested enterprises entitieswhere the ultimate controlling shareholders are either entities organized under PRC law or individuals who are PRC citizens. The Draft FIE Law issilent as to what type of enforcement action might be taken against existing VIEs, such as Gridsum PRC Holding, that operate in restricted orprohibited industries and are not controlled by entities organized under PRC law or individuals who are PRC citizens. If the restrictions andprohibitions on foreign invested enterprises included in the Draft FIE Law are enacted and enforced in their current form, our ability to use our VIEarrangements and our ability to conduct business through them could be severely limited.The Company’s ability to control Gridsum PRC Holding and its subsidiaries also depends on the WFOE’s rights, under the Shareholders’ VotingRights Proxy Agreements, to vote on all matters requiring shareholder approval. As noted above, the Company believes these Shareholders’ VotingRights Proxy Agreements are legally enforceable, but yet they may not be as effective as direct equity ownership. In addition, if the corporate structureof the Group or the contractual arrangements between the WFOE, Gridsum PRC Holding and their respective shareholders were found to be in violationof any existing PRC laws and regulations, the relevant PRC regulatory authorities could: • revoke the Group’s business and operating licenses; • require the Group to discontinue or restrict its operations; • restrict the Group’s right to collect revenues; • block Group websites; • require the Group to restructure the operations, re-apply for the necessary licenses or relocate its businesses, staff and assets; • impose additional conditions or requirements with which the Group may not be able to comply; or • take other regulatory or enforcement actions against the Group that could be harmful to the Group’s business.The imposition of any of these restrictions or actions may result in a material adverse effect on the Group’s ability to conduct its business. Inaddition, if the imposition of any of these restrictions causes the Company to lose the right to direct the activities of the Gridsum PRC Holding or theright to receive its economic benefits, the Company would no longer be able to consolidate the financial statements of Gridsum PRC Holding and itssubsidiaries. The Company believes the likelihood of losing the benefits of the Group’s current ownership structure and contractual arrangements withGridsum PRC Holding is remote based on the current facts and circumstances.There is no VIE in which the Group has a variable interest but is not the primary beneficiary. Currently there is no contractual arrangement thatcould require the Group to provide additional financial support to the VIEs. F-11Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 1.Organization and Principal Activities (continued) The consolidated financial information of the VIEs and VIE subsidiaries, including the inter-group transactions with other entities in the Group,has been included in the accompanying consolidated financial statements of the Group as follows: As of December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Total assets 584,080 672,499 1,054,865 Total liabilities 580,242 570,740 996,074 For the year ended December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Net revenues 290,403 533,681 558,393 Net income 24,060 105,597 160,550 For the year ended December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Net cash provided by/(used in) operating activities 142,418 (109,839) (148,018) Net cash used in investing activities (23,454) (45,968) (22,920) Net cash (used in)/provided by financing activities (4,000) 62,151 201,019 In accordance with various contractual agreements, the Company has the power to direct the activities of the VIEs and can have assets transferredout of the VIEs. Therefore, the Company considers that there are no assets in the consolidated VIEs that can be used only to settle obligations of theconsolidated VIEs, except for registered capital of the VIEs and VIE subsidiaries totaling RMB124,000, RMB124,000 and RMB146,000 as ofDecember 31, 2015, 2016 and 2017, respectively. As the consolidated VIEs are incorporated as limited liability companies under the Company Law ofthe People’s Republic of China, creditors do not have recourse to the general credit of the Company for the liabilities of the consolidated VIEs.Liquidity The Group has been incurring recurring losses from operations since inception. Accumulated losses from operations were RMB196,866,RMB310,847, and RMB549,911 as of December 31, 2015, 2016 and 2017, respectively. The net cash used in operating activities was RMB97,377,RMB235,177 and RMB306,704 for the years ended December 31, 2015, 2016 and 2017, respectively. F-12Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 1.Organization and Principal Activities (continued) The Group’s ability to fund operations is based on its ability to generate cash, its ability to attract investors and its ability to borrow funds onreasonable economic terms. Historically, the Group has relied principally on both operational sources of cash and non-operational sources of financingfrom investors to fund its operations and business development. The Group’s ability to continue as a going concern is dependent on management’sability to successfully execute its business plan, which includes increasing revenues while controlling operating expenses, as well as, generatingoperational cash flows and continuing to gain support from outside sources of financing. The Group has been continuously receiving financingsupport from outside investors. The Group completed its initial public offering in September 2016 (see Note 12) and completed a USD$40 millionconvertible note issuance on May 5, 2018 (see Note 18). Moreover, the Company can adjust the pace of its expansion and control Group operatingexpenses. Based on the above considerations, the Company’s consolidated financial statements have been prepared on a going concern basis, whichcontemplates the realization of assets and liquidation of liabilities in the normal course of business. See Note 18 for more discussion of the Group’sliquidity. (d)Initial Public OfferingThe Company completed its initial public offering (“IPO”) on September 23, 2016 on The Nasdaq Stock Market and the underwriterssubsequently exercised their over-allotment option on October 3, 2016. The Company issued and sold a total of 7,705,000 American Depositary Shares(“ADSs”) pursuant to these transactions. Each ADS represents one Class B ordinary share of the Company. The net proceeds received by the Company,after deducting commissions and offering expenses, amounted to approximately US$87.1 million. Upon the completion of the IPO, all of theCompany’s outstanding preferred shares were converted into Class B ordinary shares immediately as of the same date. 2.Principal Accounting Policies (a)Basis of PresentationThe Company’s consolidated financial statements have been prepared in accordance with U.S. GAAP. Significant accounting policies followedby the Company in the preparation of the accompanying consolidated financial statements are summarized below.Restatement of previously issued financial statementsThe Group’s consolidated financial statements for the years ended December 31, 2015 and 2016 have been restated in accordance with ASC 250,Accounting Changes and Error Corrections (the “restated consolidated financial statements”). In preparing its financial statements for the year endedDecember 31, 2017, the Group determined that it was appropriate to change its method for recognition of certain revenue, and in the process ofreviewing its financial statements for the years ended December 31, 2015 and 2016, the Group also identified other adjustments relating to costaccruals, expense cutoff procedures and classification changes, which resulted in restatements of the Group’s previously-issued audited consolidatedfinancial statements for the years ended December 31, 2015 and 2016.The change in the Group’s revenue recognition method applied to its sales, beginning in 2016, of public sentiment tracking services, which are apart of the Group’s Social Listening Solutions suite. The Group sells distribution rights to a public sentiment tracking service, which is provided by athird party search engine, to sub-distributors for resale to end customers. The Group previously recognized these revenues at the time of sale to the sub-distributors, when revenue recognition criteria were met in accordance with ASC 605-45. Due to the rapid increase in revenues from this service andcollection of the related accounts receivable that was slower than expected, the Group determined that it was appropriate to recognize these revenueson a cash basis, recognizing the revenues only when the fees were collected by the Group from the sub-distributors.This change in revenue recognition method reduced reported revenues in 2016 by approximately RMB42.1 million. This reduction was partiallyoffset by a RMB6.0 million increase due to a cutoff adjustment, and by an adjustment related to business tax and surcharges, resulting in a netreduction of RMB36.4 million in 2016. The change in revenue recognition method also resulted in adjustments to related items in the Group’sstatements of operations and balance sheet. Accounts receivable at December 31, 2016 was reduced by approximately RMB56.4 million, of whichapproximately RMB42.1 million reflects the change of revenue recognition method and the balance reflects classification changes and associatedchanges to deferred revenue. The change in revenue recognition method had no effect on the 2015 financial results.The Group also increased accounts payable as of December 31, 2016 by approximately RMB37.4 million, in order to reconcile its accounting tothat of its main media partners for SEM solutions.Other significant adjustments to the Group’s balance sheet as of December 31, 2016 included a RMB29.1 million decrease in deferred revenuedue to reclassification changes and associated adjustments to accounts receivable and deferred revenue balances.In connection with its accounting review, the Group identified material weaknesses in its internal control over financial reporting, which aredescribed in Item 15, “Controls and Procedures,” in this Annual Report on Form 20-F. F-13Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) The amounts of the adjustments to the line items of the financial statements for 2015 and 2016 are shown in the Restatement Adjustmentcolumns in the tables below. For the Year Ended December 31, 2015 Consolidated Statements of Comprehensive Loss As previouslyreportedRMB RestatementAdjustmentRMB As revisedRMB Revenues 237,624 (2,335) 235,289 Less: Business tax and surcharges (2,785) (307) (3,092) Net revenues 234,839 (2,642) 232,197 Cost of revenues (35,237) 1,845 (33,392) Total operating expenses (245,274) (1,463) (246,737) Loss from operations (45,672) (2,260) (47,932) Net loss for the year (48,835) (12,938) (61,773) Net loss attributable to Gridsum’s ordinary shareholders (85,168) (12,938) (98,106) Net loss per share attributable to Gridsum’s ordinary shareholders, basic and diluted (8.52) (1.29) (9.81) As of December 31, 2015 Consolidated Balance sheets As previouslyreportedRMB RestatementAdjustmentRMB As revisedRMB Accounts receivable, net 279,537 (6,001) 273,536 Prepayment and other current assets 107,046 (1,659) 105,387 Total current assets 585,106 (7,660) 577,446 Total assets 625,907 (7,661) 618,246 Accounts payable 103,289 (3,730) 99,559 Taxes payable 16,484 9,628 26,112 Deferred revenue 31,308 (12,940) 18,368 Advance from customers 104,605 8,177 112,782 Accrued expenses and other current liabilities 70,908 (3,616) 67,292 Total current liabilities 360,133 (2,481) 357,652 Total liabilities 360,133 (2,481) 357,652 Accumulated other comprehensive loss (19,052) 42 (19,010) Accumulated deficit (191,644) (5,222) (196,866) Total Gridsum’s shareholders’ equity (210,628) (5,180) (215,808) Total equity (210,244) (5,180) (215,424) For the Year Ended December 31, 2016 Consolidated Statements of Comprehensive Loss As previouslyreportedRMB RestatementAdjustmentRMB As revisedRMB Revenues 409,371 (37,493) 371,878 Less: Business tax and surcharges (9,112) 1,057 (8,055) Net revenues 400,259 (36,436) 363,823 Cost of revenues (53,487) (2,220) (55,707) Gross profit 346,772 (38,656) 308,116 Total operating expenses (383,522) (4,754) (388,276) Loss from operations (36,750) (43,410) (80,160) Foreign exchange gain or loss (829) (771) (1,600) Other expenses (1,780) (286) (2,066) Income tax expense (28,387) 13,586 (14,801) Net loss for the year (67,746) (30,881) (98,627) Net loss attributable to Gridsum’s ordinary shareholders (97,396) (30,893) (128,289) Net loss per share attributable to Gridsum’s ordinary shareholders, basic and diluted (6.47) (2.05) (8.52) F-14Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) As of December 31, 2016 Consolidated Balance sheets As previouslyreportedRMB RestatementAdjustmentRMB As revisedRMB Cash and cash equivalents 524,454 (4,002) 520,452 Restricted cash — 4,002 4,002 Accounts receivable 412,301 (56,421) 355,880 Prepayments and other current assets 160,087 29,653 189,740 Total current assets 1,166,272 (26,768) 1,139,504 Fixed assets, net 56,107 (3,489) 52,618 Intangible assets — 5,313 5,313 Deferred tax assets — 7,118 7,118 Other non-current assets 3,947 — 3,947 Total non-current assets 60,054 8,942 68,996 Total assets 1,226,326 (17,826) 1,208,500 Short-term loans 65,093 (93) 65,000 Accounts payable 12,150 37,414 49,564 Salary and welfare payables 54,779 (11,959) 42,820 Taxes payable 66,589 262 66,851 Deferred revenue 50,110 (29,053) 21,057 Advance from customers 106,570 2,811 109,381 Accrued expenses and other current liabilities 58,473 18,105 76,578 Total current liabilities 413,764 17,487 431,251 Total liabilities 413,764 17,487 431,251 Statutory reserve — 6,662 6,662 Accumulated other comprehensive loss (10,879) 792 (10,087) Accumulated deficit (268,081) (42,766) (310,847) Total Gridsum’s shareholders’ equity 812,231 (35,313) 776,918 Total Equity 812,562 (35,313) 777,249 (b)Principles of ConsolidationThe consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP. The consolidated financial statementsinclude the financial statements of the Company, its subsidiaries, VIEs and VIE subsidiaries for which the Company is the ultimate primary beneficiary.Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power or has the power togovern the financial and operating policies, to appoint or remove the majority of the members of the board of directors or to cast a majority of votes atthe meeting of directors. A VIE is an entity in which the Company, or its subsidiary, through contractual arrangement exercises effective control overthe activities that most impact economic performance and bears the risks of and enjoys the rewards normally associated with ownership of the entity, sothat the Company or its subsidiary is the primary beneficiary of the entity. All transactions and balances among the Company, its subsidiaries, VIEsand VIE subsidiaries have been eliminated upon consolidation. F-15Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) (c)Use of EstimatesThe preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, related disclosures of contingent liabilities at the balance sheet date and thereported revenues and expenses during the reported period in the consolidated financial statements and accompanying notes. Significant accountingestimates include, but are not limited to, revenue recognition, share-based compensation, redemption value of the redeemable preferred shares,realization of deferred tax assets and determination of the estimated useful lives of property and equipment. Actual results could differ materially fromsuch estimates. (d)Foreign Currency TranslationThe Group used U.S. Dollar as its reporting currency, and subsequently changed to RMB effective January 1, 2016 which applied retrospectively.The functional currency of the Company and its subsidiaries incorporated in Hong Kong is U.S. Dollars, while the functional currency of the otherentities in the Group is RMB. Assets and liabilities are translated at the applicable exchange rates on the balance sheet date. Equity amounts aretranslated at historical exchange rates. Revenues, expenses, gains and losses are translated using the average exchange rate for the periods. Translationadjustments arising from these are reported as foreign currency translation adjustments and are shown as a component of other comprehensive incomeor loss in the consolidated statement of changes in shareholders’ deficit.Foreign currency transactions denominated in currencies other than functional currency are translated into the functional currency using theexchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet dateare remeasured at the applicable rates of exchange in effect at that date. Foreign exchange gains and losses resulting from the settlement of suchtransactions and from remeasurement at year-end are recognized in foreign currency exchange gain/(loss), net in the consolidated statements ofoperations and comprehensive loss. (e)Convenience TranslationTranslations of balances in the consolidated balance sheets, consolidated statements of operation and comprehensive loss and statements of cashflows from RMB into U.S. Dollars as of and for the year ended December 31, 2017 are solely for the convenience of the reader and were calculated atthe rate of US$1.00 = RMB 6.5063, representing the noon buying rate in The City of New York for cable transfers of RMB as certified for customspurposes by the Federal Reserve Bank of New York on December 31, 2017. No representation is made that the RMB amounts represent or could havebeen, or could be, converted, realized or settled in U.S. Dollars at that rate on December 31, 2017, or at any other rate. (f)Cash and Cash EquivalentsCash and cash equivalents represent cash on hand and demand deposits with term less than three months which are unrestricted as to withdrawaland use. (g)Restricted CashCash that is restricted as to withdrawal or is used or pledged as security is reported separately on the face of the Consolidated Balance Sheets, andis not included in the total cash and cash equivalents in the Consolidated Statements of Cash Flows. The Group’s restricted cash mainly represents(a) security deposits held in designated bank accounts for issuance of bank acceptance and letter of guarantee; (b) time deposits that are pledged forshort-term bank loans. (h)Time DepositTime deposit represent demand deposits placed with banks with original maturities of more than three months but less than one year. Interestearned is recorded as interest income in the consolidated statements of comprehensive loss during the periods. Time deposit are valued based on theprevailing interest rates in the market. (i)Accounts Receivable, netAccounts receivable mainly represent amounts due from customers, including revenues earned, output VAT and amounts paid, or will pay, tosearch engines on behalf of customers, and are recorded net of an allowance for doubtful accounts, if any. The Company considers many factors inassessing the collectability of its accounts receivable, such as the age of the amounts due, the payment history, credit worthiness and the financialcondition of the debtor. The Company also makes a specific allowance if there is strong evidence indicating that an accounts receivable is likely to beunrecoverable. Accounts receivable balances are written off after all collection efforts have been exhausted. F-16Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) (j)Property and Equipment, netProperty and equipment are stated at cost less accumulated depreciation and amortization and impairment. Property and equipment aredepreciated at rates sufficient to write off their costs less impairment and residual value (estimated at 5% of cost) over their estimated useful lives on astraight-line basis. Leasehold improvements are depreciated on a straight-line basis over the period of the lease or their estimated useful lives, if shorter.The estimated useful lives are as follows: Computers 3 yearsFurniture, fixtures and equipment 5 yearsVehicles 5 yearsLeasehold improvements Over the shorter of lease terms or the estimated useful lives of assetsExpenditures for repairs and maintenance are expensed as incurred, whereas the costs of renewals and betterment that extends the useful lives ofproperty and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the costs,accumulated depreciation and amortization and impairment with any resulting gain or loss recognized in the consolidated statements of operations andcomprehensive loss. (k)Impairment of Long-lived AssetsLong-lived assets are evaluated for impairment whenever events or changes in circumstances (such as a significant adverse change to marketconditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be fully recoverable or that the useful life isshorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment for the long-lived assets by comparingthe carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventualdisposition. Such assets are considered to be impaired, if the sum of the expected future undiscounted cash flows is less than the carrying value of theassets. The impairment to be recognized is then measured by the amount by which the carrying amounts of the assets exceed the fair value of the assetsbased on the discounted cash flow. No impairment charge was recognized for any of the periods presented. (l)Intangible Assets with Finite Useful LifeIntangible assets, comprising acquired computer software, customer relationship and other finite-lived intangible assets, which are separable fromthe fixed assets, are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated usefullives of the assets. Acquired customer relationship arising from business combinations (Note 14) is stated at fair value upon acquisition lessaccumulated amortization, which is recognized using the straight-line method over the estimated useful lives of the assets. The carrying amounts of thefinite-lived intangible assets are reviewed for impairment when indicators of impairment are present in accordance with ASC 360-10. In accordancewith ASC 360-10, an impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds itsfair value. No impairment loss has been identified for the years ended December 31, 2015, 2016 and 2017.The estimated economic lives are as follows: Software and other intangible assets 3 -5 yearsAcquired customer relationship 10 years (m)GoodwillGoodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities of Beijing Zhixunyilong SoftwareCo., Ltd (“Zhixun”) when it was acquired by the Group in May 2017. F-17Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) Goodwill is not depreciated or amortized but is tested for impairment at the reporting unit level on an annual basis every December 31, and inbetween annual tests when an event occurs or circumstances change that could indicate that the asset might be impaired. Commencing September2011, in accordance with the FASB revised guidance on “Testing of Goodwill for Impairment,” a company first has the option to assess qualitativefactors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company decides, as aresult of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitativeimpairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of a comparison of the fair value ofeach reporting unit with its carrying amount, including goodwill. If the carrying amount of each reporting unit exceeds its fair value, an impairmentcharge equal to the difference between the implied fair value of the reporting unit’s goodwill and the carrying amount of goodwill will be recorded.Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assetsand liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit.The Group as a whole, including recently acquired entities, is determined to be one reporting unit for goodwill impairment testing. The Groupdirectly applied the quantitative assessment and performed the goodwill impairment test by quantitatively comparing the fair values of the reportingunit to its carrying amounts, and no impairment loss has been identified for the year ended December 31, 2017. (n)Fair ValueFair value represents the price that would be received from selling an asset, or that would be paid to transfer a liability, in an orderly transactionbetween market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based onassumptions that market participants would use in pricing an asset or a liability.Accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.Accounting guidance establishes a three-level fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize theuse of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowestlevel of input that is significant to the fair value measurement. The three levels of inputs are:Level 1— Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2— Other inputs that are directly or indirectly observable in the marketplace.Level 3— Unobservable inputs which are supported by little or no market activity.Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) incomeapproach; and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involvingidentical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present valueamount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based onthe amount that would currently be required to replace an asset. F-18Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) Financial assets and liabilities of the Group primarily consist of cash and cash equivalents, restricted cash, accounts receivable, prepayments andother current assets, accounts payable, amounts due to related parties, taxes payable, advances from customers and accrued expenses and other currentliabilities. As of December 31, 2015, 2016 and 2017, the carrying values of these financial instruments approximated their fair values due to the short-term maturity of these instruments. (o)Revenue RecognitionRevenues are generated from sales of the Company’s marketing automation solutions and e-Government and other solutions. The targetedcustomers for marketing automation solutions are enterprise customers and the targeted customers for e-Government and other solutions aregovernmental agencies and state-owned entities.Revenues are recognized when: • persuasive evidence of an arrangement exists; • the Group’s platform is made available and services have been delivered to the customer; • the fee is fixed or determinable; and • collection is reasonably assured.Revenues received from the incentive programs of search engine providers are based on factors determined by these providers, such as yearlygrowth in the amount of advertising on the provider’s search engine platform that the Company’s customers purchase through its solutions, and otherfactors selected at the discretion of these providers. Revenues are recorded net of value-added taxes and surcharges.In accordance with ASC 605-45, Revenue Recognition: Principal Agent Considerations, the Company considers several factors in determiningwhether it acts as the principal or as an agent in the arrangement of merchandise sales and provision of various related services and thus whether it isappropriate to record the revenues and the related cost of sales on a gross basis or record the net amount earned as service fees.Where customers purchase multiple solutions in a single contract, the Company allocates the total consideration to the various elements basedon the relative selling price method and recognizes revenues as services are rendered. In accordance with ASC 605-25, Revenue Recognition—Multiple- Element Arrangements, the following hierarchy are followed when determining the appropriate selling price for each element: (1) vendorspecific objective evidence (“VSOE”), (2) third party evidence (“TPE”) and (3) best estimate of selling price (“BESP”). The Company recognizesrevenues on the elements delivered and defers the recognition of revenues for the fair value of the undelivered elements until the remaining obligationshave been satisfied. Where all of the elements within an arrangement are delivered uniformly over the agreement period, revenues are recognized on astraight-line basis over the contract period.EnterpriseThe Company generates enterprise revenue primarily by providing marketing automation solutions including bid management and data analysissolutions to enterprise customers. The Company earns and records service fee revenues over the contractual period. For certain applicationdevelopment contracts, the Company recognizes revenue upon completion of performance that is stipulated in the contracts. Sometimes, the Companyreceives revenues from the incentive programs of search engine providers based on factors determined by these providers, such as yearly growth in theamount of advertising on the provider’s search engine platform that the Company’s customers purchase through its solutions, and other factors selectedat the discretion of these providers. Revenues from these programs are received on both a quarterly and an annual basis and are calculated inaccordance with the Company’s customers’ usage of the search engine providers. In addition, the Company sells distribution rights of public sentimenttracking service provided by certain third party search engine to sub-distributor, due to uncertainty of collection, the revenue is recognized when feesare collected. F-19Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) With respect to the bid management services, the Group considered that: (i) the search engines are responsible for providing the advertisementsservice to the customers; (ii) the Group lacks the latitude to determine the prices charged by the search engine providers and earns only the fixedservice fee from the customers; (iii) the hosting and maintenance of the advertisements are the responsibilities of the search engine providers; (iv) thecustomers have the discretion in choosing the search engines selection; (v) we receive revenues from incentive programs based on the search engineproviders’ policies. The Group’s responsibility is to manage the customer’s advertising campaign on the search engines, according to the terms of thecustomer contracts so the Group views itself as an agent, and records revenues related to these services on a net basis.e-Government and OtherThe Group generates revenues by entering into service contracts with governmental agencies for its e-government solutions, including LawDissector solutions for the court systems and other law communities beginning in 2015. The Company also generates revenues by entering intocontracts with state-owned television stations for its new media solutions, including TV Dissector, Streaming Dissector and Video Dissector. (p)Advances from Customers and Deferred RevenuesUpon the entering of contracts, customers pay the contractual balance as prepayments. The Company allocates the prepayments into advancesfrom customers and deferred revenues. Advances from customers are the balance of the advertising campaign spending that would be recognized as thecost payable to search engine providers when advertisements are placed. Deferred revenues are the revenues to be earned by the Group for services andis recognized as revenue according to the prescribed revenue recognition criteria and policies described above. (q)Cost of RevenuesCost of revenues primarily consists of costs related to hosting the Company’s cloud-based platform, providing implementation and ongoingcustomer support, data communications expenses, salaries and benefits of operations and support personnel, costs associated with website developmentactivities, allocated overhead and property and equipment depreciation. (r)Research and Development ExpensesResearch and development costs include payroll, stock-based compensation expense and other operating costs such as outside services, suppliesand allocated overhead costs. Research and development costs are expensed as incurred.The Group expenses all costs that are incurred in connection with the planning and implementation phases of development and costs that areassociated with repair or maintenance of the existing websites or the development of software and website content. Costs incurred in the developmentphase are capitalized and amortized over the estimated product life. However, since the inception of the Company, the amount of costs qualifying forcapitalization has been insignificant and as a result, all software development costs have been expensed as incurred. (s)Marketing ExpensesMarketing expenses mainly consist of advertising costs, promotion expenses, payroll and related expenses for personnel engaged in marketingactivities. Marketing expenses are expensed when the services are received. Advertising expenses are recorded as sales and marketing expenses whenincurred, and totaled nil, RMB6,094 and RMB14,886 for the years ended December 31, 2015, 2016 and 2017, respectively. F-20Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) (t)General and Administrative ExpensesGeneral and administrative expenses mainly consist of payroll and related costs for employees involved in general corporate functions, includingaccounting, finance, tax, legal and human resources, professional fees and other general corporate expenses as well as costs associated with the use bythese functions of facilities and equipment, such as depreciation and rental expenses. (u)Operating LeasesLeases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Paymentsmade under operating leases are charged to the consolidated statements of operations and comprehensive loss on a straight-line basis over the terms ofunderlying lease. (v)Share-based CompensationAll share-based awards to employees and directors, including stock option awards are measured at the grant date based on the fair value of theawards. Share-based compensation, net of forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is thevesting period.The Group uses the binominal option pricing model to determine the fair value of stock options and account for share-based compensationexpenses using an estimated forfeiture rate at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from initialestimates. Share-based compensation expenses are recorded net of estimated forfeitures such that expenses are recorded only for those share-basedawards that are expected to vest. (w)Employee BenefitsThe Company’s subsidiaries, VIEs and VIE subsidiaries established in the PRC participate in a government-mandated, multiemployer, definedcontribution plan, pursuant to which certain retirement, medical, housing and other welfare benefits are provided to employees. PRC labor laws requirethe entities incorporated in mainland China to pay to the local labor bureau a monthly contribution calculated at a stated contribution rate on themonthly basic compensation of qualified employees. The Group has no further commitments beyond its monthly contribution. The fair value of theemployee benefits liabilities approximates their carrying value due to the short-term nature of these liabilities. The employee benefits payable amountsto RMB1,394, RMB2,244 and RMB2,709 as of December 31, 2015, 2016 and 2017, respectively.Employee social benefits included as expenses in the accompanying consolidated statements of operations and comprehensive loss amounted toRMB26,221, RMB49,557 and RMB66,511 for the years ended December 31, 2015, 2016 and 2017, respectively. (x)Non-controlling InterestsThe non-controlling interests are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of theCompany. Non-controlling interests are presented on the face of the consolidated statement of operations and comprehensive loss as an allocation ofthe total income or loss for the year between non-controlling interest holders and the shareholders of the Group. F-21Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) (y)Income TaxCurrent income taxes are provided on the basis of net income (loss) for financial reporting purposes and adjusted for income and expense itemswhich are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred incometaxes are provided using the liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporarydifferences and are determined by applying enacted statutory tax rates that will be in effect in the period in which the temporary differences areexpected to reverse to the temporary differences between the financial statements’ carrying amounts and the tax bases of assets and liabilities. Avaluation allowance is provided to reduce the amount of deferred tax assets if based on the weight of available evidence, it is more likely than not thatsome portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes arising from a change in tax rates is recognized in theconsolidated statements of operations and comprehensive loss in the period of change.The Group applies a “more likely than not” recognition threshold in the evaluation of uncertain tax positions. The Company recognizes thebenefit of a tax position in its consolidated financial statements if the tax position is more likely than not to prevail based on the facts and technicalmerits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit thathas a greater than fifty percent likelihood of being realized upon settlement. Unrecognized tax benefits may be affected by changes in interpretation oflaws, rulings of tax authorities, tax audits and expiry of statutory limitations. In addition, changes in facts, circumstances and new information mayrequire the Group to adjust the recognition and measurement estimates with regard to uncertain tax positions. Accordingly, unrecognized tax benefitsare periodically reviewed and re-assessed. Adjustments, if required, are recorded in the Company’s consolidated financial statements in the period inwhich the change that necessitates the adjustments occurs. The ultimate outcome for a particular tax position may not be determined with certaintyprior to the conclusion of a tax audit and, in certain circumstances, a tax appeal or litigation process. As of December 31, 2015, 2016 and 2017, theGroup did not have any significant unrecognized uncertain tax positions. (z)Comprehensive LossComprehensive loss is defined to include all changes in deficit of the Group during a period arising from transactions and other events andcircumstances other than those resulting from investments by shareholders and distributions to shareholders. For the years ended December 31, 2015,2016 and 2017, the Group’s comprehensive loss included net loss and foreign currency translation adjustments. (aa)Loss per ShareBasic loss per share is computed by dividing net loss attributable to holders of ordinary shares, considering the accretions to redemption value ofthe preferred shares, by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-classmethod, net loss is allocated between ordinary shares and other participating securities based on their participating rights. Diluted loss per share iscalculated by dividing net loss attributable to ordinary shareholders, as adjusted for the accretion and allocation of net income related to the preferredshares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalentshares consist of shares issuable upon the conversion of the preferred shares using the if-converted method and ordinary shares issuable upon theexercise of outstanding stock option (using the treasury stock method). Ordinary equivalent shares are not included in the denominator of the dilutedearnings per share calculation when inclusion of such shares would be anti-dilutive. (bb)Segment ReportingThe Group provided various services to its customers, commercial companies and also government agencies or state-owned entities, includingkeyword bidding, graphical and non-graphical advertisements placement services, website quality analysis services, subscription for using multiplesuites of the Dissector solutions service. The Group’s chief operating decision maker has been identified as the chief executive officer, who reviewsconsolidated results when making decisions about allocating resources and assessing performance of the Group. The Group does not distinguishbetween markets or segments for the purpose of internal reporting. Hence, the Group has only one operating segment. As the Group’s assets andliabilities are substantially located in the PRC, substantially all revenues are earned and substantially all expenses are incurred in the PRC, nogeographical segments are presented. F-22Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) (cc)Statutory ReservesThe Group’s subsidiaries, VIEs and VIE subsidiaries established in the PRC are required to make appropriations to certain non-distributablereserve funds.In accordance with PRC laws applicable to foreign investment enterprises (“FIE”) established in the PRC, the Company’s subsidiaries registeredas wholly foreign owned enterprise have to make appropriations from their after-tax profits (as determined under generally accepted accountingprinciples in the PRC (“PRC GAAP”) to non-distributable reserve funds including general reserve fund, enterprise expansion fund and staff bonus andwelfare fund. The appropriation to the general reserve fund must be at least 10% of the after-tax profits calculated in accordance with PRC GAAP.Appropriation is not required if the general reserve fund has reached 50% of the registered capital of the company. Appropriations to the enterpriseexpansion fund and staff bonus and welfare fund are made at the respective company’s discretion.In addition, in accordance with the Company Law of the People’s Republic of China, the VIEs and VIE subsidiaries, registered as Chinesedomestic companies, must make appropriations from their after-tax profits as determined under the PRC GAAP to non-distributable reserve fundsincluding the statutory surplus fund and discretionary surplus fund. The appropriation to the statutory surplus fund must be 10% of the after-tax profitsas determined under PRC GAAP. Appropriation is not required if the statutory surplus fund has reached 50% of the registered capital of the company.Appropriation to the discretionary surplus fund is made at the discretion of the Group.The Group has made no appropriations to statutory surplus fund and other reserve funds for the years ended December 31, 2015, 2016 and 2017as the Company’s subsidiaries, VIEs and VIE subsidiaries in the PRC were in accumulated loss positions.The general reserve fund, enterprise expansion fund, statutory surplus fund and discretionary surplus fund are restricted for use. They may onlybe applied to offset losses or increase the registered capital of the respective company. The staff bonus and welfare fund is liability in nature and isrestricted to make payment of special bonuses to employees and for the collective welfare of employees. None of these reserves is allowed to betransferred to the Company by way of cash dividends, loans or advances, nor can they be distributed except under liquidation. (dd)Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contractswith Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The core principle of Topic606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expectedto be received for those goods or services. To determine revenue recognition for arrangements that it determines are within the scope of Topic 606, theGroup performed the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract;(iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when(or as) the entity satisfies a performance obligation. Topic 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill acontract. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts withcustomers.The Group has completed its analysis of Topic 606 and has concluded that the measurement of revenue and the timing of recognizing revenue isnot expected to change, except for the variable consideration related to performance based revenue. The Group has adopted Topic 606 on January 1,2018 using the modified retrospective method. The Group used most likely amount method to estimate variable consideration related to performancebased revenue at inception of the contract. Based on the analysis, the Company identified approximately RMB5.9 million cumulative catch-upadjustment to the opening balance sheet of retained earnings at January 1, 2018. The Group future financial statements will include additionaldisclosures as required by Topic 606.In November 2015, the FASB issued ASU No. 2015-17, “Compensation—Stock Compensation: Income Taxes (Topic 740): Balance SheetClassification of Deferred Taxes”. The new guidance requires entities to present all deferred tax assets and liabilities, along with any related valuationallowance, as non-current on the balance sheet. The Group does not expect this standard to have a material impact on its consolidated financialstatements. F-23Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 2.Principal Accounting Policies (continued) In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The new guidance requires that a lessee recognize the assets andliabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the leaseliability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lesseeis permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lesseesand lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.Public business entities should apply the amendments in ASU No. 2016-02 for fiscal years beginning after December 15, 2018, including interimperiods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities and allnon-public business entities upon issuance. The Group is currently evaluating the impact of adopting this new guidance on the consolidated financialstatements. Excluding any impact from the clarification of contracts representing a lease, the Group expects to recognize separate lease liabilities forthe amounts related to certain facilities under operating lease agreements. Additionally, the Group does not expect to significantly change operatinglease agreements prior to adoption.On August 6, 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows—Classification of Certain Cash Receipts and Payments.” The ASUprovides guidance on the classification of certain cash receipts and payments including debt prepayment or debt issuance costs and cash payments forcontingent considerations. The ASU also provides clarification on the application of the predominance principle outlined in ASC 230. The effectivedate for public entities will be annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption ispermitted. The Group does not expect this standard to have a material impact on its consolidated financial statements.In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-01, “Business Combinations (Topic 805): Clarifying theDefinition of a Business”, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whethertransactions should be accounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning afterDecember 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard should be applied prospectively onor after the effective date. The Group does not expect this standard to have a material impact on its consolidated financial statements.In January 2017 the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for GoodwillImpairment.” This new standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reportingunit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value,not to exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for fiscal years beginning after December 15, 2019,including interim periods within those fiscal years. Early adoption is permitted. The Group is currently evaluating the impact of the pending adoptionof ASU 2017-04 on its consolidated financial statements.In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, to provide guidance to clarify when to account for achange to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required onlyif the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms orconditions. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15,2017. Early adoption is permitted and application is prospective. The Group has not early adopted this update. The Group does not expect that theadoption of this guidance will have a material impact on its consolidated financial statements.In June 2018, the FASB issued ASU No. 2018-07 to provide guidance to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees (for example, service providers, external legal counsel, suppliers, etc.). The amendments in this ASU areeffective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Group does notexpect that the adoption of this guidance will have a material impact on its consolidated financial statements. 3.Concentration and RisksConcentration of credit riskAssets that potentially subject the Group to significant concentrations of credit risk primarily consist of cash and cash equivalents and accountsreceivable. As of December 31, 2015, 2016 and 2017, all of the Group’s cash and cash equivalents were held by reputable financial institutions locatedin the PRC, Hong Kong and the United States, which management believes are of high credit quality and financially sound based on publicly availableinformation. F-24Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 3.Concentration and Risks (continued) Accounts receivable is typically unsecured and is generally derived from revenues earned from marketing automation solutions. Customers witha receivable balance exceeding 10% of the total accounts receivable balance, net of allowance for doubtful accounts, as of December 31, 2015, 2016and 2017, are listed as follows: December 31, 2015 December 31, 2016 December 31, 2017 (Restated) (Restated) Customer A 32.5% 21.8% 25.9% F-25Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 3.Concentration and Risks (continued) Concentration of customer riskThe top 20 customers accounted for 55%, 55% and 44% of the total revenues for the years ended December 31, 2015, 2016 and 2017,respectively.Currency riskThe Group’s operation transactions and its assets and liabilities are primarily denominated in RMB, which is not freely convertible into foreigncurrencies. The Group’s cash and cash equivalents denominated in RMB are subject to government controls and amounted to RMB178,577,RMB103,973 and RMB135,542 as of December 31, 2015, 2016 and 2017, respectively. The value of the RMB is subject to changes in the centralgovernment policies and international economic and political developments that affect the supply and demand of RMB in the foreign exchangemarket. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchangerates set by the People’s Bank of China (the “PBOC”). Remittances from China in currencies other than RMB by the Group must be processed throughthe PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to effect the remittance. 4.Accounts Receivable, NetThe following summarizes the Group’s accounts receivable as of December 31, 2015, 2016 and 2017: As of December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Accounts receivable 274,800 376,839 644,729 Less: Allowance for doubtful accounts (1,264) (20,959) (45,449) Accounts receivable, net 273,536 355,880 599,280 The amount of payments to search engines on behalf of customers included in accounts receivable was RMB231,734, RMB280,866 andRMB449,411 as of December 31, 2015, 2016 and 2017, respectively.The following table sets out the movements of the allowance for doubtful accounts for the years ended December 31, 2015, 2016 and 2017: As of December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Balance at beginning of the year (92) (1,264) (20,959) Charged to costs and expenses (1,172) (19,695) (24,490) Balance at end of the year (1,264) (20,959) (45,449) F-26Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 5.Prepayments and Other Current AssetsThe following is a summary of prepayments and other current assets: As of December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Deposits to search engine service providers 83,463 93,374 170,403 Prepayments to suppliers 10,513 53,605 96,839 Advances to employees 3,451 14,617 12,372 Prepaid rental and other deposits 7,219 10,846 12,598 Penalty receivable from customer — 15,676 257 Receivables in connection with exercise of option from agents — — 2,565 Others 741 1,622 11,058 Total 105,387 189,740 306,092 Deposits to search engine service providers represent deposits to guarantee the minimum amount of ad spending by the Group’s customers andare refunded annually when the minimum ad spending requirement is met. 6.Property, Equipment, netThe following is a summary of property, equipment, net: As of December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Computers 36,343 65,851 73,292 Furniture, fixtures and equipment 3,505 3,640 4,072 Vehicles 1,833 3,770 3,772 Leasehold improvements 16,341 23,200 42,593 Total 58,022 96,461 123,729 Less: accumulated depreciation and amortization (22,182) (43,843) (72,856) Property, equipment, net 35,840 52,618 50,873 Depreciation and amortization expenses for the years ended December 31, 2015, 2016 and 2017 were RMB13,069, RMB23,722 andRMB29,858, respectively. 7.Intangible Assets, netThe following is a summary of intangible assets, net: As of December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Acquired Software and other intangible assets 442 5,524 11,051 Customer relationship — — 677 Less: accumulated depreciation and amortization (40) (211) (2,302) Intangible Assets, net 402 5,313 9,426 F-27Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 7.Intangible Assets, net (continued) Amortization expenses for the years ended December 31, 2015, 2016 and 2017 were RMB31, RMB171 and RMB1,616 respectively. Expected FutureAmortization Expense Twelve months ended December 31, 2018 2,513 2019 2,503 2020 1,530 2021 773 2022 773 Thereafter 1,334 Total expected future amortization expense 9,426 8.Short-term Bank LoansIn 2016 and 2017, the Group entered into several short-term guaranteed loan agreements. Each of the loan agreements provides for a RMBrevolving credit facility with a maturity term within twelve months. The guarantees on these loans were provided by Guosheng Qi, the Co-Founder,chief executive officer and chairman of the Company or provided by Beijing Haidian Sci-tech Enterprises Financing Guarantee Co., Ltd.Short-term bank loans as of December 31, 2015, 2016 and 2017 amounted to nil, RMB65,000 and RMB266,019, respectively, which consistedof several bank borrowings denominated in RMB. All of these bank borrowings were repayable within one year. The weighted average interest rate forthe outstanding borrowings as of December 31, 2015, 2016 and 2017 was approximately nil, 5.24% and 4.68%, respectively. F-28Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 9.Accrued Expenses and Other Current LiabilitiesThe following is a summary of accrued expenses and other current liabilities: As of December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Customer deposits 48,218 40,928 26,445 Accrued expenses 14,585 31,644 57,685 Accrued property, equipment and software related payables 3,866 3,397 2,706 Others 623 609 3,885 Total 67,292 76,578 90,721 10.Taxation(a) Value added taxThe Group’s revenues are subject to VAT at the rate of 6%. The Group’s VAT payable balance amounted to RMB8,166, RMB19,620 andRMB32,413 as of December 31, 2015, 2016 and 2017, respectively.(b) Income taxCayman IslandsUnder the current laws of the Cayman Islands, the Group is not subject to tax on income or capital gain. Additionally, the Cayman Islands doesnot impose a withholding tax on payments of dividends to shareholders.Hong KongUnder the current Hong Kong Inland Revenue Ordinance, the Company’s Hong Kong subsidiary is subject to Hong Kong profits tax at the rate of16.5% on its taxable income generated from the operations in Hong Kong. Payments of dividends by the subsidiary to the Company are not subject towithholding tax in Hong Kong.PRCThe Group’s subsidiaries, VIEs and VIE subsidiaries in the PRC are subject to the PRC Corporate Income Tax Law (“CIT Law”) and are taxed atthe statutory income tax rate of 25%.The CIT Law also provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” islocated in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for itsglobal income. The Implementing Rules of the CIT Law merely define the location of the “de facto management body” as “the place where theexercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, property, etc., of anon-PRC company is located.” Based on a review of surrounding facts and circumstances, the Group does not believe that it is likely that its operationsoutside the PRC should be considered a resident enterprise for PRC tax purposes.High and new technology enterprises (“HNTE”) will enjoy a preferential enterprise income tax rate of 15% under the CIT Law. Beijing GridsumTechnology Co., Ltd. and Guoxinjunhe (Beijing) Technology Co., Ltd, the Group’s consolidated affiliated entities in the PRC, which are qualified as aHNTE under the CIT Law, is eligible for a preferential enterprise income tax rate of 15% for the period from 2014 to 2019, so long as they obtainapproval from relevant tax authority if they are profitable during the period. In 2016, Beijing Moment Everlasting Ad Co., Ltd. and Beijing YunyangAd Co., Ltd. obtained the qualification of “HNTE” with a preferential enterprise income tax rate of 15% for the period from 2016 to 2018. F-29Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 10.Taxation (continued) Withholding tax on undistributed dividendsThe CIT law also imposes a withholding income tax of 10% on dividends distributed by a FIE to its immediate holding company outside ofChina, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if thereceived dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediateholding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The CaymanIslands, where the Company is incorporated, does not have such tax treaty with China. According to the arrangement between Mainland China andHong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid byan FIE in China to its immediate holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreigninvestor owns directly at least 25% of the shares of the FIE). The Group did not record any dividend withholding tax, as Gridsum PRC Holding, thePRC WFOE, has no retained earnings in any of the periods presented.The following table sets forth the component of income tax expenses of the Group for the years ended December 31, 2015, 2016 and 2017: For the Year Ended December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Current tax expenses 15,371 21,919 15,571 Deferred tax recovery — (7,118) (11,296) Income tax expenses 15,371 (14,801) (4,275) Reconciliation of the differences between PRC statutory income tax rate and the Group’s effective income tax rate for the years endedDecember 31, 2015, 2016 and 2017 is as follows: For the year ended December 31, 2015 2016 2017 % % % (Restated) (Restated) PRC statutory tax rate 25.0 25.0 25.0 Effect of overseas tax-exempt entities (13.7) (59.4) (15.5) Effect of tax holidays 6.3 16.9 (3.1) Effect of lower tax rate entities (0.5) (0.2) (0.1) Permanent book-tax differences (17.1) 1.6 (0.5) Changes in valuation allowance (33.1) (0.7) (4.3) Change of tax rate — (0.7) (3.0) Withholding tax — (0.2) (0.3) Effective tax rate (33.1) (17.7) (1.8) F-30Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 10.Taxation (continued) (c) Deferred tax assets and liabilitiesThe following table sets forth the significant components of the aggregate deferred tax assets and liabilities: As of December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Deferred tax assets Education expense 150 49 10 Advertising expense — — 179 Provision for bad debt 293 3,148 7,186 Accrued expense 216 253 159 Charitable donation — — 910 Capitalized R&D in PRC tax return 5,641 6,123 13,160 Intangible assets under PRC Law 794 1,218 1,364 Loss carry-forward 15,207 19,236 28,747 Total deferred tax assets 22,301 30,027 51,715 Less: Valuation allowance 22,301 22,909 33,323 Total deferred tax assets, net — 7,118 18,392Deferred tax liabilities — — — Intangible assets from acquisitions — — 249 Total deferred tax liabilities, net — — 249 F-31Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 10.Taxation (continued) As of December 31, 2017, the Group had net operating loss carryforwards of approximately RMB6,712 attributable to the Hong Kong subsidiaryand of approximately RMB178,631 attributable to the PRC subsidiaries, VIEs and VIEs’ subsidiaries. The loss carried forward by the Hong Kongsubsidiary can be carried forward to net against future taxable income without a time limit, while the loss carried forward by the PRC companies willexpire from 2018 to 2027.A valuation allowance is provided against deferred tax assets when the Group determines that it is more likely than not that the deferred taxassets will not be utilized in the foreseeable future. In making such determination, the Group evaluates a variety of factors including the Group’soperating history, accumulated deficit, existence of taxable temporary differences and reversal periods.The changes in valuation allowance for the years ended December 31, 2015, 2016 and 2017 are as follows: As of December 31, 2015 2016 2017 RMB RMB RMB (Restated) (Restated) Balance at beginning of the year 19,249 22,301 22,909 Provision 3,052 608 10,414 Balance at end of the year 22,301 22,909 33,323 11.Redeemable Convertible Preferred SharesIn September 2010, the Company issued 3,125,000 Series A convertible and redeemable preferred shares for an aggregate proceeds ofRMB35,707 (US$5,250).In July 2011, the Company issued 1,302,084 Series A-1 convertible and redeemable preferred shares for aggregate proceeds of RMB24,251(US$3,750).In October 2013, the Company issued 2,962,239 Series B convertible and redeemable preferred shares for aggregate proceeds of RMB107,100(US$17,500).In January and March 2015, the Company issued 4,640,843 Series C convertible and redeemable preferred shares for aggregate proceeds ofRMB262,561 (US$42,000).In September 2016, all of the Series A, Series A-1, Series B and Series C preferred shares were automatically converted into 12,030,166 Class Bordinary shares after the closing of IPO.The Company has classified the Series A, A-1, B and C preferred shares as mezzanine equity in the consolidated balance sheets as they arecontingently redeemable at the option of the holders at any time after September 6, 2017 if a qualified initial public offering has not occurred.The Company has determined that conversion and redemption features embedded in the Preferred Shares are not required to be bifurcated andaccounted for as derivatives, as the economic characteristics and risks of the embedded conversion and redemption features are clearly and closelyrelated to that of the preferred shares. The preferred shares are not readily convertible into cash as there is not a market mechanism in place for tradingof the Company’s shares. F-32Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 11.Redeemable Convertible Preferred Shares (continued) The Group determined that there was no beneficial conversion feature attributable to any of the preferred shares because the initial effectiveconversion prices of these preferred shares were higher than the fair value of the Company’s ordinary shares at the relevant commitment dates.In addition, the carrying values of the preferred shares are accreted from the share issuance dates to the redemption value on the earliestredemption dates. The accretions are recorded against retained earnings, or in the absence of retained earnings, by charges against additional paid-incapital. Once additional paid-in capital has been exhausted, additional charges are recorded by increasing the accumulated deficit.The rights, preferences and privileges of the preferred shares prior to the IPO were as follows:Redemption RightsAt any time after September 6, 2017 (“Redemption Start Date”), if a qualified initial public offering has not occurred, holders of more than 50%of the then outstanding Series A, A-1, B and C preferred shares may request redemption of the preferred shares of such series. On receipt of a redemptionrequest from the holders, the Company shall redeem all or part, as requested, of the outstanding preferred shares of such series.If any holder of any series of preferred shares exercises its redemption right, any holder of other series of preferred shares shall have the right toexercise the redemption of its series at the same time.The redemption price shall be 125% of original issuance price of Series A, Series A1 and Series B preferred shares, 110% of original issuanceprice of Series C preferred shares, plus all declared but unpaid dividends up to redemption closing date. The Group shall execute and deliver to eachSeries A, A1, B and C preferred shares holders a promissory note for the full amount of the redemption payment due but not paid. That such promissorynote shall be due and payable no later than one year anniversary of the closing date of the redemption and shall accrue interest daily at a rate of tenpercent per annum. F-33Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 11.Redeemable Convertible Preferred Shares (continued) The following table sets forth the changes of each of the convertible redeemable preferred shares for the years ended December 31, 2015, 2016and 2017: Series APreferred Shares Series A-1Preferred Shares Series BPreferred Shares Series CPreferred Shares Number ofShares Amount Number ofShares Amount Number ofShares Amount Number ofShares Amount TotalAmount RMB RMB RMB RMB RMB As of December 31, 2015 3,125,000 40,181 1,302,084 28,492 2,962,239 126,641 4,640,843 280,704 476,018 Accretion — 1,033 — 830 — 6,573 — 8,289 16,725 Accumulated other comprehensiveincome — 1,226 — 870 — 3,910 — 8,578 14,584 Conversion to Class B ordinaryshares (3,125,000) (42,440) (1,302,084) (30,192) (2,962,239) (137,124) (4,640,843) (297,571) (507,327) As of December 31, 2016 — — — — — — — — — As of December 31, 2017 — — — — — — — — — Conversion RightsPrior to the IPO, each preferred share was convertible, at the option of the holder, at any time after the date of issuance of such preferred shares,according to a conversion ratio, subject to adjustments for dilution, including but not limited to stock splits, stock dividends and capitalization andcertain other events. Each preferred share is convertible into a number of ordinary shares determined by dividing the applicable original issuance priceby the conversion price. The conversion price of each preferred share was the same as its original issuance price and no adjustments to conversion pricehad occurred. At December 31, 2015, each preferred share was convertible into one ordinary Class B share.Each preferred share was automatically converted into ordinary share, at a conversion ratio of one preferred share to one Class B ordinary share,upon closing of the qualified initial public offering, which occurred on September 23, 2016. F-34Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 11.Redeemable Convertible Preferred Shares (continued) Prior to the Series B preferred shares issuance on October 1, 2013, a “Qualified Initial Public Offering” was defined as an initial public offeringwith net offering proceeds no less than US$30 million and implied market capitalization of the Company of no less than US$160 million prior to suchinitial public offering. Upon the issuance of the Series B preferred shares, the net offering proceeds and market capitalization criteria for a “QualifiedInitial Public Offering” was increased to US$100 million and US$235 million, respectively. Upon the issuance of the Series C preferred shares, themarket capitalization criterion for a “Qualified Initial Public Offering” was increased to US$360 million. An extraordinary general meeting held inAugust 2016, the shareholders of the Company passed a special resolution to amend (the “August 2016 Amendment”) the definition of QIPO in thefourth amended and restated memorandum and articles of association of the Company by replacing the existing definition of QIPO with the following:“QIPO means the closing of the first firm commitment fully underwritten public offering of Ordinary Shares of the Company and the listing of suchOrdinary Shares on the New York Stock Exchange, the Nasdaq Global Market System, the Main Board of the Hong Kong Stock Exchange, ShanghaiStock Exchange, Shenzhen Stock Exchange or any other reputable international exchange or quotation system that is approved in writing by thePreferred Shareholder Majority.”Voting rightsEach preferred share shall be entitled to that number of votes corresponding to the number of ordinary shares on an as-converted basis. Preferredshares shall vote separately as a class with respect to certain specified matters. Otherwise, the holders of preferred shares and ordinary shares shall votetogether as a single class.Dividend RightsPreferred shares holders shall be entitled to receive dividends if declared by the Board of Directors, in an amount equal to 10% of the originalissuance price of the respective series of preferred shares per annum, prior and in preference to any dividend on the ordinary shares. The dividends forSeries A, Series A-1, Series B Preferred Shares shall be accruing and cumulative and non-compounding. The dividends for Series C Preferred Sharesshall be non-cumulative and non-compounding.The remaining undistributed earnings of the Company after full payment of the above amounts on the preferred shares, shall be distributed on aprorate basis to the holders of ordinary shares and preferred shares on as-if-converted basis.Liquidation PreferencesUpon any liquidation event, including deemed liquidation, dissolution or winding up of the Company, the assets of the Group shall bedistributed in the following order: (i)First, before any distribution or payment to holders of Series A, A-1 and B preferred shares or ordinary shares, each holder of the Series Cpreferred shares shall be entitled to receive an amount per share equal to 100% of the Series C preferred shares original issuance price, plusall dividends declared but unpaid with respect thereto. (ii)Second, following payment in full of the Series C preferred shares amount, but before any distribution or payment to Series A and SeriesA-1 preferred shares and ordinary shareholders, each holder of the Series B preferred shares shall be entitled to receive an amount per shareequal to 125% of the Series B preferred shares original issuance price, plus all dividends accrued but unpaid with respect thereto. (iii)Third, following payment in full of the Series C and Series B preferred shares amount, but before any distribution or payment to ordinaryshareholders, each holder of the Series A and Series A-1 preferred shares shall be entitled to receive an amount per share equal to 150% ofthe Series A or Series A-1 preferred shares original issuance price, plus all dividends accrued but unpaid with respect thereto. (iv)If there are assets of the Company available for distribution after payment of the above items i), ii), and iii) the remaining assets shall bedistributed ratably among the holders of ordinary shares and preferred shares on an as if converted basis. F-35Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 12.Ordinary SharesAs of December 31, 2016 and 2017, the Company is authorized to issue a maximum of 200,000,000 ordinary shares, comprised of 20,000,000Class A ordinary shares with a par value of $0.001 per share and 180,000,000 Class B ordinary shares with a par value of $0.001 per share. Holders ofClass A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. The holders of Class A OrdinaryShares shall have ten votes in respect of each Class A Ordinary Share held, the holders of Class B Ordinary Shares shall have one vote in respect of eachClass B Ordinary Share held. Each Class A ordinary share is convertible into one Class B ordinary share at any time by the holder thereof. Class Bordinary shares are not convertible into Class A ordinary shares under any circumstances.On September 23, 2016, the Company completed its IPO in which the Company newly issued 7,705,000 Class B ordinary shares and all of theCompany’s Series A, Series A-1, Series B and Series C preferred shares were automatically converted into 12,030,166 Class B ordinary shares.As of December 31, 2016 and 2017, 4,543,461 Class A Ordinary Shares were issued and outstanding. As of December 31, 2016 and 2017,25,191,705 and 26,280,367 Class B Ordinary Shares were issued and outstanding, respectively. 13.Share-based CompensationIn March 2017, the Group amended its employment-related stock option plan, which the Group originally adopted in 2011 and amended in 2014(“2017 Plan”, subsequently revised to “Stock Option Plan”) under which 2,500,000 Class B ordinary shares are available for issuance. The StockOption Plan will terminate automatically in 2022, unless terminated earlier.In March 2017, the Group also amended its Equity incentive plan, which the Group originally adopted in 2016 (“2017 Equity Incentive Plan)under which 2,500,000 ordinary shares are available for issuance in 2017 and the number of shares available for grant and issuance under the 2017Equity Incentive Plan shall be increased on January 1, of each of the calendar years 2017 through 2026, by the lesser of (a) two and one-half percent(2.5%) of the number of ordinary shares issued and outstanding on each December 31 immediately prior to the date of increase or (b) such number ofShares determined by the Board. The Stock Option Plan will terminate automatically in 2022, unless terminated earlier. The awards under the 2017Equity incentive plan include share options, restricted shares, share bonus, share appreciation rights, restricted share units and performance awards.Share-based compensation expenses for the total share-based awards which are based on service conditions are recognized using the straight-lineattribution approach. For the years ended December 31, 2015, 2016 and 2017, the Group recognized share-based compensation expenses ofRMB8,806, RMB10,630 and RMB22,927 respectively, for the stock options granted.Share OptionsDuring 2015, the Group granted 331,000 stock options with an average exercise price of $0.42 per share under the Stock Option plan. All of theoptions were to be vested over four years, one fourth (1/4) vesting and exercisable upon the first anniversary of the date of grant, and the remainingvesting monthly thereafter in 36 equal monthly installments.During 2017, the Group granted 1,320,000 stock options with an average exercise price of $10.1 per share under the Stock Option plan. All of theoptions were to be vested over four years, one fourth (1/4) vesting and exercisable upon the first anniversary of the date of grant, and the remainingvesting monthly thereafter in 36 equal monthly installments. F-36Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 13.Share-based Compensation (continued) Valuation Assumptions: The Group estimated the fair value of stock options using the binominal option-pricing model with assistance from anindependent valuation firm. The fair value of each option grant is estimated on the date of grant with the following assumptions: For the year ended December 31, 2015 2016 2017Exercise price US$0.42 — US$10.11Risk free rate of interest 2.59%-2.95% — 3.14%Dividend yield — — — Life of option (years) 10 — 10Volatility 46%-49% — 46%The Group estimated the risk free rate based on the yield to maturity of US treasury bonds denominated in U.S. Dollars at the option valuationdate. The exercise multiple is estimated as the ratio of fair value of underlying shares over the exercise price as at the time the option is exercised, basedon a consideration of research study regarding exercise pattern based on historical statistical data. Expected term is the contract life of the option. Theexpected volatility at the date of grant date and each option valuation date was estimated based on the historical stock prices of comparablecompanies. The Group has never declared or paid any cash dividends on its capital stock, and the Group does not anticipate any dividend payments onits ordinary shares in the foreseeable future.A summary of the Group’s stock option activities for the years ended December 31, 2015, 2016 and 2017 is presented below: NumberofOptions WeightedAverageExercisePriceUS$ WeightedAverageRemainingContractualLife Inyears AggregateIntrinsicValueUS$ Outstanding as of December 31, 2014 2,192,161 $0.42 7.98 16,471 Granted 331,000 $0.42 — — Forfeited/expired (24,000) $0.42 — — Outstanding as of December 31, 2015 2,499,161 $0.42 7.28 28,540 Granted — — — — Forfeited/expired (62,500) $0.42 — — Outstanding as of December 31, 2016 2,436,661 $0.42 6.24 34,423 Granted 1,320,000 $10.11 — — Forfeited/expired (44,606) $0.42 — — Exercise (1,088,647) $0.42 — — Outstanding as of December 31, 2017 2,623,408 $5.48 7.15 25,781 Exercisable as of December 31, 2017 1,161,247 $0.42 5.20 11,412 The weighted average grant date fair value of options granted for the year ended December 31, 2015, 2016 and 2017 was $8.81, nil and $4.93,respectively. As of December 31, 2015, 2016 and 2017, there was RMB28,643, RMB 17,467 and RMB38,300 of total unrecognized compensationexpense, adjusted for estimated forfeitures, related to non-vested share-based compensation arrangement under the Stock Option Plan, respectively.These expense are expected to be recognized over a weighted average period of 1.35 years, 1.01 years and 2.1 years as of December 31, 2015, 2016 and2017, respectively. Total unrecognized compensation expense may be adjusted for future changes in estimated forfeitures. F-37Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 13.Share-based Compensation (continued) Restricted Stock UnitsDuring 2017, the Group granted 936,999 restricted stock units (“RSU”). RSU are share awards that, upon vesting, will deliver to the holder sharesof the Group’s ordinary shares. All of the RSU were to be vested over four years, one fourth (1/4) vesting and exercisable upon the first anniversary ofthe date of grant, and the remaining vesting monthly thereafter in 36 equal monthly installments. The Group satisfies RSU vesting through the issuanceof new shares or settle by cash.A summary of the Group’s restricted stock activity for the years ended December 31, 2015, 2016 and 2017 is presented below: NumberofRSU WeightedAverageGrant datefair valueUS$ Outstanding as of December 31, 2016 — $— Awarded 936,999 $9.75 Vested (300) $11.24 Outstanding as of December 31, 2017 936,699 $9.75 As of December 31, 2017, there was RMB55,473 of total unrecognized compensation expense, adjusted for estimated forfeitures, related tonon-vested RSU. The expense is expected to be recognized over a weighted average period of 3.75 years. Total unrecognized compensation expensemay be adjusted for future changes in estimated forfeitures. 14.Business CombinationOn May 31, 2017, the Group’s VIE, Gridsum Holding (Beijing) Co., Ltd., acquired Zhixun from three individual shareholders (“PreviousShareholders”) with a purchase price of RMB2.5 million and RMB7.5 million for continuing employment compensation for the Previous Shareholdersfor the next three years. The Group funded the acquisition with its own working capital. The Group believes that the acquisition will allow it to bettermanage opportunities and capitalize on the growth potential in the market for applications related to customer relationship management.The transaction was accounted for as a business combination using the purchase method of accounting. The purchase price allocation of thetransaction was determined by the Group with the assistance of an independent appraisal firm based on the estimated fair value of the assets acquiredand liabilities assumed as of the acquisition date. The purchase price allocation to assets acquired and liabilities assumed as of the date of acquisitionwas as follows: May 31,2017 RMB Cash acquired 643 Prepayment, deposit and other assets 335 Property, equipment and software, net 888 Customer relationship 677 Accrued expense, other payable and other current liabilities (309) Deferred tax liability (271) Goodwill 537 Total 2,500 F-38Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 14.Business Combination (continued) The customer relationship represents a long term relationship with a large enterprise customers with an estimated useful life of 10 years. Thegoodwill is mainly attributable to the excess of the consideration paid over the fair value of the net assets acquired that cannot be recognizedseparately as identifiable assets under U.S. GAAP, and comprise (a) the assembled work force and (b) the expected but unidentifiable business growthas a result of the synergy resulting from the acquisition. 15.Net Loss per ShareThe following table sets forth the basic and diluted net loss per share computation and provides a reconciliation of the numerator anddenominator for the periods presented: For the year ended December 31, 2015 2016 2017 Numerator: RMB RMB RMB Net loss attributable to Gridsum Holding Inc. (61,757) (98,574) (238,996) Accretion to convertible redeemable preferred share redemption value—A (1,286) (1,033) — Accretion to convertible redeemable preferred share redemption value—A-1 (1,029) (830) — Accretion to convertible redeemable preferred share redemption value—B (7,945) (6,573) — Accretion to convertible redeemable preferred share redemption value—C (9,447) (8,289) — Cumulative dividend to convertible redeemable preferred shareholders—A (3,297) (2,571) — Cumulative dividend to convertible redeemable preferred shareholders—A-1 (2,355) (1,837) — Cumulative dividend to convertible redeemable preferred shareholders—B (10,990) (8,582) — Numerator for basic and diluted net loss per share (98,106) (128,289) (238,996) Denominator: Weighted average number of ordinary shares outstanding, basic and diluted 10,000,000 15,054,865 30,243,250 Net loss per share attributable to Gridsum’s ordinary shareholders—Basic anddiluted (9.81) (8.52) (7.90) Basic net loss per share is computed using the weighted average number of the ordinary shares outstanding during the period. Diluted net loss pershare is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. For theyears ended December 31, 2015, 2016 and 2017, options to purchase ordinary shares that were anti-dilutive and excluded from the calculation ofdiluted net loss per share was 1,949,197, 2,158,602 and 1,605,961 on a weighted average basis, respectively. For the years ended December 31, 2015,2016 and 2017, the Series A, Series A-1, Series B and Series C Preferred Shares of 11,609,978, nil and nil, respectively, on a weighted average basiswere also antidilutive and excluded from the calculation of diluted net loss per share. 16.Commitments and Contingencies (a)CommitmentThe Group leases its offices and facilities under non-cancelable operating lease agreements. Rental expenses were RMB18,237 and RMB28,664and RMB35,553 for the years ended December 31, 2015, 2016 and 2017, respectively. F-39Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 16.Commitments and Contingencies (continued) As of December 31, 2017, future minimum lease under non-cancelable operating lease and other agreements were as follows: Rentalcommitments Othercommitments Total RMB RMB RMB 2018 25,792 10,080 35,872 2019 8,242 9,398 17,640 2020 2,748 6,835 9,583 2021 and thereafter 1,380 3,992 5,372 38,162 30,305 68,467 (b)LitigationFrom time to time, the Group is involved in claims and legal proceedings that arise in the ordinary course of business. Based on currentlyavailable information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, isreasonably possible to have a material adverse effect on the Group’s financial position, results of operations or cash flows. However, litigation issubject to inherent uncertainties and the Group’s view of these matters may change in the future. Were an unfavorable outcome to occur, there existsthe possibility of a material adverse impact on the Group’s financial position, results of operations or cash flows for the period in which the unfavorableoutcome occurs and potentially in future periods.On April 25, 2018 and June 25, 2018, purported securities class action complaints were filed in the United States District Court for the SouthernDistrict of New York against the Company, Guosheng Qi and Michael Peng Zhang, among other defendants. These lawsuits, which are captioned Xu v.Gridsum Holding Inc., et al., Case No. 18-CV-3655, and Li v. Gridsum Holding Inc., et al., Case No. 18-CV-5749, alleged, among other things, that“false and/or misleading statements” were made “and/or” the Company failed to disclose its lack of effective controls over financial reporting, inconnection with Gridsum’s announcement on April 23, 2018 that its financial statements for the year ended December 31, 2016 should no longer berelied upon. On September 17, 2018, the court appointed a lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995 and orderedthe lawsuits consolidated. A consolidated amended complaint was filed on November 30, 2018 that variously alleges violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934, Rule 10b-5 of the Securities Exchange Act of 1934, and Sections 11 and 15 of the Securities Act for aputative class period between September 22, 2016 to April 20, 2018.On July 2, 2018, a third purported securities class action complaint was filed in the Supreme Court of the State of New York against Gridsum andcertain of its current and former directors and executive officers, among other defendants, variously alleging violations of Sections 11, 12(a)(2), and 15of the Securities Act against them. The lawsuit, captioned, Gordon v. Gridsum Holding Inc., et al., Index No. 18-653342, is brought on behalf of aputative class of shareholders who “purchased or otherwise acquired” ADSs in Gridsum’s initial public offering on September 23, 2016, and are basedon substantially the same allegations as the consolidated proceeding described above. The Company believes that the claims against it are withoutmerit and intends to vigorously defend against the litigation. 17.Restricted Net AssetsRelevant PRC laws and regulations permit payments of dividends by the subsidiaries and the VIEs incorporated in the PRC only out of theirretained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, each of the Company’s subsidiariesand VIEs is required to annually appropriate 10% of net after-tax income to the statutory general reserve fund (Note 2(z)) prior to payment of anydividends, unless such reserve funds have reached 50% of its respective registered capital. For the years ended December 31, 2015, 2016 and 2017, thestatutory reserve amounted to nil and RMB 6,662 and RMB 6,730 respectively. As a result of these and other restrictions under PRC laws andregulations, the subsidiaries, VIEs and VIE subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company either in theform of dividends, loans or advances of the Group’s total consolidated net assets. As of December 31, 2015, 2016 and 2017, the total restricted netassets of the Company’s subsidiaries, VIEs and VIE subsidiaries incorporated in PRC and subjected to restriction amounted to approximatelyRMB87,321, RMB178,085 and RMB110,880, respectively. Even though the Group currently does not require any such dividends, loans or advancesfrom the PRC entities for working capital and other funding purposes, the Company may in the future require additional cash resources from them dueto changes in business conditions, to fund future acquisitions and development, or merely to declare and pay dividends or distributions to itsshareholders. Except for the above, there is no other restriction on the use of proceeds generated by the Group’s subsidiaries, VIEs and VIE subsidiariesto satisfy any obligations of the Group. F-40Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) 18.Subsequent EventsOn April 30, 2018, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”), datedApril 27, 2018 (“Nasdaq Letter”), notifying the Company that it was not in compliance with the requirements for continued listing under NasdaqListing Rule 5250(c)(1), because it was unable to timely file its annual report on Form 20-F for the year ended December 31, 2017 (“2017 AnnualReport”). Under Nasdaq Listing Rules, the Group had 60 calendar days from the date of the Nasdaq Letter to submit a plan as to how it planned toregain compliance with Nasdaq’s continued listing requirements (“Compliance Plan”). If Nasdaq accepted the Group’s Compliance Plan, Nasdaq couldgrant the Group an exception of up to 180 calendar days from the due date of the 2017 Annual Report, or until October 29, 2018, to regain compliance.If Nasdaq did not accept the Compliance Plan, the Company would have the opportunity to appeal that decision to a Nasdaq Hearings Panel. TheNasdaq Letter had no immediate impact on the listing of the ADSs representing the Company’s Class B ordinary shares on Nasdaq. On August 29,2018, the Group reported that it had received a letter from Nasdaq’s Listing Qualifications Department, dated August 21, 2018. The letter notified theCompany that the Nasdaq staff had determined to grant the Group additional time to regain compliance with Nasdaq’s listing requirements, providedthe Group filed its 2017 Annual Report by October 29, 2018, and provided the Nasdaq staff with an update on the audit committee’s internalinvestigation on or before September 28, 2018. On October 31, 2018, the Company announced that it received a letter from the Staff of the ListingQualifications Department of the Nasdaq notifying the Company that since it remained delinquent in filing the 2017 Annual Report, it had notregained compliance with Nasdaq Listing Rule 5250(c)(1) (the “Rule”), which requires timely filing of periodic reports with the Securities andExchange Commission (“SEC”). As described in the letter, as a result of the continued delinquency, the Company’s ADSs were subject to delistingunless the Company timely requested a hearing before a Nasdaq Hearings Panel (“Panel”). On November 6, 2018, the Company requested a hearingbefore the Panel to present its plan for regaining compliance with the Rule and requested continued listing pending its return to compliance. OnDecember 13, 2018, the Company attended such hearing with the Panel. On January 4, 2019, the Company received a letter from the Panel granting theCompany’s request to remain listed on Nasdaq, subject to the Company being current in its filings with the SEC on or before January 31, 2019 andcertain other conditions.On May 5, 2018, the Group completed the transactions contemplated by the Company’s April 30, 2018 convertible note purchase agreementwith FutureX Innovation SPC (the “Investor”), an affiliate of FutureX Capital Limited (“FutureX”). In accordance with the convertible note purchaseagreement, the Group received US$40 million and issued a convertible note in the principal value of US$40 million (the “Note”) that is convertible, inwhole or in part, into Class B ordinary shares of the Group at a conversion price of US$6.50 per share, subject to customary adjustments. The Note has aterm of 18 months and bears interest at 2.80% per annum. The Note includes other customary terms and covenants, including certain events of defaultafter which the Note may be due and payable immediately. Additionally, in the event of a fundamental change, as defined in the Note, the holder of theNote may require the Company to repurchase the Note at a price equal to 100% of the principal amount of the Note, plus accrued and unpaid interest.The Investor agreed not to transfer or sell the Note, the Class B ordinary shares or any other securities of the Group, or enter into any swap, short sale orsimilar arrangements relating to such securities, for a period of six months after the issuance of the Note. In connection with this transaction, the Groupand Investor entered into a registration rights agreement (the “Registration Rights Agreement”), under which the Investor has the right to require theGroup, within 15 months following the issuance of the Note, to file a registration statement with the SEC covering the offer and sale of the Class Bordinary shares issued upon conversion of the Note, as well as certain customary piggyback registration rights.On May 8, 2018, the Company’s Board of Directors (the “Board”) received a preliminary non-binding proposal letter, dated May 8, 2018, fromFutureX Capital Limited (the “Proposing Buyer”), proposing to acquire all outstanding shares of the Company that the Proposing Buyer does notalready own for US$8.70 in cash per ADS (each representing one Class B ordinary share of the Company) in a going private transaction. On May 11,2018, the Board of Directors formed a special committee to evaluate the proposed transaction and any other alternative transactions.In October 2018, the Company’s audit committee concluded its internal investigation. The Group has made significant progress inimplementing, and continues to action, a number of remedial steps to bolster substantially its financial controls and contract management processes asrecommended by the audit committee.As of December 31, 2018, the Group’s total cash and cash equivalents were approximately RMB96.4 million (US$14.0 million). For thiscalculation, the RMB amount is translated into U.S. Dollars at the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board onDecember 28, 2018, which was RMB6.8755 to US$1.00. The Group’s cash and cash equivalents decreased substantially from December 31, 2017primarily due to its use of cash in operating activities, continued investments in new market opportunities, funding its net loss and increased expensesincurred for professional accounting and legal fees. The Group believes that it can meet its future liquidity and capital requirements for at least nexttwelve months from the date of this report. However, in the near term, the Group may need to suspend certain customer relationships that consumeworking capital, reduce operating expenses through restructuring, or increase its working capital through additional sales of equity or debt securities,or other borrowing arrangements. Any such restructuring activities may adversely affect its revenues, and any issuance and sale of additional equitywould result in further dilution to the Company’s shareholders. The incurrence of additional indebtedness would result in increased fixed obligationsand could result in operating covenants that would restrict the Group’s operations. Failure to increase the Group’s working capital would have amaterial adverse effect on its business. F-41Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) ADDITIONAL INFORMATION: CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANYRules 12-04(a) and 4-08(e)(3) of Regulation S-X require condensed financial information as to the financial position, cash flows and results ofoperations of a parent company as of and for the same periods for which the audited consolidated financial statements have been presented when therestricted net assets of the consolidated and unconsolidated subsidiaries together exceed 25% of consolidated net assets as of the end of the mostrecently completed fiscal year.The following condensed financial statements of the Company have been prepared using the same accounting policies as set out in theCompany’s consolidated financial statements except that the Company used the equity method to account for its investment in its subsidiaries andVIEs. Such investment is presented on the separate condensed balance sheets of the Company as “Investment in subsidiaries and VIEs” and“Accumulated losses in excess of investment in subsidiaries and VIEs.” The Company, its subsidiaries and VIEs were included in the consolidatedfinancial statements whereby the inter-company balances and transactions were eliminated upon consolidation. The Company’s share of income fromits subsidiaries and VIEs is reported as share of income from subsidiaries and VIEs in the condensed financial statements.The Company is a Cayman Islands company and, therefore, is not subjected to income taxes for all years presented. The footnote disclosurescontain supplemental information relating to the operations of the Company and, as such, these statements should be read in conjunction with thenotes to the consolidated financial statements of the Company. Certain information and footnote disclosures normally included in financial statementsprepared in accordance with U.S. GAAP have been condensed or omitted.As of December 31, 2015, 2016 and 2017, there were no material commitments or contingencies, significant provisions for long-term obligationsor guarantees of the Company, except for those which have been separately disclosed in the consolidated financial statements, if any.Inter-company charges, share-based compensation and other miscellaneous expenses for the years ended December 31, 2015, 2016 and 2017,which were previously recognized at the parent company level, had been pushed down to the WFOE/VIE level given the majority of services wereprovided to the WFOE/VIE entities. F-42Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) Condensed Balance Sheets of Parent Company As of December 31, 2015 2016 2017 2017 RMB RMB RMB US$ (Restated) (Restated) ASSETS Current assets: Cash and cash equivalents 19,616 316,210 27,355 4,204 Amounts due from subsidiaries and VIEs 72,163 299,546 518,976 79,765 Prepayments and other current assets 3,701 3,187 7,085 1,089 Total current assets 95,480 618,943 553,416 85,058 Non-current assets: Investment in subsidiaries and VIEs 164,983 170,509 — — Total non-current assets 164,983 170,509 — — Total assets 260,463 789,452 553,416 85,058 LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY/(DEFICIT) Current liabilities: Accrued expenses and other current liabilities 253 12,534 19,728 3,032 Total current liabilities 253 12,534 19,728 3,032 Total liabilities 253 12,534 19,728 3,032 Commitments and contingencies Series A convertible preferred shares (US$0.001 par value; 3,125,000 shares authorized, issued andoutstanding as of December 31, 2015; aggregate liquidation value of nil as of December 31, 2015,none issued and outstanding as of December 31, 2016 and 2017) 40,181 — — — Series A-1 convertible preferred shares (US$0.001 par value; 1,302,084 shares authorized, issuedand outstanding as of December 31, 2015; aggregate liquidation value of nil as of December 31,2015, none issued and outstanding as of December 31, 2016 and 2017) 28,492 — — — Series B convertible preferred shares (US$0.001 par value; 2,962,239 shares authorized, issued andoutstanding as of December 31, 2015; aggregate liquidation value of nil as of December 31, 2015,none issued and outstanding as of December 31, 2016 and 2017) 126,641 — — — Series C convertible preferred shares (US$0.001 par value; 4,640,843 shares authorized, issued andoutstanding as of December 31, 2015; aggregate liquidation value of nil as of December 31, 2015,none issued and outstanding as of December 31, 2016 and 2017) 280,704 — — — Total mezzanine equity 476,018 — — — Shareholders’ equity/(deficit): Ordinary shares—Class A (US$0.001 par value; 20,000,000 shares authorized, 4,543,461shares issued and outstanding as of December 31, 2016 and 2017, respectively) 31 31 31 5 Ordinary shares—Class B (US$0.001 par value; 180,000,000 shares authorized,25,191,705 and 26,280,367 shares, issued and outstanding as of December 31, 2016and 2017, respectively) 37 168 176 27 Additional paid-in capital — 1,090,991 1,107,201 170,174 Statutory Reserve — 6,662 6,730 1,034 Accumulated other comprehensive loss (19,010) (10,087) (30,539) (4,694) Accumulated deficit (196,866) (310,847) (549,911) (84,520) Gridsum’s shareholders’ equity/(deficit) (215,808) 776,918 533,688 82,026 Total liabilities, mezzanine equity and shareholders’ equity/(deficit) 260,463 789,452 553,416 85,058 F-43Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) Condensed Statements of Operations and Comprehensive Loss of Parent Company For the year ended December 31, 2015 2016 2017 2017 RMB RMB RMB US$ (Restated) (Restated) Revenues — — — — Cost of revenues — — — — Gross profit — — — — Operating expenses: Sales and marketing expenses — — — — Research and development expenses — — — — General and administrative expenses (565) (802) (872) (134) Total operating expenses (565) (802) — — Loss from operations (565) (802) (872) (134) Loss from subsidiaries and VIEs (61,192) (97,772) (238,124) (36,599) Net loss (61,757) (98,574) (238,996) (36,733) Accretions to preferred shares redemption value (19,707) (16,725) — — Cumulative dividend to preferred shareholders (16,642) (12,990) — — Net loss attributable to Gridsum’s ordinary shareholders (98,106) (128,289) (238,996) (36,733) Comprehensive loss (81,103) (89,704) (259,576) (39,896) F-44Table of ContentsGRIDSUM HOLDING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)(In thousands, except for share and per share data) Condensed Statements of Cash Flows of Parent Company For the Year EndedDecember 31, 2015 2016 2017 2017 RMB(Restated) RMB(Restated) RMB US$ Cash flows from operating activities: Net cash used in operating activities (56,436) (188,097) 2,424 373 Cash Flows from investing activities: Investment of subsidiaries and VIEs (185,448) (103,298) (291,008) (44,727) Net cash used in investing activities (185,448) (103,298) (291,008) (44,727) Cash flows from financing activities: Proceeds from issuance of Series C preferred shares 262,561 — — — Proceeds from issuance of ordinary shares — 615,032 3,091 475 Payment of financing costs in connection with the issuance of Series C preferredshares (1,061) — — — Payment for IPO costs — (27,043) (3,362) (517) Net cash provided by financing activities 261,500 587,989 (271) (42) Net increase in cash and cash equivalents 19,616 296,594 (288,855) (44,396) Cash and cash equivalents at the beginning of the year — 19,616 316,210 48,600 Cash and cash equivalents at the end of the year 19,616 316,210 27,355 4,204 Supplemental schedule of non-cash financing activities: Accretions to preferred shares redemption value 19,707 16,725 — — F-45Exhibit 4.13CONFIDENTIAL CONVERTIBLE NOTE PURCHASE AGREEMENTby and betweenGRIDSUM HOLDING INC.andFUTUREX INNOVATION SPC(on behalf of and for the account of New Technology Fund II SP as one of its segregated portfolios)Dated April 30, 2018 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND INTERPRETATION 1 Section 1.1 Definitions 1 Section 1.2 Interpretation and Rules of Construction 5 ARTICLE II PURCHASE AND SALE OF THE NOTE 6 Section 2.1 Sale and Issuance of the Note 6 Section 2.2 Closing 6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY 7 Section 3.1 Organization, Good Standing and Qualification 7 Section 3.2 Authorization 7 Section 3.3 Valid Issuance 7 Section 3.4 No Violation 8 Section 3.5 No Default 8 Section 3.6 Consents 8 Section 3.7 Compliance with Applicable Laws; Permits 8 Section 3.8 Capitalization; Significant Subsidiaries 10 Section 3.9 Litigation 11 Section 3.10 Tax 11 Section 3.11 Intellectual Property 11 Section 3.12 Real and Personal Property 11 Section 3.13 Investment Company 12 Section 3.14 Offering 12 Section 3.15 Listing 12 Section 3.16 Structured Entities 12 Section 3.17 No General Solicitation 12 Section 3.18 Brokers 12 ARTICLE IV REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE PURCHASER 12 Section 4.1 Representations and Warranties of the Purchaser 12 Section 4.2 No Reliance 14 ARTICLE V CONDITIONS 15 Section 5.1 Conditions to the Purchaser’s Obligations 15 Section 5.2 Conditions to the Company’s Obligations 15 ARTICLE VI AGREEMENTS 16 Section 6.1 Use of Proceeds 16 Section 6.2 Confidentiality 16 Section 6.3 Further Assurances 17 Section 6.4 Lock-up 17 ARTICLE VII TERMINATION 17 Section 7.1 Termination 17 Section 7.2 Effect of Termination 18 i Page ARTICLE VIII MISCELLANEOUS 18 Section 8.1 Successors and Assigns; No Third Party Beneficiaries 18 Section 8.2 Governing Law; Dispute Resolution. 18 Section 8.3 Counterparts 18 Section 8.4 Notices 18 Section 8.5 Fees and Expenses 19 Section 8.6 Entire Agreement 19 Section 8.7 Amendment; Waiver 20 Section 8.8 Severability 20 SCHEDULE 1 SIGNIFICANT SUBSIDIARIESEXHIBIT A FORM OF CONVERTIBLE NOTEEXHIBIT B FORM OF REGISTRATION RIGHTS AGREEMENTEXHIBIT C FORM OF CAYMAN LEGAL OPINION iiTHIS CONVERTIBLE NOTE PURCHASE AGREEMENT (this “Agreement”), dated April 30, 2018, is entered into by and between:(1) Gridsum Holding Inc., a Cayman Islands company (the “Company”); and(2) FutureX Innovation SPC (on behalf of and for the account of New Technology Fund II SP as one of its segregated portfolios), an exemptedcompany incorporated under the laws of the Cayman Islands and registered as a segregated portfolio company (the “Purchaser”).RECITALSWHEREAS, the Company desires to issue and sell to the Purchaser, and the Purchaser desires to subscribe for and purchase from the Company,the Note (as defined below) on the terms and subject to the conditions of this Agreement.NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein, aswell as other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legallybound, agree as follows:ARTICLE IDEFINITIONS AND INTERPRETATIONSection 1.1 Definitions. In this Agreement, except to the extent otherwise provided or that the context otherwise requires:“ADS” means American depositary shares of the Company, each representing one Ordinary Share as of the date hereof.“Affiliate” means, with respect to any specified Person, any Person that controls, is controlled by, or is under common control with such Person.For purposes of this definition, the term “control” (including the terms “controlling,” “controlled by” and “under common control with”), when usedwith respect to any specified Person, means the possession, directly or indirectly, individually or together with any other Person, of the power to director to cause the direction of the management and policies of a Person, whether through ownership of voting securities or other interests, by contract orotherwise.“Agreement” has the meaning ascribed to this term in the preamble hereto.“Anti-Money Laundering Laws” has the meaning ascribed to this term in Section 3.7(b).“Anti-Corruption Laws” has the meaning ascribed to this term in Section 3.7(c).“Business Day” means any day that is not a Saturday, a Sunday or other day on which banking institutions in the Cayman Islands, the State ofNew York, Beijing, or Hong Kong are required by Law to be closed.“Closing” has the meaning ascribed to this term in Section 2.2(a).“Closing Date” has the meaning ascribed to this term in Section 2.2(a).“Company” has the meaning ascribed to this term in the preamble hereto.“Company Material Adverse Effect” means any event, change, development or occurrence that, individually or in the aggregate, has had orwould reasonably be expected to have a material adverse effect on (a) the business, shareholders’ equity, financial condition or results of operations ofthe Company and the Significant Subsidiaries, taken as a whole (including any material adverse action by applicable regulatory authorities), or (b) theability of the Company to enter into this Agreement, the Note or the Registration Rights Agreement or to perform its obligations hereunder orthereunder; provided, however, that for purposes of clause (a) above, no change, event, circumstance, development or effect attributable to or resultingfrom any of the following shall be deemed to be, or taken into account in determining whether there has been or would reasonably be expected to be, aCompany Material Adverse Effect: (i) changes, events, developments or circumstances in or affecting general economic conditions or the securities,credit or financial markets in general (including interest rates and exchange rates), (ii) changes, events, developments or circumstances generallyaffecting the industries in which any of the Company and the Significant Subsidiaries operate, (iii) changes or developments in GAAP, other applicableaccounting rules or applicable Law, or the enforcement or interpretation thereof, or changes or developments in political, regulatory or legislativeconditions, (iv) changes, events, circumstances or developments resulting from any weather-related or other force majeure event or natural disaster(including hurricane, tornado, flood, earthquake, tsunami or volcano eruption) or outbreak or escalation of hostilities or acts of war (whether or notdeclared) or terrorism, (v) seasonal fluctuations in the Company or its Subsidiaries’ business performance or results of operations, (vi) the matterspublicly disclosed, or disclosed to the Purchaser or its Affiliates (or any directors, officers, employees, counsel, advisers or representatives thereof),about the letter dated April 16, 2018 from PricewaterhouseCoopers Zhong Tian LLP (“PwC”), the Company’s independent registered publicaccounting firm, notifying the Company’s board of directors and audit committee that, among other things, PwC’s audit report for the Company’sfinancial statements for the year ended December 31, 2016 should no longer be relied upon (the “PwC Letter”), the investigation by the Company’saudit committee, or delays in SEC filings and litigations relating to the PwC Letter or the audit committee investigation or to the matters contemplatedthereby, (vii) any failure by the Company or any of the Significant Subsidiaries to meet any internal or published projections, forecasts, estimates orprojections or analysts’ expectations in respect of revenues, cash flow, earnings or other financial or operating metrics for any period, in and of itself, or(viii) any changes in the market price or trading volume of Ordinary Shares or ADSs; provided, however, that (A) the underlying cause(s) of suchchange or failure shall not be excluded in the case of clauses (vii) and (viii) (unless otherwise excepted under the foregoing clauses (i) through (vi)) and(B) any changes, events, circumstances or developments referred to in clauses (i), (ii), (iii) and (iv) shall not be excluded to the extent the samedisproportionately affect (individually or together with other changes, events, circumstances or developments) the Company and the SignificantSubsidiaries, taken as a whole, as compared to other similarly situated Persons operating in the same principal industries in which the Company and theSignificant Subsidiaries operate.“Company SEC Documents” means all registration statements, proxy statements and other statements, reports, schedules, forms and otherdocuments filed or furnished by the Company with the SEC, including all financial statements, notes, exhibits and schedules included therein and alldocuments incorporated by reference therein. 2“Confidential Information” has the meaning ascribed to this term in Section 6.2(a).“Conversion Shares” means the Ordinary Shares into which the Note is convertible.“Depositary” means Citibank, N.A., the depositary of the Company’s ADS program.“Disclosure Letter” means the disclosure letter delivered by the Company to the Purchaser on or prior to the date hereof.“Exchange Act” means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.“GAAP” means accounting principles generally accepted in the United States.“Governmental Authority” means any federal, national, supranational, state, provincial, local, municipal or other government, any governmental,quasi-governmental, supranational, judicial, regulatory or administrative authority (including any governmental division, department, agency,commission, instrumentality, organization, unit or body, political subdivision, and any court or other tribunal) or any stock exchange or self-regulatoryorganization (including the NASDAQ) with competent jurisdiction.“Governmental Order” means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with anyGovernmental Authority.“Gridsum Stock Option Plan” means the Company’s stock option plan, adopted in 2011 and amended in 2014 and 2017, as disclosed in theCompany SEC Documents prior to the date hereof.“Gridsum Equity Incentive Plan” means the Company’s equity incentive plan, adopted on February 2, 2016 and amended in 2017, as disclosedin the Company SEC Documents prior to the date hereof.“HKIAC” has the meaning ascribed to this term in Section 8.2(b).“HKIAC Rules” has the meaning ascribed to this term in Section 8.2(b).“Information” has the meaning ascribed to this term in Section 4.2(c).“Intellectual Property” means all (i) trademarks, service marks, brand names, certification marks, collective marks, d/b/a’s, Internet domain names,logos, symbols, trade dress, trade names, and other indicia of origin, all applications and registrations for the foregoing, and all goodwill associatedtherewith and symbolized thereby, including all renewals of same; (ii) inventions and discoveries, whether patentable or not, and all patents andapplications therefor, including provisional applications, divisions, continuations, continuations-in-part, extensions, reexaminations and reissues;(iii) confidential information, trade secrets and know-how, including processes, schematics, business methods, formulae, drawings, prototypes, models,designs, customer lists and supplier lists; (iv) published and unpublished works of authorship, whether copyrightable or not (including, withoutlimitation, databases and other compilations of information), copyrights therein and thereto, and registrations and applications therefor, and allrenewals, extensions, restorations and reversions thereof; and (v) other intellectual property or proprietary rights. 3“Law” means any statute, law, ordinance, regulation, rule, code, order, judgment, writ, injunction, decree or requirement of law (includingcommon law) enacted, issued, promulgated, enforced or entered by a Governmental Authority.“Lien” means, with respect to any property or asset, any mortgage, pledge, claim, security interest, easement, covenant, restriction, reservation,defect in title, encroachment or other encumbrance, lien (choate or inchoate), charge, equity, or other restriction or limitation, whether arising bycontract or under Law.“Lock-Up Securities” has the meaning ascribed to this term in Section 6.4.“NASDAQ” means The NASDAQ Global Select Market.“Note” means the convertible note in the principal value of US$40,000,000 issued to the Purchaser pursuant to Article II, the form of which isattached hereto as Exhibit A.“Ordinary Shares” means Class B ordinary shares of the Company, par value US$0.001 per share.“Permits” has the meaning ascribed to this term in Section 3.7(d).“Person” means an individual, a corporation, a limited liability company, an association, a partnership, a joint venture, a joint stock company, atrust, an unincorporated organization or a Governmental Authority.“PRC” means the People’s Republic of China.“Proceeding” means any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative or appellate proceeding) orhearing commenced, brought, conducted or heard by or before, or otherwise involving, any arbitrator, arbitration panel, court or other GovernmentalAuthority.“Purchase Price” has the meaning ascribed to this term in Section 2.1.“Purchaser” has the meaning ascribed to this term in the preamble hereto.“Purchaser Material Adverse Effect” means any event, change or occurrence that, individually or in the aggregate, has had or would reasonablybe expected to have a material adverse effect on the ability of the Purchaser to enter into this Agreement or to perform its obligations hereunder.“Sanctions” has the meaning ascribed to this term in Section 3.7(a).“SEC” means the United States Securities and Exchange Commission.“Securities Act” means the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.“Registration Rights Agreement” means the registration rights agreement, the form of which is attached hereto as Exhibit B.“Significant Subsidiaries” means the entities set forth in Schedule 1 hereto. 4“Structured Entities” has the meaning ascribed to this term in Section 3.16.“Subsidiary” means, as of the relevant date of determination, with respect to any Person (the “subject entity”), (i) any Person (x) more than fiftypercent (50%) of whose shares or other interests entitled to vote in the election of directors or (y) more than fifty percent (50%) interest in the profits orcapital of such Person are owned or controlled directly or indirectly by the subject entity or through one or more Subsidiaries of the subject entity,(ii) any Person, including for the avoidance of doubt any “variable interest entity,” whose financial statements, or portions thereof, are or are intendedto be consolidated with the financial statements of the subject entity for financial reporting purposes in accordance with GAAP or (iii) any Person withrespect to which the subject entity has the sole power to control or otherwise direct the business and policies of that entity directly or indirectlythrough another subsidiary or otherwise.“Tax” or “Taxes” means all federal, state, local, and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains, property,capital, sales, transfer, use, payroll, employment, severance, withholding, duties, intangibles, franchise, backup withholding, value-added, and othertaxes imposed by a Governmental Authority, together with all interest, penalties and additions to tax imposed with respect thereto.“Tax Return” means any report, return or other document (including any amendments thereto) required to be supplied to a GovernmentalAuthority with respect to Taxes.Section 1.2 Interpretation and Rules of Construction. In this Agreement, except to the extent otherwise provided or that the context otherwiserequires:(a) The words “party” and “parties” shall be construed to mean a party or the parties to this Agreement, and any reference to a party to thisAgreement or any other agreement or document contemplated hereby shall include such party’s successors and permitted assigns.(b) When a reference is made in this Agreement to an article, section or clause, such reference is to an article, section or clause of thisAgreement.(c) The headings for this Agreement are for reference purposes only and do not affect in any way the meaning or interpretation of thisAgreement.(d) Whenever the words “include,” “includes” or “including” are used in this Agreement, they are deemed to be followed by the words “withoutlimitation.”(e) The words “hereof,” “herein” and “hereunder” and words of similar import, when used in this Agreement, refer to this Agreement as a wholeand not to any particular provision of this Agreement.(f) All terms defined in this Agreement have the defined meanings when used in any certificate or other document made or delivered pursuanthereto, unless otherwise defined therein.(g) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms. 5(h) A reference to any legislation or to any provision of any legislation shall include any modification, amendment, re-enactment thereof, anylegislative provision substituted therefor and all rules, regulations and statutory instruments issued or related to such legislation.(i) The parties have each participated in the negotiation and drafting of this Agreement and if any ambiguity or question of interpretationshould arise, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring orburdening either party by virtue of the authorship of any of the provisions in this Agreement or any interim drafts thereof.ARTICLE IIPURCHASE AND SALE OF THE NOTESection 2.1 Sale and Issuance of the Note. Subject to the terms and conditions of this Agreement, at the Closing, the Company agrees to issueand sell to the Purchaser, and the Purchaser agrees to subscribe for and purchase from the Company, the Note, for a purchase price of US$40,000,000(the “Purchase Price”).Section 2.2 Closing.(a) Subject to the satisfaction or waiver of the conditions set forth in Article V, the closing of the transactions described in this Agreement (the“Closing”) shall take place as soon as practicable but in no event later than the third (3rd) Business Day following the satisfaction or waiver of theconditions set forth in Article V (other than those conditions that by their nature are to be satisfied at the Closing), or such other date as the parties maymutually agree in writing (the date on which the Closing takes place, the “Closing Date”).(b) The Closing shall take place remotely via the exchange of documents and signatures, or at such other place and in such other manner as theparties may mutually agree in writing.(c) At the Closing, the Purchaser shall (i) pay the Purchase Price to the Company in U.S. dollars by wire transfer of immediately available fundsto a bank account designated in writing by the Company to the Purchaser at least two (2) Business Days prior to the Closing Date; and (ii) deliver tothe Company the Registration Rights Agreement duly executed by the Purchaser.(d) At the Closing, the Company shall deliver to the Purchaser:(i) the Note, dated the Closing Date and registered in the name of the Purchaser;(ii) the Registration Rights Agreement, duly executed by the Company,(iii) an opinion of Travers Thorp Alberga, Cayman Islands counsel to the Company, dated the Closing Date, substantially in the formattached hereto as Exhibit C; and(iv) a certificate, dated the Closing Date and signed by the Chief Executive Officer or a Chief Financial Officer of the Company,certifying on behalf of the Company that the conditions specified in Section 5.1(a), (b) and (c) have been fulfilled. 6ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF THE COMPANYExcept as set forth in the Company SEC Documents or the Disclosure Letter, the Company hereby represents and warrants to the Purchaser that,as of the date hereof and as of the Closing:Section 3.1 Organization, Good Standing and Qualification. The Company is an exempted company, duly incorporated, validly existing and ingood standing under the Laws of the Cayman Islands, and each of the Company’s Significant Subsidiaries is duly incorporated or organized, validlyexisting and in good standing (where such concept is applicable) under the Laws of the jurisdiction of its incorporation or organization. The Companyand each of its Significant Subsidiaries has the requisite corporate power and authority to own or lease all of its properties and assets and to carry on itsbusiness as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the businessconducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, exceptwhere the failure so to qualify or to be in good standing would not, individually or in the aggregate, result in a Company Material Adverse Effect.Section 3.2 Authorization. The Company has all requisite corporate power to enter into this Agreement, the Note and the Registration RightsAgreement and to perform its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement, the Note and theRegistration Rights Agreement by the Company have been duly authorized by all necessary corporate action on the part of the Company. ThisAgreement and the Registration Rights Agreement have been or will be duly executed and delivered by the Company and, assuming dueauthorization, execution and delivery by the Purchaser, constitute or will constitute legal, valid and binding obligation of the Company, enforceableagainst the Company in accordance with its terms, except as enforcement may be limited by general principles of equity, whether applied in a court ofLaw or a court of equity, and by applicable bankruptcy, insolvency and similar Law affecting creditors’ rights and remedies generally.Section 3.3 Valid Issuance. The Note has been duly and validly authorized for issuance and sale to the Purchaser by the Company, and whenissued and delivered by the Company against payment therefor by the Purchaser in accordance with the terms of this Agreement, the Note will belegally binding and valid obligations of the Company and enforceable against the Company in accordance with its terms, except as enforcement maybe limited by general principles of equity, whether applied in a court of Law or a court of equity, and by applicable bankruptcy, insolvency and similarLaw affecting creditors’ rights and remedies generally. The Conversion Shares have been duly authorized for issuance and, when issued uponconversion of the Note, will be duly and validly issued, fully paid and non-assessable, and will not be subject to any pre-emptive or similar rights andwill rank pari passu with all other existing Ordinary Shares. 7Section 3.4 No Violation. The execution, delivery and performance by the Company of this Agreement, the Note and the Registration RightsAgreement, the issuance of the Conversion Shares upon conversion of the Note, and the consummation of the other transactions contemplated herebyand thereby, do not and will not (i) violate, conflict with or result in the breach of any provision of the memorandum and articles of association (orsimilar organizational documents) of the Company or any of its Significant Subsidiaries, (ii) subject to the truth and accuracy of the representationsand warranties of the Purchaser in Article IV, conflict with or violate any Law or Governmental Order applicable to the Company or any of itsSignificant Subsidiaries or the assets, properties, businesses or operations of the Company or any of its Significant Subsidiaries, or (iii) conflict with,result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, requireany consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, any note, bond,mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which the Company or anyof its Significant Subsidiaries is a party or result in the creation of any Liens upon any of the properties or assets of the Company or any of itsSignificant Subsidiaries.Section 3.5 No Default. To the Company’s knowledge, neither the Company nor any of its Significant Subsidiaries (i) is in violation of anyprovision of its memorandum and articles of association (or similar organizational documents) ; (ii) is in default, and no event has occurred that, withnotice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained inany indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its Significant Subsidiaries isa party or by which the Company or any of its Significant Subsidiaries is bound or to which any of the property or assets of the Company or any of itssubsidiaries is subject; or (iii) is in violation of any law or statute applicable to the Company or any of its Significant Subsidiaries or any judgment,order, rule or regulation of any court or arbitrator or governmental or regulatory authority having jurisdiction over the Company or any of itsSignificant Subsidiaries, except, in the case of clauses (ii) and (iii) above, for any such default or violation that would not reasonably be expected,individually or in the aggregate, to have a Company Material Adverse Effect.Section 3.6 Consents. Subject to the truth and accuracy of the representations and warranties of the Purchaser in Article IV, the execution,delivery and performance by the Company of this Agreement, the Note and the Registration Rights Agreement, the issuance of the Conversion Sharesupon conversion of the Note, and the consummation of the other transactions contemplated hereby and thereby do not and will not require anyconsent, approval, authorization or other order of, action by, filing with, or notification to, any Governmental Authority or any third party other thanthose as have been made or obtained, and except for any required filing or notification with the SEC or NASDAQ in connection therewith.Section 3.7 Compliance with Applicable Laws; Permits.(a) None of the Company, its Subsidiaries and, the Company’s and its Subsidiaries’ respective directors, officers, and to the knowledge of theCompany, employees, representatives, agents or Affiliates has conducted or entered into a contract to conduct any transaction with the governments orany sub-division thereof, agents or representatives, residents of, or any entity based or resident in the countries that are currently, or at the time suchtransaction was conducted or such contract entered into were, subject to any sanctions administered by the Office of Foreign Assets Control of the U.S.Treasury Department , the United Nations Security Council, the European Union or Her Majesty’s Treasury (collectively, “Sanctions”); and neither theCompany nor any of its Subsidiaries has financed the activities of any person currently subject to any Sanctions. The Company will not directly orindirectly use the proceeds from the sale of the Note, or lend, contribute or otherwise make available such proceeds to any Subsidiary, Affiliate, jointventure partner or other person or entity for the purpose of financing the activities of any person currently subject to any Sanctions. 8(b) None of the Company, its Subsidiaries and, the Company’s and its Subsidiaries’ respective directors, officers, and to the knowledge of theCompany, employees, representatives, agents or affiliates, has violated, and the Company’s participation in the transaction contemplated hereby willnot violate, any Anti-Money Laundering Laws (as defined below). As used herein, “Anti-Money Laundering Laws” means all applicable Lawsregarding anti-money laundering, including, without limitation, Title 18 U.S. Code section 1956 and 1957, the USA Patriot Act, the Bank Secrecy Act,and international anti-money laundering principals or procedures published by an intergovernmental group or organization, such as the FinancialAction Task Force on Money Laundering, of which the United States is a member and with which designation the United States representative to thegroup or organization continues to concur, in each case as amended, and any executive order, directive, or regulation pursuant to the authority of anyof the foregoing, or any orders or licenses issued thereunder. There is no action, suit or proceeding by or before any court or governmental agency,authority or body or any arbitrator involving the Company or any of its Subsidiaries with respect to Anti-Money Laundering Laws that is pending or,to the knowledge of the Company, threatened.(c) To the Company’s knowledge, neither the Company nor any of its Significant Subsidiaries nor any director, officer, or employee of theCompany or any of its Significant Subsidiaries nor, to the knowledge of the Company, any agent, affiliate or other person acting on behalf of theCompany or any of its Significant Subsidiaries has (i) used any funds for any unlawful contribution, gift, entertainment or other unlawful expenserelating to political activity; (ii) made or taken an act in furtherance of an offer, promise or authorization of any direct or indirect unlawful payment orunlawful benefit to any foreign or domestic government or regulatory official or employee, including of any government-owned or controlled entity orof a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party orparty official or candidate for political office; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended,or any applicable law or regulation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International BusinessTransactions, or committed an offence under the Bribery Act 2010 of the United Kingdom, or any other applicable anti-bribery or anti-corruption laws(collectively, the “Anti-Corruption Laws”); or (iv) made, offered, agreed, requested or taken an act in furtherance of any unlawful bribe or otherunlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful or improper payment or benefit. TheCompany and its Significant Subsidiaries have instituted and maintain policies and procedures designed to promote and ensure compliance with theAnti-Corruption Laws.(d) Except in each case as, individually or in the aggregate, has not had and would not reasonably be expected to have a Company MaterialAdverse Effect, (i) the Company and its Significant Subsidiaries have all licenses, permits, qualifications, accreditations, approvals, consents,authorizations, franchises, variances, exemptions and orders of any Governmental Authority (collectively, the “Permits”), and have made all necessaryfilings required under applicable Laws, necessary to conduct the business of the Company and its Significant Subsidiaries, (ii) since December 31,2016, neither the Company nor any of its Significant Subsidiaries has received any written notice of any violation of or failure to comply with anyPermit or any actual or possible revocation, withdrawal, suspension, cancellation, termination or material modification of any Permit, and (iii) eachsuch Permit has been validly issued or obtained and is in full force and effect. 9Section 3.8 Capitalization; Significant Subsidiaries.(a) The authorized capital stock of the Company consists of 200,000,000 ordinary shares, par value of US$0.001 per share, which is dividedinto 20,000,000 Class A ordinary shares, par value of US$0.001 per share, and 180,000,000 Class B ordinary shares, par value of US$0.001 per share, ofwhich 30,824,438 ordinary shares, comprising of 4,543,461 Class A ordinary shares and 26,280,977 Class B ordinary shares, are issued andoutstanding as of February 28, 2018 (excluding the 110,758 Class B ordinary shares issued to the Depositary for bulk issuance of ADSs reserved forfuture issuances upon the exercise or vesting of awards granted under the Gridsum Stock Option Plan or the Gridsum Equity Incentive Plan). TheCompany has not issued any shares of capital stock since February 28, 2018 except pursuant to exercise of the outstanding share options or otherequity awards disclosed in paragraph (b) below. Except as set forth in this Section 3.8, the Company has no outstanding warrants, options, bonds,debentures, notes or other obligations, the holders of which have the right to vote (or which are convertible into or exercisable or exchangeable forsecurities having the right to vote) with the shareholders of the Company on any matter. All issued and outstanding Ordinary Shares have been dulyauthorized and validly issued and are fully paid and non-assessable, are free of preemptive rights, were issued in compliance with applicable U.S. andother applicable securities Laws and were not issued in violation of any preemptive right, resale right, right of first refusal, or similar right.(b) As of February 28, 2018, 1,341,889 Ordinary Shares were issuable upon the exercise of outstanding share options under the Gridsum StockOption Plan and 1,320,000 Ordinary Shares were issuable upon the exercise of outstanding share options under the Gridsum Equity Incentive Plan. Asof February 28, 2018, the Company has granted 1,013,026 restricted share units under the Gridsum Equity Incentive Plan and 1,013,026 restrictedshare units were outstanding. The Company has not issued any share options or restricted share units since February 28, 2018 except for restricted shareunits representing not more than 313,125 Ordinary Shares.(c) Except as set forth above in this Section 3.8, there are no outstanding (i) shares of capital stock or voting securities of the Company,(ii) securities of the Company convertible into or exercisable or exchangeable for shares of capital stock or voting securities of the Company or(iii) preemptive or other outstanding rights, options, warrants, conversion rights, “phantom” stock rights, stock appreciation rights, redemption rights,repurchase rights, agreements, arrangements, calls, commitments or rights of any kind that obligate the Company to issue or sell any shares of capitalstock or other securities of the Company or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person aright to subscribe for or acquire, any securities of the Company, and no securities or obligations evidencing such rights are authorized, issued oroutstanding. The authorized capital stock of the Company is sufficient to accommodate the issuance of the Conversion Shares upon conversion of theNote. 10(d) All outstanding shares of capital stock or other securities of the Significant Subsidiaries (other than any Significant Subsidiary organizedunder the Laws of the PRC) are duly authorized, validly issued, fully paid and non-assessable. The registered capital of each Significant Subsidiaryorganized under the Laws of the PRC has been timely contributed in accordance (if so required) with its articles of association.(e) Other than the Significant Subsidiaries set forth on Schedule 1, there are no Subsidiaries that meet the definition of a “significantsubsidiary” in Article 1, Rule 1-02 of Regulation S-X under the Exchange Act (but with all references to “10%” therein being deemed to refer to“15%”).Section 3.9 Litigation.(a) As of the date of this Agreement, to the knowledge of the Company, there is no pending Proceeding against the Company or any of itsSignificant Subsidiaries or any director or officer thereof (in their capacity as such), in each case, as would have, if decided adversely, individually or inthe aggregate, a Company Material Adverse Effect.(b) There is no Governmental Order in effect or pending to which the Company or any of its Significant Subsidiaries is a party or subject whichmaterially interferes with the business of the Company and its Significant Subsidiaries as currently conducted, taken as a whole.Section 3.10 Tax. Except as, individually or in the aggregate, has not had and would not reasonably be expected to have a Company MaterialAdverse Effect:(a) the Company and each of its Significant Subsidiaries have timely filed (taking into account all applicable extensions) all Tax Returnsrequired to be filed by them, and all such Tax Returns were correct and complete in all respects, and the Company and each of its SignificantSubsidiaries have paid (or have had paid on their behalf) to the appropriate Governmental Authority all Taxes that are required to be paid by them,except, in each case, with respect to matters contested in good faith or for which adequate reserves have been established in accordance with GAAP;and(b) there are no disputes pending, or claims asserted in writing, in respect of Taxes of the Company or any of its Significant Subsidiaries forwhich reserves in accordance with GAAP have not been established.Section 3.11 Intellectual Property. The Company owns, or possesses the right to use, all of the Intellectual Property, licenses, permits and otherauthorizations that are reasonably necessary for the operation of its business, without infringing the rights of any other Person, except for failures to soown, or so possess the right to use, that would not have a Company Material Adverse Effect.Section 3.12 Real and Personal Property. Except as would not reasonably be expected, individually or in the aggregate, to have a CompanyMaterial Adverse Effect, the Company and its Significant Subsidiaries have good and marketable title in fee simple (in the case of real property) to, orhave valid and marketable rights to lease or otherwise use, all items of real and personal property and assets (other than intellectual property, which issubject to Section 3.11) that are material to the business of the Company and its Significant Subsidiaries, in each case free and clear of all Liens,encumbrances, claims and defects and imperfections of title. 11Section 3.13 Investment Company. The Company is not, and immediately after receipt of the Purchase Price will not be, an “investmentcompany” within the meaning of the Investment Company Act of 1940, as amended.Section 3.14 Offering. Subject to the truth and accuracy of the representations and warranties of the Purchaser in Section 4.1(f), the offer, saleand issuance of the Note are conducted outside the United States in an “offshore transaction” as defined in Rule 902 of Regulation S under theSecurities Act and are exempt from the registration requirements of the Securities Act.Section 3.15 Listing. The Ordinary Shares are registered pursuant to Section 12(b) of the Exchange Act and the ADSs are listed on theNASDAQ.Section 3.16 Structured Entities. The Company controls the structured entities set forth on Schedule 1 (the “Structured Entities”) through aseries of contractual arrangements, and there is no enforceable agreement or understanding to rescind, amend or change the nature of such captivestructure or material terms of the contractual arrangements with the Structured Entities.Section 3.17 No General Solicitation. Neither the Company nor any other Person authorized by the Company to act on its behalf has engagedin a general solicitation or general advertising (within the meaning of Regulation D of the Securities Act) of investors with respect to offers or sales ofthe Note. The Company has not, directly or indirectly, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security(as defined in the Securities Act) which, to its knowledge, is or will be integrated with the Note sold pursuant to this Agreement.Section 3.18 Brokers. Neither the Company nor any other Person authorized by the Company to act on its behalf has retained, utilized or beenrepresented by any broker or finder in connection with the transactions contemplated by this Agreement whose fees the Purchaser would be required topay.ARTICLE IVREPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE PURCHASERSection 4.1 Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company that, as of the datehereof and as of the Closing:(a) Organization and Good Standing. The Purchaser is duly incorporated, validly existing and in good standing under the Laws of itsjurisdiction of organization.(b) Authorization. The Purchaser has all requisite corporate power to enter into this Agreement and the Registration Rights Agreement and toperform its obligations hereunder. The execution, delivery and performance of this Agreement and the Registration Rights Agreement by the Purchaserhave been duly authorized by all necessary corporate or similar action on the part of the Purchaser. This Agreement and the Registration RightsAgreement have been or will be duly executed and delivered by the Purchaser and, assuming due authorization, execution and delivery by theCompany, constitute or will constitute legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with itsterms, except as enforcement may be limited by general principles of equity, whether applied in a court of Law or a court of equity, and by applicablebankruptcy, insolvency and similar Law affecting creditors’ rights and remedies generally. 12(c) No Violation. The execution, delivery and performance by the Purchaser of this Agreement, the Note and the Registration Rights Agreementand the consummation of the transactions contemplated hereby and thereby do not and will not (i) violate, conflict with or result in the breach of anyprovision of its memorandum and articles of association (or similar organizational documents), (ii) conflict with or violate any Law or GovernmentalOrder applicable to it or any of its assets, properties or businesses, or (iii) conflict with, result in any breach of, constitute a default (or event which withthe giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination,amendment, acceleration, suspension, revocation or cancellation of, any note, bond, mortgage or indenture, contract, agreement, lease, sublease,license, permit, franchise or other instrument or arrangement to which it is a party or result in the creation of any Liens upon any of its properties orassets, other than, in the case of clauses (ii) and (iii) above, any such conflict, violation, default, termination, amendment, acceleration, suspension,revocation, cancellation or encumbrance that would not have, individually or in the aggregate, a Purchaser Material Adverse Effect.(d) Consents. The execution, delivery and performance by the Purchaser of this Agreement, the Note and the Registration Rights Agreement donot and will not require any consent, approval, authorization or other order of, action by, filing with, or notification to, any Governmental Authority orany third party.(e) Offshore Transaction. The Purchaser is not a “U.S. person” and is located outside of the United States, as such terms are defined in Rule 902of Regulation S under the Securities Act. The Purchaser is acquiring the Note in an offshore transaction executed in reliance upon the exemption fromregistration provided by Regulation S under the Securities Act.(f) No Distribution. The Purchaser is acquiring the Note for its own account and not with a view towards, or for resale in connection with, thepublic sale or distribution thereof, except pursuant to sales registered or exempted under the Securities Act. The Purchaser does not presently have anyagreement or understanding, directly or indirectly, to distribute the Note or any Conversion Shares.(g) Restricted Securities. The Purchaser acknowledges that the Note and the Conversion Shares are “restricted securities” that have not beenregistered under the Securities Act or any applicable state securities Law, and may not be resold unless pursuant to an effective registration under theSecurities Act and applicable state securities Laws or an exemption from.(h) Brokers. Neither the Purchaser nor any other Person authorized by the Purchaser to act on its behalf has retained, utilized or been representedby any broker or finder in connection with the transactions contemplated by this Agreement whose fees the Company would be required to pay.(i) No Additional Representations. The Purchaser acknowledges that the Company makes no express or implied representations or warranties asto any matter whatsoever except as expressly set forth in this Agreement or in any certificate delivered by the Company to the Purchaser in accordancewith the terms hereof. 13Section 4.2 No Reliance.(a) The Purchaser represents and warrants that (i) it is a sophisticated investor familiar with transactions similar to those contemplated by thisAgreement, the Note and the Registration Rights Agreement, and has sufficient knowledge and experience in financial and business matters so as to becapable of evaluating the merits and risks of its investment in the Note and the Conversion Shares; (ii) it is experienced in the trading of securities ofprivate and public companies; and (iii) it is capable of bearing the economic risks of such investment, including a complete loss thereof.(b) The Purchaser further represents and warrants that (i) it has carefully reviewed such information as it and its advisers deem necessary to makeits decision to invest in the Note and the Conversion Shares, (ii) has the ability to make, and has made, an informed decision as to the risks and meritsof its investment in the Note and the Conversion Shares on the terms set forth in this Agreement, the Note and the Registration Rights Agreement, and(iii) has made its own decision to consummate the transactions contemplated hereunder based exclusively on its own independent review, its financialexperience, and consultations with such advisers as it deemed necessary. Without limiting the generality of the foregoing, the Purchaser acknowledgesthat neither the Company nor any of its Affiliates or representatives is acting as a fiduciary or financial or investment adviser to the Purchaser, or hasgiven the Purchaser any investment advice, opinion or other information on whether an investment in the Note and/or the Conversion Shares isprudent. The Purchaser is not relying on the Information (as defined below), or any other information other than the express representations set forth inthis Agreement.(c) The Purchaser acknowledges that the Company and its Affiliates and representatives possess material nonpublic information regarding theCompany not known to the Purchaser that may impact the value of the Note and/or the Conversion Shares (the “Information”), that the Information isnot disclosed in the Company’s public disclosures or its filings with the SEC, and that the Company is not disclosing the Information to the Purchaserand that the Company and its Affiliates and representatives have not made, and are not making, any representation with respect to any Information. ThePurchaser understands, based on its experience, the disadvantage to which the Purchaser is subject due to the disparity of information between theCompany and the Purchaser and the fact that the Information is not being disclosed to the Purchaser. The Purchaser acknowledges and agrees that,notwithstanding such disparity, it has deemed it appropriate to enter into this Agreement, the Note and the Registration Rights Agreement and toconsummate the transactions contemplated hereunder and thereunder. The Purchaser acknowledges the possibility that the Information may bematerial to a determination of a fair value for the Note or the Conversion Shares and that value may be substantially different from the Purchase Price.(d) The Purchaser agrees that neither the Company nor any of its Affiliates or representatives shall have any liability to the Purchaserwhatsoever due to or in connection with the non-disclosure of the Information, and the Purchaser hereby irrevocably waives any claim that it mighthave based on the failure of the Company to disclose the Information. The Purchaser hereby irrevocably and unconditionally expressly releases,discharges and waives, to the fullest extent permitted by law, any and all claims, rights, causes of action, suits, obligations, debts, demands, liabilities,controversies, costs, expenses, fees or damages of any kind (including, but not limited to, any and all claims alleging violations of federal or statesecurities laws, common-law fraud or deceit, breach of fiduciary duty, negligence or otherwise), whether directly, derivatively, representatively or inany other capacity, that it may have or hereafter acquire against the Company, or any of its Affiliates and their respective officers, employees, agentsand controlling persons, relating to the offer and sale of the Note and/or the Conversion Shares, including the existence or non-existence of anyInformation, the Purchaser’s inability to review such Information or any failure to disclose such Information. 14(e) The Purchaser understands that the Company relies on the accuracy and truth of the foregoing representations, warranties,acknowledgements and agreements in entering into this Agreement, the Note and the Registration Rights Agreement and performing its obligationshereunder and thereunder, and would not engage in the transactions contemplated by this Agreement, the Note and the Registration Rights Agreementin the absence of such representations, warranties, acknowledgements and agreements, and the Purchaser hereby consents to such reliance.(f) Notwithstanding the forgoing, nothing in this Section 4.2 shall be deemed to limit or restrict the Purchaser’s rights or remedies with respectto any breach or violation by the Company of any of its representations, warranties or covenants contained in this Agreement, the Note or theRegistration Rights Agreement.ARTICLE VCONDITIONSSection 5.1 Conditions to the Purchaser’s Obligations. The obligations of the Purchaser to consummate the Closing are subject to thesatisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in writing by the Purchaser in its sole discretion:(a) The representations and warranties of the Company contained in Article III shall be true and correct in all material respects (except for thoserepresentations and warranties that are qualified by materiality or Company Material Adverse Effect, which shall be true and correct to such extent) asof the date hereof and as of the Closing (except for those representations and warranties that speak as of a specific date, which shall be so true andcorrect as of such date).(b) The Company shall have performed its obligations hereunder to be performed on or before the Closing Date in all material respects.(c) Since the date hereof, there shall not have occurred any circumstance or event that, individually or in the aggregate, has had or wouldreasonably be expected to have a Company Material Adverse Effect.(d) All applicable anti-takeover measures under the Cayman Islands, and any anti-takeover provisions under the certificate of incorporation,bylaws, memorandum and articles of association or similar organizational documents of the Company or any of its Significant Subsidiaries, or the laws,statutes, orders, rules, regulations, policies or guidelines of any federal, state or local Governmental Authority applicable to the Company or suchSignificant Subsidiary, that are applicable to the Purchaser as a result of the transactions hereunder, shall be duly waived.Section 5.2 Conditions to the Company’s Obligations. The obligations of the Company to consummate the Closing are subject to thesatisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in writing by the Company in its sole discretion: 15(a) The representations and warranties of the Purchaser contained herein shall be true and correct in all material respects (except for thoserepresentations and warranties that are qualified by materiality or Purchaser Material Adverse Effect, which shall be true and correct to such extent) asof the date hereof and as of the Closing.(b) The Purchaser shall have performed its obligations hereunder to be performed on or before the Closing Date in all material respects.(c) Since the date hereof, there shall not have occurred any circumstance or event that, individually or in the aggregate, has had or wouldreasonably be expected to have a Purchaser Material Adverse Effect.ARTICLE VIAGREEMENTSSection 6.1 Use of Proceeds. The Company shall use the net proceeds from the sale of the Note hereunder for working capital and other lawfulgeneral corporate purposes consistent with past practice and in the ordinary course of business or for the payment of any amount payable hereunder,and shall not use such proceeds (a) for the satisfaction of any portion of the Company’s debt other than payment of any amount payable hereunder orany trade payables in the ordinary course of the Company’s business and consistent with past practices, (b) for the payment of dividends on or theredemption of any capital stock of the Company, ADS or any shares, interests, rights to acquire, warrants, options, participations or other equivalents ofor interests in (however designated) stock issued by the Company or (c) for the settlement of any outstanding litigation.Section 6.2 Confidentiality.(a) Subject to the remaining provisions of this Section 6.2, each party shall keep confidential and not disclose to any third party (i) anyinformation exchanged between the parties or any of their respective Affiliates (or any directors, officers, employees or representatives thereof) inconnection with this Agreement, the Note or the Registration Rights Agreement or the transactions contemplated hereby or thereby, (ii) the existence,status and provisions of this Agreement, the Note or the Registration Rights Agreement, and (iii) the status and content of any discussion between theparties or any of their respective Affiliates (or any directors, officers, employees or representatives thereof) in connection with the transactionscontemplated hereby or by the Note, unless such information is (w) previously known on a non-confidential basis by the receiving party, (x) in thepublic domain through no fault of such receiving party or any of its Affiliates (or any directors, officers, employees or representatives thereof), (y)received from a Person other than the other party or its Affiliates (or any directors, officers, employees or representatives thereof), so long as such Personwas not, to the knowledge of the receiving party, subject to a duty of confidentiality, or (z) developed independently by the receiving party withoutreference to any Confidential Information (collectively, “Confidential Information”); provided that a party may disclose Confidential Information to(A) its Affiliates, financing providers, or any officer, director, employee or representative of such party or its Affiliates or financing providers, on aneed-to-know and confidential basis, or (B) to any Governmental Authority having jurisdiction over such party or its Affiliates if such disclosure isrequired by applicable Laws. Each party shall use Confidential Information only for the purpose of, and to the extent necessary to perform, thisAgreement, the Note and the Registration Rights Agreement, and shall not use any Confidential Information for any other purposes. 16(b) Notwithstanding any other provisions in this Section 6.2, if any party believes in good faith that any announcement or notice is required tobe prepared or published pursuant to applicable Laws (including any rules or regulations of any securities exchange or valid legal process) orinformation is otherwise required to be disclosed to any Governmental Authority, such party may make the required disclosure in the manner it deemsin compliance with the requirements of applicable Laws or such Governmental Authority; provided that the parties, to the extent permitted byapplicable Law, will consult with each other before issuance, and provide each other the opportunity to review and comment upon any press release orpublic statement with respect to this Agreement, the Note or the Registration Rights Agreement and the transactions contemplated hereby or thereby.Notwithstanding any other provisions in this Section 6.2, each party may make public statements in response to specific questions by the press,analysts, investors or those attending industry conferences or financial analyst conference calls, so long as any such statements are not materiallyinconsistent with previous press releases, public disclosures or public statements made in compliance with this Section 6.2(b) and do not revealmaterial, non-public information regarding the other party or the transactions contemplated by this Agreement, the Note or the Registration RightsAgreement.Section 6.3 Further Assurances. Each party agrees to cooperate with each other, and do such other reasonable acts and things in good faith asmay be necessary to effectuate the intents and purposes of this Agreement, the Note and the Registration Rights Agreement, subject to the terms andconditions hereof and thereof and compliance with applicable Laws, including taking reasonable action to facilitate the filing of any document or thetaking of reasonable action to assist the other party in complying with the terms hereof or thereof.Section 6.4 Lock-up. The Purchaser shall not, at any time from the Closing Date to the date that is six (6) months thereafter, directly orindirectly, (i) offer, sell, pledge, transfer, assign or otherwise dispose of all or any part of the Note, any Conversion Shares, any Ordinary Shares, ADSs orother securities of the Company (collectively, “Lock-Up Securities”) to any third party, (ii) enter into any swap, short sale or any other arrangement orany transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of any Lock-Up Securities, (iii) enterinto any agreement with respect to any of the foregoing, or (iv) publicly disclose the intention to effect any of the foregoing, without, in each case, theprior written consent of the Company.ARTICLE VIITERMINATIONSection 7.1 Termination. This Agreement may be terminated:(a) by the written consent of both parties; or(b) by either the Company or the Purchaser, if the Closing shall not have occurred by May 8, 2018; provided, however, that the right toterminate this Agreement under this Section 7.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shallhave been the principal cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date. 17Section 7.2 Effect of Termination. Upon any termination of this Agreement pursuant to Section 7.1, this Agreement will have no further force oreffect, except that Section 6.2, this Section 7.2 and Article VIII shall survive such termination and remain in full force and effect; provided that notermination of this Agreement shall relieve any party of liability for any breach of this Agreement prior to such termination.ARTICLE VIIIMISCELLANEOUSSection 8.1 Successors and Assigns; No Third Party Beneficiaries. This Agreement and the rights and obligations herein may not be assigned byany party without the prior written consent of the other party. This Agreement shall be binding upon and inure solely to the benefit of the parties andtheir respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person any legalor equitable right, benefit or remedy of any nature whatsoever, except as expressly provided in this Agreement.Section 8.2 Governing Law; Dispute Resolution.(a) This agreement shall be governed by and construed in accordance with the laws of Hong Kong, without regard to the principles of conflictof laws.(b) Any dispute, controversy, difference or claim arising out of or relating to this Agreement, including its existence, validity, interpretation,performance, breach or termination or any dispute regarding non-contractual obligations arising out of or relating to it, shall be referred to and finallyresolved by arbitration administered by the Hong Kong International Arbitration Centre (“HKIAC”) under the HKIAC Administered Arbitration Rules(the “HKIAC Rules”) in force when the notice of arbitration is submitted. The law of this arbitration clause shall be Hong Kong law. The seat ofarbitration shall be Hong Kong. The arbitration tribunal shall consist of three arbitrators to be appointed in accordance with the HKIAC Rules. Anyparty may apply for a preservation order or seek other interim or injunctive relief, and judgment upon an award rendered in arbitration proceedingsunder this Agreement may be applied for and entered, in each case in any court of competent jurisdiction.Section 8.3 Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be deemed an original, but all ofwhich together shall constitute one and the same instrument.Section 8.4 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed dulygiven, made or received (i) on the date of delivery if delivered in person, (ii) on the date of confirmation of receipt of transmission by facsimile or otherform of electronic delivery (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party) or(iii) three (3) Business Days after deposit with an internationally recognized express courier service to the respective parties at the following addresses(or at such other address for a party as shall be specified in a notice given in accordance with this Section 8.4): 18If to the Company, to:Gridsum Holding Inc.Jade Palace Hotel Office Building, 8th Floor76 Zhichun RoadHaidian District, Beijing 100086People’s Republic of ChinaAttention: Michael Peng ZhangE-mail: zhangpeng@gridsum.comwith a copy to:Fenwick & West LLPUnit 908, 9th Floor, Kerry Parkside OfficeNo. 1155 Fang Dian RoadPudong New Area, Shanghai 201204People’s Republic of ChinaAttention: David Michaels and Niping WuE-mail: dmichaels@fenwick; niping.wu@fenwick.comIf to the Purchaser, to:FutureX Innovation SPCUnit 1602, Cheung Kong Center,2 Queen’s Road, Central, Hong KongAttention: Laurel RONGE-mail: ryq@futurexcapital. comwith a copy to:Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, L.L.PAddress: Suite 2101, Building CYintai Center, #2 Jianguomenwai AveBeijing 100022 ChinaAttention: Steven LiuE-mail: sliu@gunder.comFax: + 8610-5680-3889Section 8.5 Fees and Expenses. Each party shall bear and pay its own costs, fees and expenses incurred by it in connection with this Agreementand the transactions contemplated hereby; provided that the Company shall, upon Closing, reimburse the Purchaser for reasonable fees and expensesincurred by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to the Purchaser, in connection with this Agreement and thetransactions contemplated hereby, up to a maximum amount of US$125,000.Section 8.6 Entire Agreement. Except as otherwise provided herein, this Agreement, the Note, the Registration Rights Agreement and the otherdocuments delivered pursuant hereto or thereto constitute the entire agreement between the parties with respect to the subject matter hereof andthereof, and supersede all prior agreements and understandings, both oral and written, between the parties and/or their Subsidiaries and Affiliates withrespect to such subject matter. 19Section 8.7 Amendment; Waiver.(a) This Agreement may be amended, modified or supplemented only by a written instrument duly executed by both parties.(b) The observance of any provision in this Agreement may be waived only by the written consent of the party against whom such waiver is tobe effective. No failure or delay on the part of any party to exercise any right hereunder shall operate as waiver thereof, nor shall any single or partialexercise by any party of any right preclude any other or future exercise thereof or the exercise of any other right.Section 8.8 Severability. If any provision of this Agreement is found to be invalid or unenforceable, then such provision shall be construed, tothe extent feasible, so as to render the provision enforceable and to provide for the consummation of the transactions contemplated hereby onsubstantially the same terms as originally set forth herein, and if no feasible interpretation would save such provision, it shall be severed from theremainder of this Agreement, which shall remain in full force and effect unless the severed provision is essential to the rights or benefits intended bythe parties. In such event, the parties shall use commercially reasonable efforts to negotiate, in good faith, a substitute, valid and enforceable provisionor agreement, which most nearly effects the parties’ intent in entering into this Agreement. 20IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement on the date first above written. Gridsum Holding Inc.By: /s/ Guosheng Qi Name: Guosheng Qi Title: Director[Signature Page to Convertible Note Purchase Agreement]IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement as of the date first abovewritten. FutureX Innovation SPC (on behalf of and for the accountof New Technology Fund II SP as one of its segregatedportfolios)By: /s/ ZHANG Qian Name: ZHANG Qian Title: Director[Signature Page to Convertible Note Purchase Agreement]SCHEDULE 1SIGNIFICANT SUBSIDIARIESSubsidiaries Gridsum Holding (China) LimitedDissector (Beijing) Technology Co., Ltd.Structured Entities Gridsum Holding (Beijing) Co., Ltd.Beijing Gridsum Technology Co., Ltd.Guoxinjunhe (Beijing) Technology Co., Ltd.Beijing Moment Everlasting Ad Co., Ltd.Beijing Gridsum Yizhun Technology Co., Ltd.Beijing Guoxinwangyan Technology Co., Ltd.Beijing Yunyang Ad Co., Ltd. Schedule 1EXHIBIT AFORM OF CONVERTIBLE NOTE Exhibit AEXHIBIT BFORM OF REGISTRATION RIGHTS AGREEMENT Exhibit BEXHIBIT CFORM OF CAYMAN LEGAL OPINION Exhibit CEXHIBIT 8.1LIST OF SIGNIFICANT SUBSIDIARIES AND CONSOLIDATED AFFILIATED ENTITIESAll significant subsidiaries and consolidated affiliated entities do business under their legal name.Significant Subsidiaries Name of Company Jurisdiction ofIncorporation Percentage ofAttributable EquityInterestsGridsum Holding (China) Limited Hong Kong 100%Dissector (Beijing) Technology Co., Ltd. PRC 100%Affiliated Entities Consolidated in the Registrant’s Financial Statements Name of Company Jurisdiction of Incorporation Percentage ofAttributable Equity InterestsGridsum Holding (Beijing) Co., Ltd. PRC 100%Beijing Gridsum Technology Co., Ltd. PRC 100%Guoxinjunhe (Beijing) Technology Co., Ltd. PRC 100%Beijing Moment Everlasting Ad Co., Ltd. PRC 100%Beijing Gridsum Yizhun Technology Co., Ltd. PRC 100%Beijing Guoxinwangyan Technology Co., Ltd. PRC 80%Beijing Yunyang Ad Co., Ltd. PRC 100%Beijing Zhixunyilong Software Co., Ltd. PRC 100%Beijing Hainatianchuang Technology Development Co., Ltd. PRC 51%Beijing Gridsum Wang’an Technology Co., Ltd. PRC 100%EXHIBIT 12.1CERTIFICATIONI, Guosheng Qi, certify that:1. I have reviewed this annual report on Form 20-F of Gridsum Holding Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;4. The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the company and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered bythe annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financialreporting; and5. The company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to thecompany’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internalcontrol over financial reporting.Dated: January 7, 2019 By: /s/ Guosheng QiName: Guosheng QiTitle: Chief Executive OfficerEXHIBIT 12.2CERTIFICATIONI, Michael Peng Zhang, certify that:1. I have reviewed this annual report on Form 20-F of Gridsum Holding Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;4. The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the company and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered bythe annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financialreporting; and5. The company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to thecompany’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internalcontrol over financial reporting.Date: January 7, 2019 By: /s/ Michael Peng ZhangName: Michael Peng ZhangTitle: Co-Chief Financial OfficerEXHIBIT 12.3CERTIFICATIONI, Ravi Sarathy, certify that1. I have reviewed this annual report on Form 20-F of Gridsum Holding Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;4. The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the company and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered bythe annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financialreporting; and5. The company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to thecompany’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internalcontrol over financial reporting.Date: January 7, 2019 By: /s/ Ravi SarathyName: Ravi SarathyTitle: Co-Chief Financial OfficerEXHIBIT 13.1CERTIFICATIONIn connection with the annual report of Gridsum Holding Inc. (the “Company”) on Form 20-F for the year ended December 31, 2017, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Guosheng Qi, Chief Executive Officer of the Company, certify, pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: January 7, 2019 By: /s/ Guosheng QiName: Guosheng QiTitle: Chief Executive OfficerEXHIBIT 13.2CERTIFICATIONIn connection with the annual report of Gridsum Holding Inc. (the “Company”) on Form 20-F for the year ended December 31, 2017, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Peng Zhang, Co-Chief Financial Officer of the Company,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: January 7, 2019 By: /s/ Michael Peng ZhangName: Michael Peng ZhangTitle: Co-Chief Financial OfficerEXHIBIT 13.3CERTIFICATIONIn connection with the annual report of Gridsum Holding Inc. (the “Company”) on Form 20-F for the year ended December 31, 2017, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Ravi Sarathy, Co-Chief Financial Officer of the Company, certify,pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: January 7, 2019 By: /s/ Ravi SarathyName: Ravi SarathyTitle: Co-Chief Financial OfficerEXHIBIT 15.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-216798) of Gridsum Holding Inc. of ourreport dated January 7, 2019 relating to the financial statements, which appears in this Form 20-F./s/ Shandong Haoxin Certified Public Accountants Co., Ltd.Shandong Haoxin Certified Public Accountants Co., Ltd.Weifang, the People’s Republic of ChinaJanuary 7, 2019EXHIBIT 15.2CONSENT OF MERITS & TREE LAW OFFICESJanuary 7, 2019Gridsum Holding Inc.South Wing, High Technology BuildingNo. 229 North 4th Ring RoadHaidian District, Beijing 100083People’s Republic of ChinaDear Sirs,We consent to the reference to our firm under the heading “Item 4. Information on the Company—C. Organizational Structure” and elsewhere in theAnnual Report of Gridsum Holding Inc. on Form 20-F for the year ended December 31, 2017 (the “Annual Report”), which will be filed with theSecurities and Exchange Commission (the “SEC”), and further consent to the incorporation by reference of such references into the RegistrationStatement on Form S-8 (File No. 333-216798) of Gridsum Holding Inc. We also consent to the filing with the SEC of this consent letter as an exhibit tothe Annual Report. Yours faithfully,/s/ Merits & Tree Law OfficesMerits & Tree Law OfficesEXHIBIT 15.3Securities and Exchange Commission100 F Street, N.E.WashingtonDC 20549USAJanuary 7, 2019Commissioners:We have read the statements made by Gridsum Holding Inc. (copy attached), pursuant to Item 16F of Form 20-F, which we understand will be filed withthe Securities and Exchange Commission as part of the Annual Report on Form 20-F of Gridsum Holding Inc. dated January 7, 2019. We agree with thestatements concerning our Firm contained therein.Very truly yours,/s/ PricewaterhouseCoopers Zhong Tian LLPPricewaterhouseCoopers Zhong Tian LLPEnclosureITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTOn June 28, 2018, we dismissed PricewaterhouseCoopers Zhong Tian LLP, or PwC China, and engaged Marcum Bernstein Pinchuk LLP, orMarcumBP, as our independent registered public accounting firm in connection with the audit of our consolidated financial statements for the yearsended December 31, 2015, 2016 and 2017.The decision to authorize the dismissal of PwC China and the engagement of MarcumBP was recommended by our Audit Committee and approved byour Board of Directors.Prior to the dismissal, PwC China informed us of certain issues it had identified in conducting its audit of our financial statements for the year endedDecember 31, 2017. Those issues related to certain revenue recognition, cash flow, cost, expense items, and their underlying documentation. PwCChina also advised us that certain of these issues would materially impact our financial statements for the year ended December 31, 2016, andaccordingly, PwC China’s audit report for our financial statements for the year ended December 31, 2016 should no longer be relied upon. PwC Chinaalso advised that the issues identified raised questions related to its ability to rely upon the representations of management. PwC China has notdelivered an audit report with respect to our financial statements for the year ended December 31, 2017.In response to the issues raised by PwC China, our Audit Committee commenced an investigation of such issues with assistance from external legal andaccounting advisors. In October 2018, the Audit Committee concluded this investigation. We authorized PwC China to respond fully to inquiries fromMarcumBP.PwC China’s report on our financial statements for the years ended December 31, 2015 and 2016 (which was subsequently withdrawn) contained noadverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.During each of the years ended December 31, 2015 and 2016, and through June 28, 2018, there were no disagreements between us and PwC China onany matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any of which, if not resolved to PwCChina’s satisfaction, would have caused PwC China to make reference to the subject matter of the disagreement in its audit report.During each of the years ended December 31, 2015 and 2016, and through June 28, 2018, there were no “reportable events,” as defined below,requiring disclosure by us pursuant to Item 16F(a)(1)(v) of Form 20-F, other than as disclosed in this Item 16F. As previously disclosed in our annualreport on Form 20-F for the year ended December 31, 2016, prior to our initial public offering in September 2016, we were a private company withlimited accounting personnel and other resources with which to address our internal controls. Our independent registered public accounting firm hasnot conducted an audit of our internal controls over financial reporting.PwC China was unable to assess what additional audit work it would need to plan and perform in order to complete to its satisfaction an audit of our2017 financial statements. PwC China was unable to assess what additional audit work it would need to plan and perform in order be in a position toreissue its audit opinion (or issue a new opinion) with respect to our 2016 financial statements. Because such matters were not resolved to thesatisfaction of PwC China as of the date of its dismissal, such matters constitute reportable events under Item 16F(a)(1)(v).In the course of auditing our consolidated financial statements for the year ended December 31, 2015, two material weaknesses in internal control overfinancial reporting were identified, specifically: (1) a lack of sufficient financial reporting and accounting personnel with appropriate knowledge ofU.S. GAAP and the SEC reporting requirements to properly address complex accounting issues and to prepare and review our financial statements andrelated disclosures in accordance with U.S. GAAP and SEC financial reporting requirements; and (2) our lack of sufficient written policies andprocedures for capturing certain services received before contracts were signed to timely record the related expenses in the financial statements. Thesesame two material weaknesses were identified during the course of auditing our consolidated financial statements for the year ended December 31,2016. These material weaknesses remain unresolved and require disclosure as a reportable event under Item 16F.For purposes of this Item 16F, the term “reportable events” means any of the following events:(A) The accountant’s having advised the registrant that the internal controls necessary for the registrant to develop reliable financial statements do notexist;(B) The accountant’s having advised the registrant that information has come to the accountant’s attention that has led it to no longer be able to relyon management’s representations, or that has made it unwilling to be associated with the financial statements prepared by management;(C)(1) The accountant’s having advised the registrant of the need to expand significantly the scope of its audit, or that information has come to theaccountant’s attention during the time period covered by Item 16F(a)(1)(iv), that if further investigated may: (i) Materially impact the fairness orreliability of either: a previously issued audit report or the underlying financial statements; or the financial statements issued or to be issued coveringthe fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that may prevent itfrom rendering an unqualified audit report on those financial statements); or (ii) Cause it to be unwilling to rely on management’s representations or beassociated with the registrant’s financial statements; and (2) Due to the accountant’s resignation (due to audit scope limitations or otherwise) ordismissal, or for any other reason, the accountant did not so expand the scope of its audit or conduct such further investigation; or(D)(1) The accountant’s having advised the registrant that information has come to the accountant’s attention that it has concluded materially impactsthe fairness or reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statements issued or tobe issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including informationthat, unless resolved to the accountant’s satisfaction, would prevent it from rendering an unqualified audit report on those financial statements); and (2)Due to the accountant’s resignation, dismissal or declination to stand for reelection, or for any other reason, the issue has not been resolved to theaccountant’s satisfaction prior to its resignation, dismissal or declination to stand for re-election.In accordance with PRC regulations, MarcumBP was required to cooperate with a qualified PRC local accounting firm to support its audit work inChina. For these purposes, MarcumBP engaged Shandong Haoxin Certified Public Accountants Co., Ltd., or Shandong Haoxin, which has beenPCAOB registered since 2010. The process of auditing our financial statements also required the engagement of a specialist technology audit firm tohelp verify certain of our revenue generating activities. That firm conducted the work to test our information technology systems to support ourrevenues and certain expenses. However, the firm could not agree to share its work and cooperate with PCAOB due to PRC cybersecurity and dataprivacy regulations that would have prohibited certain information from being provided to PCAOB. As a result, MarcumBP could not use the firm’sreport and underlying work in its audit. Therefore, to complete the audit work, on January 6, 2019 we dismissed MarcumBP and engaged ShandongHaoxin as our independent registered public accounting firm to audit our consolidated financial statements for the years ended December 31, 2015,2016 and 2017. On January 6, 2019 we also retained MarcumBP to provide substantial assistance to Shandong Haoxin in the performance of its auditactivitiesMarcumBP did not deliver a report on our consolidated financial statements for the years ended December 31, 2015, 2016 and 2017. The decision toauthorize the dismissal of MarcumBP and the engagement of Shandong Haoxin, as our independent registered public accounting firm wasrecommended by our Audit Committee and approved by our Board of Directors.There were no disagreements between us and MarcumBP on any matter of accounting principles or practices, financial statement disclosure, or auditingscope or procedure, any of which, if not resolved to MarcumBP’s satisfaction, would have caused MarcumBP to make reference to the subject matter ofthe disagreement in its audit report.From June 28, 2018 through January 6, 2019, there were no reportable events requiring disclosure by us pursuant to Item 16F(a)(1)(v) of Form 20-F.We did not consult with MarcumBP or Shandong Haoxin, prior to their respective engagements, on either (1) the application of accounting principlesto specific transaction or the type of audit opinion that might be rendered on our financial statements, and no written report was provided to us or oraladvice provided that the new accountant concluded was an important factor considered by us in reaching a decision on the accounting, auditing orfinancial reporting issue, or (2) any matter that was the subject of a disagreement or reportable event described above.We provided PwC China and MarcumBP with a copy of the foregoing disclosure, and requested that PwC China and MarcumBP each furnish us with aletter addressed to the SEC stating whether it agrees with the above statements that relate to them, and if not, stating the respects in which it does notagree. We have received the requested letters from PwC China and MarcumBP, copies of which are included as Exhibits 15.3 and 15.4 to this annualreport on Form 20-F.EXHIBIT 15.4January 7, 2019Securities and Exchange Commission100 F Street, N.E.Washington, DC 20549Commissioners:We have read the statements made by Gridsum Holding Inc. under Item 16F of its Form 20-F dated January 7, 2019. We agree with the statementsconcerning our Firm in such Form 20-F; we are not in a position to agree or disagree with other statements of Gridsum Holding Inc. contained therein.Very truly yours,/s/ Marcum Bernstein & Pinchuk LLPMarcum Bernstein & Pinchuk LLP

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